FLETCHER CHALLENGE CANADA LIMITED ANNUAL REPORT 1998 Brought to you by Global Reports
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Financial Highlights 2
President’s Message 3
Printing Papers 12
Market Pulp 18
Environment Report 20
Production Capacities 28
Management’s Discussion and Analysis 30
Financial Statements 44
Comparative Review 1988 - 1998 54
Directors and Officers 56
Corporate Information 57
marketplace for quality
and performance, two of
the attributes delivered
with the Company’s
leadership in lightweight
runnability. The Company
also continues to differen-
tiate its specialty and high-
bright papers, bringing
other products to market
such as :advance™.
Fletcher Challenge
Canada is the world’s
largest producer of
sawdust-based pulp, an
innovative product
branded Triax™, which is
Corporate Profi le
Contents
Fletcher Challenge
Canada is the largest
producer of newsprint and
groundwood specialty
papers in western North
America, serving the
publishing and
commercial printing
industries in the markets
of the North Pacific Rim.
The Company’s branded
paper products and
services, such as
Marathon and Catalyst™,
are distinguished in the
used as a substitute for
conventional pulps in the
manufacture of tissues,
packaging and specialty
papers. The Company
also produces kraft pulp
and specialty Metaliners™
containerboard.
Fletcher Challenge
Canada operates three
manufacturing facilities in
British Columbia —
Crofton, Elk Falls and
Mackenzie — and has an
agreement in principle
to acquire a controlling
interest in Trust
International Paper
Corporation (TIPCO),
the largest newsprint
producer in the
Philippines.
Shares of Fletcher
Challenge Canada
(FCC.A) are traded on the
Toronto, Montreal and
Vancouver stock
exchanges.
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Relentless focus, an unwavering commitment to create shareholder value and an effective
organization that can make things happen. These have been our touchstones in
transforming Fletcher Challenge Canada into a world-class printing papers business.
Now focused on paper as our future and free from the distraction
of multiple businesses, we are dedicated to providing outstanding lightweight printing
papers and leading-edge services that result in superior pressroom runnability for
our customers. Our lightweight runnability strategy is unique in North America, and
represents a superior opportunity to create value for our customers and the
stakeholders of Fletcher Challenge Canada. With much of our restructuring behind us,
a solid strategy that is being implemented, a competitive labour agreement in place and
a solid financial platform, we have the momentum and confidence to carry us forward.
F L E T C H E R C H A L L E N G E C A N A D A
1
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Notes:(1) Continuing operationsFiscal 1998 results were affected by a nine-month strike at the Company’s manufacturing facilities.
Net Sales (1)
($ millions)
2000
1500
1000
500
0 94 95 96 97 98
Financial Highlights
300
200
100
0
Net Earnings($ millions)
400
300
200
100
0
-100
Cash Providedby (Used for)Operations(1)
($ millions)
94 95 96 97 98 94 95 96 97 98
F L E T C H E R C H A L L E N G E C A N A D A
2/3
For the Years Ended June 30 1998 1997 1996
(in millions of dollars)
Financial Summary
Net sales (1) $ 284.1 $ 949.6 $ 1,388.8Operating earnings (loss) (1) (169.9) 12.3 200.8Earnings (loss) from continuing
operations (92.1) (0.4) 99.6Net earnings 298.6 119.5 154.4Cash provided by (used for) operations (1) (93.6) 75.0 305.1Capital expenditures (1) 44.1 67.3 118.2
Financial Position
Total assets $ 2,530.7 $ 2,648.9 $ 2,920.2Net debt (cash) (844.3) (278.9) 196.0Common shareholders’ equity 2,175.7 2,000.5 1,946.9Ratio of debt to capitalization 0:100 0:100 8:92
(in dollars, except shares outstanding)
Per Common Share
Earnings (loss) from continuingoperations $ (0.74) $ 0.00 $ 0 .80Net earnings 2.40 0.96 1.24Cash provided by (used for) operations (1) (0.75) 0.60 2.46Book value 17.52 16.11 15.68Shares outstanding (in millions) 124.2 124.2 124.2
The Company’s year end is June 30
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President’s Message
Catalyst™, :ad:advance™ and Maraand Marathon – wthon – words thaords that suggest ct suggest change, momovement and enduranceement and endurance.
SeparaSeparately, these wthese words arords are the brand names thae the brand names that define some of our unique prt define some of our unique product andoduct and
service offervice offerings in the markings in the marketplace.Together, thethey descry describe the qualities thaibe the qualities that art are pre providing
the momentum to kthe momentum to keep Fletceep Fletcher Challenge Canada moher Challenge Canada moving forwving forward to become a ward to become a world-classorld-class
printing paperinting papers compans company.
For our neour newspaper pubwspaper publishing and commercial prlishing and commercial printing customerinting customers, paper brpaper breaks dureaks during longing long
press ress runs aruns are a costle a costly pry problem.At the same timeAt the same time, customercustomers ars are looking for lighter basise looking for lighter basis
Working with customers in closerpartnership, Fletcher Challenge Canadais delivering on its strategy to be theoutright leader in lightweight, high
printing papers. The Company has positioned
itself favourably as the largest producer of
newsprint and uncoated groundwood
specialty papers in western North America.
performance
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weight papers to reduce distribution and operating costs, and address the reality of contemporary
environmental considerations. Finally, the competition between customers and with other
communication media is driving technical printing standards ever higher to achieve better
reproduction quality for readers.
These unmet needs have provided us with a challenge and an opportunity to step forward with
new products and services that will serve to cement long-term, mutually beneficial relationships
for our customers and our Company. Building on our existing competencies, we’ve responded
with advances in our product and service offerings.
The benefits for customers from lightweight, highly runnable papers are significant – less press
downtime, reduced paper waste, higher press speeds – and translate into added revenue. Our
goal is to establish long-term contracts with large-volume customers who will benefit from
a substantial improvement in paper runnability – and to share in the value created.
For example, Marathon, our new highly runnable newsprint sheet and technical support
package, is being trialed with some of our valued, large-volume newsprint customer partners.
With an industry standard performance of about one break per 30 rolls, Marathon is delivering
close to one break per 100 rolls in these early trials, and we are excited by its promise of doing
even better.
Catalyst™, the Company’s high-opacity directory paper, continues to be the sheet of choice
for many directory publishers with annual capacity selling out early in fiscal 1999. Given the
performance of the product, the Company is making a $16 million investment to produce a
new generation ultralight Catalyst™ at basis weights as low as 29.3 gsm, with the same
runnability properties offered at much higher basis weights from competitors.
We are also making product advances in our high-bright grades for retailers and commercial
printers.We launched a lightweight 48.8 gsm paper in fiscal 1998 and are now conducting
trials of super-lightweight sheets under 45 gsm. To reflect sheet improvements, we plan to
launch a new offset grade in the fall to complement our :advance™ line of high-bright papers.
We are also developing a new newsprint grade for commercial printers who require a low-
cost alternative to standard newsprint.
F L E T C H E R C H A L L E N G E C A N A D A
4/5
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Last year the Company established sales offices in Tokyo and Taipei to increase market share
in Asia with lighter-weight papers.To this end, the Company recently trialed a new lighter
basis weight magazine grade for the Japanese market – 44 gsm Japanese News.
With these successes in hand, we plan to invest in the order of $100 million over the
next three years to fully commercialize our lightweight runnability strategy. In the
process, we expect to further our leadership position as the company with the “ lightweight,
runnability” solutions.
A fully integrated supply chain is a key component to achieving superior runnability. We are
well-advanced in optimizing our supply chain to significantly improve end-to-end delivery
service and reduce product handling damage. A central distribution centre, currently under
development in GreaterVancouver, will allow us to consolidate product movement – helping
us realize zero damage, lower costs and shorter delivery time. We will also achieve considerable
freight savings by moving to fewer, larger partnership accounts.
Achieving substantial cost reductions is a priority across the paper business.We are targeting
$75 per tonne in cost reductions over the next two years through both operating improvements
and work practice changes.
With our organization clearly focused on leadership in lightweight highly runnable papers
and solidly committed to significant advances in operational performance, we are well-
positioned to use our financial strength to deliver value opportunities for shareholders.
With Marathon, our goal is
to set new North American
performance standards in
newsprint runnability.
We are aiming for one break
in 200 rolls by the end of
fiscal 2001, and one break
in 400 rolls by 2003.
RU
NN A B I L I T Y
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We are in the process of gaining a foothold in Asia having signed an agreement in principle
to acquire a controlling interest in Trust International Paper Corporation (TIPCO), the largest
newsprint producer in the Philippines.The acquisition will provide an excellent opportunity
for the Company to capitalize on the market dynamics of Asia and to participate with well-
established partners in a successful enterprise.We are looking at forging further alliances to
enhance our position as one of the pre-eminent suppliers in the Asia Pacific region.
A 100 percent-recycled newsprint facility,TIPCO has an annual production capacity of 230,000
tonnes.TIPCO’s strong domestic market position and strategic location will give us the ability
to supply both Asian and western North American markets cost-effectively.The acquisition
will also help us meet customer requirements for recycled-content newsprint.
P U L P B U S I N E S S Our pulp business is pursuing a distinct business strategy of its own
following the decision last year to make it a separate operating unit within the Company.The
strategy is built on a platform of sourcing low-cost, non-traditional fibre; achieving operational
excellence; and marketing specific pulps to attractive market segments. Linked together,
these three planks will help the Company’s pulp operations build a competitive advantage
relative to new production capacity that has come on-line in other regions.
As the original developer of sawdust-based pulps, the Company is now the world’s largest
producer. Sold globally under the Triax™ brandname, this product is used by customers as
a cost-effective substitute for conventional northern bleached softwood kraft pulp (NBSK)
in manufacturing tissues, packaging, and specialty paper products. We have adopted a technical
sales approach to match Triax’s unique fibre characteristics with the product performance
needs of customers, and are actively developing new markets for this high-margin pulp.
In 1998, we completed a review of all NBSK grades, the market segments they serve and the
fibre characteristics sought by the most desirable customers.This analysis has resulted in a
realignment of our marketing efforts in order to match our NBSK grades to market segments
where we can add measurable value to our customers’ operations.
F L E T C H E R C H A L L E N G E C A N A D A
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Our pulp strategy addresses the higher quality and consistency standards demanded by
our targeted customers. By focusing more narrowly on specific market segments, the
Company expects to lower significantly its exposure to volatile spot markets and improve
its overall margin.
The Company’s Silverliner™ containerboard product, marketed through our pulp organization,
continues to enjoy a competitive advantage in western North America for high quality,
consistency and customer support.A niche product used by packaging customers for top
sheets on corrugated boxes, Silverliner™ generates consistently high earnings for the Company.
In order to address the underlying competitive issues facing the pulp business in British
Columbia, we have embarked on a systematic cost-reduction program to attain top-quartile
status in overall conversion costs in the Canadian pulp industry. Initiatives are now underway
that will lead to a reduction in pulp manufacturing costs of $75 per tonne within two years.
L A B O U R P R A C T I C E S With the settlement of a nine-month strike between the
Company and its unions on April 18, Fletcher Challenge Canada now has a level playing field
on labour practices with its North American competitors.
The benefits of flexible work practices and continuous 365-day operation will enhance operating
margins across the Company by $30 million annually. The six-year contract is the longest ever
achieved in the history of the BC pulp and paper industry. As part of the agreement, the unions
have agreed not to target the Company in 2003, effectively guaranteeing our customers up
The pulp strategy builds on the
Company’s leadership position
in manufacturing sawdust-
based pulps, which now
represent more than one-third
of our annual capacity.
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to 10 years of uninterrupted supply. Quarterly meetings of Company executives and local
union executives will now provide a forum for ongoing discussion of workplace issues.
The Company is continuing with its restructuring initiatives to improve performance.As a
result of broad operational improvements, the Company will reduce the hourly workforce
at its pulp and paper operations by approximately 15 per cent, or 300 positions, by the end
of 1999.To fully develop the program, we engaged in a consultation process with our local
unions and hourly employees.The goal is to achieve the workforce changes through voluntary
means wherever possible.
This initiative follows the restructuring last year into independent pulp and paper organizations
and a reduction in staff employees, which resulted in annual overhead cost savings of $25 million.
F I N A N C I A L R E S U L T S Net earnings for the year ended June 30, 1998 were a record
for the Company at $299 million, or $2.40 per share.This compares with net earnings of
$120 million, or 96 cents per share, for the same period last year.
The sale of Blandin Paper Company during fiscal 1998 contributed an after-tax gain of $390
million.With Blandin’s coated paper business in the US mid-west having a distinct geographic
and customer base, the sale allows Fletcher Challenge Canada to focus its resources on its
core printing papers business in western North America and Asia.
The 1997 results included the $135 million after-tax gain on the sale of the Company’s 52
per cent interest in TimberWest Forest Limited. Fiscal 1997 results also included after-tax
restructuring expenses of $15 million.
The Company’s continuing operations recorded a net loss of $92 million for the year, or 74
cents per share, down from a net loss of $400,000, break-even on a per share basis, one year
earlier.The 1998 results reflect lower production and shipment volumes related to the
shutdown of the Company’s BC pulp and paper operations from July 14, 1997 to April 18,
1998 as a result of the strike.
F L E T C H E R C H A L L E N G E C A N A D A
8/9
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Sales from continuing operations totalled $284 million, down 70 per cent from $950 million
in the previous year. Cash flow of $94 million was used in continuing operations in the year.
Continuing operations provided cash flow of $75 million one year ago.
North American newsprint demand was healthy during the year, continuing the trend of
improvement that began during the latter half of fiscal 1997. Paper markets in Asia weakened
in the final six months of the fiscal year, as the financial crisis led to reduced demand and
consumption in the region. Pulp markets improved in the first six months of fiscal 1998, with
reasonable paper demand in both the United States and Europe, but weakened during the
second half of the year due to events in Asia.
Capital spending was $44 million for the year, a decrease from $67 million in the previous
year.The reduced level of capital expenditure reflects the effect of the strike and a continuing
emphasis on low capital, high payback projects.
Quarterly dividends to shareholders during the year were 15 cents per share.The total dividend
payout of 60 cents per share for the year represents 25 per cent of net earnings.
