-----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, OFg+FaeMAlkU8SDUl69UksiM9UzGeZ3kRToZDzBqu7Y6l5kXpDWtQgEdsItFLCXB Y7YGfc9PJLgjBSMxgzeR9Q== 0000898822-01-501008.txt : 20020413 0000898822-01-501008.hdr.sgml : 20020413 ACCESSION NUMBER: 0000898822-01-501008 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20011221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTVACO CORP CENTRAL INDEX KEY: 0000106498 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 131466285 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-03013 FILM NUMBER: 1820259 BUSINESS ADDRESS: STREET 1: 299 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10171 BUSINESS PHONE: 2126885000 MAIL ADDRESS: STREET 1: 299 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10171 FORMER COMPANY: FORMER CONFORMED NAME: WEST VIRGINIA PULP & PAPER CO DATE OF NAME CHANGE: 19700114 10-K/A 1 december21-10ka.txt FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000 COMMISSION FILE NUMBER 1-3013 WESTVACO CORPORATION (Exact name of registrant as specified in its charter) Delaware 299 Park Avenue (State of incorporation) New York, New York 10171 Telephone 212-688-5000 13-1466285 (Address and telephone number of (I.R.S. Employer registrant's principal Identification No.) executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock- $5 par value New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Sinking Fund Debentures: 8 1/8%, due 2001-2007 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (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, 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. X --- At October 31, 2000, the latest practicable date, the number of shares of common stock outstanding and aggregate market value of voting common stock held by nonaffiliates were 100,662,409 and $2,831,130,253, respectively. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000 (the "2000 Westvaco Annual Report") are incorporated by reference into Parts I, II and IV of this Form 10-K. Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held February 27, 2001 ("Westvaco's 2001 Proxy Statement") are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS PART I ITEM PAGE 1. BUSINESS I-1 2. PROPERTIES I-4 3. LEGAL PROCEEDINGS I-7 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS I-8 PART II 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED II-1 SECURITY HOLDER MATTERS 6. SELECTED FINANCIAL DATA II-1 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS II-1 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET II-1 RISK 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA II-2 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE II-2 PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT III-1 11. EXECUTIVE COMPENSATION III-1 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND III-1 MANAGEMENT 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS III-1 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON IV-1 FORM 8-K PART I ITEM 1. BUSINESS GENERAL Westvaco Corporation, a Delaware Corporation incorporated in 1899 as West Virginia Pulp and Paper Company, is one of the world's major producers of packaging, paper and chemicals. The company serves customers in more than 70 countries with operations in the United States, South America and Europe. The company produces paper and paperboard to convert into a variety of packaging products. Westvaco is also a leading global supplier of premium packaging for consumer products markets. The company considers premium packaging to be products that offer versatile printing and finishing capabilities for functional and decorative packaging needs, including: o Folding cartons in paperboard and plastic, alone or in combination o Injection-molded packaging o Specialty inks, coatings, varnishes and stocks o Simulated luxury finishes o Refractive and precision foil stamping o High gloss coatings o Two-side printing o Windowing o Security tagging o Anti-counterfeiting professional services and products The company also manufactures a variety of specialty chemicals, sells timber from its forestlands, is engaged in land development and produces lumber. In Brazil, it is a major producer of paperboard and corrugated packaging. Westvaco operates consumer packaging plants in Austria, Brazil, the Czech Republic, Germany, Ireland, The Netherlands, the United Kingdom and the United States. Westvaco exports products from the United States and certain of its foreign subsidiaries to other countries throughout the world. The term "Westvaco" or "the company" includes Westvaco Corporation and its consolidated subsidiaries unless otherwise noted. CURRENT YEAR DEVELOPMENTS In December 1999, the company acquired Temple-Inland's bleached paperboard mill in Evadale, TX. In January 2000, the company acquired Mebane Packaging Group, a leading North American supplier of packaging for pharmaceutical products and personal care items with seven plants in the eastern United States and Puerto Rico. In March 2000, the company acquired the asphalt emulsion business of Raschig GmbH. In July 2000, the company completed its acquisition of IMPAC Group, Inc. ("IMPAC"), a leading North American and European supplier of packaging for entertainment products, cosmetics and health and beauty aids with 13 plants in Europe and eight plants in the United States. Also, in July 2000, Rigesa, Ltda. ("Rigesa"), Westvaco's Brazilian subsidiary, acquired all assets of Agaprint Embalagens, a leading supplier of consumer packaging in Brazil. In August 2000, IMPAC Europe Ltd., a Westvaco subsidiary, acquired DuBOIS Holdings Ltd., a major European manufacturer of DVD packaging. In October 2000, IMPAC Europe acquired Sony Music Printing (Holland) BV, a manufacturer of packaging for entertainment products in The Netherlands. In September 2000, the company announced a definitive agreement to acquire a majority interest in Alfred Wall AG ("Wall"), a leading European supplier of consumer packaging based in Graz, Austria. Wall has six packaging plants in Austria, the United Kingdom, Germany and Poland. The transaction is scheduled to close in 2001. I-1 BUSINESS SEGMENTS The company's principal business segments are the manufacture of (1) packaging products, (2) paper products, and (3) chemicals. A more detailed description of the company's business segments, including financial information, is contained in Note P to the consolidated financial statements in the 2000 Westvaco Annual Report, and is incorporated herein by reference. MARKETING AND DISTRIBUTION The principal markets for Westvaco's products are in the United States, Brazil, Europe and Asia. Sales to customers outside the United States made up approximately 22% of Westvaco's total sales in 2000, 24% in 1999 and 25% in 1998. Substantially all products are sold through the company's own sales force. Westvaco maintains sales offices in key cities throughout the world. FOREST RESOURCES The principal raw material used in the manufacture of paper, paperboard