EXHIBIT 13
Paper
--------------------------------------------------------------------------------
Years Ended December 31
Net Sales (in millions of dollars) 1994 % 1993 % 1992 %
------------------------------------ ------ --- ------ --- ------ ---
Product Category:
Printing and writing papers......... $2,042 48 $1,830 48 $1,795 47
Publication papers.................. 867 21 801 21 785 20
Bleached kraft market pulp.......... 369 9 289 7 374 10
Newsprint........................... 352 8 342 9 318 8
Milk cartons........................ 248 6 267 7 268 7
Paperboard and kraft paper.......... 235 5 192 5 194 5
Industrial products................. 74 2 69 2 70 2
Miscellaneous products.............. 30 1 28 1 31 1
------ --- ------ --- ------ ---
$4,217 100 $3,818 100 $3,835 100
====== === ====== === ====== ===
1
Wood Products
--------------------------------------------------------------------------------
Years Ended December 31
Net Sales (in millions of dollars) 1994 % 1993 % 1992 %
-------------------------------------- ------ --- ------ --- ------ ---
Product Category:
Lumber................................ $ 481 44 $ 480 38 $ 368 34
Softwood plywood and waferboard....... 264 24 333 27 301 28
Logs and stumpage..................... 253 23 272 22 257 23
Sidings and industrial plywood........ 47 4 85 7 80 7
Hardwood plywood, related sheet
and hardboard....................... 32 3 32 2 30 3
Miscellaneous products................ 24 2 49 4 56 5
------ --- ------ --- ------ ---
$1,101 100 $1,251 100 $1,092 100
====== === ====== === ====== ===
2
Champion International Corporation and Subsidiaries
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Consolidated Income (in thousands, except per share amounts)
Years Ended December 31 1994 1993 1992
-------------------------------------------- ---------- ---------- ----------
Net Sales................................... $5,318,192 $5,068,833 $4,926,471
Cost of products sold....................... 4,752,926 4,709,757 4,564,637
Selling, general and administrative
expenses.................................. 299,266 292,684 288,463
---------- ---------- ----------
Income from Operations...................... 266,000 66,392 73,371
Interest and debt expense (Notes 3 and 6)... 235,086 224,658 206,295
Other (income) expense - net (Note 11)...... (57,342) 7,410 (142,516)
---------- ---------- ----------
Income (Loss) before Income Taxes,
Extraordinary Item and Cumulative Effect of
Accounting Changes......................... 88,256 (165,676) 9,592
Income Taxes (Benefit) (Note 12)............. 24,951 (31,222) (4,328)
---------- ---------- ----------
Income (Loss) before Extraordinary Item and
Cumulative Effect of Accounting Changes.... 63,305 (134,454) 13,920
Extraordinary Item - Loss on Early Retirement
of Debt, Net of Taxes...................... --- (14,266) ---
Cumulative Effect of Accounting Changes,
Net of Taxes (Notes 1, 12 and 13)......... --- (7,523) (454,314)
---------- ---------- ----------
Net Income (Loss)........................... $ 63,305 $ (156,243) $ (440,394)
========== ========== ==========
Dividends on Preference Stock (Note 8)...... 27,750 27,750 27,750
---------- ---------- ----------
Net Income (Loss) Applicable to Common Stock $ 35,555 $ (183,993) $ (468,144)
========== ========== ==========
Average Number of Common Shares Outstanding. 93,061 92,788 92,639
========== ========== ==========
Earnings (Loss) Per Common Share:
Income (Loss) before Extraordinary Item and $ .38 $ (1.75) $ (.15)
Cumulative Effect of Accounting Changes...
Extraordinary Item - Loss on Early --- (.15) ---
Retirement of Debt........................ --- (.08) (4.90)
Cumulative Effect of Accounting Changes..... ---------- ---------- -----------
Net Income (Loss)........................... $ .38 $ (1.98) $ (5.05)
========== ========== ===========
The accompanying notes are an integral part of this statement.
3
Champion International Corporation and Subsidiaries
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Consolidated Retained Earnings (in thousands, except per share amounts)
Years Ended December 31 1994 1993 1992
-------------------------------------------- ---------- ---------- ----------
Beginning Balance........................... $1,861,535 $2,064,120 $2,550,836
Net Income (Loss)........................... 63,305 (156,243) (440,394)
Cash Dividends Declared:
$92.50 Convertible Preference Stock - $92.50
per share in 1994, 1993 and 1992.......... (27,750) (27,750) (27,750)
Common Stock - $.20 per share in 1994, 1993
and 1992.................................. (18,614) (18,592) (18,572)
---------- ---------- ----------
Ending Balance.............................. $1,878,476 $1,861,535 $2,064,120
========== ========== ==========
The accompanying notes are an integral part of this statement.
4
Champion International Corporation and Subsidiaries
--------------------------------------------------------------
Consolidated Balance Sheet (in thousands of dollars)
Assets December 31 1994 1993
------------------------------------------------------ ---------- ----------
Current Assets:
Cash and cash equivalents............................. $ 90,948 $ 55,653
Short-term investments................................ --- 7,197
Receivables........................................... 562,085 494,426
Inventories (Note 2).................................. 441,430 469,269
Prepaid expenses...................................... 23,286 22,818
Deferred income taxes (Note 12)....................... 61,032 65,064
---------- ----------
Total Current Assets................................ 1,178,781 1,114,427
---------- ----------
Timber and Timberlands, at cost - less cost of timber
harvested........................................... 1,846,823 1,838,550
---------- ----------
Property, Plant and Equipment, at cost
(Notes 3, 6 and 7).................................. 8,579,254 8,467,756
Less - Accumulated depreciation....................... 2,976,640 2,665,720
---------- ----------
5,602,614 5,802,036
---------- ----------
Other Assets and Deferred Charges..................... 335,410 387,756
---------- ----------
$8,963,628 $9,142,769
========== ==========
The accompanying notes are an integral part of this statement.
5
Champion International Corporation and Subsidiaries
Consolidated Balance Sheet (in thousands of dollars)
Liabilities and Shareholders' Equity December 31 1994 1993
------------------------------------------------------ ---------- ----------
Current Liabilities:
Current installments of long-term debt (Note 6)........ $ 308,922 $ 88,052
Short-term bank borrowings (Note 6).................... 90,184 88,258
Accounts payable and accrued liabilities (Note 5)...... 592,033 591,153
Income taxes (Note 12)................................. 43,273 4,841
---------- ----------
Total Current Liabilities............................ 1,034,412 772,304
---------- ----------
Long-Term Debt (Note 6)................................ 2,889,252 3,316,165
---------- ----------
Other Liabilities (Notes 13 and 16).................... 670,761 672,788
---------- ----------
Deferred Income Taxes (Note 12)........................ 1,039,927 1,077,234
---------- ----------
Minority Interest in Subsidiaries...................... 68,531 54,160
---------- ----------
Commitments and Contingent Liabilities
(Notes 7, 16 and 17)................................. --- ---
Preference Stock, $1.00 par value, $92.50 Cumulative
Convertible Series; 300,000 shares issued and
outstanding (redeemable at maturity for $300,000) 300,000 300,000
(Note 8)............................................. ---------- ----------
Shareholders' Equity:
Capital Shares (Notes 8 and 9):
Preference Stock, 8,231,431 shares authorized but
unissued........................................... --- ---
Common stock, $.50 par value: 250,000,000 authorized
shares; 96,786,039 and 96,367,755 issued shares.... 48,393 48,184
Capital surplus...................................... 1,175,008 1,163,555
Retained earnings (Note 6)............................. 1,878,476 1,861,535
---------- ----------
3,101,877 3,073,274
Treasury shares, at cost (Note 8)...................... (100,308) (100,233)
Cumulative translation adjustment...................... (40,824) (22,923)
---------- ----------
2,960,745 2,950,118
---------- ----------
$8,963,628 $9,142,769
========== ==========
The accompanying notes are an integral part of this statement.
6
Champion International Corporation and Subsidiaries
Consolidated Cash Flows (in thousands of dollars)
Years Ended December 31 1994 1993 1992
------------------------------------- ----------- ----------- ----------
Cash flows from operating activities:
Net Income (Loss).................... $ 63,305 $ (156,243) $ (440,394)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary item................. --- 14,266 ---
Cumulative effect of accounting
changes.......................... --- 7,523 454,314
Depreciation expense............... 379,386 360,240 338,004
Cost of timber harvested........... 79,311 83,194 72,496
(Gain) loss on sale of assets...... (10,651) (9,973) (103,778)
(Increase) in receivables.......... (70,938) (28,235) (11,274)
(Increase) decrease in inventories. 21,755 (13,529) (4,830)
(Increase) decrease in prepaid
expenses......................... (989) (2,789) 5,091
Increase (decrease) in accounts
payable and accrued liabilities.. 4,975 (61,296) (10,263)
Increase (decrease) in income taxes
payable.......................... 38,707 (3,032) (1,517)
Increase (decrease) in other
liabilities...................... (7,250) 21,164 (2,027)
(Decrease) in deferred income taxes (26,746) (26,843) (11,904)
All other - net.................... 62,486 16,348 (26,143)
----------- ----------- ----------
Net cash provided by operating 533,351 200,795 257,775
activities......................... ----------- ----------- ----------
Cash flows from investing activities:
Expenditures for property, plant
and equipment.................... (225,042) (475,633) (622,976)
Timber and timberlands
expenditures..................... (103,830) (130,147) (95,313)
Purchase of investments............ (28,902) (123,978) (203,424)
Proceeds from sales and redemptions
of investments................... 61,893 230,561 145,461
Proceeds from sales of property,
plant and equipment and timber
and timberlands.................. 38,723 304,773 174,417
All other - net.................... (4,796) (17,448) (9,096)
----------- ----------- ----------
Net cash used in investing activities (261,954) (211,872) (610,931)
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt............................. 424,857 1,382,715 770,052
Payments of current installments of
long-term debt and long-term
debt............................. (621,769) (1,307,909) (439,646)
Cash dividends paid................ (46,351) (46,334) (46,326)
All other - net.................... 7,161 1,580 (6,942)
----------- ----------- ----------
Net cash provided by (used in)
financing activities................ (236,102) 30,052 277,138
----------- ----------- ----------
Increase (decrease) in cash and cash
equivalents........................ 35,295 18,975 (76,018)
Cash and cash equivalents:
Beginning of period................ 55,653 36,678 112,696
----------- ----------- ----------
End of period...................... $ 90,948 $ 55,653 $ 36,678
=========== =========== ==========
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest (net of capitalized
amounts)....................... $ 236,481 $ 225,764 $ 201,925
Income taxes (net of refunds)
(Note 12)...................... 1,051 11,867 15,181
The accompanying notes are an integral part of this statement.
