-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BA0wzGVJZaeu2aRnLI/3l+qKt0XxULSMpxC7+Y6ivN+b3jb4w45jlLwMfn5u3zU8 xUs0qo8YX4fN3xlBy0fdtA== 0001047469-98-012606.txt : 19980331 0001047469-98-012606.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012606 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL PAPER CO /NEW/ CENTRAL INDEX KEY: 0000051434 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 130872805 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03157 FILM NUMBER: 98579794 BUSINESS ADDRESS: STREET 1: TWO MANHATTANVILLE RD CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9143971500 MAIL ADDRESS: STREET 1: TWO MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL PAPER & POWER CORP DATE OF NAME CHANGE: 19710527 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- FOR FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 1-3157 ------------------------ INTERNATIONAL PAPER COMPANY (Exact name of Company as specified in its charter) NEW YORK 13-0872805 (State or other jurisdiction of (I.R.S. Employee incorporation or organization) Identification No.)
TWO MANHATTANVILLE ROAD, PURCHASE, N.Y. (Address of principal executive offices) 10577 (Zip Code) COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: 914-397-1500 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - --------------------------------------------------------------- ----------------------------- Cumulative $4 Preferred Stock, without par value New York Stock Exchange Common Stock, $1 per share par value New York Stock Exchange 5 1/8% Debentures due 2012
INDICATE BY CHECK MARK WHETHER THE COMPANY (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE COMPANY WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / / INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405, OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. / / THE AGGREGATE MARKET VALUE OF THE COMMON STOCK OF THE COMPANY OUTSTANDING AS OF FEBRUARY 27, 1998, HELD BY NON-AFFILIATES OF THE COMPANY WAS $14,043,803,601, CALCULATED ON THE BASIS OF THE CLOSING PRICE ON THE COMPOSITE TAPE ON FEBRUARY 27, 1998. FOR THIS COMPUTATION, THE COMPANY HAS EXCLUDED THE MARKET VALUE OF ALL COMMON STOCK BENEFICIALLY OWNED BY ALL EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY AND THEIR ASSOCIATES AS A GROUP AND TREASURY STOCK. SUCH EXCLUSION IS NOT TO SIGNIFY IN ANY WAY THAT MEMBERS OF THIS GROUP ARE "AFFILIATES" OF THE COMPANY. THE NUMBER OF SHARES OUTSTANDING OF THE COMPANY'S COMMON STOCK, AS OF FEBRUARY 27, 1998: OUTSTANDING IN TREASURY 302,924,867 570,745
The following documents are incorporated by reference into the parts of this report indicated below: 1997 ANNUAL REPORT TO SHAREHOLDERS PARTS I, II AND IV (INSIDE FRONT COVER AND PAGES 4 THROUGH 50) PROXY STATEMENT, DATED MARCH 30, 1998 PART III
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL International Paper Company, (referred to subsequently as the "Company" or "International Paper") a New York corporation incorporated in 1941 as the successor to the New York corporation of the same name organized in 1898, is a global paper and forest products company that produces printing and writing papers, pulp, tissue, paperboard and packaging and wood products. It also manufactures nonwovens; specialty chemicals; and specialty panels and laminated products. The Company's primary markets and manufacturing and distribution operations are in the United States, Europe and the Pacific Rim. In the United States at December 31, 1997, the Company operated 26 pulp, paper and packaging mills, 59 converting and packaging plants, 32 wood products facilities, 13 specialty panels and laminated products plants, 6 nonwoven products facilities, and 6 specialty chemicals plants. Production facilities at December 31, 1997 in Europe, Asia, Latin America and Canada included 13 pulp, paper and packaging mills, 33 converting and packaging plants, one wood products plant, 5 specialty panels and laminated products plants, 2 nonwoven products facilities, and 5 specialty chemicals plants. The Company distributes printing, packaging, graphic arts and industrial supply products, primarily manufactured by other companies, through over 300 distribution branches located primarily in the United States, and also engages in oil and gas and real estate activities in the United States. At December 31, 1997, the Company controlled approximately 6.3 million acres of forestlands in the United States. Through its acquisition of Carter Holt Harvey, the Company, primarily in New Zealand and Australia, operates 6 mills producing pulp, paper, packaging and tissue products, 26 converting and packaging facilities, 53 wood products manufacturing and distribution facilities, and 8 building products plants. Carter Holt Harvey distributes paper and packaging products through 20 distribution branches located in New Zealand and Australia. In New Zealand, Carter Holt Harvey controls approximately 845,000 acres of forestlands. In September 1997 the Company acquired Merbok Formtec, a company that has pioneered the development of doorfacing products through postforming medium density fiberboard. In November 1997, the stock of Taussig Graphics Supply, Inc., was acquired. On March 12, 1996, the Company completed the merger with Federal Paper Board (Federal), a diversified forest and paper products company. Under the terms of the merger agreement, Federal shareholders received, at their election and subject to certain limitations, either $55 in cash or a combination of cash and International Paper common stock worth $55 for each share of Federal common stock. To complete the merger, Federal shares were acquired for approximately $1.3 billion in cash and $1.4 billion in International Paper common stock, and approximately $800 million of debt was assumed. In August 1996 the Company acquired Forchem, a tall oil and turpentine processor in Finland. In September 1996 Carter Holt Harvey, a consolidated subsidiary, acquired Forwood Products, the timber processing business of the South Australian government. In late April 1995 the Company acquired approximately 26% of Carter Holt Harvey, a New Zealand-based forest and paper products company for $1.1 billion. The acquisition increased International Paper's ownership to just over 50%. As a result, Carter Holt Harvey was consolidated into International Paper's financial statements beginning on May 1, 1995. Prior to this date the equity accounting method was utilized. In January 1995 the assets of both Seaman-Patrick and Carpenter Paper Companies, two Michigan-based paper distribution companies, were acquired by issuing approximately 988,000 shares of common stock. In September, Micarta, the South Carolina-based high-pressure laminates business of Westinghouse, 2 was acquired. In October, the Company purchased the inks and adhesives resin business of DSM located in Niort, France. All of the 1997, 1996 and 1995 acquisitions were accounted for using the purchase method. The operating results of these mergers and acquisitions have been included in the consolidated statement of earnings from the dates of acquisition. A further discussion of mergers and acquisitions can be found on pages 26, 27 and 39 of the Annual Report, which information is incorporated herein by reference. From 1991 through 1997, International Paper's capital expenditures approximated $8.7 billion, excluding mergers and acquisitions. These expenditures reflect the continuing efforts to improve product quality and environmental performance, lower costs, expand production capacity, and acquire and improve forestlands. Capital spending in 1997 was approximately $1.1 billion and is budgeted to be approximately $1.1 billion in 1998. A further discussion of capital expenditures can be found on page 26 of the Annual Report, which information is incorporated herein by reference. The Company, primarily through its majority-owned subsidiary, IP Timberlands, Ltd. ("IPT"), a Texas limited partnership, controlled approximately 6.3 million acres of forestlands in the United States at December 31, 1997. IPT controlled approximately 5.6 million acres of forestlands in the United States at December 31, 1997. IPT was formed to succeed to substantially all of International Paper's forestlands business for the period 1985 through 2035 unless earlier terminated. Through its ownership of Carter Holt Harvey, International Paper controls approximately 845,000 acres of forestlands in New Zealand. In June 1997, a $535 million pre-tax business improvement reserve ($385 million after taxes or $1.28 per share) was established under a plan to improve the Company's financial performance through closing or divesting of operations that no longer meet financial or strategic objectives. It included approximately $230 million for asset write-downs, $210 million for the estimated losses on sales of businesses included in the reserve and $95 million for severance and other expenses. Approximately $28 million of these costs were incurred in 1997. The majority of the reserve relates to the restructuring of the printing papers business in the United States and overseas and the sale of certain specialty businesses. Annual improvement in earnings before interest and income taxes of approximately $100 million is expected by the end of 1998. A further discussion of restructuring activities can be found on pages 22 and 23 of the Annual Report, which information is incorporated herein by reference. Also in June 1997, the Company recorded a $150 million pre-tax charge ($93 million after taxes or $.31 per share) to add to its legal reserves. On July 14, 1997, Masonite Corporation, a wholly owned subsidiary, announced that it had reached a proposed settlement in a class action pending in Mobile County, Alabama. The Company believes its legal reserves are adequate to cover any amounts to be paid pursuant to the proposed settlement, which is now final. For a further discussion of the Masonite legal settlement, see pages 28, 40 and 42 of the Annual Report, which information is incorporated herein by reference. In December 1997, an additional pre-tax charge of $125 million ($80 million after taxes or $.26 per share) was recorded for anticipated losses associated with the sale of the remaining imaging businesses. On March 29, 1996, IPT completed the sale of a 98% general partnership interest in a subsidiary partnership that owns approximately 300,000 acres of forestlands located in Oregon and Washington. Included in the net assets of the partnership interest sold were forestlands, roads and $750 million of long-term debt. As a result of this transaction, International Paper recognized in its first-quarter consolidated results a $592 million pre-tax gain ($336 million after taxes and minority interest expense or $1.25 per share). IPT and International Paper retained nonoperating interests in the partnership. In December 1997, these retained interests were redeemed, and a related debt guaranty was released resulting in a pre-tax gain of $170 million ($97 million after taxes and minority interest expense or $.32 per share). 3 Also in the first quarter of 1996, the Company's Board of Directors authorized a series of management actions to restructure and strengthen existing businesses that resulted in a pre-tax charge to earnings of $515 million ($362 million after taxes or $1.35 per share). The charge included $305 million for the write-off of certain assets, $100 million for asset impairments (related to the adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"), $80 million in associated severance costs and $30 million of other expenses, including the cancellation of leases. Accruals for one-time cash costs, which included severance and other expenses, totaled $110 million. Approximately $34 million of these costs were incurred in 1996 and substantially all of the remainder was spent in 1997. In the fourth quarter of 1996, the Company recorded a $165 million pre-tax charge ($105 million after taxes or $.35 per share) for the write-down of its investment in Scitex, a company that markets digital communication products, and to record its share of a restructuring charge announced by Scitex in November 1996. On March 10, 1998, IP Forest Resources Company, a subsidiary of International Paper, announced that it will exercise its right to purchase all of the 7,299,500 publicly traded Class A Depositary Units of IP Timberlands Ltd on March 25, 1998 for a purchase price of $13.6325 per unit. FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS The financial information concerning segments is set forth on pages 22 through 26 and 32 of the Annual Report, which information is incorporated herein by reference. FINANCIAL INFORMATION ABOUT INTERNATIONAL AND DOMESTIC OPERATIONS The financial information concerning international and domestic operations and export sales is set forth on page 31 of the Annual Report, which information is incorporated herein by reference. COMPETITION AND COSTS Despite the size of the Company's manufacturing capacities for paper, paperboard, packaging and pulp products, the markets in all of the cited product lines are large and highly fragmented. The markets for wood and specialty products are similarly large and fragmented. There are numerous competitors, and the major markets, both domestic and international, in which the Company sells its principal products are very competitive. These products are in competition with similar products produced by others, and in some instances, with products produced by other industries from other materials. Many factors influence the Company's competitive position, including prices, costs, product quality and services. Information on the impact of prices and costs on operating profits is contained on pages 22 through 30 of the Annual Report, which information is incorporated herein by reference. MARKETING AND DISTRIBUTION Paper and packaging products are sold through the Company's own sales organization directly to users or converters for manufacture. Sales offices are located throughout the United States as well as internationally. Significant volumes of products are also sold through paper merchants and distributors, including facilities in the Company's distribution network. The Company's U.S. production of lumber and plywood is marketed through independent and Company-owned distribution centers. Specialty products are marketed through various channels of distribution. 4 DESCRIPTION OF PRINCIPAL PRODUCTS The Company's principal products are described on pages 4 through 8 of the Annual Report, which information is incorporated herein by reference. Production of major products for 1997, 1996 and 1995 was as follows: PRODUCTION BY PRODUCTS (UNAUDITED)
1997(F) 1996(D,F) 1995(E,F) ----------- ----------- ----------- Printing Papers (in thousands of tons) Business Papers................................................................. 3,986 3,875 3,432 Coated Papers................................................................... 1,304 1,089 1,136 Market Pulp(A).................................................................. 2,148 2,007 1,733 Newsprint....................................................................... 86 94 91 Packaging (in thousands of tons) Containerboard.................................................................. 2,945 2,702 2,387 Bleached Packaging Board........................................................ 2,191 1,885 1,167 Industrial Papers............................................................... 691 667 653 Industrial and Consumer Packaging(B)............................................ 3,379 3,313 2,952 Specialty Products (in thousands of tons) Tissue.......................................................................... 147 126 68 Forest Products (in millions) Panels (sq. ft. 3/8"-basis)(C).................................................. 1,445 1,242 936 Lumber (board feet)............................................................. 2,153 1,815 1,104 MDF (sq. ft. 3/4"-basis)........................................................ 204 285 263 Particleboard (sq. ft. 3/4"-basis).............................................. 188 192 182
- ------------------------ (A) This excludes market pulp purchases. (B) A significant portion of this tonnage was fabricated from paperboard and paper produced at the Company's own mills and included in the containerboard, bleached packaging board and industrial papers amounts in this table. (C) Panels include plywood and oriented strand board. (D) Includes Federal Paper Board from March 12, 1996, and Carter Holt Harvey for a full year. (E) Includes amounts for Carter Holt Harvey as applicable since May 1, 1995. (F) Certain reclassifications and adjustments have been made to current- and prior-year amounts. RESEARCH AND DEVELOPMENT The Company operates research and development centers at Sterling Forest, New York; metropolitan Cincinnati, Ohio; Panama City, Florida; Erie, Pennsylvania; Kaukauna, Wisconsin; Binghamton, New York; South Walpole, Massachusetts; St. Charles, Illinois; Holyoke, Massachusetts; Odenton, Maryland; Morley, United Kingdom; Munich, Germany; Saint-Priest, France; Annecy, France; a regional center for applied forest research in Bainbridge, Georgia; a forest biotechnology center in Rotorua, New Zealand; and several product laboratories. Research and development activities are directed to short-term, long-term and technical assistance needs of customers and operating divisions; process, equipment and product innovations; and improvement of profits through tree generation and propagation research. Activities include studies on improved forest species and management; innovation and improvement of pulping, 5 bleaching, chemical recovery, papermaking and coating processes; packaging design and materials development; reduction of environmental discharges; re-use of raw materials in manufacturing processes; recycling of consumer and packaging paper products; energy conservation; applications of computer controls to manufacturing operations; innovations and improvement of products; and development of various new products. Product development efforts specifically address product safety as well as the minimization of solid waste. The cost to the Company of its research and development operations was $99.9 million in 1997, $112.5 million in 1996 and $110.8 million in 1995. ENVIRONMENTAL PROTECTION Controlling pollutants discharged into the air, water and groundwater to avoid adverse impacts on the environment, making continual improvements in environmental performance and achieving 100% compliance with applicable laws and regulations are continuing objectives of the Company. The Company has invested substantial funds to modify facilities to assure compliance, and plans to make substantial capital expenditures for this purpose in the future. A total of $90 million was spent in 1997 to control environmental releases into the air and water and to assure environmentally sound disposal of solid and hazardous waste. The Company expects to spend approximately $105 million in 1998 for similar capital programs. Amounts to be spent for environmental control projects in future years will depend on new laws and regulations, changes in legal requirements and changes in environmental concerns. Taking these uncertainties into account, the Company's preliminary estimate for additional environmental appropriations during the period 1999 through 2000 is approximately $350 million. In November 1997, the United States Environmental Protection Agency ("EPA") published on the internet new pulp and paper mill standards for air emissions and water discharges to be met three to eight years after final promulgation (the "Cluster Regulations"). Final promulgation will occur when the regulations are published in the Federal Register which is expected to occur in April of 1998. The estimated spending for 1998 through 2000 includes the cost of these regulations as well as other environmental projects. The Company has spent $145 million over the last four years to convert 13 of its U.S. and European bleached mills to Elemental Chlorine Free ("ECF") pulping, one of the requirements of the Cluster Regulations, and for certain other environmental projects related to the Cluster Regulations. Two former Federal Paperboard mills will be converted to ECF pulping in 1998. The additional cost related to the Cluster Regulations for the three years 1998 to 2000 is estimated to be $230 million. Projected costs for the following five years are $180 million. The final cost depends on the outcome of Cluster water regulations for pulp and paper subcategories other than bleached papergrade kraft. Regulations for these subcategories are not likely to become final until late 1999 or 2000. The Company now estimates that annual operating costs, excluding depreciation, will increase approximately $20 million when these regulations are fully implemented. The Company expects the significant effort it has made in the analysis of environmental issues and the development of environmental control technology to enable it to keep costs for compliance with environmental regulations, at, or below, industry averages. A further discussion of environmental issues can be found on page 28 of the Annual Report, which information is incorporated herein by reference. Additional information is available in the Company's annual environmental health and safety report published in October of 1997. EMPLOYEES As of December 31, 1997, the Company had approximately 82,000 employees, of whom approximately 54,000 were located in the United States and the remainder overseas. Of the domestic employees, 6 approximately 37,000 are hourly employees, approximately 17,000 of whom are represented by the United Paperworkers International Union. During 1997, new labor agreements were reached at the following mills: Augusta, Sprague, Gardiner, Mobile, Riverdale, Oswego, Millers Falls and Vicksburg. During 1998, labor agreements are scheduled to be negotiated at the Louisiana, Moss Point and Pine Bluff mills, and in 1999, the Erie Mill. During 1997, labor agreements expired in seven packaging plants and two distribution operations. New labor agreements were negotiated at each location, except three packaging plants where negotiations were still in progress at year end; one additional packaging plant has a contract open from a previous year. RAW MATERIALS For information as to the sources and availability of raw materials essential to the Company's business, see Item 2 "PROPERTIES." ITEM 2. PROPERTIES FORESTLANDS The principal raw material used by International Paper is wood in various forms. At December 31, 1997, the Company controlled approximately 6.3 million acres of forestlands in the United States. Of this acreage, IP Timberlands, Ltd. ("IPT"), a limited partnership in which the Company has a majority ownership interest, controlled approximately 5.6 million acres of forestlands in the U.S. An additional 845,000 acres of forestlands in New Zealand are held through Carter Holt Harvey, a consolidated subsidiary of International Paper. During 1997, the U.S. forestlands supplied 2.4 million cords of roundwood to the Company's U.S. facilities. This amounted to the following percentages of the roundwood requirements of its mills and forest products facilities: 13% in its Northern mills, 21% in its Southern mills and none in its Western mill. The balance was acquired from other private industrial and nonindustrial forestland owners, with only an insignificant amount coming from public lands of the United States government. In addition, 3.9 million cords of wood were sold to other users in 1997. In November 1994, the Company adopted the Sustainable Forestry Principles developed by the American Forest and Paper Association in August 1994. MILLS AND PLANTS A listing of the Company's production facilities can be found in Appendix I hereto, which information is incorporated herein by reference. The Company's facilities are in good operating condition and are suited for the purposes for which they are presently being used. The Company continues to study the economics of modernizing or adopting other alternatives for higher cost facilities. Further discussions of new mill and plant projects can be found on pages 26 and 27 of the Annual Report, which information is incorporated herein by reference. CAPITAL INVESTMENTS AND DISPOSITIONS Given the size, scope and complexity of its business interests, International Paper continuously examines and evaluates a wide variety of business opportunities and planning alternatives, including possible acquisitions and sales or other dispositions of properties. Planned capital investments for 1998, dispositions, and restructuring activities as of December 31, 1997 are set forth on pages 22, 23, 26 and 40 of the Annual Report, which information is incorporated herein by reference. 7 ITEM 3. LEGAL PROCEEDINGS MASONITE LITIGATION A lawsuit which was certified as a nationwide class action and was filed against the Company and Masonite Corporation, a wholly owned subsidiary of the Company, ("Masonite"), on December 27, 1994, in Mobile County Circuit Court, Mobile, Alabama has been settled. This lawsuit alleged that hardboard siding, which is used as exterior cladding for residential dwellings and is manufactured by Masonite, fails prematurely, allowing moisture intrusion. It alleged further that the presence of moisture in turn causes the failure of the structure underneath the siding. The class consists of all owners of homes in the United States having Masonite hardboard siding incorporated into buildings between 1980 and January 15, 1988. It is impossible to know how many homes have this siding, but it is estimated that there are between three and four million. As previously reported, a Phase I trial was conducted in August and September of 1996 to determine the sole issue of inherent product defect. The jury, in attempting to apply the various laws of all the states on a nationwide basis, returned a mixed decision that found in favor of the Company and Masonite in some jurisdictions and in favor of the plaintiffs in other jurisdictions. As also previously reported, a Phase II trial was set for July 14, 1997, on the remaining issues in the case. The Phase II trial was not conducted owing to the settlement. Final approval of the settlement was granted by the Mobile County Circuit Court on January 15, 1998. The settlement provides for monetary compensation to class members meeting the requirements of the settlement agreement on a claims-made basis for a period of seven years for those having Masonite hardboard siding manufactured between 1980 and 1989 and for a period of ten years for those having Masonite hardboard siding manufactured between 1990 and January 15, 1998, with certain specified deductions based on years of use. The settlement also provides for the payment of attorneys' fees equaling fifteen percent of settlement amounts paid to class members, with a non-refundable advance of $47.5 million plus $2.5 million in costs. While the total cost of the settlement is not presently known with certainty, it is believed that this settlement will not have a material adverse effect on the Company's consolidated financial position or results of operation. The Company and Masonite have the right, in their sole discretion, to terminate this settlement after seven years from the date of final approval. OTHER LITIGATION As of March 30, 1998, there were no other pending judicial proceedings brought by governmental authorities against the Company for alleged violations of applicable environmental laws or regulations. The Company is engaged in various administrative proceedings that arise under applicable environmental and safety laws or regulations, including approximately 73 active proceedings under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and comparable state laws. Most of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under the CERCLA, as a practical matter, liability for CERCLA cleanups is allocated among the many potential responsible parties. Based upon previous experience with respect to the cleanup of hazardous substances and upon presently available information, the Company believes that it has no or DE MINIMIS liability with respect to 17 of these sites; that liability is not likely to be significant at 45 sites; and that estimates of liability at 11 of these sites is likely to be significant but not material to the Company's consolidated financial position or results of operations. The Company's majority-owned subsidiary, Carter Holt Harvey, has an indirect shareholding of 30.05% in Chile's largest industrial company, COPEC. This shareholding is held through Carter Holt Harvey's joint venture in Los Andes with Inversiones Socoroma S.A., a Chilean investment company ("Socoroma"). In late 1993, Carter Holt Harvey commenced several actions in Chilean courts challenging certain corporate governance documents of Los Andes, as well as agreements between Carter Holt Harvey's subsidiary and Socoroma. One such action, challenging the validity of the by-laws of Los Andes, is 8 still pending. In December 1994, Socoroma commenced an arbitration action seeking to expel Carter Holt Harvey from Los Andes at a price which is less than the carrying value. The decision of the arbitrator is expected in the first quarter of 1998. Although the Company believes that the eventual resolution of this Carter Holt Harvey litigation should not have a material adverse effect on the Company, the actual resolution of each of these actions cannot be predicted because of the uncertainties involved in the litigation and arbitration proceedings. The Company is also involved in other contractual disputes, administrative and legal proceedings and investigations of various types. While any litigation, proceeding or investigation has an element of uncertainty, the Company believes that the outcome of any proceeding, lawsuit or claim that is pending or threatened, or all of them combined, will not have a material adverse effect on its consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1997. SPECIAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY INTERNATIONAL PAPER COMPANY EXECUTIVE OFFICERS AS OF MARCH 30, 1998 INCLUDING NAME, AGE, OFFICES AND POSITIONS HELD(1) AND BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS John T. Dillon, 59, chairman and chief executive officer since 1996. Prior to that he was executive vice president-packaging from 1987 to 1995 when he assumed the position of president and chief operating officer. C. Wesley Smith, 58, executive vice president-printing papers since 1992. Prior thereto he was president-International Paper Europe from 1989. W. Michael Amick, 57, executive vice president-forest products and industrial packaging. He was vice president and group executive-specialty industrial papers from 1988 to 1992, when he became president-International Paper-Europe. He assumed his current position in February 1996. James P. Melican, Jr., 57, executive vice president-legal and external affairs. He assumed his current position in 1991. David W. Oskin, 55, executive vice president, consumer packaging and specialty industrial papers since 1995. He held the position of senior vice president from 1988 to 1992, when he became the chief executive officer and managing director of Carter Holt Harvey Limited of New Zealand until his current position. Milan J. Turk, 59, executive vice president, specialty businesses. He was vice president and group executive-specialty products from 1990 until 1993, when he became senior vice president-specialty products. He assumed his current position in February, 1996. Robert M. Byrnes, 60, senior vice president, human resources since 1989. Thomas E. Costello, 58, senior vice president-distribution businesses since March 1997. Prior to that he was president-ResourceNet International, the Company's distribution business since 1991. 9 Douglas B. Fox, 50, senior vice president, marketing since 1997. He was president and chief operating officer of Landmark Communication from 1994 to 1995; and was an executive with The Times Mirror Company from 1987 to 1994, holding a variety of positions of increasing responsibility, including president and chief operating officer of Newsday/New York Newsday. Marianne M. Parrs, 54, senior vice president and chief financial officer since 1995. She was controller-printing papers from 1985 to 1993 and then held the position of staff vice president-tax until 1995. Andrew R. Lessin, 55, vice president and controller since 1995. Prior thereto he was the controller since 1990. William B. Lytton, 49, vice president and general counsel. He was vice president and general counsel for GE Aerospace from 1990 to 1993; vice president and associate general counsel for Martin Marietta from 1993 to 1995; and vice president and general counsel for Lockheed Martin Electronics from 1995 to 1996. He assumed his current position in 1996. - ------------------------ (1) Executive officers of International Paper are elected to hold office until the next annual meeting of the board of directors following the annual meeting of shareholders and until election of successors, subject to removal by the board. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Dividend per share data on the Company's common stock and the high and low sale prices for the Company's common stock for each of the four quarters in 1997 and 1996 are set forth on page 50 of the Annual Report and are incorporated herein by reference. As of March 20, 1998, there were 32,384 holders of record of the Company's common stock. ITEM 6. SELECTED FINANCIAL DATA The comparative columnar table showing selected financial data for the Company is set forth on pages 48 and 49 of the Annual Report and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's review and comments on the consolidated financial statements are set forth on pages 22 through 30 of the Annual Report and are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are set forth on pages 29 and 30 of the Annual Report and are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements, the notes thereto and the reports of the independent public accountants and Company management are set forth on pages 33 through 47 of the Annual Report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors of the Company and their business experience are set forth on pages 8 through 11 of the Company's Notice of 1998 Annual Meeting and Proxy Statement, dated March 30, 1998 (the "Proxy Statement") and are incorporated herein by reference. The discussion of executive officers of the Company is included in Part I of this report under "Executive Officers of the Company." ITEM 11. EXECUTIVE COMPENSATION A description of the compensation of the Company's executive officers is set forth on pages 14 through 17 and 20 through 27 of the Proxy Statement and is incorporated herein by reference. 11 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company knows of no one owning beneficially more than five percent (5%) of the Company's common stock other than the following: STATE STREET BANK & TRUST CO., N.A. 25,003,206 8.3%
As of December 31, 1997, State Street Bank & Trust Co., N.A. holds such shares as the independent trustee in trust funds for employee savings, thrift, and similar employee benefit plans of the Company and its subsidiaries ("Company Trust Funds"). In addition, State Street Bank & Trust Co., N.A. is trustee for various third party trusts and employee benefit plans and is an Investment Advisor. As a result of its holdings in all capacities, State Street Bank & Trust Co., N.A. is the record holder of 24,628,312 shares of common stock of the Company. The trustee disclaims beneficial ownership of all such shares except 3,530,000 shares of which it has sole power to dispose or to direct the disposition. The common stock held by the Company Trust Funds is allocated to participants' accounts and such stock or the cash equivalent will be distributed to participants upon termination of employment or pursuant to withdrawal rights. The trustee votes the shares of common stock held in the Company Trust Funds in accordance with the instructions of the participants; shares for which no instructions are received are voted proportionately to those shares voted by participants. MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED 20,601,662 6.8%
As of January 31, 1998, Merrill Lynch & Co., Inc. is a parent holding company and a broker-dealer registered under Section 15 of the Securities Exchange Act of 1934 (the "Act"). They, or subsidiaries, hold these shares primarily as sponsor to various registered investment companies, but disclaim beneficial ownership thereof other than certain of which are held in proprietary accounts. THE CAPITAL GROUP COMPANIES, INC. 18,150,000 6.0%
As of December 31, 1997, the Capital Group Companies, Inc. holds such shares as the parent holding company of a group of investment management companies (including Capital Research and Management Company). The Capital Group Companies, Inc. does not have investment power or voting power over any of the securities reported here; however, The Capital Group Companies, Inc. may be deemed to "beneficially own" such securities by virtue of Rule 13d-3 under the Act. Capital Research and Management Company, an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of these shares as a result of acting as investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940. COMMON STOCK HELD BY DIRECTORS AND DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP 1,555,691 0.51%
The table showing ownership of the Company's common stock held by directors and by directors and executive officers as a group is set forth on page 6 of the Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None, other than those described under Item 11. It is noted that in June 1997, the Company sold 825 acres of land near Killington, Vermont to the Conservation Fund for later disposition to the State of Vermont for conservation and recreational use. The sale price was $424,875 which was the market value of the land. Mr. Noonan, a director of the Company, is chairman and chief executive officer of the Conservation Fund. 12 FORWARD-LOOKING INFORMATION THIS 1997 ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS CONCERNING PROJECTED IMPROVEMENT IN EARNINGS AT INTERNATIONAL PAPER. ACTUAL RESULTS MAY DIFFER BASED PRIMARILY ON OVERALL DEMAND AND WHETHER PRICE INCREASES FOR VARIOUS PAPER AND PACKAGING PRODUCTS CAN BE REALIZED IN 1998, AND WHETHER ANTICIPATED SAVINGS FROM RESTRUCTURING, THE BUSINESS IMPROVEMENT PROGRAM AND OTHER INITIATIVES ARE ACHIEVED. THIS ANNUAL REPORT ALSO INCLUDES CONCLUSIONS AS TO VALUE AT RISK ASSOCIATED WITH FINANCIAL INSTRUMENTS. RESULTS MAY DIFFER BASED ON ACTUAL MOVEMENTS IN INTEREST AND CURRENCY EXCHANGE RATES. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS: - --------------------------------------------- (11) Statement of Computation of Per Share Earnings (12) Computation of Ratio of Earnings to Fixed Charges (13) 1997 Annual Report to Shareholders of the Company (21) List of Significant Subsidiaries (22) Proxy Statement, dated March 30, 1998 (23) Consent of Independent Public Accountants (24) Power of Attorney (27) Financial Data Schedule (99) Management Incentive Plan dated January 1, 1998.