and pulp is wood. Westvaco owns 1,418,000 acres of forestland in the United States and southern Brazil (more than 2,000 miles from the Amazon rainforests.) Westvaco's Cooperative Forest Management Program provides an additional source of wood fiber from the 1,371,000 acres owned by participating landowners and managed with assistance from Westvaco foresters. Westvaco's strategy, based on the location of its mills and the composition of surrounding forestland ownership, is to provide a portion of its wood fiber from company-owned land and to rely on private woodland owners and sawmill residues for substantial quantities of wood. Westvaco furnished 32% in 2000, 39% in 1999 and 36% in 1998 of its wood requirements from company-owned land. An additional 6% in 2000, 8% in 1999 and 7% in 1998 was purchased from landowners in the Cooperative Forest Management Program. The remainder was purchased from other private landowners and sawmills by mill wood procurement organizations, including a long-term wood supply contract with Temple-Inland, the previous owner of the Evadale, Texas mill. The wood procurement system includes 29 pulpwood concentration and processing yards that are strategically located to store and ship wood to the mills as needed. The Cooperative Forest Management Program, private landowners and sawmills have continuously provided adequate volumes of timber to meet our external fiber needs. The company has no reason to expect that these sources will be unable to furnish adequate wood supply in the future. Westvaco has the capacity to supply 100% of the wood for its Brazilian mills from company plantations. Westvaco forests include plantations, natural stands and fiber farms. The inventory of growing trees, the basis for volume production, has increased steadily over the last decade in spite of a steady rise in the volume of wood harvested. As a result of land sales during the past year, the total inventory volume has decreased slightly. The company has also decided to reduce its U.S. land base of 1.3 million acres by approximately 200,000 acres over the next two to three years. These parcels are not strategically significant to Westvaco due to their location in areas where the company otherwise has a sufficient, secure, long-term, low-cost fiber supply for its mills. Most of the pine stands harvested are plantations that are regenerated by establishing new pine plantations. Most hardwood stands that are harvested are re-established by planned natural regeneration from seeds and sprouts. Westvaco's hardwood plantation and fiber farm programs are expanding and involve several domestic species. The quantity of wood harvested by Westvaco from its lands in any year is primarily controlled by long-range forest management programs based on integrated wood supply plans. PATENTS Westvaco has obtained a number of foreign and domestic patents as a result of its research and product development efforts. Westvaco is the owner of many registered trademarks for its products. Although I-2 in the aggregate, its patents and trademarks are of material importance to Westvaco's business, the loss of any one or any related group of such intellectual property rights would not have a material adverse effect on the financial position, results of operations or liquidity of the company. No single patent or related group of patents is deemed to be material to Westvaco. Westvaco holds patents in each of its principal business segments (packaging products; paper products; and chemicals). COMPETITION Westvaco operates in very competitive domestic and foreign markets. Westvaco's strategy is to develop distinctive and innovative products and services for its customers in the United States and world markets. There are many large, well-established and highly competitive manufacturers operating in these markets as well. The company competes principally through: o quality; o value-added products and services; o customer service; o innovation; o technology; and o product design and price. The company considers value-added products and services to be package design, development and performance products and services which offer packaging solutions across the entire supply chain for customers through special programs and approaches devised by the company's packaging professionals. The company's business is affected by a range of macroeconomic conditions, such as: o industry capacity; o economic growth in the U.S. and abroad; and o currency exchange rates. RESEARCH Westvaco operates three major research facilities at Laurel, MD, North Charleston, SC, and Covington, VA. These facilities provide process and product support for our manufacturing operations, as well as a forest science laboratory in Summerville, SC. Forest research conducted there and at satellite centers in Wickliffe, KY, Rupert, WV, and Tres Barras, State of Santa Catarina, Brazil, is focused on biotechnology, genetics, tree nutrition, regeneration, stand management, environmental protection and forest measurements. The goal is increased timber and fiber production on a sustainable basis. The company's larger divisions and subsidiaries also have product development staffs which work on product-related projects directed toward specific opportunities of the individual units. The company incurred $49.5 million in 2000, $47.3 million in 1999 and $45.1 million in 1998 of research and development costs. Substantially all of the research projects are company sponsored. Approximately 240 scientists were employed in research and development activities. The company is I-3 seeking to take commercial advantage of its forestry research abilities through new initiatives to develop and market forestry technology and systems. ENVIRONMENTAL PROTECTION Westvaco is subject to federal and state environmental laws and regulations in all jurisdictions in which it has operating facilities. Compliance with these requirements involves the diversion of capital from production facilities and increases operating costs. In the opinion of Westvaco's management, environmental protection requirements are not likely to adversely affect the company's competitive industry position since other domestic companies are subject to similar requirements, nor are they likely to materially affect the company's overall financial condition, results of operations or liquidity. In 1995, the company authorized removal of elemental chlorine from all of its pulp bleaching processes. This important initiative, completed during 1997 at a cost of approximately $110 million, represented a major step by Westvaco in anticipating EPA regulations for the U.S. pulp and paper industry regarding air and water quality. A portion of the anticipated environmental capital expenditures will be in connection with the company's implementation of the Cluster Rule, issued by EPA in April 1998. The Cluster Rule regulations established new requirements regarding air emissions and wastewater discharges from pulp and paper mills to