7
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Note 1. Summary of Significant Accounting Policies
A. Consolidation
The consolidated financial statements include the accounts of the company and
all of its domestic and foreign subsidiaries. Affiliates which are 20% to 50%
owned are reflected using the equity method of accounting, with the related
investments included in Other Assets and Deferred Charges. All significant
intercompany transactions have been eliminated.
Certain amounts have been reclassified to conform to the current year's
presentation.
B. Cash and Cash Equivalents
Cash and cash equivalents includes all highly liquid investments with original
maturities of three months or less. Short-term investments are investments
which mature within twelve months but which do not meet the criteria of cash
equivalents.
C. Inventories
Inventories are generally stated at the lower of average cost or market (market
approximates net realizable value), except for certain inventories of the paper
segment which are stated on the last-in, first-out (LIFO) method.
D. Capitalization and Amortization of Certain Costs
Pre-operating expenses and start-up costs incurred in connection with the
construction of major properties are deferred until such properties become
operational. These expenses and costs are then amortized over a five-year
period. No pre-operating expenses and start-up costs were deferred during 1994.
E. Fixed Assets
Property, Plant and Equipment, which includes capitalized leases, is stated at
cost. Timber and Timberlands, which includes original costs, road construction
costs, and reforestation costs, such as site preparation and planting costs, is
stated at unamortized cost. Property taxes, surveying, fire control and other
forest management expenses are charged to expense as incurred. When fixed
assets are sold or retired, cost and accumulated depreciation are eliminated
from the accounts and gains or losses are recorded in income.
For financial reporting purposes, plant and equipment are depreciated using the
straight-line method over the estimated service lives of the individual assets.
Machinery and equipment lives range from 3 to 35 years, buildings from 10 to 40
years and land improvements from 5 to 24 years. Leasehold improvements are
amortized over the shorter of the lives of the leases or estimated service
lives. Cost of timber harvested is based on the estimated quantity of timber
available during the growth cycle and is credited directly to the asset accounts
(Notes 3, 6 and 7).
8
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
F. Revenue Recognition
The company recognizes revenues as products are shipped.
G. Earnings Per Common Share
Primary earnings per common share are computed by dividing net income, after
deducting dividends on preference shares, by the average number of common shares
and dilutive common share equivalents outstanding during the year. The
computation of fully diluted earnings per common share assumes that the average
number of common shares and dilutive common share equivalents outstanding is
increased by the conversion of securities having a dilutive effect and that net
income applicable to common stock is increased by dividends and after-tax
interest on such securities.
H. Foreign Currency Translation
The assets and liabilities of the company's Canadian subsidiary are translated
into U.S. dollars using year-end exchange rates. The resulting translation
gains or losses are included with the cumulative translation adjustment in the
Shareholders' Equity section of the balance sheet.
Due to the high inflation rate in Brazil, the company's Brazilian subsidiary
uses the U.S. dollar as its functional currency. Except for certain items
translated at historical exchange rates, assets and liabilities are translated
using year-end exchange rates. Gains or losses from balance sheet translation
are included in net income.
Gains or losses resulting from foreign currency transactions are included in net
income.
I. Derivative Financial Instruments
The company occasionally enters into interest rate swap agreements to hedge the
impact of changes in interest rates on the company's outstanding variable rate
debt. In addition, the company occasionally enters into foreign exchange
contracts to mitigate the risks associated with its exposure to fluctuations in
foreign currency exchange rates. The swap agreements and foreign exchange
contracts are held for purposes other than trading. At December 31, 1994, the
company had no foreign exchange contracts and had one interest rate swap
agreement, maturing in March 1995, covering $10 million of debt.
J. Accounting Changes
During the fourth quarter of 1993, the company adopted, retroactive to January
1, 1993, Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits" (Note 13).
During the fourth quarter of 1992, the company adopted, retroactive to January
1, 1992, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions" (Note 13) and SFAS No. 109, "Accounting for Income Taxes" (Note
12).
9
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Note 2. Inventories
December 31 (in thousands of dollars) 1994 1993
-------------------------------------------------- -------- --------
Paper, pulp and packaging products................ $150,249 $182,569
Wood products..................................... 44,509 35,495
Logs.............................................. 69,491 65,603
Pulpwood.......................................... 19,369 17,152
Raw materials, parts and supplies................. 157,812 168,450
-------- --------
$441,430 $469,269
======== ========
At December 31, 1994 and 1993, inventories stated using the last-in, first-out
(LIFO) method, representing approximately 12% and 22% of total inventories, were
$54,601,000 and $102,339,000, respectively. If the lower of average cost or
market method (which approximates current cost) had been utilized for
inventories carried at LIFO, inventory balances would have been increased by
$64,920,000 and $59,961,000 at December 31, 1994 and 1993, respectively.
The LIFO inventory reduction in 1994 resulted in a liquidation of LIFO inventory
layers carried at lower costs which prevailed in prior years. The effect of
this liquidation was to decrease cost of products sold by $3.9 million and to
increase net income by $2.4 million or $.03 per share.
10
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Note 3. Property, Plant and Equipment
December 31 (in thousands of dollars) 1994 1993
------------------------------------- ----------- -----------
Land and land improvements........... $ 310,393 $ 303,591
Buildings and leasehold improvements 905,205 902,814
Machinery and equipment.............. 7,176,025 7,065,628
Construction in progress............. 187,631 195,723
----------- -----------
8,579,254 8,467,756
Accumulated depreciation............. (2,976,640) (2,665,720)
----------- -----------
$ 5,602,614 $ 5,802,036
=========== ===========
Interest capitalized into construction in progress during 1994, 1993 and 1992
was $7,926,000, $33,784,000 and $39,628,000, respectively.
Depreciation expense includes the following components:
Years Ended December 31 (in thousands of dollars) 1994 1993 1992
--------------------------------------------------- -------- -------- --------
Land improvements.................................. $ 15,295 $ 14,041 $ 8,472
Buildings and leasehold improvements............... 26,773 26,270 24,034
Machinery and equipment............................ 337,318 319,929 305,498
-------- -------- --------
$379,386 $360,240 $338,004
======== ======== ========
11
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Note 4. Lines of Credit
At December 31, 1994, the company had unused U.S. lines of credit of
approximately $1,035 million ($382 million of which supported short-term
borrowings classified as long-term debt as discussed in Note 6) and unused
foreign lines of credit of approximately $179 million. At December 31, 1994,
interest rates on the U.S. and foreign lines were no higher than the prime rate
or its equivalent. Commitment fees of .15% are required on the $1,100 million
U.S. lines of credit, which are available to November 15, 1999 on a revolving
basis, at which time amounts owed, if any, become payable. Commitment fees of
no more than .25% are required on the $203 million foreign lines of credit.
Commitments under the credit agreements cannot be withdrawn provided the company
continues to meet required conditions.
12
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Note 5. Accounts Payable and Accrued Liabilities
December 31 (in thousands of dollars) 1994 1993
----------------------------------------------------- -------- --------
Accounts payable..................................... $259,158 $243,920
-------- --------
Dividends payable.................................... 4,668 4,654
-------- --------
Accrued liabilities:
Payrolls and commissions........................... 117,364 104,520
Employee benefits.................................. 59,212 50,668
Interest........................................... 47,496 49,611
Taxes, other than income taxes..................... 30,376 25,462
Other.............................................. 73,759 112,318
-------- --------
Total accrued liabilities..................... 328,207 342,579
-------- --------
$592,033 $591,153
======== ========
13
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Note 6. Indebtedness
December 31 (in thousands of dollars) 1994 1993
----------------------------------------------------- ---------- ----------
Secured debt, 9.8% average rate, payable
through 2007 (a)................................... $ 2,812 $ 41,375
Unsecured debt, 7.4% average rate, payable through
2028 (b)........................................... 2,951,084 3,115,570
Lease obligations, 6.9% average rate, payable
through 2029....................................... 236,598 237,666
Other contractual obligations, 5.9% average rate,
payable through 1998............................... 7,680 9,606
---------- ----------
Total Debt.................................... 3,198,174 3,404,217
Less: Current installments of long-term debt........ 308,922 88,052
---------- ----------
Long-term debt (c)................................... $2,889,252 $3,316,165
========== ==========
Short-term bank borrowings (d)....................... $ 90,184 $ 88,258
========== ==========
(a) Such debt is secured by certain assets with a net book value at December
31, 1994 of approximately $12 million.
(b) Unsecured debt includes borrowings payable in less than one year. The
company has the ability to refinance these borrowings under the credit
agreements discussed in Note 4. At December 31, 1994, $332 million of U.S.
commercial paper and $50 million of U.S. short-term obligations have been
classified as long-term debt since the company intends to renew or
refinance these obligations through 1995 and into future periods.
Unsecured debt at December 31, 1994 and 1993 includes $150 million of the
company's 6 1/2% convertible subordinated debentures due April 15, 2011.
The conversion rate for these debentures is 28.777 shares of the company's
common stock for each $1,000 principal amount of debentures.
(c) The annual principal payment requirements under the terms of all long-term
debt agreements for the years 1995 through 1999 are $309 million, $102
million, $245 million, $386 million and $738 million, respectively.