REPORTS ON FORM 8-K A Current Report on Form 8-K was filed by the Company on January 13, 1998, and on January 20, 1998. FINANCIAL STATEMENT SCHEDULES The consolidated balance sheets as of December 31, 1997 and 1996 and the related consolidated statements of earnings, cash flows and common shareholders' equity for each of the three years ended December 31, 1997 and the related Notes to Consolidated Financial Statements, together with the report thereon of Arthur Andersen LLP, dated February 6, 1998, appearing on pages 33 through 47 of the Annual Report, are incorporated herein by reference. With the exception of the aforementioned information and the information incorporated by reference in Items 1, 2 and 5 through 8, the Annual Report is not to be deemed filed as part of this report. The following additional financial data should be read in conjunction with the financial statements in the Annual Report. Schedules not included with this additional financial data have been omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto. ADDITIONAL FINANCIAL DATA 1997, 1996 AND 1995 Report of Independent Public Accountants on Financial Statement Schedule............... 14 Consolidated Schedule: II--Valuation and Qualifying Accounts................................................ 15
13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To International Paper Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in the Company's 1997 Annual Report to Shareholders, incorporated by reference in this Form 10-K, and have issued our report thereon dated February 6, 1998. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, NY February 6, 1998 14 SCHEDULE II INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS)
FOR YEAR ENDED DECEMBER 31, 1997 ----------------------------------------------------------------------------- BALANCE BALANCE AT ADDITIONS ADDITIONS DEDUCTIONS AT END BEGINNING CHARGED TO CHARGED TO FROM OF DESCRIPTION OF PERIOD EARNINGS OTHER ACCOUNTS RESERVES PERIOD - -------------------------------------------------- ------------- --------------- ------------------- ----------- ----------- Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts-current......................... $ 101 $ 22 $ 0 $ (30)(A) $ 93 -- -- ----- --- ----------- ----- ----- --- ----------- ----- FOR YEAR ENDED DECEMBER 31, 1996 ----------------------------------------------------------------------------- BALANCE BALANCE AT ADDITIONS ADDITIONS DEDUCTIONS AT END BEGINNING CHARGED TO CHARGED TO FROM OF DESCRIPTION OF PERIOD EARNINGS OTHER ACCOUNTS RESERVES PERIOD - -------------------------------------------------- ------------- --------------- ------------------- ----------- ----------- Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts-current......................... $ 101 $ 22 $ 0 $ (22)(A) $ 101 -- -- ----- --- ----------- ----- ----- --- ----------- ----- FOR YEAR ENDED DECEMBER 31, 1995 ----------------------------------------------------------------------------- BALANCE BALANCE AT ADDITIONS ADDITIONS DEDUCTIONS AT END BEGINNING CHARGED TO CHARGED TO FROM OF DESCRIPTION OF PERIOD EARNINGS OTHER ACCOUNTS RESERVES PERIOD - -------------------------------------------------- ------------- --------------- ------------------- ----------- ----------- Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts-current......................... $ 97 $ 25 $ 0 $ (21)(A) $ 101 -- -- ----- --- ----------- ----- ----- --- ----------- -----
- ------------------------ (A) Includes write-offs, less recoveries, of accounts determined to be uncollectible and other adjustments. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL PAPER COMPANY By: /s/ JAMES W. GUEDRY ----------------------------------------- James W. Guedry VICE PRESIDENT AND SECRETARY
March 30, 1998 Pursuant to the requirements of the securities exchange act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- JOHN T. DILLON Chairman of the Board, - ------------------------------ Chief Executive Officer March 30, 1998 (John T. Dillon) and Director C. WESLEY SMITH* - ------------------------------ Executive Vice President March 30, 1998 (C. Wesley Smith) and Director PETER I. BIJUR* - ------------------------------ Director March 30, 1998 (Peter I. Bijur) WILLARD C. BUTCHER* - ------------------------------ Director March 30, 1998 (Willard C. Butcher) ROBERT J. EATON* - ------------------------------ Director March 30, 1998 (Robert J. Eaton) JOHN A. GEORGES* - ------------------------------ Director March 30, 1998 (John A. Georges) THOMAS C. GRAHAM* - ------------------------------ Director March 30, 1998 (Thomas C. Graham) JOHN R. KENNEDY* - ------------------------------ Director March 30, 1998 (John R. Kennedy) DONALD F. MCHENRY* - ------------------------------ Director March 30, 1998 (Donald F. McHenry)
16
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- PATRICK F. NOONAN* - ------------------------------ Director March 30, 1998 (Patrick F. Noonan) JANE C. PFEIFFER* - ------------------------------ Director March 30, 1998 (Jane C. Pfeiffer) EDMUND T. PRATT, JR.* - ------------------------------ Director March 30, 1998 (Edmund T. Pratt, Jr.) CHARLES R. SHOEMATE* - ------------------------------ Director March 30, 1998 (Charles R. Shoemate) MARIANNE M. PARRS - ------------------------------ Senior Vice President and March 30, 1998 (Marianne M. Parrs) Chief Financial Officer ANDREW R. LESSIN Vice President and - ------------------------------ Controller and March 30, 1998 (Andrew R. Lessin) Chief Accounting Officer
*By: JAMES W. GUEDRY ------------------------- (James W. Guedry) (ATTORNEY-IN-FACT) 17 APPENDIX I 1997 LISTING OF FACILITIES PRINTING PAPERS BUSINESS PAPERS, COATED PAPERS AND PULP DOMESTIC: Mobile, Alabama Selma, Alabama (Riverdale Mill) Camden, Arkansas Pine Bluff, Arkansas Augusta, Georgia Bastrop, Louisiana (Louisiana Mill) Springhill, Louisiana (C & D Center) Jay, Maine (Androscoggin Mill) Hazelton, Pennsylvania (C & D Center) Sturgis, Michigan (C & D Center) Ontario, California (C & D Center) Wilmington, North Carolina (Reclaim Center) Saybrook, Ohio (C & D Center) Millers Falls, Massachusetts West Springfield, Massachusetts Westfield, Massachusetts (C & D Center) Moss Point, Mississippi Natchez, Mississippi Corinth, New York (Hudson River Mill) Ticonderoga, New York Riegelwood, North Carolina Hamilton, Ohio Erie, Pennsylvania Lock Haven, Pennsylvania Georgetown, South Carolina Texarkana, Texas INTERNATIONAL: Clermont-Ferrand, France (Corimex Mill) Docelles, France (Lana Mill) Grenoble, France (Pont De Claix Mill) Maresquel, France Saillat, France Saint Die, France (Anould Mill) Strasbourg, France (La Robertsau Mill) Bergisch Gladbach, Germany (Gorhrsmuhle Mill) Duren, Germany (Reflex Mill) Kinleith, New Zealand Mataura, New Zealand Kwidzyn, Poland Inverurie, Scotland PACKAGING CONTAINERBOARD DOMESTIC: Mansfield, Louisiana Pineville, Louisiana Vicksburg, Mississippi Oswego, New York Gardiner, Oregon INTERNATIONAL: Arles, France Kinleith, New Zealand Penrose, New Zealand CORRUGATED CONTAINER DOMESTIC: Mobile, Alabama Fordyce, Arkansas Russellville, Arkansas Carson, California Modesto, California Putnam, Connecticut Auburndale, Florida Chicago, Illinois Shreveport, Louisiana Springhill, Louisiana Detroit, Michigan Minneapolis, Minnesota Geneva, New York Statesville, North Carolina Cincinnati, Ohio Wooster, Ohio Mount Carmel, Pennsylvania Georgetown, South Carolina Nashville, Tennessee Dallas, Texas Edinburg, Texas El Paso, Texas Delavan, Wisconsin Fond du Lac, Wisconsin INTERNATIONAL: Las Palmas, Canary Islands Suva, Fiji Arles, France Chalon-sur-Saone, France Chantilly, France Creil, France LePuy, France Mortagne, France Guadeloupe, French West Indies Bellusco, Italy Catania, Italy Pedemonte, Italy Pomezia, Italy San Felice, Italy Auckland, New Zealand Christchurch, New Zealand Hamilton, New Zealand Hastings, New Zealand Levin, New Zealand Barcelona, Spain Bilbao, Spain Valladolid, Spain Thrapston, United Kingdom Winsford, United Kingdom Fiber Converting Plant Auckland, New Zealand BLEACHED BOARD DOMESTIC: Pine Bluff, Arkansas Sprague, Connecticut Augusta, Georgia Moss Point, Mississippi Georgetown, South Carolina Riegelwood, North Carolina Texarkana, Texas INTERNATIONAL: Whaketane, New Zealand LIQUID PACKAGING DOMESTIC: Turlock, California Plant City, Florida Atlanta, Georgia Cedar Rapids, Iowa Kansas City, Kansas Framingham, Massachusetts Kalamazoo, Michigan Raleigh, North Carolina Philadelphia, Pennsylvania A-1 INTERNATIONAL: Itu, Brazil Edmonton, Alberta, Canada London, Ontario, Canada Longueuil, Quebec, Canada Shanghai, China San Salvador, El Salvador Santiago, Dominican Republic St. Priest, France Kingston, Jamaica Hyogo, Japan Seoul, Korea Taipei, Taiwan Caracas, Venezuela IMPERIAL BONDWARE Visalia, California Shelbyville, Illinois Kenton, Ohio Menomonee Falls, Wisconsin FOLDING CARTON AND RETAIL BAG DOMESTIC: Mobile, Alabama La Grange, Georgia Thomaston, Georgia Clinton, Iowa Hopkinsville, Kentucky Hendersonville, North Carolina Wilmington, North Carolina Cincinnati, Ohio Jackson, Tennessee Richmond, Virginia INTERNATIONAL: Auckland, New Zealand Christchurch, New Zealand Palmerston North, New Zealand LABEL Bowling Green, Kentucky KRAFT PAPER Mobile, Alabama Camden, Arkansas MULTIWALL BAGS INTERNATIONAL: Auckland, New Zealand PLASTIC PACKAGING DOMESTIC: Janesville, Wisconsin INTERNATIONAL: Santiago, Chile Albany, New Zealand Auckland, New Zealand Hamilton, New Zealand Hastings, New Zealand Wellington, New Zealand Sydney, New South Wales, Australia DISTRIBUTION WHOLESALE AND RETAIL DISTRIBUTION (325 distribution branches) XPEDX DOMESTIC: Stores Group Chicago, Illinois 180 locations nationwide Southeast Region Greensboro, North Carolina 22 branches in the Middle Atlantic States and Southeast West Region Denver, Colorado 23 branches in the West and Midwest Specialty Business Group Erlanger, Kentucky 10 branches nationwide Northeast Region Erlanger, Kentucky 24 branches in New England, Middle Atlantic States and Midwest, Midwest Region Olathe, Kansas 31 branches in the West, Midwest and South INTERNATIONAL: Chihuahua, Mexico 3 locations OTHER INTERNATIONAL: Aussedat Rey France Distribution S.A., Pantin, France Recom Papers Nijmegen, Netherlands Scaldia Papier BV, Nijmegen, Netherlands Aalbers Paper Products Veenendaal, Netherlands Paper Merchant, Warehousing and Distribution Centers, Australia, 7 locations New Zealand, 13 locations Poland, 8 locations FOREST PRODUCTS FORESTLANDS DOMESTIC: Approximately 6.3 million acres in the South and Northeast INTERNATIONAL: Approximately 845,000 acres in New Zealand WOOD PRODUCTS DOMESTIC: Maplesville, Alabama Tuscaloosa, Alabama Gurdon, Arkansas Leola, Arkansas Whelen Springs, Arkansas Augusta, Georgia Washington, Georgia Springhill, Louisiana Morton, Mississippi Wiggins, Mississippi Joplin, Missouri Madison, New Hampshire Riegelwood, North Carolina Pilot Rock, Oregon Johnston, South Carolina Newberry, South Carolina Sampit, South Carolina Henderson, Texas Jefferson, Texas Nacogdoches, Texas New Boston, Texas Danville, Virginia Building Products Ukiah, California Lisbon Falls, Maine Laurel, Mississippi Towanda, Pennsylvania Fiberboard Spring Hope, North Carolina Marion, South Carolina Particleboard Stuart, Virginia Waverly, Virginia A-2 Slaughter Dallas, Texas 2 branches in the Southwest and Northwest INTERNATIONAL: Masonite Africa Limited Estcourt Plant Mt. Gambier, South Australia Nangwarry, South Australia Myrtleford, New South Wales, Australia Mt. Druit, New South Wales, Australia Benella, Victoria, Australia Box Hill, Victoria, Australia Auckland, New Zealand Christchurch, New Zealand Kopu, New Zealand Nelson, New Zealand Putaruru, New Zealand Rangiora, New Zealand Rotorua, New Zealand Taupo, New Zealand Thames, New Zealand Topuni, New Zealand Tokoroa, New Zealand Building Supply Retail Outlets, 36 branches in New Zealand REALTY PROJECTS Haig Point Plantation Daufuskie Island, South Carolina SPECIALTY PRODUCTS TISSUE Mills: Box Hill, Victoria, Australia Kawerau, New Zealand Klucze, Poland Plants: Box Hill, Victoria, Australia Clayton, Victoria, Australia Keon Park, Victoria, Australia Suva, Fiji Auckland, New Zealand (two plants) Myrtleford, New South Wales, Australia Te Rapa, New Zealand NONWOVENS DOMESTIC: Athens, Georgia Griswoldville, Massachusetts Walpole, Massachusetts Lewisburg, Pennsylvania Bethune, South Carolina Green Bay, Wisconsin INTERNATIONAL: Toronto, Ontario, Canada San Jose Ituebide, Mexico IMAGING PRODUCTS DOMESTIC: Holyoke, Massachusetts Binghamton, New York INTERNATIONAL: Munich, Germany Morley, Great Britain CHEMICALS DOMESTIC: Panama City, Florida Pensacola, Florida Port St. Joe, Florida Oakdale, Louisiana Springhill, Louisiana Picayune, Mississippi INTERNATIONAL: Oulu, Finland Valkeakoski, Finland Niort, France Sandarne, Sweden Greaker, Norway PETROLEUM Alvin, Texas Midland, Texas Orange, Texas SPECIALTY PANELS DOMESTIC: Chino, California Ukiah, California Cordele, Georgia Glasgow, Kentucky Odenton, Maryland Laurel, Mississippi Statesville, North Carolina Tarboro, North Carolina Klamath Falls, Oregon Towanda, Pennyslvania Hampton, South Carolina Waverly, Virginia Oshkosh, Wisconsin INTERNATIONAL: Pori, Finland Bergerac, France (Couze Mill) Ussel, France Barcelona, Spain (Durion Mill) Carrick-on-Shannon, Ireland BUILDING PRODUCTS FLOORING Sydney, New South Wales, Australia INSULATION Minto, New South Wales, Australia Auckland, New Zealand Christchurch, New Zealand Rooty Hill, New South Wales, Australia ROOFING Corona, California Auckland, New Zealand SINKWARE Adelaide, South Australia SPECIALTY PAPERS Thilmany Knoxville, Tennessee Kaukauna, Wisconsin Nicolet De Pere, Wisconsin Jay, Maine (Androscoggin Mill) Akrosil DOMESTIC: Menasha, Wisconsin Lancaster, Ohio INTERNATIONAL: Toronto, Canada Limburg, Netherlands A-3 [INTERNATIONAL PAPER LOGO] TWO MANHATTANVILLE ROAD PURCHASE, NEW YORK 10577 Printed on Hammermill Papers, Accent Opaque 50 lbs. Hammermill Papers is a division of International Paper. EX-11 2 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS Exhibit 11 INTERNATIONAL PAPER COMPANY STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
YEAR TO DATE DECEMBER 31, ------------------------------------- 1997 1996 1995 ------- ------- -------- NET EARNINGS (LOSS) $ (151) $ 303 $ 1,153 Debenture interest savings, net of taxes, assuming conversion of convertible subordinated debentures 4 Reduction in minority interest expense, net of taxes, assuming conversion of preferred securities of subsidiary trust 7 -------- --------- ------- NET EARNINGS (LOSS) - ASSUMING DILUTION $ (151) $ 303 $ 1,164 -------- --------- ------- AVERAGE COMMON SHARES OUTSTANDING 301.6 292.1 256.5 Shares assumed to be repurchased using long-term incentive plan deferred compensation at average market price (0.9) (0.9) (0.8) Shares assumed to be issued upon exercise of stock options, net of treasury buyback at average market price 1.4 1.0 Shares assumed to be issued upon conversion of convertible subordinated debentures 3.4 Shares assumed to be issued upon conversion of preferred securities of subsidiary trust 3.8 -------- --------- ------- AVERAGE COMMON SHARES OUTSTANDING - ASSUMING DILUTION 300.7 292.6 263.9 -------- --------- ------- -------- --------- ------- EARNINGS (LOSS) PER COMMON SHARE $ (0.50) $ 1.04 $ 4.50 -------- --------- ------- -------- --------- ------- EARNINGS (LOSS) PER COMMON SHARE - ASSUMING DILUTION $ (0.50) $ 1.04 $ 4.41 -------- --------- ------- -------- --------- -------
Note: If an amount does not appear in the above table, the security has been retired or was antidilutive for the period presented. EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12
INTERNATIONAL PAPER COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED) FOR THE YEARS ENDED DECEMBER 31, TITLE 1992 1993 1994 1995 1996 1997 - ----------------------------------------------------------------------------------------------------------------- A) Earnings before income taxes, minority interest, extraordinary item and accounting changes $ 226.0 $ 538.0 $ 715.0 $ 2,028.0 $ 802.0 $ 16.0 B) Less: Minority interest expense, net of taxes (15.0) (36.0) (47.0) (156.0) (169.0) (129.0) C) Add: Fixed charges excluding capitalized interest 325.3 365.3 412.3 605.9 672.4 686.6 D) Add: Amortization of previously capitalized interest 9.9 12.2 12.8 13.0 17.8 20.0 E) Less: Equity in undistributed earnings of affiliates (19.1) (25.9) (49.1) (94.5) 6.2 (40.4) --------- --------- --------- ---------- -------- -------- F) EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY ITEM, ACCOUNTING CHANGES AND FIXED CHARGES $ 527.1 $ 853.6 $ 1,044.0 $ 2,396.4 $ 1,329.4 $ 553.2 -------- -------- --------- --------- --------- ------- -------- -------- --------- --------- --------- ------- FIXED CHARGES G) Interest and amortization of debt expense $ 297.1 $ 334.5 $ 371.0 $ 542.3 $ 582.8 $ 593.0 H) Interest factor attributable to rentals 28.2 30.8 41.3 53.0 66.0 70.0 I) Preferred dividends of subsidiary 10.6 23.6 23.6 J) Capitalized Interest 42.0 12.2 18.0 58.0 66.7 61.9 -------- -------- --------- --------- --------- ------- K) TOTAL FIXED CHARGES $ 367.3 $ 377.5 $ 430.3 $ 663.9 $ 739.1 $ 748.5 -------- -------- --------- --------- --------- ------- -------- -------- --------- --------- --------- ------- l) RATIO OF EARNINGS TO FIXED CHARGES 1.44 2.26 2.43 3.61 1.80 -------- -------- --------- --------- --------- -------- -------- --------- --------- --------- m) Deficiency in earnings necessary to cover fixed charges $ 195.3 ------- -------
EX-13 4 ANNUAL REPORT EXHIBIT 13.1 INTERNATIONAL PAPER 1997 ANNUAL REPORT 1997 ANNUAL REPORT 100 YEARS CELEBRATING OUR CENTENNIAL 1898-1998 CONTENTS IFC FINANCIAL HIGHLIGHTS 2 LETTER TO SHAREHOLDERS 4 OUR BUSINESSES 10 OUR TRANSFORMATION 12 CUSTOMER FOCUS 14 TEAMWORK IN ACTION 16 THE PRODUCTS OF SUCCESS 18 TOOLS OF THE TRADE 20 THE BOTTOM LINE 21 FINANCIAL REVIEW 51 DIRECTORS AND SENIOR MANAGEMENT 53 LIST OF EMPLOYEE TEAMS 54 SHAREHOLDER INFORMATION 100 years Our Centennial is not so much a milestone as it is a checkpoint. It's an opportunity to see where we've been. And, more important, where we're going. Together, we're moving confidently toward our next 100 years. [Logo] INTERNATIONAL PAPER CENTENNIAL 1998 [LOGO -- APPENDIX A NO. 1] FINANCIAL HIGHLIGHTS
DOLLAR AMOUNTS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1997 1996 - -------------------------------------------------------------------------------- FINANCIAL SUMMARY ================================================================================ Net Sales $ 20,096 $ 20,143 - -------------------------------------------------------------------------------- Operating Profit 741(1,2) 1,589(1,3) - -------------------------------------------------------------------------------- Earnings Before Income Taxes and Minority Interest 16(2) 802(3) - -------------------------------------------------------------------------------- Net Earnings (Loss) (151)(2) 303(3) - -------------------------------------------------------------------------------- Total Assets 26,754 28,252 - -------------------------------------------------------------------------------- Common Shareholders' Equity 8,710 9,344 - -------------------------------------------------------------------------------- Return on Investment 1.2%(2) 3.3%(3) - -------------------------------------------------------------------------------- PER SHARE OF COMMON STOCK ================================================================================ Earnings (Loss) $ (.50)(2) $ 1.04(3) - -------------------------------------------------------------------------------- Earnings (Loss) - Assuming Dilution (.50)(2) 1.04(3) - -------------------------------------------------------------------------------- Cash Dividends 1.00 1.00 - -------------------------------------------------------------------------------- Common Shareholders' Equity 28.82 31.13 - -------------------------------------------------------------------------------- SHAREHOLDER PROFILE ================================================================================ Shareholders of Record at December 31 32,697 33,930 - -------------------------------------------------------------------------------- Shares Outstanding at December 31 302.2 300.2 - -------------------------------------------------------------------------------- Average Shares Outstanding 301.6 292.1 - --------------------------------------------------------------------------------
(1) See the operating profit tables on page 32 for details of operating profit by industry segment. Results of equity investees are not included in operating profit. (2) Includes a pre-tax business improvement charge of $535 million ($385 million after taxes or $1.28 per share), a $150 million pre-tax provision for legal reserve ($93 million after taxes or $.31 per share), a pre-tax charge of $125 million ($80 million after taxes or $.26 per share) for anticipated losses associated with the sale of the imaging businesses, and a pre-tax gain of $170 million ($97 million after taxes and minority interest expense or $.32 per share) from the redemption of certain retained West Coast partnership interests and the release of a related debt guaranty. Return on investment was 3.0% before these items. The provision for legal reserve is not included in operating profit. (3) Includes a pre-tax restructuring and asset impairment charge of $515 million ($362 million after taxes or $1.35 per share), a $592 million pre-tax gain on the sale of a partnership interest ($336 million after taxes and minority interest or $1.25 per share) and a $165 million pre-tax charge ($105 million after taxes or $.35 per share) for the write-down of the investment in Scitex. The write-down of the investment in Scitex is not included in operating profit. Return on investment was 3.6% before these items. TODAY AND TOMORROW, INTERNATIONAL PAPER WILL BE A GLOBAL INDUSTRY LEADER AND PROVIDE AN EXCELLENT FINANCIAL RETURN. WE WILL BE THE PREFERRED CHOICE BY SHAREHOLDERS, CUSTOMERS AND EMPLOYEES. [1] 1898 [PHOTOGRAPH - APPENDIX A NO. 2] Seventeen pulp and paper mills in the northeastern United States merged to form International Paper. 1898 [PHOTOGRAPH - APPENDIX A NO. 3] Hammermill Paper Company founded in Erie, Pennsylvania. 1916 [PHOTOGRAPH - APPENDIX A NO. 4] Federal Paper Board Company launched with paper mill in Bogota, New Jersey. 1927 [PHOTOGRAPH - APPENDIX A NO. 5] Formed Southern International Paper, a wholly owned subsidiary of International Paper. 1930 [PHOTOGRAPH - APPENDIX A NO. 6] Formed Arizona Chemical as an International Paper/American Cyanamid joint venture. 1942 [PHOTOGRAPH - APPENDIX A NO. 7] Developed wet-strength linerboard to ship military supplies during WWII. 1946 [PHOTOGRAPH - APPENDIX A NO. 8] Southern Kraft Division opened research laboratory in Mobile, Alabama. 1946 [PHOTOGRAPH - APPENDIX A NO. 9] Acquired Single Service Containers, Inc. to enter liquid packaging market. 1957 [PHOTOGRAPH - APPENDIX A NO. 10] Established Southlands Experiment Forest in Bainbridge, Georgia. 1969 [ILLUSTRATION - APPENDIX A NO. 11] Corporate Research Center opened in Tuxedo Park, New York. 1981 [PHOTOGRAPH - APPENDIX A NO. 12] Sold Canadian International Paper to finance modernization of U.S. operations. 1986 [ILLUSTRATION - APPENDIX A NO. 13] Acquired Hammermill Paper Company. 1987 [PHOTOGRAPH - APPENDIX A NO. 14] Moved operations headquarters to Memphis, Tennessee. 1988 [PHOTOGRAPH - APPENDIX A NO. 15] Acquired Masonite Corporation. 1989 [PHOTOGRAPH - APPENDIX A NO. 16] Acquired Aussedat Rey, a major French paper company. 1989 [PHOTOGRAPH - APPENDIX A NO. 17] Acquired Zanders Feinpapiere AG, a leading German producer of fine papers. 1992 [PHOTOGRAPH - APPENDIX A NO. 18] Acquired the Kwidzyn paper mill in Poland. 1993 [PHOTOGRAPH - APPENDIX A NO. 19] Consolidated distribution businesses into ResourceNet International, later named xpedx. 1995 [PHOTOGRAPH - APPENDIX A NO. 20] Acquired majority ownership of Carter Holt Harvey in New Zealand. 1996 [PHOTOGRAPH - APPENDIX A NO. 21] Merged with Federal Paper Board. 1996 [PHOTOGRAPH - APPENDIX A NO. 22] Opened the Cincinnati Technology Center. 1998 [ILLUSTRATION - APPENDIX A NO. 23] International Paper celebrates its Centennial. "...WE INTEND TO WIN BY BECOMING MORE FOCUSED ON THOSE BUSINESSES IN WHICH WE CAN HAVE A LEADERSHIP POSITION AND GENERATE RETURNS THAT WILL BE AMONG THE BEST IN OUR INDUSTRY." [PHOTOGRAPH - APPENDIX A NO. 24] John T. Dillon Chairman and Chief Executive Officer TO OUR SHAREHOLDERS Although we made significant progress on many fronts, 1997 proved to be a very difficult year for International Paper. Last year at this time, I had anticipated that business would improve early in the year. But the recovery from the depressed conditions experienced since late 1995 stretched out until the third quarter, and just as a discernible improvement started to take hold, the economic problems in Southeast Asia began to affect some of our major businesses. As a result, we finished the year with earnings before special items of $310 million or $1.03 per share, compared with prior-year earnings (also before special items ) of $434 million or $1.49 per share. Net sales of $20 billion were about even with last year's level. For 1997, International Paper recorded a loss of $151 million or $.50 per share after special items. As I have said, in many respects 1997 was a year of significant progress. For example: o Federal Paper Board was successfully integrated into our consumer packaging business with results that exceeded our expectations. The addition of Imperial Bondware provided an important new dimension affording customers, particularly in the fast-food industry, the benefits of the most extensive product line in our industry. o At midyear, we announced a plan to narrow our focus and sell over $1 billion worth of assets or businesses that could not either meet our financial return requirements or achieve market leadership. We are finalizing the divestiture of the imaging products business. We have sold small paper mills in France and Colombia, and expect to complete the sale of our Veratec nonwovens business and several facilities within our decorative products division by mid-1998. o We have restructured our huge uncoated papers business to achieve a return on investment leadership position. Accordingly, we have shut down or reallocated some 400,000 tons of capacity - the equivalent of more than 15 percent of International Paper's U.S. uncoated papers capacity and two percent of U.S. industry capacity. o A review and analysis of our entire coated papers business was completed and we are now weighing the alternatives for improving returns. And our new Accolade lightweight coated freesheet papers are enjoying excellent success. o Our 1997 $300 million cost improvement objective was exceeded by 10 percent. Unfortunately, this accomplishment was overshadowed by more than $500 million in price declines. o We significantly reduced capital spending to $1.1 billion in 1997 - despite the fact that, following the Federal Paper Board acquisition, we are now a substantially larger company. o We made employees at all levels aware of the critical importance of improving our return on investment and have put in place a financial discipline that focuses every facility on these goals. o We restructured our senior management compensation system so that annual incentives are now largely dependent on whether we meet our return on investment targets and how our returns compare with our competitors. In addition, we [2] initiated an incentive bonus program for 2,000 middle level managers that is likewise dependent on the attainment of return on investment targets. But despite the many accomplishments of 1997, and the hard work by thousands of proud and dedicated employees that went into making them happen, our financial performance failed to meet our - and our shareholders' - expectations. We understand that we must do things very differently if we are to achieve our goals. In the future, we intend to win by becoming more focused on those businesses in which we can have a leadership position and generate returns that will be among the best in our industry. International Paper today is in three businesses: (1) paper, including paper distribution; (2) packaging, both consumer and industrial packaging; and (3) forest products, which encompasses building materials and related products that derive from our being this country's largest private owner of forestlands. For each of these businesses, we have a powerful plan in place to achieve maximum operational effectiveness and excellence. International Paper also expects to be a continuing part of the increasing worldwide industry consolidation process. And we will actively pursue new vehicles and types of investments, e.g., joint ventures and marketing alliances, that would enable us to grow and improve returns. For much of our history, we have been primarily a manufacturing company, believing that success will come from manufacturing excellence and from being the low-cost producer. Today, however, it is clear that manufacturing expertise by itself is not enough. We need to become more attuned to market trends and, as we did in 1997, continue to reduce working capital by curtailing production before inventories are built. We also need to become far more proficient in developing and bringing to market new products and services that meet our customers' changing needs, while always providing those customers with the highest level of quality. This year, every one of our businesses will strive to attain preferred supplier status with customers, and will measure itself against that objective. Success also requires sound people development strategies. We want the people at International Paper to have a winning attitude and to regard this Company as a great place to work. If we are to outperform our competition, we must hire, train, motivate, develop, promote and retain outstanding people. Knowledgeable, skilled and determined people are our competitive advantage. One month ago, International Paper began its second century of operations. While it was a source of great pride and satisfaction for all of us to celebrate the Centennial, I also sensed a spirit of renewed energy and rededication. We fully realize that if we are to succeed in an increasingly competitive global marketplace, we must be viewed as the preferred choice of shareholders, customers and employees. We are committed to executing whatever organizational and cultural changes are required to achieve this goal. I am convinced that even in today's highly demanding marketplace, our businesses can earn an improving rate of return. I am also convinced that no other company in our industry can match the international scope of our resources, the diversity of our products, the innovation of our technology or the talent of our employees. With these very considerable assets, I am confident that we will succeed in improving the performance of International Paper. /s/ John T. Dillon John T. Dillon Chairman and Chief Executive Officer March 5, 1998 "...TO SUCCEED IN AN INCREASINGLY COMPETITIVE GLOBAL MARKETPLACE, WE MUST BE VIEWED AS THE PREFERRED CHOICE OF SHAREHOLDERS, CUSTOMERS AND EMPLOYEES." [3] OUR BUSINESSES WE WILL BE THE PREFERRED SUPPLIER OF QUALITY PRODUCTS TO OUR VALUED CUSTOMERS AROUND THE WORLD. [PHOTOGRAPH - APPENDIX A NO. 25] PRINTING PAPERS The Springhill brand name assures superior print quality for printers, publishers and everyday consumers of our papers. [PHOTOGRAPH - APPENDIX A NO. 26] PRINTING PAPERS Our bristols and coated papers offer excellent printing characteristics for a wide range of uses. [PHOTOGRAPH - APPENDIX A NO. 27] PRINTING PAPERS Our pulp grades are used as the basic ingredient for many diverse products ranging from paper to yarn. - -------------------------------------------------------------------------------- PRINTING PAPERS - -------------------------------------------------------------------------------- International Paper produces a broad range of printing papers in six countries for consumers around the world. To better serve our customers, we are organized in customer-focused business units that align us with our major markets. Printing and Office Papers We manufacture the broadest line of office papers for advanced digital imaging printers, as well as more traditional office equipment. In addition, we offer printing papers for offset printing and opaques for books, direct mail and advertising materials. Hammermill and Springhill brands are produced in the U.S. In Europe, we are the leading supplier of office papers, with our EverRey, Duo, Presentation and Tecnis brands. In New Zealand, Carter Holt Harvey produces reprographic and fine papers at the Mataura mill. Converting and Specialty Our converting and specialty group provides papers for specialized applications such as envelopes, tablets, security papers and release backings. This business group has had extensive success in developing new products with higher returns using our diverse technical and product development capabilities. Coated Papers and Bristols We manufacture coated papers and bristols in the U.S. and Germany. Our improved Miraweb II and new Accolade coated papers target high-end magazines and catalogs. Publication Gloss and Hudson Web are also used for catalogs, magazines and newspaper coupon inserts. Zanders Ikono remains the preferred coated freesheet paper for premium printing applications. Our Springhill and Carolina coated bristols are used for book covers and commercial printing. And our uncoated Springhill bristols are used for commercial printing and converting applications, such as file folders, tags, tickets and index cards. Fine Papers International Paper has committed itself to the fine papers business and is investing in its people, brands and facilities. The creation of International Paper Premium Papers will integrate the Company's fine papers activities in Europe. The new entity will unite the sales and marketing functions of Zanders premium uncoated papers, Aussedat Rey, Strathmore and Beckett. Pulp International Paper is a major producer of market pulp in the U.S., France, Poland and New Zealand. Our grades range from high-purity pulp for acetate and fabrics to fluff pulp for hygiene products and paper pulp for the production of paper and paperboard. Initiatives In addition to streamlining our organizational structure to provide better market focus and responsiveness, we are taking aggressive steps to improve the fundamental profitability of our printing papers businesses. Our objective is to double the returns of our U.S. printing papers group over the next few years. To accomplish our objective, we are implementing the following business initiatives: o Significantly improving our manufacturing efficiency by removing 400,000 tons of high-cost uncoated papers and pulp capacity and then simplifying and optimizing our remaining assets to maximize manufacturing productivity; o Continuing to generate more than 10 percent of our annual sales volume from new, value-added products. We are focusing especially on emerging, rapidly growing markets created by new computer-based imaging technologies; o Restructuring the fine papers organization and facility mix while making significant investments to improve customer service and profitability. Examples include the start-up of a new centralized converting and distribution facility at Saybrook, Ohio, in 1998 and the restructuring of the Erie mill that will make it a world-class producer of fine papers; [4] o Repositioning our coated paper assets into higher value coated specialty papers; o Further enhancing the distinctive printing characteristics of our high-quality Carolina and Springhill coated bristols lines; and o Investing $40 million in our Natchez, Miss., mill to enhance product quality and reaffirm our position as a world leader in chemical cellulose pulp. In Europe, our efforts to increase productivity and to reduce costs lie at the core of our strategy to improve competitiveness and returns. Our strategy includes the following: o Reducing costs in real terms by two percent annually; o Increasing productivity by three to five percent annually, with even more significant impact expected in 1998 due to the rebuild of a board machine in Kwidzyn; and o Updating our product line so that we offer our customers the solutions they seek for their office papers, fax, copier and digital imaging needs. - -------------------------------------------------------------------------------- PACKAGING - -------------------------------------------------------------------------------- International Paper's packaging products do more than simply keep our customers' goods fresh, secure and attractive; we also strive to solve the shipping and merchandising-related challenges that our customers face every day. Containerboard We manufacture three million tons of containerboard annually at seven manufacturing facilities in the U.S., Europe and New Zealand. Our facilities are among the most efficient in the world and aggressive cost management efforts are targeted at continuously improving our competitive cost position. We also manufacture one of the industry's widest product ranges, including visual-appeal grades such as ColorBrite and WhiteTop linerboard. U.S. Container In the U.S., our 22 container plants cover the range from below average performer to the world's best, and we have specific plans under way to bring all of our facilities up to first-quartile performance. We have one of the broadest product offerings in the industry. Extensive product development activities, spearheaded by our packaging technology and design centers, continue to bring forth new products to meet increasing market demands. International Container In Europe, 18 container plants in the United Kingdom, Italy, Spain and France make us a leading provider of corrugated packaging for agricultural products. And with 10 container plants in New Zealand, Carter Holt Harvey is a major producer of corrugated boxes. Kraft Papers We manufacture a broad array of bleached and unbleached kraft papers for applications ranging from fancy shopping bags to multiwall pet food sacks. A new dunnage bag plant in Fordyce, Ark., manufactures cushioning products for the rail and truck freight industry. Bleached Board We have a world-class manufacturing system that produces two million tons annually of high-quality Everest and Starcote bleached board for global markets. Our vast array of products with excellent performance characteristics provide superior convertibility and printability for products such as liquid packaging, paper cups and plates, and folding cartons for food and cosmetics. We continue to expand our business in response to the growing requirements of the consumer packaging markets of the world. For example, in 1996, we merged with Federal Paper Board. Since the merger, we have streamlined and rationalized our manufacturing system to operate each machine at its optimum capability. Liquid Packaging Twenty-one plants produce fresh and aseptic liquid packaging for customers around the world. We set ourselves apart by offering unique barrier board, excellent process print characteristics and complete systems including filling machinery, board and packaging. Our innovative leadership is demonstrated through products such as Spout-Pak and FreshCap. Folding Cartons, Cups and Retail Bags Customers for these products require high-resolution graphics and exacting specifications and performance standards. Fifteen plants worldwide manufacture folding cartons, cups and bags. We possess an efficient manufacturing system, a broad product offering and a commitment to grow with our customers. Initiatives Our industrial packaging businesses occupy important positions in the major market segments around the world and we plan to grow each business in excess of double the overall [PHOTOGRAPH - APPENDIX A NO. 28] PRINTING PAPERS International Paper's European Papers business is the number one marketer of copy paper in Europe. [PHOTOGRAPH - APPENDIX A NO. 29] PACKAGING International Paper's WhiteTop visual-appeal linerboard combined with sharp graphics transform corrugated packaging into billboards. [PHOTOGRAPH - APPENDIX A NO. 30] PACKAGING We produce a wide range of corrugated packaging for customers worldwide that provides both protection and consumer appeal. [PHOTOGRAPH - APPENDIX A NO. 31] PACKAGING To produce superior packaging with bold graphics, folding carton producers use our Starcote and Everest bleached board products. [5] [PHOTOGRAPH - APPENDIX A NO. 32] PACKAGING Consumers around the world enjoy beverages in both our aseptic and fresh liquid packaging cartons. [PHOTOGRAPH - APPENDIX A NO. 33] DISTRIBUTION RepliCopy reprographic paper is one of the many fine paper products xpedx offers customers in North America. [PHOTOGRAPH - APPENDIX A NO. 34] DISTRIBUTION Regency cleaning products are used by savvy consumers seeking a high-quality national brand and excellent service from xpedx. [PHOTOGRAPH - APPENDIX A NO. 35] DISTRIBUTION xpedx offers a full line of Colorlok precision printing products to the graphic arts market in North America. annual market growth rate. International Paper will be the preferred supplier to industrial packaging customers around the world by implementing the following initiatives: o Increasing the capacity of our packaging system to further improve financial returns by capturing the incremental margins generated from selling corrugated containers. An important step was the recent announcement of the merger with Weston Paper and Manufacturing Company. Weston's 11 packaging plants greatly strengthen our presence in the central and southeastern U.S. and bring us valuable expertise in high-end printing applications; o Expanding our industrial packaging presence in rapidly growing overseas markets. The recent announcement of a joint venture with Olmuksa, the leading manufacturer of industrial packaging in Turkey, will give us a significant opportunity at the crossroads of Europe and Asia; and o Focusing on long-term customer relationships and growing with our partners in attractive specialized market segments around the world. In consumer packaging, our goal is to be the preferred worldwide packaging supplier to consumer products markets by utilizing our diversity and global presence. With our unparalleled breadth of products and resources for packaging solutions, we can service the needs of global customers. We will seek long-term relationships with customers and provide value-added products and service through the following initiatives: o Continuing to seek opportunities to expand our businesses in response to the growing requirements of consumer packaging markets. The merger with Federal Paper Board and our recent investments in France and El Salvador for liquid packaging and in Australia for cups and folding cartons are examples of this commitment; o Establishing an effective organization for "one-stop shopping," by combining the efforts of our folding carton, cup and retail bag business and by becoming partners with the customers who previously had maintained separate relationships with these divisions. We have the resources to dedicate specific employee teams and machinery, and capitalize on the unique resources of International Paper to offer packaging solutions that set us apart from our competition; and o Aggressively implementing supply chain management initiatives to increase efficiencies and establish long-term partnerships with customers. The goal is to provide customers with quality products, shorter order times, quicker turnarounds and service that is second to none. - -------------------------------------------------------------------------------- DISTRIBUTION - -------------------------------------------------------------------------------- International Paper's distribution businesses in North America, Europe and Australasia ensure that users of paper, office supplies, industrial products and graphic arts supplies have just-in-time access to the products they rely upon every day. [Logo] xpedx The backbone of our North American distribution business, known as xpedx since January 1, 1998, is a strong sales and marketing organization that builds solid relationships with customers ranging from large national accounts to individual consumers. Our sophisticated distribution system, which uses geographic regional hubs, allows us to give our customers fast and efficient service for virtually any printing, packaging, graphic arts or industrial supplies product. What's more, about 20 percent of the revenue generated by xpedx involves distribution of products manufactured by International Paper. Aussedat Rey, Scaldia and Impap Just as xpedx is creating a world-class organization in the U.S., Aussedat Rey in France, Scaldia in the Netherlands and Impap in Poland are leveraging their strengths in purchasing, marketing and efficient distribution. The distribution business in Europe has moved aggressively to increase product offerings, reduce costs and improve logistics. These businesses offer superior service to their customers and are growing as fast or faster than their respective markets. Carter Holt Harvey Carter Holt Harvey in New Zealand has a distribution system that serves customers in New Zealand and Australia. The company's merchant distribution subsidiaries include B.J. Ball Papers and Raleigh Paper. B.J. Ball has a major position in New Zealand's paper distribution market, while in Australia, Raleigh focuses on specialty papers. Initiatives Worldwide distribution is focusing on growth in specific market segments, increasing operational efficiency, reducing costs and improv- [6] ing returns through the following initiatives: o Implementing a worldwide management training program for employees in North America, Europe and Australasia; o Achieving operational efficiencies and improving customer information by installing a common operating system for all North American distribution locations; o Expanding the growing international and North American national account program that has been a performance leader in the Company; o Using geographic regional distribution hubs to provide our North American customers with a service advantage and a competitive edge in asset turn; and o Increasing the marketing effort we have made in servicing the retailers of printing and imaging products across the U.S. - -------------------------------------------------------------------------------- SPECIALTY PRODUCTS - -------------------------------------------------------------------------------- The specialty products businesses provide global solutions to customers with a diverse array of products. These businesses are tied to our forest products base by way of raw materials, by-products, processes and land ownership. Specialty Panels In specialty panels, we design and produce engineered products based on wood and paper. Our Masonite subsidiary molds wood fiber into a broad line of door facings with many different designs and sizes. Our customers fabricate these facings into doors that bring style, functionality, durability and economy to both new construction and remodeling. Today, Masonite is the world leader with its CraftMaster brand. We also manufacture a broad line of hardboard exterior siding and industrial hardboard and softboard. In 1997, we merged our Nevamar operations in North America with our Polyrey operation in Europe. This has positioned us to enter new global markets for high-pressure paper laminates used as decorative surfaces on kitchen and bathroom countertops, furniture and cabinets. Nevamar and Polyrey target high-end architecturally specified projects that require a wide range of unique patterns and colors. Other products include Uniwood and Fome-Cor paper and polystyrene-faced foam panels used for retail signage, point of purchase displays, exhibition display boards and art-framing materials. We see continued global growth of our specialty panel products. We are driving this through the following initiatives: o Value-added marketing that brings solutions to and builds intimacy with our customers. Our success depends on customizing marketing programs to meet specific needs of individual segments; o Identifying new customer needs ahead of competition and developing products, processes and applications to expand our family of branded products; and o Investing in technology to lower operating costs and to improve capital utilization. For example, recently acquired molding technology, using smaller, more capital efficient plants, is positioning us to expand our CraftMaster line of products in new international markets in advance of demand. Industrial Papers We produce over 300,000 tons annually of industrial papers. Applications for these papers include food and industrial packaging, industrial sealant and tapes, pressure sensitive labels and consumer hygiene products. Through our Thilmany, Pressure Sensitive Papers and Akrosil divisions, we are committed to continued product innovation in the rapidly growing industrial papers markets, and will continue to seek opportunities to expand these businesses worldwide. Chemicals and Petroleum During the year, we integrated our recent acquisitions in Europe and built a team to manage the chemicals business on a global basis. Arizona Chemical is now the leading producer of products based on pulp chemical by-products with sales evenly split between North America and Europe. This business has been built by serving a growing worldwide customer base with adhesive, ink and chewing gum resins, polymer additives, coating chemicals, fatty acids and related products. We will continue to grow through the following initiatives: o Developing functional solutions to our customer needs rather than selling specific molecular chemicals; o Expanding through both internal growth and acquisitions; and o Targeting improvements in operating efficiencies. [PHOTOGRAPH - APPENDIX A NO. 36] DISTRIBUTION Consumers in Europe and Australasia have come to rely on our overseas distribution businesses for high-quality products and service. [PHOTOGRAPH - APPENDIX A NO. 37] SPECIALTY PRODUCTS Masonite produces a diverse line of CraftMaster door facings with different designs and styles. [PHOTOGRAPH - APPENDIX A NO. 38] SPECIALTY PRODUCTS Peel-and-stick labels are just one of the many products made by our industrial papers group and use our adhesive resins. [PHOTOGRAPH - APPENDIX A NO. 39] SPECIALTY PRODUCTS Arizona Chemical's food-grade resins find their way into products such as chewing gum. [7] [PHOTOGRAPH - APPENDIX A NO. 40] SPECIALTY PRODUCTS Consumers in New Zealand and Australia are familiar with Carter Holt Harvey's tissue products. [PHOTOGRAPH - APPENDIX A NO. 41] FOREST PRODUCTS International Paper developed fast-growing SuperTree pine seedlings to renew harvested tracts of forestland. [PHOTOGRAPH - APPENDIX A NO. 42] FOREST PRODUCTS International Paper is a leading producer of southern yellow pine lumber. [PHOTOGRAPH - APPENDIX A NO. 43] FOREST PRODUCTS Our oriented strand board and veneer are used to make I-joists, an engineered wood product. based on incorporation of best practices across all facilities. Our petroleum and minerals business manages the mineral resources on Company land and also explores for and develops oil and gas reserves in West Texas, the Gulf Coast and the Gulf of Mexico. By promoting our fee ownership, we are successfully getting extensive new three-dimensional seismic surveys shot across our property. We will continue this effort and, on key properties, retain the right to participate in drilling projects in addition to our normal royalty position. Tissue Through our majority ownership of Carter Holt Harvey, we are the largest tissue products manufacturer in New Zealand and Australia. Our brand names, such as Sorbent and Handee, are among the best known tissue products to consumers down under. Divestitures As previously announced, a number of businesses have been offered for sale. In regard to our imaging products business, Ilford and Anchor Chemicals have been sold, and Horsell Anitec is under contract to be sold in 1998. Veratec, our nonwovens business, and several specialty panels businesses are also being offered for sale, with closings expected in 1998. - -------------------------------------------------------------------------------- FOREST PRODUCTS - -------------------------------------------------------------------------------- International Paper is a strong steward of the environment and the natural resources entrusted in our care. We are committed to managing our forests in an environmentally responsible manner and taking a leadership role in the American Forest & Paper Association's Sustainable Forestry Initiative. Forestlands International Paper owns or manages about 6.3 million acres of forestlands in the U.S., mostly in the South, where loblolly pine trees thrive. Our forestlands are managed to strike a balance between the public's need for forest products, the sustainability of the forests and the health and well-being of the forest environment. In the U.S., we have developed advanced land management techniques that enable us to harvest trees while providing watershed protection, wildlife habitat preservation and recreational opportunities. We also have an interest in 800,000 acres of radiata pine forests in New Zealand through Carter Holt Harvey, giving us access to export markets throughout the Pacific Rim. Additionally, Carter Holt Harvey has a stake in COPEC, one of the largest industrial companies in Chile. COPEC's principal business, Arauco, owns about one million acres of radiata pine forests in Chile. Wood Products Our wood products are used by residential and commercial builders throughout the world. We produce lumber, plywood, oriented strand board (OSB) and other wood products at 25 plants in the U.S. Our 1996 merger with Federal Paper Board more than doubled our U.S. lumber capacity. With 10 plants in New Zealand and Australia, Carter Holt Harvey is one of the region's largest lumber producers. Also, Carter Holt Harvey has a leading position in plywood in New Zealand and in veneer-laminated lumber in Australia. With 36 branches, Carters, its own building materials outlet, is New Zealand's second largest building materials merchandiser. Initiatives While harvest volumes in the next few years are expected to be below 1997 levels, we expect them to double in the next 10 years through environmentally responsible forest stewardship and these initiatives: o Expansion of high-yield reforestation techniques; o Aggressive mid-rotation thinning; o Selective mature-stand harvesting; and o Active and aggressive support of the Sustainable Forestry Initiative. We will maintain the top quartile returns of our wood products business by doing the following: o Increasing development and growth of value-added products that include premium OSB products used in