be met by the year 2006. Compliance with the Cluster Rule requires new and existing integrated pulp and paper mills to install emission control devices to limit the release of certain pollutants into the air and water. Additionally, the Cluster Rule establishes testing methods for 12 chemical compounds that must be measured in the mills' air emissions and water discharges. While the company has taken major steps to implement the Cluster Rule, we currently anticipate related expenditures of approximately $80 million over the next five years. Additional operating expenses in the range of $3 million to $7 million annually will be incurred as capital installations required by the Cluster Rule are put into service. Environmental organizations are challenging the Cluster Rule in the U.S. Court of Appeals. Westvaco and other companies are participating in that litigation. If the legal challenge by environmental organizations to the regulations is successful, the company could face additional compliance costs of up to $150 million over the next several years. Westvaco is currently named as a potentially responsible party with respect to the cleanup of a number of hazardous waste sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and similar state laws. While joint and several liability is authorized under CERCLA, as a practical matter, remediation costs will be allocated among the waste generators and others involved. The company has accrued approximately $5 million for estimated potential cleanup costs based upon its close monitoring of ongoing activities and its past experience with these matters. In addition, the company is involved in the remediation of certain other than CERCLA sites and has accrued approximately $11 million for remediation of these sites. With regard to environmental matters, an additional matter in which the company disputes any liability for fines and the need to install additional pollution controls, see Part I, Item 3, "Legal proceedings," "Other matters." EMPLOYEES At October 31, 2000, Westvaco employed approximately 17,100 persons. Of this group, 6,880 domestic employees and 1,580 employees of Rigesa, Ltda. ("Rigesa"), Westvaco's Brazilian subsidiary, are represented by various labor unions under collective bargaining agreements. Most of the company's European facilities have separate house union agreements or series of agreements specific to the workforce at such facility. Westvaco believes its labor relations are good. INTERNATIONAL OPERATIONS Operations outside the United States are conducted through subsidiaries located in Austria, Brazil, the Czech Republic, Germany, Ireland, The Netherlands and the United Kingdom. The company's sales that I-4 were attributable to domestic operations were 78% in 2000, 76% in 1999 and 75% in 1998. The company's sales that were attributable to foreign operations were 22% in 2000, 24% in 1999 and 25% in 1998. For more information about domestic and foreign operations, see Note P to the consolidated financial statements, included in the 2000 Westvaco Annual Report. Rigesa, our Brazilian subsidiary, is one of that country's leading suppliers of corrugated containers, and operates two paperboard mills, four corrugated box plants and a consumer packaging plant. Rigesa is one of the few paper companies in Brazil which is integrated from the forests to the markets. This fact, combined with technology drawn from Westvaco's U.S. experience, has provided Rigesa with a history of high-quality products. Over the past five years, Rigesa has experienced a compound annual sales growth rate of 6.25% in local currency as well as growth in product shipped of 4.5%. Rigesa accounted for approximately 9% of the packaging segment operating profit in 2000. In Europe, Westvaco operates 16 consumer packaging plants and is an international designer, manufacturer and marketer of high-end, value-added specialty printing and packaging for various consumer products markets. Through its creative design work, specialized manufacturing techniques and diverse printing capabilities, the company offers innovative specialty packaging solutions for customers that seek to differentiate their products in the retail marketplace. In addition, the company offers its products using a unique blend of materials including paper, paperboard and injection-molded plastic. Export sales from Westvaco's U.S. operations made up approximately 16% of Westvaco's 2000 sales, 18% of 1999 sales and 17% of 1998 sales. Sales of our foreign operating subsidiaries, were 6% of Westvaco's total 2000 and 1999 sales, and 8% of total 1998 sales. While there are risks inherent in foreign investments, Westvaco does not believe at this time that such risks are material to its overall business prospects. ITEM 2. PROPERTIES The location of Westvaco's production facilities and their principal products in each business segment as of October 31, 2000, were as follows: PACKAGING LOCATION PRODUCT Covington, Virginia Bleached paperboard Evadale, Texas Bleached paperboard North Charleston, South Carolina Saturating kraft, containerboard and folding carton stock Tres Barras, Santa Catarina, Containerboard and kraft papers Brazil Valinhos, Sao Paulo, Brazil Corrugating medium (principally from recycled papers) Silsbee, Texas Extrusion coated bleached paperboard Low Moor, Virginia Extrusion coated bleached paperboard PACKAGING (continued) LOCATION PRODUCT Birmingham, United Kingdom Consumer packaging Caguas, Puerto Rico (Leased) Consumer packaging Chatham, New Jersey Consumer packaging Cleveland, Tennessee Consumer packaging Corby, United Kingdom Consumer packaging Dublin, Ireland (Leased) Consumer packaging I-5 Enschede, The Netherlands Consumer packaging Franklin Park, Illinois (Leased) Consumer packaging Freden, Germany Consumer packaging Garner, North Carolina Consumer packaging Greenville, Mississippi Consumer packaging Grover, North Carolina Consumer packaging Haarlem, The Netherlands Consumer packaging Jacksonville, Illinois Consumer packaging Kearny, New Jersey Consumer packaging Littlehampton, United Kingdom Consumer packaging (Leased) London, United Kingdom (Leased) Consumer packaging Louisa, Virginia (Leased) Consumer packaging Louisville, Kentucky (Leased) Consumer packaging Mebane, North Carolina Consumer packaging Melrose Park, Illinois (Leased) Consumer packaging Memphis, Tennessee Consumer packaging Newark, Delaware Consumer packaging Norwich, Connecticut Consumer packaging Richmond, Virginia Consumer packaging Salzburg, Austria (Leased) Consumer packaging Slough, United Kingdom Consumer packaging Svitavy, Czech Republic Consumer packaging Swindon, United Kingdom (Leased) Consumer packaging Uden, The Netherlands (Leased) Consumer packaging Valinhos, Sao Paulo, Brazil Consumer packaging Warrington, Pennsylvania (Leased) Consumer packaging Weesp, The Netherlands Consumer packaging Blumenau, Santa Catarina, Brazil Corrugated boxes Manaus, Amazonas, Brazil Corrugated boxes Pacajus, Ceara, Brazil