Filed by Champion International Corporation
pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant Rule 14a-12 of the
Securities Exchange Act of 1934
Commission File No: 1-3053
Subject Company: Champion International Corporation
The following Letter to Shareholders will be sent to shareholders of
Champion International Corporation with its Annual Report to Shareholders
for the year ended December 31, 1999.
LETTER TO SHAREHOLDERS
Different. Focused. Stronger. These words aptly describe the
transformation that has taken place at Champion since October 1997 when we
announced a three-pronged strategy to maximize total shareholder return by
focusing on strategic businesses, increasing earnings through a profit-
improvement program, and exercising strong financial discipline. I am
pleased to report that we have met the major goals of our plan a full year
ahead of schedule.
In addition, I am pleased to report that as we went to press with
this publication, we announced an agreement to merge with UPM-Kymmene
Corporation, a leading paper and forest products company based in Helsinki,
Finland. The combined company will be called Champion International and
will have production plants in 17 countries, responsibility for the
sustainable management of some 16 million acres of forestlands worldwide,
total annual revenues of approximately $14 billion, total papermaking
capacity of approximately 12.1 million metric tons per year, and
approximately 49,000 employees.
Champion and UPM-Kymmene's paper and wood products businesses
complement one another well, and the geographic diversification of our
combined company will help to strengthen our leadership positions in global
markets. Based in Helsinki, the new Champion will truly be a premier
global forest products company. We are excited about the opportunities
that lie ahead and are convinced that this merger will better serve the
needs of our customers, shareholders, and employees.
We will be working out the details of the merger over the next
few months and communicating information as it becomes available.(1) The
balance of this report focuses on Champion's performance in 1999 and our
continuing strategy to maximize total return for our shareholders.
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(1) Investors and security holders are encouraged to read the joint
proxy statement/prospectus regarding the merger between Champion
and UPM-Kymmene when it becomes available because it will contain
important information. The joint proxy statement/prospectus will be
filed with the Securities and Exchange Commission by UPM-Kymmene
and Champion. Investors and security holders may obtain a free copy
of the joint proxy statement/prospectus (when available) and other
related documents filed by UPM-Kymmene and Champion at the
Commission's website at www.sec.gov. The joint proxy
statement/prospectus and the other documents may also be obtained
free of charge by contacting Champion, Attn: Thomas L. Hart, Vice
President-Finance and Treasurer, One Champion Plaza, Stamford,
Connecticut 06921.
MAKING PROGRESS
The positive trend in our earnings over the past few years provides
evidence that our strategy is working. In 1997, we earned four cents per
share before a special item. The following year, in 1998, our earnings
rose to 98 cents per diluted share before special items. In 1999, earnings
increased to $2.46 per diluted share before an extraordinary charge of five
cents. It is important to emphasize that much of this improvement is the
result of tremendous work on the part of our employees to lower our cost
structure and not of higher prices for our products.
We are very pleased with this progress. However, we are not
satisfied. We know we can do better. That's why we have embarked on a new
set of initiatives, which we call Target 285, that is intended to increase
Champion's annual pre-tax profitability at the rate of an additional $285
million by the end of 2001. Before discussing our new goals, I'd like to
review our accomplishments.
MEETING STRATEGIC GOALS
In 1997, we announced our intention to divest several non-strategic assets
in order to focus on those businesses that offer the greatest opportunity
for increased economic profit.(2) In 1998, we proceeded to sell our Lufkin
and Sheldon, Texas, newsprint operations; our Texas recycling centers; and
our Belvidere, Illinois, ovenable-board plant. During 1999, we sold our
Deferiet, New York, specialty papers mill; and our specialty uncoated
papers, bleached board, and liquid packaging businesses at our Canton and
Waynesville, North Carolina, facilities and five DiaryPakregistered
trademark plants. In addition, we completed the sale of approximately
300,000 acres of non-strategic forestlands in New York, Vermont, and New
Hampshire. With only the Hamilton, Ohio, premium papers mill left to sell,
our divestiture program now is largely behind us.
The goal of our profit-improvement program, the second component
of our strategy, was to increase our pre-tax profits by $400 million per
year (in 1997 dollars) by the end of 2000. We successfully met, and
exceeded, this ambitious goal at the end of 1999 - one year ahead of
schedule. This outstanding achievement was accomplished primarily through
cost reductions, productivity increases, and shifts in our product mix
toward higher value-added products. A major component of the program was
an 11 percent reduction in employment at our ongoing operations by the end
of 1999. While this was a difficult process, we achieved this objective
six months ahead of schedule and, since then, have surpassed it.
Finally, our strategy called for improved financial discipline in
all types of spending, including capital projects, expansion, and daily
operations. An important part of this effort was to keep capital spending
at our ongoing operations in line with depreciation, depletion and
amortization (DD&A). By exercising careful financial discipline and
finding innovative, non-capital solutions wherever possible, we have kept
our capital spending below DD&A for the past three years, 1997 through
1999, and plan to keep capital spending, excluding strategic expansion
projects, at DD&A levels in the future.