engineered lumber, southern specialty plywood and prime-grade lumber products; o Raising the productivity of our facilities. For example, in 1997, system-wide productivity improvements produced incremental lumber equivalent to the output of a new large-sized lumber mill; and o Continuously reducing manufacturing costs system-wide. [8] POWERFUL PROGRAMS ARE IN PLACE TO EFFECT POSITIVE CHANGE. WE'RE MOVING TO SERVE CUSTOMERS MORE EFFECTIVELY. ENCOURAGING PROGRESS EMPLOYEES TO THINK CREATIVELY. HARNESSING NEW PROCESSES AND TECHNOLOGIES. STREAMLINING OUR ORGANIZATION. [9] International Paper is changing. We are moving aggressively toward the goals that we have established for the businesses in our company. We are changing the way we do business to compete successfully in the 21st century. We are taking a more proactive approach to changes in our marketplace. Establishing a customer-driven corporate culture. Strengthening teamwork. Developing new products. Inventing new technologies. Creating the customer service processes that will ensure our leadership in the years ahead. In some cases, change means building on our strengths. In other cases, it means exiting businesses that no longer make economic sense. In all cases, our transformation means focusing our resources to earn the highest return on investment possible. Shown are mature southern pine trees growing in our Southlands Experiment Forest in Bainbridge, Ga. > [PHOTOGRAPH - APPENDIX A NO. 44] [10] OUR TRANSFORMATION MAKING CHANGES. EMPOWERING OUR EMPLOYEES. IMPROVING PRODUCTIVITY. SHARING BEST PRACTICES. IT WILL KEEP US A LEADER IN OUR INDUSTRY. [11] [PHOTOGRAPH - APPENDIX A NO. 45] "TEAMWORK" EN FRANCAIS During 1997, the employees of International Paper's Saillat, France, mill demonstrated the benefits of sharing best practices and teamwork. Saillat is a key facility for the production of business papers, a product growing in excess of five percent annually in Europe. The mill had set an aggressive productivity improvement goal of 200 French francs per ton of pulp. To capture this growth, Saillat had to both reduce costs and improve productivity. o By pursuing operating excellence from the forests on through to the shipping of the finished product, and through the extraordinary commitment and teamwork of individual employees, the Saillat team achieved the stated goal in less than two months. By year-end, actual results were nearly double the goal. As a result, the mill improved its cost position and product quality, and productivity improved nearly 10 percent. C'est magnifique! o Shown are Saillat mill employees and products at a local landmark in Etagnac, France. > [PHOTOGRAPH - APPENDIX A NO. 46] FROM INDIANA TO ISTANBUL International Paper continues to look for opportunities to expand globally our well positioned businesses targeted for growth. The most recent examples of this strategy are the proposed merger with Weston Paper and Manufacturing Company and our joint venture with Olmuksa. o Although Weston is an Indiana-based company with production facilities located mostly in the Mississippi River basin and Olmuksa's box plants and paper mill are located in Turkey, almost six thousand miles away, the two businesses share much in common. Both companies operate modern facilities and have proven track records of success. Both manufacture product lines that strengthen our industrial packaging segment capabilities. And both give International Paper a presence in markets where we've had a limited presence in the past. o As the world grows ever small, International Paper is covering more of it. That's why we answer to the world. o Shown is a representation of our expanding global industrial packaging business. [PHOTOGRAPH - APPENDIX A NO. 47] WHAT'S IN A NAME? [xpedx Logo] When Shakespeare wrote, "By any other name would smell as sweet," he probably wasn't thinking about his customers. But when International Paper's North American distribution business changed its name from ResourceNet International to xpedx, it did so because it wanted to unify all of its operations under a single identity that its customers could easily recognize and remember. o The new name "expresses our broad, collective commitment to customer service," said Tom Costello, president of xpedx. Extensive market research confirms that the new name suggests strong performance in excellence, speed, efficiency and accuracy. The name has generated encouraging comments from employees and customers. The strong, clean logo is quick to catch the eye and holds recognition. That's critical when transforming the brand identity for one of North America's leading distributors of paper and packaging products, industrial and sanitary maintenance products, and graphic supplies and equipment. o Shown is an xpedx delivery truck near the company's headquarters in Covington, Ky. What separates one company in our industry from another? In our view, the answer is clear: value. Every day our experience confirms that customers are looking for more than simply reams of paper, folding cartons, sheets of plywood or corrugated boxes. They want innovative new products that satisfy unique needs. That's why $2 billion of our Company's sales in 1997 were from products that came to market within the last three years. By listening to our customers and working with them to create new products and services, we have enabled them to be first to market. By focusing on our customers, we help them succeed. And that's important. Because, after all, our customers' success is a prerequisite to our own. Shown are two IP account executives, Marc Armato of Hammermill and Erin Hally of the bleached board division. > CUSTOMER FOCUS ASKING QUESTIONS. LISTENING. PROVIDING SOLUTIONS. IT'S HOW WE SET OURSELVES APART. [12] [PHOTOGRAPH - APPENDIX A NO. 48] [13] MAXIMIZING VALUE To grow our businesses more profitably, we must first understand our customers' needs. That was the thinking behind our new alliance with Tyson Foods. Tyson became a leader in the poultry industry through internal growth and acquisitions. We recognized that Tyson could save time and money by standardizing its packaging operations. We also knew that each facility would require local support and service. o Working together, Tyson and International Paper's U.S. container division created a centralized procurement and supply network. For our part, we unified resources at every level of the division, making our unique combination of national and local resources available to Tyson. Specifically, we created programs for direct communications and dedicated technical support, design, sales and customer service resources exclusively to Tyson. The result: reduced order and delivery times and lower packaging costs for Tyson Foods and preferred supplier status for International Paper. When customers become partners, everybody wins. o Shown are Tyson Foods employees and an International Paper sales executive in Springdale, Ark. > [PHOTOGRAPH - APPENDIX A NO. 49] A BETTER WAY TO MEASURE SUCCESS Thanks to the new Customer Satisfaction Index (CSI), employees at Arizona Chemical have a better understanding of how well they're serving their customers. The new measurement relies on empirical data, such as on-time delivery, to measure satisfaction monthly. o "With our commitment to be the best supplier, it was time for us to take responsibility and measure our own performance," explained Medardo Monzon, global manager, sales/marketing, for Arizona Chemical. Employees are now able to identify specific ways they can enhance quality and reliability. Improvements made so far range from manufacturing adjustments for product improvement to clearer labeling when shipping. o How successful is CSI with our customers? o Sanford A. Siegel of East China Clay International said, "We're impressed with the pride your employees take in their products at Arizona Chemical and we're about ready to adopt your Customer Satisfaction Index for our own folks!" o Shown are Arizona Chemical employees at the Panama City, Fla., plant. > [PHOTOGRAPH - APPENDIX A NO. 50] TEAMING UP FOR SUCCESS Sharpening our customer focus requires us to leverage the widespread capabilities of our Company by removing organizational barriers and gaining a competitive advantage. That's what happened when the bleached board, folding carton and industrial papers groups teamed up to create total packaging solutions for our tobacco products customers. o In the past, these groups maintained separate relationships with our customers. Now, by combining efforts, the three groups can take full advantage of International Paper's diversity, size and global reach. Working together, we have become partners with our customers and a more significant supplier of bleached board, label paper, folding cartons and foil liner. o The result: supply chain management capabilities our competition cannot match and the opportunity for further growth with these valued customers worldwide. o Shown is an array of packaging produced at various International Paper manufacturing facilities. [PHOTOGRAPH - APPENDIX A NO. 51] [PHOTOGRAPH - APPENDIX A NO. 52] TEAMWORK IN ACTION COOPERATION. IT GIVES US THE POWER WE NEED TO PERFORM AT THE HIGHEST LEVEL. [14] Our employees are our greatest asset. We value their ideas. We respect their skills. We celebrate their diversity. But no employee stands alone. In every mill and office, we work as a team. We encourage our employees - from the most senior manager to our most junior trainee - to regard themselves as owners with a personal stake in International Paper's success. We give them the tools they need to get their jobs done right today. We ask them to think of better ways to do their jobs in the future. Empowering employees does more than make International Paper a great place to work. It helps us attract the best talent available. Most important, it allows us to leverage that talent on our customers' behalf. ---------- < Shown are Jimmy Pierce, David Stephens and Pearl Jones, "Carolina King" pulp dryer team members at our Riegelwood, N.C., mill. [PHOTOGRAPH - APPENDIX A NO. 53] [15] [PHOTOGRAPH - APPENDIX A NO. 54] EMPOWERING EMPLOYEES THROUGH EDUCATION How can employees at every level contribute to improving profitability and meeting the Company's return on investment goals? o The first step is education. As Pete Carr, work systems facilitator in Masonite's Ukiah, Calif., plant explained, "If you expect employees to help you achieve business goals, they need to know the score of the game as it's being played." o Ensuring that every member of the team knows the score is what Masonite Ukiah's business literacy program is all about. "We teach employees that we have to meet goals to earn reinvestment," said mill manager Carolyn Stein. "We emphasize that there are many things we can each do to make a difference." These things include using materials wisely, reducing unscheduled downtime and reducing inventories. o Employee response has been enthusiastic. As boiler operator Ed Evans summarized, "Employees want to help. The more we know about what's important, the more we can do something about it." o Shown are Masonite employees standing in a wood chip pile at the Ukiah plant. > [PHOTOGRAPH - APPENDIX A NO. 55] PUTTING A NEW FACE ON RETURNS The employees at our folding carton plant in Richmond, Va., knew that improving their return on investment (ROI) required everyone to pull in the same direction. A strong, consistent communication effort was needed to heighten everyone's awareness of ROI. That's how the character of Richmond ROI (pronounced Roy) was born. o From his forum in a monthly newsletter, Richmond ROI keeps employees focused on the plant's financial goals and the impact each of them can make. Monthly ROI results inform everyone of the plant's progress, citing specific causes that affected the plant's performance. Safety results are also reported by Richmond ROI. o With all employees focused on returns, Richmond improved its results significantly in 1997, generating an 11 percent ROI. Progress continues in 1998, with an even higher target. You can be sure that Richmond ROI will be keeping score. o Shown are employees in front of the plant's newest rotogravure printing press. [PHOTOGRAPH - APPENDIX A NO. 56] A MERGER OF MINDS The 1996 merger of International Paper and Federal Paper Board created a single business entity that was greater than the sum of the two parts. By combining the two excellent bleached board organizations, we were able to increase overall productivity through improved paper machine utilization, transportation and logistics rationalization, and sharing of best practices and technologies. o Our Riegelwood, N.C., mill is a case in point. The mill gained 75 tons per day of additional capacity following the merger through increased production efficiencies. In addition, the close working relationships forged by Riegelwood employees with other International Paper mills and the corporate technology group helped improve product quality and reduce costs. o Throughout the system, our employees are making the merger a resounding success through teamwork. In 1997 alone, the synergies produced efficiencies that created 200,000 tons of additional capacity with no additional capital expenditure and achieved cost savings of over $100 million. o Shown are Riegelwood mill personnel in a railcar loaded with rolls of bleached board products. THE PRODUCTS OF SUCCESS ANTICIPATING CHANGE. EXCEEDING EXPECTATIONS. One of International Paper's greatest strengths is the ability to create customized solutions to customers' toughest challenges. Every year, our Company creates many new products or improves existing products, each directed toward providing added value to its end users. From WhiteTop visual-appeal linerboard to Accolade lightweight coated freesheet papers, we are an industry leader in product development. It's a position in which we take great pride and a responsibility we take very seriously. Clearly, adding value is critical to our goal of being our customers' supplier of choice. We must develop new superior products and provide value our customers can't find elsewhere. In today's competitive environment, we'll be successful only if our customers succeed as well. Shown is an image used as part of the very successful Strathmore Writing System advertising campaign. > [PHOTOGRAPH - APPENDIX A NO. 57] [16] WHEN OUR PRODUCTS CREATE VALUE FOR CUSTOMERS, WE'VE SUCCEEDED. [17] FINE PAPERS GET EVEN FINER The fine papers division was hard at work in 1997. For example, Beckett Papers introduced Paradox, a versatile new text and cover grade available in two finishes and a spectrum of colors for use in annual reports, brochures and other applications. How could Beckett produce a high-quality product selling at a competitive price? In a word: teamwork. o Working from specifications established by a resource-planning task force, technicians, engineers, chemists, production workers and finishing employees in Hamilton, Ohio, worked as one to produce samples that would exceed prevailing standards. Consulting with corporate technology and the Hamilton mill's machine operators - not to mention designers, printers and merchants - the team quickly established new high performance and quality benchmarks within stringent price parameters. o The result: yet another innovative International Paper product that fills a distinct niche in the marketplace. o Shown is an array of Paradox samples and a marketing brochure. > [PHOTOGRAPH - APPENDIX A NO. 58] FRESH IDEAS FOR SUCCESS In our liquid packaging division, successful products do more than just satisfy customers' needs. They also help customers increase sales and margins. But don't take our word for it. Ask the folks at Schenkel's All Star Dairy in Huntington, Ind. o Schenkel's Dairy was our first customer to use the FreshCap package, which was designed to keep milk fresh longer than traditional gable-top cartons. Another important advantage: the printability of paper cartons over plastic. With FreshCap, dairies can feature eye-catching graphics that appeal to consumers at point-of-sale. These advantages are augmented by the award-winning FreshCap Marketing Program, an array of promotional tools including television and radio commercials, that we offer to our customers to promote their dairy products. o Maybe that's why Tom Schenkel said, "FreshCap's the best thing to come along for us in 20 years." We couldn't agree more. o Shown is an array of FreshCap dairy cartons. > [PHOTOGRAPH - APPENDIX A NO. 59] ACCOLADES FOR TEAMWORK By almost any measure, the introduction of Accolade lightweight coated freesheet papers in 1997 was a success. Upscale catalog retailers such as FAO Schwarz, Lands' End and the Pleasant Company have lauded Accolade for its excellent performance characteristics. But success was no accident. It was the result of several years of research and development and, most of all, teamwork. o International Paper customers worked closely with our corporate technology group and the Androscoggin mill to develop Accolade. Customers were involved from the start, helping to pinpoint and evaluate the characteristics they need for catalogs, brochures and magazines. Our scientists and engineers created ways to balance brightness, shade and opacity with print cleanliness and smoothness for superior image fidelity. And mill operators ensured that the product quality consistently meets our customers' specifications. o The result of the team approach: a successful product that continues to receive accolades from our many coated freesheet papers customers. o Shown is an FAO Schwarz catalog printed on Accolade lightweight coated freesheet paper. [PHOTOGRAPH - APPENDIX A NO. 60] International Paper recognizes the importance of technology as an essential tool for success. We are recognized as a technology leader in the paper and forest products industry. That makes sense because over the years we have made significant investments in research and development and we will continue to do so in the future. But the true strength of our technology is not only our investment - it's our philosophy of sharing best practices. Many of our most innovative products and processes were made possible because we shared new technologies across different lines of business and geographic boundaries. Technological innovations in one International Paper business have benefited others time and again. < Shown is Raj Bodalia, senior research associate in the analytical sciences department at the Technology Center in Cincinnati, Ohio. [PHOTOGRAPH - APPENDIX A NO. 61] [18] TOOLS OF THE TRADE FINDING A BETTER WAY. THEN IMPROVING IT FURTHER. SUPERIOR TECHNOLOGY GIVES US A COMPETITIVE EDGE. [PHOTOGRAPH - APPENDIX A NO. 62] INNOVATION IN THE HEART OF TEXAS When International Paper creates new advances in coated paper manufacturing technology, chances are good that our McKinney Coated Products (MCP) facility in Texas served as the laboratory. From conceptualization to commercialization, MCP assists with development and production, and also supports the Company's leadership position in printing and barrier substrates. o That was the case in 1997, when MCP helped the coated papers group develop a new line of ink-jet printing papers for home and office use. These papers lend vivid color to graphics when documents are produced on ink-jet printers. It was also the case with the launch of the Invent It! brand, our entry into the fast-growing category of do-it-yourself creativity projects for home computers such as greeting cards, banners and business cards. o Whenever International Paper launches a dynamic new coated product line, it's a good bet that McKinney Coated Products helped Invent It! o Shown is a consumer shopping for paper products at an Invent It! display in an office products store. > [PHOTOGRAPH - APPENDIX A NO. 63] FIELD OF DREAMS When International Paper scientists at our Southlands Experiment Forest in Bainbridge, Ga., built their "field of dreams," they attracted top researchers from throughout the southern U.S. and the U.S. Department of Energy to "play ball" with them. o Southlands' field of dreams is not a game, however. Instead, it is a laboratory for fast-growing loblolly pine and sweetgum trees. Southlands scientists and research partners have the goal of growing trees 50 feet tall and 10 inches in diameter in 10 years. Using treatments like fertilization and irrigation, plus pest and disease protection, researchers are determining the upper limits of the trees' growth. Field of dreams results will give Company foresters a benchmark for operational plantations and potential environmental and pest impacts, providing valuable information that will continue to advance the success of the Company's forest productivity initiatives. The dream is quickly becoming a reality! o Shown are International Paper foresters in their field of dreams in Bainbridge. [PHOTOGRAPH - APPENDIX A NO. 64] ADVANCED MANUFACTURING TRAINING The art and science of papermaking is advancing at a rapid rate, and International Paper is in the forefront of that progress. At the same time, it's critical to keep all of our manufacturing employees abreast of the latest technical advances. o Advanced training at our new Manufacturing Technology Center (MTC) in Cincinnati, Ohio, is ensuring that our pulp and paper mill process area employees have an in-depth understanding of new problem-solving techniques. The MTC offers management skills courses for both hourly operators and supervisors taught by a faculty made up of seasoned technical employees from across the Company. o To make the course interactive, students are required to bring a specific problem from their mill to discuss in class and then return home with solutions. Since 1994, a total of 400 students have completed the management skills courses. To date, the students have solved an impressive 90 percent of the problems studied. o Shown are students and instructor during a recent management skills class at the Manufacturing Technology Center in Cincinnati. [PHOTOGRAPH - APPENDIX A NO. 65] THE BOTTOM LINE IMPROVING FINANCIAL PERFORMANCE. DELIVERING SHAREHOLDER VALUE. ULTIMATELY, THAT'S THE BOTTOM LINE. THE BOTTOM LINE IN OUR BUSINESS, AS IN ANY OTHER, IS THE RETURN WE DELIVER TO SHAREHOLDERS. GOING FORWARD, OUR GOAL IS TO IMPROVE THE RETURN ON INVESTMENT OF OUR BUSINESS WORLDWIDE. OUR ABILITY TO REACH OUR PERFORMANCE GOALS IS ROOTED IN THE COMBINATION OF THE VALUE OF OUR PRODUCTS, A HIGHLY COMPETITIVE COST STRUCTURE, AND BEING PRESENT IN ESTABLISHED AND EMERGING MARKETS WORLDWIDE. INTERNATIONAL PAPER IS STRONG IN ALL THREE OF THESE AREAS. WORKING TOGETHER, WE PLEDGE TO BUILD ON OUR STRENGTHS AND PRODUCE THE RETURNS OUR SHAREHOLDERS EXPECT AND DESERVE. [20] FINANCIAL REVIEW 22 MANAGEMENT'S DISCUSSION AND ANALYSIS 22 CORPORATE OVERVIEW 23 PRINTING PAPERS 24 PACKAGING 24 DISTRIBUTION 25 SPECIALTY PRODUCTS 25 FOREST PRODUCTS 26 LIQUIDITY & CAPITAL RESOURCES 31 FINANCIAL INFORMATION BY GEOGRAPHIC AREA 32 FINANCIAL INFORMATION BY INDUSTRY SEGMENT 33 REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS 33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 34 CONSOLIDATED STATEMENT OF EARNINGS 35 CONSOLIDATED BALANCE SHEET 36 CONSOLIDATED STATEMENT OF CASH FLOWS 37 CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 48 ELEVEN-YEAR FINANCIAL SUMMARY 50 INTERIM FINANCIAL RESULTS [21] 22 Management's Discussion and Analysis - ------------------ CORPORATE OVERVIEW - ------------------ Results of Operations International Paper's 1997 net sales of $20.1 billion were essentially flat with 1996 and slightly above 1995 sales of $19.8 billion. Despite generally stronger demand than 1996 and a full-year contribution from Federal Paper Board (Federal), acquired in March 1996, sales were flat overall due to lower pricing for most products. Before contributions from Federal, 1997 sales declined about 2%. Sales outside the United States totaled $5.8 billion in 1997, 29% of net sales, including Carter Holt Harvey, which was consolidated from May 1995 and contributed $2.0 billion, $2.1 billion and $1.4 billion in 1997, 1996 and 1995, respectively. Export sales from the U.S. were $1.4 billion in 1997 and 1996 and $1.5 billion in 1995, bringing total international sales to $7.2 billion compared with $7.4 billion in 1996 and $7.1 billion in 1995. For 1997, the Company reported a loss of $151 million or $.50 per share after special items that reduced net earnings by $461 million or $1.53 per share. Net earnings before special items were $310 million or $1.03 per share, compared with 1996 earnings before special items of $434 million or $1.49 per share and 1995 record earnings of $1.2 billion or $4.50 per share. Excluding special items, return on investment was 3.0% in 1997 compared with 3.6% in 1996 and 8.4% in 1995. Management recognizes that current financial returns are not satisfactory and is focused on company-wide business improvement initiatives. These are described more fully in the section titled "Restructuring and Business Improvement Actions" below and in the discussion and analysis of each business segment. 1997 was characterized by improving market conditions, and we surpassed our profit improvement goal of $300 million. When the year began, prices for a number of our products were lower than at any time during 1996. Although prices improved during the year, on average they were lower than in 1996, and overall results were considerably weaker. Lower prices in 1997 in our U.S. businesses alone cost the Company over $500 million. Despite positive contributions from acquisitions, results for both 1997 and 1996 were significantly lower than the earnings record set in 1995, when prices for many products were at peak levels. In 1998, more aggressive profit improvement targets are in place and we expect to complete our previously announced over $1 billion of asset sales by midyear. We anticipate continued strong demand for our products, fueled by moderate economic growth in the U.S. and stronger growth in Europe than in recent years. However, the recent downturn in Asian economic markets is creating a great deal of uncertainty and has started to cause prices for pulp and some paper products worldwide to weaken. We expect any disruption in world markets will be temporary, and believe Asia will be of continuing long-term strategic importance. On the positive side, the situation in Asia is significantly slowing down the rapid expansion of pulp and paper capacity in that region. Special Items Special items reduced 1997 net earnings by $461 million or $1.53 per share and 1996 net earnings by $131 million or $.45 per share. The table at the bottom of this page shows the impact of special items in both 1997 and 1996. Second-quarter 1997 results included a business improvement charge of $535 million and a $150 million provision to increase legal reserves as a result of a recent settlement by Masonite Corporation, a wholly owned subsidiary, of a class-action lawsuit relating to its hardboard siding product. Fourth-quarter special items included a charge of $125 million for anticipated losses on the sale of the Company's remaining imaging businesses and a gain of $170 million on the redemption of certain retained West Coast partnership interests and the release of a related debt guaranty. First-quarter 1996 results reflected a gain of $592 million on the sale of a 98% interest in a partnership that owns 300,000 acres of these same West Coast forestlands. 1996 results also included a first-quarter charge of $515 million to cover the costs of management actions to restructure and strengthen certain businesses, and a fourth-quarter charge of $165 million to write down the Company's investment in Scitex; these totaled $680 million. A table showing the impact of special items on each of the business segments in 1997 and 1996 appears on page 32. Restructuring and Business Improvement Actions In June 1997, a $535 million business improvement charge ($385 million after taxes or $1.28 per share) was recorded under a plan to improve the Company's financial performance by closing or divesting of operations that no longer meet financial or strategic objectives. The charge included approximately $230 million for asset writedowns, $210 million for estimated losses on sales of businesses, and $95 million for severance and other expenses. The majority of the charge relates to the restructuring of the Impact of Special Items (in millions, except per share amounts)
1997 ------------------------------------------------- Earnings (Loss) Earnings (Loss) Before Taxes After Taxes and and Earnings (Loss) Minority Minority Per Interest Interest Share - ---------------------------------------------------------------------------------------- Before special items $ 656 $ 310 $ 1.03 Business improvement charge (535) (385) (1.28) Provision for legal reserve (150) (93) (.31) Restructuring and asset impairment charges (125) (80) (.26) Gains on sales of partnership interests 170 97 .32 ----- ----- -------- After special items $ 16 $(151) $ (.50) ===== ===== ======== 1996 ------------------------------------------------ Earnings (Loss) Earnings (Loss) Before Taxes After Taxes and and Earnings (Loss) Minority Minority Per Interest Interest Share - --------------------------------------------------------------------------------------------- Before special items $ 890 $ 434 $ 1.49 Business improvement charge Provision for legal reserve Restructuring and asset impairment charges (680) (467) (1.70) Gains on sales of partnership interests 592 336 1.25 ----- ----- -------- After special items $ 802 $ 303 $ 1.04 ===== ===== ========
Management's Discussion and Analysis 23 Company's printing papers business and the sale of certain specialty businesses. Restructuring actions completed in 1997 included the shutdown of the Woronoco, Mass., mill; two paper machines at the Erie, Pa., mill; one paper machine at the Mobile, Ala., mill; the Lock Haven, Pa., de-inking operation; a higher cost paper machine at the Moss Point, Miss., mill; and two container plants in California. Also completed were the sales of the imaging products division's photographics and pressroom chemicals businesses. In December 1997, an additional charge of $125 million ($80 million after taxes or $.26 per share) was recorded for anticipated losses associated with the sale of the Company's remaining imaging businesses. Other sales completed in 1997 included the Lancey coated papers mill in France; three multiwall kraft bag plants in the U.S.; and our minority share of Productores de Papeles, S.A., a paper manufacturer in Colombia. Approximately $28 million of the cash costs associated with the business improvement program were incurred in 1997. The remainder will be spent in 1998. Annual improvement in earnings before interest and taxes related to the business improvement program of approximately $100 million is expected by the end of 1998. Divestitures scheduled for completion in 1998 include the imaging products division's printing and graphic arts businesses, for which an agreement to sell was reached in 1998. We will also sell the Veratec nonwovens division, several decorative panels businesses and the label business. Under a 1996 program, International Paper recognized a restructuring and asset impairment charge of $515 million ($362 million after taxes or $1.35 per share). The charge included $305 million to write off certain assets, primarily those of the Company's imaging products businesses; $100 million for asset impairments related to the adoption of Statement of Financial Accounting Standards No. 121; and one-time cash costs of $110 million for severance and other expenses. Cash costs totaling $34 million were incurred in 1996 and substantially all of the remainder was spent in 1997. Annual improvement in earnings before interest and taxes was on target and just over $100 million in 1997. Printing Papers Printing Papers reported 1997 sales of $5.5 billion, down from $5.6 billion in 1996 and $6.1 billion in 1995. The modest decline between 1997 and 1996 occurred primarily in Europe. Otherwise, generally stronger volumes for most product lines offset lower prices. Operating profit before special charges was $174 million, down from $220 million in 1996 and well below 1995's record $1.1 billion. After special charges relating to restructuring and business improvement programs, the segment lost $38 million in 1997 and earned $185 million in 1996. Results reflect weaker pulp and paper markets during the first half of 1997. Conditions improved somewhat by midyear and prices improved, but the recovery was not strong. The Company made good progress during 1997 to restructure its printing papers businesses. In the U.S., we shut down four inefficient machines and a de-inking plant, and transferred three machines to more profitable product lines. In 1998, we plan to shut down another machine, reconfigure one to produce specialty fine grades and convert two others to packaging grades. When this is done, we will have permanently reduced our U.S. pulp and business papers productive capacity by 400,000 tons. Elsewhere, we sold Aussedat Rey's Lancey coated papers mill in France and our minority interest in a printing papers business in Colombia. As 1998 began, overall demand was stable and customer inventories were at normal levels. However, economic weakness in Asia poses a great deal of uncertainty about the near-term strength of world pulp and paper markets, as demand decreases from that region, and exports, particularly from Indonesia, begin to find their way into world markets. Business Papers sales were $2.9 billion in 1997, a decline of 4% from 1996 and 12% from 1995. In the U.S., shipments were flat and average prices fell $35 per ton or 4% from 1996 levels. Lower manufacturing costs partially offset the impact of lower prices. However, U.S. operating profit was one-third that of 1996. In Europe, sales volumes increased due to the full-year impact of the former Federal mill in Inverurie, Scotland, while prices declined from 1996. Operating profit improved by more than 50% due to significantly lower costs at both Aussedat Rey and Kwidzyn. In the coming year, restructuring actions and other management initiatives alone are expected to increase profitability in our U.S. operations by as much as $50 million. Our European operations will continue to focus on productivity and cost reduction as well. Coated Papers sales were $1.8 billion, increasing 4% over 1996, again due to higher volumes. Sales were flat with 1995 as the addition of Federal's bristols business offset price declines. Overall, coated papers operating profit improved 13% in 1997 to 80% of 1995's record level. In the U.S., pricing for both groundwood and freesheet products trended upward during the year. Coated papers volumes increased 26% and sales of Accolade, our new coated freesheet, exceeded expectations. However, U.S. operating profit declined significantly due mainly to start-up costs associated with the reconfigured machine at our mill in Jay, Maine, which produces Accolade. Our European operations were on the upswing, returning to profitability following losses in 1996 and 1995. Zanders performance was considerably better as cost-reduction actions taken over the past several years began to pay off. For 1998, we expect the U.S. coated papers market to remain strong, but are less optimistic about Europe due to capacity additions and pricing pressure. Pulp sales declined modestly to $880 million in 1997 as stronger shipments offset lower average prices. Operating profit nearly doubled due mainly to higher volumes and lower manufacturing costs at our European mills. Results were particularly strong at Aussedat Rey's Saillat mill, which was modernized in 1993. After improving for several months, worldwide pulp prices began to erode in late 1997 due to the economic downturn in Southeast Asia. As the year ended, the Company was experiencing lower order rates from Asian customers, and prices continued to trend downward. We believe pulp prices will remain under pressure through the first quarter of 1998. In 1998, we will complete our improvement program for our printing papers businesses, and identify additional opportunities to reduce costs by optimizing the use of our production facilities. 24 Management's Discussion and Analysis Initiatives to increase shipments and improve sales mix will also add favorably to results in 1998. Packaging Packaging sales totaled $4.9 billion in 1997, flat with 1996. Operating profit of $194 million before special charges in 1997 declined from $463 million in 1996. After special charges relating to restructuring and business improvement programs, operating profit was $146 million in 1997 and $421 million in 1996. Shipments were generally stronger across the Company's packaging businesses in 1997, but substantially weaker prices for industrial packaging during the first half of the year drove the decline in operating profit. In 1995, sales were $4.5 billion and operating profit was $741 million. During the past year, we took several actions to strengthen our packaging businesses. We sold our multiwall bag operations, allowing us to focus our resources on stronger segments of the kraft packaging business, and we shut down two unprofitable container plants. So far in 1998, we have entered into a joint venture with a box manufacturer in Turkey, adding to our presence in Eastern Europe and Asia. We also announced plans to merge with Weston Paper and Manufacturing Company, which operates a corrugated medium mill and 11 container plants in the central and southeastern U.S. The merger will add to our capabilities in markets where International Paper does not currently have container plants, and increases our level of integration with our containerboard mills to nearly 60%. Carter Holt Harvey moved ahead with the 1998 completion of the modernization of its Kinleith mill, to secure an internationally competitive cost position for both containerboard and pulp. Finally, we plan to exit the label business during the first half of 1998. Industrial Packaging sales were $2.6 billion in 1997, down from $2.8 billion in 1996 and $3.1 billion in 1995. These businesses broke even in 1997, after reporting a 60% decline in operating profit in 1996. In the U.S., industrial packaging prices declined during the first half of 1997, but improved in the second half as strong export demand caused markets to tighten. Overall, average containerboard sales prices were 8% lower than in 1996. Although pricing was weak, demand for industrial packaging was relatively strong. Shipments increased 10% over 1996, largely from corrugated boxes and export containerboard. Carter Holt Harvey, accounting for about 16% of our industrial packaging sales in 1997, also experienced lower prices, mainly in New Zealand, on flat sales volumes. Earnings were one-fourth as much as in 1996. Construction-related downtime at Kinleith also contributed to the earnings decline. Faced with increasing domestic competition, Carter Holt Harvey improved its service and quality during the past year and will continue to do so in 1998. Most indicators are positive for the U.S. industrial packaging industry. No U.S. producers have announced plans to expand containerboard production capacity, and inventories continue at reasonable levels. As 1998 began, containerboard prices were 25% lower than the last-cycle peak in mid-1995, but were $25 per ton or 8% higher than the 1997 average. Despite the economic situation in Asia, domestic and export demand remains strong, and we believe that, on average, 1998 industrial packaging prices will be higher than in 1997. A number of key initiatives will also contribute to higher industrial packaging sales and earnings in 1998. These include growth in our specialty products such as WhiteTop, Pineliner and ColorBrite and a plan to offset higher fiber costs with productivity and volume gains. Consumer Packaging sales were $2.3 billion in 1997, up from $2.1 billion in 1996. Sales were $1.4 billion in 1995. Sales growth between 1995 and 1997 was due mainly to higher volumes resulting from our merger with Federal in March 1996. Operating profit declined 14% from 1996, but remained slightly higher than in 1995. Bleached board prices declined in early 1997 and were essentially flat the rest of the year. On average, prices were about 3% lower than in 1996. Our U.S. mills significantly reduced costs in 1997 as the integration of Federal continued and high-performance work systems became more effective. These more than offset higher fiber and energy costs during the year. Our converting operations achieved better volumes and sales mix, posting results that were in line with 1996. Liquid packaging sales grew 6% in 1997, the first full year of operations for plants in Europe and South America, but the division reported a small loss due to currency devaluations late in the year, primarily in South Korea. Carter Holt Harvey's sales and operating profit declined considerably due to the same competitive environment faced by its industrial packaging business. And Kwidzyn, in Poland, reported a loss on its boxboard operations due to weak margins. Early in 1998, bleached board order backlogs softened. We expect that the situation in Asia and a strong U.S. dollar will preclude tighter markets until late in the year. However, we anticipate that earnings will improve in 1998 as internal initiatives more than offset flat prices and higher fiber costs. Longer term, we are positioning our businesses to compete in growing global markets. For example, we are pursuing additional offshore opportunities in fresh juice and aseptic packaging. And recently, we announced plans to complement our Imperial Bondware food-service products by investing with Carter Holt Harvey in an Australian cup maker. Distribution Distribution sales totaled $4.7 billion in both 1997 and 1996 compared with 1995 sales of $5.0 billion. Operating profit was $99 million ($83 million after a business improvement charge) in 1997, declining from $109 million in 1996 and $106 million in 1995. Profit on sales declined from 2.3% in 1996 to 1.8% in 1997 due largely to lower prices. xpedx, the Company's North American distribution operation, posted sales of $4.2 billion in 1997, flat with 1996. Sales volume increased 7%, fueled by effective sales and marketing programs and 30 new retail stores. Although unit sales grew, margins weakened and operating profit declined 16%. About 70% of xpedx sales are in printing papers markets, with the balance in graphic arts and industrial products. Paper prices declined 10% in 1997. xpedx costs did not decline at the same rate, causing gross margins to decline (by nearly one-half of 1%) in 1997. Also contributing somewhat was a higher proportion of direct sales, which have lower margins than sales of products flowing through our warehouses. During 1997, xpedx moved ahead with the strengthening of its Management's Discussion and Analysis 25 service base by closing inefficient locations and consolidating operations into highly automated, efficient regional distribution centers. Actions taken in 1997 are projected to reduce costs by over $10 million annually, beginning in 1998. In 1998, xpedx expects continued strong unit sales growth. Sales growth will come from an effective national accounts program, alliances with national suppliers to sell their branded products exclusively and the growing small-office, home-office market. Another source of growth will be Taussig Graphics Supply, Inc., a premier distributor of graphic arts products, acquired late in 1997. International Paper's international distribution operations posted sales of $455 million, declining slightly from 1996 and 1995. Operating profit was in line with 1996 and 1995, with both European and Pacific Rim operations contributing positively. Overall, we expect higher sales and earnings for the distribution businesses in 1998. Specialty Products Specialty Products sales of $3.5 billion were essentially flat with 1996. Sales were $3.3 billion in 1995. Earnings before special charges were $323 million in 1997 compared with $319 million in 1996 and $207 million in 1995. After special charges relating mainly to businesses being divested, the segment reported operating losses of $4 million in 1997 and $51 million in 1996. In 1998, the Company will divest itself of several businesses with net sales of approximately $1.1 billion. These are the imaging products and nonwovens businesses and certain specialty panel operations. In our assessment, these businesses do not have the growth or return potential necessary to meet the Company's overall financial goals. Specialty Panels includes molded interior door facings, hardboard siding and decorative surfaces such as high-pressure laminates. Sales were $990 million in 1997, in line with both 1996 and 1995. Demand for door facings and high-pressure laminates grew in 1997, supported by a strong U.S. housing market and growth overseas. However, specialty panels operating profit declined 12% due to start-up costs associated with a new door facings plant in Ireland and weaker earnings at Carter Holt Harvey. Sales and earnings of our U.S. low-pressure laminates and industrial panels businesses were weak in 1997, plagued by overcapacity, and we announced plans to exit these product lines by mid-1998. In 1998, we expect demand for door facings to continue to grow, but we expect pricing to be under pressure because of new industry capacity. We are targeting sales growth in international markets, particularly Europe, and in Asia, where we are using new technology to build less costly production lines. New products will also contribute to growth in specialty panels sales. Imaging sales declined 3% to $690 million. Operating profit improved considerably due to the success of the cost-reduction program we undertook in early 1996. These gains were offset somewhat by volume declines across all major product lines. Over the past several years, advances in digital-based imaging technology has severely reduced demand for photosensitive papers and films and, in July 1997, the Company announced its plan to exit the imaging products businesses. Late in 1997, we sold our photographics and pressroom chemicals businesses. Early in 1998, we reached an agreement on the sale of the printing and graphic arts operations. We expect to incur operating losses until the sale is completed. Industrial Papers 1997 sales of $550 million were flat with 1996. However, operating profit declined 23% after growing 16% in 1996. The U.S. market for release-backing products became more competitive in 1997 as the industry consolidated and European producers entered the market. Prices were down 5% in 1997. Demand for other grades remained strong throughout the year. Market conditions in 1998 are expected to mirror 1997. Industrial papers continues to meet our return goals, and we are selectively investing in products with growth potential. In 1998, Thilmany will install a new extruder in the U.S. and Akrosil will install a new coater in the Netherlands. We expect both sales and earnings to improve in 1998 due to volume growth and lower costs. Tissue sales of $410 million were slightly higher than in 1996. Operating profit also improved slightly due mainly to volume growth. Since the acquisition of the Australian operations of Bowater plc in early 1995, Carter Holt Harvey has achieved market share gains in Australia, and in New Zealand a new diaper machine boosted sales ahead of expectations. We expect the tissue business to continue to perform well. Nonwovens sales of $250 million declined about 5% from 1996 and 1995 levels. Operating profit nearly doubled as the spunbond capabilities we built over the past several years began to pay off. Profits were offset somewhat by declines in traditional nonwovens, markets that have been shrinking due to new spunbond technology. We expect this business to be sold by mid-1998. Sales of Chemicals and Petroleum were $560 million in 1997, 3% higher than last year. Operating profit fell 6% but remained well above 1995. Chemicals profit increased 25% in 1997, returning to 1995 levels. Results reflect strong European operations, where we have increased resins sales mainly at Forchem, acquired in late 1996. U.S. operations were weaker in 1997 due to operating problems and environmental costs. Petroleum earnings declined 20% due to lower production and lower gas and oil prices. In 1998, we expect chemicals earnings to improve as we focus on specialty resins and improvements in manufacturing operations. Petroleum's results will depend on oil and gas pricing. Our exploration program will continue to concentrate on West Texas, the Gulf Coast and the Gulf of Mexico. Forest Products Forest Products sales for 1997 were $2.7 billion, even with 1996. Sales were $2.1 billion in 1995. Operating profit, before special items, increased to $430 million, from $390 million in 1996 and $388 million in 1995. After special items, operating profit was $554 million in 1997 and $925 million in 1996. Special items in 1996 included a gain of $592 million from the sale of an interest in a partnership in Oregon and Washington that included essentially all of IP Timberlands, Ltd.'s Western forestland holdings. In December 1997, the Company's remaining interest in this partnership was redeemed and a related debt guaranty was released, resulting in a gain of $170 million. Additionally, special items included restructuring and business improvement charges of $46 26 Management's Discussion and Analysis million in 1997 and $57 million in 1996. Forestlands revenues decreased 13% to $650 million in 1997 from $750 million in 1996, while operating profit increased nearly 20%. Sales declined because 1996 included our West Coast operations through March. Operating profit for the year reflected strong pricing and demand in the U.S., as well as the sale of controlling interests in nonstrategic forestlands in western Pennsylvania and New York. U.S. harvest volumes were higher in 1997, with sawlog volumes increasing approximately 12%. Sawlog prices averaged about 2% above 1996 levels, and pulpwood prices rose approximately 10%. Carter Holt Harvey's revenues decreased 15% and earnings were down for the year, as lower pricing in New Zealand and Asia offset higher harvest volumes. Our outlook for our forestlands business is mixed. Prices for our stumpage entered 1998 at or near all-time highs. In addition, U.S. construction activity is projected to remain strong in 1998, which would support continued strong demand for our stumpage. We also expect to complete partnership interest sales involving approximately 112,000 acres of forestland in Pennsylvania and New York in 1998. Harvest volumes, however, are expected to decline somewhat below 1997's record levels for the next few years due to a younger average age class for our timber. Furthermore, the recent economic downturn in Asia could adversely affect demand for stumpage in the U.S. in 1998, and will depress 1998 results for Carter Holt Harvey. Wood Products revenues increased 8% in 1997 to $2.1 billion, up from $1.9 billion in 1996 and $1.4 billion in 1995. In the U.S., operating profit increased slightly. Results reflect strong lumber operations, offset by losses for panels and other products. Our lumber operations were particularly strong in 1997 as robust construction markets pushed sales up over 35% while operating profits nearly doubled. Results also benefited from a full year's contribution from the five plants acquired in the Federal merger of March 1996. Lumber prices rose over 10%, driven by strong demand and by an increase in sales of premium grades, which carry higher margins. About 15% of our lumber sales are premium grades, up from about 5% in 1996. 1998 projections are to grow to over 20%. The higher prices and shipments, together with cost reductions, more than offset higher log costs in 1997. Our U.S. panel businesses were negatively impacted by higher log costs and a sharp decline in prices for oriented strand board (OSB), as industry-wide capacity additions came on line. However, by year-end, OSB prices had recovered somewhat as demand and capacity moved closer to balance. Average plywood prices increased slightly in 1997, while sales volumes were slightly lower. Panels results continue to benefit from production of higher margin specialty products that represent approximately 25% of our plywood sales. Carter Holt Harvey's sales, which represent about 30% of our wood products business, increased 8% in 1997. Operating profit was in line with 1996. With improving business conditions in Australia, the 1996 acquisition of Forwood Products is exceeding sales and profit targets, and further gains are expected in 1998. About 10% of Carter Holt Harvey's products are exported into Asia. The Asian economic situation will result in weakness during 1998. However, Carter Holt Harvey is strategically committed to its customer base in the Asian market, and in the longer term remains positive on the outlook for demand from the region. In the U.S., we expect construction activity to remain strong in 1998, with housing starts at or near 1997 levels. As a result, demand and pricing for wood products should continue to be favorable. We expect some further recovery in OSB prices as the year progresses. Profitability in 1998 is expected to be negatively affected early in the year by both higher log costs and wood availability. However, productivity and cost-savings initiatives currently under way, together with increased sales of higher margin premium products, should reduce the impact of higher costs. - ----------------------------- LIQUIDITY & CAPITAL RESOURCES - ----------------------------- Cash Provided by Operations Cash provided by operations declined to $1.2 billion in 1997 from $1.7 billion in 1996 and $2.2 billion in 1995. As compared with 1996, earnings after adjusting for noncash special items declined by $100 million. In addition, working capital reduced operating cash flow by about $390 million. On an overall basis, noncash working capital was $2.9 billion at December 31, 1997, which was about a $200 million decrease from 1996. However, after adjusting for foreign exchange, acquisitions and restructuring activities, working capital increased by about $390 million. Just under half the increase resulted from reductions in nontrade accrued liabilities. Inventory accounted for most of the rest, including increases in xpedx inventory, liquid packaging filling machines and purchased timber deeds. Depreciation and amortization expense of $1.3 billion in 1997 was about $100 million above 1996, increasing from $1.0 billion in 1995. Investment Activities Capital spending was reduced to $1.1 billion in 1997, from $1.4 billion and $1.5 billion in 1996 and 1995, respectively. Capital spending is expected to be $1.1 billion in 1998 and will continue to be focused on the Company's stronger, more competitive businesses.