Corrugated boxes Valinhos, Sao Paulo, Brazil Corrugated boxes Summerville, South Carolina Building products PAPER LOCATION PRODUCT Luke, Maryland White printing and converting papers Wickliffe, Kentucky White printing and converting papers, and market pulp Tyrone, Pennsylvania White printing and converting papers Atlanta, Georgia Envelopes Dallas, Texas Envelopes Enfield, Connecticut Envelopes Indianapolis, Indiana Envelopes Kenosha, Wisconsin Envelopes Los Angeles, California Envelopes Springfield, Massachusetts Envelopes Williamsburg, Pennsylvania Envelopes Worcester, Massachusetts (Leased) Envelopes Springfield, Massachusetts Flexible packaging and paper cups I-6 CHEMICALS LOCATION PRODUCT Covington, Virginia Activated carbon products and services Wickliffe, Kentucky Activated carbon products and services DeRidder, Louisiana Printing ink resins and tall oil derivatives North Charleston, South Carolina Lignin-based surfactants and tall oil derivatives OTHER LOCATION PRODUCT Summerville, South Carolina Land development and forest technology services CAPACITY AND PRODUCTION Capacity estimates are based on the expected operations and product mix of each of the locations. Whether these estimates can in practice be attained or exceeded is dependent upon a variety of factors such as actual product mix, quantity and timing of production runs, required maintenance time and labor conditions. The company's mills are a significant source of supply for the paper and paperboard needs of the converting plants, which produce a variety of consumer packaging, corrugated boxes and envelopes. During fiscal 2000, the mills supplied 60 % of the paper and paperboard needs of the converting plants. All of the company's production facilities are in good operating condition and have sufficient capacity to meet current production requirements. LEASES See Note J to the consolidated financial statements, incorporated by reference in Part II of this report, for financial data on leases. Substantially all of the leases of production facilities contain options to purchase or renew for future periods. FOREST RESOURCES Westvaco owns 1,418,000 acres of forestland. There are 1,087,000 acres in the South and Middle Atlantic United States, 211,000 acres in the Central United States and 120,000 acres in southern Brazil. OTHER INFORMATION Certain Westvaco facilities are owned, in whole or in part, by municipal or other public authorities pursuant to standard industrial revenue bond financing arrangements and are accounted for as property owned by Westvaco. Westvaco holds options under which it may purchase each of these facilities from such authorities by paying a nominal purchase price and assuming the indebtedness owing on the industrial revenue bonds at the time of the purchase. The company owns in fee all of the mills, plants and timberlands listed in Item 2, except leased facilities, those described above and pending purchases. Westvaco's mills, plants and related machinery and equipment are considered by the company to be well maintained and in good operating condition. I-7 ITEM 3. LEGAL PROCEEDINGS In 1995, the company authorized removal of elemental chlorine from all of its pulp bleaching processes. This important initiative, completed during 1997 at a cost of approximately $110 million, represented a major step by Westvaco in anticipating EPA regulations for the U.S. pulp and paper industry regarding air and water quality. A portion of the anticipated environmental capital expenditures will be in connection with the company's implementation of the Cluster Rule, issued by EPA in April 1998. The Cluster Rule regulations established new requirements regarding air emissions and wastewater discharges from pulp and paper mills to be met by the year 2006. While the company has taken major steps to implement the Cluster Rule, we currently anticipate related expenditures of approximately $80 million over the next five years. Additional operating expenses in the range of $3 million to $7 million annually will be incurred as capital installations required by the Cluster Rule are put into service. Environmental organizations are challenging the Cluster Rule in the U.S. Court of Appeals. Westvaco and other companies are participating in that litigation. If the legal challenge by environmental organizations to the regulations is successful, the company could face additional compliance costs of up to $150 million over the next several years. The company is currently named as a potentially responsible party with respect to the cleanup of a number of hazardous waste sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and similar state laws. While joint and several liability is authorized under CERCLA, as a practical matter, remediation costs will be allocated among the waste generators and others involved. The company has accrued approximately $5 million for estimated potential cleanup costs based upon its close monitoring of ongoing activities and its past experience with these matters. In addition, the company is involved in the remediation of certain other than CERCLA sites and has accrued approximately $11 million for remediation of these sites. In April 1999, EPA, Region III, issued Notices of Violation to seven paper industry facilities, including the company's Luke, MD, mill, alleging violation of EPA's Prevention of Significant Deterioration (PSD) regulations under the Clean Air Act requiring special permitting and emissions evaluation prior to industrial expansion. On August 28, 2000, an enforcement action in federal district court in Maryland was brought against the company which charges these violations and addresses capital projects at the mill carried out in the 1980s. The action alleges that the company did not obtain PSD permits or install required pollution controls, and seeks penalties of $27,500 per day for each claimed violation together with the installation of control equipment. The company strongly disagrees with EPA's allegations of Clean Air Act violations by the company and expects to vigorously defend this action. I-8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter ended October 31, 2000. I-9 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning the executive officers of Westvaco Corporation: YEAR IN WHICH SERVICE IN PRESENT NAME AGE PRESENT POSITION POSITION BEGAN - ---- --- ---------------- -------------- John A. Luke, Jr.