Fletcher Challenge Canada’s balance sheet at the end of the fiscal year was the strongest in
our industry, with a cash position of $844 million and no debt.This enhances our ability to
further strengthen our position as a world-class printing papers supplier.
With an agreement in principle to
acquire a controlling interest in
TIPCO, the largest newsprint
producer in the Philippines, Fletcher
Challenge Canada will gain a
stronger production base for serving
the freight logical markets of western
North America and Northern Asia.
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O R G A N I Z A T I O N A L C H A N G E S Our pulp and paper business strategies hinge on the
ability of our people to work in highly collaborative customer-supplier relationships.They
require meeting exacting standards for product quality and superior performance.They
demand we create innovative solutions to meet changing customer needs. Constant improvement,
relentless cost reduction and solid teamwork are required to improve the competitive
positioning of our operations.Across the Company, we admire and appreciate the drive of
our people – focused on meeting business goals in the face of continuous challenge and change.
The competitive labour agreements we signed in April give us the platform to improve the
productivity and efficiency of our operations. To enhance employee skills and abilities to
support the implementation of flexible work practices, we have developed a comprehensive
two-year employee training program with BC community colleges.
There were a number of board member and senior management changes during the year.
We are pleased to welcome to our board of directors Michael J.Andrews, chairman of Fletcher
Challenge Canada Limited and chief executive officer of Fletcher Challenge Limited, and
Harold N. Kvisle, president of Fletcher Challenge Energy Canada Inc.We appreciate the valuable
contributions of Ian Donald and John A. Hood who retired from the board in 1997.
Jim Armitage, who has held senior operating positions with major newspaper groups in Canada,
was appointed senior vice-president, newsprint. Dennis Day, who has held a number of senior
executive positions with the Company, was named senior vice-president, paper manufacturing.
We are pleased to welcome John Longley as senior vice-president and chief financial officer,
who returns to the Company after holding a senior position with Fletcher Challenge Limited.
O U R P R I O R I T I E S In the coming year, we will continue to carve out a unique niche for
ourselves in the competitive landscape of paper producers – further advancing our capabilities
in the manufacture and marketing of high performance papers. We will significantly improve
operational performance with the implementation of new work practices and a relentless focus
on cost reduction throughout the organization. At the same time, we will assess future
opportunities for our pulp business and use our financial strength to deliver value for shareholders.
F L E T C H E R C H A L L E N G E C A N A D A
10/11
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Although our paper customers face competitive challenges from electronic media sources,
they are fighting back. Newspaper publishers and commercial printers are re-inventing their
businesses to respond to changing competition and customer demands. We want to be a
valuable ally in helping them make the transition.
Of particular interest, readership is increasing in many Pacific Rim nations. Rising living
standards and literacy rates are expected to drive steady consumption in these areas over the
next decade.Although Asia is currently facing short-term challenges, the long-term outlook
is bright. Here, too, we want to play a role and share in the growth of these economies.
It is projected the Asia Pacific region will consume 33 per cent of the world’s newsprint by
2010, up from 25 per cent today.With no new capacity forecast in North America until at
least the year 2000 and consumption expected to grow at a moderate pace, paper demand
and supply should remain in relative equilibrium in fiscal 1999.
In pulp, we expect markets to be difficult in the near term as a result of the events in Asia
and excess supply. Slower expansion in pulp capacity in Asia will have a positive effect in
the medium term. Demand for containerboard is expected to be steady in fiscal 1999
because of a strong North American economy, although there has been recent price weakness
in some grades.
With both the paper and pulp businesses solidly focused on their distinct strategies, we believe
the Company is well-positioned to capitalize on the many opportunities that lie ahead.
On behalf of the Board,
Douglas W.G. Whitehead
President and Chief Executive Officer
July 28, 1998
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Like many great corporate strategies,lightweight runnability is an ideawhose time has come.
A marriage of papermaking innovation and leading-edge technical support, lightweight
runnability plays to the competencies of the Company and the unmet needs of its customers
in the publishing and commercial printing industries.
Its success rests not only on superior product and service offerings, but also on a bond of
partnership that goes beyond the normal transactional nature of the business. In the end, both
the customer and the Company share in the value that has been created.
The equation for creating these mutual benefits seems deceptively simple: the Company
offers a quantum improvement in pressroom runnability with lower basis weight papers
while the customer commits to higher volumes, stable pricing and long-term contracts.
The value returned to each party is quantifiable and significant – the lasting measure of any
successful partnership.
But the journey to this outcome requires equal commitment and the collective wisdom of
both the Company and customer organizations.The results so far have been gratifying.
Working with partnership customers, such as The San Diego Union Tribune,The Orange
County Register and The SeattleTimes, we will add value through both cost savings and
revenue generation by delivering a superior runnable product and a suite of technical services
that optimize pressroom performance.
12/13
F L E T C H E R C H A L L E N G E C A N A D A
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At the crux of these solutions, it is the synergy of paper, press and people that creates the
quantum improvement in performance.Through extensive research and testing, we have
developed a unique furnish mix that allows us to reduce paper basis weights while matching
or surpassing the print reproduction qualities of heavier papers – and delivering superior
runnability. Customer value is created by less downtime, higher running speeds and reduced
paper waste.
To unlock this value, we have developed an innovative five-step program designed to identify
the unique customer benefits that derive from superior runnability.The program includes
an initial value assessment, a partnership agreement followed by several solutions-oriented
modules to examine product requirements, handling and pressroom practices. A dedicated
core team of employees, formed from both Company and customer organizations, is responsible
for achieving superior runnability on the press.
The performance of paper on today’s high-speed presses is critical.As it unrolls from large
reels, a seamless web of paper must navigate through countless twists and turns before
emerging as a newspaper, flyer or insert.And if the paper breaks – a web break in the language
of the press room – the meter starts running for the customer in terms of downtime, costs
and foregone revenue. Re-threading the paper through the press can take up to 30 minutes,
precious time lost in the competitive newspaper environment; costly time for a commercial
printer who loses money when presses are idle.
Consequently, a key indicator for runnability from the perspective of the customer is the
number of paper breaks encountered during press runs – a statistic that every press production
department tracks.
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F L E T C H E R C H A L L E N G E C A N A D A
14/15
In North America, standard newsprint breaks on average one time in 30 rolls. By contrast,
the Company’s Marathon newsprint is setting new runnability thresholds during pressroom
trials of close to one break in 100 rolls. Development work is now underway to take that
mark up to one break in 200 rolls by the end of fiscal 2001 and to one break in 400 rolls by
2003. Our goal is to push the envelope to develop and refine lightweight printing papers that
cannot be easily equaled by the competition in North America.
To support this commitment, over the next three years we will invest in the order of $100
million in systems and equipment to further enhance our paper’s runnability.These projects
will increase paper uniformity and reduce defects, improving sheet runnability while lowering
basis weights.
Strict product specifications and ISO quality control systems have been institutionalized at our
Crofton paper mill to achieve superior consistency in paper quality, 24 hours a day, 365 days
a year.A similar program has been launched at Elk Falls and will be completed next year.
The Company is in the process of re-engineering its supply chain from initial order entry to
product delivery to facilitate the lightweight runnability strategy.An enterprise-wide information
system has been implemented to support this end-to-end process.The investment also enables
more efficient use of our production, maintenance and support resources.
Lightweight runnability benefits
• Less fibre required for production
• Less weight/volume to ship
• Zero product damage
• Perfect order execution
• Shorter cycle times
• On-time delivery
• Less handling time for receiving crews
• Less time spent delivering paper to press
• Fewer pallets
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Zero product damage, perfect order execution, shorter cycle times and on-time delivery are
critical components to creating customer value. Consolidation of product movement through
one distribution centre in Greater Vancouver is a major step to reduce damage, lower costs
and shorten delivery time. Other initiatives include standardizing procedures across the
supply chain, introducing handling audit procedures at customer sites and establishing close
relationships with key transportation carriers.
By its very nature, the lightweight runnability strategy demands a change in traditional work
practices. We are focused on building a lightweight runnability culture within Fletcher
Challenge Canada – one that is highly responsive to customer needs and totally focused on
delivering superior runnability.
The paper organization is structured around business units – newsprint and specialties – each
dedicated to the profit performance of its product lines. Each business unit is totally focused
on the marketplace and creating sustainable customer value.
• Less warehouse space needed to
store paper rolls
• Fewer breaks and improved runnability
• Less waste
• Fewer rolls to strip
• Fewer cores with white waste
• Fewer wrappers for disposal
• Less downtime
• Higher running speeds
• Reduced volume of printed product
• Less weight/volume to ship
• Lower delivery/mailing costs
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F L E T C H E R C H A L L E N G E C A N A D A
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Reflecting its transition from a traditional commodities producer, the Company introduced
branding to differentiate its product and service offerings. Chosen to represent the enduring
and unique qualities of the specific products, these brand names further distinguish Fletcher
Challenge Canada from the competition.
With our core brands – Marathon, Catalyst™ and :advance™ – we are using advanced technology
and the papermaking skills of our employees to drive basis weights lower while delivering
superior optical paper performance.
M A R A T H O N During the year, the Company began a series of trials of Marathon – the brand
name for our new highly runnable newsprint and technical-service support package which will
be launched this fall. Marathon is designed for our high-volume newsprint publishing customers
and will dramatically exceed industry norms for runnability. Made to high standards of consistency
and uniformity, with low tolerance for defects, Marathon promises longer runs between breaks.
More than just the paper, Marathon is a customized service package that helps customers
with procedures and practices designed to significantly improve runnability in their pressrooms.
C A T A L Y S T As the brand name suggests, we are committed to being an agent of change
with our Catalyst™ directory paper. Already an industry leader in printability and runnability
at basis weights as low as 32.5 gsm, the Catalyst™ range will be expanded over the next year
to offer a superior ultra-lightweight 29.3 gsm sheet. This new product will mark a major
technical advance in the production of high-quality lightweight directory papers.
Independent testing of Catalyst™ against every major North American competitor this year
proved that Catalyst™ continues to provide a superior combination of opacity and brightness,
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and reduced print-through.With the growing use of four-colour printing in directories, these
attributes of Catalyst™ continue to differentiate the product from the competition.The
Company is a significant supplier to several directory printers and publishers including R.R.
Donnelley, Pacific Access and Western Printing Alliance.
Given high customer demand for Catalyst™, the Company’s goal is to further enhance its
directory business in North America and offshore. The Company is also actively pursuing
long-term partnerships with key customers.
: A D V A N C E To further improve product performance, the Company upgraded its high-
bright sheets during the year – changing furnish mix and sheet chemistry to enhance printability
and runnability.
The high-opacity 48.8 gsm high-bright :advance™ is enabling our commercial printing
customers to benefit from the cost savings of lighter-weight products while maintaining
runnability, opacity and brightness for the production of newspaper inserts and flyers.
The Company is also pioneering the development of high-quality, soft-calendered papers in
the 38.5 gsm to 45 gsm range, which would establish market leadership for the lowest basis
weights in this category. Plans are also underway to develop a new grade of newsprint for the
exclusive use of commercial printers.
During the year, the Company established new, significant positions with major printers
and retailers including World Color and Sears and in new offshore markets such as Japan
and Australia.
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F L E T C H E R C H A L L E N G E C A N A D A
18/19
The Company’s pulp business is also managed under a distinct and focused operating strategy that
was developed following its restructuring as a stand-alone unit within Fletcher Challenge Canada.
The pulp strategy is built on a platform of low-cost fibre, operational excellence and technically-
innovative products. As part of this strategy, the Company has embarked on a major operational
improvement project that will lower costs by $75 per tonne within two years.The program involves
a wide-range of workplace and process changes, supported by minor targeted capital spending.
Building on the Company’s competencies in acquiring and trading fibre resources, we have
expanded our annual capacity of sawdust-based pulps at Elk Falls and Mackenzie to 256,000
tonnes to become the world’s largest producer of this product.
T R I A X Marketed under the brand name Triax™, this unique pulp is a lower-priced alternative
that offers superior performance factors utilized in the manufacture of tissues, and printing
and writing grade specialties.
In developing new markets for Triax™, the Company is building on 34 years of experience
in sawdust-based pulps, enabling us to grow already well-established markets in North America,
Asia and Europe. Production from the recent expansions is finding broad acceptance in these
markets, where Triax™ is an attractive and economical substitute for higher-priced pulps.
For its northern bleached softwood kraft pulp grades, the Company targets the reinforcing,
high-quality tissue and specialty market segments.The Company’s long-fibre pulps add
strength and runnability characteristics sought by customers in the paper manufacturing and
consumer products industries.
S I L V E R L I N E R The Company’s containerboard markets are concentrated in western
North America where its premium whitetop linerboard, Silverliner™, is a market leader in
the corrugated packaging industry. Silverliner™ is a member of the Company’s series of
Metaliners™ containerboard products.
Kraft pulp from non-traditional fibre
long-fibre pulpSawdust-based pulp
Market Pulp
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The business strategies of FletcherChallenge Canada’s paper and pulpoperations are closely integrated withthe Company’s commitment to meetits environmental responsibilities.
F L E T C H E R C H A L L E N G E C A N A D A
20/21
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While 1998 was an atypical year because of the labour dispute which idled manufacturing
operations, the Company made advances in its environmental program of continual improvement
on several fronts. A point of pride in these achievements is our increasing ability to produce
products that help the Company and its pulp and paper customers reduce their impact on
the environment.
For example, the Company’s lightweight runnability strategy results in better utilization of
available fibre and other resources while enabling customers to reduce waste and achieve
higher productivity with smaller volumes of paper. Similarly, the high-quality Triax™ pulps
produced from sawdust and other non-traditional fibres convert an environmental disposal
problem into a commercial success.
Throughout our operations, a concerted effort has been undertaken to reduce the volume
of chemicals in our processes and to conserve energy and other material resources. For
example, the use of fillers and mechanical pulp in papermaking allows us to extract more
usable fibre from the wood resource than can be achieved through chemical-process pulps
– and it involves less chemical bleaching.
As an energy-efficiency initiative, the Company is participating in a gas-fired cogeneration
project being developed by a third party adjacent to the Elk Falls mill. Low-cost steam
purchased from the facility for the mill’s production processes will lower manufacturing
costs and fossil fuel use. The new facility is scheduled to be operational by July 2000.