(d) Weighted average interest rates on outstanding balances for 1994 and 1993
were 6.3% and 4.7%, respectively. These rates exclude book cash overdrafts
of $81 million and $62 million, respectively, at December 31, 1994 and
1993.
The indentures and agreements relating to long-term debt arrangements, as well
as the company's Certificate of Incorporation, contain restrictions on the
payment of cash dividends. Under the most restrictive of these provisions,
approximately $464 million of consolidated retained earnings at December 31,
1994 is free of such restrictions.
14
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Note 7. Commitments
Future Minimum Lease Payments
----------------------------------
Capitalized Non-Cancelable
Period (in thousands of dollars) Leases Operating Leases
--------------------------------------------- ----------- ----------------
1995......................................... $ 16,589 $ 23,248
1996......................................... 16,568 21,095
1997......................................... 16,547 19,363
1998......................................... 16,525 17,387
1999......................................... 16,504 21,183
Thereafter................................... 556,975 238,177
-------- --------
Total payments............................... 639,708 340,453
-------- --------
Less: Sublease rental income................ --- 71,265
--------
Net operating lease payments................. --- $269,188
========
Less: Amount representing interest.......... 399,918
--------
Present value of capitalized lease payments
($350 current; $239,440 long-term)......... $239,790
========
The following schedule shows the composition of total rental expense for all
operating leases:
Years Ended December 31 (in thousands of dollars) 1994 1993 1992
--------------------------------------------------- ------- ------- -------
Minimum rentals.................................... $25,120 $25,204 $26,082
Less: Sublease rental income...................... 619 573 970
------- ------- -------
$24,501 $24,631 $25,112
======= ======= =======
15
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Note 8. Capital Shares
Redeemable Preference Stock
---------------------------
On December 6, 1989, the company issued 300,000 shares of Preference Stock,
$92.50 Cumulative Convertible Series, $1.00 par value ("$92.50 Preference
Stock"). In preference to shares of common stock, each share is entitled to
cumulative cash dividends of $92.50 per year and $1,000 upon liquidation. Each
share is convertible into approximately 26.3 shares of common stock and has
approximately 26.3 votes on all matters submitted to shareholders. In the event
of arrearages in $92.50 Preference Stock dividends, the company is prohibited
from declaring or paying any cash dividends on its common stock. The company
has the right, except in certain circumstances, to redeem all the shares at any
time at $1,150 per share plus accrued dividends. On December 6, 1999, all
outstanding shares must be redeemed at $1,000 per share plus accrued dividends.
Except under certain circumstances, the company has the right to purchase any
securities, including common stock, owned by the original holders of the $92.50
Preference Stock before such securities are sold to third parties.
Unissued Preference Stock
-------------------------
At December 31, 1994 and 1993, 6,731,431 preference shares for which no series
has been designated were authorized and unissued. At December 31, 1994 and 1993,
1,500,000 additional authorized and unissued shares were designated and reserved
for the issuance of the company's Preference Stock, Participating Cumulative
Series or Participating Cumulative Series B, $1.00 par value.
16
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Common Stock
------------
Changes in common shares during the three years ended December 31, 1994 are as
follows:
(In shares and thousands of dollars)
Treasury Shares
Issued Shares (at cost)
------------------------------- -----------------------
Par Capital
Shares Value Surplus Shares Amount
---------- ------- ---------- ---------- ---------
Balance at January 1, 1992.... 96,089,717 $48,045 $1,156,639 (3,169,982) $(100,147)
Exercise of stock options..... 40,750 20 962 --- ---
Compensation plans............ 20,368 10 550 (107,563) (54)
Other......................... 6,277 4 (1) --- ---
---------- ------- ---------- ---------- ---------
Balance at December 31, 1992.. 96,157,112 48,079 1,158,150 (3,277,545) (100,201)
Exercise of stock options..... 182,950 91 4,751 --- ---
Compensation plans............ 23,078 12 639 (63,810) (32)
Other......................... 4,615 2 15 --- ---
---------- ------- ---------- ---------- ---------
Balance at December 31, 1993.. 96,367,755 48,184 1,163,555 (3,341,355) (100,233)
Exercise of stock options..... 396,300 198 10,881 --- ---
Compensation plans............ 18,824 10 573 (150,925) (75)
Other......................... 3,160 1 (1) --- ---
---------- ------- ---------- ---------- ---------
Balance at December 31, 1994.. 96,786,039 $48,393 $1,175,008 (3,492,280) $(100,308)
========== ======= ========== ========== =========
At December 31, 1994, common shares of the company were reserved for issue as
follows:
$92.50 Preference Stock............................................. 7,894,737
Stock options granted or available for grant........................ 7,900,050
Conversion of long-term debt........................................ 4,318,695
Compensation plans.................................................. 2,675,022
----------
22,788,504
==========
17
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Note 9. Stock Options
The company has granted to officers and key employees options to purchase common
shares at the market price of the shares on the date of grant. Certain options
granted to officers and to key employees are accompanied by stock appreciation
rights. The options expire ten years or ten years and 31 days from the date of
grant and generally become exercisable subsequent to a period of 12 calendar
months from date of grant.
Transactions under the plans are summarized below:
Options Option Price
---------- ------------------
Balance at January 1, 1992................ 3,352,725 $17.50 to $38.25
Granted.............................. 606,600 27.50
Exercised............................ (78,525) 17.50 to 28.13
Surrendered or canceled.............. (96,300) 17.50 to 38.25
---------
Balance at December 31, 1992.............. 3,784,500 18.88 to 38.25
Granted.............................. 598,200 31.00
Exercised............................ (266,300) 22.13 to 31.50
Surrendered or canceled.............. (103,400) 24.00 to 38.25
---------
Balance at December 31, 1993.............. 4,013,000 18.88 to 38.25
Granted.............................. 582,400 30.13
Exercised............................ (565,000) 18.88 to 38.25
Surrendered or canceled.............. (65,600) 24.13 to 38.25
---------
Balance at December 31, 1994.............. 3,964,800 $22.13 to $38.25
========= =================
Options exercisable at December 31, 1994.. 3,388,800
At December 31, 1994, the stock options had an aggregate option price of
$117,808,000.
18
Champion International Corporation and Subsidiaries
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Notes to Financial Statements
Note 10. Fair Value of Financial Instruments
1994 1993
------------------------- -------------------------
December 31 Carrying Fair Carrying Fair
(in thousands of dollars) Amount Value Amount Value
--------------------------- ----------- ------------ ----------- -----------
Assets (Liabilities):
Short-term investments..... $ --- $ --- $ 7,197 $ 7,197
Long-term debt, excluding
lease obligations........ (2,961,576) (2,968,339) (3,166,551) (3,408,342)
$92.50 Preference Stock.... (300,000) (345,000) (300,000) (345,000)
The fair value of the company's short-term investments is based on quoted market
prices at the reporting date for those or similar investments. The fair value
of the company's long-term debt, which includes current installments, is
estimated using discounted cash flow analyses, based on the company's
incremental borrowing rates for similar types of borrowings. The fair value of
the company's $92.50 Preference Stock is estimated to be the amount at which
(together with accrued dividends) the company has the right, except in certain
circumstances, to redeem the shares. On December 6, 1999, all outstanding
shares of $92.50 Preference Stock must be redeemed at the carrying amount plus
accrued dividends.
The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables, short-term bank borrowings, and accounts payable and
accrued liabilities approximate fair values due to the short maturity of those
instruments.
19
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
Note 11. Other (Income) Expense -- Net
Years Ended December 31
(in thousands of dollars) 1994 1993 1992
------------------------------------- --------- --------- ---------
Interest income...................... $ (31,107) $ (30,135) $ (23,825)
Foreign currency losses -- net....... 10,725 24,717 5,116
Minority interest in income of
subsidiaries....................... 18,243 7,288 2,856
Equity in net income of affiliates... (337) (463) (972)
Royalty, rental and commission
income............................. (13,031) (8,276) (13,950)
Net gain on disposal of fixed assets,
timberlands and investments (a).... (14,151) (9,973) (103,778)
Miscellaneous -- net (b)............. (27,684) 24,252 (7,963)
--------- --------- ---------
$ (57,342) $ 7,410 $(142,516)
========= ========= =========
(a) 1994 included a gain of $16 million from the sale of the company's interest
in a Swedish linerboard mill. 1992 included a gain of $107 million from
sales of portions of the company's West Coast timberlands, including the
sale of its wood products facility in Roseburg, Oregon.
(b) 1994 included income of $19 million from a refund due on countervailing
duties on lumber exports from Canada into the United States in prior years.
1992 included income of $30 million from the favorable resolution of
certain issues in Brazil.