* 52 Chairman, 1996 President and Chief Executive 1992 Officer James A. Buzzard 46 Executive Vice President 2000 Rudolph G. Johnstone, J 64* Executive Vice President 1995 David E. McIntyre 60 Group Vice President 1999 Richard H. Block 60 Senior Vice President 2000 Richard N. Burton 52 Senior Vice President 1998 Oscar B. (Bo) Fears, Jr 54 Senior Vice President 2000 Rita V. Foley 47 Senior Vice President 1999 Gilbert M. Gillespie 60 Senior Vice President 1998 James F. Jordan 53 Senior Vice President 1999 James L. Martin 62 Senior Vice President 1999 Karen R. Osar 51 Senior Vice President and 1999 Chief Financial Officer Linda V. Schreiner 41 Senior Vice President 2000 James E. Stoveken, Jr. 61 Senior Vice President and 1996 Comptroller 1999 Samuel L. Torrence 60 Senior Vice President 1996 R. Scott Wallinger 61 Senior Vice President 1987 Wendell L. Willkie, II 49 Senior Vice President and General 1996 Counsel William S. Beaver 49 Vice President 1996 and Treasurer 1987 John W. Hetherington 62 Vice President, 1987 Assistant General Counsel and 1978 Secretary Ned W. Massee 50 Vice President 1991 *Director of Westvaco Westvaco's officers are elected by the Board of Directors annually for one-year terms. Westvaco's executive officers have served in their present capacities for the past five years or longer with the following exceptions: James A. Buzzard, Senior Vice President, 1999, Vice President, 1992-1999; David E. McIntyre, Senior Vice President, 1998-1999, Vice President, 1996-1998; Richard H. Block, President and Chief Executive Officer of IMPAC Group, Inc., 1998-2000, President and Chief Executive Officer of AGI Inc., 1987-1998; Richard N. Burton, Vice President, 1994-1998; Oscar B. (Bo) Fears, Jr., Vice President and Manager of Consumer Packaging, 1998-2000, President and Managing Director of Rigesa, Ltda., 1996-1998; Rita V. Foley, Independent Consultant, 1998-1999, Executive Vice President Sales and Marketing, QAD, Inc., 1997-1998, Vice President, Digital Equipment Corporation, 1994-1997; Gilbert M. Gillespie, Vice President, 1990-1998; James F. Jordan, Vice President and Manager of Westvaco Worldwide, 1998-1999, Manager of Marketing and Administration for Westvaco Worldwide, 1991-1998; James L. Martin, Vice President and Assistant Division Manager of the Bleached Board Division, 1996-1999, President and Managing Director of I-10 Rigesa, Ltda., 1993-1996; Karen R. Osar, Vice President and Treasurer of Tenneco Inc., 1994-1999; Linda V. Schreiner, Manager of Strategic Leadership Development, 1999-2000, Senior Manager of Arthur D. Little, Inc., 1998-1999, Vice President of Signet Banking Corporation, 1988-1998; James E. Stoveken, Jr., Vice President, 1986-1996; Samuel L. Torrence, Vice President, 1991-1996; Wendell L. Willkie, II, Vice President and Associate General Counsel, 1995-1996. No arrangements or understandings exist between any of Westvaco's officers and directors and any other person pursuant to which those officers or directors were selected to serve in their current position. Information required by Item 405 of Regulation S-K will be included in Westvaco's 2001 Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission by January 31, 2001, and is incorporated herein by reference. I-11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS (A) MARKET AND PRICE RANGE OF COMMON STOCK The company's common stock is traded on the New York, Chicago and Pacific Stock Exchanges under the symbol W. The New York Stock Exchange is the principal market on which the common stock is traded. The quarterly price range of common stock for 2000 and 1999 is included on the inside front cover of the 2000 Westvaco Annual Report under the caption "Stock price ranges," and is incorporated herein by reference. (B) APPROXIMATE NUMBER OF COMMON SHAREHOLDERS At October 31, 2000, the number of shareholders of record of Westvaco common stock was approximately 6,600. In addition, there were 12,390 current or former employees of the company who were Westvaco shareholders by virtue of their participation in the company's savings and investment plans. (C) DIVIDENDS The company's record of uninterrupted quarterly cash dividends extends 105 years. Information concerning quarterly dividends per share for 2000 and 1999 is included on the inside front cover of the 2000 Westvaco Annual Report under the caption "Dividends per share," and is incorporated herein by reference. There were no restrictions on dividends at October 31, 2000. ITEM 6. SELECTED FINANCIAL DATA Information required by this item is included in the 2000 Westvaco Annual Report under the caption "Eleven-year comparison," and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this item is included in the Financial Review section of the 2000 Westvaco Annual Report under the captions "Analysis of operations," "Fiscal year 1999," "Liquidity and capital resources," and "Forward-looking statements," and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's financial market risk arises from fluctuations in interest rates and foreign currency exchange rates. Most of the company's debt obligations at year-end 2000 were at fixed interest rates. Consequently, a 10% change in market interest rates would not have a material effect on the company's 2001 results of operations or cash flows. The company's exposure to foreign currency fluctuations on its financial instruments is not material because most instruments are denominated in U.S. dollars. Furthermore, the company's exposure to foreign currency fluctuations on its income is not material because a majority of II-1 the company's sales are in U.S. dollars. The company does not hold financial instruments for trading purposes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is included in the 2000 Westvaco Annual Report under the captions "Consolidated statement of income," "Consolidated balance sheet," "Consolidated statement of shareholders' equity," "Consolidated statement of cash flows," "Notes to financial statements" and "Report of independent accountants," and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. II-2 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item for the company's directors will be contained in Westvaco's 2001 Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission by January 31, 2001, and is incorporated herein by reference. Information required by this item for the company's executive officers is contained in Part I of this report under the caption "Executive officers of the registrant." ITEM 11. EXECUTIVE COMPENSATION Information required by this item will be contained in Westvaco's 2001 Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission by January 31, 2001, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item will be contained in Westvaco's 2001 Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission by January 31, 2001, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item will be contained in Westvaco's 2001 Proxy Statement, pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission by January 31, 2001, and is incorporated herein by reference. III-1 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: 1. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements of Westvaco Corporation and consolidated subsidiaries listed below are incorporated herein by reference to the following pages of the 2000 Westvaco Annual Report: PAGE Consolidated statements of income for fiscal years ended October 31, 2000, 1999 and 1998 20 Consolidated balance sheets at October 31, 2000 and 1999 21 Consolidated statements of shareholders' equity at October 31, 2000, 1999 and 1998 22 Consolidated statements of cash flows for fiscal years ended October 31, 2000, 1999 and 1998 23 Notes to financial statements 24-36 Report of independent accountants 37 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES All financial statement schedules have been omitted because they are inapplicable, not required, or shown in the consolidated financial statements and notes thereto contained in the 2000 Westvaco Annual Report and incorporated herein by reference. 3. EXHIBITS 3.i Restated Certificate of Incorporation, previously filed as Exhibit 3(i) to the company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997, incorporated herein by reference. 3.ii Bylaws of Westvaco Corporation, previously filed as Exhibit 3a to the company's Quarterly Report on Form 10-Q/A for the nine months ended July 31, 1996, File No. 1-3013, and incorporated herein by reference. 4.a Credit Agreement dated June 21, 1993, as amended September 19, 1997, previously filed as Exhibit 4(a) to the company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997, incorporated herein by reference. 4.b Form of Indenture, dated as of March 1, 1983, between Westvaco Corporation and The Bank of New York (formerly Irving Trust Company), as trustee, previously filed as Exhibit 2 to the company's Registration Statement on Form 8-A, File No. 1-3013, dated January 24, 1984. IV-1 4.c The company agrees to furnish copies of other instruments defining the rights of holders of long-term debt to the Commission upon its request. 4.d Rights Agreement dated as of September 23, 1997 between Westvaco Corporation and The Bank of New York, previously filed as Exhibit 1 to the company's Form 8-A dated October 31, 1997, File No. 1-3013, incorporated herein by reference. 4.e Credit Agreement dated November 16, 2000, previously filed as Exhibit 10 to the company's Form 8-K, filed on December 8, 2000, incorporated herein by reference. 10.a The 1983 Stock Option and Stock Appreciation Rights Plan, as amended, previously filed as Exhibit 28(b) to Post-Effective Amendment No. 1 to Registration Statement on Form S-8, File No. 2-94699, incorporated herein by reference. 10.b The 1988 Stock Option and Stock Appreciation Rights Plan, as amended, previously filed as Exhibit 28(c) to Registration Statement on Form S-8, File No. 33-26823, incorporated herein by reference. 10.c Copies of Westvaco Corporation Savings and Investment Restoration Plan, as amended, effective January 1, 1990, and Retirement Income Restoration Plan and Excess Benefit Plan, as amended, effective January 1, 1990, previously filed as Exhibit 10(d) to the company's Annual Report on Form 10-K for the fiscal year ended October 31, 1989, incorporated herein by reference. 10.d Amendment to the Savings and Investment Restoration Plan, effective January 1, 1991, previously filed as Exhibit 10(e) to the company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991, incorporated herein by reference. 10.e Amendment to the Savings and Investment Restoration Plan, effective October 1, 1995, previously filed as Exhibit 10(e) to the company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996, incorporated herein by reference. 10.f The 1995 Salaried Employee Stock Incentive Plan, effective February 28, 1995, previously filed as Exhibit 99 to Registration Statement on Form S-8, File No. 33-57879, incorporated herein by reference. 10.g The Westvaco Corporation Annual Incentive Compensation Plan, effective November 1, 1995, previously filed as Appendix A to the company's Notice of 1996 Annual Meeting of Shareholders and Proxy Statement dated December 29, 1995, File No. 1-3013, incorporated herein by reference. 10.h The 1995 Non-Employee Director Stock Incentive Plan, effective February 28, 1995, previously filed as Exhibit 99 to Registration Statement on Form S-8, File No. 33-57881, incorporated herein by reference. 10.i Westvaco Corporation Deferred Compensation Plan for Outside Directors dated December 1986, previously filed as Exhibit 10(j) to the company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996, incorporated herein by reference. 10.j Employment Agreement dated as of January 25, 1999, by and between Westvaco Corporation and John A. Luke, Jr., previously filed as Exhibit 10(a) to the company's Quarterly Report on Form 10-Q for the three months ended January 31, 1999, File No. 1-3013, and incorporated herein by reference. 10.k Employment Agreement dated as of January 26, 1999, by and between Westvaco Corporation and Rudolph G. Johnstone, Jr., previously filed as Exhibit 10(b) to the company's Quarterly Report on Form 10-Q for the three months ended January 31, 1999, File No. 1-3013, and incorporated herein by reference. IV-2 10.l Employment Agreement dated as of January 27, 1999, by and between Westvaco Corporation and R. Scott Wallinger, previously filed as Exhibit 10(e) to the company's Quarterly Report on Form 10-Q for the three months ended January 31, 1999, File No. 1-3013, and incorporated herein by reference. 10.m Form of Employment Agreement by and between Westvaco Corporation and certain individual officers of the company dated January 1999, previously filed as Exhibit 10(f) to the company's Quarterly Report on Form 10-Q for the three months ended January 31, 1999, File No. 1-3013, and incorporated herein by reference. 10.n Form of Employment Agreement by and between Westvaco Corporation and certain individual officers of the company dated January 1999, previously filed as Exhibit 10(g) to the company's Quarterly Report on Form 10-Q for the three months ended January 31, 1999, File No. 1-3013, and incorporated herein by reference. 10.o Employment Agreement dated as of January 27, 1999, by and between Westvaco Corporation and James A. Buzzard, previously filed as Exhibit 10(a) to the company's Quarterly Report on Form 10-Q for the three months ended January 31, 2000, File No. 1-3013, and incorporated herein by reference. 10.p Employment Agreement dated as of January 27, 1999, by and between Westvaco Corporation and Karen R Osar, previously filed as Exhibit 10(b) to the company's Quarterly Report on Form 10-Q for the three months ended January 31, 2000, File No. 1-3013, and incorporated herein by reference. 10.q Employment Agreement dated as of April 20, 2000, by and between Westvaco Corporation and Richard H. Block, previously filed as Exhibit 10(a) to the company's Quarterly Report on Form 10-Q for the three months ended July 31, 2000, File No. 1-3013, and incorporated herein by reference. 10.r The 1999 Salaried Employee Stock Incentive Plan, effective September 17, 1999, previously filed as Exhibit 99 to Registration Statement on Form S-8, File No. 33-87275, incorporated herein by reference. 10.s Form of Indemnification Contract between the company and each of its officers and directors as listed in the Westvaco Corporation 2000 Annual Report to Shareholders, incorporated herein by reference. 