The Company’s three BC mills are developing an environmental management system (EMS),
for certification under IS0 14001. When fully implemented by fall 1999, the EMS will support
more focused and orderly planning, implementation and measurement of environmental
performance and enhance our ability to continuously improve. During the year, we also developed
a five-year environmental strategic plan based on a comprehensive review of global environmental
issues and trends.
In October 1998, the fifth round of environmental audits of Company facilities will begin
to review all equipment and operations in the context of current standards and government
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F L E T C H E R C H A L L E N G E C A N A D A
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1998
Environmental Management
Continued development of an environmentalmanagement system at the three BC mills.
Developed a five-year environmentalstrategic plan.
Reducing Waste
Implemented a waste tracking and managementplan at Crofton.
Safeguarding Water
Continued with the second phase of Environmental Effects Monitoring.
Eliminated chlorine in effluent from Crofton’s water filtration system.
Improving Air Quality
Implemented automated polling of ambientair stations to monitor odourous emissionsat Crofton.
1999
Obtain ISO 14001 certification by fall 1999.
Conduct fifth round of facilities’ audits.
Continue to investigate alternative uses forsolid waste.
Complete redesign of Mackenzie’srecausticizing plant to reduce lime mud waste discharged to landfills.
For Environmental Effects Monitoring, conduct oyster studies at Crofton, marinelife surveys at Elk Falls, and receiving watersurveys at Mackenzie.
Conduct a shore-based mussel study andcontinue monitoring dioxin levels in crabs at Elk Falls.
Collect and treat filtration water at Crofton.
Complete installation of oxygen bleachingat Crofton and evaluate similar installationat Elk Falls and Mackenzie.
Complete upgrade of the non-condensablegas (NCG) collection and incineration system at Elk Falls.
Begin development of a system to collectand incinerate total reduced sulphur (TRS)emissions from two digesters at Crofton.
Complete real-time particulate monitoringat Mackenzie and Crofton, enabling operators to make adjustments on atimely basis.
Complete a pilot study of the No.5 boiler scrubber at Elk Falls to evaluate ways to reduce power boiler haze.
P L A N S A N D P R O G R E S S
Fletcher Challenge Canada’s year end is June 30.
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regulations.Also, for the third year the Company is participating in the Voluntary Challenge
Registry, a program to encourage and track voluntary greenhouse gas emission reductions
in Canada. Since 1990, Crofton and Elk Falls have reduced greenhouse gas emissions by 71
per cent and 15 per cent, respectively, as the mills modernized and replaced oil with natural
gas. Mackenzie has experienced a marginal increase in its emissions recently, resulting from
reduced wood waste burning and an increase in the use of natural gas.The Company continues
to explore ways to reduce greenhouse gas emissions.
The Company’s pending acquisition of a controlling interest in Trust International Paper
Corporation (TIPCO) in the Philippines will strengthen our ability to meet customer requirements
for newsprint containing recycled fibre.TIPCO produces 100 per cent recycled newsprint.
From an environmental perspective, Crofton and Elk Falls had a relatively smooth start-up
following the strike. After experiencing an accidental chemical process discharge into the
effluent treatment system during start-up, Mackenzie delayed mill operations for six days to
allow time for the microbiology to treat the discharge. No non-compliance occurred as a
result of this event. Elk Falls released quantities of soot into a neighbouring subdivision, which
was promptly cleaned up.
F I B R E S U P P L Y With the sale in fiscal 1997 of its 52 per cent interest in TimberWest
Forest Limited, and the sale in fiscal 1998 of its 100 per cent interest in Blandin Paper Company,
Fletcher Challenge Canada is no longer involved in harvesting timber or manufacturing lumber.
To supply its three mills located in British Columbia, Fletcher Challenge Canada purchases
wood fibre from several independent suppliers, primarily solid wood manufacturers.
Approximately 85 per cent of the Company’s fibre supply purchases consist of sawmill wood
chips and sawdust – the residuals of lumber manufacture that would otherwise be burned or
disposed in landfills.The remaining 15 per cent is derived from a combination of pulp logs
– logs that are defective or otherwise unsuitable for lumber manufacture – and deinked pulp
recycled from old newspapers and magazines.
Fletcher Challenge Canada is a leader in the use of alternative waste fibres such as sawdust, and
log sort and waterborne debris.While providing the Company with an incremental fibre opportunity,
fibre debris sources allow our suppliers to improve on their environmental performance.
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Sustainable Forest Management Certification
All suppliers who manage publicly-owned BC forest resources must harvest timber in compliance
with the BC Forest Practices Code. The Code is among the world’s most stringent legislative
systems of forest management to protect ecological values and ensure forest sustainability. In
addition, there is increased demand for independent verification that BC forests are being
managed sustainably and current forest practices are in compliance with regulatory requirements.
Verification is achieved through the process of Sustainable Forest Management certification (SFM).
During the year, a number of our BC suppliers voluntarily began the SFM certification process
which will lead to an increasing volume of our fibre being purchased from certified sources.
Fletcher Challenge Canada supports all legitimate SFM certification programs and encourages
our suppliers to gain certification of their forest resources.To verify ongoing performance and
regulatory compliance, we have initiated an annual audit of our fibre suppliers to allow us to
quantify their forest practices’ performance, intentions and progress towards SFM certification.
R E D U C I N G W A S T E Fletcher Challenge Canada is committed to reducing its solid waste
volume and disposal to landfill. Typical solid waste materials generated at Company mills
include boiler fly ash, lime mud from the recausticizing process, sludge from effluent treatment
systems, and unusable wood refuse. The Company is working to develop market uses for
wastes such as lime, sludge and ash.
During the year, our mills continued to investigate operational changes to reduce solid waste
generation.A redesign of Mackenzie’s recausticizing plant to be completed in 1999 will reduce
lime mud waste discharged to landfills.The recausticizing plant is part of the system that
recovers pulping chemicals for reuse. Elk Falls completed an assessment of a proposed fluid
bed modification to its wood waste boiler to improve combustion and reduce fly ash volumes
sent to landfills.Technical problems with the process preclude proceeding at this time. Crofton
has started a system to track solid waste and reduce waste volumes sent to landfill.The new
system will also raise employee awareness to reduce waste in all aspects of operation.
Crofton is also proceeding with its plan to work with a solid waste expert to reduce waste generation
and to find market uses for materials such as lime mud, sludge and ash.The mill is exploring the
feasibility of negotiating a partnership agreement with a local waste company to use sludge in
manufacturing a consumer product, instead of burning it in the power boiler.This will improve
Crofton’s energy performance.
F L E T C H E R C H A L L E N G E C A N A D A
24/25
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Mackenzie has arranged with an outside supplier to remove waste oil, oil filters, antifreeze
and batteries after equipment servicing, eliminating two hazardous waste storage areas at the
mill. Crofton and Elk Falls already have similar arrangements in place.
Landfills
During the year, Crofton completed a survey of the mill’s landfills to assess remaining
capacities and identify solutions to meet future landfill requirements.
Crofton also upgraded the leachate collection system at the Mann Road landfill site. In response
to concerns expressed by a local environmental group about groundwater quality, Crofton
retained a consulting hydrogeologist to assess the performance of all of its active and closed
landfill sites. In 1996, a leachate collection system and treatment plant were installed at
Crofton’s decommissioned Swallowfield landfill and in 1997, provincial regulators gave the
mill permission to discharge the treated non-toxic leachate into the Chemainus River estuary.
In 1999, Mackenzie will begin construction of a new landfill and leachate collection system
for primary effluent sludge. Elk Falls is involved with a provincial committee investigating
beneficial uses for boiler fly ash and treatment plant sludge.As part of this work Elk Falls will
complete an assessment of sludge and fly ash for miscellaneous contaminants.
S A F E G U A R D I N G W A T E R Wastewater from the Company’s three mills is treated by
primary and secondary effluent treatment systems. Primary treatment reduces suspended
solids through settling, while secondary treatment uses bacteria to reduce the effluent’s
biochemical oxygen demand (BOD) and toxicity. Since the installation of secondary effluent
treatment systems at Crofton and Elk Falls in 1991, and the expansion of Mackenzie’s secondary
effluent treatment system in 1989, the mills have progressively improved their effluent quality.
Our mills are continuing with the Environmental Effects Monitoring program, implemented
by Environment Canada in 1992 to determine the effects of mill effluent on the environment.
As part of the second phase, our mills will conduct various receiving water surveys, including
oyster studies at Crofton. Elk Falls will also complete a shore-based mussel study and continue
to monitor dioxin levels in crabs.
During the year, Crofton eliminated chlorine in effluent from its water filtration system and
dredged the sedimentation basins at the filter plant to improve performance and reduce
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Total Suspended Solids (TSS)
Crofton and Elk Falls had no TSS permit exceedances during the year. (TSS is a measure of
insoluble material and wood fibre suspended in effluent.)
Reflecting the excellent performance of Crofton’s effluent treatment system and improvements
achieved by dredging sedimentation basins, the mill applied for and received a more stringent
TSS emissions permit which reduced its maximum allowable emission levels by 38 per cent.
Mackenzie experienced one monthly and four daily TSS exceedances related to fluctuating
effluent levels in the mill’s aeration basin following start-up after the nine-month strike. The mill anticipates
reduced TSS concentrations after successfully dredging the secondary effluent aeration basin.
Mackenzie will undertake a second phase of dredging in 1999 if desired concentration
levels are not achieved. Solids recovered from the dredging process will be incinerated in the
recovery boiler.
Biochemical Oxygen Demand (BOD)
Mackenzie had five BOD exceedances in fiscal 1998. One incident was attributable to high levels
of TSS related to fluctuating effluent levels in the aeration basin. This situation has since been
stabilized. The other four are being addressed by the installation of additional aeration capability.
Crofton and Elk Falls experienced no BOD exceedances during the year. Crofton’s BOD permit
limits were reduced by 52 per cent, reflecting the mill’s improved effluent quality.
Toxicity
The three mills passed all fish bioassay tests during the year, which are conducted by
independent laboratories.
Dissolved carbon dioxide has been found in effluent at a number of coastal BC mills, affecting
toxicity levels. Due to a toxicity problem at Crofton in fiscal 1997, the mill will continue trials in
1999 as part of its involvement in a joint industry research committee to prevent future occurrences.
Adsorbable Organic Halides (AOX)
During the year, the mills were well within the allowable AOX level in effluent – 1.5 kg per tonne
of pulp produced. (AOX is a standardized test to measure the amount of chlorinated organic
material in wastewater.) All three mills have reduced AOX discharge after eliminating the use of
elemental chlorine in the pulp bleaching process.
The installation of pressurized oxygen bleaching at Crofton will further lower AOX levels by
reducing the use of chlorine dioxide. Both Mackenzie and Elk Falls are evaluating similar initiatives.
Dioxins and Furans
During the year, the mills operated well within the federal permit levels for dioxins and furans.
F L E T C H E R C H A L L E N G E C A N A D A
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E F F L U E N T
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sediment deposits at the Chemainus River estuary. In 1999, the mill will install a collection
system and treat filtration water in its secondary effluent treatment system.This will enable
the mill to recycle filtration water and reduce water use by up to five per cent.
A I R Q U A L I T Y I M P R O V E M E N T The Company strives for continuous improvement
in air quality at its mills. The two current air quality issues are pulp mill odour – a by-product
of the kraft pulp cooking process – and smoke and fly ash produced from burning wood waste.
Elk Falls is continuing to upgrade its non-condensable gas (NCG) collection and incineration
system.The installation of a bypass scrubber and new instrumentation, to be completed in
October 1998, will eliminate the occasional need to release odourous NCG directly into the
atmosphere.These releases currently occur during less than one per cent of operating time.
The mill is evaluating ways to retrofit the scrubber on its No. 5 power boiler to reduce haze
and further improve performance.
The design and installation of a system to collect and incinerate total reduced sulphur (TRS)
from Crofton’s kraft digester is expected to reduce these emissions by 12 per cent when
completed in fiscal 1999. The mill is also in the process of installing an on-line air quality
monitoring system that will provide immediate and current data needed to resolve odour and
particulate problems.
Mackenzie has installed new equipment on its power boiler to provide real-time data for
particulate emissions.This will help the mill reduce particulate by enabling operators to make
adjustments on a timely basis.
E M I S S I O N S
Total Reduced Sulphur and Particulate
Mackenzie experienced one TRS exceedance and two particulate exceedances during the year.
(TRS is a group of sulphur-containing gases that produce the characteristic odour associated with
kraft pulp mills. Particulate refers to dust particles emitted after burning wood waste and other
fuels.) The mill has increased particulate testing to reduce power boiler emissions.
Elk Falls was unable to complete testing for the No. 5 power boiler in the fourth quarter of
fiscal 1998 due to a four-week maintenance shutdown. Testing is scheduled to be completed
during the first quarter of fiscal 1999.
Crofton marginally exceeded miscellaneous TRS emissions in the fourth quarter of fiscal 1998.
Work is ongoing to reduce TRS emissions through improved process control.
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F L E T C H E R C H A L L E N G E C A N A D A
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P R O D U C T I O N C A P A C I T I E S
Annual Production Capacity
PR I NTI NG PAPE R S
Newsprint and groundwood specialties 935,000 tonnes
Annual Mill Capacity
Crofton 435,000 tonnesCrofton, BC
Elk Falls 500,000 tonnesCampbell River, BC
Newsprint 705,000 tonnesHigh Brights 135,000 tonnesDirectory 95,000 tonnes
Newsprint is produced in basis weights from 43 to 48.8 gsm.High brights are produced in basis weights as low as 45 gsm.Directory papers are produced in basis weights as low as 32.5 gsm.
End UsesNewspapers, telephone and specialty directories, newspaper inserts and retail flyers.
MAR KET PU LP 745,000 tonnes
Annual Mill Capacity
Crofton 325,000 tonnesCrofton, BC
Elk Falls 200,000 tonnesCampbell River, BC
Mackenzie 220,000 tonnesMackenzie, BC
Includes 256,000 tonnes of sawdust-based pulps.
End UsesManufacture of printing and writing papers, and specialty papers and products.
Containerboard 100,000 tonnes
Annual Mill Capacity
Elk Falls 100,000 tonnesCampbell River, BC
Comprises primarily whitetop linerboard.
End UsesProduct packaging.