Capital Spending by Industry Segment In millions for the years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------- Printing Papers $ 401 $ 454 $ 375 Packaging 275 338 531 Distribution 20 14 18 Specialty Products 191 289 251 Forest Products 172 195 271 ------ ------ ------ Subtotal 1,059 1,290 1,446 Corporate 52 104 72 ------ ------ ------ Total $1,111 $1,394 $1,518 ====== ====== ======
Under the business improvement plan undertaken by the Company in 1997, sales of nonstrategic businesses and assets are expected to generate cash proceeds of $1 billion. Proceeds will be used primarily to reduce debt. In 1997, proceeds from these divestitures totaled $322 million. Acquisitions in 1997 included Merbok Formtec, an Asian door facings company that will be an addition to Masonite, and Taussig Management's Discussion and Analysis 27 Graphics Supply, Inc., a distributor of graphic arts products, to complement our distribution business. In March 1996, International Paper merged with Federal Paper Board, a paper and forest products company with facilities in the U.S. and the U.K. Federal shareholders received, at their election and subject to certain limitations, either $55 in cash or a combination of cash and International Paper common stock for each share of Federal Paper Board common stock. To complete the merger, Federal shares were acquired for approximately $1.3 billion in cash and $1.4 billion in International Paper stock, and $800 million of debt was assumed. Other 1996 acquisitions included Forchem, a tall oil and turpentine processor in Finland, and Forwood Products, a timber-processing business in Australia, acquired for about $100 million each. Acquisitions in 1995 included approximately 26% of the outstanding shares of Carter Holt Harvey, bringing International Paper's ownership of the New Zealand-based forest and paper products company to just over 50%. The share purchases were financed with borrowings totaling $1.1 billion. (The Company's initial investment of 16% of Carter Holt Harvey was made in 1991 and was followed by an additional 8% investment in 1994.) We also acquired the assets of paper distributors Seaman-Patrick Paper Company and Carpenter Paper Company; Micarta, a high-pressure laminates business; and the inks and adhesives resin business of DSM in France. Financing Activities Financing activities during 1997 included the issuance of environmental and industrial development bonds for various capital projects, repayment of $164 million of Federal Paper Board 10% debentures, and a net reduction in commercial paper and short-term bank borrowings. Long-term debt and notes payable to banks on our balance sheet were $9.4 billion at December 31, 1997 compared with $10 billion in 1996. However, after adjusting for foreign exchange, acquisitions and restructuring activities, debt was reduced by approximately $220 million on a cash flow basis. Financing activities in 1996 included short-term borrowings of $1.3 billion used to acquire Federal. Also, $741 million of notes with maturities ranging from three to seven years were issued, and IPT borrowed $450 million due in 1999 from a consortium of banks. In 1995, IPT issued $750 million of five-year debt, Carter Holt Harvey issued $300 million of U.S. dollar-denominated notes, and International Paper Capital Trust, a wholly owned subsidiary, issued $450 million of preferred securities that are convertible into International Paper common stock. Also during 1995, 5.75% convertible debentures were called by the Company and converted into 5.8 million shares of common stock. Unless otherwise noted, the proceeds of all of the financings described above were used to reduce short-term debt or for general corporate purposes. Dividend payments were $302 million in 1997 ($1.00 per common share), $291 million in 1996 and $237 million in 1995. In the third quarter of 1995, the Company declared a two-for-one stock split and raised the quarterly dividend from $.21 to $.25 per common share. Capital Resources Outlook for 1998 The Company's financial condition continues to be strong. The ratio of debt to total capital was held at 39% in 1997, equal to 1996 and 1995. The Company anticipates that cash flow from operations, supplemented as necessary by short- or long-term borrowings, will be adequate to fund its capital expenditures, to service existing debt, and to meet working capital and dividend requirements during 1998. Other Financial Statement Items Net interest expense was $490 million in 1997, declining from $530 million in 1996. The reduction reflects lower borrowing rates and tax-related interest income in 1997. Net interest expense was $493 million in 1995. Minority interest expense declined to $129 million in 1997 from $169 million in 1996, due largely to weaker earnings at Carter Holt Harvey and a lower level of profits on the sales of West Coast partnership interests by IPT. (Minority interest expense related to such sales was $6 million and $32 million in 1997 and 1996, respectively.) These declines were offset in part by stronger results at Zanders. Minority interest expense was $156 million in 1995. Before special items, the 1997 effective tax rate was 34%, declining from 36% in 1996 due to a change in the mix of earnings, and 35.5% in 1995. After special items, the effective tax rate was 238% of pre-tax income in 1997 and 41% in 1996. Taxes provided on special charges, which included expenses that were not deductible for tax purposes, as well as taxes at statutory rates on the gain on sale of a partnership interest, caused the Company's 1997 tax provision to be more than twice that of earnings before taxes. The table below presents components of earnings and the related income taxes for 1997 and 1996. In 1998, we expect the effective tax rate on operating earnings to be about 34%. Effective Tax Rate (dollars in millions)
1997 1996 ------------------------------------------ ------------------------------------------- Earnings (Loss) Earnings (Loss) Before Taxes Tax Effective Before Taxes Tax Effective and Minority Expense Tax and Minority Expense Tax Interest (Benefit) Rate Interest (Benefit) Rate - ------------------------------------------------------------------------------------------------------------------------------------ Before special items $ 656 $ 223 34% $ 890 $ 319 36% Business improvement charge (535) (150) 28% Provision for legal reserve (150) (57) 38% Restructuring and asset impairment charges (125) (45) 36% (680) (213) 31% Gains on sales of partnership interests 170 67 39% 592 224 38% ----- ----- ----- ----- After special items $ 16 $ 38 238% $ 802 $ 330 41% ===== ===== ===== =====
28 Management's Discussion and Analysis The full-year impact of the March 1996 merger with Federal contributed between 2% and 18% to the components of 1997 costs and expenses. Recent Accounting Pronouncements In the first quarter of 1997, International Paper adopted the provisions of American Institute of Certified Public Accountants Statement of Position (SOP) No. 96-1, "Environmental Remediation Liabilities," which provides guidance concerning the recognition, measurement and disclosure of environmental remediation liabilities. The adoption of the SOP did not have a material effect on the Company's financial position or results of operations. Also in 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which did not have a material effect on reported earnings per common share. Disclosures required by this standard appear in Note 2 to the consolidated financial statements. In 1998, the Company will adopt SFAS No. 130, "Reporting Comprehensive Income," which sets standards for the reporting of comprehensive income and its components, and SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," which requires the presentation of segment information on a basis consistent with that used by management for operating decisions and sets forth quarterly and annual disclosure requirements. Legal and Environmental Issues International Paper operates in an industry subject to extensive state and federal environmental regulation. A total of $90 million was spent in 1997 ($130 million in 1996 and $108 million in 1995) to control environmental releases into the air and water and to assure environmentally sound disposal of waste. The Company expects to spend approximately $105 million in 1998 for similar capital projects, including costs to comply with the Environmental Protection Agency's (EPA) "Cluster Rule" regulations. Amounts to be spent in future years will depend on new laws and regulations and changes in environmental issues. Taking these uncertainties into account, our preliminary estimate for 1999 and 2000 is approximately $350 million. In early 1998, the EPA will issue final regulations on the "Cluster Rule" establishing new requirements regarding air emissions and wastewater discharges from pulp and paper mills. Implementation will be required over the next three to eight years. One of the main requirements of the Cluster Rule will be that pulp and paper mills use only elemental chlorine-free technology (ECF) in the pulp bleaching process. In 1996, International Paper completed the conversion of 13 of its U.S. and European bleached mills to this technology. The cost of conversion as well as other related projects completed through 1997 was $145 million. Two former Federal Paper Board mills, Augusta and Riegelwood, will be converted to ECF in 1998. The Company estimates that additional capital expenditures of approximately $230 million will be made over the next three years in order to comply with the Cluster Rule's initial provisions. Projected costs during the years 2001 through 2006 total $180 million. The final cost will depend on the outcome of regulations for pulp and paper grades other than bleached kraft. Regulations for these categories are not likely to become final until late 1999 or 2000. The Company now estimates that annual pre-tax operating costs, excluding depreciation, will increase approximately $20 million annually when the regulations are fully implemented. International Paper has been named as a potentially liable party with respect to a number of environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act. Related costs are recorded in the financial statements when they are probable and reasonably estimable. Completion of these actions is not expected to have a material adverse effect on our financial condition or results of operations. Further details can be found in the Company's quarterly reports on Form 10-Q and annual report on Form 10-K filed with the Securities and Exchange Commission. A nationwide class-action lawsuit filed against International Paper and Masonite in Alabama in 1994 was settled in July 1997. The lawsuit alleged that hardboard siding manufactured by Masonite, and used as exterior cladding for residential dwellings, failed prematurely. The class consists of all homeowners in the U.S. who used the siding in their residences since 1980. Final approval of the settlement was granted on January 15, 1998. It provides for payments to claimants meeting certain requirements of the settlement agreement for a period of up to 10 years. In the second quarter of 1997, the Company recorded a $150 million provision to increase its legal reserves. While the total cost of the settlement is not known with certainty, the Company believes its legal reserves are sufficient and that the settlement will not have a material adverse effect on its consolidated financial position or results of operations. While any proceeding or litigation has an element of uncertainty, the Company believes that the outcome of any lawsuit or claim that is pending or threatened, or all of them combined, will not have a material adverse effect on its consolidated financial position or results of operations. For a further discussion of legal issues, see Note 11 to the consolidated financial statements and Item 3 (Legal Proceedings) of the annual report on Form 10-K. Year-2000 Costs Many of our systems and related computer technology are year-2000 compliant. However, we have a program in place to bring the remaining software and systems into year-2000 compliance by mid-1999. We estimate that this will cost $65 million, exclusive of software and systems that are being replaced or upgraded in the normal course of business. Information system maintenance or modification costs are expensed as incurred, while the cost of new software and equipment is capitalized and amortized over the assets' useful lives. Management's Discussion and Analysis 29 Market Risk We use financial instruments, including fixed and variable rate debt, to finance operations, for capital spending programs and for general corporate purposes. Additionally, financial instruments, including swap and forward contracts, are used to hedge exposures to interest rate and foreign currency risks. We do not use financial instruments for trading purposes. Our exposure to market risk for changes in interest rates relates primarily to investments, and short- and long-term debt obligations. We invest in high-credit-quality securities with major international financial institutions while limiting exposure to any one issuer. Our investments at December 31, 1997 were not significant. The table that follows summarizes our debt obligations outstanding as of December 31, 1997 expressed in U.S. dollar equivalents. This information should be read in conjunction with Note 13 to the consolidated financial statements.
Short- and Long-Term Debt (in millions) Outstanding as of December 31, 1997 1998 1999 2000 2001 2002 Thereafter Total Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ U.S. commercial paper and bank notes-5.7% average interest rate $ 772 $ 772 $ 772 New Zealand dollar commercial paper and bank notes-8.4% average interest rate 273 273 273 Australian dollar commercial paper and bank notes-4.9% average interest rate 116 116 116 Belgian franc bank notes-4.0% average interest rate 119 119 119 French franc bank notes-3.8% average interest rate 618 618 618 German mark bank notes-3.9% average interest rate 271 271 271 Dutch guilder bank notes-3.8% average interest rate 208 208 208 Finnish markka bank notes-3.9% average interest rate 98 98 98 New Zealand dollar notes payable-8.9% average interest rate 418 418 418 Fixed rate debt-7.9% average interest rate 31 $ 28 $ 361 $ 286 $ 287 $2,611 3,604 3,996 5 7/8% Swiss franc debentures 80 80 87 Floating rate notes-6.2% average interest rate 450 450 450 Medium-term notes-7.4% average interest rate 50 282 8 121 76 85 622 640 Environmental and industrial development bonds-5.8% average interest rate 15 20 76 22 51 852 1,036 1,091 German mark fixed rate borrowings-5.5% average interest rate 56 20 20 34 49 179 179 Other 261 105 41 26 48 21 502 508 ------ ----- ----- ------ ------ ------ ------ ------ Total Debt $3,306 $ 885 $ 506 $ 555 $ 496 $3,618 $9,366 $9,844 ====== ===== ===== ====== ====== ====== ====== ======
Interest Rate and Currency Swaps (in millions) Outstanding as of December 31, 1997 1998 1999 2000 2001 2002 Thereafter Total Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ U.S. dollar variable to fixed rate swaps $ 50 $525 $ 45 $1,000 $1,620 $ (127) Average pay rate 7.1% Average receive rate 5.8% Australian dollar variable to fixed rate swaps 68 44 $ 34 $ 51 17 214 (4) Average pay rate 7.0% Average receive rate 4.9% New Zealand dollar variable to fixed rate swaps 15 15 27 15 15 87 Average pay rate 7.5% Average receive rate 8.1% U.S. dollar fixed to variable rate swaps 45 1,250 1,295 146 Average pay rate 7.0% Average receive rate 7.5% U.S. dollar to Australian dollar cross-currency swap 150 150 19
30 Management's Discussion and Analysis For debt obligations, the table presents principal cash flows and related weighted average interest rates by year of maturity. Variable interest rates disclosed represent the weighted average rates at the end of the period. For financial statement classification, $1.4 billion of short-term debt has been classified as long-term pursuant to line of credit agreements. We use cross-currency and interest rate swap agreements to manage the composition of our fixed and floating rate debt portfolio. Amounts to be paid or received as interest under these agreements are recognized over the life of the swap agreements as adjustments to interest expense. The impact on earnings and the Company's net liability under these agreements were not significant. The previous table presents notional amounts and principal cash flows for swap agreements by year of maturity expressed in U.S. dollar equivalents. COPEC, a Chilean equity investment of Carter Holt Harvey, has approximately $1.0 billion of U.S. dollar-denominated debt. The remeasurement of this debt as the Chilean peso and U.S. dollar exchange rate fluctuates is recorded in earnings. Based on the relative ownership, a 3% movement in that exchange rate would result in approximately a one cent per share earnings impact for International Paper. The Company transacts business in many currencies and is subject to currency exchange rate risk. We address this risk through a risk management program that involves financing a portion of our investments in overseas operations with borrowings denominated in the same currency as the investment or by entering into currency exchange contracts in tandem with U.S. dollar borrowings. These contracts are effective in providing a hedge against fluctuations in currency exchange rates. Additionally, we utilize currency exchange contracts to hedge certain transactions that are denominated in foreign currencies, primarily export sales and equipment purchased from nonresident vendors. These contracts serve to protect the Company from currency fluctuations between the transaction and settlement dates. The following table presents information about our foreign currency forward contracts outstanding as of December 31, 1997 expressed in U.S. dollar equivalents. All contracts have maturities of less than 12 months. This information should be read in conjunction with Note 14 of the consolidated financial statements.
Weighted Average Unrealized Foreign Currency Contract Exchange Gain Forward Contracts (dollars in millions) Amount Rate (Loss) - -------------------------------------------------------------------------------- Receive Belgian francs/Pay Italian lira $ 13 2.09 $ Receive Belgian francs/Pay U.S. dollars 78 36.36 1 Receive French francs/Pay Belgian francs 13 6.16 Receive French francs/Pay British pounds 10 9.66 Receive British pounds/Pay U.S. dollars 38 1.67 (1) Receive Italian lira/Pay U.S. dollars 51 1,715.87 (1) Receive Dutch guilders/Pay Belgian francs 42 18.31 Receive Dutch guilders/Pay British pounds 18 3.35 Receive U.S. dollars/Pay British pounds 13 1.65 Receive U.S. dollars/Pay Belgian francs 25 36.42 Receive Irish punts/Pay U.S. dollars 128 0.68 (1) Receive New Zealand dollars/ Pay U.S. dollars 803 1.46 (55) Receive New Zealand dollars/ Pay Australian dollars 113 0.93 2 Receive Australian dollars/ Pay New Zealand dollars 68 1.12 (1) Receive Swiss francs/ Pay New Zealand dollars 79 1.10 5 Receive U.S. dollars/ Pay New Zealand dollars 206 1.56 9 Receive U.S. dollars/ Pay Australian dollars 301 1.37 20
The company has an additional $123 million in a number of smaller contracts to purchase or sell other currencies with a related net unrealized gain of $2.5 million. Value at Risk Value at risk is used to describe an approach for measuring market risk exposure that utilizes statistical models that are based on historical price and volatility patterns to estimate the probability of the value of a financial instrument falling above or below a specified amount at a specified confidence level and over a given time period. Our analysis uses variance-covariance statistical modeling techniques and includes substantially all interest rate sensitive debt and swaps, and currency exchange contracts. The model estimates the potential loss in fair market value or earnings the Company could incur from adverse changes in interest rates or currency exchange rates. The results of our analysis at a 95% confidence level were not significant to the Company's consolidated common shareholder's equity, earnings or daily change in market capitalization. Effect of Inflation General inflation has had minimal impact on International Paper's operating results in the last three years. Sales prices and volumes are more strongly influenced by supply-and-demand factors in specific markets and by exchange rate fluctuations than by inflationary factors. Financial Information by Geographic Area 31
NET SALES In millions 1997 1996 1995 - -------------------------------------------------------------------------------- United States (1),(3) $ 14,760 $ 14,512 $ 14,610 Europe (3) 3,402 3,583 3,791 Pacific Rim (4) 2,129 2,263 1,571 Other 226 186 188 Less: Intergeographic Sales (421) (401) (363) -------- -------- -------- Net Sales $ 20,096 $ 20,143 $ 19,797 ======== ======== ========
ASSETS In millions 1997 1996 1995 - -------------------------------------------------------------------------------- United States (3) $15,650 $15,695 $12,033 Europe (3) 3,635 4,405 4,252 Pacific Rim (4) 3,985 4,779 4,334 Other 189 187 192 Equity Investments 1,046 1,070 1,291 Corporate 2,249 2,116 1,875 ------- ------- ------- Assets $26,754 $28,252 $23,977 ======= ======= =======
EUROPEAN SALES BY INDUSTRY SEGMENT In millions 1997 1996 1995 - -------------------------------------------------------------------------------- Printing Papers (3) $1,469 $1,506 $1,664 Packaging 646 707 756 Distribution 321 334 378 Specialty Products 961 1,006 960 Forest Products 5 30 33 ------ ------ ------ European Sales $3,402 $3,583 $3,791 ====== ====== ======
OPERATING PROFIT
1997 1996 1995 ------------------------------------ ------------------------------------ ------- Before After Before After Special Special Special Special Special Special In millions Items Items Items Items Items Items - ------------------------------------------------------------------------------------------------------------------------------------ United States(3) $ 977 $ (252) $ 725 $ 1,272 $ 306 $ 1,578 $ 2,062 Europe(3) 102 (227) (125) (218) (218) 251 Pacific Rim(4) 111 111 218 218 216 Other 30 30 11 11 6 ------- ------- ------- ------- ------- ------- ------- Operating Profit(2) $ 1,220 $ (479) $ 741 $ 1,501 $ 88 $ 1,589 $ 2,535 ======= ======= ======= ======= ======= ======= =======
(1) Export sales to unaffiliated customers (in billions) were $1.4 in 1997, $1.4 in 1996 and $1.5 in 1995. (2) Includes amounts for acquisitions, net of goodwill amortization, from the dates of acquisition. (3) Includes the results of Federal Paper Board from March 12, 1996. (4) Includes the results of Carter Holt Harvey from May 1, 1995 except for earnings from its investment in COPEC, which are included in corporate items. Europe European business sales of $3.4 billion were $200 million or 5% below 1996 sales of $3.6 billion and $400 million or 10% below 1995 sales of $3.8 billion. Operating profit, before special items, of $102 million improved over breakeven results in 1996. Special items in 1997 included charges related to the disposal of the imaging businesses and the restructure of the printing papers business. Better economic conditions and cost-reduction efforts resulted in profits for the printing papers businesses compared with a loss in 1996. Contributions from Chemicals' 1996 acquisitions, partially offset by start-up costs at Masonite's Ireland plant, also added to European profits. We expect continued improvement led by stronger economic growth in Europe. However, recent financial events in Asia may temporarily weaken pulp and paper pricing in early 1998. Pacific Rim Carter Holt Harvey, a New Zealand-based forest and paper products company, represents the majority of our operations in the Pacific Rim. Through its equity interest in COPEC, it also has substantial assets in Chile. Carter Holt Harvey is a major producer of tissue in Australasia and supplies wood products to the Australian markets. International Paper's 1997 results include Carter Holt Harvey sales of $2.0 billion and operating profit of $112 million compared with $2.1 billion and $211 million, respectively, for 1996. Carter Holt Harvey's results are on a one-month-lag basis and include adjustments to conform with U.S. accounting principles. Operating profit declined mainly due to lower packaging prices in New Zealand as the result of increased competition and general price weakness for pulp and forest products. The Asian economic situation is expected to place pressure on pricing and earnings in 1998, particularly in pulp, packaging board and log export markets. A company-wide review of all operations was recently completed and a program to improve margins through increased productivity, customer and revenue management, and operational efficiencies is now under way. A detail of Carter Holt Harvey's sales by industry segment, adjusted to conform to International Paper's presentation, is included on page 32. 32 Financial Information by Industry Segment NET SALES
In millions 1997 1996 1995(1) - -------------------------------------------------------------------------------- Printing Papers $ 5,550 $ 5,640 $ 6,090 Packaging 4,950 4,945 4,475 Distribution 4,690 4,675 5,040 Specialty Products 3,450 3,475 3,260 Forest Products 2,715 2,665 2,140 Less: Intersegment Sales (1,259) (1,257) (1,208) -------- -------- -------- Net Sales $ 20,096 $ 20,143 $ 19,797 ======== ======== ========
ASSETS
In millions 1997 1996 1995 - -------------------------------------------------------------------------------- Printing Papers $ 7,810 $ 8,627 $ 7,121 Packaging 6,198 6,088 4,150 Distribution 1,477 1,346 1,454 Specialty Products 3,106 3,636 3,639 Forest Products 4,868 5,369 4,447 Equity Investments 1,046 1,070 1,291 Corporate(2) 2,249 2,116 1,875 ------- ------- ------- Assets $26,754 $28,252 $23,977 ======= ======= =======
OPERATING PROFIT
1997 1996 1995 --------------------------------- ----------------------------------- -------- Before After Before After Special Special Special Special Special Special In millions Items Items Items Items Items Items - ------------------------------------------------------------------------------------------------------------------------------------ Printing Papers $ 174 $ (212) $ (38) $ 220 $ (35) $ 185 $ 1,093 Packaging 194 (48) 146 463 (42) 421 741 Distribution 99 (16) 83 109 109 106 Specialty Products 323 (327) (4) 319 (370) (51) 207 Forest Products 430 124 554 390 535 925 388 ------- ------- ------- ------- ------- ------- ------- Operating Profit 1,220 (479) 741 1,501 88 1,589 2,535 Interest Expense, net (490) (490) (530) (530) (493) Corporate Items, net(3) (74) (161) (235) (81) (176)(4) (257) (14) ------- ------- ------- ------- ------- ------- ------- Earnings Before Income Taxes and Minority Interest $ 656 $ (640) $ 16 $ 890 $ (88) $ 802 $ 2,028 ======= ======= ======= ======= ======= ======= =======
DEPRECIATION, DEPLETION AND AMORTIZATION
In millions 1997 1996 1995 - -------------------------------------------------------------------------------- Printing Papers $ 550 $ 528 $ 475 Packaging 359 329 246 Distribution 34 35 35 Specialty Products 202 194 199 Forest Products 259 220 150 Corporate 12 9 6 ------- ------- ------- Depreciation, Depletion and Amortization 1,416 1,315 1,111 Less: Depletion(5) (158) (121) (80) ------- ------- ------- Depreciation and Amortization $ 1,258 $ 1,194 $ 1,031 ======= ======= =======
FEDERAL PAPER BOARD AND CARTER HOLT HARVEY SALES(6)
1997 Net Sales 1996 Net Sales --------------------------------------------------- --------------------------------------------------- Federal Carter Federal Carter International Paper Holt International Paper Holt In millions Paper Board Harvey Consolidated Paper Board Harvey Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- Printing Papers $ 4,799 $ 641 $ 110 $ 5,550 $ 4,941 $ 565 $ 134 $ 5,640 Packaging 3,590 829 531 4,950 3,659 650 636 4,945 Distribution 4,557 133 4,690 4,538 137 4,675 Specialty Products 2,919 531 3,450 2,924 551 3,475 Forest Products 1,479 292 944 2,715 1,492 222 951 2,665 Less: Intersegment Sales (815) (148) (296) (1,259) (877) (50) (330) (1,257) -------- -------- -------- -------- -------- -------- -------- -------- Net Sales $ 16,529 $ 1,614 $ 1,953 $ 20,096 $ 16,677 $ 1,387 $ 2,079 $ 20,143 ======== ======== ======== ======== ======== ======== ======== ========
(1) 1995 net sales have been adjusted to conform with the current-year presentation. (2) Corporate assets are principally cash and temporary investments, investments, deferred taxes and other assets that are not identifiable with industry segments. (3) Corporate Items, net includes our share of earnings from equity investments, unallocated corporate expenses and special items not affecting the segments. (4) Includes the write-down of the Scitex investment. (5) Depletion consists of cost of timber harvested and is included in Forest Products. (6) The financial statements reflect the merger with Federal Paper Board (March 12, 1996) and the consolidation of Carter Holt Harvey (May 1, 1995). Their net sales have been adjusted to conform with International Paper's classifications. 33 Report of Management on Financial Statements The management of International Paper Company is responsible for the fair presentation of the information contained in the financial statements in this annual report. The statements are prepared in accordance with generally accepted accounting principles and reflect management's best judgment as to the Company's financial position, results of operations and cash flows. The Company maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are properly recorded and summarized so that reliable financial records and reports can be prepared and assets safeguarded. An important part of the internal controls system is the Company's Policy on Ethical Business Conduct, which requires employees to maintain the highest ethical and legal standards in their conduct of Company business. The internal controls system further includes careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility, dissemination of accounting and business policies throughout the Company, and an extensive program of internal audits with management follow-up. The Company maintains a toll-free telephone "compliance line" whereby any employee may report suspected violations of law or Company policy. The independent public accountants provide an objective, independent review of management's discharge of its responsibility for the fairness of the Company's financial statements. They review the Company's internal accounting controls and conduct tests of procedures and accounting records to enable them to form the opinion set forth in their report. The Board of Directors monitors management's administration of the Company's financial and accounting policies and practices, and the preparation of these financial statements. The Audit Committee, which consists of five nonemployee directors, meets regularly with representatives of management, the independent public accountants and the internal Auditor to review their activities. The Audit Committee recommends that the shareholders approve the appointment of the independent public accountants to conduct the annual audit. The independent public accountants and the internal Auditor both have free access to the Audit Committee and meet regularly with the Audit Committee, with and without management representatives in attendance. /s/ Marianne M. Parrs Marianne M. Parrs Senior Vice President and Chief Financial Officer Report of Independent Public Accountants To the Shareholders of International Paper Company: We have audited the accompanying consolidated balance sheets of International Paper Company (a New York corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, common shareholders' equity and cash flows for each of the three years ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of International Paper Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP New York, N.Y. February 6, 1998 34 Consolidated Statement of Earnings
IN MILLIONS, EXCEPT PER SHARE AMOUNTS, FOR THE YEARS ENDED DECEMBER 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ NET SALES $ 20,096 $ 20,143 $ 19,797 -------- -------- -------- COSTS AND EXPENSES Cost of products sold 14,973 14,901 13,896 Selling and administrative expenses 1,581 1,509 1,381 Depreciation and amortization 1,258 1,194 1,031 Distribution expenses 933 925 794 Taxes other than payroll and income taxes 205 194 174 Business improvement charge 535 Provision for legal reserve 150 Restructuring and asset impairment charges 125 680 -------- -------- -------- TOTAL COSTS AND EXPENSES 19,760 19,403 17,276 Gains on sales of West Coast partnership interests 170 592 -------- -------- -------- EARNINGS BEFORE INTEREST, INCOME TAXES AND MINORITY INTEREST 506 1,332 2,521 Interest expense, net 490 530 493 -------- -------- -------- EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 16 802 2,028 Income tax provision 38 330 719 Minority interest expense, net of taxes 129 169 156 -------- -------- -------- NET EARNINGS (LOSS) $ (151) $ 303 $ 1,153 ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE $ (.50) $ 1.04 $ 4.50 ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE - ASSUMING DILUTION $ (.50) $ 1.04 $ 4.41 ======== ======== ========
The accompanying notes are an integral part of these financial statements. Consolidated Balance Sheet 35
IN MILLIONS AT DECEMBER 31 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Current Assets Cash and temporary investments $ 398 $ 352 Accounts and notes receivable, less allowances of $93 in 1997 and $101 in 1996 2,404 2,553 Inventories 2,760 2,840 Other current assets 383 253 ------- ------- Total Current Assets 5,945 5,998 Plants, Properties and Equipment, Net 12,369 13,217 Forestlands 2,969 3,342 Investments 1,166 1,178 Goodwill 2,557 2,748 Deferred Charges and Other Assets 1,748 1,769 ------- ------- TOTAL ASSETS $26,754 $28,252 ======= ======= LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Liabilities Notes payable and current maturities of long-term debt $ 2,212 $ 3,296 Accounts payable 1,338 1,426 Accrued liabilities 1,330 1,172 ------- ------- Total Current Liabilities 4,880 5,894 ------- ------- Long-Term Debt 7,154 6,691 Deferred Income Taxes 2,681 2,768 Other Liabilities 1,236 1,240 Minority Interest 1,643 1,865 International Paper-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely International Paper Subordinated Debentures-Note 8 450 450 Commitments and Contingent Liabilities-Note 11 Common Shareholders' Equity Common stock, $1 par value, issued at December 31, 1997-302.9 shares, 1996-300.8 shares 303 301 Paid-in capital 3,258 3,426 Retained earnings 5,186 5,639 ------- ------- 8,747 9,366 Less: Common stock held in treasury, at cost, 1997-0.7 shares, 1996-0.6 shares 37 22 ------- ------- Total Common Shareholders' Equity 8,710 9,344 ------- ------- TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $26,754 $28,252 ======= =======
The accompanying notes are an integral part of these financial statements. 36 Consolidated Statement of Cash Flows
IN MILLIONS FOR THE YEARS ENDED DECEMBER 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net earnings (loss) $ (151) $ 303 $ 1,153 Depreciation and amortization 1,258 1,194 1,031 Deferred income tax provision (benefit) (90) 107 146 Business improvement charge 535 Provision for legal reserve 150 Restructuring and asset impairment charges 125 680 Payments related to restructuring and legal charges (116) (34) Gains on sales of West Coast partnership interests (170) (592) Other, net 92 133 (92) Changes in current assets and liabilities Accounts and notes receivable (53) 192 45 Inventories (150) 174 (320) Accounts payable and accrued liabilities (188) (399) 289 Other (19) (4) ------- ------- ------- CASH PROVIDED BY OPERATIONS 1,242 1,739 2,248 ------- ------- ------- INVESTMENT ACTIVITIES Invested in capital projects (1,111) (1,394) (1,518) Mergers and acquisitions, net of cash acquired (80) (1,527) (1,168) Consolidation of equity investment 241 Proceeds from divestitures 322 Other 16 (59) (111) ------- ------- ------- CASH USED FOR INVESTMENT ACTIVITIES (853) (2,980) (2,556) ------- ------- ------- FINANCING ACTIVITIES Issuance of common stock 142 100 66 Issuance of preferred securities by subsidiary trust 450 Issuance of debt 531 1,909 1,055 Reduction of debt (752) (375) (950) Change in bank overdrafts 29 (23) 57 Dividends paid (302) (291) (237) Other 6 (40) (100) ------- ------- ------- CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (346) 1,280 341 ------- ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 3 1 9 ------- ------- ------- CHANGE IN CASH AND TEMPORARY INVESTMENTS 46 40 42 CASH AND TEMPORARY INVESTMENTS Beginning of the year 352 312 270 ------- ------- ------- End of the year $ 398 $ 352 $ 312 ======= ======= =======
The accompanying notes are an integral part of these financial statements. Consolidated Statement of Common Shareholders' Equity 37
IN MILLIONS, EXCEPT SHARE AMOUNTS IN THOUSANDS Common Stock Issued Treasury Stock - ------------------------------------------------------------------------------------------------------------------------------------ Total Common Paid-In Retained Shareholders' Shares Amount Capital(1) Earnings Shares Amount Equity ------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1995 256,488 $256 $1,658 $4,711 4,698 $111 $6,514 Issuance of stock for acquisitions 988 1 37 38 Issuance of stock for various plans 27 (2,445) (55) 82 Conversion of subordinated debentures 5,785 6 199 205 Cash dividends-Common stock ($.92 per share) (237) (237) Foreign currency translation (less tax benefit of $66) 42 42 Net earnings 1,153 1,153 ------- ---- ------ ------ ------ ---- ------ BALANCE, DECEMBER 31, 1995 263,261 263 1,963 5,627 2,253 56 7,797 Issuance of stock for merger 35,348 35 1,368 1,403 Issuance of stock for various plans 2,215 3 67 (2,567) (70) 140 Repurchase of stock 868 36 (36) Cash dividends-Common stock ($1.00 per share) (291) (291) Foreign currency translation (less tax expense of $36) 28 28 Net earnings 303 303 ------- ---- ------ ------ ------ ---- ------ BALANCE, DECEMBER 31, 1996 300,824 301 3,426 5,639 554 22 9,344 Issuance of stock for various plans 2,086 2 55 (2,345) (106) 163 Repurchase of stock 2,517 121 (121) Cash dividends-Common stock ($1.00 per share) (302) (302) Realized foreign currency translation adjustment related to divestitures (less tax benefit of $6) 23 23 Foreign currency translation (less tax expense of $200) (246) (246) Net loss (151) (151) ------- ---- ------ ------ ------ ---- ------ BALANCE, DECEMBER 31, 1997 302,910 $303 $3,258 $5,186 726 $ 37 $8,710 ======= ==== ====== ====== ====== ==== ======
(1) The cumulative foreign currency translation adjustment (in millions) was $(396), $(173) and $(201) million at December 31, 1997, 1996 and 1995, respectively. The accompanying notes are an integral part of these financial statements. 38 Notes to Consolidated Financial Statements - ------------------------------------------------- Note 1 Summary of Significant Accounting Policies - ------------------------------------------------- Nature of the Company's Business The Company is a global forest products, paper and packaging company that is complemented by an extensive distribution system, with primary markets and manufacturing operations in the United States, Europe and the Pacific Rim. Substantially all of the Company's businesses have experienced and are likely to continue to experience cycles relating to available industry capacity and general economic conditions. For a further discussion of the Company's business, see pages 22 through 30 of management's discussion and analysis of financial condition and results of operations. Financial Statements The preparation of these financial statements in conformity with generally accepted accounting principles requires the use of management's estimates. For a further discussion of significant estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations, and disclosure of contingent assets and liabilities, see the legal and environmental issues section on page 28. Actual results could differ from management's estimates. Revenue Recognition The Company recognizes revenues when goods are shipped. Consolidation The consolidated financial statements include the accounts of International Paper Company and its subsidiaries. Minority interest represents minority shareholders' proportionate share of the equity in several of the Company's consolidated subsidiaries, primarily Carter Holt Harvey Limited, IP Timberlands, Ltd. (IPT), Zanders Feinpapiere AG, Georgetown Equipment Leasing Associates, L.P. and Trout Creek Equipment Leasing, L.P. All significant intercompany balances and transactions are eliminated. Investments in affiliated companies owned 20% to 50%, and the Company's investment in Scitex Corporation Ltd., where the Company has the ability to exercise significant influence, are accounted for by the equity method. The Company's share of affiliates' earnings is included in the consolidated statement of earnings. The results of Carter Holt Harvey are consolidated on a one-month-lag basis due to the availability of financial information. Temporary Investments Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost, which approximates market. Inventories Inventory values include all costs directly associated with manufacturing products: materials, labor and manufacturing overhead. These values are presented at cost or market, if it is lower. In the United States, costs of raw materials and finished pulp and paper products are generally determined using the last-in, first-out method. Other inventories are primarily stated using the first-in, first-out or average cost method. Plants, Properties and Equipment Plants, properties and equipment are stated at cost, less accumulated depreciation. For financial reporting purposes, the Company uses the units-of-production method for depreciating its major pulp and paper mills and certain wood products facilities and the straight-line method for other plants and equipment. Annual straight-line depreciation rates are buildings, 2 1/2% to 8 1/2%, and machinery and equipment, 5% to 33%. For tax purposes, depreciation is computed utilizing accelerated methods. Interest costs related to the development of certain long-term assets are capitalized and amortized over the related assets' estimated useful lives. The Company capitalized net interest costs of $62 million in 1997, $67 million in 1996 and $58 million in 1995. Interest payments made during 1997, 1996 and 1995 were $708 million, $658 million and $603 million, respectively. Total interest expense was $593 million in 1997, $583 million in 1996 and $542 million in 1995. Forestlands The Company, which currently owns 84% and 100% of IPT's Class A and Class B Units, respectively, controlled approximately 6.3 million acres of forestlands in the United States and, through its ownership of Carter Holt Harvey, approximately 845,000 acres of forestlands in New Zealand at December 31, 1997. Forestlands are stated at cost, less accumulated depletion representing the cost of timber harvested. Forestlands include owned property as well as certain timber harvesting rights with terms of one or more years. Costs attributable to timber are charged against income as trees are cut. The depletion rate charged is determined annually based on the relationship of remaining costs to estimated recoverable volume. Amortization of Intangible Assets Goodwill, the cost in excess of assigned value of businesses acquired, is amortized for periods of up to 40 years. Accumulated amortization was $344 million and $296 million at December 31, 1997 and 1996, respectively. Stock-Based Compensation Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Environmental Remediation Costs Costs associated with environmental remediation obligations are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are discounted to their present value when the expected cash flows are reliably determinable. Notes continued 39 Translation of Financial Statements Balance sheets of the Company's international operations are translated into U.S. dollars at year-end exchange rates, while statements of earnings are translated at average rates. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in paid-in capital. Gains and losses resulting from foreign currency transactions are included in earnings. Reclassifications Certain reclassifications have been made to prior-year amounts to conform with the current-year presentation. - -------------------------------- Note 2 Earnings Per Common Share - -------------------------------- Earnings per common share were computed by dividing net earnings by the weighted average number of common shares outstanding. Earnings per common share-assuming dilution were computed assuming that all potentially dilutive securities were converted into common shares at the beginning of each year. In 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which did not have a material effect on reported earnings per common share. A reconciliation of the amounts included in the computation of earnings per common share and earnings per common share-assuming dilution is as follows.