13. The inside front cover and pages 14 through 38 of the Westvaco Corporation 2000 Annual Report to Shareholders. Except for the information that is expressly incorporated by reference, the Annual Report to Shareholders is furnished for the information of the Securities and Exchange Commission and is not deemed to be filed as part of this report. The highlights of the year (Exhibit 13a) and the eleven year comparison (Exhibit 13c) are hereby incorporated by reference. 21. Subsidiaries of the registrant. 23. Consent of independent accountants. (b) Reports on Form 8-K A report on Form 8-K was filed on September 5, 2000, and is incorporated herein by reference. The contents of the report are summarized below: IV-3 Item 5. Other Events - News release dated September 5, 2000, the company announced that it has reached a definitive agreement to acquire a majority interest in Alfred Wall AG, a leading European supplier of consumer packaging based in Graz, Austria. Item 7. Financial Statements and Exhibits A report on Form 8-K was filed on December 8, 2000, and is incorporated herein by reference. The contents of the report are summarized below: Item 7. Financial Statements and Exhibits Credit Agreement, dated as of November 16, 2000, among Westvaco Corporation, the Banks listed therein and The Bank of New York, as Administrative Agent, Bank of America, N.A., as Documentation Agent, and Citibank, N.A., as Syndication Agent. IV-4 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. WESTVACO CORPORATION (REGISTRANT) December 21, 2001 By /s/ John A. Luke, Jr. ----------------------------- John A. Luke, Jr. Chairman, President and Chief Executive Officer 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. SIGNATURE TITLE DATE /s/ John A. Luke, Jr. Chairman, President, - -------------------------- Chief Executive Officer John A. Luke, Jr. and Director /s/ Karen R. Osar Senior Vice President - -------------------------- (Principal Financial Officer) Karen R. Osar /s/ James E. Stoveken, Jr. - -------------------------- Senior Vice President and Comptroller James E. Stoveken, Jr. (Principal Accounting Officer) /s/ Michael E. Campbell - -------------------------- Director Michael E. Campbell - -------------------------- Director Dr. Thomas W. Cole, Jr. - -------------------------- Director David F. D'Alessandro /s/ Richard B. Kelson - -------------------------- Director Richard B. Kelson - -------------------------- Director Douglas S. Luke /s/ Robert C. McCormack - -------------------------- Director Robert C. McCormack /s/ Jane L. Warner - -------------------------- Director Jane L. Warner /s/ Richard A. Zimmerman - -------------------------- Director Richard A. Zimmerman IV-5 EX-13 3 december21-exh13.txt EXHIBIT 13 - MANAGEMENT'S DISCUSSION AND ANALYSIS EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF OPERATIONS Fiscal year 2000 financial results benefited from improved markets and from companywide initiatives taken following a comprehensive strategic review completed in 1999. These initiatives include the acquisition of a well-invested bleached paperboard mill in Evadale, TX, and the acquisitions of Mebane Packaging Group (Mebane) and the IMPAC Group, Inc. (IMPAC), as well as steps to reduce costs, improve product mix and strengthen our market positions. Sales for fiscal 2000 were $3.7 billion, a 30.7% increase compared to 1999, and reflect an increase in volume of 24.9% and a 5.8% benefit from price and product mix improvement. Sales from acquisitions completed in 2000 represented two-thirds of the increase in sales. Net income in 2000 was $245.9 million, or $2.44 per share, basic and diluted, an increase of 121% from 1999 earnings of $111.2 million, or $1.11 per share, basic and diluted. Earnings for fiscal 2000 included a pretax restructuring charge of $27.2 million, or $.18 per share, resulting primarily from a writedown of assets, due to an anticipated decline in future sales of folding cartons to U.S. tobacco markets that has not yet occurred, a pretax gain of $11.2 million, or $.07 per share, from the sale of a liquid packaging plant previously written down as part of the restructuring charge in 1999, an after-tax extraordinary charge of $8.8 million, or $.09 per share, from the early retirement of higher interest rate debt and a pretax gain of $3.6 million, or $.04 per share, from the sale of our interest in a joint venture in China (see "Notes to the Financial Statements"). Earnings for 1999 included a pretax restructuring charge of $80.5 million, or $.49 per share, basic and diluted, in connection with a business performance improvement plan and an income tax benefit of $15.0 million, or $.15 per share, basic and diluted, related to a release of deferred taxes, as discussed below. Export sales from the United States increased 17% compared to 1999 and accounted for 16% of the company's consolidated sales. Total sales outside of the United States, including sales of our foreign operating subsidiaries, accounted for approximately 22% of consolidated sales compared to 24% in the prior year. Gross profit margin for the year improved to 23% from 20% in the prior year, due primarily to savings resulting from our 1999 restructuring and other cost reduction initiatives, partially offset by the impact of a provision to reflect inventories at LIFO value. Fiscal year 2000 operating results also benefited from an increase in non-cash pension credits of $26.0 million, reflecting cumulative favorable investment returns on pension plan assets. We anticipate that earnings in fiscal year 2001 will benefit from an increase in non-cash pension credits of $22 million to approximately $130 million before tax. Packaging segment: Packaging segment sales increased by 46.8% from the prior year to $2.15 billion in 2000, reflecting the effects of higher shipment volume, product mix improvement and strong performance by the company's recently acquired bleached paperboard mill in Evadale, TX; segment volume increased 43.0% and price and product mix improvements increased revenues by 3.8%. The increase in shipment volume reflects the contributions by acquisitions including the Evadale, TX, mill, IMPAC and Mebane. Fourth quarter shipments were well ahead of 1999 fourth quarter levels, but demand softened in the fourth quarter relative to the second and third quarters of 2000. To balance demand and production, we took downtime at the Covington, VA, and Evadale, TX, mills of about 12,000 tons. The company plans to take nearly 35,000 tons of downtime in the first quarter at the Covington and Evadale bleached paperboard mills to balance demand and production. Operating profit for the packaging segment for 2000 increased by 84.4% to $351.2 million due to acquisitions, product mix improvements, reduced costs and stronger business conditions. Revenues and profits for Rigesa, Ltda., our Brazilian subsidiary, showed strong improvement reflecting improved economic conditions in Brazil and product mix enhancements. During 2000, approximately 