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Management’s Discussion and Analysis
30/31
F L E T C H E R C H A L L E N G E C A N A D A
R E S U LT S O F O P E R AT I O N S
Summary of Operating Results
The following table shows the Company’s product sales and operating earnings by industry segment for the years endedJune 30:
(in millions of Canadian dollars) 1998(1) 1997 1996
Product Sales
Newsprint & Specialties $ 151 $ 529 $ 806Market Pulp & Containerboard 133 421 583
$ 284 $ 950 $ 1,389Operating Earnings (Loss)
Newsprint & Specialties(2) $ (92) $ 19 $ 150Market Pulp & Containerboard(2) (78) (7) 51
(170) 12 201Other Income (Expense) 31 (15) (22)Income Taxes (Recovery) (47) (3) 80Earnings (Loss) from Continuing Operations (92) – 99Earnings from Discontinued Operations,Net of Income Taxes 391 120 55Net Earnings $ 299 $ 120 $ 154Cash Provided by (Used for) Continuing Operations $ (94) $ 75 $ 305
Summary of ShipmentsThe following table shows the Company’s shipments by product line for the years ended June 30:
1998(1) 1997 1996
Product Shipments
Newsprint & Specialties (m tonnes) 223 747 816Market Pulp & Containerboard (m tonnes)(3) 206 689 651
Notes:(1) Fiscal 1998 shipments and operating results were affected by a nine-month strike at the Company’s
manufacturing facilities.(2) Inter-segment transfers of slush pulp are recorded at market.This is a change from the presentation in prior
years which were at cost. See note 17 of the financial statements.(3) Includes containerboard shipments of 28 m tonnes in 1998, 92 m tonnes in 1997, and 90 m tonnes in 1996.
-200
-150
-100
-50
0
50
100
150
200
250
94 95 96 97 98
Operating Earnings(Loss)(1)
(in millions of dollars)
Note:(1) Continuing operations
1.30
1.35
1.40
1.45
1.50
94 95 96 97 98
Canadian/USDollar Exchange($Cdn/$US)
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Comparison of EarningsYear Ended June 30, 1998 vs Year Ended June 30, 1997
Fletcher Challenge Canada Limited’s 1998 finan-
cial results from continuing operations reflect
lower production and shipment volumes resulting
from an extended shutdown of its manufacturing
facilities because of a strike that began on July 14,
1997. The Company and unions representing
hourly employees reached new six-year collective
agreements on April 18, 1998 and full production
subsequently resumed.
In September 1997, the Company agreed to
sell Blandin Paper Company, its coated paper
operation in the U.S. mid-west, to UPM-
Kymmene Corporation for US$650 million. The
sale was completed in late October 1997 and
resulted in after-tax net proceeds of C$825 mil-
lion.The results of Blandin are included in discon-
tinued operations along with those of TimberWest
Forest Limited. The Company sold its 52% inter-
est in TimberWest in June 1997.
The Company recorded net earnings of $299
million, or $2.40 per Class A common share, in
the year ended June 30, 1998, compared to net
earnings of $120 million, or $0.96 per Class A
common share, for the year ended June 30, 1997.
Discontinued operations contributed net earn-
ings of $391 million, compared to $120 million
in fiscal 1997. The 1998 results include the
Company’s gain on the sale of Blandin Paper
Company of $390 million after-tax. The 1997
results included the $135 million after-tax gain
on the sale of the Company’s 52 per cent interest
in TimberWest Forest Limited. The fiscal 1997
results also included after-tax restructuring
expenses of $15 million.
The Company’s continuing operations
incurred a loss of $92 million, or $0.74 per Class
A common share, in fiscal 1998. A loss from con-
tinuing operations of $0.4 million, break-even on
a per share basis, was recorded in fiscal 1997.
Sales from continuing operations for the year
ended June 30, 1998 were $284 million, down 70
per cent from $950 million in the previous year.
Fletcher Challenge Canada’s continuing oper-
ations incurred an operating loss of $170 million in
fiscal 1998, a decline of $182 million from operat-
ing earnings of $12 million for the 1997 fiscal year.
The decline in operating earnings was primarily a
result of lower sales and production volumes
because of the strike, partially offset by slightly
higher average market pulp prices and a strength-
ening in the U.S. dollar from an average of C$1.37
to C$1.42.
Newsprint and Specialties
An operating loss for newsprint and specialties of
$92 million was incurred in the year ended
June 30, 1998, a decline of $111 million from
operating earnings of $19 million in the year
ended June 30, 1997.
The change in product sales by industry segment is shown below:
Sales Increase (Decrease) from 1997
Total(in millions of dollars) 1998 1997 Change Volume Price Exchange
Newsprint & Specialties $ 151 $ 529 $ (378) $ (355) $ (42) $ 19Market Pulp & Containerboard 133 421 (288) (313) 10 15
$ 284 $ 950 $ (666) $ (668) $ (32) $ 34
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Management’s Discussion and Analysis
32/33
F L E T C H E R C H A L L E N G E C A N A D A
In fiscal 1998, average benchmark prices for
newsprint and groundwood specialty papers were
up slightly from levels realized in fiscal 1997.
Global demand for newsprint increased by 6.8 per
cent in 1997 because of higher consumption.
Newsprint consumption by daily newspapers in
the United States increased by 4.1 per cent in
1997. Advertising lineage was at record levels and
several large dailies added pages to their papers in
response to a robust U.S. economy and consumer
optimism, while the decline in U.S. newspaper
circulation slowed to 0.4 per cent.
Newsprint pricing improved slowly during
1997 as paper demand and supply came close
to equilibrium. Paper prices benefited from
increased consumption, a significant decline in
North American newsprint mill and publisher
inventory levels, and market-related downtime
taken by producers.
A trend of improvement in paper consump-
tion that began in late 1996 brought a better bal-
ance to newsprint markets toward the end of the
first quarter of 1997, allowing the Company to
implement a US$75 per tonne newsprint price
increase in its main western North American mar-
ket in March 1997. Newsprint prices in western
North America increased a further US$10 per
tonne towards the end of 1997 before declining by
US$15 to $25 per tonne during the first six months
of 1998. The economic crisis in Asia resulted in
lower newsprint demand and consumption in the
region, contributing to lower North American
exports to Asia and increased competition in North
American markets in the last half of the Company’s
fiscal year. Newsprint prices in offshore markets
were slightly improved in fiscal 1998, but remained
below prices in North America.
Total shipments of newsprint and groundwood
specialties decreased to 223,000 tonnes in fiscal
1998 from 747,000 tonnes one year earlier because
of the strike. Sales of directory and lightweight
specialty papers from Crofton decreased to 19,000
tonnes in fiscal 1998 from 67,000 tonnes one year
earlier. Sales of higher brightness groundwood
specialty grades from Elk Falls decreased to 26,000
tonnes in fiscal 1998 from 102,000 tonnes the
previous year. Average sales realizations for the
Company’s newsprint and groundwood specialty
printing papers decreased by approximately $30 per
tonne, or 4 per cent, from fiscal 1997 levels. Sales
realizations were adversely affected by additional
shipping costs incurred during the strike to deliver
product from off-site inventories to customers.
Newsprint PricesBased on average quarterly prices in US$ per tonneAverage USWest Transaction Price – 48.8 gram. Source-RISI.
400
500
600
700
800
93 94 95 96 97 98
Calendar US$ perYear Quarter Tonne
1993 3 4354 435
1994 1 4232 4373 4704 510
1995 1 5582 6403 7004 760
1996 1 7572 6773 6004 510
1997 1 5072 5453 5634 583
1998 1 5952 585
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Fletcher Challenge Canada periodically curtailed
newsprint and groundwood specialty paper pro-
duction from February 1996 to January 1997 to
match production to customer order levels.
Total newsprint and groundwood specialty
printing paper production for the year was
174,000 tonnes, compared to 809,000 tonnes in
fiscal 1997. Market-related downtime in fiscal
1997 reduced production by approximately 91,000
tonnes. Production in fiscal 1997 was also adverse-
ly affected by weather-related start-up difficulties
following the Christmas shutdowns in 1996.
Paper production at Crofton decreased by 76
per cent to 85,000 tonnes in fiscal 1998.This rep-
resented a 19 per cent operating rate. Market-
related downtime reduced production by approxi-
mately 51,000 tonnes in fiscal 1997. At Elk Falls,
paper production decreased by 80 per cent to
89,000 tonnes in fiscal 1998, representing an 18
per cent operating rate. Market-related downtime
in fiscal 1997 reduced production by approximate-
ly 40,000 tonnes.
Market Pulp and Containerboard
An operating loss of $78 million was incurred for
market pulp and containerboard in fiscal 1998,
a $71 million decline from an operating loss of
$7 million in the previous year.
Average northern bleached softwood kraft
(“NBSK”) pulp prices for fiscal 1998 were up by
approximately 3 per cent from the levels prevail-
ing in fiscal 1997.
Market pulp demand grew by approximately
5 per cent in 1997. Most of the increase was
recorded in the United States and in Western
Europe. Shipments to Asia were down slightly
because of destocking by pulp customers in the
second half of the year.
Following weakness in pulp markets early in the
year, market conditions began to improve during
the second quarter of 1997 as producer inventory
levels declined, with healthy demand from paper
producers and production downtime being taken
by pulp producers. Pulp prices increased by US$30
per tonne in North America in the third quarter of
1997. Prices in Europe and Japan increased by the
same amount early in the fourth quarter but fell
back as markets began to weaken toward the end
of the quarter.The weakness in pulp markets con-
tinued during much of the first half of 1998 as a
result of reduced demand and inventory destock-
ing in Asia. NBSK pulp prices declined by approx-
imately US$60 to $80 per tonne in the first quar-
ter of 1998, before increasing by approximately
US$25 to $50 per tonne in early June. Markets
once again weakened and prices began to move
lower by the end of the quarter.
The Company’s total market pulp shipments
decreased to 178,000 tonnes in fiscal 1998 from
597,000 tonnes in the previous year reflecting the
strike. Average market pulp sales realizations were
up by approximately $40 per tonne, or 7 per cent,
from fiscal 1997 levels.Total market pulp produc-
tion was 111,000 tonnes in the year, down from
663,000 tonnes in fiscal 1997. The length of the
strike resulted in a difficult start-up of parts of the
kraft pulp operations and full production was not
attained on a sustained basis until late May 1998.
Approximately 13,000 tonnes of market-related
pulp production curtailment was taken in fiscal
1997. Pulp production was also adversely affected
in fiscal 1997 by unseasonably cold weather which
resulted in extremely difficult start-ups following
the Christmas shutdowns.
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Management’s Discussion and Analysis
34/35
F L E T C H E R C H A L L E N G E C A N A D A
Market pulp production at Crofton decreased by
83 per cent to 50,000 tonnes in fiscal 1998, rep-
resenting an operating rate of 15 per cent. Kraft
operations were affected in June 1996 when the
digester operations were shut down for the com-
pletion of an unplanned inspection and repair pro-
gram.The shutdown of the digesters reduced kraft
pulp production by approximately 13,000 tonnes
in fiscal 1997.
At Mackenzie, market pulp production
decreased by 84 per cent to 29,000 tonnes in fiscal
1998, for a 13 per cent operating rate. Following
the resolution of the strike, the Mackenzie pulp
operations completed a two-week maintenance
program which had been deferred in the spring of
1997. Kraft mill operation was affected by capital
project installations and mechanical difficulties
during fiscal 1997.
Market pulp production at Elk Falls decreased
by 83 per cent to 32,000 tonnes in fiscal 1998,
representing a 16 per cent operating rate.
No market-related pulp production curtail-
ment was taken at Elk Falls or Mackenzie in fiscal
1997. Crofton curtailed production by approxi-
mately 13,000 tonnes in January 1997.
Projects at Mackenzie and Elk Falls to increase
the production of sawdust-based pulp were com-
pleted on schedule and on budget, with successful
start-up of new equipment occurring in October
and November 1996, respectively. These projects
are meeting operational and product quality goals.
Demand in the containerboard sector was
healthy in fiscal 1998. A containerboard price
increase of US$30 per short ton took effect in
August 1997 and a number of producers imple-
mented a further US$50 per short ton increase in
October 1997. Containerboard market conditions
remained favourable in the first half of 1998 with
demand and pricing relatively stable.
Average containerboard sales realizations for fiscal
1998 were virtually unchanged from the levels
prevailing in fiscal 1997. Containerboard sales vol-
ume decreased by 70 per cent to 28,000 tonnes.
Production decreased by 80 per cent to 19,000
tonnes in fiscal 1998, representing a 20 per cent
operating rate.
Other Income/Expense
Other Income in the year ended June 30, 1998
was $31 million compared to Other Expense of
$15 million in the year ended June 30, 1997.
Other Income in fiscal 1998 was the result of
interest income of $45 million, partially offset by
interest expense of $2 million and miscellaneous
expense of $12 million. Other Expense in fiscal
NBSK Pulp PricesBased on average quarterly prices in US$ per tonneAverage Price to Contract Buyers –Delivered to Northern Europe. Source-RISI.
200
400
600
800
1000
93 94 95 96 97 98
Calendar US$ perYear Quarter Tonne
1993 3 4124 392
1994 1 4452 5273 6074 700
1995 1 7752 8583 9254 975
1996 1 6922 5073 5534 565
1997 1 5372 5453 5854 598
1998 1 5332 560
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1997 included restructuring expense of $25 mil-
lion, interest expense of $15 million, a $4 million
expense on the early redemption of debentures
and miscellaneous expense of $6 million, partially
offset by interest income of $35 million.
Discontinued Operations
In June 1997, the Company exited the wood prod-
ucts business with the sale of its 52 per cent inter-
est in TimberWest Forest Limited. In October
1997, the Company exited the lightweight coated
paper business with the sale of its wholly owned
subsidiary Blandin Paper Company. The results of
TimberWest and Blandin are included in discon-
tinued operations. Discontinued operations con-
tributed net earnings of $391 million in fiscal
1998, comprised almost entirely of the gain on the
Blandin sale. Discontinued operations contributed
net earnings of $120 million in fiscal 1997, includ-
ing a $135 million after-tax gain on the Timber-
West sale.