20
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
Note 12. Income Taxes
The provision for income taxes includes the following components:
Years Ended December 31 (in thousands of dollars) 1994 1993 1992
------------------------------------------------- --------- --------- ---------
Provision for income taxes currently
payable (receivable):
Federal........................................ $ (2,920) $ (15,206) $ ---
State and local................................ 2,100 1,680 1,820
Foreign........................................ 52,517 9,147 5,756
--------- --------- ---------
51,697 (4,379) 7,576
--------- --------- ---------
Provision for deferred income taxes:
Federal........................................ (36,274) (34,005) (40,233)
State and local................................ (4,667) (8,821) (2,071)
Foreign........................................ 14,195 15,983 30,400
--------- --------- ---------
(26,746) (26,843) (11,904)
--------- --------- ---------
$ 24,951 $ (31,222) $ (4,328)
========= ========= =========
Domestic and foreign income (loss) before income taxes, extraordinary item and
cumulative effect of accounting changes are as follows:
Years Ended December 31 (in thousands of dollars) 1994 1993 1992
------------------------------------------------- --------- --------- ---------
Domestic......................................... $(110,544) $(250,755) $(114,450)
Foreign.......................................... 198,800 85,079 124,042
--------- --------- ---------
Total income before income taxes, extraordinary
item and cumulative effect of accounting
changes........................................ $ 88,256 $(165,676) $ 9,592
========= ========= =========
21
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
Principal reasons for the variation between the effective rate and the statutory
federal income tax rate are as follows:
Years Ended December 31 1994 1993 1992
-------------------------------------------------- ------ ------ ------
Statutory rate -- provision (benefit)............. 35.0 % (35.0)% 34.0 %
Rate difference -- foreign subsidiaries........... (3.9) (1.0) 28.5
Foreign dividends................................. 8.2 1.3 45.7
State and local taxes, net of federal tax effect.. (1.9) (2.8) (1.7)
Adjustment to prior years' income taxes........... (5.6) 4.4 (103.1)
Adjustment of purchase accounting liabilities..... --- (0.4) (63.7)
Statutory rate change adjustments................. --- 14.1 ---
All other -- net.................................. (3.5) 0.6 15.2
------ ------ ------
Effective income tax rate......................... 28.3 % (18.8)% (45.1)%
====== ====== ======
Deferred tax liabilities (assets) are composed of the following:
Years Ended December 31 (in thousands of dollars) 1994 1993
-------------------------------------------------- ---------- ----------
Depreciation and cost of timber harvested......... $1,677,529 $1,671,507
Capitalization of interest and deferral of
pre-operating and start-up costs (net)........... 44,940 52,362
Other............................................. 45,544 44,696
---------- ----------
Gross Liabilities........................... 1,768,013 1,768,565
---------- ----------
Loss and other carryforwards...................... (404,668) (388,780)
Accrued liabilities and reserves.................. (174,116) (181,932)
Postretirement benefits other than pensions....... (151,175) (144,044)
Other............................................. (93,166) (83,930)
---------- ----------
Gross Assets................................ (823,125) (798,686)
---------- ----------
Valuation allowance............................... 34,007 42,291
---------- ----------
$ 978,895 $1,012,170
========== ==========
22
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
As of December 31, 1994, the company had available, for U.S. income tax return
purposes, general business credit carryforwards of $51,900,000, which expire
from 1999 through 2008; net operating loss carryforwards of $654,700,000, which
expire from 2006 through 2009; and alternative minimum tax credit carryforwards
of $99,600,000, which do not expire.
It is the company's intention to reinvest undistributed earnings of certain of
its foreign subsidiaries and thereby indefinitely postpone their remittance.
Accordingly, no provision has been made for income taxes on undistributed
earnings of $800,900,000 at December 31, 1994. Computation of the potential
deferred tax liability associated with these undistributed earnings is not
practicable.
The valuation allowance primarily relates to general business credit
carryforwards. The decrease in the valuation allowance of $8,284,000 for 1994 is
primarily due to the resolution of issues with respect to the utilization of
such carryforwards.
In the fourth quarter of 1992, the company adopted, retroactive to January 1,
1992, SFAS No. 109. The adoption of SFAS No. 109 changed the company's method of
accounting for income taxes from the deferred method to an asset and liability
approach. The company adopted the standard using a cumulative effect adjustment
and recorded a charge to 1992 net income of $242 million ($2.61 per share)
principally as the result of changes to the tax provision for years prior to
1988.
The effect of the adoption on 1992 results, after recording the cumulative
effect for the years prior to 1992, was to record additional pre-tax expense of
approximately $27 million, primarily as the result of an increase in
depreciation expense, and a reduction to net income of approximately $9 million.
Note 13. Pension and Other Benefit Plans
The company and its subsidiaries have a number of noncontributory pension plans
covering substantially all employees. The plans covering salaried employees
provide pension benefits that generally are based on the employee's compensation
during the 60 months before retirement. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service. The
company bases domestic pension contributions on funding standards established by
the Employee Retirement Income Security Act of 1974.
The net periodic pension cost of these plans in 1994, 1993 and 1992 included the
following:
(in thousands of dollars) 1994 1993 1992
------------------------------------------------- --------- --------- ---------
Service cost--benefits earned during the period.. $ 25,301 $ 25,256 $ 24,257
Interest cost on projected benefit obligation.... 95,461 98,667 96,248
Actual return on plan assets..................... (4,883) (208,714) (105,909)
Net amortization and deferral.................... (128,456) 90,806 (3,662)
--------- --------- ---------
Net periodic pension cost (income)............... $ (12,577) $ 6,015 $ 10,934
========= ========= =========
----------------------------------------------------------------------------------
Assumptions used in determining 1994, 1993 and
1992 net periodic pension cost were:
Expected long-term rate of return on assets...... 10.0% 10.0% 10.0%
Discount rate.................................... 7.3% 8.3% 8.5%
Long-term rate of increase in compensation levels 4.3% 5.3% 5.5%
----------------------------------------------------------------------------------
23
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
The accrued pension cost at December 31, 1994 and 1993 for defined benefit plans
is shown below. The measurement dates used to determine the funded status were
September 30, 1994 and 1993. Benefit obligations for 1994 and 1993 were
determined using an assumed discount rate of 8.0% and 7.25%, respectively, and
an assumed average long-term rate of increase in compensation levels of 5.0% and
4.25%, respectively. Plan assets consist primarily of listed stocks and bonds.
Assets Exceed Accumulated Benefits
----------------------------------
1994 1993
---------- ----------
(in thousands of dollars)
-------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation.................. $1,158,733 $1,179,538
========== ==========
Accumulated benefit obligation............. $1,195,890 $1,214,997
========== ==========
Projected benefit obligation............... $1,295,767 $1,330,228
Plan assets at fair value...................... 1,290,416 1,362,952
---------- ----------
Plan assets in excess of (less than) the
projected benefit obligation................. (5,351) 32,724
Unrecognized net (gain) loss................... 8,425 (43,014)
Prior service cost not yet recognized in net
periodic pension cost........................ 28,361 23,437
Unrecognized net transitional (asset).......... (16,929) (18,369)
---------- ----------
Pension asset (liability)...................... $ 14,506 $ (5,222)
========== ==========
24
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
Other Retiree Benefits
----------------------
The company provides certain health care and life insurance benefits to eligible
retired employees. Employees are generally eligible for benefits upon retirement
and completion of a specified number of years of service. These benefit plans
are unfunded.
Summary information on the company's plans providing postretirement benefits
other than pensions is as follows:
December 31 (in thousands of dollars) 1994 1993
---------------------------------------------- -------- --------
Accumulated postretirement benefit obligation:
Retirees.................................... $270,100 $308,000
Fully eligible, active plan participants.... 29,300 42,100
Other active plan participants.............. 53,600 53,500
-------- --------
Accumulated postretirement benefit obligation 353,000 403,600
Unrecognized prior service (cost) benefit..... 28,400 30,400
Unrecognized net (loss)....................... (1,700) (57,600)
-------- --------
Accrued postretirement benefit obligation..... $379,700 $376,400
======== ========
Net periodic postretirement benefit cost for 1994, 1993 and 1992 includes the
following components:
(in thousands of dollars) 1994 1993 1992
------------------------------------------- -------- -------- --------
Service cost............................... $ 4,300 $ 4,800 $ 4,300
Interest cost on accumulated postretirement
benefit obligation....................... 29,100 32,700 30,500
Net amortization and deferral.............. (900) --- ---
------- ------- -------
Net periodic postretirement benefit cost... $32,500 $37,500 $34,800
======= ======= =======
The accumulated postretirement benefit obligation at December 31, 1994 and 1993
was determined using an assumed discount rate of 8.25% and 7.5%, respectively.
The assumed health care cost trend rate used for measurement purposes was 9.2%
for 1995, declining ratably to an ultimate rate of 5% over a period of seven
years.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of December 31, 1994 would be
increased by approximately 10%. The effect of this change on the aggregate of
service and interest cost for 1994 would be an increase of approximately 10%.
25
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
In the fourth quarter of 1992, the company adopted, retroactive to January 1,
1992, SFAS No. 106. This statement requires that the cost of retiree benefits
other than pensions be recognized in the financial statements during the
employee's working career. The company's previous practice was generally to
expense the cost of these benefits as they were paid.
The cumulative effect of adopting SFAS No. 106 as of January 1, 1992 resulted in
an after-tax charge of $213 million ($2.30 per share) to 1992 earnings, after
reduction of approximately $126 million for income tax effects.
The effect of adoption on 1992 results, after recording the cumulative effect
for the years prior to 1992, was to recognize additional pre-tax expense of
approximately $13 million.
Postemployment Benefits
-----------------------
In the fourth quarter of 1993, the company adopted, retroactive to January 1,
1993, SFAS No. 112. The standard requires an accrual method of accounting for
postemployment benefits. Prior to adoption, the company was on a cash basis of
accounting for certain of these postemployment benefits. The cumulative effect
of adopting SFAS No. 112 as of January 1, 1993 resulted in an after-tax charge
of $7.5 million ($.08 per share) to 1993 earnings after reduction of
approximately $4.7 million for income taxes. The effect of adoption on 1993
results, after recording the cumulative effect, was not material.
26
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
Note 14. Business Segments
Information about the company's operations in different businesses for the three
years ended December 31, 1994 is as follows:
Timber,
Timberlands
and Wood Corporate Consolidated
(in thousands of dollars) Paper Products and Other Total
--------------------------- ----------- ----------- ---------- ------------
Net Sales to
Unaffiliated Customers:
1994................. $4,216,795 $1,101,397 $ --- $5,318,192
1993................. 3,817,579 1,251,254 --- 5,068,833
1992................. 3,834,585 1,091,886 --- 4,926,471
Income from Operations:
1994................. $ 70,887 $ 242,285 $ (47,172) $ 266,000
1993................. (133,774) 247,989 (47,823) 66,392
1992................. (7,490) 125,071 (44,210) 73,371
Identifiable Assets:
1994................. $6,377,202 $2,170,850 $ 415,576 $8,963,628
1993................. 6,563,263 2,148,921 430,585 9,142,769
1992................. 6,556,177 2,344,257 480,998 9,381,432
Capital Expenditures:
1994................. $ 198,499 $ 123,225 $ 7,148 $ 328,872
1993................. 417,407 182,785 5,588 605,780
1992................. 614,795 95,993 7,501 718,289
Depreciation Expense and
Cost of Timber Harvested:
1994................. $ 387,628 $ 57,346 $ 13,723 $ 458,697
1993................. 358,294 72,513 12,627 443,434
1992................. 324,010 72,562 13,928 410,500
The company's domestic and Canadian timber and timberlands assets and related
capital expenditures support both business segments but were not allocated to
the paper segment because identification of the specific timber and timberlands
assets associated with either segment is impossible. The timber that has been
harvested has been included at cost in the results of the business segments.