In millions 1997 1996 1995 - -------------------------------------------------------------------------------- Net earnings (loss) $ (151) $ 303 $ 1,153 Effect of dilutive securities Convertible subordinated debentures 4 Preferred securities of subsidiary trust 7 -------- -------- --------- Net earnings (loss)-assuming dilution $ (151) $ 303 $ 1,164 ======== ======== ========= Average common shares outstanding 301.6 292.1 256.5 Effect of dilutive securities Long-term incentive plan deferred compensation (0.9) (0.9) (0.8) Stock options 1.4 1.0 Convertible subordinated debentures 3.4 Preferred securities of subsidiary trust 3.8 -------- -------- --------- Average common shares outstanding- assuming dilution 300.7 292.6 263.9 ======== ======== ========= Earnings (loss) per common share $ (.50) $ 1.04 $ 4.50 ======== ======== ========= Earnings (loss) per common share- assuming dilution $ (.50) $ 1.04 $ 4.41 ======== ======== =========
Note: If an amount does not appear in the above table, the security has been retired or was antidilutive for the period presented. - ----------------------------------- Note 3 Industry Segment Information - ----------------------------------- Financial information by industry segment and geographic area for 1997, 1996 and 1995 is presented on pages 26, 31 and 32. - ------------------------------------- Note 4 Recent Accounting Developments - ------------------------------------- The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," in June 1997. This statement establishes standards for the reporting and display of comprehensive income and its components and is effective for fiscal years beginning after December 15, 1997. The Company will adopt the provisions of this statement in the first quarter of 1998. - ------------------------------- Note 5 Mergers and Acquisitions - ------------------------------- In September 1997, the Company acquired Merbok Formtec, a company that has pioneered the development of door facing products through postforming medium-density fiberboard. In November 1997, the stock of Taussig Graphics Supply, Inc. was acquired. On March 12, 1996, the Company completed the merger with Federal Paper Board (Federal), a diversified paper and forest products company. Under the terms of the merger agreement, Federal shareholders received, at their election and subject to certain limitations, either $55 in cash per share or a combination of cash and International Paper common stock worth $55 for each share of Federal common stock. Federal shares were acquired for approximately $1.3 billion in cash and $1.4 billion in International Paper common stock, and approximately $800 million of debt was assumed. In August 1996, the Company acquired Forchem, a tall oil and turpentine processor in Finland. In September 1996, Carter Holt Harvey acquired Forwood Products, the timber-processing business of the South Australian Government. In late April 1995, the Company acquired approximately 26% of Carter Holt Harvey, a New Zealand-based forest and paper products company, for $1.1 billion. The acquisition increased International Paper's ownership to just over 50%. As a result, Carter Holt Harvey was consolidated into International Paper's financial statements beginning on May 1, 1995. Prior to this date, the equity accounting method was utilized. As a result of this consolidation, the Company's consolidated cash and temporary investments balance increased by $241 million, representing approximately 74% of Carter Holt Harvey's cash and temporary investments balance as of the acquisition date. This is reflected in the consolidated statement of cash flows as the consolidation of an equity investment. The acquisition of Carter Holt Harvey is presented net of 26% of its cash and temporary investments as of the acquisition date. In January 1995, the assets of both Seaman-Patrick Company and Carpenter Paper Company, two paper distribution companies, were acquired for approximately 988,000 shares of common stock. In September, Micarta, the high-pressure laminates business of Westinghouse, was acquired. In October, the inks and adhesives resin business of DSM, located in Niort, France, was acquired. All of the 1997, 1996 and 1995 acquisitions were accounted for using the purchase method. The operating results of these mergers and acquisitions have been included in the consolidated statement of earnings from the dates of acquisition. 40 Notes continued - -------------------------------------- Note 6 Restructuring and Other Charges - -------------------------------------- In June 1997, a $535 million pre-tax business improvement reserve ($385 million after taxes or $1.28 per share) was established under a plan to improve the Company's financial performance through closing or divesting of operations that no longer meet financial or strategic objectives. It included approximately $230 million for asset write-downs, $210 million for the estimated losses on sales of businesses included in the reserve and $95 million for severance and other expenses. Approximately $28 million of these costs were incurred in 1997. The majority of the reserve relates to the restructuring of the printing papers business in the United States and overseas and the sale of certain specialty businesses. Annual improvement in earnings before interest and income taxes of approximately $100 million is expected by the end of 1998. See the first paragraph on page 23 of management's discussion and analysis for a summary of restructuring actions completed in 1997. In December 1997, an additional pre-tax charge of $125 million ($80 million after taxes or $.26 per share) was recorded for anticipated losses associated with the sale of the remaining imaging businesses. Also in June 1997, we recorded a $150 million pre-tax charge ($93 million after taxes or $.31 per share) to add to our legal reserves. On July 14, 1997, Masonite Corporation, a wholly owned subsidiary, announced that it had reached a proposed settlement in a class action pending in Mobile County, Alabama. The Company believes its legal reserves are adequate to cover any amounts to be paid pursuant to the proposed settlement, which is now final. See Note 11 for a further discussion of this legal settlement. In the first quarter of 1996, we adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). This statement requires that such assets be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable and that such assets be reported at the lower of their carrying amount or fair value. The adoption of the provisions of this statement resulted in a pre-tax charge to earnings totaling $100 million as noted below. Also in the first quarter of 1996, the Company's Board of Directors authorized a series of management actions to restructure and strengthen existing businesses that resulted in a pre-tax charge to earnings of $515 million ($362 million after taxes or $1.35 per share). The charge included $305 million for the write-off of certain assets, $100 million for asset impairments (related to the adoption of SFAS No. 121), $80 million in associated severance costs and $30 million of other expenses, including the cancellation of leases. Accruals for one-time cash costs, which include severance costs and other expenses, totaled $110 million. Approximately $34 million of these costs were incurred in 1996 and substantially all of the remainder was spent in 1997. In the fourth quarter of 1996, a $165 million pre-tax charge ($105 million after taxes or $.35 per share) was recorded for the write-down of the investment in Scitex, a company that markets digital communication products, and to record the Company's share of a restructuring charge announced by Scitex in November 1996. The remaining balances of these reserves were $542 million at December 31, 1997 and $108 million at December 31, 1996. - --------------------------------------------------------- Note 7 Gains on Sales of West Coast Partnership Interests - --------------------------------------------------------- On March 29, 1996, IP Timberlands Ltd. (IPT) completed the sale of a 98% general partnership interest in a subsidiary partnership that owns approximately 300,000 acres of forestlands located in Oregon and Washington. Included in the net assets of the partnership interest sold were forestlands, roads and $750 million of long-term debt. As a result of this transaction, International Paper recognized in its 1996 first-quarter consolidated results a $592 million pre-tax gain ($336 million after taxes and minority interest expense or $1.25 per share). IPT and International Paper retained nonoperating interests in the partnership. In December 1997, these retained interests were redeemed and a related debt guaranty was released resulting in a pre-tax gain of $170 million ($97 million after taxes and minority interest expense or $.32 per share). - ----------------------------------------- Note 8 Preferred Securities of Subsidiary - ----------------------------------------- In the third quarter of 1995, International Paper Capital Trust (the Trust) issued $450 million of International Paper-obligated mandatorily redeemable preferred securities. The Trust is a wholly owned consolidated subsidiary of International Paper and its sole assets are International Paper 5 1/4% convertible subordinated debentures. The obligations of the Trust related to its preferred securities are fully and unconditionally guaranteed by International Paper. These preferred securities are convertible into International Paper common stock. Preferred securities distributions of $24 million were paid in each of the years 1997 and 1996, and $10 million was paid in 1995. - -------------------------------------------- Note 9 Sale of Limited Partnership Interests - -------------------------------------------- During 1993, the Company contributed assets with a fair market value of approximately $900 million to two newly formed limited partnerships, Georgetown Equipment Leasing Associates, L.P. and Trout Creek Equipment Leasing, L.P. These partnerships are separate and distinct legal entities from the Company and have separate assets, liabilities, business functions and operations. However, for accounting purposes, the Company continues to consolidate these assets, and the minority shareholders' interests are reflected as minority interest in the accompanying financial statements. The purpose of the partnerships is to invest in and manage a portfolio of assets including pulp and paper equipment used at the Georgetown, S.C., and Ticonderoga, N.Y., mills. This equipment is leased to the Company under long-term leases. Partnership assets also include floating rate notes, debentures and cash. During 1993, outside investors purchased a portion of the Company's limited Notes continued 41 partner interests for $132 million and also contributed an additional $33 million to one of these partnerships. At December 31, 1997, the Company held aggregate general and limited partner interests totaling 83.5% in Georgetown Equipment Leasing Associates, L.P. and 81.4% in Trout Creek Equipment Leasing, L.P. The Company also held $439 million and $378 million of borrowings at December 31, 1997 and 1996, respectively, from these partnerships. These funds are being used for general corporate purposes. - -------------------- Note 10 Income Taxes - -------------------- The Company uses the asset and liability method of accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are revalued to reflect new tax rates in the periods rate changes are enacted. The components of earnings before income taxes and minority interest, and the provision for income taxes by taxing jurisdiction were:
In millions 1997 1996 1995 - -------------------------------------------------------------------------------- Earnings (loss) U.S. $ (40) $ 815 $ 1,565 Non-U.S. 56 (13) 463 ======= ======= ======= Earnings before income taxes and minority interest $ 16 $ 802 $ 2,028 ======= ======= =======
In millions 1997 1996 1995 - -------------------------------------------------------------------------------- Current tax provision U.S. federal $ 84 $ 158 $ 380 U.S. state and local 8 1 88 Non-U.S. 36 64 105 ------- ------- ------- 128 223 573 ======= ======= ======= Deferred tax provision (benefit) U.S. federal (49) 146 141 U.S. state and local (42) (3) (6) Non-U.S. 1 (36) 11 ------- ------- ------- (90) 107 146 ------- ------- ------- Income tax provision $ 38 $ 330 $ 719 ======= ======= =======
The Company made income tax payments of $179 million, $286 million and $413 million in 1997, 1996 and 1995, respectively. A reconciliation of income tax expense using the statutory U.S. income tax rate compared with the Company's actual income tax expense follows:
In millions 1997 1996 1995 - -------------------------------------------------------------------------------- Earnings before income taxes and minority interest $ 16 $ 802 $ 2,028 Statutory U.S. income tax rate 35% 35% 35% ------- ------- ------- Tax expense using statutory U.S. income tax rate 6 281 710 State and local income taxes (22) (1) 53 Non-U.S. tax rate differences 34 37 (45) Nondeductible business expenses 52 7 20 Foreign sales corporation benefit (21) (6) (19) Minority interest (23) (37) (32) Goodwill 19 21 8 Net U.S. tax on non-U.S. dividends 11 54 3 Tax credits (7) (23) (5) Other, net (11) (3) 26 ------- ------- ------- Income tax provision $ 38 $ 330 $ 719 ------- ------- ------- Effective income tax rate 238% 41% 35.5% ======= ======= =======
The net deferred income tax liability as of December 31, 1997 and 1996 includes the following components:
In millions 1997 1996 - -------------------------------------------------------------------------------- Current deferred tax asset $ 238 $ 107 Noncurrent deferred tax liability(1) (2,522) (2,576) ------- ------- Total $(2,284) $(2,469) ======= =======
(1) Net of $159 million and $192 million at December 31, 1997 and 1996, respectively, of noncurrent deferred tax assets. The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1997 and 1996 were as follows:
In millions 1997 1996 - -------------------------------------------------------------------------------- Plants, properties and equipment $(2,325) $(2,332) Prepaid pension costs (326) (299) Forestlands (650) (622) Postretirement benefit accruals 169 174 Alternative minimum and other tax credits 217 173 Non-U.S. net operating losses 132 148 Other 499 289 ------- ------- Total $(2,284) $(2,469) ======= =======
The Company had net operating loss carryforwards applicable to non-U.S. subsidiaries of which $182 million expire in years 1998 through 2006 and $243 million can be carried forward indefinitely. Deferred taxes are not provided for temporary differences of approximately $353 million, $361 million and $501 million as of December 31, 1997, 1996 and 1995, respectively, representing earnings of non-U.S. subsidiaries that are intended to be permanently reinvested. If these earnings were remitted, the Company believes that U.S. foreign tax credits would eliminate any significant impact on future income tax provisions. - ---------------------------------------------- Note 11 Commitments and Contingent Liabilities - ---------------------------------------------- The Company leases certain property, machinery and equipment under cancelable and noncancelable lease agreements. At December 31, 1997, total future minimum rental commitments under noncancelable leases were $480 million, due as follows: 42 Notes continued 1998-$131 million, 1999-$106 million, 2000-$83 million, 2001-$57 million, 2002-$43 million and thereafter-$60 million. Rent expense was $210 million, $198 million and $159 million for 1997, 1996 and 1995, respectively. A nationwide class-action lawsuit filed against the Company and Masonite Corporation, a wholly owned subsidiary, has been settled. This lawsuit alleged that hardboard siding manufactured by Masonite fails prematurely, allowing moisture intrusion that in turn causes the failure of the structure underneath the siding. The class consists of all U.S. homeowners having Masonite hardboard siding installed on and incorporated into buildings between 1980 and January 15, 1998. Final approval of the settlement was granted by the Court on January 15, 1998. The settlement provides for monetary compensation to class members meeting the settlement requirements on a claims-made basis. It also provides for the payment of attorneys' fees equaling 15% of the settlement amounts paid to class members, with a nonrefundable advance of $47.5 million plus $2.5 million in costs. While the total cost of the settlement is not presently known with certainty, the Company believes that it will not have a material adverse effect on its consolidated financial position or results of operations. The Company and Masonite have the right to terminate this settlement after seven years from the date of final approval. The Company is also involved in various other inquiries, administrative proceedings and litigation relating to contracts, sales of property, environmental protection, tax, antitrust and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, the Company believes that the outcome of any lawsuit or claim that is pending or threatened, or all of them combined, will not have a material adverse effect on its consolidated financial position or results of operations. - ----------------------------------------------- Note 12 Supplementary Balance Sheet Information - ----------------------------------------------- Inventories by major category were:
In millions at December 31 1997 1996 - -------------------------------------------------------------------------------- Raw materials $ 478 $ 552 Finished pulp, paper and packaging products 1,466 1,400 Finished lumber and panel products 160 215 Operating supplies 387 397 Other 269 276 ------ ------ Inventories $2,760 $2,840 ====== ======
The Company uses the last-in, first-out inventory method to value substantially all of its domestic inventories. Approximately 74% of the Company's total raw materials and finished products inventories were valued using this method. If the first-in, first-out method had been used, it would have increased total inventory balances by approximately $253 million, $228 million and $227 million at December 31, 1997, 1996 and 1995, respectively. Plants, properties and equipment by major classification were:
In millions at December 31 1997 1996 - -------------------------------------------------------------------------------- Pulp, paper and packaging facilities Mills $16,361 $16,386 Packaging plants 1,452 1,620 Wood products facilities 1,869 1,914 Other plants, properties and equipment 2,645 2,811 ------- ------- Gross cost 22,327 22,731 Less: Accumulated depreciation 9,958 9,514 ------- ------- Plants, properties and equipment, net $12,369 $13,217 ======= =======
- -------------------------------- Note 13 Debt and Lines of Credit - -------------------------------- A summary of long-term debt follows:
In millions at December 31 1997 1996 - -------------------------------------------------------------------------------- 8 7/8% to 10.5% notes-due 1998-2012 $ 653 $ 325 8 7/8% to 9.7% notes-due 2000-2004 600 600 8 3/8% to 9 1/2% debentures-due 2015-2024 300 300 6 7/8% to 7 7/8% notes-due 2000-2007 1,223 1,223 6 7/8% to 8 1/8% notes-due 2023-2024 545 545 6 1/8% notes-due 2003 199 199 5 7/8% Swiss franc debentures-due 2001 80 88 5 1/8% debentures-due 2012 84 82 Floating rate notes-due 1999(1) 450 450 Medium-term notes-due 1998-2009(2) 622 664 Environmental and industrial development bonds-due 1998-2021(3),(4) 1,036 981 Commercial paper and bank notes(5) 1,094 727 Other(6) 479 814 ------ ------ Total(7) 7,365 6,998 Less: Current maturities 211 307 ------ ------ Long-term debt $7,154 $6,691 ====== ======
(1) The weighted average interest rate on these notes was 6.2% in 1997 and 1996 and is based on LIBOR. (2) The weighted average interest rate on these notes was 7.4% in 1997 and 7.5% in 1996. (3) The weighted average interest rate on these bonds was 5.8% in 1997 and 1996. (4) Includes $315 million of bonds at December 31, 1997 and $323 million at December 31, 1996, which may be tendered at various dates and/or under certain circumstances. (5) Includes $321 million in 1997 of non-U.S. dollar-denominated borrowings with a weighted average interest rate of 5.9% in 1997. (6) Includes $41 million in 1997 and $60 million in 1996 of French franc borrrowings with a weighted average interest rate of 3.0% in 1997 and 3.2% in 1996, and $179 million in 1997 and $218 million in 1996 of German mark borrowings with a weighted average interest rate of 5.5% in 1997 and 6.7% in 1996. (7) The fair market value was approximately $7.8 billion and $7.3 billion at December 31, 1997 and 1996, respectively. Total maturities of long-term debt over the next five years are 1998-$211 million, 1999-$885 million, 2000-$1.2 billion, 2001-$555 million and 2002-$1.2 billion. At December 31, 1997 and 1996, the Company, including a non-U.S. subsidiary, classified $1.4 billion and $1.1 billion, respectively, of tenderable bonds, commercial paper and bank notes as long-term debt. The Company and this subsidiary have the intent and ability to renew or convert these obligations through 1998 and into future periods. At December 31, 1997, the Company had unused bank lines of credit of approximately $1.7 billion. The lines generally provide for interest at market rates plus a margin based on the Company's current bond rating. The principal line, which is cancelable only if the Company's bond rating drops below investment grade, provides for $750 million of credit through January 2000, and has a facility fee of .10% that is payable quarterly. A non-U.S. subsidiary of the Notes continued 43 Company also has two principal lines of credit that support its commercial paper programs. A $600 million line of credit matures in April 2002 and has a .15% facility fee that is payable quarterly, and a 250 million New Zealand dollar line of credit matures in February 2002 and has a .13% facility fee that is payable quarterly. At December 31, 1997, notes payable classified as current liabilities included $2.0 billion of non-U.S. dollar-denominated debt with a weighted average interest rate of 5.6%. At December 31, 1997, the Company's total outstanding debt included approximately $3.1 billion of borrowings with interest rates that fluctuate based on market conditions and the Company's credit rating. Through a public tender offer in the 1997 third quarter, the Company's wholly owned subsidiary, Federal Paper Board, repurchased $164 million of its 10% debentures due April 15, 2011. The earnings impact of the debt retirement was not significant. In July 1995, 5 3/4% convertible debentures were called by the Company and converted into 5.8 million shares of common stock. - ----------------------------- Note 14 Financial Instruments - ----------------------------- The Company uses financial instruments primarily to hedge its exposure to currency and interest rate risk. To qualify as hedges, financial instruments must reduce the currency or interest rate risk associated with the related underlying items and be designated as hedges by management. Gains or losses from the revaluation of financial instruments that do not qualify for hedge accounting treatment are recognized in earnings. The Company has a policy of financing a portion of its investments in overseas operations with borrowings denominated in the same currency as the investment or by entering into foreign exchange contracts in tandem with U.S. dollar borrowings. These contracts are effective in providing a hedge against fluctuations in currency exchange rates. Gains or losses from the revaluation of these contracts, which are fully offset by gains or losses from the revaluation of the net assets being hedged, are determined monthly based on published currency exchange rates and are recorded as translation adjustments in common shareholders' equity. Upon liquidation of the net assets being hedged or early termination of the foreign exchange contracts, the gains or losses from the revaluation of foreign exchange contracts would be included in earnings. Amounts payable to or due from the counterparties to the foreign exchange contracts are included in accrued liabilities or accounts receivable as applicable. Non-U.S. dollar-denominated debt totaling $2.7 billion was outstanding at December 31, 1997. Also outstanding were foreign exchange contracts totaling $1.2 billion, all having maturities of less than 360 days, as follows: New Zealand dollars, $687 million; Australian dollars, $203 million; Irish punts, $128 million; Italian lira, $48 million; Swiss francs, $76 million; and British pounds, $36 million. In addition, a non-U.S. subsidiary of the Company had outstanding foreign exchange contracts totaling $378 million that were denominated in U.S. dollars. The average amount of outstanding contracts during 1997 and 1996 was $1.7 billion and $1.9 billion, respectively. The Company also utilizes foreign exchange contracts to hedge certain transactions that are denominated in foreign currencies, primarily export sales and equipment purchased from nonresident vendors. These contracts serve to protect the Company from currency fluctuations between the transaction and settlement dates. Gains and losses from the revaluation of these contracts, based on published currency exchange rates, along with offsetting gains and losses resulting from the revaluation of the underlying transactions, are recognized in earnings or deferred and recognized in the basis of the underlying transaction when completed. Any gains or losses arising from the cancellation of the underlying transactions or early termination of the foreign currency contracts would be included in earnings. At December 31, 1997, foreign exchange contracts totaling $407 million, all having maturities of less than 12 months, were outstanding as follows: Belgian francs, $112 million; Australian dollars, $107 million; Dutch guilders $68 million; French francs, $42 million; British pounds, $22 million; and contracts totaling $56 million in 12 different currencies. Non-U.S. subsidiaries of the Company also had contracts outstanding of $287 million that were denominated in U.S. dollars. The average amount of outstanding contracts during 1997 and 1996 was $726 million and $583 million, respectively. The Company uses cross-currency and interest rate swap agreements to manage the composition of its fixed and floating rate debt portfolio. Amounts to be paid or received as interest under these agreements are recognized over the life of the swap agreements as adjustments to interest expense. Gains or losses from the revaluation of cross-currency swap agreements that qualify as hedges of investments are recorded as translation adjustments in common shareholders' equity. Gains or losses from the revaluation of cross-currency swap agreements that do not qualify as hedges of investments are included in earnings. The related amounts payable to or due from the counterparties to the agreements are included in accrued liabilities or accounts receivable as applicable. If swap agreements are terminated early, the resulting gain or loss would be deferred and amortized over the remaining life of the related debt. During 1996, the Company entered into interest rate swap agreements maturing in 1998 and 1999 under which it will receive interest at floating rates and pay interest at fixed rates based on a principal amount of $575 million. Also, in 1994, the Company entered into interest rate swap agreements involving the exchange of fixed or floating rate interest payments, without changing the underlying principal amounts, related to $600 million and $400 million of long-term debt having maturities ranging from 10 to 30 years. 44 Notes Continued A non-U.S. subsidiary of the Company also uses cross-currency and interest rate swap agreements to manage the composition of its fixed and floating rate debt. Under a cross-currency agreement entered into in 1996 and maturing in 2002, the subsidiary will receive $150 million and will pay 203 million Australian dollars. Interest is receivable at 7 5/8% and payable at floating rates. During 1997, the non-U.S. subsidiary entered into 12 interest rate swap agreements totaling 145 million New Zealand dollars and 150 million Australian dollars under which it will receive interest at floating rates and pay interest at fixed rates. These swap agreements mature from 1998 through 2002. During 1996, the subsidiary entered into an interest rate swap agreement maturing in 1999 under which it will receive interest at floating rates and pay interest at fixed rates based on a principal amount of 65 million Australian dollars. Also outstanding at December 31, 1997 was an interest rate swap agreement maturing in 1998 under which the subsidiary will receive interest at floating rates and pay interest at fixed rates based on a principal amount of 100 million Australian dollars, and two agreements maturing in 2004 under which the subsidiary will receive interest at fixed rates and pay interest at floating rates based on a combined principal amount of $250 million. The impact on earnings and the Company's net liability under these agreements were not significant. The Company does not hold or issue financial instruments for trading purposes. The counterparties to the Company's interest rate swap agreements and foreign exchange contracts consist of a number of major international financial institutions. The Company continually monitors its positions with and the credit quality of these financial institutions and does not expect nonperformance by the counterparties. - --------------------- Note 15 Capital Stock - --------------------- The authorized capital stock of the Company at December 31, 1997 and 1996 consisted of 400,000,000 shares of common stock, $1 par value; 400,000 shares of cumulative $4 nonredeemable preferred stock, without par value (stated value of $100 per share); and 8,750,000 shares of serial preferred stock, $1 par value. The serial preferred stock is issuable in one or more series by the Board of Directors without further shareholder action. In the third quarter of 1995, the Company declared a two-for-one common stock split that was distributed to shareholders of record as of August 18, 1995. All share amounts have been retroactively adjusted for the effect of the common stock split. In addition, the quarterly dividend was raised $.04 to $.25 per common share on a split-adjusted basis. The Company has stock rights under a Shareholder Rights Plan whereby each share of common stock has one right. Each right entitles shareholders to purchase one common stock share at an exercise price of $77.50. The rights will become exercisable 10 days after anyone acquires or tenders for 20% or more of the Company's common stock. If, thereafter, anyone acquires 30% or more of the common stock, or a 20% or more owner combines with the Company in a reverse merger in which the Company survives and its common stock is not changed, each right will entitle its holder to purchase Company common stock with a value of twice the $77.50 exercise price. If, following an acquisition of 20% or more of the common stock, the Company is acquired in a merger or sells 50% of its assets or earnings power, each right will entitle its holder to purchase stock of the acquiring company with a value of twice the $77.50 exercise price. - ------------------------ Note 16 Retirement Plans - ------------------------ The Company maintains pension plans that provide retirement benefits to substantially all employees. Employees generally are eligible to participate in the plans upon completion of one year of service and attainment of age 21. The plans provide defined benefits based on years of credited service and either final average earnings (salaried employees), hourly job rates or specified benefit rates (hourly and union employees). U.S. Defined Benefit Plans The Company makes contributions that are sufficient to fully fund its actuarially determined costs, generally equal to the minimum amounts required by ERISA. Net periodic pension income for the Company's qualified and nonqualified defined benefit plans comprised the following:
In millions 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost-benefits earned during the period $ (62) $ (61) $ (39) Interest cost on projected benefit obligation (205) (192) (170) Actual return on plan assets 542 372 477 Net amortization and deferrals (200) (47) (193) ----- ----- ----- Net periodic pension income $ 75 $ 72 $ 75 ===== ===== =====
The actuarial assumptions used in determining net periodic pension income for the years presented were:
1997 1996 1995 - -------------------------------------------------------------------------------- Discount rate 7.5% 7.25% 8.75% Expected long-term return on plan assets 10.0% 10.0% 10.0% Weighted average rate of increase in compensation levels 4.5% 4.25% 4.75%
The discount rates and the rates of increase in future compensation levels used to determine the projected benefit obligations at December 31, 1997 were 7.25% and 4.5%, respectively, and at December 31, 1996 were 7.5% and 4.5%, respectively. The following table presents the funded status of the Company's U.S. pension plans and the amounts reflected in the accompanying consolidated balance sheet: Notes continued 45
In millions at December 31 1997 1996 - -------------------------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefits $ 2,594 $ 2,420 ------- ------- Accumulated benefit obligation $ 2,716 $ 2,558 ------- ------- Projected benefit obligation(1) $ 2,945 $ 2,745 Plan assets at fair value 3,729 3,355 ------- ------- Plan assets in excess of projected benefit obligation 784 610 Unrecognized net (gain) loss (42) 92 Balance of unrecorded transition asset(2) (28) (55) Other 60 42 ------- ------- Prepaid pension cost $ 774 $ 689 ======= =======
(1) Includes nonqualified unfunded plans with projected benefit obligations of approximately $77 million and $76 million at December 31, 1997 and 1996, respectively. (2) Amortization of the transition asset, which increases annual net periodic pension income, will be completed in 1999. Plan assets are held primarily in master trust accounts and comprise the following:
In millions at December 31 1997 1996 - -------------------------------------------------------------------------------- Cash reserves $ 266 $ 44 Fixed income securities 1,002 1,159 Diversified equities 1,675 1,449 International Paper common stock 449 422 Real estate 156 117 Other 181 164 ------ ------ Total plan assets $3,729 $3,355 ====== ======
Non-U.S. Defined Benefit Plans Generally, the Company's non-U.S. pension plans are funded using the projected benefit as a target, except in certain countries where funding of benefit plans is not required. Net periodic pension expense for the Company's non-U.S. pension plans was immaterial for 1997, 1996 and 1995. The following table presents the funded status of the Company's non-U.S. pension plans and the amounts reflected in the accompanying consolidated balance sheet. Plan assets are composed principally of common stocks and fixed income securities.