LIQU I D ITY AN D CAPITAL R E SOU RCE S
Capital Resources
Fletcher Challenge Canada had a net cash position
of $279 million at June 30, 1997 following the
sale of its 52 per cent ownership in TimberWest
Forest Limited. Proceeds from the sale of wholly
owned subsidiary Blandin Paper Company in
October 1997 left Fletcher Challenge Canada
with a cash position of $844 million and no debt
at June 30, 1998.
The Company’s total capital is composed of
the following:
As of June 30, 1998, the Company and its sub-
sidiaries maintained committed bank lines of $100
million, of which none was utilized.
Fletcher Challenge Canada Limited is desig-
nated by Fletcher Challenge Industries Limited
(“FCIL”), a company wholly owned by Fletcher
Challenge Limited, as a “Core Subsidiary” with
respect to covenants that FCIL has made to its
lenders. For purposes of administering its
covenants, FCIL has a right of first refusal to pro-
vide the additional borrowing requirements of the
Company above a threshold amount under terms
and conditions no less favourable than the
Company could achieve from external sources. If
at any time FCIL chooses not to provide such
funding, the Company may source its require-
ments externally. Commitments of the Company
to its existing lenders are not affected by the
performance of FCIL under its covenants.
The Company estimates that capital expendi-
tures for the year ended June 30, 1999 will be
approximately $150 million, of which $65 million
is for projects in progress at the end of June 1998.
These expenditures cover improvement of existing
product lines, maintenance of business and envi-
ronmental protection.
In addition to the requirements resulting
from ongoing capital expenditures in fiscal 1998,
the Company redeemed the Series H debentures
in August 1997.The Company called the Series H
debentures for redemption on August 15, 1997
at $75.0 million plus a prepayment premium of
June 30 June 30(in millions of dollars) 1998 1997
Long Term Debt (including current portion)(1) $ – – % $ 75 3%Deferred Income Taxes 162 7% 203 9%Shareholders’ Equity 2,176 93% 2,000 88%
$ 2,338 100% $ 2,278 100%
Note:(1) The Company had cash and short term investments of $844 million at June 30, 1998. At June 30, 1997, the Company had cash
and short term investments of $358 million, giving it a net cash position of $279 million.
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Management’s Discussion and Analysis
36/37
F L E T C H E R C H A L L E N G E C A N A D A
$4.5 million. The prepayment premium repre-
sented the difference between current interest
rates and the coupon rate of the debentures, calcu-
lated over the remaining term to maturity of the
debentures. These fiscal 1998 commitments were
funded from cash provided by operations and
existing cash and short term investments.
The Company’s short term investments are
managed under a Board approved policy that was
updated in October 1997, recognizing the signifi-
cant increase in the size of the investment portfo-
lio upon receipt of the Blandin proceeds.The pol-
icy provides for the efficient administration of cash
surpluses and recognizes that credit quality and
liquidity are of primary importance. Eligible
investments are comprised of bankers acceptances,
bearer deposit notes, term deposits and govern-
ment guaranteed commercial paper to a maximum
of one year.
Cash Provided By (Used For) Continuing
Operations
Cash used for continuing operations, before
changes in operating working capital, was $105
million in fiscal 1998, down from cash provided by
continuing operations of $93 million in fiscal 1997.
The decline was primarily a result of lower pulp
and paper shipments resulting from the strike.
Operating working capital requirements of
continuing operations were down by $11 million
in the year ended June 30, 1998. In fiscal 1997,
operating working capital requirements were up
by $18 million. Working capital requirements
increased in the fourth quarter of fiscal 1998 fol-
lowing the resumption of operations. The
Company elected not to resume selling accounts
receivable to a bank under an existing non-
recourse agreement which expires in August
1998, resulting in an increase in working capital
requirements of $75 million.After working capital
changes, cash used for continuing operations for
the 1998 fiscal year was $94 million, down from
cash provided by continuing operations of $75 mil-
lion one year earlier.
Investing Activities
Capital spending on continuing operations totalled
$44 million for the year ended June 30, 1998,
compared to $67 million for the previous year.The
lower level of capital expenditures in fiscal 1998
reflects the strike, maintenance level investment
and a continuing spending discipline emphasizing
low risk, high payback profit adding projects.
Projects underway in fiscal 1998 and scheduled for
completion in fiscal 1999 include a $30 million
upgrade of the No. 5 paper machine at Elk Falls
and $16 million in modifications to the No. 2
paper machine at Crofton.
In fiscal 1998, the Company sold its invest-
ment in Blandin Paper Company to a related
company with unutilized net capital losses.
Pursuant to the terms of the agreement, the relat-
ed company received $48 million in respect of the
utilization of $285 million of its net capital losses.
The amount is subject to adjustment under certain
conditions and was decreased by $9 million during
the year.The net amount of $39 million, attributed
to the related company, is included in income taxes
on the sale of discontinued operations.
In fiscal 1997, the Company acquired from a
related party, at market value of $53 million,
companies with $188 million in available non-
capital losses carried forward. The purchase price
was paid in 1998. The acquisition cost of these
companies is included in other assets as future tax
benefits. The excess of the benefit of these losses
over their cost is recognized in income as the
losses are utilized.
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In fiscal 1995, the Company acquired from a relat-
ed party, at market value of $53 million, compa-
nies with $193 million in available non-capital
losses carried forward and $38 million in capital
losses carried forward. The purchase price to
acquire the companies is subject to adjustment
under certain conditions. The acquisition cost of
these companies is included in other assets as
future tax benefits. The excess of the benefit of
these losses over their cost is recognized in income
as the losses are utilized. In 1997, this excess
reduced income tax expense on the sale of discon-
tinued operations by $14 million.
Financing Activities
Total long term debt of continuing operations,
including current portion, decreased by $75 mil-
lion during the year ended June 30, 1998 as
a result of the redemption of the Series H debentures.
Dividends
During fiscal 1997 and fiscal 1998, annual cash
dividends of $0.60 per Class A common share
were paid.
OTH E R
Uncertainties
Fletcher Challenge Canada produces and markets
products that are sold in world markets. The
Company seeks to differentiate its product lines
from those of other producers by supplying spe-
cialty products which add value for customers.
However, the Company’s operating environment is
subject to uncertainties, many of which are com-
mon to virtually all companies in the forest prod-
ucts industry in North America and also some that
are more specifically applicable to the Company’s
operations based in British Columbia.A discussion
of the principal uncertainties to which the
Company is subject follows.
Product Prices
The forest products industry is cyclical in nature.
Markets for the Company’s principal products are
affected by fluctuations in supply and demand
within each cycle, which in turn affect product
prices. Demand for forest products has historical-
ly been determined by the level of economic
growth and has been very closely tied to overall
business activity and personal income. The
Company’s earnings are sensitive to price changes
for its principal products, with the effect of price
changes on newsprint and groundwood specialty
grades being the greatest.
The effect of changes in product prices on the
Company’s net earnings is shown in the Product
Price Sensitivity table on page 41.
Currency
The profitability of the Company’s operations is
subject to fluctuations in foreign currencies, par-
ticularly the U.S. dollar in which most of the
Company’s sales are denominated. Fluctuations in
foreign currencies affect the Company’s competi-
tive position in world markets. Apart from the
value of the Canadian dollar relative to the U.S.
dollar, the Company’s competitiveness in world
markets is also affected by the relative strength of
the currencies of other producing countries.
The effect of a $.01 change in the value of the
Canadian dollar relative to the U.S. dollar is shown
under Exchange Sensitivity on page 41.
Pulp and Paper Fibre Supply
Fletcher Challenge Canada’s operations in British
Columbia consume wood fibre which is purchased
as either wood chips, sawdust or pulp logs. Fibre is
acquired from independent suppliers, primarily
under secure long term contracts.
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Management’s Discussion and Analysis
38/3 9
F L E T C H E R C H A L L E N G E C A N A D A
Sawmill wood chips presently comprise approxi-
mately 62 per cent of the fibre supply for the
Company’s three pulp and paper operations in
British Columbia. The remainder is composed of:
pulpwood, 13 per cent; sawdust, 22 per cent; and
recycled deinked pulp, 3 per cent.
Fibre for the Company’s coastal mills,
Crofton and Elk Falls, is acquired from approxi-
mately 50 independent mills, primarily as residual
wood chips and sawdust from lumber operations
located on the Coast and in the southern Interior
of the province. The Mackenzie pulp mill is sup-
plied with fibre from independent suppliers with-
in the local region.
Five wood chip and sawdust suppliers provide
approximately 51 per cent of the Company’s fibre
supply.The supply contracts with these companies
were negotiated by Fletcher Challenge Canada for
indefinite terms (“evergreen”) when certain of the
Company’s timber and processing assets were
sold. In addition, the Company, through evergreen
contracts with a coastal log producer, is able to
secure additional coastal wood chip supply
through sawlog sales made by it to coastal
sawmills. These contracts provide an additional
13 per cent of the Company’s fibre supply.
Together, fibre purchased from these suppliers
comprises approximately 64 per cent of the
Company’s fibre supply.
The remainder of the fibre requirements for
the Company’s three pulp and paper operations in
British Columbia is sourced from independent
suppliers, mainly under long term contracts. Fibre
is purchased from suppliers at market prices or at
prices determined under market-based formulas.
The Company’s sawdust-based pulp capacity
has recently been expanded with the installation of
new sawdust digesters at Elk Falls and Mackenzie.
These projects, which were commissioned in
October and November 1996, respectively,
increased the Company’s annual sawdust consump-
tion from 1.0 million cubic metres to 1.6 million
cubic metres, with a reduction in annual wood chip
consumption of 0.5 million cubic metres.
The Company presently has an adequate
supply of fibre for its B.C. pulp and paper opera-
tions, and is repositioning its product lines and
developing alternative sources to offset any future
reduction in availability from existing sources.
Labour Agreements
Collective agreements with Company pulp and
paper hourly employees in British Columbia
expired in April 1997. The Company’s B.C. pulp
and paper operations were idled on July 14, 1997
as a result of strike action following a breakdown
in negotiations with the two unions.The Company
and the unions reached new six-year collective
agreements on April 18, 1998. The Company and
the unions agreed to a settlement that contains
flexible work practices, 365-day operations and a
long term contract, key to a competitive agree-
ment.The new collective agreements put Fletcher
Challenge Canada on an equal footing with labour
practices in place at mills in Eastern Canada and
provide long term stability for the Company’s cus-
tomers and employees. The unions have also
agreed, as part of the collective agreements, that
Fletcher Challenge Canada will not be selected to
lead the process of individual mill bargaining in
British Columbia at the expiry of the agreements
in 2003.
Environment
The operations of the Company are subject to a
wide range of general and industry-specific envi-
ronmental laws and regulations related to waste
management. Environmental performance is mon-
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itored regularly by the Company. The Company
believes that its facilities are operating in substan-
tial compliance with applicable environmental
laws and regulations.
The British Columbia provincial govern-
ment’s pulp mill effluent regulations limit AOX
discharges to 1.5 kilograms per tonne of pulp pro-
duced. The Company’s facilities are operating
within these limits. The B.C. provincial govern-
ment has further mandated the elimination of
AOX in mill effluent by December 31, 2002.
Although technology is available to eliminate all
AOX discharge at kraft pulp mills in British
Columbia, capital and operating costs associated
therewith are presently prohibitive. In early 1997,
the provincial government indicated that it may re-
examine the appropriateness of this regulation. In
November 1997, the United States Environmental
Protection Agency (“EPA”) established AOX dis-
charge limits for United States-based bleach kraft
pulp mills at 0.623 kilograms per air-dried
bleached tonne of production. Following comple-
tion of capital projects currently planned or near-
ing completion, all Company mills will be in sub-
stantial compliance with the new United States
EPA limits by December 31, 2002.
All three of the Company’s pulp and paper
mills in British Columbia are being asked by the
B.C. Ministry of Environment to make improve-
ments in air emissions as part of their air permit
reviews.At Crofton and Elk Falls, the area of most
attention concerns ambient odour levels from the
kraft pulp mills. At Mackenzie, the focus is on
power boiler particulate emissions. The Company
is presently working with the Ministry of
Environment to find satisfactory solutions in these
areas. This is expected to require some additional
capital expenditures, but the Company should not
be disadvantaged competitively with other pro-
ducers in those regions in which it operates.
Recycled Containing Newsprint
Fletcher Challenge Canada Limited is a major sup-
plier of newsprint and other groundwood printing
papers to western North America. The most sig-
nificant of these markets is the western United
States where in three states - California, Arizona
and Oregon - newspaper publishers and commer-
cial printers are required by law to use a certain
proportion of recycled containing paper.That pro-
portion is currently 40 per cent and will increase
to 50 per cent by the year 2000. While the other
western states and Canada do not have legislated
requirements for recycled containing paper, many
printers and publishers are demanding some recy-
cled containing paper as part of their supply mix.
The Company is currently meeting this mar-
ket demand through the use of recycled pulp pur-
chased from Newstech Recycling Inc., located in
Coquitlam, B.C. This deinked post-consumer
recycled pulp is mixed with virgin pulp furnish,
primarily at the Crofton mill, to produce
newsprint that meets the legislated requirement. It
is anticipated, however, that availability of pur-
chased pulp from this source may not meet the
growth in the market demand in the future. The
Company is assessing alternative ways to meet this
growing demand from its customers in a cost-
effective way.
Williston Lake Levels
In late 1993, the Company completed the con-
struction of mitigation facilities to avert possible
production interruption at its Mackenzie pulp
operation in the event water levels in the Williston
Lake reservoir recede below 2,145 feet above sea
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Management’s Discussion and Analysis
40/41
F L E T C H E R C H A L L E N G E C A N A D A
level. Should the lake level drop below 2,145 feet,
the Company believes the mitigation facilities
allow operation at a lake level as low as 2,130 feet.
Insurance Program
The Company has instituted an insurance program
whereby it will, with minor exceptions, insure
only against ‘catastrophic’ losses. In consequence,
it will now self insure the first US$25 million of
each loss. The Company believes that this level of
exposure is manageable and that the cost of the
new program will be materially less than the pre-
vious program.
Year 2000 Issue
The “Year 2000 Issue” is a term used to refer to
certain business implications of the arrival of the
new millennium.These implications arise primar-
ily because it has been normal practice for com-
puter hardware and software to use only two dig-
its rather than four to record the year in date
fields. On January 1, 2000, when the year is desig-
nated as “00”, many computer systems could either
fail completely or create erroneous data as a result
of misinterpretation of the year.