27
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
Information about the company's operations in different geographic areas for the
three years ended December 31, 1994 is as follows:
Corporate Consolidated
(in thousands of dollars) U.S. Canada Brazil and Other Total
--------------------------- ----------- -------- -------- ---------- ------------
Net Sales to
Unaffiliated Customers:
1994..................... $4,370,317 $694,104 $253,771 $ --- $5,318,192
1993..................... 4,185,388 610,947 272,498 --- 5,068,833
1992..................... 4,114,609 532,623 279,239 --- 4,926,471
Income from Operations:
1994..................... $ 125,145 $133,930 $ 54,097 $ (47,172) $ 266,000
1993..................... (18,063) 53,674 78,604 (47,823) 66,392
1992..................... (11,418) 37,778 91,221 (44,210) 73,371
Identifiable Assets:
1994..................... $7,254,363 $747,225 $546,464 $ 415,576 $8,963,628
1993..................... 7,454,454 744,631 513,099 430,585 9,142,769
1992..................... 7,588,478 718,695 593,261 480,998 9,381,432
Capital Expenditures:
1994..................... $ 258,899 $ 14,029 $ 48,796 $ 7,148 $ 328,872
1993..................... 486,074 65,035 49,083 5,588 605,780
1992..................... 638,392 16,974 55,422 7,501 718,289
Depreciation Expense and
Cost of Timber Harvested:
1994..................... $ 387,483 $ 32,338 $ 25,153 $ 13,723 $ 458,697
1993..................... 376,456 32,513 21,838 12,627 443,434
1992..................... 342,769 33,366 20,437 13,928 410,500
For the year ended December 31, 1994, net export sales to foreign countries
totaled $544 million.
As of December 31, 1994, net assets located outside of the United States
included in the consolidated financial statements were approximately $849
million. Of this amount, $492 million, which includes $51 million of cash and
cash equivalents, is owned by the company's Brazilian subsidiary.
28
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
Note 15. Quarterly Results of Operations (Unaudited)
(in millions of dollars, except per share amounts)
--------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------------------------------------------------------------------------
Net Sales 1994 $1,226.1 $1,242.0 $1,384.7 $1,465.4
1993 1,267.0 1,256.3 1,245.3 1,300.2
Gross Profit 1994 $ 83.4 $ 80.5 $ 161.8 $ 239.6
1993 103.8 92.5 68.7 94.1
Income Taxes
(Benefit) (a) 1994 $ (9.0) $ (15.0) $ 8.8 $ 40.2
1993 (18.7) (14.9) 4.7 (2.3)
Income (Loss) before
Extraordinary Item
and Cumulative
Effect of Accounting
Changes (b) 1994 $ (31.0) $ (31.1) $ 23.1 $ 102.3
1993 (28.1) (22.3) (53.5) (30.6)
Net Income (Loss) (c) 1994 $ (31.0) $ (31.1) $ 23.1 $ 102.3
1993 (35.6) (22.3) (53.5) (44.8)
Earnings (Loss) Per
Common Share before
Extraordinary Item
and Cumulative
Effect of
Accounting Changes 1994 $ (.41) $ (.41) $ .18 $ 1.02
1993 (.38) (.31) (.65) (.41)
Earnings (Loss)
Per Common Share (c) 1994 $ (.41) $ (.41) $ .18 $ 1.02
1993 (.46) (.31) (.65) (.56)
(a) Income taxes (benefit) for the three month period ended December 31, 1994
included a benefit of $7 million to reflect one-time adjustments to the
company's deferred tax liability. The three-month periods ended September
30 and December 31, 1993 included provisions of $23 million and $11
million, respectively, to reflect one-time adjustments to the company's
deferred tax liability.
(b) Other (income) expense - net included non-recurring pre-tax income of $34
million for the three month period ended December 31, 1994 and $10 million
for the three month period ended December 31, 1993.
29
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
(c) Net income (loss) and earnings (loss) per common share for the three month
period ended March 31, 1993 included the one-time charge for the cumulative
effect of an accounting change of $8 million, or $.08 per share,
respectively, for the adoption as of January 1, 1993 of SFAS No. 112 (Note
13).
Net income (loss) and earnings (loss) per common share for the three month
period ended December 31, 1993 included an after-tax charge of $14 million,
or $.15 per share, respectively, for a loss on early retirement of debt.
30
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
Note 16. Environmental Liabilities
The company has been designated as a potentially responsible party by the U.S.
Environmental Protection Agency (the "EPA") under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, and by certain
states under applicable state laws, with respect to the cleanup of hazardous
substances at a number of sites. In the case of many of these sites, other
potentially responsible parties also have been so designated. In addition, the
company and, in certain instances, other responsible parties have entered into
agreements with the EPA and certain states regarding the cleanup of hazardous
substances at various other locations. Also, the company is involved in the
remediation of certain other sites which are not the subject of investigation by
federal or state agencies.
The company cannot predict with certainty the total cost of such cleanups, the
company's share of the total cost of multiparty cleanups or the extent to which
contribution will be available from other parties, or the amount of time
necessary to accomplish such cleanups. However, based upon, among other things,
its previous experience with respect to the cleanup of hazardous substances as
well as the regular detailed review of known hazardous waste sites by the
company, the company has accrued $77 million at December 31, 1994, which
represents its current estimate of the probable cleanup liabilities, including
remediation and legal costs, at all known sites. This accrual does not reflect
any possible future insurance recoveries, which are not expected to be
significant, but does reflect a reasonable estimate of cost-sharing at
multiparty sites.
Although the company's probable liabilities have been accrued for currently,
hazardous substance cleanup expenditures generally are paid over an extended
period of time, in some cases possibly more than 30 years. Annual cleanup
expenditures during the period from 1992 through 1994 were approximately $6.6
million, $6.9 million and $4.3 million, respectively.
31
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Notes to Financial Statements
Note 17. Legal Proceedings
The company was a defendant in a class action which originally sought $5 billion
in damages allegedly resulting from the purported discharge of hazardous
substances, including dioxin, from the company's Canton, North Carolina, mill
into the Pigeon River. In October 1992, a mistrial was declared after the jury
was unable to reach a unanimous verdict. In May 1993, the court approved a
settlement of the action providing for the payment of $6.5 million by the
company. In June 1993, the court's approval of the settlement was appealed and,
in September 1994, the appeal was dismissed. In November 1994, a motion for
rehearing was denied. The time has expired for any further appeal of the court's
approval of the settlement and, accordingly, the settlement is final.
The company is a defendant in a class action which originally sought $500
million in damages allegedly resulting from the purported discharge of hazardous
substances, including dioxin, from the company's Pensacola, Florida, mill into
Eleven Mile Creek, which flows into Perdido Bay. The plaintiffs now are seeking
not more than $50,000 for each class member. It is anticipated that the class,
which was certified in June 1994, will consist of approximately 2,000 members.
The company is vigorously defending this action.
The company is also involved in other legal and administrative proceedings and
claims of various types. While any litigation contains an element of
uncertainty, management, based upon the opinion of the company's General
Counsel, presently believes that the outcome of each such proceeding or claim
which is pending or known to be threatened (including the actions described
above), or all of them combined, will not have a material adverse effect on the
company.
32
Report of Independent Public Accountants
--------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of Champion International Corporation:
We have audited the accompanying consolidated balance sheet of Champion
International Corporation (a New York corporation) and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Champion International
Corporation and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted accounting
principles.
As explained in Notes 1, 12 and 13 of Notes to Financial Statements, the
company adopted new accounting standards promulgated by the Financial Accounting
Standards Board, changing its methods of accounting for income taxes and for
postretirement benefits other than pensions, effective January 1, 1992, and
changing its method of accounting for postemployment benefits, effective January
1, 1993.
Arthur Andersen LLP
New York, N.Y.
January 17, 1995
33
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
---------------------
Overall Annual Results
----------------------
Results for 1994 improved significantly from both 1993 and 1992. In 1994, net
income was $63 million or 38 cents per share. This compared with a loss of $156
million or $1.98 per share in 1993 and a loss of $440 million or $5.05 per share
in 1992. The improvement from 1993 reflected substantially higher operating
income in the paper segment, while the improvement from 1992 reflected
substantially higher operating income in both the paper and wood products
segments.
Non-recurring items benefited 1994 results but adversely affected results for
1993 and 1992. Excluding non-recurring income and expense items, an
extraordinary item and the cumulative effect of the adoption of certain new
accounting standards, as described below, net income was $36 million or nine
cents per share in 1994, compared with a loss of $106 million or $1.44 per share
in 1993 and a loss of $95 million or $1.33 per share in 1992.
Results for 1994 included several non-recurring income and expense items,
principally the sale of the company's 25 percent interest in a Swedish
linerboard mill, a refund due on countervailing duties on lumber exports from
Canada into the United States in prior years and certain one-time adjustments to
the company's deferred tax liability. The net effect of all such items was to
increase net income by approximately $27 million or 29 cents per share.
Results for 1993 included several non-recurring income and expense items,
primarily a one-time adjustment to the company's deferred tax liability to
reflect the impact of changes during the year in the corporate income tax rates
in the United States and Canada. The net effect of all such items was to reduce
net income by approximately $28 million or 31 cents per share. Results for 1993
also included an extraordinary charge to earnings of $14 million or 15 cents per
share in connection with the redemption of certain debt. In addition, in 1993
the company adopted a new accounting standard relating to postemployment
benefits, the cumulative effect of which resulted in a charge to earnings of $8
million or eight cents per share.