In millions at December 31 1997(2) 1996 - -------------------------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefits $ 138 $ 367 ----- ----- Accumulated benefit obligation $ 149 $ 382 ----- ----- Projected benefit obligation(1) $ 168 $ 473 Plan assets at fair value 124 511 ----- ----- Plan assets in excess of projected benefit obligation (44) 38 Unrecognized net (gain) loss 6 (12) Balance of unrecorded transition asset (1) (34) Other 2 4 ----- ----- Pension liability $ (37) $ (4) ===== =====
(1) The weighted average discount rate and the weighted average rate of compensation increase used to measure the projected benefit obligation were 6.67% (7.08% in 1996) and 4.45% (4.99% in 1996), respectively. (2) Benefit obligations and plan assets declined in 1997 and the resulting pension liability increased primarily due to the sale of the imaging businesses whose U.K. plans were fully funded. Other Plans The Company sponsors several defined contribution plans to provide substantially all U.S. salaried and certain hourly employees of the Company an opportunity to accumulate personal funds for their retirement. Contributions may be made on a before-tax basis to substantially all of these plans. As determined by the provisions of each plan, the Company matches the employees' basic voluntary contributions. Company matching contributions to the plans were approximately $46 million, $42 million and $38 million for the plan years ending in 1997, 1996 and 1995, respectively. The net assets of these plans approximated $2.0 billion as of the 1997 plan year-end. - ------------------------------- Note 17 Postretirement Benefits - ------------------------------- The Company provides certain retiree health care and life insurance benefits covering a majority of U.S. salaried and certain hourly employees. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. A plan amendment in 1992 limits the maximum annual Company contribution for health care benefits for retirees after January 1, 1992 based on age at retirement and years of service after age 50. Amortization of this plan amendment, which reduces annual net postretirement benefit cost, will be completed in 1999. The Company does not prefund these benefits and has the right to modify or terminate certain of these plans in the future. The components of postretirement benefit expense in 1997, 1996 and 1995 were as follows:
In millions 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 6 $ 7 $ 6 Interest cost on accumulated postretirement benefit obligation 24 25 26 Net amortization of plan amendments (20) (17) (18) ---- ---- ---- Net postretirement benefit cost $ 10 $ 15 $ 14 ==== ==== ====
The accumulated postretirement benefit obligation, included in other liabilities in the accompanying consolidated balance sheet, comprises the following components:
In millions at December 31 1997 1996 - -------------------------------------------------------------------------------- Retirees $ 264 $ 251 Fully eligible active plan participants 20 22 Other active plan participants 60 85 ----- ----- Total accumulated postretirement benefit obligation 344 358 Unrecognized net loss (38) (30) Unrecognized effect of plan amendments 61 58 ----- ----- Accrued postretirement benefit obligation $ 367 $ 386 ===== =====
Future benefit costs were estimated assuming medical costs would increase at a 8.75% annual rate, decreasing to a 5% annual growth rate ratably over the next six years and then remaining at a 5% annual growth rate thereafter. A 1% increase in this annual trend rate would have increased the accumulated postretirement benefit obligation at December 31, 1997 by $19 million, with an immaterial effect on 1997 postretire- 46 Notes continued ment benefit cost. The weighted average discount rate used to estimate the accumulated postretirement benefit obligation at December 31, 1997 was 7.25% compared with 7.5% at December 31, 1996. - ----------------------- Note 18 Incentive Plans - ----------------------- The Company has a Long-Term Incentive Compensation Plan that includes a Stock Option Plan, a Restricted Performance Share Plan and an Executive Continuity Award Plan, administered by a committee of nonemployee members of the Board of Directors who are not eligible for awards. The plan allows stock appreciation rights to be awarded, although none were awarded in 1997, 1996 or 1995. The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which was adopted in 1996. Accordingly, no compensation cost has been recognized for the stock option plan. Had compensation cost for the Company's stock-based compensation plans been determined consistent with the provisions of SFAS No. 123, the Company's net earnings, earnings per common share and earnings per common share-assuming dilution would have been reduced to the pro forma amounts indicated below:
In millions, except per share amounts 1997 1996 1995 - -------------------------------------------------------------------------------- Net Earnings (Loss) As reported $ (151) $ 303 $ 1,153 Pro forma (175) 291 1,143 Earnings (Loss) Per Common Share As reported $ (.50) $ 1.04 $ 4.50 Pro forma (.58) 1.00 4.46 Earnings (Loss) Per Common Share-Assuming Dilution As reported $ (.50) $ 1.04 $ 4.41 Pro forma (.58) 1.00 4.37
The effect on 1997, 1996 and 1995 pro forma net earnings, earnings per common share and earnings per common share-assuming dilution of expensing the estimated fair value of stock options is not necessarily representative of the effect on reported earnings for future years due to the vesting period of stock options and the potential for issuance of additional stock options in future years. Stock Option Plan Initial stock options are normally granted in January of each year. The option price is the market price of the stock at the date of grant. Options are immediately exercisable under the plan; however, the underlying shares cannot be sold and carry profit forfeiture provisions during the initial four years following grant. Upon exercise of an option, a replacement option may be granted with the exercise price equal to the current market price and with a term extending to the expiration date of the original option. For purposes of the pro forma disclosure above, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively:
1997 1996 1995 - -------------------------------------------------------------------------------- Initial Options(1) Risk-Free Interest Rate 6.32% 5.45% 7.80% Price Volatility 29.50% 22.18% 22.15% Dividend Yield 2.50% 2.72% 2.44% Expected Term in Years 4.37 4.74 4.74 Replacement Options(2) Risk-Free Interest Rate 6.31% 6.38% 5.91% Price Volatility 29.50% 22.18% 22.15% Dividend Yield 2.31% 2.68% 2.34% Expected Term in Years 2.22 2.97 2.97
(1) The average fair values of initial option grants during 1997, 1996 and 1995 were $11.59, $8.37 and $10.33, respectively. (2) The average fair values of replacement option grants during 1997, 1996 and 1995 were $9.04, $6.82 and $7.23, respectively. A summary of the status of the Stock Option Plan as of December 31, 1997, 1996 and 1995 and changes during the years ended on those dates is presented below:
Weighted Average Options(1) Exercise Price - -------------------------------------------------------------------------------- Outstanding at 1/1/95 8,396,868 $ 32.41 Granted 3,196,311 40.03 Exercised (2,069,022) 30.09 Forfeited (262,044) 35.64 ---------- ------- Outstanding at 12/31/95 9,262,113 35.44 Granted(2) 4,234,695 35.42 Exercised (2,091,942) 30.39 Forfeited (460,321) 36.89 ---------- ------- Outstanding at 12/31/96 10,944,545 36.53 Granted 5,478,674 45.82 Exercised (4,196,183) 35.42 Forfeited (683,248) 40.66 ---------- ------- Outstanding at 12/31/97 11,543,788 41.09 ==========
(1) This table does not include Executive Continuity Award tandem options described below. No fair value is assigned to these options under SFAS No. 123. The tandem restricted shares accompanying these options are expensed over their vesting periods. (2) At acquisition, outstanding Federal Paper Board options that were not paid in cash were converted to 797,776 options of International Paper with a fair value of $20.58 per option. The fair value for all acquired options was included in the purchase price that has been allocated to acquired assets and liabilities. The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding and Exercisable --------------------------------------------- Weighted Weighted Number Average Average Range of Exercise Outstanding at Remaining Exercise Prices 12/31/97 Life Price - ------------------------------------------------------------------------------ $14.36-$36.50 1,266,827 2.90 $ 30.17 $36.62-$38.88 2,839,300 5.80 $ 37.87 $38.93-$41.75 2,671,400 7.00 $ 39.91 $41.87-$43.13 2,610,737 7.20 $ 42.79 $43.18-$59.94 2,155,524 3.10 $ 51.15
Restricted Performance Share Plan Under the Restricted Performance Share Plan, contingent awards of Company common stock are granted by the committee. Awards are earned if the Company's financial performance over a five-year Notes continued 47 period meets or exceeds that of other forest products companies using standards determined by the committee. The following summarizes the activity of the Restricted Performance Share Plan for the three years ending December 31, 1997:
Shares - -------------------------------------------------------------------------------- Outstanding at 1/1/95 690,012 Granted 360,701 Issued (211,648) Forfeited (28,101) --------- Outstanding at 12/31/95 810,964 Granted 424,264 Issued (190,660) Forfeited (85,178) --------- Outstanding at 12/31/96 959,390 Granted 277,815 Issued (87,451) Forfeited (40,352) --------- Outstanding at 12/31/97 1,109,402 =========
Executive Continuity Award Plan The Executive Continuity Award Plan provides for the granting of tandem awards of restricted stock and/or nonqualified stock options to key executives. Grants are restricted and awards conditioned on attainment of specified age and years of service requirements. Exercise of a tandem stock option results in the cancellation of the related restricted shares. The following summarizes the activity of the Executive Continuity Award Plan for the three years ending December 31, 1997:
Shares - -------------------------------------------------------------------------------- Outstanding at 1/1/95 477,000 Granted 28,000 Forfeited(1) (26,000) ------- Outstanding at 12/31/95 479,000 Granted 136,650 Forfeited(1) (132,000) ------- Outstanding at 12/31/96 483,650 Granted 106,108 Forfeited (9,500) ------- Outstanding at 12/31/97 580,258 =======
(1) Includes restricted shares canceled when tandem stock options were exercised. In 1996 and 1995, 400,000 and 120,000 tandem stock options were exercised, respectively. At December 31, 1997 and 1996, a total of 4.8 million and 7.9 million shares, respectively, were available for grant under the Long-Term Incentive Compensation Plan. The compensation cost that has been charged to earnings for the performance-based plans was $11 million, $13 million and $14 million for 1997, 1996 and 1995, respectively. - --------------------------------------- Note 19 Pro Forma Financial Information - --------------------------------------- The following unaudited pro forma financial information for the year ended December 31, 1996 reflects the combined results of the continuing operations of the Company and the 1996 acquisitions listed in Note 5. The 1997 amounts presented below are actual results for the year ended December 31, 1997. These amounts include all of the 1996 acquisitions for the entire year and are presented for comparative purposes only. The 1996 pro forma information is presented as if the transactions occurred as of the beginning of the year. The pro forma adjustments are based on available information, preliminary purchase price allocations and certain assumptions that the Company believes are reasonable. The 1996 pro forma information does not purport to represent the Company's actual results of operations if the transactions described above would have occurred at the beginning of the year nor is it indicative of the actual results since acquisition. In addition, the information may not be indicative of future results.
In millions, except per share amounts, (Unaudited) for the years ended December 31 1997 1996 - -------------------------------------------------------------------------------- Net Sales $ 20,096 $ 20,500 Net Earnings (Loss) (151) 289 Earnings (Loss) Per Common Share (.50) .96 Earnings (Loss) Per Common Share- Assuming Dilution (.50) .96
- ------------------------- Note 20 Subsequent Events - ------------------------- In February 1998, International Paper announced that it would merge with Weston Paper and Manufacturing Company through an exchange of shares valued at $232 million. The transaction, which is expected to be finalized during the second quarter, is subject to the completion of due diligence, regulatory approvals and approval by Weston shareholders. Weston, based in Terre Haute, Ind., operates one paper mill that produces corrugating medium and 11 corrugated container plants. Also in February 1998, the Company announced that it had reached an agreement to sell the printing and graphic arts businesses of its imaging products division. 48 Eleven-Year Financial Summary Eleven-Year Financial Summary 49
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net sales $ 20,096 $ 20,143 $ 19,797 $ 14,966 Costs and expenses, excluding interest 19,760 19,403 17,276 13,902 Earnings before income taxes, minority interest, extraordinary item and cumulative effect of accounting changes 16(1) 802(2) 2,028 715(3) Minority interest expense, net of taxes 129(1) 169(2) 156 47 Extraordinary item Cumulative effect of accounting changes (75) Net earnings (loss) (151)(1) 303(2) 1,153 357(3) Earnings (loss) applicable to common shares (151)(1) 303(2) 1,153 357(3) -------- -------- -------- -------- FINANCIAL POSITION Working capital $ 1,065 $ 104 $ 1,010 $ 796 Plants, properties and equipment, net 12,369 13,217 10,997 9,139 Forestlands 2,969 3,342 2,803 802 Total assets 26,754 28,252 23,977 17,836 Long-term debt 7,154 6,691 5,946 4,464 Common shareholders' equity 8,710 9,344 7,797 6,514 -------- -------- -------- -------- PER SHARE OF COMMON STOCK - ASSUMING NO DILUTION(8) Earnings (loss) before extraordinary item and cumulative effect of accounting changes $ (.50)(1) $ 1.04(2) $ 4.50 $ 1.73(3) Extraordinary item Cumulative effect of accounting changes (.30) Earnings (loss) (.50)(1) 1.04(2) 4.50 1.43(3) Cash dividends 1.00 1.00 .92 .84 Common shareholders' equity 28.82 31.13 29.87 25.87 -------- -------- -------- -------- COMMON STOCK PRICES(8) High 61 44 5/8 45 3/4 40 1/4 Low 38 5/8 35 5/8 34 1/8 30 3/8 Year-end 43 1/8 40 1/2 37 7/8 37 3/4 -------- -------- -------- -------- FINANCIAL RATIOS Current ratio 1.2 1.0 1.2 1.2 Total debt to capital ratio 38.9 38.9 38.5 41.2 Return on equity (1.7)(1),(9) 3.4(2),(9) 16.1 5.6(3) Return on investment 1.2(1),(9) 3.3(2),(9) 8.4 4.2(3) -------- -------- -------- -------- CAPITAL EXPENDITURES $ 1,111 $ 1,394 $ 1,518 $ 1,114 -------- -------- -------- -------- NUMBER OF EMPLOYEES 82,000 87,000 81,500 70,000 ======== ======== ======== ========
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------------------ RESULTS OF OPERATIONS Net sales $ 13,685 $ 13,598 $ 12,703 $ 12,960 Costs and expenses, excluding interest 12,837 13,125(5) 11,695(6) 11,695(7) Earnings before income taxes, minority interest, extraordinary item and cumulative effect of accounting changes 538 226(5) 693(6) 988(7) Minority interest expense, net of taxes 36 15 42 33 Extraordinary item (6) Cumulative effect of accounting changes (50) (215) Net earnings (loss) 289(4) 86(5) 184(6) 569(7) Earnings (loss) applicable to common shares 289(4) 86(5) 184(6) 569(7) -------- -------- -------- -------- FINANCIAL POSITION Working capital $ 472 $ (165) $ 404 $ 784 Plants, properties and equipment, net 8,872 8,884 7,848 7,287 Forestlands 786 759 743 751 Total assets 16,631 16,516 14,941 13,669 Long-term debt 3,601 3,096 3,351 3,096 Common shareholders' equity 6,225 6,189 5,739 5,632 -------- -------- -------- -------- PER SHARE OF COMMON STOCK - ASSUMING NO DILUTION(8) Earnings (loss) before extraordinary item and cumulative effect of accounting changes $ 1.17(4) $ .58(5) $ 1.80(6) $ 2.61(7) Extraordinary item (.02) Cumulative effect of accounting changes (.21) (.97) Earnings (loss) 1.17(4) .35(5) .83(6) 2.61(7) Cash dividends .84 .84 .84 .84 Common shareholders' equity 25.12 25.23 25.52 25.67 -------- -------- -------- -------- COMMON STOCK PRICES(8) High 35 39 1/4 39 1/8 29 7/8 Low 28 3/8 29 1/4 25 1/4 21 3/8 Year-end 33 7/8 33 3/8 35 3/8 26 3/4 -------- -------- -------- -------- FINANCIAL RATIOS Current ratio 1.1 .96 1.1 1.2 Total debt to capital ratio 38.5 38.0 39.1 36.1 Return on equity 4.7(4) 1.4(5) 3.2(6) 10.5(7) Return on investment 3.6(4) 2.0(5) 3.5(6) 7.2(7) -------- -------- -------- -------- CAPITAL EXPENDITURES $ 954 $ 1,368 $ 1,197 $ 1,267 -------- -------- -------- -------- NUMBER OF EMPLOYEES 72,500 73,000 70,500 69,000 ======== ======== ======== ========
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES 1989 1988 1987 - ------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net sales $ 11,378 $ 9,587 $ 7,800 Costs and expenses, excluding interest 9,739 8,199 6,930 Earnings before income taxes, minority interest, extraordinary item and cumulative effect of accounting changes 1,434 1,223 703 Minority interest expense, net of taxes 26 22 21 Extraordinary item Cumulative effect of accounting changes Net earnings (loss) 864 754 407 Earnings (loss) applicable to common shares 845 733 387 -------- -------- -------- FINANCIAL POSITION Working capital $ 366 $ 781 $ 657 Plants, properties and equipment, net 6,238 5,456 5,125 Forestlands 764 772 780 Total assets 11,582 9,462 8,710 Long-term debt 2,324 1,853 1,937 Common shareholders' equity 5,147 4,557 4,052 -------- -------- -------- PER SHARE OF COMMON STOCK - ASSUMING NO DILUTION(8) Earnings (loss) before extraordinary item and cumulative effect of accounting changes $ 3.86 $ 3.28 $ 1.84 Extraordinary item Cumulative effect of accounting changes Earnings (loss) 3.86 3.28 1.84 Cash dividends .77 .64 .60 Common shareholders' equity 23.67 20.57 18.18 -------- -------- -------- COMMON STOCK PRICES(8) High 29 3/8 24 3/4 28 7/8 Low 22 5/8 18 1/4 13 1/2 Year-end 28 1/4 23 1/4 21 1/8 -------- -------- -------- FINANCIAL RATIOS Current ratio 1.1 1.5 1.4 Total debt to capital ratio 33.9 25.8 31.6 Return on equity 17.8 17.0 10.0 Return on investment 11.3 11.0 7.2 -------- -------- -------- CAPITAL EXPENDITURES $ 887 $ 645 $ 603 -------- -------- -------- NUMBER OF EMPLOYEES 63,500 55,500 45,500 ======== ======== ========
FINANCIAL GLOSSARY Current ratio- current assets divided by current liabilities. Total debt to capital ratio- long-term debt plus notes payable and current maturities of long-term debt divided by long-term debt, notes payable and current maturities of long-term debt, deferred income taxes, minority interest, other liabilities, preferred securities and total common shareholders' equity. Return on equity- net earnings divided by average common shareholders' equity (computed monthly). Return on investment- net earnings plus after-tax interest expense and minority interest expense divided by an average of total assets minus accounts payable and accrued liabilities. (1) Includes a pre-tax business improvement charge of $535 million ($385 million after taxes or $1.28 per share), a $150 million pre-tax provision for legal reserve ($93 million after taxes or $.31 per share), a pre-tax charge of $125 million ($80 million after taxes or $.26 per share) for anticipated losses associated with the sale of the imaging businesses, and a pre-tax gain of $170 million ($97 million after taxes and minority interest expense or $.32 per share) from the redemption of certain retained West Coast partnership interests and the release of a related debt guaranty. (2) Includes a pre-tax restructuring and asset impairment charge of $515 million ($362 million after taxes or $1.35 per share), a $592 million pre-tax gain on the sale of a West Coast partnership interest ($336 million after taxes and minority interest expense or $1.25 per share) and a $165 million pre-tax charge ($105 million after taxes or $.35 per share) for the write-down of the investment in Scitex. (3) Includes $17 million ($10 million after taxes or $.04 per share) of additional earnings related to the change in accounting for start-up costs. (4) Includes $25 million ($.10 per share) of additional income tax expense to revalue deferred tax balances to reflect the increase in the U.S. statutory federal income tax rate. (5) Includes restructuring and other charges totaling $398 million ($263 million after taxes or $1.08 per share). (6) Includes a $60 million pre-tax restructuring charge ($37 million after taxes or $.17 per share) and additional expenses related to the adoption of SFAS No. 106 of $25 million ($16 million after taxes or $.07 per share). (7) Includes a $212 million pre-tax restructuring charge ($137 million after taxes or $.63 per share). (8) Per share data and common stock prices have been adjusted to reflect two-for-one stock splits in September 1995 and May 1987. All per share amounts are computed before the effects of dilutive securities. (9) Return on equity was 3.3% and return on investment was 3.0% in 1997 before special items. Return on equity was 4.8% and return on investment was 3.6% in 1996 before special items. 50 Interim Financial Results (unaudited)
Quarter -------------------------------------------------- IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES First Second Third Fourth Year - ------------------------------------------------------------------------------------------------------------------------- 1997 Net Sales $ 4,862 $ 5,034 $ 5,119 $ 5,081 $ 20,096 Gross Margin(1) 1,226 1,248 1,328 1,321 5,123 Earnings (Loss) Before Income Taxes and Minority Interest 108 (557)(2) 208 257(3) 16(2),(3) Net Earnings (Loss) 34 (419)(2) 102 132(3) (151)(2),(3) Per Share of Common Stock Earnings (Loss) $ .11 $ (1.39)(2) $ .34 $ .44(3) $ (.50)(2),(3) Earnings (Loss)-Assuming Dilution .11 (1.39)(2) .34 .44(3) (.50)(2),(3) Dividends .25 .25 .25 .25 1.00 Common Stock Prices High 43 5/8 51 7/8 61 58 1/2 61 Low 38 3/4 38 5/8 48 1/4 39 7/8 38 5/8 1996 Net Sales $ 4,798 $ 5,093 $ 5,108 $ 5,144 $ 20,143 Gross Margin(1) 1,242 1,322 1,348 1,330 5,242 Earnings Before Income Taxes and Minority Interest 336(4) 217 227 22(5) 802(4),(5) Net Earnings (Loss) 98(4) 99 111 (5)(5) 303(4),(5) Per Share of Common Stock Earnings (Loss) $ .36(4) $ .33 $ .37 $ (.02)(5) $ 1.04(4),(5) Earnings (Loss)-Assuming Dilution .36(4) .33 .37 (.02)(5) 1.04(4),(5) Dividends .25 .25 .25 .25 1.00 Common Stock Prices High 41 1/2 43 3/8 44 5/8 44 44 5/8 Low 35 5/8 36 7/8 36 3/4 38 3/4 35 5/8
(1) Gross margin represents net sales less cost of products sold. (2) Includes a pre-tax business improvement charge of $535 million ($385 million after taxes or $1.28 per share) and a $150 million pre-tax provision for legal reserve ($93 million after taxes or $0.31 per share). (3) Includes a pre-tax charge of $125 million ($80 million after taxes or $.26 per share) for anticipated losses on the sale of the imaging businesses and a pre-tax gain of $170 million ($97 million after taxes and minority interest expense or $.32 per share) from the redemption of certain retained West Coast partnership interests and the release of a related debt guaranty. (4) Includes a pre-tax restructuring and asset impairment charge of $515 million ($362 million after taxes or $1.35 per share) and a $592 million pre-tax gain on the sale of a West Coast partnership interest ($336 million after taxes and minority interest expense or $1.25 per share). (5) Includes a $165 million pre-tax charge ($105 million after taxes or $0.35 per share) for the write-down of the investment in Scitex. Directors and Senior Management 51 - --------- Directors - --------- PETER I. BIJUR 14 Chairman and Chief Executive Officer Texaco WILLARD C. BUTCHER 1345* Retired Chairman and Chief Executive Officer The Chase Manhattan Bank, N.A. JOHN T. DILLON 2*36 Chairman and Chief Executive Officer International Paper ROBERT J. EATON 4*7 Chairman and Chief Executive Officer Chrysler Corporation JOHN A. GEORGES 236 Retired Chairman and Chief Executive Officer International Paper THOMAS C. GRAHAM 247* Retired Chairman of the Board AKSteel Corporation JOHN R. KENNEDY 17 Retired Chairman and Chief Executive Officer Federal Paper Board DONALD F. MCHENRY 356* University Research Professor of Diplomacy and International Affairs Georgetown University PATRICK F. NOONAN 167 Chairman and Chief Executive Officer The Conservation Fund JANE C. PFEIFFER 1*56 Management Consultant EDMUND T. PRATT, JR. 23*45 Retired Chairman and Chief Executive Officer Pfizer Inc. CHARLES R. SHOEMATE 45 Chairman, President and Chief Executive Officer Best Foods, Inc. C. WESLEY SMITH 67 Executive Vice President Printing Papers International Paper (1) Audit Committee (2) Executive Committee (3) Finance Committee (4) Management Development and Compensation Committee (5) Nominating Committee (6) Public and Legal Affairs Committee (7) Environment, Health and Technology Committee * Committee Chairperson - ----------------- Senior Management - ----------------- JOHN T. DILLON Chairman and Chief Executive Officer W. MICHAEL AMICK Executive Vice President Forest Products and Industrial Packaging JAMES P. MELICAN Executive Vice President Legal and External Affairs DAVID W. OSKIN Executive Vice President Consumer Packaging and Industrial Papers C. WESLEY SMITH Executive Vice President Printing Papers MILAN J. TURK Executive Vice President Specialty Businesses ROBERT M. AMEN President International Paper Europe ROBERT M. BYRNES Senior Vice President Human Resources THOMAS E. COSTELLO Senior Vice President Distribution Business DOUGLAS B. FOX Senior Vice President Marketing MARIANNE M. PARRS Senior Vice President and Chief Financial Officer RICHARD B. PHILLIPS Senior Vice President Technology 52 Directors and Senior Management - ----------------------------- Senior Management (continued) - ----------------------------- DAVID A. BAILEY President International Paper Poland E. WILLIAM BOEHMLER Vice President and Treasurer H. WAYNE BRAFFORD Vice President Converting and Specialty Papers JAMES A. CEDERNA Vice President Arizona Chemical WILLIAM P. CRAWFORD Vice President Logistics HANS PETER DAROCZI Vice President International Container C. CATO EALY Vice President Business Development and Planning JOHN V. FLYNN Vice President Human Resources HARTWIG GEGINAT Chairman and Chief Executive Officer Zanders THOMAS E. GESTRICH Vice President Bleached Board PHILLIP S. GIARAMITA Vice President Corporate Communications MARK O. GODBOLD Auditor JAMES W. GUEDRY Vice President and Corporate Secretary EVANS A. HEATH Vice President Liquid Packaging PAUL HERBERT Chief Operating Officer Zanders ROBERT M. HUNKELER Vice President Investments ROBERT L. JANDA Vice President Manufacturing Printing Papers THOMAS C. JORLING Vice President Environmental Affairs JEFFREY F. KASS Vice President Strategic Planning HARRY G. LAMBROUSSIS President International Paper Latin/South America PETER F. LEE Vice President Research and Development NEWLAND A. LESKO Vice President Coated and Bristol Papers ANDREW R. LESSIN Vice President and Controller WILLIAM B. LYTTON Vice President and General Counsel GERALD C. MARTERER President International Paper Asia ARTHUR W. MCGOWEN Vice President Wood Products JEAN-PHILIPPE MONTEL Chairman and Chief Executive Officer Aussedat Rey KARL W. MOORE Vice President and Chief Information Officer GEORGE A. O'BRIEN President, IPForest Resources Company JOSEPH R. RIMSTIDT Vice President Quality Management CAROL L. ROBERTS Vice President People Development R. MICHAEL ROSS Vice President Container WILLIAM H. SLOWIKOWSKI Vice President Imaging Products BENNIE R. SMITH Vice President Strategic Planning Industrial Packaging RICHARD M. SMITH Vice President Printing and Office Papers MANCO L. SNAPP President Masonite W. DENNIS THOMAS Vice President Public Affairs TOBIN J. TREICHEL Vice President Tax CAROL S. TUTUNDGY Vice President Investor Relations List of Employee Teams 53 LIST OF EMPLOYEE TEAMS PAGE 11: PRODUCTIVITY TEAM AUSSEDAT REY SAILLAT, FRANCE Robert Ringuet Jerome Mandaglio Patrick Genin Michele Demoulinger Philippe Demon PAGE 13: POULTRY TEAM TYSON FOODS SPRINGDALE, ARKANSAS Mike Roetzel* Steve Morris* Don Washington Robert Cole* John Rodgers* * Employee of Tyson Foods PAGE 13: SERVICE TEAM ARIZONA CHEMICAL PANAMA CITY, FLORIDA Richard Craft Betty Johnson Francis Bolin Harold Brookins PAGE 15: ROI TEAM FOLDING CARTON RICHMOND, VIRGINIA Antoine Harris Chris Mulligan Billy Cheatham Kim Inscoe Joe Brown PAGE 15: ROI TEAM MASONITE UKIAH, CALIFORNIA James Pollitz Ed Evans Pete Carr Hillary Hufford Jaime Garcia PAGE 15: SHIPPING TEAM RIEGELWOOD MILL RIEGELWOOD, NORTH CAROLINA Jeff Stocks James Dixon Mary Smith PAGE 19: FORESTRY TEAM SOUTHLANDS EXPERIMENT FOREST BAINBRIDGE, GEORGIA Julie Durfield Tom Cooksey Larry Stubbs PAGE 19: SKILLS TRAINING TECHNOLOGY CENTER CINCINNATI, OHIO Le Tran Ann-Charlotte Norrdahl Todd Biggs PAGE 19: TOOLS OF THE TRADE TECHNOLOGY CENTER CINCINNATI, OHIO Ven Ochaya Cheryl Caldwell Paul Canino Inna Golinkin-Elsner Raj Bodalia Tricia Reighard James Burks John Soehnlen Nommiy Brown Tina Collett John Tonelli Stephanie Plear Tom Corkhill Mimi Muterspaw David Pedley Jeff Wheeler 54 Shareholder Information CORPORATE HEADQUARTERS International Paper Two Manhattanville Road Purchase, N.Y. 10577 914-397-1500 ANNUAL MEETING The next meeting of shareholders will be held at 9:30 a.m., Tuesday, May 12, 1998, at The Queensbury Hotel, 88 Ridge Street, Glens Falls, N.Y. TRANSFER AGENT For services regarding your account such as change of address, lost certificates or dividend checks, change in registered ownership, or the dividend reinvestment program, contact: ChaseMellon Shareholder Services, L.L.C. 85 Challenger Road Overpeck Centre Ridgefield Park, N.J. 07660 800-678-8715 www.chasemellon.com STOCK EXCHANGE LISTINGS Common Shares (symbol: IP) are traded on the following exchanges: New York, Basel, Geneva, Lausanne, Zurich and Amsterdam. International Paper options are traded on the Chicago Board of Options Exchange. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Under our plan you may invest all or a portion of your dividends, and you may purchase up to $20,000 of additional shares each year. The Company pays all brokerage commissions and fees. You may also deposit your certificates with the transfer agent for safekeeping. For a copy of the plan prospectus, call or write to the Corporate Secretary at corporate headquarters. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP 1345 Avenue of the Americas New York, N.Y. 10105 REPORTS AND PUBLICATIONS Additional copies of this report, environmental reports, SEC filings and other publications are available by calling 914-397-1522 or writing to the Investor Relations department at corporate headquarters. Most of this information is also available on our website - http:www.ipaper.com INVESTOR RELATIONS Investors desiring further information about International Paper should contact the Investor Relations department at corporate headquarters, 914-397-1625. CREDITS Papers used in this report: Cover: Zanders IkonoGloss, 111 lb. cover; pages 1-8: Strathmore Elements, 80 lb. text, bright white solids; pages 9-20: Zanders IkonoDull Satin, 100 lb. text; pages 9-20, short sheets: Zanders IkonoDull Satin, 115 lb. text; pages 21-54: Hammermill Regalia, 80 lb. text, old porcelain, smooth. All are recycled papers. Designed by Pentagram. Printed by The Hennegan Company. Major photography by John Blaustein, John Madere and William Whitehurst. Product and brand designations appearing in italics are trademarks of International Paper or a related company. THIS 1997 ANNUAL REPORT TO SHAREHOLDERS, AND MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) IN PARTICULAR, CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS CONCERNING PROJECTED IMPROVEMENT IN EARNINGS AT INTERNATIONAL PAPER. ACTUAL RESULTS MAY DIFFER BASED PRIMARILY ON OVERALL DEMAND AND WHETHER PRICE INCREASES FOR VARIOUS PAPER AND PACKAGING PRODUCTS CAN BE REALIZED IN 1998, AND WHETHER ANTICIPATED SAVINGS FROM RESTRUCTURING, THE BUSINESS IMPROVEMENT PROGRAM AND OTHER INITIATIVES ARE ACHIEVED. THE MD&A ALSO INCLUDES CONCLUSIONS AS TO VALUE AT RISK ASSOCIATED WITH FINANCIAL INSTRUMENTS. RESULTS MAY DIFFER BASED ON ACTUAL MOVEMENTS IN INTEREST AND CURRENCY EXCHANGE RATES. (C) 1998 INTERNATIONAL PAPER COMPANY. All rights reserved. INTERNATIONAL PAPER TWO MANHATTANVILLE ROAD PURCHASE, NY 10577 WE ANSWER TO THE WORLD APPENDIX A PHOTOGRAPHS AND ILLUSTRATIONS FOR 1997 ANNUAL REPORT 1. Inside front cover - illustration of International Paper's centennial logo. Circular in shape, with wording "International Paper Centennial 1998 around the outer edge, and an illustration of a tree and waterfall in the middle. 2. page 1 (fold out) - photo of International Paper's first annual report in 1899. 3. page 1 (fold out) - photo of Hammermill paper mill under construction in Erie, Pa. 4. page 1 (fold out) - aerial photo of Federal Paper Board mill in Bogota, NJ. 5. page 1 (fold out) - aerial photo of Southern International Paper mill. 6. page 1 (fold out) - photo of an Arizona Chemical plant. 7. page 1 (fold out) - photo of soldiers carrying supplies packaged in corrugated boxes made with our wetstrength linerboard. 8. page 1 (fold out) - photo of a scientist in our research laboratory in Mobile, Ala. 9. page 1 (fold out) - photo of a young girl drinking from a milk carton. 10. page 1 (fold out) - photo of two foresters at our Southlands Experiment Forest in Bainbridge, Ga. 11. page 1 (fold out) - illustration of International Paper's research center in Tuxedo, NY. 12. page 1 (fold out) - photo of the Canadian flag. 13. page 1 (fold out) - illustration of the Hammermill Paper Company logo. 14. page 1 (fold out) - photo of International Paper's operations headquarters in Memphis, TN. 15. page 1 (fold out) - photo of the Masonite logo. 16. page 1 (fold out) - aerial photo of the Aussedat Rey mill in Saillat, France. 17. page 1 (fold out) - photo of a paper machine at Zanders in Germany. 18. page 1 (fold out) - photo of a paper machine at our Kwidzyn mill in Poland. 19. page 1 (fold out) - photo of the ResourceNet International logo, and map of U.S. locations. 20. page 1 (fold out) - aerial photo of a radiata pine plantation in New Zealand. 21. page 1 (fold out) - photo of a Federal Paper Board mill. 22. page 1 (fold out) - photo of the Cincinnati technology center. 23. page 1 (fold out) - illustration of International Paper's centennial logo. Circular in shape, with wording "International Paper Centennial 1998" around the outer edge, and an illustration of a tree and waterfall in the middle. 24. page 2 - photo of John T. Dillon, Chairman and Chief Executive Officer, International Paper. 25. page 4 - photo of three reams of SPRINGHILL reprographic paper. 26. page 4 - photo of an NHL advertising brochure and a doll catalog, printed on our bristol and coated paper, respectively. 27. page 4 - photo of a large spool of yellow thread, to represent our pulp business. 28. page 5 - photo of three reams of paper, POLSPEED (from Kwidzyn in Poland), and REYPRINT (from Aussedat Rey in France) and DUO (from Tait in Scotland). 29. page 5 - photo of a corrugated box made with our WHITETOP linerboard for Sunkist lemons. 30. page 5 - photo of two corrugated boxes, one from our US division, made for Chiquita; and the other from our European division, for Champey. 31. page 5 - photo of a TDK VCR tape and packaging made from our STARCOTE bleached board. 32. page 6 - photo of two aseptic packages containing Elle & Vire sauces. 33. page 6 - photo of two reams of REPLICOPY reprographic paper. 34. page 6 - photo of a container of REGENCY cleaning product. 35. page 6 - photo of a can of COLORLOK precision printing ink. 36. page 7 - photo of three reams of reprographic paper, POLCOPY (from Poland), MATAURA (from New Zealand), and TECNIS (from Europe). 37. page 7 - photo of a red CRAFTMASTER door, made by Masonite. 38. page 7 - photo of peel and stick labels. 39. page 7 - photo of a gumball machine filled with gum. 40. page 8 - photo of SORBENT toilet tissue package. 41. page 8 - photo of a seedling. 42. page 8 - photo of yellow pine lumber. 43. page 8 - photo of an I-joist. 44. pages 10-11(short sheet - side one) - photo of a stand of loblolly trees, looking up from the ground, with blue sky and clouds in the background. 45. page 11 (short sheet - side two) - photo of a globe in a brown corrugated box. 46. page 11 (short sheet - side two) - photo of a parked xpedx truck with Cincinnati, Ohio in the background. 47. page 11 - photo of five employees of Aussedat Rey's Saillat mill, taken in front of a local landmark, with Aussedat Rey products. 48. page 13 (short sheet - side one) - photo of half of a globe, showing the US and Europe (this photo directly faces photo 52 - profile of two employees). 49. page 13 (short sheet - side two) - a photo of an array of tobacco products. 50. page 13 - photo of four employees of Tyson Foods, and one International Paper employee, shown with corrugated boxes made by International Paper for Tyson. 51. page 13 - photo of four Arizona Chemical employees at our Panama City, Florida location. 52. page 13 - photo of the profile of two International Paper account executives (this photo directly faces photo 48 - globe). 53. page 15 (short sheet - side one, and full page 15) - photo of three employees and rows of pulp produced at our Reigelwood, N.C. mill. 54. page 15 (short sheet - side two) - photo of 5 employees on a printing press at our Richmond, Va., folding carton plant. 55. page 15 (short sheet - side two) - photo of 3 employees and rolls of bleached board inside a rail car at our Reigelwood, N.C. mill. 56. page 15 - photo of 5 employees on a chip pile outside our Masonite plant in Ukiah, Calif. 57. page 16 - page 17 (short sheet- side one) - photo of several sheets of Strathmore paper, brightly lit with yellow, green and blue lighting. 58. page 17 (short sheet - side two) - photo of page from a FAO Schwarz catalog printed on our ACCOLADE coated paper. 59. page 17 - photo of a Beckett PARADOX product brochure, and an array of the seven colors that the paper comes in. 60.page 17 - photo of an array of various milk cartons made by International Paper. 61. page 18 - photo of a research associate looking through a microscope at our Cincinnati, Ohio research center. 62. page 19 (short sheet - side two) - photo of three foresters in a stand of "field of dreams" pine trees at our Southlands Experiment Forest in Bainbridge, Ga. 63. page 19 (short sheet - side two) - photo of two students and an instructor at a management skills training class in Cincinnati, Ohio. 64. page 19 - photo of a consumer in front of our INVENT IT display. 65. page 19 - photo of 16 employees at our research center in Cincinnati, Ohio. EX-21 5 SUBSIDIARIES EXHIBIT 21 Company and Subsidiaries:
PERCENTAGE OF VOTING SOVEREIGN POWER SECURITIES OWNED BY UNDER WHICH ORGANIZED IMMEDIATE PARENT --------------------- ---------------- International Paper Company (the "Company") New York Parent Federal Paper Board Company, Inc. North Carolina 100% IP Timberlands, Ltd. Texas 100%; prior to March 25, 1998, the Company owned 100% of the Class A Common Stock and Class B Common Stock of IP Forest Resources Company, managing general partner of IPT, and 84% of the Class A Depositary Units and 100% of the Class B Depositary Units of IPT.