During 1997, Fletcher Challenge Canada ini-
tiated a program to identify all critical business and
process control systems and assess the risk and
impact of the date change. Following the review of
these applications, a program of upgrades, modifi-
cation and replacement of systems was developed
and is now in progress.The program is expected to
be completed by June 30, 1999, with the most sig-
nificant changes complete by November 1998.
The restructuring of the Company’s opera-
tions to create separate organizations and distinct
strategies for its paper and pulp businesses has
been completed. The paper organization has
replaced most of its business systems with a new
SAP enterprise-wide package which is certified
Year 2000 compliant. The pulp organization is
presently implementing several new fully compli-
ant systems and upgrading the current systems
that are not already compliant.
A complete inventory of all process control
and embedded systems at the three pulp and paper
mills has been compiled. All identified Year 2000
risks and known potential problem areas have been
noted and plans have been put in place to upgrade
or replace these systems by June 1999. In addition,
for any systems that need to be reset or adjusted at
the millennium, the required procedures are now
set up and assigned to an appropriate resource.
A review and assessment of internal systems
and processes is only part of Fletcher Challenge
Canada’s Year 2000 readiness program. Just as
assessments are being made on the Company’s
state of preparation, it is necessary to assess the
risk of ‘failure’ among customers, suppliers and
financial intermediaries. Year 2000 compliance
surveys are being sent to all major customers and
suppliers to assess their Year 2000 programs. In
addition, direct contact is being made with those
suppliers and customers considered critical to the
Company’s operations.
Expenditures for new business systems that
have been incurred for business reasons and not to
specifically addressYear 2000 issues have been cap-
italized. The costs of changes to the process con-
trol systems and other remaining costs of Year
2000 compliance are being expensed in the period
they are incurred. Total expenditures required to
specifically address Year 2000 compliance are
expected to be approximately $1 million.
TheYear 2000 project team reports regularly
to the senior executives responsible for compli-
ance and quarterly to the Audit Committee of the
Board of Directors.
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Earnings Sensitivities
Fletcher Challenge Canada’s earnings are sensitive
to fluctuations in prices for its products and in cur-
rency exchange rates.
Product Price Sensitivity
Based on production capacities and exchange rates
as at June 30, 1998, a US$10 per unit change in
the net sales price of its principal products would
affect the Company’s annualized after-tax earnings
as follows:
(in millions of dollars)
Newsprint and specialties – $10 change per tonne $8.4
Market pulp – $10 change per tonne 6.7
Exchange Sensitivity
Based on anticipated fiscal 1999 sales volumes and
prices, a $0.01 change in the Canadian dollar rela-
tive to the value of the U.S. dollar would affect the
Company’s after-tax earnings by approximately
$4.5 million.
Outlook
Although conditions in Asia are resulting in some
uncertainty, Fletcher Challenge Canada is cau-
tiously optimistic that market conditions for its
printing paper business will improve during fiscal
1999. Increased paper consumption has had a pos-
itive effect on groundwood printing paper markets
since late 1996. With no new newsprint capacity
forecast in North America until at least the year
2000 and consumption expected to continue to
grow at a moderate rate, paper demand should
remain in relative balance with supply in fiscal
1999. Fletcher Challenge Canada anticipates
steady demand for its groundwood specialty paper
products as a result of stable market conditions for
newsprint and lightweight coated paper. The eco-
nomic problems being experienced in Asia are a
concern and may affect demand and prices for
newsprint and groundwood specialties in the
region in the near term.
Worldwide demand for market pulp is
expected to be lower in fiscal 1999, having
been affected by the currency and economic
crisis in Asia. Pulp markets are experiencing
some near term weakness because of the situa-
tion in Asia and softness in wood-free paper
demand in Europe.
Demand for containerboard is expected to be
steady in fiscal 1999 because of the continued
strength of the NorthAmerican economy, but there
has been recent price weakness in some grades.
Fletcher Challenge Canada’s efforts in fiscal
1999 will be focused on maximizing the benefits
afforded by the new labour agreements, continu-
ing to improve its operations, and using the
strength of its balance sheet to enhance value for
shareholders.
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Management’s Responsibility
42/43
F L E T C H E R C H A L L E N G E C A N A D A
The management of Fletcher Challenge Canada Limited is responsible for the preparation, integrity and
fair presentation of the accompanying consolidated financial statements and other information contained
in this Annual Report. The consolidated financial statements and related notes were prepared in accor-
dance with accounting principles generally accepted in Canada and reflect management’s best judgments
and estimates. Financial information provided elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.
Management maintains a system of internal controls over financial reporting, which encompasses
policies, procedures and controls to provide reasonable assurance that assets are safeguarded against loss
or unauthorized use, transactions are executed and recorded in accordance with management’s autho-
rization, and financial records are accurate and reliable.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for
financial reporting and internal control.The Audit Committee, which consists of eight non-management
members of the Board of Directors, the majority of whom are independent of the majority shareholders,
provides oversight to the financial reporting process. The Audit Committee meets periodically with
management, the internal auditors and the external auditors to review the consolidated financial state-
ments, the adequacy of financial reporting, accounting systems and controls and internal and external
auditing functions.
The consolidated financial statements have been reviewed by the Audit Committee which recom-
mended their approval by the Board of Directors.These consolidated financial statements have been audited
by KPMG, the external auditors, whose report follows.
Douglas W.G. Whitehead John E. Longley
President and Chief Executive Officer Senior Vice-President and Chief Financial Officer
July 17, 1998
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We have audited the consolidated balance sheets of Fletcher Challenge Canada Limited as at June 30, 1998
and 1997 and the consolidated statements of earnings, retained earnings and changes in financial position
for the years then ended.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 an audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all material respects, the
financial position of the Company as at June 30, 1998 and 1997 and the results of its operations and the
changes in its financial position for the years then ended in accordance with generally accepted accounting
principles. As required by the Company Act (British Columbia), we report that, in our opinion, these
principles have been applied on a consistent basis.
Chartered Accountants
Vancouver, CanadaJuly 17, 1998
Auditors’ Report to the Shareholders
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Consolidated Balance Sheets
44/45
F L E T C H E R C H A L L E N G E C A N A D A
As at June 30 1998 1997
(in millions of Canadian dollars)
ASSETS
Current assets
Cash and short term investments (note 2) $ 844.3 $ 357.8Accounts receivable (note 3) 143.1 106.2Inventories (note 4) 149.4 208.7Prepaid expenses 14.1 6.0
1,150.9 678.7Fixed assets (note 5) 1,289.2 1,286.5Other assets (note 6) 90.6 36.3
2,530.7 2,001.5Assets of discontinued operations (note 11) – 647.4
$2,530.7 $2,648.9
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 193.2 $ 196.1Current portion of long term debt (note 7) – 75.0
193.2 271.1Deferred income taxes 161.8 202.8
355.0 473.9Liabilities of discontinued operations (note 11) – 174.5
355.0 648.4
Shareholders’ equity
Share capital (note 8) 1,262.6 1,262.6Retained earnings 913.1 689.0Foreign currency adjustment (note 11) – 48.9
2,175.7 2,000.5
$2,530.7 $2,648.9
Commitments (note 14)
Approved by the directors:
Michael J. Andrews, Director Douglas W. G.Whitehead, Director
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Consolidated Statements of Earnings
Years Ended June 30 1998 1997
(in millions of Canadian dollars, except per share amounts)
Net sales $ 284.1 $ 949.6
Operating expenses
Cost of products sold 369.2 793.5Depreciation 38.4 94.8Selling and administrative 46.4 49.0
454.0 937.3
Operating earnings (loss) (169.9) 12.3Investment and other income (expense) (note 9) 30.9 (15.3)
Loss from continuing operations before income taxes (139.0) (3.0)Income tax recovery (note 10) (46.9) (2.6)
Loss from continuing operations (92.1) (0.4)Earnings from discontinued operations,net of income taxes (note 11) 390.7 119.9
Net earnings $ 298.6 $ 119.5
Per shareLoss from continuing operations $ (0.74) $ –Net earnings $ 2.40 $ 0.96
Consolidated Statements of Retained Earnings
Years Ended June 30 1998 1997
(in millions of Canadian dollars)
Balance at beginning of year $ 689.0 $ 644.0Net earnings 298.6 119.5Dividends (74.5) (74.5)
Balance at end of year $ 913.1 $ 689.0
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Consolidated Statements of Changes in Financial Position
46/47
F L E T C H E R C H A L L E N G E C A N A D A
Years Ended June 30 1998 1997
(in millions of Canadian dollars, except per share amounts)
Cash provided by (used for)
Operations
Loss from continuing operations $ (92.1) $ (0.4)Items not requiring (providing) cashDepreciation 38.4 94.8Deferred income tax recovery (53.6) (5.7)Other 2.3 4.1
(105.0) 92.8Change in working capital of continuing operations 11.4 (17.8)
Cash provided by (used for) continuing operations (93.6) 75.0
Per share $ (0.75) $ 0.60Investment
Additions to fixed assets (44.1) (67.3)Proceeds from sale of fixed assets 0.7 3.6Decrease (increase) in other assets (54.5) 3.3Net proceeds from sale of discontinued operations (note 11) 825.0 531.4
727.1 471.0
Financing
Decrease in long term debt (75.0) (145.6)Dividends paid (74.5) (74.5)
(149.5) (220.1)
Cash provided by continuing operations 484.0 325.9Cash provided by discontinued operations (note 11) 2.5 11.8
Cash increase during year 486.5 337.7Cash at beginning of year 357.8 20.1
Cash at end of year $ 844.3 $ 357.8
(Cash includes cash and short term investments)
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1. S IG N I FICANT ACCOUNTI NG POLICI E S
(a) Basis of Consolidation
The financial statements include the accounts of
Fletcher Challenge Canada Limited and its sub-
sidiaries (“the Company”). Major subsidiaries
included are Elk Falls Forest Industries Limited,
Fletcher Challenge Paper Company, Fletcher
Challenge Canada Sales Inc., Fletcher Challenge
Canada Pulp Operations Limited (formed on
amalgamation of 3264891 Canada Limited,
3264912 Canada Limited and 3264939 Canada
Limited), 545260 B.C. Ltd., 566816 B.C. Ltd.
(all wholly owned), Blandin Paper Company
(wholly owned) until sold on October 29, 1997
and TimberWest Forest Limited (“TimberWest”)
(51.6 per cent owned) until sold on June 23,
1997. All significant inter-company transactions
and balances have been eliminated.
(b) Use of Estimates
The preparation of financial statements in confor-
mity with generally accepted accounting principles
requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenues
and expenses during the period. Actual amounts
could differ from those estimates.
(c) Inventories
Inventories, other than supplies which are valued
at cost, are valued at the lower of average cost and
net realizable value.
(d) Fixed Assets
Fixed assets are stated at cost.
Plants, buildings and equipment are depreci-
ated on a straight line basis at rates that reflect esti-
mates of the economic lives of the assets.The rates
for major classes of assets are:
Buildings 2.5 - 5.0%
Pulp and paper machinery and equipment 5.0%
During periods of major production interruption,
an obsolescence amount of 10 per cent of normal
depreciation is charged on manufacturing equipment.
No depreciation is charged on capital projects
during the period of construction. Start-up costs
incurred in achieving normal operating capacity
on major capital projects are deferred and amor-
tized over a five-year period.
(e) Foreign Currency
The majority of the Company’s sales are denomi-
nated in foreign currencies, principally the U.S.
dollar. Revenue and expense items denominated
in foreign currencies are translated at the rates of
exchange prevailing during the period. The assets
and liabilities of the Company’s continuing opera-
tions denominated in foreign currencies are
translated at the period end exchange rates. Gains
or losses on translation of current assets and
current liabilities are reflected in net earnings for
the period.
The assets and liabilities of self-sustaining for-
eign subsidiaries, now reported as discontinued
operations, were translated at the period end rates
of exchange with the resulting foreign currency
adjustment forming part of shareholders’ equity.
(f) Derivatives
The Company manages its foreign exchange expo-
sure on certain foreign currency receipts through
forward currency sales. Derivatives are used for
hedging purposes in connection with an anticipat-
ed transaction or underlying asset and are not used
for trading purposes. Gains and losses on hedges
are deferred and recognized in earnings in the
same period and in the same financial statement
category as the income or expense arising from the
corresponding hedged positions.
(g) Post-retirement Benefits
The Company provides health care and life insur-
ance benefits to eligible retired employees and their
dependents. The costs of providing these benefits
Notes to Consolidated Financial StatementsFor the Years Ended June 30, 1998 and 1997(tabular amounts in millions of Canadian dollars)
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Notes to Consolidated Financial Statements
48/4 9
F L E T C H E R C H A L L E N G E C A N A D A
are expensed by the Company as paid.
(h) Comparative Figures
Certain 1997 comparative figures have been reclas-
sified to conform with the presentation adopted
for the current year.
2. CAS H AN D S HORT TER M I NVE STM E NTS
1998 1997
Cash and short term investments $ 744.3 $ 257.8Deposit with a wholly owned
subsidiary of the majority shareholder 100.0 100.0
$ 844.3 $ 357.8
At the year end, the short term investments and
the deposit with a wholly owned subsidiary of
the majority shareholder are invested for terms
of three months or less and at market rates averag-
ing 4.94% (1997 – 2.95%) and 5.12% (1997 –
3.40%), respectively.
3. SALE OF RECE IVAB LE S
In 1993, the Company sold to a bank, without
recourse, an interest representing approximately
US$65 million in a designated pool of accounts
receivable. Cash proceeds of US$60 million were
received from the initial sale. As receivables were
collected, they were replaced with new receivables
to maintain the aggregate balance under this pro-
gram, with any remaining balance payable upon
final collection of the receivables at the end of the
term of the sale program in August 1998. The
amount of new receivables declined during the
strike and the Company elected not to sell further
receivables into this program on the resumption of
operations. As at June 30, 1998, the balance of
receivables sold was nil.
The Company also had an agreement with a
wholly owned subsidiary of the Company’s major-
ity shareholder to purchase US$60 million
for C$75 million. This contract was settled in
June 1998.