Results for 1992 included several non-recurring income and expense items,
principally sales of timberlands, the net effect of which was to increase net
income by approximately $109 million or $1.18 per share. Also in 1992, the
company adopted two new accounting standards relating to income taxes and
postretirement benefits other than pensions, the cumulative effect of which
resulted in a charge to earnings of $454 million or $4.90 per share.
Significant Line Item Changes
-----------------------------
Net sales for 1994 of $5.3 billion improved from $5.1 billion in 1993 and $4.9
billion in 1992. Operating income also was up from both prior years. These
improvements reflected increased shipments of paper and, to a lesser extent,
higher prices for wood products and certain of the company's pulp and paper
grades.
34
Shipments of wood products declined as the result of the sale and the closure of
various wood products facilities. The aggregate cost of products sold rose from
1993 and 1992, mainly due to the increased paper shipments.
The decrease in long-term debt reflected the payment of certain debt as well as
the classification of certain debt payable in 1995 as current installments of
long-term debt. Although long-term debt declined from 1993 and 1992, interest
and debt expense increased somewhat, reflecting higher interest rates and less
capitalization of interest related to capital projects. Other (income) expense-
net was substantially higher than in 1993, principally due to lower foreign
currency translation expenses recorded by the company's Brazilian subsidiary,
Champion Papel e Celulose Ltda., as the result of reduced inflation in Brazil,
as well as the sale of the company's interest in a Swedish linerboard mill and
the refund due on countervailing duties on lumber exports referred to above.
Compared to 1992, other (income) expense - net declined significantly, primarily
reflecting gains from the sales of timberlands in 1992 referred to above. The
income tax provision was impacted favorably in 1994 and adversely in 1993 by
one-time adjustments to the company's deferred tax liability.
Quarterly Results
-----------------
Excluding non-recurring items in each quarter, earnings per share of 73 cents in
the fourth quarter of 1994 improved considerably from the per-share loss of 35
cents in the fourth quarter of 1993 and earnings per share of 18 cents in the
third quarter of 1994. The improvement from both prior periods principally
reflected substantially higher operating income in the paper segment.
Paper Segment
-------------
For the company's paper segment, operating income of $71 million in 1994
compared with losses of $134 million in 1993 and $7 million in 1992. Fourth
quarter 1994 operating income of $113 million compared with a loss of $24
million in the fourth quarter of 1993 and operating income of $36 million in the
third quarter of 1994.
In general, the paper business tends to follow overall economic trends. The
improvement in paper segment earnings in the second half of 1994 reflected
increased demand attributable to strengthening economies in the United States
and Europe. In addition, on the supply side, there were few capacity increases
in the industry during the year. This favorable demand/supply relationship
resulted in strong markets and substantial price increases for all of the
company's principal pulp and paper grades in the second half of 1994.
Results for the domestic printing and writing papers business, while a loss,
improved substantially from the loss in 1993 and moderately from the loss in
1992. Volumes were significantly above 1993 and 1992 levels for uncoated papers,
mainly due to the start-up of the No. 35 paper machine at the Courtland,
Alabama, mill in the third quarter of 1993; volumes for coated papers increased
slightly from the two prior years. Average prices for coated papers were lower
than in 1993 and 1992, while average prices for uncoated papers were about the
same as in the two prior years. Fourth quarter 1994 earnings represented a
significant improvement from the loss in the fourth quarter of 1993 and the
break-even results of the third quarter of 1994.
35
The improvement was due principally to price increases for both coated and
uncoated papers and increased volumes for uncoated papers. Additional price
increases for coated and uncoated grades were effective in January 1995, and
further increases were announced for February.
At the company's Brazilian subsidiary, which produces uncoated printing and
writing papers, net income (excluding non-recurring items) increased from 1993
and 1992. However, operating income declined from the two prior years. Average
prices were higher than in 1993 but lower than in 1992. Volumes were slightly
higher than in both prior years. The decline in operating income from both prior
years reflected the impact of lower inflation on recorded sales prices and was
approximately offset by a favorable adjustment to the foreign currency
translation expenses included in other (income) expense - net, as discussed
above. Reflecting higher overall operating income at the company's U.S. and
Canadian operations and lower operating income at the Brazilian subsidiary,
approximately 17% of the company's 1994 consolidated operating income, before
general corporate expense, was attributable to the Brazilian subsidiary. Fourth
quarter 1994 net income (excluding non-recurring items) and operating income
improved from the prior and year-ago quarters, primarily due to higher domestic
and export prices. Domestic and export prices continued to strengthen early in
1995.
Earnings for the publication papers business declined from 1993 but improved
significantly from the loss in 1992. The decline from last year was due to lower
average prices for coated groundwood papers and increased purchased pulp costs.
The improvement from 1992 was attributable mainly to higher volumes and prices
for coated groundwood and coated free sheet papers. Fourth quarter 1994 results
improved from the fourth quarter of 1993 and the third quarter of 1994 due to
higher prices for all publication paper grades. Additional price increases for
certain grades were effective in January 1995, and increases for certain other
grades were announced for February.
Operating income for the U.S. and Canadian market pulp operations improved
substantially from the loss in 1993 and moderately from the earnings level in
1992. Results reflected higher prices for almost all grades of pulp, which more
than offset lower shipments attributable to increased consumption of pulp by the
company following the start-up of the No. 35 paper machine in Courtland,
Alabama. Operating income in the fourth quarter of 1994 improved considerably
from the loss in the fourth quarter of 1993 and slightly from the earnings level
in the third quarter of 1994. The improvement was due to price increases for all
pulp grades, which more than offset lower shipments caused by maintenance
outages at all of the market pulp mills in the fourth quarter of 1994.
Additional price increases for all grades of pulp were effective in January
1995. Since the company is a net seller of pulp, overall profits benefit from
higher pulp prices; however, the company's publication papers mills and the
printing and writing papers mills in Hamilton, Ohio, and Canton, North Carolina,
purchase pulp from outside suppliers and are adversely affected by higher pulp
prices.
Results for the newsprint operation, while a loss, represented a significant
improvement from the losses in 1993 and 1992 due to higher volumes and prices.
The small loss in the fourth quarter of 1994 was a considerable improvement from
the losses of the prior and year-ago quarters due to higher prices. Additional
price increases were announced for March and May 1995.
36
--------------------------------------------------------------------------------
Earnings for the packaging business were significantly above the levels in 1993
and 1992, primarily due to higher prices for kraft paper and linerboard. Fourth
quarter 1994 results were up from the fourth quarter of 1993 and the third
quarter of 1994 due to higher prices for both products. Additional price
increases for kraft paper and most grades of linerboard were effective in
January 1995.
Wood Products Segment
---------------------
For the company's wood products segment, which includes the wood-related
operations of the Canadian subsidiary, Weldwood of Canada Limited, income from
operations of $242 million in 1994 declined slightly from $248 million in 1993
but improved substantially from $125 million in 1992. Fourth quarter 1994
operating income of $61 million was up from $57 million in the fourth quarter of
1993 and even with the third quarter of 1994.
The earnings of the wood products segment have been strong in recent years, due
primarily to supply factors such as industry timber shortages in the United
States attributable to environmental considerations. In addition, demand has
improved as housing starts in the United States returned to relatively high
levels in 1993 and 1994. Domestic housing markets appeared to be weakening
somewhat at the beginning of 1995, reflecting higher mortgage rates.
Average prices for lumber and plywood were higher than in 1993 and significantly
higher than in 1992. Volumes for lumber and plywood were substantially lower
than in 1993 and 1992, due to the sale in the third quarter of 1992 of the
Roseburg, Oregon, facility, the fourth quarter 1993 sales of the Lumber City,
Georgia, and Bonner and Libby, Montana, facilities, and the closure of the
Klickitat, Washington, lumber mill in the third quarter of 1994. Timber stumpage
prices were higher, while volumes were lower, than in 1993 and 1992. Results for
Weldwood's wood-related operations were adversely affected in 1994 by increased
stumpage costs for wood cut on government-owned timberlands in British Columbia.
Prices for lumber declined somewhat in the fourth quarter of 1994 and in early
1995. Prices for plywood increased during most of the fourth quarter of 1994 but
declined late in the quarter and in early 1995.
Labor Contracts
---------------
The company has labor agreements, which expire between 1995 and 1999, at ten of
its eleven domestic paper mills. Facilities at which labor agreements expire in
1995 include the Courtland, Alabama, printing and writing papers mill and the
Bucksport, Maine, and Sartell, Minnesota, publication papers mills. The
Quinnesec, Michigan, publication papers mill is a non-union facility.
The labor agreement that covers the paper industry in Brazil, including the
company's Brazilian subsidiary, is renegotiated each year.
At Weldwood of Canada, labor agreements covering the Hinton, Alberta, pulp mill
and timberlands operation and the joint venture pulp mill in Quesnel, British
Columbia, expired in 1994. These facilities presently are operating under the
terms of their respective expired contracts while efforts to reach new
agreements continue.
37
--------------------------------------------------------------------------------
Financial Condition
-------------------
General
-------
The company's current ratio was 1.1 to 1 at year-end 1994, as compared to 1.4 to
1 at year-end 1993 and 1.5 to 1 at year-end 1992. Total debt to total
capitalization was 43% at year-end 1994, as compared to 44% at year-end 1993 and
42% at year-end 1992.
Reflecting improved results and reduced capital spending, in 1994 the company's
net cash provided by operating activities exceeded the requirements of its
investing activities (principally capital expenditures). The approximate excess
was used to pay dividends as well as a portion of the company's long-term debt
and to increase cash and cash equivalents. In 1994, long-term debt (including
current installments) declined by $206 million, and cash and cash equivalents
increased by $35 million.
In each of 1993 and 1992, the company's net cash provided by operating
activities was not sufficient to meet the requirements of its investing
activities (principally capital expenditures) and its financing activities
(principally debt payments and cash dividends). Each year the approximate
difference was financed through borrowings and, in 1992, through the use of cash
and cash equivalents. In 1993, net borrowings generated cash proceeds of $75
million, while cash and cash equivalents increased by $19 million. In 1992, net
borrowings generated cash proceeds of $330 million, and cash and cash
equivalents decreased by $76 million.
