fletcher challenge canada limited annual report 1998

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98

Brought to you by Global Reports

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.


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


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


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


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


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.


4/5


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


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.


6/7


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.


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.


8/9


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.


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.


10/11


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


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



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.



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


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



16/17

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,


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.



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


The business strategies of FletcherChallenge Canada’s paper and pulpoperations are closely integrated withthe Company’s commitment to meetits environmental responsibilities.


20/21


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



22/23

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.


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.


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.


24/25


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


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.


26/27

E F F L U E N T


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.



28/29

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


Crofton 325,000 tonnesCrofton, 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



Comprises primarily whitetop linerboard.

End UsesProduct packaging.


Management’s Discussion and Analysis

30/31


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)


Note:(1) Continuing operations

1.30

1.35

1.40

1.45

1.50

94 95 96 97 98

Canadian/USDollar Exchange($Cdn/$US)


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



32/33


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


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.



34/35


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


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.



36/37


$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.


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.



38/3 9


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-


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



40/41


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.


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:


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.


Management’s Responsibility

42/43


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


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


Consolidated Balance Sheets

44/45


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


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


(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


Consolidated Statements of Changes in Financial Position

46/47



(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)


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)


Notes to Consolidated Financial Statements

48/4 9


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


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.



50/51


(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


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.



52/53


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.


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.


Comparative Review 1988 – 1998Years Ended June 30

54/55


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


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.


Directors & Officers

56


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


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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Fletcher Challenge Canada Limited

9th Floor, 700 West Georgia StreetP. O. Box 10058 Pacific Centre

Vancouver, British Columbia V7Y 1J7Telephone: (604) 654-4000

Printed in Canada


fletcher challenge canada limited annual report 1998

Documents