4. I NVE NTOR I E S
1998 1997
Newsprint, specialties, pulpand containerboard $ 75.3 $ 155.5
Logs and wood chips 36.6 16.6Production and maintenance
supplies 37.5 36.6$ 149.4 $ 208.7
5. FIXE D ASS ETS
1998
Accumulated Net bookCost Depreciation Value
Property, plant and
equipment
Newsprint and specialties $1,019.8 $ 424.4 $ 595.4
Pulp and containerboard 1,079.7 385.9 693.8
$2,099.5 $ 810.3 $1,289.2
1997
Accumulated Net bookCost Depreciation Value
Property, plant and
equipment
Newsprint and specialties $ 994.2 $ 409.2 $ 585.0
Pulp and containerboard 1,068.3 366.8 701.5
$2,062.5 $ 776.0 $1,286.5
6. OTH E R ASS ETS
1998 1997
Investments and long term receivables $ 8.5 $ 6.1
Future tax benefits (note 13) 78.5 25.9Deferred charges 3.6 4.3
$ 90.6 $ 36.3
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7. LONG TE R M DE BT
1998 1997
Debentures
Series H, 11% due June 1998 $ – $ 75.0Less current portion of
long term debt – (75.0)$ – $ –
8. S HAR E CAPITAL
1998 1997
Authorized
150,000,000 Class A common shares without par value
100,000,000 Class B preferredshares without par value
Issued and outstanding
124,189,252 Class Acommon shares $1,262.6 $1,262.6
1,572,926 Series 1 Class B preferred shares 157.3 157.3Less held by a wholly
owned subsidiary (157.3) (157.3)$1,262.6 $1,262.6
9. INVESTMENT AND OTHER INCOME (EXPENSE)
1998 1997
Interest income fromshort term investments,including interest earned bycontinuing operations fromdiscontinued operationsof $9.0 million (1997 – $34.7 million) $ 44.7 $ 35.1
Interest expense (1.7) (14.8)Prepayment premium on
long term debt – (4.5)B.C. Corporation Capital Tax (3.3) (4.8)Restructuring costs – (25.0)Other (8.8) (1.3)
$ 30.9 $ (15.3)
The Company restructured its Canadian operations
to create two separately managed organizations for
its printing papers and pulp operations in October
1996. The restructuring costs in the 1997 year
pertain primarily to severance and related costs
for salaried employees whose positions have been
eliminated.
10. I NCOME TAX R ECOVE RY
The Company’s income taxes and effective income
tax rates pertaining to its continuing operations
are as follows:
1998 1997
Loss from continuing operationsbefore income taxes $ (139.0) $ (3.0)
Income tax recovery (46.9) (2.6)Effective income tax rate (33.7)% (86.7)%
The effective income tax rate differs from the
Canadian statutory income tax rate. The principal
factors causing these different income tax rates are
shown below:
1998 1997
Income tax recoveryat Canadian statutory rates $(53.5) (38.5)% $(1.1) (38.5)%
Non-allowableexpenses, net – – 2.7 93.1
Large corpo-rations tax 2.8 2.0 3.2 108.9
Foreign tax 0.3 0.2 (7.3) (248.4)Other 3.5 2.6 (0.1) (1.8)
$(46.9) (33.7)% $(2.6) (86.7)%
11. D I SCONTI N U E D OPERATION S
(a) Sale of Subsidiaries
On October 29, 1997, the Company sold its whol-
ly owned subsidiary, Blandin Paper Company for
net proceeds of $825.0 million and a gain of
$390.3 million, net of taxes of $75.6 million.
On June 23, 1997, the Company sold its
51.6% investment in TimberWest Forest Limited
for net proceeds of $531.4 million and a gain of
$135.1 million, net of taxes of $105.7 million.
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Notes to Consolidated Financial Statements
50/51
F L E T C H E R C H A L L E N G E C A N A D A
(b) Earnings from Discontinued Operations, Net of Income Taxes
1998 1997
Coated Coated WoodPaper Paper Products Total
Net sales $ 120.9 $ 437.9 $ 593.3 $1,031.2Operating expenses 112.6 454.6 538.7 993.3Operating earnings (loss) 8.3 (16.7) 54.6 37.9Interest and other expense (6.8) (31.0) (8.0) (39.0)Earnings (loss) before income taxes 1.5 (47.7) 46.6 (1.1)Income taxes (recovery) 1.1 (16.8) 21.0 4.2Earnings (loss) before non-controlling interest 0.4 (30.9) 25.6 (5.3)Non-controlling interest – – (9.9) (9.9)Gain on sale, net of income taxes of
$75.6 million (1997 – $105.7 million) 390.3 – 135.1 135.1$ 390.7 $ (30.9) $ 150.8 $ 119.9
(c) Net Proceeds from Sale of Discontinued Operations
1998 1997
Coated WoodPaper Products
Proceeds from sale of shares and repayment of inter-company debt $ 898.5 $ 543.5Current income taxes (62.8) (12.1)Cash to purchaser (10.7) –
$ 825.0 $ 531.4
(d) Cash Provided by Discontinued Operations
1998 1997
Coated Coated WoodPaper Paper Products Total
Operations
Earnings (loss) from discontinued operations $390.7 $(30.9) $150.8 $119.9Items not requiring (providing) cash
Gain on sale of discontinued operations (390.3) – (135.1) (135.1)Other operating items 30.7 71.9 29.5 101.4
31.1 41.0 45.2 86.2Investing (26.7) (47.8) (28.6) (76.4)Financing (1.9) 6.8 (4.8) 2.0
$ 2.5 $ – $ 11.8 $ 11.8
(e) Financial Position of Discontinued Operations
October 29 June 301997 1997
Coated WoodPaper Products
Assets of discontinued operations
Current assets $ 87.0 $ 95.5Fixed assets 559.7 543.2Other assets 8.7 8.7
655.4 647.4
Liabilities of discontinued operations
Current liabilities 48.9 56.6Deferred income taxes 121.2 117.9
170.1 174.5Net investment, excluding foreign currency adjustment account of $52.7 million
on October 29, 1997 (June 30, 1997 – $48.9 million) $ 485.3 $ 472.9
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12. FI NANCIAL IN STR U M E NTS
(a) Credit Risk
The Company is exposed to credit risk on
accounts receivable from customers. Its customers
are mainly in the newspaper publishing, commer-
cial printing, and paper manufacturing businesses.
To manage its credit risk, the Company has credit
policies which include the analysis of the financial
position of its customers and the regular review of
their credit limits. In certain offshore markets, the
Company requires bank letters of credit or utilizes
credit insurance.
The Company is exposed to credit risk on its
short term investments. The Company manages
this credit risk by investing in obligations of, or
guaranteed by, the Canadian or certain provincial
governments, major Canadian chartered banks or
related companies (note 2).
The Company is exposed to credit risk with
counter parties to the Company’s forward
exchange contracts. The Company limits the
possibility of non-performance by dealing with
Canadian chartered banks or related companies.
(b) Fair Value
Estimated fair values of financial instruments
which differ from carrying values are:
1998 1997
Carrying Fair Carrying FairValue Value Value Value
Long term debt $ – $ – $79.5 $79.5
The above carrying value of long term debt as at
June 30, 1997 includes the accrued premium on
redemption. Fair value of long term debt is based
on the redemption amount.
13. R E LATE D PARTY TRAN SACTION S
Related parties include Fletcher Challenge
Limited, the majority shareholder, together with
its subsidiaries and affiliates.
The prices and terms of sales and purchase
transactions with related parties are in accordance
with normal trade practices. Net sales to related
parties for the year ended June 30, 1998 amounted
to $2.0 million (1997 – $8.3 million). Net sales
to discontinued operations were $10.7 million
(1997 – $37.5 million). The Company has trade
receivables of $nil (1997 – $3.7 million) and other
receivables of $9.4 million (1997 – $14.6 million)
due from related parties and discontinued operations.
The Company borrows funds from affiliates at
market rates. Interest incurred on these loans
amounted to $0.2 million (1997 – $1.7 million).
In October 1997, the Company sold its
investment in Blandin Paper Company to a related
company with unutilized net capital losses.
Pursuant to the terms of the agreement, the relat-
ed company received $47.8 million in respect of
the utilization of $284.9 million of its net capital
losses.The amount is subject to adjustment under
certain conditions and was decreased by $9.3 mil-
lion during the year which amount is included in
receivables at the year-end. The net amount of
$38.5 million, attributable to the related company,
is included in income taxes on the sale of discon-
tinued operations.
In June 1997, the Company acquired, from
a wholly owned subsidiary of its majority share-
holder, companies with non-capital losses of
$187.5 million for $52.5 million which was paid
in 1998.The acquisition cost of these companies is
included in other assets as future tax benefits.The
excess of the benefit of these losses over their cost
is recognized in income as the losses are utilized.
In June 1995, the Company acquired, from a
wholly owned subsidiary of the majority share-
holder, companies with $192.7 million in non-
capital losses carried forward and $37.5 million in
capital losses carried forward for $53.4 million.
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Notes to Consolidated Financial Statements
52/53
F L E T C H E R C H A L L E N G E C A N A D A
The purchase price is subject to adjustment under
certain conditions and $6.4 million is included in
accrued liabilities at the year-end in respect of
such adjustments. The acquisition cost of these
companies has been included in other assets as
future tax benefits. The excess of the benefit of
these losses over their cost is recognized in income
as the losses are utilized. In 1997, this excess
reduced income tax expense on the sale of discon-
tinued operations by $13.9 million.
14. COMM ITM E NTS
The Company is committed to make the following
future minimum payments under various operat-
ing leases in each of the years ended June 30:
1999 $ 3.22000 3.52001 3.22002 3.12003 2.9Subsequent years 22.6
$ 38.5
15. YEAR 2000 ISSU E
TheYear 2000 Issue arises because many computer-
ized systems use two digits rather than four to iden-
tify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in
errors when information using year 2000 dates is
processed. In addition, similar problems may arise
in some systems which use certain dates in 1999 to
represent something other than a date. The effects
of the Year 2000 Issue may be experienced before,
on, or after January 1, 2000, and, to the extent not
addressed, the impact on operations and financial
reporting may range from minor errors to signifi-
cant systems failure which could affect an entity’s
ability to conduct normal business operations. It is
not possible to be certain that all aspects of the
Year 2000 Issue affecting the entity, including those
related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
To address the risks noted above, the
Company has taken an inventory of all critical
business and process control systems.The risk and
impact of the date change has been assessed for
each of these systems. The Paper segment has
replaced most of its business systems with an SAP
enterprise-wide package which is certified Year
2000 compliant. The Pulp segment is implement-
ing several new systems, which are Year 2000
compliant, and has modified existing critical
systems to be compliant. The Year 2000 risks for
process control systems have been catalogued and
plans have been put in place to upgrade or replace
the few identified as non-compliant.
Year 2000 compliance surveys are being sent
to all major customers and suppliers to assess their
Year 2000 programs.
The expenditures for new business systems
incurred for business reasons, and not to specifi-
cally address Year 2000 issues, are capitalized or
expensed in accordance with the Company’s exist-
ing policies. The costs of changes to the process
control systems and other remaining costs of
Year 2000 compliance are expensed in the period
incurred.Total expenditures required to specifical-
ly address Year 2000 compliance are expected to
approximate $1 million.
16. E M PLOYE E R ETI R E M E NT PLANS
The Company and its subsidiaries maintain pen-
sion plans that include defined benefit and defined
contribution segments, which are available to all
salaried employees and to hourly employees not
covered by union pension plans. Employees hired
subsequent to January 1, 1994 enroll in the
defined contribution segment.
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The defined benefit segment provides a pension
based on years of service and earnings. For the
defined contribution segment, the Company’s
contributions are based on a percentage of an
employee’s earnings with the employee’s pension
benefits based on these contributions along with
investment earnings from those contributions. For
the defined contribution segment, the Company’s
obligations are satisfied upon crediting contribu-
tions to the employees’ accounts and no further
obligation accrues.
Based on the most recent actuarial valuations
of these defined benefit plans as of December 31,
1997 there was no unfunded liability for past
services.The status of the defined benefit pension
plans is as follows as at June 30:
1998 1997
Pension fund assets $216.0 $204.2Present value of accrued
pension benefits $200.1 $197.8
Unionized employees of the Company and its
Canadian subsidiaries are members of industry-
wide benefit plans to which the Company con-
tributed a predetermined amount per hour
worked by an employee. The pension expense for
these plans is equal to the Company’s required
contribution.
17. S EG M E NTED I N FOR MATION
The Company’s operations are segmented into two
primary business segments: newsprint and special-
ties, and market pulp and containerboard. All
manufacturing operations are located in Canada.
Segmenting the operations of the Company
involves the use of management’s estimates of a
fair and appropriate allocation between segments.
Information concerning the Company’s business
on a segmented basis is as follows:
1998 Business Segments
MarketPulp &
Newsprint & Container-Specialties board Consolidated
External sales by market:
Canada $ 30 $ 13 $ 43United States 66 47 113Pacific Rim 35 40 75Other Offshore 20 33 53
Total sales to externalcustomers 151 133 284
Operating loss (92) (78) (170)Identifiable assets,
net of cash 845 842 1,687Depreciation 17 21 38Capital expenditures 34 10 44
1997 Business Segments
MarketPulp &
Newsprint & Container-Specialties board Consolidated
External sales by market:
Canada $ 81 $ 69 $ 150United States 276 132 408Pacific Rim 133 140 273Other Offshore 39 80 119
Total sales to external customers 529 421 950
Operating earnings (loss) 19 (7) 12Identifiable assets,
net of cash 771 873 1,644 **Depreciation 51 44 95Capital expenditures 40 27 67
**Excludes identifiable assets of $647 million for discontinued operations in 1997.
Inter-segment transfers of slush pulp are at market.
This is a change in policy from prior years which
were at cost.The effect of this change has been to
increase (decrease) newsprint and specialties earn-
ings for the year by $5 million (1997 – $(16)
million). The change has increased or decreased
market pulp and containerboard earnings by an
offsetting amount.