Operating Activities
--------------------
Net cash provided by operating activities of $533 million improved from $201
million in 1993 and $258 million in 1992. The increase was due primarily to
significantly higher earnings and changes in certain components of working
capital.
Investing Activities
--------------------
Net cash used in investing activities of $262 million increased from $212
million in 1993 and declined from $611 million in 1992. The increase from 1993
was due to reduced net proceeds from asset sales and sales of investments in
marketable securities, which more than offset the substantial decline in capital
expenditures. The decrease from 1992 was due to significantly lower capital
expenditures and higher net proceeds from sales of investments in marketable
securities, which more than offset reduced asset sale proceeds.
In 1994, the company received net proceeds of $39 million from sales of
timberlands and fixed assets. In addition, the company received net proceeds of
$33 million from sales of investments, including $25 million from the sale of
the company's 25 percent interest in a Swedish linerboard mill. In 1993, the
company received net proceeds of $305 million from sales of timberlands and
fixed assets principally located in Montana. In addition, the company received
net proceeds of $107 million from sales of investments in marketable securities.
In 1992, the company received net proceeds of $174 million from sales of
timberlands and fixed assets primarily located on the West Coast. The company
had net expenditures of $58 million for investments in marketable securities in
1992.
38
--------------------------------------------------------------------------------
In February 1995, Weldwood of Canada sold its two coastal British Columbia
sawmills and related timber-cutting rights to International Forest Products
Limited for (Cdn) $140 million plus an additional amount for inventories. The
two sawmills have a combined annual capacity of 185 million board feet of
lumber. In addition, Weldwood is negotiating with the Hancock Timber Resource
Group to sell approximately 32,000 acres of Weldwood's fee-owned timberlands in
coastal British Columbia.
Financing Activities
--------------------
Net cash used in financing activities of $236 million compared with net cash
provided by financing activities of $30 million in 1993 and $277 million in
1992. This was due primarily to the reduction of debt in 1994, reflecting the
improved results and lower capital expenditures discussed above, as compared to
the increase in debt in each of the two prior years.
At December 31, 1994, the company had $382 million of U.S. commercial paper and
other short-term obligations outstanding, all of which are classified as long-
term debt, down from $559 million at year-end 1993 and $721 million at year-end
1992. In addition, at December 31, 1994, the company had $65 million of notes
outstanding under its U.S. bank lines of credit, down from $224 million at year-
end 1993 and $178 million at year-end 1992. Domestically, at December 31, 1994,
$382 million of the company's unused bank lines of credit of $1,035 million
supported the classification of commercial paper and other short-term
obligations as long-term debt. At December 31, 1994, Weldwood of Canada had
unused bank lines of credit of approximately $179 million.
During 1994, the company issued $230 million of variable rate notes due in 1998
and 1999 and borrowed $88 million through the issuance of long-term tax-exempt
bonds.
The annual principal payment requirements under the terms of all long-term debt
agreements for the years 1995 through 1999 are $309 million, $102 million, $245
million, $386 million and $738 million, respectively.
Capital Expenditures
--------------------
With the completion of the company's extensive capital improvement program in
1993, capital spending has been reduced to levels required for routine capital
replacements, environmental compliance and incremental improvements.
Capital spending of $268 million in 1994 declined substantially from $491
million in 1993 and $611 million in 1992. The company presently anticipates that
capital spending will be approximately $390 million in 1995, all of which is
expected to be financed through internally generated funds. The anticipated
increase in capital spending in 1995 is attributable in part to environmental-
related projects.
39
--------------------------------------------------------------------------------
The Environment
---------------
Environmental Capital Expenditures
The company is subject to various federal, state and local laws and regulations
relating to the discharge of materials into the environment and to the disposal
of solid wastes. These laws and regulations require the company to obtain
permits and licenses from appropriate governmental authorities with respect to
its properties and to operate its properties in compliance with such permits and
licenses.
In order to meet the standards established by the various federal, state and
local environmental laws and regulations to which the company is subject, the
company is required to invest substantial amounts in pollution abatement
facilities. During the period from 1990 through 1994, the company spent
approximately $338 million in its domestic operations to purchase and install
systems to control the discharge of pollutants into air and water and to dispose
of solid wastes; in addition, the company spent approximately $280 million on
the environmental improvement and modernization project at the Canton, North
Carolina, mill. In 1994, capital expenditures incurred for environmental
purposes were $31 million. In view of changing environmental laws and
regulations and their interpretation, as well as the uncertainties and variables
inherent in business planning, it is not possible for the company to predict
with certainty the amount of capital expenditures to be incurred for
environmental purposes in the future. However, the company estimates that
capital expenditures for air and water pollution control systems and solid waste
disposal systems in the United States will be approximately $90 million in 1995
and $46 million in 1996. In carrying forward its environmental program, the
company will commit additional amounts for environmental purposes in years
subsequent to 1996. Preliminary estimates indicate that for the period from 1997
through 1999 capital expenditures for air and water pollution control facilities
and solid waste disposal facilities in the United States will aggregate
approximately $217 million. The environmental capital expenditures described in
this paragraph are included in the respective past and estimated 1995 capital
spending amounts set forth above under "Capital Expenditures."
Although some pollution abatement and solid waste disposal facilities produce
improvements in operating efficiency, most increase product costs without
enhancing capacity or operating efficiency. However, since other paper and
forest products companies also are subject to environmental laws and
regulations, the company does not believe that compliance with such laws and
regulations will have a material adverse effect on its competitive position.
Proposed EPA Air and Water Regulations
In December 1993, the United States Environmental Protection Agency (the "EPA")
proposed regulations pursuant to the federal Clean Air Act Amendments of 1990
(the "Clean Air Act") and the federal Water Pollution Control Act (the "Clean
Water Act"). Certain additional Clean Air Act regulations are expected to be
proposed in 1995. It is anticipated that all of these regulations will become
final in 1996, with compliance required no later than 1999.
40
--------------------------------------------------------------------------------
As previously reported, trace amounts of dioxin were found in the pulp, sludge
and effluent at some bleached kraft mills in the United States and Canada,
including certain of the company's mills. The proposed regulations under the
Clean Water Act are based upon the use of oxygen delignification and chlorine
dioxide substitution as the preferred technology option to reduce the potential
for the formation of dioxin in the pulp bleaching process. The company has
implemented and is continuing to implement this technology at its bleached kraft
mills. If the final regulations continue to designate oxygen delignification and
chlorine dioxide substitution as the preferred technology option, the company
presently anticipates that it will incur capital expenditures to meet the
requirements of the Clean Water Act regulations, additional to those set forth
above under "Capital Expenditures" and "Environmental Capital Expenditures," of
approximately $15 million during 1995 and 1996.
Assuming that the Clean Air Act regulations expected to be proposed in 1995 use
a range of standards currently anticipated by the company and that all of the
regulations pursuant to the Clean Air Act are adopted as proposed, the company
presently expects that it will incur capital expenditures to meet the
requirements of the Clean Air Act and state air toxics regulations, additional
to those set forth above under "Environmental Capital Expenditures," of
approximately $300 million over the period of approximately 1996 to 1999.
Great Lakes Initiative
The company may incur capital expenditures, additional to those set forth above
under "Capital Expenditures" and "Environmental Capital Expenditures," in order
to meet the requirements of the Great Lakes Water Quality Agreement of 1978 and
the Great Lakes Critical Programs Act of 1990. Pursuant thereto, in April 1993,
the EPA issued proposed guidance to the states regarding water quality standards
for the waters of the Great Lakes and their tributaries. The company is awaiting
the issuance of implementing regulations by the environmental agencies of the
affected states in order to determine the extent of any additional costs and the
period over which they will be incurred. As a result, the company is not yet in
a position to provide a meaningful estimate of any such costs.
Federal Executive Order
In October 1993, President Clinton issued an executive order covering the
purchase of uncoated printing and writing papers by the federal government. The
order establishes a minimum post-consumer recycled content for such paper
purchased by federal agencies of 20% commencing at the end of 1994, increasing
to 30% at the end of 1998. In addition, for certain types of such paper, the
order requires a minimum content of 50% recovered materials.
Although the federal government purchases less than 2% of the paper produced in
the United States, federal government procurement standards sometimes are
adopted by state and local governments and private industry. The sale of
uncoated printing and writing papers by the company to the federal government
accounts for an immaterial portion of total company sales. However, the sale of
domestic uncoated printing and writing papers by the company to all customers
accounted for approximately 17% of total company sales in 1994.
41
--------------------------------------------------------------------------------
The company is continuing to review the possible implications of the executive
order, including the extent to which additional facilities would be required to
meet its standards and the extent to which purchasers other than the federal
government are likely to adopt similar standards. The company may incur capital
expenditures, additional to those set forth above under "Capital Expenditures"
and "Environmental Capital Expenditures," to meet the recycled content
requirements of the executive order and of the marketplace generally. However,
in view of the uncertainties, the company is not yet in a position to provide a
meaningful estimate of any such costs or of the impact of the executive order on
demand for virgin market pulp produced by the company.
Hazardous Substance Cleanup
The company has been designated as a potentially responsible party by the EPA
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, and by certain states under applicable state laws, with respect to the
cleanup of hazardous substances at a number of sites. In the case of many of
these sites, other potentially responsible parties also have been so designated.
In addition, the company and, in certain instances, other responsible parties
have entered into agreements with the EPA and certain states regarding the
cleanup of hazardous substances at various other locations. Also, the company is
involved in the remediation of certain other sites which are not the subject of
investigation by federal or state agencies. The cost of all such cleanups is not
capitalized and, accordingly, is not included in the capital expenditure
information set forth above under "Capital Expenditures" and "Environmental
Capital Expenditures."