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(2) Economic profit is profit earned by a company or business in excess
of a capital charge for debt holders and equity holders who provide
capital to the company to finance its operations.
This effort also includes applying careful financial discipline
in our acquisition decisions. Since 1997, we have acquired three strategic
assets along with associated forestlands: our Passadumkeag, Maine,
softwood lumber mill; our Inpacel coated papers mill in Brazil; and our
Sunpine Forest Products business in Alberta, Canada. These businesses were
purchased at attractive prices and already are contributing to our improved
profit performance. In addition, we've developed several significant
alliances - with Hewlett-Packard Company, Asia Pacific Resources
International Holdings Ltd., and Hercules Incorporated - which allow us to
grow our business without significant capital spending.
MANAGING OUR BUSINESS DIFFERENTLY
Much of our success in meeting the goals of our profit-improvement program
can be attributed to the adoption of world-class, Value-Based Management
(VBM) practices. VBM is a set of principles that helps guide us in our
business decisions and ensures that our strategy remains aligned with our
governing objective of maximizing total shareholder return.
In addition, we have significantly increased our marketing
efforts. We are in the process of transforming a manufacturing-oriented,
inwardly focused company into a market-oriented, customer-focused
organization. We have hired a number of marketing professionals to help
expand our marketing capabilities. Each of our businesses spent
considerable time during 1999 gaining a better understanding of its
customers' needs in an effort to increase customer value in ways that
increase shareholder value. In the case of our domestic uncoated freesheet
papers business, this process has resulted in the implementation of a new
business model - one that we believe will strengthen the profitability of
that business.
SETTING NEW GOALS
In October 1999, we announced our Target 285 profit-improvement program.
The goal of this program is to further increase Champion's pre-tax profit
at an annual rate of $285 million by the end of 2001. Target 285 has three
components: $100 million in productivity improvements and cost reductions;
$140 million in "top-line" initiatives; and the remaining $45 million from
the completion of projects that already are under way.
The $100 million in productivity improvements and cost reductions
is a very ambitious goal, considering that we already have made tremendous
achievements in these areas. However, we are confident that we can
continue to find opportunities to improve our operational performance and
to eliminate expenditures that do not add value to the company.
The top-line initiatives represent business opportunities that
will increase the revenue of the company in a way that improves our "bottom
line". These initiatives include the development of new products, new
markets, and new customers. Our Value-Based Management process and
increased marketing focus are supporting this effort.
The third component of Target 285 is the completion and
optimization of a number of projects that currently are under way. These
include the completion of our new sawmill in western Florida; the addition
of a new gap former on the No. 3 machine in Sartell, Minnesota; the
completion of a natural gas-fired turbine generator at our mill in
Bucksport, Maine; and the optimization of Sunpine Forest Products.
REWARDING SHAREHOLDERS
In October 1999, we also announced several measures that will directly
increase the financial return to our shareholders and strengthen the
company's balance sheet.
The quarterly dividend paid on our common stock, which has been
at five cents per share since 1991, is being increased by five cents per
quarter until it reaches 25 cents per quarter. This means that
shareholders who previously have been receiving dividends totaling 20 cents
per share each year will receive dividends totaling $1 per share by 2001.
In addition, the company has targeted a total-debt-to-total
capitalization ratio of 35 percent or less by the end of 2001. Substantial
progress in reducing the debt ratio already has been made through the
scheduled retirement of $200 million of debt and the repurchase of $217
million in high-cost debt during 1999. Our target level of total-debt-to-
total-capitalization will help to strengthen our balance sheet and give us
the financial flexibility we need to consider additional opportunities to
enhance shareholder value in the future.
MAINTAINING OUR CORE VALUES
Since 1997, our company has undergone tremendous change. We have
streamlined our businesses and created a financially stronger company that
is focused on maximizing total return for our shareholders.
Through all this change, however, we have not lost sight of our
core values. Champion is widely admired for its commitment to the
responsible stewardship of the environment and the well-being of the
communities in which the company operates. Equally important is our
commitment to the health, safety, and welfare of our employees. It is
through their efforts that we are successfully building a better Champion.
Before closing, I would like to thank our Board of Directors for
the valuable leadership and direction they have provided in the development
of our strategy. In addition, I would like to welcome Henrique Meirelles,
president of global banking and financial services for FleetBoston
Financial Corporation, who joined the Board in early 1999. In particular,
his background and experience in Brazil, where we have a substantial
presence, bring unique and valuable perspective to our company.
A focused strategy. A committed value system. Solid leadership.
Talented employees. Excellent assets. These are the characteristics of a
stronger Champion - a company better positioned than at any time in its
history to continue improving performance and building shareholder value in
2000 and beyond.
Richard E. Olson
Chairman and Chief Executive Officer
February 17, 2000