Names of subsidiaries which, if considered in the aggregate as a single subsidiary would not constitute a significant subsidiary, have been omitted. EX-22 6 PROXY STATEMENT DATED 3/30/98 [INTERNATIONAL PAPER LOGO] TWO MANHATTANVILLE ROAD PURCHASE, NEW YORK 10577 JOHN T. DILLON CHAIRMAN March 30, 1998 Dear Fellow Shareholder: This year is an important year for International Paper as we celebrate our Centennial anniversary. On January 31, 1898, International Paper Company was formed by the joining of seventeen paper companies, including the Hudson River Mill in Corinth, New York. To commemorate that occasion, this year's annual meeting will be held at the Queensbury Hotel, 88 Ridge Street, Glens Falls, New York, the area of the state where the Company was founded 100 years ago. The meeting will start at 9:30 a.m., on Tuesday, May 12, 1998. You are cordially invited to attend this meeting and we look forward to seeing you there. The following Proxy Statement outlines the business to be conducted at the meeting, which includes the election of one class of directors; ratification of the appointment of Arthur Andersen LLP as the independent auditor for 1998; and consideration of one shareholder proposal concerning a chlorine-containing compound phaseout schedule. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOUR VOTE IS IMPORTANT. WE URGE YOU TO VOTE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD, OR IF YOU PREFER, YOU MAY VOTE VIA THE TELEPHONE. Attendance at the meeting is limited to shareholders of record as of the close of business on March 20, 1998, or their duly appointed proxy holder (not to exceed one proxy per shareholder), and to guests of management. If you or your proxy holder plan to attend the meeting, please complete and return the enclosed Request for Admittance card. Thank you for your continued support. Sincerely, [/S/ JOHN T. DILLION] John T. Dillon [INTERNATIONAL PAPER LOGO] NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TUESDAY, MAY 12, 1998 9:30 A.M. THE QUEENSBURY HOTEL 88 RIDGE STREET GLENS FALLS, NEW YORK To the Owners of Common Stock of International Paper Company: The annual meeting of shareholders of International Paper Company will be held Tuesday, May 12, 1998, at 9:30 a.m. at the Queensbury Hotel, 88 Ridge Street, Glens Falls, New York to: 1. Elect one class of directors: Peter I. Bijur, John T. Dillon, and John R. Kennedy, each for a term of three years; 2. Ratify the appointment of Arthur Andersen LLP as independent auditor for 1998; 3. Consider and vote on a shareholder resolution concerning a schedule for total phaseout of chlorine-containing compounds for papermaking; and 4. Transact such other business properly before the meeting or any adjournments. YOUR BOARD OF DIRECTORS URGES SHAREHOLDERS TO VOTE FOR ITEMS 1 AND 2 AND AGAINST ITEM 3. Shareholders of record at the close of business on March 20, 1998, will be entitled to vote at the meeting or any adjournments thereof. By order of the Board of Directors JAMES W. GUEDRY VICE PRESIDENT AND SECRETARY March 30, 1998 PROXY STATEMENT INTERNATIONAL PAPER COMPANY TWO MANHATTANVILLE ROAD PURCHASE, NEW YORK 10577 (914) 397-1500 GENERAL INFORMATION This statement is furnished to you by the Board of Directors of International Paper Company in connection with the solicitation of your proxy to be voted at the annual meeting of shareholders to be held on May 12, 1998. You are entitled to one vote for each share of common stock held of record at the close of business on March 20, 1998. As of that date, there were 302,813,198 shares of common stock outstanding. The annual report, including the audited financial statements of International Paper for the fiscal year ended December 31, 1997, has been mailed to you with this Proxy Statement and should be read carefully in conjunction with this Proxy Statement before voting on any proposals contained herein, as it contains details of the Company's operations and other relevant disclosures. PROXY PROCEDURES VOTING BY TELEPHONE This year you have a choice of voting by telephone or by mail. The telephone voting procedure is simple and fast. Dial the 800 number on your proxy card and listen for further directions. You must have a touch-tone phone in order to respond to the questions. This vote will be counted immediately and there is no need to send in your proxy card. VOTING BY PROXY CARD Shares eligible to be voted, and for which a properly-signed proxy is returned, will be voted in accordance with the instructions specified on the proxy card; if you do not mark any instructions, your shares will be voted in favor of proposals 1 and 2 and against proposal 3. If any other matters come before the meeting, including any proposal submitted by a shareholder which was omitted from this Proxy Statement, your proxy will be voted in accordance with the best judgment of the persons voting them. As of the time this Proxy Statement was printed, management was not aware of any other matters to be voted upon. You may revoke your proxy at any time before its exercise by submitting a written revocation or a new proxy, or by attending and voting at the annual meeting. Solicitation of proxies may be done by directors, officers and employees, as well as by Georgeson & Company Inc. Payments to that firm as compensation are estimated to be about $14,500 plus reimbursable expenses. This solicitation may be carried out by mail, telephone, telecommunication, or personal interview. The cost of any such solicitations will be borne by International Paper. WHO COUNTS THE VOTE AND IS IT CONFIDENTIAL? The Company has a policy of confidentiality in the voting of shareholder proxies generally. It uses the services of its registrar and transfer 2 agent, ChaseMellon Shareholder Services, L.L.C., as independent inspectors of election to receive and tabulate the proxy vote. These representatives are the only persons who process and have access to your proxy card. This Proxy Statement and the form of Proxy were sent to shareholders commencing March 30, 1998. ADMITTANCE PROCEDURES AT MEETING You shareholders of record as of the close of business on March 20, 1998 (or your duly appointed proxy holder) are entitled to vote and attend the meeting. Certain procedures have been adopted to insure that no inconvenience or delays are caused to the Company's shareholders or their proxy holders when entering the meeting. If you plan to attend the meeting in person or appoint someone to attend as your proxy (other than the proxies set out on the proxy card), please complete, sign and return the enclosed Request for Admittance card promptly so that an admittance card can be reserved for you or your proxy in advance of the meeting. If you are appointing your own proxy, please include his or her name on the Request. These admittance cards will be delivered to you or your proxy holder at the shareholders' admittance counter at the meeting upon verification of identification by you or your proxyholder. If you are a record shareholder and do not have an admittance card reserved for you at the meeting, you will be admitted upon verification of ownership at the shareholders' admittance desk. If you have not appointed a proxy in advance or have changed the appointed proxy on the Request for Admittance card, your duly appointed proxy who attends the meeting in your place will be required to present evidence of your signature on the proxy (a copy of your driver's license or employment identification card or other identification with your signature) in order to determine that only valid proxies are admitted and voted. Persons who own stock through brokers, trustees, plans or "street name" and not directly through ownership of stock certificates are considered "beneficial owners." Beneficial owners of record on March 20, 1998, or their duly appointed proxy holder, can obtain admittance cards only at the shareholders' admittance desk by presenting evidence of common stock ownership in the Company. This evidence could be a proxy from the institution that is the record holder of the stock or your most recent bank or brokerage firm account statement, along with proper identification. If you are a beneficial shareholder who will appoint a proxy to attend the meeting on your behalf, your duly appointed proxy will be required to comply with the procedures described above in this paragraph, as well as the admittance procedures described above for duly appointed proxies not designated in advance on the Request for Admittance card. CORPORATE GOVERNANCE BOARD OF DIRECTORS The Board has three classes of directors: Class I directors, of which there are currently two, were elected until the 1998 annual meeting and one new director who is being assigned to that class; Class II directors, of which there are currently five, were elected to serve until the 1999 annual meeting; and 3 Class III directors, of which there are currently five, were elected until the 2000 annual meeting. Each class is elected for a three-year term, unless they retire earlier. Three Class II directors are scheduled to retire upon reaching retirement age prior to the 1999 annual meeting. New directors are assigned to a class until the first annual meeting after their selection. Nine regular meetings and three special meetings of the Board of Directors were held in 1997. In addition, there were 23 Committee meetings. Each director attended at least 75% of the meetings of the Board and the Committees on which he or she serves. All of the directors attended an average of 93% of such meetings of the Board and the Committees on which they serve. Record and beneficial ownership of current directors in equity securities of the Company is shown in the table on page 6. RELATED TRANSACTION In June 1997, the Company sold 825 acres of land near Killington, Vermont to The Conservation Fund for later disposition to the State of Vermont for conservation and recreational use. The sale price was $424,875 which was the market value of the land. Mr. Noonan, a director of the Company, is chairman and chief executive officer of The Conservation Fund. AUDIT COMMITTEE The Audit Committee of the Board assists the Board in carrying out its responsibilities for monitoring management's accounting for the Company's financial results and for the timeliness and adequacy of the reporting of those results; it discusses and makes inquiry into the audits of the Company's books made internally and by outside independent auditors, the Company's financial and accounting policies, its internal controls and its financial reporting; it reviews and makes a recommendation to the Board each year with respect to the appointment of independent auditors for the following year; it informs the Board of any significant accounting matters; and it reviews the performance of the Committee. Current members of the Committee, none of whom is an employee of the Company, are J. C. Pfeiffer (Chairman), P. I. Bijur, W. C. Butcher, J. R. Kennedy, and P. F. Noonan. Four meetings of the Committee were held in 1997. MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE The Management Development and Compensation Committee reviews Company policies and programs for the development of management personnel; it makes recommendations to the Board with respect to any proposals for compensation or compensation adjustments of officers who are also directors of the Company; it authorizes compensation or compensation adjustments for other officers of the Company; it administers the Company's executive bonus and Long-Term Incentive Compensation Plan; it reviews and endorses changes in Company employee retirement and benefits plans; it reviews officer candidates and endorses nominees for election as executive officers; it delegates to the Chief Executive Officer the authority to act on compensation adjustments at certain levels; it makes recommendations to the Board with respect to directors' compensation; it reviews senior management succession planning; and it reviews the performance of the Committee. Current members of the Committee, none of whom is an employee of the Company, are R. J. Eaton (Chairman), P. I. Bijur, W. C. Butcher, T. 4 C. Graham, E. T. Pratt, Jr. and C. R. Shoemate. Stanley C. Gault retired from the Board and as chairman of the Committee on January 6, 1998. Five meetings of the Committee were held in 1997. NOMINATING COMMITTEE The Nominating Committee reviews the size and composition of the Board; it reviews possible director candidates and director nominations properly presented by shareholders; it recommends to the Board individuals suitable for election as directors; it reviews and recommends annually to the full Board the slate of nominees for election by the Company's shareholders; it reviews institutional affiliations of directors and director candidates for possible conflicts; and it reviews and recommends Board Committee assignments. Current members of the Committee, none of whom is an employee of the Company, are W. C. Butcher (Chairman), D. F. McHenry, J. C. Pfeiffer, E. T. Pratt, Jr. and C. R. Shoemate. Four meetings of the Committee were held in 1997. ENVIRONMENT, HEALTH AND TECHNOLOGY COMMITTEE The Environment, Health and Technology Committee reviews environmental, safety, health and technological policies and programs throughout the Company; it assures that they are appropriate to the short- and long-term objectives of the Company in terms of industry leadership, compliance with federal and state laws and regulations and social responsibility; it advises the Board of the effectiveness of these policies and programs; and it reviews the performance of the Committee. Current members of the Committee are T. C. Graham (Chairman), R. J. Eaton, J. R. Kennedy, P. F. Noonan and C. W. Smith. Three meetings of the Committee were held in 1997. OTHER COMMITTEES Membership of the other regular Committees of the Board of Directors is shown on page 51 of the Company's annual report which accompanies this Proxy Statement. FUTURE SHAREHOLDER PROPOSALS AND NOMINATIONS In order to be considered for inclusion in next year's Proxy Statement, shareholder proposals intended to be presented at the 1999 annual meeting must be made in writing and received by the Secretary of the Company at the Company's principal executive offices by the close of business on November 30, 1998. Other shareholder proposals intended to be introduced at the 1999 annual meeting must be made in accordance with Article I, Section 7 of the Company's By-laws. Thus, shareholder proposals intended to be presented at the 1999 annual meeting, but not included in the 1998 Proxy Statement, must be received by the Secretary of the Company not earlier than February 9, 1999 nor later than March 11, 1999, if the annual meeting is held on May 11, 1999, and must conform to the requirements set out in the Company's By-laws. Nominations by shareholders for directors must be made in accordance with Article II, Section 9 of the Company's By-laws. Thus, shareholder nominations, to be considered by the Nominating Committee for the 1999 election of directors must be received by the Secretary of the Company not earlier than 5 February 9, 1999, nor later than March 11, 1999, if the annual meeting is held on May 11, 1999, and must conform to the requirements set out in the Company's By-laws. COMMON STOCK OWNERSHIP OF DIRECTORS AND MANAGEMENT The following table shows, as of March 20, 1998, the number of shares of Company common stock beneficially owned or otherwise claimed by each current director, executive officers included in the Summary Compensation Table on page 20, and by all directors and executive officers of the Company as a group. The total beneficial ownership of common stock of all directors and executive officers as a group represents less than 1% of the outstanding stock. To the best knowledge of the Company, no person or group beneficially owns more than 5% of the Company's common stock outstanding, except as set forth below in the table beside the respective shares owned.
SHARES NAME OF INDIVIDUAL BENEFICIALLY STOCK UNITS OR GROUP OWNED (1) OWNED (2) - -------------------------------------------------- ------------- -------------- P.I. Bijur........................................ 1,083 510 W.C. Butcher...................................... 7,134 24,819 J.T. Dillon....................................... 300,429 26,515 R.J. Eaton........................................ 5,500 5,841 J.A. Georges...................................... 36,185 0 T.C. Graham....................................... 15,135 28,762 J.R. Kennedy...................................... 103,929 2,736 D.F. McHenry...................................... 8,002 10,123 P.F. Noonan....................................... 4,150 4,384 J.C. Pfeiffer..................................... 7,734 5,428 E.T. Pratt, Jr. .................................. 7,143 44,458 C.R. Shoemate..................................... 4,200 4,712 C.W. Smith........................................ 152,738 15,660 J.P. Melican...................................... 137,838 17,377 D.W. Oskin........................................ 160,404 0 M.J. Turk......................................... 126,593 4,530 All directors and executive officers as a group... 1,555,691 (.51%) Bank trustee under Company and subsidiary employee benefit plans (3)............................... 25,003,206 (8.3%) Merrill Lynch, Pierce, Fenner & Smith Incorporated (4)............................................. 20,601,662 (6.8%) The Capital Group Companies, Inc. (5)............. 18,150,000 (6.0%)
(1) Ownership shown includes securities over which the individual has or shares, directly or indirectly, voting or investment powers, including certain relatives and ownership by trusts for the benefit of such relatives, as required to be reported by the Securities and Exchange Commission; certain individuals may disclaim beneficial ownership of some of these shares, 6 but they are included for the purpose of computing the holdings and the percentages of common stock owned. The above table does not include shares represented by stock options granted executive officers under the Long-Term Incentive Compensation Plan, including options for 323,037 shares for Mr. Dillon, 149,700 shares for Mr. C. W. Smith, 164,200 shares for Mr. Melican, 135,700 shares for Mr. Oskin, and 107,000 shares for Mr. Turk. (2) Ownership shown represents the non-voting stock-equivalent units owned by the named individuals and group under the Nonfunded Deferred Compensation Plan for Non-Employee Directors or the Unfunded Savings Plan. (3) As of December 31, 1997, State Street Bank & Trust Co., N.A. holds such shares as the independent trustee in trust funds for employee savings, thrift, and similar employee benefit plans of the Company and its subsidiaries ("Company Trust Funds"). In addition, State Street Bank & Trust Co., N.A. is trustee for various third party trusts and employee benefit plans and is an Investment Advisor. As a result of its holdings in all capacities, State Street Bank & Trust Co., N.A. is the record holder of 25,003,206 shares of common stock of the Company. The trustee disclaims beneficial ownership of all such shares except 3,904,894 shares of which it has sole power to dispose or to direct the disposition. The common stock held by the Company Trust Funds is allocated to participants' accounts and such stock or the cash equivalent will be distributed to participants upon termination of employment or pursuant to withdrawal rights. The trustee votes the shares of common stock held in the Company Trust Funds in accordance with the instructions of the participants; shares for which no instructions are received are voted in the trustee's discretion. (4) As of January 31, 1998, Merrill Lynch, Pierce, Fenner & Smith Incorporated is a broker-dealer registered under Section 15 of the Securities Exchange Act of 1934 (the "Act"). They, or subsidiaries, hold these shares primarily as sponsor to various registered investment companies, but disclaim beneficial ownership thereof other than certain of which are held in proprietary accounts. (5) As of December 31, 1997, the Capital Group Companies, Inc. holds such shares as the parent holding company of a group of investment management companies (including Capital Research and Management Company). The Capital Group Companies, Inc. does not have investment power or voting power over any of the securities reported here; however, The Capital Group Companies, Inc. may be deemed to "beneficially own" such securities by virtue of Rule 13d-3 under the Act. Capital Research and Management Company, an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, is the beneficial owner of these shares as a result of acting as investment advisor to various investment companies registered under Section 8 of the Investment Company Act of 1940. 7 MATTERS TO BE CONSIDERED AT THE MEETING 1. ELECTION OF THREE DIRECTORS At this meeting, two (2) directors are to be re-elected and one director elected as Class I directors for three-year terms expiring in 2001. Each nominee is currently a director of the Company. Election requires the affirmative vote by the holders of a plurality of outstanding common stock voting at the annual meeting of shareholders. A plurality means that the three (3) nominees receiving the largest number of votes cast will be elected. Votes which are withheld from any nominee, as well as broker non-votes, will not be counted in such nominee's favor. Shareholders voting at the meeting may not vote for more than the number of nominees listed in the Proxy Statement. Proxies given to management to vote will be voted according to instructions given, but only for nominees listed in the Proxy Statement. The term of the present Class I directors expires at the adjournment of the 1998 annual meeting. CLASS I DIRECTORS--TERM EXPIRING IN 2001 The three nominees for election at this meeting as Class I directors are Peter I. Bijur, John T. Dillon and John R. Kennedy, and are identified below: [PHOTO] PETER I. BIJUR, 55, Chairman and Chief Executive Officer of Texaco Inc. He joined Texaco in 1966 and progressed through a series of positions and was elected senior vice president in May of 1992. He became vice chairman of the Board in January 1996, and was elected to his current position in July 1996. He is also a director of the American Petroleum Institute and a member of The Business Council, The Business Roundtable, The Conference Board, and the National Petroleum Council. Director since July 8, 1997 [PHOTO] JOHN T. DILLON, 59, Chief Executive Officer since 1996. Prior to that he was executive vice president-packaging from 1987 to 1995 when he assumed the position of president and chief operating officer. He is also a director and chairman of the board of IP Forest Resources (the managing general partner of IP Timberlands, Ltd.) and a director of Caterpillar Inc. He is chairman of the board of The National Council on Economic Education. Director since March 1, 1991 [PHOTO] JOHN R. KENNEDY, 67, retired President and Chief Executive Officer of Federal Paper Board Company, Inc. from 1975 to 1996. He is a director of DeVlieg Bullard, Inc., Chase Brass Industries, Inc., Holnam, Inc., and Spartech Corporation. He is director and chairman of the board of Georgetown University, on the board of governors of the United Nations Association of the United States of America, and one of the directors for the Foreign Policy Association. Director since March 12, 1996 8 CLASS II DIRECTORS--TERM EXPIRING IN 1999 None of these directors are to be elected at the 1998 annual meeting, but were elected until the 1999 annual meeting. [PHOTO] WILLARD C. BUTCHER, 71, retired Chairman and Chief Executive of The Chase Manhattan Bank, N.A. He is a director of ASARCO, Incorporated, and Texaco, Inc. He is a member of The Business Council, the International Advisory Board for Banca Nazionale del Lavaro, the International Advisory Council of The Chase Manhattan Bank and vice chairman of the Lincoln Center for the Performing Arts, Inc. He is a trustee emeritus of the American Enterprise Institute for Public Policy Research and a fellow emeritus of Brown University. Director since August 1, 1989 [PHOTO] THOMAS C. GRAHAM, 71, Consultant. Retired Chairman of the Board of AK Steel Corporation. Previously, he was chairman and chief executive officer, elected to those posts concurrent with the formation of AK Steel Holding Corporation, a publicly held corporation which emerged from the privately-held Armco Steel Company, L.P. in April of 1994. He had been named president and chief executive officer of Armco Steel in June 1992. He was formerly chairman and chief executive officer of Washington Steel Corporation until 1992. He is a director of IP Forest Resources Company (the managing general partner of IP Timberlands, Ltd.). Director since October 14, 1986 [PHOTO] JANE C. PFEIFFER, 64, Management Consultant. She is a director of Ashland, Inc., IP Forest Resources Company (the managing general partner of IP Timberlands, Ltd.), J.C. Penney Company, Inc., and The Mutual Life Insurance Company of New York. She is a trustee of the Conference Board, the University of Notre Dame and the Overseas Development Council and a member of The Council on Foreign Relations. Director since June 14, 1977 [PHOTO] EDMUND T. PRATT, Jr., 71, retired Chairman of the Board (from 1972 to 1992) and Chief Executive Officer from (1972-1991) of Pfizer Inc. He is a director and member of the Executive Committee of AEA Investors, Inc., and a member of the Board of Trustees of Logistics Management Institute. Director since September 9, 1975 [PHOTO] C. WESLEY SMITH, 57, Executive Vice President--printing papers since 1992. Prior thereto, he was president--International Paper--Europe from 1989. Director since December 12, 1995 9 CLASS III DIRECTORS-TERM EXPIRING IN 2000 None of these directors are to be elected at the 1998 annual meeting, but were elected until the 2000 annual meeting. [PHOTO] ROBERT J. EATON, 58, Chairman and Chief Executive Officer of the Chrysler Corporation. He joined Chrysler in 1992, as vice chairman and chief operating officer and a member of the Board. Prior to joining Chrysler, his 29-year career with General Motors included various management positions, the most recent being president of General Motors Europe (1988 to 1992). He is a fellow of both the Society of Automotive Engineers and the Engineering Society of Detroit and a member of the National Academy of Engineering. He is a member of The Business Council and The Business Roundtable. He also is a member of the President's Advisory Committee on Trade Policy and Negotiations and serves as a director of The Economic Strategy Institute and the U.S./Japan Business Council. Director since January 10, 1995 [PHOTO] JOHN A. GEORGES, 67, retired Chairman and Chief Executive Office of International Paper. He was elected chief executive officer in 1984 and became chairman and chief executive officer in 1985. He was a director, chairman of the board and chief executive officer of IP Forest Resources Company (the managing general partner of IP Timberlands, Ltd.) from 1985 to 1996. Since retirement from International Paper, he has joined Windward Capital Partners, L.P. as senior managing director. He is a director of AK Steel Holding Corporation, Ryder Systems, Inc., Warner-Lambert Company and IP Forest Resources (the managing general partner of IP Timberlands Ltd.) He is a member of The Business Council, The Trilateral Commission, and Bankers Trust European Advisory Board. He is a trustee of the Public Policy Institute of the Business Council of New York State and board member of the University of Illinois Foundation. Director since February 1, 1980 [PHOTO] DONALD F. MCHENRY, 61, University Research Professor of Diplomacy and International Affairs at Georgetown University since 1981. He is president of the IRC Group LLC and a director of AT&T, The Coca-Cola Company, Bank of Boston Corporation, the First National Bank of Boston, SmithKline Beecham plc, and the Institute for International Economics. He is a trustee of The Brookings Institution, The Mayo Foundation, and Columbia University; and chairman of the board of Africare. Director since April 14, 1981 [PHOTO] PATRICK F. NOONAN, 55, Chairman of the Board of The Conservation Fund (a nonprofit organization dedicated to conserving America's land and water resources) and previously, also its chief executive officer since 1985. Prior to that he was president of The Nature Conservancy. He is a trustee of The National Geographic Society. He is also a director of Ashland, Inc., the Fund for Government Investors, Saul Centers REIT, the American Gas Association Index Fund and IP Forest Resources (the managing general partner of IP Timberlands Ltd.) He is a member of the Board of Visitors of Duke University School of the Environment. Director since December 14, 1993 10 [PHOTO] CHARLES R. SHOEMATE, 58, Chairman, President and Chief Executive Officer of Bestfoods. He was elected president and a member of its board of directors in 1988, chief executive officer in August 1990 and chairman in September 1990. He joined Bestfoods, formerly CPC International, in 1962 and progressed through a variety of positions in manufacturing, finance and business management within the consumer foods and corn refining businesses. In 1981, he was named president of Canada Starch Company, CPC's Canadian subsidiary. He was elected vice president of the corporation in 1983, and in 1986 became president of the Corn Refining Division. He is a director of CIGNA Corporation and chairman of the Grocery Manufacturers of America, Inc. He is a member of the Business Roundtable; and a trustee of The Conference Board. Director since November 1, 1994 2. RATIFICATION OF ARTHUR ANDERSEN LLP AS INDEPENDENT AUDITOR Arthur Andersen LLP has been our independent public accountant for many years. The Audit Committee and the Board considered the qualifications of Arthur Andersen LLP and have appointed it as independent auditor of the consolidated financial statements of the Company for 1998. The Committee reviewed its performance in prior years, as well as its reputation for integrity and competence in the fields of accounting and auditing. The Committee has expressed its satisfaction with Arthur Andersen LLP in all of these respects. The Committee's review also included inquiry concerning litigation involving Arthur Andersen LLP and the existence of any investigations by the Securities and Exchange Commission into the financial reporting practices of the companies audited by it. In this respect, the Committee concluded that the ability of Arthur Andersen LLP to perform services for the Company is in no way adversely affected by any such investigation or litigation. A representative of Arthur Andersen LLP will be present at the annual meeting to respond to appropriate questions and to make a statement if he or she desires. We are asking shareholders to ratify the Board's appointment of Arthur Andersen LLP as independent auditors for 1998. We need the affirmative vote of a majority of the shares voting on this proposal in order to ratify the appointment. Abstentions and broker non-votes will not be counted as having voted on this proposal. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF ARTHUR ANDERSEN LLP AS INDEPENDENT AUDITOR FOR 1998. 11 3. SHAREHOLDER PROPOSAL CONCERNING A CHLORINE-COMPOUND PHASEOUT SCHEDULE PROPOSAL The Sisters of Mercy of the Americas, Regional Community of Detroit, 29000 Eleven Mile Road, Farmington Hills, Michigan 48336, represented that, as of November 18, 1997, it owned 1,050 shares of common stock of the Company and has informed us that it intends to present the following proposal at the annual meeting. Two groups and one individual, whose names, addresses and shareholdings will be supplied upon oral or written request to the Secretary of the Company, have co-sponsored the proposal. The text of the proposal is as follows: "WHEREAS: our company claims to be environmentally responsible, yet uses chlorine-based bleach chemicals that produce dioxin and many other persistent pollutants known to harm human and environmental health in even minute quantities; "Dioxins, furans, and other organochlorines are created whenever chlorine- based chemicals are used. These chemicals pass up the food chain, accumulating in living organisms. In humans, minuscule amounts contribute to reproductive failure, birth defects, immune suppression, cancer. In children, they cause developmental impairment, hormonal disruption, and behavioral disorders; "Distinguished world bodies, including the: - World Bank - American Public Health Association - International Joint Commission on the Great Lakes - Intergovernmental Forum on Chemical Safety publicly recognize the grave risks posed by chlorine-based pulp and paper bleaching. These significant scientific and economic viewpoints demonstrate worldwide support for phasing out the industrial use of chlorine-containing compounds; "New regulations set minimum bleach standards as 100% chlorine dioxide (ClO2). But ClO2 perpetuates organochlorine contamination, and represents a costly and imprudent investment when commercially available technologies that eliminate chlorinated compounds are in successful use by our global competitors; "US EPA recognizes "technology options more advanced than the technology option [of ClO2, such as] . . . ozone-based bleaching sequences, [and] totally chlorine-free bleaching"; "According to EPA: "total chlorine free bleaching . . . provides significant benefits such as elimination of chlorinated pollutants to the environment and allows bleach plant effluents to be recycled . . . [this] moves the mill further toward the closed mill concept"; "Closed-loop mills are possible because totally chlorine-free (TCF) technologies eliminate highly corrosive ClO2. ClO2's corrosiveness wears out mill equipment more rapidly, resulting in accelerated capital replacement and higher costs. Closed-loop mills would allow tremendous savings through the reduction and reuse of chemicals, energy and water; "Dangerously unstable, ClO2 also threatens worker health and safety, driving up costs and reducing productivity. The paper industry's record of adopting innovative technology is one of the country's lowest when compared to other US industrial sectors; 12 "TCF technology would enable IP to compete in global TCF markets. The world's largest paper market (Europe) has moved from less than 5% to over 25% TCF just since 1991. IP cannot compete in these growing world markets by remaining committed to chlorinated chemicals; "Chlorine-based bleaching inevitably releases persistent organochlorine toxins, and results in higher health and safety costs. Our company should phase out chlorine-based compounds in its production; "RESOLVED: that our company report by the 1998 annual meeting on a schedule to phase out the use of chlorine-based compounds from its pulp and paper production." The supporting statement of shareholders on this resolution is as follows: "IP should not be committed to chlorine-based chemicals, but rather to comprehensive solutions. ClO2 has significant problems that cannot be overcome: high corrosiveness, explosiveness, and toxicity. The use of ClO2 reduces global opportunities and has higher long-term operating costs. Scientific research indicates that NO safe or "acceptable" level of exposure to many organochlorine chemicals exists. Reliance on ClO2 bleaching postpones the adoption of proven TCF technologies. To be an environmental and technological innovator, IP must use technology that eliminates organochlorines from pulp and paper production." POSITION OF YOUR COMPANY'S BOARD OF DIRECTORS We recommend that you vote AGAINST the proposal. The Company has eliminated dioxins and furans in its mill effluents, utilizing the EPA's very low (10 parts per quadrillion) detection levels. We formerly used sodium-hypochlorite and elemental chlorine as bleaching agents in the pulp and paper making process but began phasing them out in 1988. The Company set and met a schedule for conversion of all of its eleven mills to 100% elemental chlorine free ("ECF") bleaching by December 31, 1996. Two additional mills acquired in 1996 as part of the merger with Federal Paper Board will be converted by the end of 1998. Having voluntarily expended $160 million, the Company has eliminated any detectable dioxins or furans, by-products of using elemental chlorine as a bleaching agent. We disagree with the proponent's opinions regarding chlorine dioxide. We believe that: - There is no scientific evidence that an ECF mill produces any dioxin; - There is no scientific evidence that there is any bioaccumulation of dioxin associated with an ECF mill; - There is no national or international body that has publicly recognized any dangers, much less significant dangers, from ECF bleaching. In fact, the opposite is true: all agencies that have evaluated ECF bleaching, such as the U.S. EPA, have regarded ECF bleaching as protective of health and the environment; - TCF pulp is qualitatively inferior to ECF pulp and requires more wood per unit of pulp; - To convert International Paper's existing mills to TCF would require that we retrofit thirteen mills at an estimated cost of $500 million over and above what is being spent on the Cluster Rules, including ECF conversion with no environmental, health or other benefits, but with significant reductions in product quality and substantial increases in energy and wood fiber usage for the same unit of production. 13 We believe that no valid health, safety or financial objective would be obtained from the very substantial expenditure of capital required to implement a total phase-out of chlorine dioxide in our mill system. Since none of our major U.S. competitors are utilizing totally chlorine-free processes, to require International Paper to do so would put us at a significant cost disadvantage from a competitive standpoint. Approval of this proposal requires the affirmative vote of a majority of the shares voting on it. Abstentions and broker non-votes will not be counted as having voted on this proposal. THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THE COMPANY DEVISING A SCHEDULE FOR THE PHASEOUT OF CHLORINE COMPOUNDS IN ITS PAPER-MAKING PROCESSES. REPORT OF THE MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS As of December 31, 1997, the Management Development and Compensation Committee (the "Committee") consisted of seven outside directors: Peter I. Bijur, Willard C. Butcher, Robert J. Eaton, Thomas C. Graham, Stanley C. Gault, Edmund T. Pratt, Jr. and Charles R. Shoemate. Mr. Stanley C. Gault served as chairman of the Committee during 1997, and retired effective January 6, 1998. Mr. Eaton was named chairman effective January 6, 1998. The Committee met five times in 1997 with a 97% attendance record. The chairman and chief executive officer of the Company was not present during any discussion of his compensation. GENERAL Total compensation received by the named executive officers consists of salary, cash bonus, stock options and restricted stock. The total compensation has been designed to attract the most qualified talent, motivate them to reach their highest level of achievement, reward sustained superior performance and retain those senior managers whose competencies are prerequisite to shareholder value appreciating over the long term. The cash bonus and long-term incentives introduce considerable risk in the total executive compensation package, since the value of these components may vary significantly from year to year based on Company performance, individual performance and Company stock price. The Committee periodically reviews each component of the Company's executive compensation program to ensure that pay levels and incentive opportunities are competitive and that incentive opportunities are linked to Company performance. The Committee relates total compensation levels for the Company's executives to the compensation paid at a select group of comparator companies. The Committee reviews and approves 14 the selection of companies used for compensation comparisons. International Paper also uses independent compensation consulting firms to advise the Committee. In 1997, the comprehensive pay study of incentive-eligible positions originally conducted in 1996, was updated and expanded, and included a cross section of 31 manufacturing companies. The 31 manufacturing companies included in the pay study are in industries that are close in size ($19.5 billion average revenue) and manufacturing complexity to International Paper and compete directly with International Paper for executive talent. The Company's compensation levels for each component of pay were compared to the median of the comparator group's competitive pay. The Company's Management Incentive Plan (MIP) was amended in 1997 and directly links payment of an annual cash bonus to the achievement of (1) the Company's return on investment versus budget; (2) the Company's return on investment compared to Peer Paper Group's (eight companies which comprise the Peer Line of the Performance Graphs on pages 18 and 19); and (3) predetermined targets of qualitative nonfinancial performance factors, such as quality, safety and environment and people development. The Plan was amended to emphasize return on investment rather than net after tax earnings; create three separate performance measures which independently fund the MIP pool; and calculate individual awards on differing allocations of emphasis on performance measures. Performance in 1997 against financial targets was above threshold but did not achieve 100% of goal in one case and achieved 100% of goal in the other; performance compared to nonfinancial targets met or exceeded the goals for 1997. Accordingly, the bonus awards as set out on page 20 were earned in 1997. There was no fund generated in 1996. The Company's Long-Term Incentive Compensation Plan and amendments, which were approved by the shareholders in 1989 and 1994, respectively, provide for awards of stock options and restricted stock in the form of performance shares which are made in amounts which the Committee determines to be competitive based on the study described above. Stock options are granted at fair market value at the time of the award and are restricted for four years. Contingent awards of performance shares are made in December of the year preceding a five-year Award Period. At the end of the five-year Award Period, the number of shares earned is determined by financial performance which the Committee measures by comparing the Company's and Peer Paper Group's (eight companies which comprise the Peer Group Line of the Performance Graphs on pages 18 and 19) and weighing equally, the five-year average return on equity and earnings per share. If the threshold level of performance is not attained, no shares are earned. Above the threshold, the contingent award is reduced if the target goal is not met or supplemented if the target goal is exceeded. Adjustments in the number of shares earned can be made by the Committee with any such adjustments offset by reductions in other awards made under the Company's Long-Term Incentive Compensation Plan or other Company bonus awards. Payouts of earned performance shares are made in Company stock at the end of the five-year Award Period. One half of the shares earned is mandatorily deferred for an additional three years, and payout is subject to the executive's continued employment throughout that period. From time to time executive continuity awards are made with long-term vesting requirements which are designed to encourage retention of a small number of 15 senior executives designated by the Committee. The size of an award, and any adjustments, is determined by the Committee to reflect an executive's level of responsibility and individual performance. As provided by the Company's Long-Term Incentive Compensation Plan, a continuity award may consist of restricted stock or a tandem grant of restricted stock together with a related non-qualified stock option which is granted at fair market value and restricted until a specified age. If the stock option is exercised, then the related restricted shares are canceled; if any portion of the stock option is not exercised by the date the continuity award terminates, then the less valuable component of the tandem award is canceled. The Committee has considered the provisions of the Omnibus Budget Reconciliation Act of 1993 which limit deductibility of compensation paid to named executive officers which exceeds $1 million. The Committee endorsed amendments to the Company's Long-Term Incentive Compensation Plan in 1994 to make certain sections of the Plan compatible with those provisions, while maintaining the Committee's flexibility in the Company's Management Incentive Plan to exercise business judgment in determining awards to take account of business conditions or the performance of individual executives. In 1997, the Committee recognized that a portion of Mr. Dillon's total current compensation was above $1 million. THE 1997 EXECUTIVE OFFICERS' COMPENSATION The Committee approved merit salary increases for all named executive officers based on competitiveness of the executives' pay and personal performance. In April 1997, Mr. Dillon's salary was increased to $900,000, which is below the median base salary level for CEO's in the group of surveyed companies referred to above. Salaries paid to the named officers in 1997, were competitively positioned from below to slightly above the median of the survey companies. MIP awards for the named executive officers in 1997 were determined by the Committee after review of Company and personal performance compared to predetermined 1997 financial and nonfinancial goals. All named executive officers' MIP awards increased compared to 1996 since no bonus fund was generated for that year. The performance share guidelines described above were used by the Committee to determine contingent performance share awards in December 1997 to the named executive officers for the 1998-2002 Award Period and the payouts in 1997 of earned shares for the 1992-1996 Award Period. The pretax value of Mr. Dillon's performance share award in 1997 was $1,421,000 in contingent restricted stock for the 1998-2002 Award Period. The actual payout of this award will not be determined until 2003. Awards for the 1992-1996 Award Period were slightly below target; accordingly, the pretax values of Mr. Dillon's award, paid in 1997, including accrued dividends, were $291,747 in deferred restricted stock; and $291,747 in earned shares. The shares earned for the 1992-1996 Award Period reflect Company performance which compared with the somewhat better performance of the Peer Paper Group. The Committee granted stock options in 1997 based on earlier described competitive surveys of senior managers' total compensation packages, without consideration of the amount of stock options already held by named executive officers. Mr. Dillon's 1997 stock option award was 104,000 shares reflecting his promotion to chief executive officer; his 1996 stock option award was 26,000 16 shares; and his 1995 stock option awards were 19,737 shares which reflected his promotion to president. In 1997, no named executive officers were granted continuity awards. THE MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS Peter I. Bijur Willard C. Butcher Robert J. Eaton, chairman Thomas C. Graham Edmund T. Pratt, Jr. Charles R. Shoemate COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No executive officer or other employee of the Company served as a member of the Committee or as a member of the compensation committee on the board of any company where an executive officer of such company is a member of the Committee. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors among others, to file reports of ownership and changes in ownership of such securities with the Securities Exchange Commission and the New York Stock Exchange. Copies of these reports must also be furnished to the Company. Based solely upon a review of the copies of the forms filed under Section 16(a) and furnished to the Company, or written representations from reporting persons, the Company believes that all filing requirements applicable to its executive officers and directors were complied with during 1997, except that C. Wesley Smith, a director and executive officer, inadvertently failed to file a report reflecting his sale of stock in December 1997, but made a late filing of such report immediately upon discovery of the oversight. 17 PERFORMANCE GRAPHS The following charts compare a $100 investment in International Paper stock with a similar investment in a peer group of eight key competitor companies and the S&P 500. The charts portray total nominal return, 1992-1997 and 1987-1997 assuming reinvestment of dividends. The Company has presented information pertaining to total shareholder return over two different time periods since all holders of the common stock did not acquire their investment in International Paper on the same date. The Company believes a presentation in this format more accurately reflects the financial return provided to the holders of its common stock which may not be evident if only one time period was highlighted. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN 5 YEARS ENDED DECEMBER 31, 1997* DOLLARS International Paper S&P 500 Index Peer Group** 1992 100 100 100 1993 104 110 114 1994 119 111 117 1995 122 153 128 1996 134 189 138 1997 146 251 149
Assumes $100 invested on December 31, 1992. *Total return assumes reinvestment of dividends. **Includes Boise Cascade, Champion, Georgia Pacific, Mead, Stone Container, Union Camp, Westvaco, and Weyerhaeuser. 18 EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF TEN-YEAR CUMULATIVE TOTAL RETURN* DOLLARS International Paper S&P 500 Index Peer Group** 1987 100 100 100 1988 113 117 106 1989 141 154 116 1990 138 149 94 1991 188 194 128 1992 181 209 143 1993 189 230 162 1994 215 233 168 1995 222 320 182 1996 243 394 197 1997 265 525 213
Assumes $100 invested on December 31, 1987. * Total return assumes reinvestment of dividends. ** Includes Boise Cascade, Champion, Georgia Pacific, Mead, Stone Container, Union Camp, Westvaco, and Weyerhaeuser. 19 ADDITIONAL INFORMATION REGARDING EXECUTIVE COMPENSATION The compensation of the Company's executive officers is approved by the Committee except for the compensation of the officer-directors, which is recommended by the Committee and approved by the Board of Directors. The following tables set forth information with respect to the five most highly compensated executive officers of the Company for the years 1995-1997.
SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION --------------------- ANNUAL COMPENSATION CONTINGENT AWARDS ---------------------------------- --------------------- (a) (b) (c) (d) (e) (f) (g) (h) OTHER RESTRICTED ANNUAL STOCK ALL OTHER SALARY BONUS COMPENSATION AWARD OPTIONS COMPENSATION NAME AND POSITION YEAR ($) (1) ($) (2) ($) (3) ($) (4) (#) (5) ($) (6) John T. Dillon as 1997 $ 862,500 $ 850,000 $ 0 $1,421,001 160,300 $ 153,497 Chief Executive Officer 1996 $ 712,500 $ 0 $ 0 $3,400,911 26,000 $ 172,397 1995 $ 490,417 $ 600,000 $ 0 $1,771,108 35,737 $ 129,717 C. Wesley Smith as 1997 $ 465,000 $ 310,000 $ 0 $ 345,539 72,900 $ 97,052 Executive Vice President 1996 $ 429,667 $ 0 $ 0 $ 340,423 25,000 $ 114,086 1995 $ 380,750 $ 410,000 $ 0 $ 367,619 36,600 $ 93,299 James P. Melican as 1997 $ 493,333 $ 275,000 $ 0 $ 316,204 96,600 $ 93,834 Executive Vice President 1996 $ 471,667 $ 0 $ 0 $ 311,518 15,400 $ 111,882 1995 $ 446,667 $ 410,000 $ 0 $ 248,987 27,700 $ 106,803 David W. Oskin as 1997 $ 422,917 $ 275,000 $ 490,491 $ 316,204 57,500 $ 51,328 Executive Vice President 1996 $ 397,917 $ 0 $ 0 $ 745,974 50,800 $ 143,199 1995 $ 461,315 $ 129,410 $ 149,719 $ 400,131 12,000 $ 256,608 Milan J. Turk as 1997 $ 355,000 $ 250,000 $ 0 $ 289,301 74,200 $ 58,088 Executive Vice President 1996 $ 332,083 $ 0 $ 0 $1,137,962 12,000 $ 68,842 1995 $ 293,750 $ 260,000 $ 0 $ 191,405 27,200 $ 60,554
(1) Salary paid in 1997 including amounts deferred pursuant to Section 401(K) of the Internal Revenue Code or pursuant to unfunded deferral arrangements. Includes, for 1995, Mr. Oskin's salary paid by Carter Holt Harvey, Ltd. during the six months after which it became a Company subsidiary. (2) Management Incentive Plan awards paid in 1998 and 1996 attributable to 1997 and 1995 respectively, including amounts deferred pursuant to Section 401(K) of the Internal Revenue Code or pursuant to deferral arrangements reported in the year earned. No awards were paid for 1996. 20 (3) Includes payment in 1995 of household maintenance expenses and home leave of $81,477 and $47,018, respectively, and reimbursement, plus tax gross-up for interest paid by Mr. Oskin on a third party loan undertaken in connection with an expatriate assignment from 1993 to 1995 with an affiliate, later a subsidiary. (4) Represents (a) 100% of the value of gross target restricted performance shares contingently awarded in 1997 for the 1998-2002 Award Period, in 1996 for the 1997-2001 Award Period, and in 1995 for the 1996-2000 Award Period which are earned if the target goal is met for an Award Period. The awards are reduced if the goal is not met, or entirely forfeited if a predetermined threshold goal is not met. 150% of the value of the target restricted performance shares are earned if the target goal is exceeded by a predetermined percentage; (b) 100% of the value of incremental target awards for prior periods made upon promotion, subject to the same contingencies; and (c) the value of continuity awards of $840,000 in 1996 and $858,750 in 1995 for Mr. Dillon; $336,000 in 1996 for Mr. Oskin; and $648,000 in 1996 for Mr. Turk. The number and dollar value of restricted stock holdings at December 31, 1997 are as follows: 220,515/$9,509,728 for Mr. Dillon; 96,452/$4,159,497 for Mr. Smith; 94,655/$4,082,017 for Mr. Melican; 92,179/$3,975,226 for Mr. Oskin; and 90,985/$3,923,707 for Mr. Turk. These numbers include the restricted stock portion of the tandem awards of restricted stock/options made to the respective individuals under continuity awards. Dividends are paid on restricted shares. (5) Includes replacement options if applicable. These figures do not include the tandem option awards made as a part of the continuity awards, insofar as the awards are characterized as restricted stock awards. Such tandem options were for 100,000 shares for Mr. Dillon in 1996 and 1995; 40,000 shares for Mr. Oskin in 1996; and 80,000 shares for Mr. Turk in 1996. (6) 1997 totals represent Company contributions to the Salaried Savings Plan and Unfunded Savings Plan, cost of group life, premium payments grossed up for taxes for the Executive Supplemental Insurance Plan (ESIP), accruals for ESIP lump-sum dividend payments as follows: $41,400, $15,075, $76,176 and $20,846 for Mr. Dillon; $22,320, $12,049, $45,462 and $17,221 for Mr. Smith; $23,689, $12,811, $37,010 and $20,323 for Mr. Melican; $7,800, $5,949, $28,208 and $9,372 for Mr. Oskin; and $17,050, $9,092, $31,946 and $0 for Mr. Turk. 21 The table below sets out information on the option grants made in 1997 to the named executive officers:
OPTION GRANTS IN 1997 INDIVIDUAL GRANTS (a) (b) (c) (d) (e) (f) % OF TOTAL OPTIONS OPTIONS GRANTED EXERCISE OR GRANT DATE GRANTED TO EMPLOYEES BASE PRICE EXPIRATION VALUE NAME AND POSITION (#) (1) IN 1997 ($/SH) DATE ($) (2) John T. Dillon as 12,300(4) 0.22% $ 57.688 01/10/99 $ 113,731 Chief Executive Officer 14,000(4) 0.26% $ 57.688 01/09/00 $ 161,546 14,000(4) 0.26% $ 57.688 01/08/01 $ 161,546 16,000(4) 0.29% $ 57.688 01/14/02 $ 184,624 85,000(3) 1.55% $ 42.875 01/14/07 $ 996,863 19,000(3) 0.35% $ 41.000 01/29/07 $ 213,083 C. Wesley Smith as 8,600(4) 0.16% $ 54.938 01/09/00 $ 94,505 Executive Vice President 8,600(4) 0.16% $ 54.938 01/08/01 $ 94,505 8,600(4) 0.16% $ 54.938 01/14/02 $ 94,505 13,600(4) 0.25% $ 54.938 01/12/03 $ 149,450 25,000(3) 0.46% $ 42.875 01/14/07 $ 293,195 8,500(3) 0.16% $ 41.000 01/29/07 $ 95,327 James P. Melican as 9,600(4) 0.18% $ 56.125 01/10/99 $ 88,221 Executive Vice President 12,300(4) 0.22% $ 56.125 01/09/00 $ 138,086 13,600(4) 0.25% $ 56.125 01/08/01 $ 152,680 15,400(4) 0.28% $ 56.125 01/14/02 $ 172,888 15,400(4) 0.28% $ 56.125 01/12/03 $ 172,888 22,000(3) 0.40% $ 42.875 01/14/07 $ 258,012 7,700(3) 0.14% $ 41.000 01/29/07 $ 86,355 David W. Oskin as 8,600(4) 0.16% $ 49.000 01/10/99 $ 71,126 Executive Vice President 9,600(4) 0.18% $ 43.000 01/14/02 $ 82,571 9,600(4) 0.18% $ 43.000 01/12/03 $ 82,571 22,000(3) 0.40% $ 42.875 01/14/07 $ 258,012 7,700(3) 0.14% $ 41.000 01/29/07 $ 86,355 Milan J. Turk as 9,600(4) 0.18% $ 57.688 01/12/03 $ 110,774 Executive Vice President 9,600(4) 0.18% $ 57.688 01/11/04 $ 110,774 12,000(4) 0.22% $ 57.688 01/10/05 $ 138,468 12,000(4) 0.22% $ 57.688 01/09/06 $ 145,302 17,000(3) 0.31% $ 42.875 01/14/07 $ 199,373 7,000(4) 0.13% $ 57.688 01/29/07 $ 101,361 7,000(3) 0.13% $ 41.000 01/29/07 $ 78,504
(1) Each option granted may be replaced upon exercise. This means that a new option is granted for the same number of shares as is exercised, with the then current market value becoming the new exercise price. The replacement option does not extend the term of the original option. Options may not be replaced more than three times. Original options are indicated by "(3)" and replacement options by "(4)". These numbers do not include any options granted as part of the tandem awards of restricted stock/options made as continuity awards in 1997. The restricted stock is reported as part of the total holdings of the respective individuals under footnote 3 to the Summary Compensation Table. (2) Grant date value is based on the Black-Scholes option pricing model adapted for use in valuing stock options. The real value of the options in this table depends upon the actual 22 performance of the Company's stock during the applicable period and upon when they are exercised. The Company believes that no model accurately predicts the future price of International Paper's stock or places an accurate present value on stock options. The grant date values were determined based upon the following assumptions:
ORIGINAL (3) REPLACEMENT (4) ------------- ----------------- Expected volatility.............................................. 29.50% 29.50% Risk-free rate of return......................................... 6.32% 6.31% Dividend yield................................................... 2.50% 2.31% Expected term (years)............................................ 4.37 2.22
The table below sets out the information on options exercised and options outstanding:
AGGREGATED OPTION EXERCISES IN 1997 AND DECEMBER 31, 1997 OPTION VALUES (a) (b) (c) (d) (e) (f) (g) VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT SHARES VALUE REALIZED($) OPTIONS AT 12/31/97(#)(5) 12/31/97($)(5) ACQUIRED ON ---------------------- ------------------------- ------------------------- EXERCISE AGGREGATE ANNUALIZED RESTRICTED UNRESTRICTED RESTRICTED NAME AND POSITION (#)(1) (1) (2) UNRESTRICTED (3) (4) (3)(4) John T. Dillon as 79,300 $1,573,700 $334,136 84,600 165,737 $ 26,138 $342,638 Chief Executive Officer C. Wesley Smith as 43,400 $ 871,550 $299,470 47,400 81,300 $ 0 $257,100 Executive Vice President James P. Melican as 84,800 $1,398,255 $413,656 75,900 75,900 $ 0 $248,050 Executive Vice President David W. Oskin as 42,600 $ 355,893 $190,725 54,600 66,700 $ 72,000 $196,988 Executive Vice President Milan J. Turk as 50,200 $1,018,613 $576,794 32,400 57,600 $117,800 $ 4,250 Executive Vice President
(1) The number of incremental shares retained on exercises by Mr. Dillon and Mr. Turk was 14,728 and 9,721 shares respectively. (2) Represents the aggregate incremental value realized divided by the number of years the option was held prior to exercise. (3) All options are exercisable under the plan upon grant; however, columns (e) and (g) indicate the number and value of options, the underlying shares of which, while exercisable, cannot be sold or are otherwise restricted. (4) Total value of options (market value minus exercise price) based on fair market value of Company stock of $43.125, as of December 31, 1997. (5) Options granted as part of the tandem awards of restricted stock/options made as continuity awards are not included. 23 RETIREMENT BENEFITS The following table shows the total estimated annual pension benefits payable under the Company's qualified and supplementary retirement plans upon retirement at age 65, calculated on a straight life annuity basis and reduced by a Social Security offset:
COMBINED RETIREMENT PLAN TABLE OF ESTIMATED BENEFITS CREDITABLE YEARS OF SERVICE PENSIONABLE ---------------------------------------------------------------- REMUNERATION 5 10 15 20 25 30 $ 400,000 $ 100,000 $ 124,829 $ 187,243 $ 192,044 $ 192,044 $ 192,444 $ 600,000 $ 150,000 $ 189,829 $ 284,743 $ 292,044 $ 292,044 $ 292,644 $ 800,000 $ 200,000 $ 254,829 $ 382,243 $ 392,044 $ 392,044 $ 392,844 $1,000,000 $ 250,000 $ 319,829 $ 479,743 $ 492,044 $ 492,044 $ 493,044 $1,500,000 $ 375,000 $ 482,329 $ 723,493 $ 742,044 $ 742,044 $ 743,544 $2,000,000 $ 500,000 $ 644,829 $ 967,243 $ 992,044 $ 992,044 $ 994,044
"Pensionable Remuneration" for purposes of the table above means salary, bonus and compensation deferred under the Unfunded Savings Plan or awards deferred under the MIP. Retirement benefits are payable under one or more of the following plans: a qualified plan covering all salaried employees which provides pension benefits based on final average earnings; a supplementary plan which provides a make-up of qualified plan benefits limited by the imposition of statutory Code limitations; and a supplementary plan covering designated senior managers which provides supplemental benefits to the qualified plan. At December 31, 1997, the number of creditable years of service and the currently applicable average pensionable remuneration (NOT the pension) under the retirement plans for the following are:
NAME YEARS AMOUNT - ------------------------------ --------- ------------- Mr. Dillon.................... 30.92 $ 1,712,500 Mr. Smith..................... 17.33 $ 790,750 Mr. Melican................... 13.92 $ 856,667 Mr. Oskin..................... 22.25 $ 697,917 Mr. Turk...................... 7.67 $ 605,000
COMPENSATION OF DIRECTORS COMPENSATION AND BENEFITS The compensation of each non-employee director of the Company is a retainer fee of $36,000 per year plus fees of $1,500 for each Board and Committee or other meeting attended. Directors may elect to defer receipt of all or part of their remuneration until a later date under a Deferred Compensation Plan, at which time the director will be paid in 24 cash equal to (1) the cash amount deferred plus interest at the higher of 6% per annum or the yield of U.S. Treasury bills or (2) the value at the time of payment of units equivalent to the value of Company common stock credited to the director's account at the time of each deferral, plus dividend equivalents. In addition, there is a compulsory portion to the Deferred Compensation Plan. Under this, each non-employee director, 54 years or older, is credited with 300 common stock equivalent units each year which remain in the Plan until death, disability or retirement. The common stock units held in each non-employee director's account are credited with dividend equivalents. Upon retirement, the amounts will be paid in cash. Employees of the Company who are also directors receive no compensation for services as a director or for attendance at Board or Committee meetings. In addition, under the Non-Employee Directors Restricted Stock Plan, awards of 2,100 shares of common stock are made upon the election or re-election of a director to a full three-year term, or a pro-rata amount for the appointment of a non-employee director to fill an unexpired term. Awards made in 1997 were 2,100 shares each for Class III directors and a pro-rata award to one newly elected director. Directors receive dividend payments represented by the shares awarded under the Restricted Stock Plan at $0.25 per share per quarter. As part of its overall program to promote charitable giving to education and assist corporate recruiting and research efforts, the Company has established a directors' planned gift program funded by life insurance policies on all directors. Upon the death of an individual director, the Company will donate $1 million over a ten-year period to one or more qualifying universities or colleges recommended by the individual director and the Company will be reimbursed by life insurance proceeds. Individual directors derive no financial benefit from this program since charitable deductions accrue solely to the Company. The program does not result in any material cost to the Company. IP FOREST RESOURCES COMPANY Further, four of the non-employee directors of the Company serve as directors of IP Forest Resources Company ("IPFR"), a wholly-owned subsidiary which acts as the managing general partner of IP Timberlands, Ltd., a New York Stock Exchange-listed limited partnership. As such, each of the four non-employee directors receives a retainer fee of $7,000 per year plus a fee of $1,500 for each IPFR Board and Committee meeting attended. These fees are paid by IPFR. There were six meetings of the Board and four Committee meetings in 1997. INDEMNIFICATION INSURANCE AND CONTRACTS The Company provides liability insurance for the Company's directors and all elected officers, as well as contractual arrangements with directors and certain officers of the Company, agreeing to compensate them for costs and liabilities incurred in actions brought against them while acting as directors or officers. On June 15, 1997, the Company amended its policies with Federal Insurance Company and National Union Insurance Company and purchased a policy with Zurich Insurance Company at a current annual period cost aggregating $600,000, such policies expiring on June 15, 1998. No monies have been paid under such policies by the carrier or by the Company under the contractual arrangements. 25 TERMINATION AGREEMENTS The Company has agreements with members of the executive officer group, providing for payments and other benefits if there is a change of control of the Company and the officer's employment is terminated (i) by the Company or its successor, other than for cause, disability or retirement, or (ii) by the officer if the chief executive officer of the Company ceases to hold that position for reasons other than cause, retirement or disability, or if the officer determines that by reason of adverse changes in, among other things, the officer's authority, compensation, duties, office location or responsibilities, the officer is unable to perform the duties and responsibilities of the position the officer held immediately prior to the change in control. These agreements provide that if the officer's employment terminates under the circumstances described above, the officer will receive: (a) continuation of medical and dental insurance coverage until age 65 or eligibility to join a comparable plan sponsored by another employer; (b) retiree medical coverage comparable to the Company's pre-change of control retiree medical plan; (c) a lump-sum payment equal to (i) his annual salary at termination together with his most recent short-term annual incentive compensation payment during the year preceding termination, multiplied by the smaller of the number "three" or the number of years between the termination date and the date he reaches age 65 and (ii) an amount necessary to offset any special federal excise tax on all payments received under the termination agreement. In addition to the foregoing provisions, Mr. Dillon's agreement can be triggered by a voluntary termination at any time within 18 months of the change in control. The agreement provides him with the above benefits as well as (a) payment of vested benefits under the pension plan which entitlement shall include payments made under the agreement which constitute "compensation" under the pension plan; (b) a lump-sum payment equal to the difference between (i) the actuarial value on termination date of accrued vested pension benefits and (ii) the actuarial value on termination date of what accrued pension benefits would have been if the period and payments set out in (c)(i) and (c)(ii) below were recognized under the pension plan; (c) a lump-sum payment equal to (i) his annual salary at termination, (ii) the average of his short-term incentive compensation award for three years preceding termination and (iii) the value of his average earned award under the Performance Share Award Plan (PSA) for three years preceding termination, multiplied by the number "four"; (d) a lump-sum payment equal to the value of any deferred incentive compensation or PSA awards and unvested Company matching contributions under the Salaried Savings Plan; (e) stock options equal to the average number of options awarded during the three years preceding termination, multiplied by the number "four", plus the extension of each option held until the end of the normal term of such option if he had not left the Company. The Board requires unanimous approval at a meeting of the Management Development and Compensation Committee, composed solely of non-employee directors, and majority approval by the Board before any termination agreement such as those described above is amended or entered into. The potential cost of satisfying the payments called for under the above-described termination agreements, prior to tax "gross-up", if there had been a change in control and all of the members of the executive officer group described in the Summary Compensation Table had 26 been terminated on December 31, 1997, would have been approximately $25 million. In addition to the foregoing, the Long-Term Incentive Compensation Plan contains provisions that release restrictions from stock awards and stock options for all members of the group if there is a change of control of the Company. Also, the Supplemental Retirement Plan for Senior Managers provides that if a change of control of the Company occurs, pension benefits will vest immediately and the minimum benefit will be increased from 25% to 50% of pensionable remuneration. The Company has authorized a grantor trust under Sections 671 through 677 of the Code in connection with the Company's benefit plans and termination agreements. Under the grantor trust, the trustee will pay the beneficiaries of the trust the amounts to which they are entitled under such plans and agreements subject to claims of the Company's creditors. 27 [INTERNATIONAL PAPER LOGO] TWO MANHATTANVILLE ROAD PURCHASE, NEW YORK 10577 Printed on Hammermill Papers, Accent Opaque 50 lbs. Hammermill Papers is a division of International Paper. EX-23 7 CONSENT OF ARTHUR ANDERSEN Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 6, 1998, included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 2-57646, 33-11117, 33-32527, 33-38133, 33-41374, 33-50438, 33-51447, 33-52945, 33-61335, 33-62283, 333-01667, 333-02137, 333-24869, and 333-47583. ARTHUR ANDERSEN LLP New York, New York March 27, 1998 EX-24 8 POWER OF ATTORNEY POWER OF ATTORNEY Know all Men by These Presents, that the undersigned hereby constitutes and appoints JAMES W. GUEDRY, WILLIAM B. LYTTON, AND JAMES P. MELICAN and each of them (with full power to each of them to act alone) their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for them on their behalf and in their name, place and stead, in any and all capacities, to sign, execute and affix their seal thereto and file the Annual Report of International Paper Company on Form 10-K (or any other appropriate form), under the Securities Exchange Act of 1934, as amended, together with any and all amendments to such Annual Report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, for all intents and purposes, and that the undersigned hereby ratify and confirm all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. EXHIBIT 24 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. International Paper Company By: /s/ James W. Guedry ----------------------------- James W. Guedry, Secretary March 30, 1998 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED: NAME TITLE DATE /s/ John T. Dillon Chairman of the Board, March 30, 1998 - ----------------------- Chief Executive Officer (John T. Dillon) and Director /s/ C. Wesley Smith* Executive Vice March 30, 1998 - ------------------- President and Director (C. Wesley Smith) /s/ Peter I. Bijur* Director March 30, 1998 - ------------------- (Peter I. Bijur) /s/ Willard C. Butcher* Director March 30, 1998 - ----------------------- (Willard C. Butcher) /s/ Robert J. Eaton* Director March 30, 1998 - -------------------- (Robert J. Eaton) /s/ John A. Georges* Director March 30, 1998 - -------------------- (John A. Georges) /s/ Thomas C. Graham* Director March 30, 1998 - --------------------- (Thomas C. Graham) /s/ John R. Kennedy* Director March 30, 1998 - -------------------- (John R. Kennedy) /s/ Donald F. McHenry* Director March 30, 1998 - ---------------------- (Donald F. McHenry) /s/ Patrick F. Noonan* Director March 30, 1998 - ---------------------- (Patrick F. Noonan) /s/ Jane C. Pfeiffer* Director March 30, 1998 - --------------------- (Jane C. Pfeiffer) /s/ Edmund T. Pratt, Jr.* Director March 30, 1998 - ------------------------- (Edmund T. Pratt, Jr.) /s/ Charles R. Shoemate* Director March 30, 1998 - ------------------------ (Charles R. Shoemate) /s/ Marianne M. Parrs Senior Vice President March 30, 1998 - ------------------------ and Chief Financial (Marianne M. Parrs) Officer /s/ Andrew R. Lessin Vice President and March 30, 1998 - ---------------------- Controller and Chief (Andrew R. Lessin) Accounting Officer *By /s/ James W. Guedry ----------------------------------- (James W. Guedry, Attorney-in-Fact) EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 398 0 2,497 93 2,760 5,945 22,327 9,958 26,754 4,880 7,154 0 0 303 8,407 26,754 20,096 20,096 14,973 19,760 0 22 490 16 38 (151) 0 0 0 (151) (0.50) (0.50)
EX-99 10 MANAGEMENT INCENTIVE PLAN EXHIBIT 99 INTERNATIONAL PAPER COMPANY - MANAGEMENT INCENTIVE PLAN (MIP) AMENDED AND RESTATED AS OF JANUARY 1, 1998 I. PURPOSES OF THE PLAN The purposes of this Amended and Restated Management Incentive Plan are: (a) to provide greater incentive for Participants to exert their best efforts to increase the profitability of the Company, (b) to attract and retain in the employ of the Company persons of outstanding competence, and (c) to further the identity of interests of Plan Participants with the interests of the Company's shareholders. The awards made under the Plan are not a form of deferred regular compensation with respect to the Participants' normal performance of their regular duties, but are instead intended to provide an incentive to achieve higher than expected levels of performance. Defined terms used herein shall have the meanings set forth in Article II. II. DEFINITIONS BUSINESS UNIT: "Business Unit" means a business unit or sector, composed of an aggregate of Mill/Facilities and identified in a list each Plan Year by the Committee. COMMITTEE: "Committee" means the Management Development and Compensation Committee of the Company's Board of Directors. COMPANY: "Company" means International Paper Company, a New York corporation, together with its subsidiaries. COMPANY PEER GROUP: "Company Peer Group" means those companies engaged in the forest products industry which the Committee determines from time to time to be a representative group of companies with which the Company competes. COMPANY ROI: "Company ROI" means, with respect to any Plan Year, the Company's Return on Investment for such Plan Year compared to its budgeted Return on Investment for such Plan Year. COMPETITIVE ROI: "Competitive ROI" means a comparison of the Company ROI with the ROI of the Company's Peer Group, calculated on a weighted basis, as determined from time to time by the Committee. CORPORATE PARTICIPANTS: "Corporate Participants " means those Participants not included in the list of Participants attached to a specific Business Unit or Mill/ Facility. EMPLOYEES: "Employees" mean those persons who are full time employees of the Company. -2- INCENTIVE COMPENSATION FUND: "Incentive Compensation Fund" means, with respect to any Plan Year, the aggregate amount available for incentive compensation payments under the Plan, as determined in accordance with Article VI hereof. KEY INITIATIVES: "Key Initiatives" means areas that have been specifically targeted for growth and development by the unit to which such Key Initiatives relate. MILL/FACILITY: "Mill/Facility" means a mill, facility, forest region or similar subdivision of a Business Unit as identified in a list compiled each Plan Year by the Committee. NON-FINANCIAL GOALS: "Non-financial Goals" means, with respect to any Plan Year, a comparison of how well the Company performed in certain non-financial areas compared to targeted performance in such areas. PARTICIPANT: "Participant" means a person who has been designated as a participant in the Plan pursuant to Article V hereof. PERFORMANCE FACTOR: "Performance Factor" means the percentage amount assigned by the Committee to a Performance Measure for a level of achievement and representing a percentage of Target Award, pursuant to Article VI(C) hereof. PERFORMANCE MEASURE: "Performance Measure" means one of the three separate measurements of corporate performance used in determining the Incentive Compensation Fund. PLAN: "Plan" means this Amended and Restated Management Incentive Plan, as the same may be amended from time to time. PLAN YEAR: "Plan Year" means the twelve month period corresponding to the Company's fiscal year. POOL FUNDING FACTOR: "Pool Funding Factor" means, with respect to any given Plan Year, the sum of all Performance Measures, after giving effect to the weighting of each Performance Measure and after multiplication of each Performance Measure by its Performance Factor. RETURN ON INVESTMENT/ROI: "Return on Investment" or "ROI" means earnings before interest and after taxes divided by capital employed. TARGET AWARD: "Target Award" means an amount equal to the percentage of salary range midpoint applicable to the actual position level of each Participant, as set forth in Appendix A hereto. -3- UNIT NON-FINANCIAL RATING: "Unit Non-financial Rating" means, with respect to any given Plan year, the numerical rating which can range from .50 to 1.75 awarded the Corporate Participants as a group, and each Business Unit and Mill/Facility as a measure of such unit's achievement of its respective non-financial goals. III. PLAN DESCRIPTION The Plan establishes a maximum fund based on corporate performance compared to Plan Year financial and non-financial objectives as described herein. Funds are allocated proportionally to Corporate, Business Unit and Mill/Facility Participants based on performance levels established for the organizational units to which such Participants are allocated. Individual Participant awards are based on a proportionate share of their respective fund, adjusted for individual performance. A separate Special Recognition Fund may be established to reward special contributions by Employees during the Plan Year. IV. ADMINISTRATION OF THE PLAN The Plan shall be administered under the direction of the Committee. The Committee is authorized to exercise considerable discretion and judgment in interpreting the Plan and in adopting, from time to time, rules and regulations governing the administration of the Plan. Decisions of the Committee shall be final, conclusive and binding upon all parties, including the Company, its shareholders and employees. V. PARTICIPATION IN THE PLAN Participants in the Plan shall be limited to officers and employees of the Company, as determined from time to time by the Chief Executive Officer. Recommendations with respect to the final determination of the Participants who are to receive incentive awards for each Plan Year and to the amount of the awards for each Plan Year, shall be made each year to the Committee by the Chief Executive Officer under such procedures as may from time to time be prescribed by the Committee. Employees who are eligible for participation in any business unit or divisional variable cash compensation plan of the Company shall not be eligible for an incentive award under this Plan based upon the same period of service, and amounts paid under such plans shall not be regarded as awards under this Plan. Participation in this Plan, or receipt of an award under this Plan, shall not give a Participant or Employee any right to a subsequent award, nor any right to continued employment by the Company for any period, nor shall the granting of an award give the Company any right to continued services of the Participant or Employee for any period. Likewise, participation in the Plan will not in any way affect the Company's right -4- to terminate the employment of the Participant or Employee at any time with or without cause. VI. AMOUNT AVAILABLE FOR INCENTIVE AWARDS A. INCENTIVE COMPENSATION FUND. The amount available in any Plan Year in the Incentive Compensation Fund shall be determined in accordance with this Article VI. B. PERFORMANCE MEASURES. In establishing the Incentive Compensation Fund, three separate measurements of corporate performance shall be used. These measurements shall include Company ROI, Competitive ROI and Non-financial Goals. Weighting factors of forty percent (40%), thirty-five percent (35%) and twenty-five percent (25%), shall be given, respectively, to the Performance Measures reflecting Company ROI, Competitive ROI and Non-financial Goals. C. PERFORMANCE FACTOR. Each Performance Measure shall be multiplied by a Performance Factor ranging from fifty percent (50%) to one hundred seventy-five percent (175%) . The Committee shall determine the Performance Factor applicable to each Performance Measure and shall have broad discretion in determining such Performance Factors. In connection with Company ROI and Competitive ROI, the Committee may take into account, without limitation, such items as unforeseen changes in economic conditions and the like. In connection with Non-financial Goals, the Committee may take into account, without limitation, such items as changes in the law, technology, natural disasters or catastrophic occurrences. D. CALCULATION OF INCENTIVE COMPENSATION FUND. The sum of all Performance Measures, after giving effect to the weighting of each Performance Measure and after multiplication of each Performance Measure by its Performance Factor, shall equal the "Pool Funding Factor." The sum of Target Awards for all Participants shall be multiplied by the Pool Funding Factor and the amount so obtained shall constitute the Incentive Compensation Fund for the applicable Plan Year. Examples of the methodology to be used in applying Performance Factors and Performance Measures to the determination of Target Awards are set forth in Appendix B hereto. VII. ALLOCATION OF INCENTIVE COMPENSATION FUND AMONG PARTICIPANTS A. GENERAL. Amounts available under the Incentive Compensation Fund for payment of individual awards shall be allocated among Corporate, Business Unit and Mill/ Facility Participants based on organizational level performance. -5- B. CORPORATE LEVEL PERFORMANCE. To the extent feasible under the applicable portion of the Incentive Compensation Fund, the attainment of Participant Target awards by Corporate Participants, subject to adjustment under Section VII E below, shall be (1) eighty percent (80%) of the sum of a figure based (a) seventy percent (70%) on overall Company performance and (b) thirty percent (30%) on Key Initiatives in the Participant's specific area plus (2) twenty percent (20%) of the Unit Non-financial Rating. C. BUSINESS UNIT PERFORMANCE. To the extent feasible under the applicable portion of the Incentive Compensation Fund, the attainment of Participant Target awards by Business Unit Participants, subject to adjustment under Section VII E below, shall be (1) eighty percent (80%) of the sum of a figure based (a) fifty percent (50%) on Company performance and (b) fifty percent (50%) on Business Unit performance plus (2) twenty percent (20%) of the Unit Non-financial Rating. The Company portion of such performance shall be based entirely on overall Company performance. The remaining fifty percent (50%) shall be based on the particular Business Unit's Performance, with seventy percent (70%) of such amount based on actual ROI, or, if such an ROI measurement is determined, in the sole discretion of the Committee to be inappropriate, based on such other financial measurements as the Committee shall deem appropriate, compared to budgeted ROI, and thirty percent (30%) of such amount based on Key Initiatives in the Participant's Unit. D. MILL/FACILITY PERFORMANCE. To the extent feasible under the applicable portion of the Incentive Compensation Fund, the attainment of Participant Target Awards by Mill/Facility Participants, subject to adjustment under Section VII E below, shall be (1) eighty percent (80%) of the sum of a figure based (a) twenty-five percent (25%) on overall Company performance, (b) twenty-five percent (25%) on Business Unit ROI and Key Initiatives measurements for that Business Unit in which the Mill/Facility is included and (c) the remaining fifty percent (50%) on such Mill/Facility's performance plus (2) twenty percent (20%) of the Unit Non-financial Rating. In determining Mill/Facility performance, seventy percent (70%) of such amount based on actual ROI against budgeted ROI or, if such an ROI measurement is determined, in the sole discretion of the Committee to be inappropriate, based on such other financial measurements as the Committee shall deem appropriate, and thirty percent (30%) of such amount based on Key Initiatives. E. INDIVIDUAL AWARDS. Individual awards for Participants shall be based on each Participant's share of the relevant fund established in connection with Corporate performance, Business Unit performance and Mill/Facility performance, as the case may be, factored by the individual performance of the Participant, within a range of 0 percent (0%) to one hundred twenty percent (120%). -6- VIII. SPECIAL RECOGNITION FUND. The Committee may approve the establishment of a discretionary fund to be used to reward Employees whose contribution during the Plan Year merits special recognition. Such awards shall be recommended by the Chief Executive Officer of the Company and, in the aggregate, may not exceed two percent (2%) of the total Incentive Compensation Fund approved by the Committee for the Plan Year. IX. AWARD RECOMMENDATIONS. A. RECOMMENDATIONS. The Chief Executive Officer shall submit to the Committee at the end of each Plan Year recommendations with respect to the Participants who should receive incentive awards for that Plan Year, together with the proposed amount of such individual awards. B. GRANTING OF AWARDS. The Committee, in its sole discretion, may approve, revise or disapprove any recommended award to a Participant as it deems appropriate. Any award to an Officer-Director shall be subject to approval by the full Board of Directors of the Company. C. DEATH, DISABILITY OR RETIREMENT OF A PARTICIPANT. A Participant whose employment terminates during a Plan Year because of death, retirement or disability (or who is granted a leave of absence) may, at the discretion of the Committee and under such rules as the Committee may from time to time prescribe, be eligible for consideration for a pro-rata award based on the period of active employment during the Plan Year. If a Participant's employment with the Company is terminated for any reason other than death, disability, retirement, or the grant of a leave of absence, prior to actual payment of an award hereunder, such award shall be canceled and the Participant shall have no right to receive payment on account of such award. X. METHOD AND TIME OF PAYMENT OF AWARDS A. TYPE OF PAYMENT. As soon as practicable after an individual incentive award under this Plan has been approved by the Committee (or approved by the Board of Directors with respect to an award to an Officer-Director), the award shall be paid to the Participant in cash unless the Participant has elected to defer payment as described in Article X(C). B. PAYMENT TO BENEFICIARIES. If a Participant dies prior to receipt of an approved award under the Plan, the award shall be paid to such beneficiary or beneficiaries as the Participant shall designate in writing. The beneficiary designation shall state -7- whether payment shall be made in a lump-sum or in quarterly installments over a specified period of time (not to exceed forty calendar quarters). If a Participant dies without having filed a beneficiary designation as set forth above, the award shall be paid in a lump-sum to the Participant's estate. C. DEFERRAL OF PAYMENT (1998 AWARD YEARS AND AFTER). Subject to the approval of the Committee and for any Award Year beginning in 1998, any Participant may elect to defer payment of all or any portion of an award under this Plan by filing a written irrevocable Election to Defer Payment with the Company by a date determined by the Company. Awards or portions thereof so elected to be deferred shall be invested in the Participant's accounts under the Company's Unfunded Savings Plan as directed by the Participant. XI. MODIFICATION, SUSPENSION OR TERMINATION OF PLAN. The Board of Directors may at any time suspend, terminate, modify or amend any or all of the provisions of this Plan. XII. GOVERNING LAW. The Plan shall be governed by the laws of the State of New York. XIII. TAX WITHHOLDING. The Company shall have the right to deduct from any award made under the Plan, a sufficient amount to cover withholding of any federal, state, local or foreign jurisdiction taxes required by law, or to take such other action as may be necessary to satisfy any such withholding obligations. XIV. NON-TRANSFERABILITY OF AWARDS. No award, under this Plan, and no rights or interests therein, shall be assignable or transferable by a Participant (or legal representative). XV. EFFECTIVE DATE This Plan shall become effective as of January 1, 1998. APPENDIX A MANAGEMENT INCENTIVE PLAN (MIP) TARGET AWARDS POSITION MIP LEVEL TARGET 43 75% 36 55% 35 55% 34 55% 33 50% 32 50% 31 50% 30 45% 29 45% 28 45% 27 40% 26 40% 25 40% 24 36% 23 30% 22 30% 21 25% 20 20% 19 20% 18 15% APPENDIX B MANAGEMENT INCENTIVE PLAN (MIP) CALCULATION OF INCENTIVE COMPENSATION FUND FINANCIAL AND NON-FINANCIAL PERFORMANCE RATING GOAL ACHIEVEMENT PERFORMANCE RATING 125% and above 1.75 100% 1.00 70% 0.50 69% and below 0.00 FINANCIAL PERFORMANCE FACTOR Goal Performance Performance GOALS ACHIEVEMENT RATING WEIGHTING FACTOR ROI vs. Budget 78.9% .648 .40 .324 ROI vs. Peers 100.0 .700 .35 .175 --- ---- Total .75 .499 NON-FINANCIAL PERFORMANCE FACTOR Goal Performance Performance GOALS ACHIEVEMENT RATING WEIGHTING FACTOR Quality 115.0% 1.45 .0833 .121 Safety & Environment 113.0 1.39 .0833 .116 People Development 103.0 1.09 .0833 .091 ----- ---- Total .2500 .328 COMPANY PERFORMANCE FACTOR Financial Performance Factor (.499) + Non-Financial Performance Factor(.328) = .827 PRELIMINARY MANAGEMENT INCENTIVE PLAN FUND PROJECTION Company Performance Factor x Aggregate Target Awards .827 x $23.312MM = $19.279MM -----END PRIVACY-ENHANCED MESSAGE-----