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Comparative Review 1988 – 1998Years Ended June 30
54/55
F L E T C H E R C H A L L E N G E C A N A D A
1998 1997 1996 1995 1994 1993
EarningsNet sales $ 284.1 $ 949.6 $1,388.8 $2,153.9 $1,675.4 $1,226.8Cost of products sold 369.2 793.5 1,045.9 1,649.0 1,397.6 1,041.8Depreciation, depletion and amortization 38.4 94.8 88.7 146.9 154.4 112.9Selling and administrative 46.4 49.0 53.4 82.7 75.0 58.0(Earnings) losses from associate companies –99 –99 –99 –99 –99 –99Operating earnings (loss) (169.9) 12.3 200.8 275.3 48.4 14.1Interest expense (1.7) (14.8) (16.2) (40.5) (47.1) (48.3)Other income (expense) 32.6 (0.5) (5.3) 34.8 43.7 4.3Earnings (loss) before income taxes and non-controlling interest (139.0) (3.0) 179.3 269.6 45.0 (29.9)Income taxes (recovery) (46.9) (2.6) 79.7 115.4 2.3 (5.7)Earnings (loss) before non-controlling interest (92.1) (0.4) 99.6 154.2 42.7 (24.2)Non-controlling interest –99 –99 –99 34.1 16.3 –99Earnings (loss) from discontinued operations* 390.7 119.9 54.8 –99 –99 –99Net earnings (loss) $ 298.6 $ 119.5 $ 154.4 $ 120.1 $ 26.4 $ (24.2)
Changes in Financial PositionCash provided by (used for)Operations (93.6) 75.0 305.1 312.2 123.5 107.3Investment
Additions to fixed assets (44.1) (67.3) (118.2) (113.9) (81.6) (31.9)Proceeds from sale of fixed assets 0.7 3.6 3.0 7.6 8.3 18.8Investments and advances (54.5) 3.3 8.2 (68.6) (40.5) **(866.5)Dividends received –99 –99 –99 –99 –99 –99Net proceeds from sale of discontinued operations* 825.0 531.4 –99 –99 –99 –99
FinancingIssue of shares and funded debt –99 –99 –99 –99 185.4 889.4(Decrease) increase in term loans –99 (61.2) 35.7 (94.1) 53.1 15.3Repayment of long term debt (75.0) (84.4) (108.6) (52.6) (49.7) (55.0)(Decrease) increase in current bank loans –99 –99 –99 –99 –99 –99Purchase and redemption of shares –99 –99 –99 (8.3) (237.2) (7.5)Dividends paid (74.5) (74.5) (74.5) (12.4) –99 –99
Discontinued operations* 2.5 11.8 (36.2) –99 –99 –99Increase (decrease) in cash $ 486.5 $ 337.7 $ 14.5 $ (30.1) $ (38.7) $ 69.9
Assets and CapitalizationWorking capital 957.7 407.6 126.2 197.7 133.6 163.0Investments and other 90.6 36.3 65.8 97.8 72.4 29.3Fixed assets 1,289.2 1,286.5 1,318.2 2,200.3 2,248.7 2,278.0Assets of discontinued operations* –99 647.4 1,262.9 –99 –99 –99Net assets $2,337.5 $2,377.8 $2,773.1 $2,495.8 $2,454.7 $2,470.3
Long term debt –99 –99 75.0 227.6 391.5 367.7Deferred income taxes 161.8 202.8 136.7 190.0 113.2 112.4Liabilities of discontinued operations* –99 174.5 438.3 –99 –99 –99Preferred shares issued by subsidiaries –99 –99 –99 34.3 39.8 275.0Non-controlling interest –99 –99 176.2 174.5 143.4 –99Shareholders’ equity 2,175.7 2,000.5 1,946.9 1,869.4 1,766.8 1,715.2Total capitalization $2,337.5 $2,377.8 $2,773.1 $2,495.8 $2,454.7 $2,470.3
Financial & Statistical Dataper common share
net earnings (loss) $ 2.40 $ 0.96 $ 1.24 $ 0.97 $ 0.21 $ (0.26)cash flow from operations (0.75) 0.60 2.46 2.51 0.99 1.14equity 17.52 16.11 15.68 15.05 14.23 14.02dividends paid 0.60 0.60 0.60 0.10 0.28 0.26market price range
high 24.25 24.60 24.75 23.00 23.25 22.13low 18.05 18.00 17.63 16.50 16.00 14.25
Net earnings to sales (%) 105.1 12.6 11.1 5.6 1.6 (2.0)Return on net assets (%) 12.7 5.1 6.7 7.3 2.9 0.3Return on common shareholders’ equity (%) 14.0 6.3 7.9 6.7 1.5 (1.9)Ratios
Current 6.0 2.5 1.8 1.5 1.4 1.6Debt to capitalization 0:100 0:100 8:92 14:86 19:81 26:74
Common shares outstanding (000’s) 124,189 124,189 124,189 124,189 124,189 90,730Number of employees 2,696 3,839 5,932 6,009 6,014 6,225
Brought to you by Global Reports
1992 1991 1990 1989 1988
$ 957.3 $1,115.4 $1,282.2 $1,423.4 $1,470.1902.6 1,013.9 1,064.1 1,082.3 1,053.7
92.0 78.6 68.4 62.8 61.048.8 68.3 83.8 80.1 68.6(1.4) (21.4) (54.8) (58.3) (40.7)
(84.7) (24.0) 120.7 256.5 327.5(61.3) (45.4) (18.6) (23.3) (33.9)60.8 26.0 14.4 25.1 0.5
(85.2) (43.4) 116.5 258.3 294.1(41.7) (18.4) 38.8 99.2 124.7(43.5) (25.0) 77.7 159.1 169.4
–99 –99 –99 –99 –99–99 –99 –99 –99 –99
$ (43.5) $ (25.0) $ 77.7 $ 159.1 $ 169.4
(83.7) 50.4 176.8 246.5 291.3
(78.4) (237.2) (348.7) (439.0) (157.8)41.3 9.2 78.6 3.6 3.182.8 7.2 71.0 75.9 (137.0)
3.4 3.4 44.7 34.3 10.3–99 –99 –99 –99 –99
245.7 1.2 10.6 158.0 218.7(166.2) 207.0 5.0 (15.9) (177.6)
(45.6) (9.0) (7.2) (11.1) (7.3)(19.8) 14.8 (2.8) (3.3) 1.3
–99 –99 –99 (4.0) (0.3)–99 (24.0) (48.0) (43.3) (33.1)–99 –99 –99 –99 –99
$ (20.5) $ 23.0 $ (20.0) $ 1.7 $ 11.6
127.4 63.7 140.2 197.0 206.047.1 80.7 72.0 163.8 256.5
1,470.2 1,502.5 1,365.9 1,188.0 823.1–99 –99 –99 –99 –99
$1,644.7 $1,646.9 $1,578.1 $1,548.8 $1,285.6
413.7 586.4 436.0 440.3 344.6117.1 156.6 190.4 189.6 164.3
–99 –99 –99 –99 –9912.0 16.4 16.7 16.4 14.6–99 –99 –99 –99 –99
1,101.9 887.5 935.0 902.5 762.1$1,644.7 $1,646.9 $1,578.1 $1,548.8 $1,285.6
$ (0.70) $ (0.42) $ 1.30 $ 2.68 $ 2.95(1.35) 0.84 2.94 4.14 5.1014.30 14.77 15.59 15.09 13.19
0.03 0.40 0.80 0.73 0.57
18.63 18.50 19.75 20.50 25.8814.00 12.25 14.50 16.75 14.25(4.5) (2.2) 6.1 11.2 11.5(0.4) 0.1 5.7 12.2 16.0(4.9) (2.7) 8.5 18.6 24.2
1.6 1.2 1.6 1.9 2.228:72 41:59 32.68 32:68 31:69
77,058 60,086 59,971 59,814 57,7634,960 5,839 6,299 7,261 7,074
Notes and Explanations
(millions of Canadian dollars except forFinancial and Statistical Data section)
A. Terms and DefinitionsNet earnings before
non-controlling interest plus(i) Return on net assets = after-tax interest on long term debt
Average net assets
(ii) Return on common = Net earnings – preferred dividendsshareholders’ equity Average shareholders’ equity –
average preferred share capital
(iii) Ratio of debt to capitalization = Debt to Equity
Debt plus equity Debt plus equity
For purposes of calculating ratio of debt to capitalization, debtis defined as bank loans plus long term debt (including currentportion), less cash, plus fixed term and retractable preferredshares issued by subsidiaries and equity is defined as share-holders’ equity plus non-controlling interest.
B. Increases in Common Share Capital
EffectiveYear Ended
Common Shares $ Million June 30
1,910,987 33 198916,872,000 249 199212,421,053 177 199331,578,947 450 1993
In 1993, Elk Falls Forest Industries Limited issued commonshare equivalents represented by 450,000 Class A preferredshares that were subsequently exchanged into 31,578,947common shares of the Company in 1994.
C. Statement of Changes in Financial Position
Cash is defined to include cash and short term investments.
Notes:**In October 1997 and June 1997, the Company exited the coated paper
and solid wood products businesses with the sale of its respective 100%interest in Blandin Paper Company and 51.6% interest in TimberWestForest Limited. For the years ended June 30, 1998, 1997 and 1996,earnings, cash flow, assets and liabilities of coated paper and wood prod-ucts operations have been classified as discontinued operations. The1998 and 1997 investment cash flows include proceeds from the sale ofthe discontinued operations.
**Includes acquisition of Elk Falls Forest Industries Limited – $896.1million.
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Directors & Officers
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F L E T C H E R C H A L L E N G E C A N A D A
Directors
Michael J. Andrews 1,3,4
Auckland, New ZealandChairman, Fletcher Challenge Canada Limited and Chief Executive Officer, Fletcher Challenge Limited
Hugh A. Fletcher 1,3,4
Auckland, New ZealandCorporate Director
Harold N. Kvisle 2
Calgary, AlbertaPresident,Fletcher Challenge Energy Canada Inc.
Eva Lee Kwok 2,3,4
West Vancouver, British ColumbiaChair and Chief Executive Officer,Amara International Investment Corp.
John McDonald
Auckland, New ZealandGroup Treasurer, Fletcher Challenge Limited
Ward C. Pitfield 1,4,5
Toronto, OntarioCorporate Director
William P. Rosenfeld 1,2,4
Toronto, OntarioPartner, Goodman, Phillips & Vineberg
Ronald D. Southern 1,3,4
Calgary, AlbertaChairman and Chief Executive Officer,ATCO Ltd. and Canadian Utilities Limited
Robert T. Stewart 1,2,3
West Vancouver, British ColumbiaCorporate Director
Douglas W.G. Whitehead 2
Coquitlam, British ColumbiaPresident and Chief Executive Officer,Fletcher Challenge Canada Limited
W. Robert Wyman 1,3,5
West Vancouver, British ColumbiaVice-Chairman, Fletcher Challenge Canada Limited;Chairman, Suncor Inc.
1 Member of the Audit Committee2 Member of the Environmental, Health and Safety Committee3 Member of the Governance and Nomination Committee4 Member of the Human Resources Committee5 Member of the Pension Advisory Committee
Officers
Michael J. Andrews
Chairman of the Board
Douglas W.G. Whitehead
President and Chief Executive Officer
James E. Armitage
Senior Vice-President, Newsprint
Dennis J. Day
Senior Vice-President, Paper Manufacturing
Ida J. Goodreau
President, Pulp Operations
Lawrence J. Jackson
Senior Vice-President, Specialties
John E. Longley
Senior Vice-President and Chief Financial Officer
Howard M. Burleigh
Vice-President, Human Resources
Wanda C. Costuros
Vice-President, Finance, Pulp Operations
Mark R. Gibson
Vice-President, Asia Sales
Carlos J. Guilherme
Vice-President, Supply Chain
James M. Miller
Vice-President, Sales and Marketing, Pulp Operations
Jay G. Whitwham
Vice-President, Secretary and Treasurer
Bill J.M. Wong
Vice-President and Chief Taxation Officer
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Corporate Office
Fletcher Challenge Canada Limited
9th Floor, 700 West Georgia StreetP. O. Box 10058 Pacific CentreVancouver, British Columbia V7Y 1J7Telephone: (604) 654-4000
Pulp Operations
19th Floor, 401 West Georgia StreetVancouver, British Columbia V6B 5A1Telephone: (604) 654-4488
Operations
Crofton
P. O. Box 70Crofton, British Columbia V0R 1R0Telephone: (250) 246-6100
Elk Falls
P. O. Box 2000Campbell River, British Columbia V9W 5C9Telephone: (250) 287-5200
Mackenzie
P. O. Bag 6000Mackenzie, British Columbia V0J 2C0Telephone: (250) 997-2431
Marketing Contacts
Canada
Newsprint and Specialty Papers
Telephone: (604) 654-4226 (Newsprint)Telephone: (604) 654-4954 (Specialty Papers)Fax: (604) 654-4145
Pulp
Telephone: (604) 654-4327Fax: (604) 654-4342
United States
Fletcher Challenge Paper Company
3470 Mt. Diablo Blvd, Suite A-210Lafayette, California 94549Telephone: (510) 299-0070Fax: (510) 299-3821
Springfield, Illinois Office:Telephone: (217) 546-8770Fax: (217) 546-5028
Corporate Information
Asia
Fletcher Challenge Paper Sales
Ginza Fujiya Bldg. 601 3-1, Ginza 1-chome,Chuo-kuTokyo 103, JapanTelephone: 813-5524-2651Fax: 813-5524-2653
4F-2, No. 70, Sec. 5Nanking East Rd.Taipei,Taiwan, R.O.C.Telephone: 886-2275-69323Fax: 886-2275-69157
Investor Information
Annual General Meeting
The Annual General Meeting of theShareholders will be held on Wednesday,October 28, 1998 at 2:00 p.m. in thePark Ballroom of the Four Seasons HotelinVancouver, British Columbia.
Transfer Agent and Registrar
CIBC Mellon Trust Company at itsprincipal offices in Vancouver,Torontoand Montreal
Auditors
KPMG,Vancouver, British Columbia
Shares Listed
Common Shares (symbol: FCC.A)TheToronto Stock Exchange, MontrealExchange,Vancouver Stock Exchange
Investor Relations Contact
Telephone: (604) 654-4380Fax: (604) 654-4254
Annual and Quarterly Reports
For copies of Annual and Quarterlyreports contact:Telephone: (604) 654-4380Fax: (604) 654-4254
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