The company cannot predict with certainty the total cost of such cleanups, the
company's share of the total cost of multiparty cleanups or the extent to which
contribution will be available from other parties, or the amount of time
necessary to accomplish such cleanups. However, based upon, among other things,
its previous experience with respect to the cleanup of hazardous substances as
well as the regular detailed review of known hazardous waste sites by the
company, the company has developed an estimate of its probable cleanup
liabilities. This estimate includes remediation and legal costs with respect to
properties presently or formerly owned or operated by the company or its
predecessors as well as properties, such as municipal or county landfills, owned
and operated by third parties to which the company or its contractor sent waste
material. The company has accrued $77 million at December 31, 1994, on a non-
discounted basis, which represents its current estimate of the probable cleanup
liabilities at all known sites. This accrual does not reflect any possible
insurance recoveries, which are not expected to be significant, but does reflect
a reasonable estimate of cost-sharing at multiparty sites.
Although the company's probable liabilities have been accrued for currently,
hazardous substance cleanup expenditures generally are paid over an extended
period of time, in some cases possibly more than 30 years. Annual cleanup
expenditures during the period from 1992 through 1994 were approximately $6.6
million, $6.9 million and $4.3 million, respectively.
42
--------------------------------------------------------------------------------
Environmental Legal Proceedings
The company was a defendant in a class action which originally sought $5 billion
in damages allegedly resulting from the purported discharge of hazardous
substances, including dioxin, from the company's Canton, North Carolina mill
into the Pigeon River. In October 1992, a mistrial was declared after the jury
was unable to reach a unanimous verdict. In May 1993, the court approved a
settlement of the action providing for the payment of $6.5 million by the
company. In June 1993, the court's approval of the settlement was appealed and,
in September 1994, the appeal was dismissed. In November 1994, a motion for
rehearing was denied. The time has expired for any further appeal of the court's
approval of the settlement and, accordingly, the settlement is final.
The company is a defendant in a class action which originally sought $500
million in damages allegedly resulting from the purported discharge of hazardous
substances, including dioxin, from the company's Pensacola, Florida, mill into
Eleven Mile Creek, which flows into Perdido Bay. The plaintiffs now are seeking
not more than $50,000 for each class member. It is anticipated that the class,
which was certified in June 1994, will consist of approximately 2,000 members.
In February 1994, the company received a notice of violation from the Texas
Natural Resources Conservation Commission ("TNRCC") alleging unauthorized air
emissions from the company's Sheldon, Texas, mill. The notice of violation
alleged several violations, all but two of which have been resolved without
penalty. With respect to the two remaining alleged violations, it is expected
that the TNRCC will seek penalties, although the company is unable at this time
to estimate the amount of penalties which may be sought or finally assessed.
The company is vigorously defending each of the pending actions described above.
While any litigation contains an element of uncertainty, management, based upon
the opinion of the company's General Counsel, presently believes that the
outcome of these actions will not have a material adverse effect on the company.
Other
-----
The industry in which the company operates is capital intensive. Due to
inflation, the company's property, plant and equipment and timber and
timberlands could not be replaced for the historical cost value at which they
are reflected in the company's financial statements. On a current cost basis,
depreciation expense and cost of timber harvested would be greater than reported
on a historical cost basis.
43
Champion International Corporation and Subsidiaries
--------------------------------------------------------------------------------
Eleven - Year Selected Financial Data
(in millions, except per share amounts and ratio data)
1994 1993 1992 1991
----------------------------------------------------------------- ------ ------ ------ ------
Earnings:
Net sales...................................................... $5,318 $5,069 $4,926 $4,786
Depreciation expense and cost of timber harvested.............. 459 443 411 342
Provision for wood products restructuring...................... --- --- --- ---
Gross profit................................................... 565 359 362 454
Income from operations......................................... 266 66 73 179
Interest and debt expense...................................... 235 224 206 211
Other (income) expense -- net.................................. (57) 7 (143) (110)
Income (loss) before income taxes, extraordinary item and
cumulative effect of accounting changes...................... 88 (165) 10 78
Income taxes (benefit)......................................... 25 (31) (4) 38
Income (loss) before extraordinary item and cumulative effect
of accounting changes....................................... 63 (134) 14 40
Extraordinary item, net of taxes............................... --- (14) --- ---
Cumulative effect of accounting changes, net of taxes.......... --- (8) (454) ---
Net income (loss).............................................. 63 (156) (440) 40
Per Common Share: *
Primary earnings (loss)...................................... $ .38 $(1.98) $(5.05) $ .14
Fully diluted earnings (loss)................................ .38 (1.98) (5.05) .14
Cash dividends declared...................................... .20 .20 .20 .20
Cash dividends paid.......................................... .20 .20 .20 .425
Shareholders' equity......................................... 31.25 31.23 33.53 39.02
Financial Position:
Current assets............................................... $1,179 $1,114 $1,142 $1,162
Timber and timberlands -- net................................ 1,847 1,839 2,012 1,666
Property, plant and equipment -- net......................... 5,603 5,802 5,763 5,386
Other assets and deferred charges............................ 335 388 464 442
------ ------ ------ ------
Total assets............................................. $8,964 $9,143 $9,381 $8,656
====== ====== ====== ======
Current liabilities.......................................... $1,034 $ 772 $ 786 $ 794
Long-term debt and other liabilities......................... 3,560 3,990 3,928 3,162
Deferred income taxes........................................ 1,040 1,077 1,159 678
Minority interest in subsidiaries............................ 69 54 49 51
$92.50 convertible preference stock.......................... 300 300 300 300
Shareholders' equity......................................... 2,961 2,950 3,159 3,671
------ ------ ------ ------
Total liabilities and shareholders' equity............... $8,964 $9,143 $9,381 $8,656
====== ====== ====== ======
Other Statistics:
Expenditures for property, plant and equipment............... $ 225 $ 476 $ 623 $ 604
Timber and timberlands expenditures.......................... $ 104 $ 130 $ 95 $ 58
U.S. timber acreage owned or controlled...................... 5.1 5.1 6.0 6.2
Common shares outstanding at year-end........................ 93 93 93 93
Dividends declared on preference shares...................... $ 28 $ 28 $ 28 $ 28
Dividends declared on common shares.......................... $ 19 $ 19 $ 19 $ 19
Current ratio................................................ 1.1 1.4 1.5 1.5
Ratio of total debt to total capitalization.................. .43:1 .44:1 .42:1 .40:1
Return on average shareholders' equity and $92.50 convertible
preference stock before extraordinary item and cumulative
effect of accounting changes............................... 2.0% (4.0)% 0.4% 1.0%
* Primary and fully diluted earnings (loss) per share for 1993 include the
cumulative effect of an accounting change of $(.08) and extraordinary item
for early retirement of debt of $(.15).
Primary and fully diluted earnings (loss) per share for 1992 include the
cumulative effect of accounting changes of $(4.90).
44
--------------------------------------------------------------------------------
1990 1989 1988 1987 1986 1985 1984
------ ------ ------ ------ ------ ------ ------
$5,090 $5,163 $5,129 $4,615 $4,388 $5,770 $5,121
323 279 260 252 270 263 204
--- --- --- --- --- --- 220
800 1,048 1,141 872 798 903 585
491 769 861 598 438 364 82
156 136 161 177 170 171 102
(85) (93) (30) (198) (45) (52) ---
420 726 730 619 313 245 (20)
197 294 274 237 112 82 (14)
223 432 456 382 201 163 (6)
--- --- --- --- --- --- ---
--- --- --- --- --- --- ---
223 432 456 382 201 163 (6)
$ 2.11 $ 4.56 $ 4.80 $ 4.03 $ 2.08 $ 1.59 (.36)
2.08 4.43 4.65 3.92 2.05 1.59 (.36)
1.10 1.10 .95 .72 .52 .46 .40
1.10 1.075 .90 .65 .52 .43 .40
39.10 38.12 35.06 30.82 27.52 26.08 25.27
$1,104 $1,074 $ 986 $ 896 $ 811 $1,041 $1,681
1,645 1,613 1,581 1,554 1,555 1,569 1,527
5,117 4,404 3,702 3,340 3,309 3,143 3,287
485 440 431 389 432 345 320
------ ------ ------ ------ ------ ------ ------
$8,351 $7,531 $6,700 $6,179 $6,107 $6,098 $6,815
====== ====== ====== ====== ====== ====== ======
$801 $ 804 $ 699 $ 657 $ 734 $1,118 $1,904
2,864 2,175 2,133 2,120 2,462 2,057 2,169
651 605 474 415 281 290 197
56 58 49 51 38 34 48
300 300 --- --- --- --- ---
3,679 3,589 3,345 2,936 2,592 2,599 2,497
------ ------ ------ ------ ------ ------ ------
$8,351 $7,531 $6,700 $6,179 $6,107 $6,098 $6,815
====== ====== ====== ====== ====== ====== ======
$ 959 $ 916 $ 585 $ 340 $ 446 $ 443 $ 405
$ 88 $ 78 $ 88 $ 62 $ 53 $ 43 $ 34
6.4 6.4 6.4 6.5 6.5 6.5 6.8
93 93 95 95 94 93 93
$ 28 $ 2 $ --- $ --- $ 6 $ 15 $ 15
$ 102 $ 104 $ 91 $ 69 $ 49 $ 43 $ 26
1.4 1.3 1.4 1.4 1.1 .9 .9
.38:1 .32:1 .34:1 .36:1 .44:1 .42:1 .50:1
5.6% 12.2% 14.5% 13.8% 7.8% 6.4% (0.3)%
45
Common Stock
Prices and
Dividends Paid Quarterly sales prices for the company's common stock as
reported on the New York Stock Exchange composite tape,
and quarterly dividends paid, in 1994 and 1993 were:
----------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
1994
----
High $36 $34 1/2 $40 $40
Low 28 3/4 28 32 5/8 32 3/4
Dividends Paid .05 .05 .05 .05
----------------------------------------------------------------------------
1993
----
High $33 $34 5/8 $34 1/8 $34
Low 27 1/8 29 7/8 29 1/4 28 5/8
Dividends Paid .05 .05 .05 .05
46