19% of packaging segment sales were made to the tobacco industry compared to about 26% for 1999. About 13% of segment sales were for overseas tobacco markets with the remaining 6% for tobacco sales in the United States. Increasingly competitive conditions as well as the current legal and regulatory pressures on the tobacco industry may have an adverse effect on packaging segment profitability. While we expect to compensate for such an adverse effect by continuing our growth in other consumer packaging markets, these alternatives may not, in the short run, fully offset any decline in profitability related to sales to the tobacco industry. Paper segment: Paper segment sales for the year of $1.17 billion increased 13.3% from the prior year, due to improvements in price and product mix of 8.4% and volume gains of 4.9%. Sales of coated printing papers increased sharply in 2000 compared to 1999, as new products and a focused selling effort led to an increase in market share and higher prices. Operating profit for the paper segment was $140.6 million for the year, compared to $62.0 million for the prior year period. Coated papers accounted for nearly all of the improvement. Manufacturing efficiencies, higher prices, higher shipment volumes and cost reductions contributed to the improvement. Chemicals segment: Chemicals segment sales for the year increased 9.4% from 1999 to $344.2 million, due to favorable changes in price and product mix of 3.3% and volume gains of 6.1%. Operating profit for the chemicals segment was $64.5 million compared to $52.5 million in the prior year. This increase reflects strong U.S. demand in a number of our markets. In the past year, we increased our market share for tall oil based ingredients used for ink resins. Other markets for tall oil ingredients including paper size, and rubber emulsifiers were also strong in response to the strong economy and results were enhanced by cost savings. Asphalt emulsifier sales increased sharply compared to the prior year period, due in part to the acquisition of the asphalt emulsion business of Raschig GmbH in 2000. Our activated carbon business benefited from record U.S. auto sales and strong global sales. The above segment discussion does not take into account the restructuring charges for 2000 and 1999 which are included in Corporate and other segment information. Other items: "Other income [expense]" increased from the prior year due to increased gains on land sales, a gain on the sale of our interest in a folding carton plant in China and higher interest income from the temporary investment of cash raised to finance acquisitions. Gains on land sales totaled $31.0 million before tax for 2000 compared to $23.0 million pretax in 1999. We expect gains on land sales to be in the range of $35 to $40 million before taxes in 2001. Interest expense increased by 56% for the year compared to the prior year, due to the issuance of long-term debt in the first and third quarters of 2000 and increased commercial paper borrowings to support our acquisition activities. We expect interest expense to be slightly higher in 2001 reflecting a full year of higher interest costs related to acquisitions closed in 2000. The effective tax rate for 2000 increased to 36.9% from 24.9% in the prior year, principally due to the one-time 1999 release of deferred taxes and the effects of fiscal 2000 goodwill amortization. ACQUISITIONS On December 29, 1999, Westvaco completed the acquisition of a bleached paperboard mill in Evadale, TX from Temple-Inland, Inc. The total purchase price was $648 million, including $82 million of debt assumed. The transaction also included a long-term contract with Temple-Inland for the supply of wood fiber to the mill. The Evadale mill's annual production capacity of 670,000 tons increased Westvaco's total annual bleached paperboard production capacity to 1.6 million tons. On January 7, 2000, Westvaco completed the acquisition of Mebane, a leading supplier of packaging for pharmaceutical products and personal care items, based in Mebane, NC. Mebane has seven packaging plants located in the U.S. and Puerto Rico. This acquisition increased the company's presence in select packaging markets, particularly pharmaceutical, health care and personal care. On July 11, 2000, Westvaco completed the acquisition of IMPAC, a leading global supplier of high-value specialty packaging and printing solutions for a wide variety of consumer product markets including entertainment, cosmetics and personal care. The purchase price for IMPAC, which has 13 plants in Europe and eight in the United States, was approximately $530 million, including the assumption of $294 million in debt and preferred stock. Westvaco redeemed substantially all of the debt and all of the preferred stock shortly after closing. In the fourth quarter, Westvaco acquired three additional foreign plants which expanded our reach in the DVD, multimedia and music packaging markets. All of the acquisitions completed during the current year were accounted for using the purchase method. The operating results of the acquisitions have been included in the "Consolidated Statements of Income" from the dates of acquisition. The accompanying "Consolidated Balance Sheets" as of October 31, 2000, reflects preliminary allocations of the purchase prices of the current year's acquisitions to the fair value of the assets acquired and liabilities assumed. Related goodwill of approximately $610 million, representing the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 40 years, which is the expected period to be benefited. On September 5, 2000, the company announced a definitive agreement to acquire a majority interest in Alfred Wall AG, a leading European supplier of consumer packaging based in Graz, Austria. Wall has six packaging plants in Austria, Germany, Poland and the United Kingdom. The transaction is scheduled to close in 2001. The company expects that Wall's operations will have a neutral effect on its earnings for about a year before becoming accretive. FISCAL YEAR 1999 Sales of $2.8 billion for fiscal 1999 were down 2.9% from 1998, the result of a 4.3% decrease in price and product mix, partially offset by a 1.4% improvement in the volume of shipments. Net income in 1999 was $111.2 million, or $1.11 per share, basic and diluted, a 15.8% decrease from 1998 earnings of $132.0 million, or $1.30 per share, basic and diluted. Earnings for the 1999 fiscal year included a pretax restructuring charge of $80.5 million, or $.49 per share, basic and diluted, in connection with a business performance improvement plan and an income tax benefit of $15.0 million, or $.15 per share, basic and diluted, related to a release of deferred taxes, both recorded in the fourth quarter. The restructuring charge included $76.0 million for the writedown of fixed assets. The income tax benefit resulted from a business reorganization which reduced the company's deferred state income tax liability. Earnings for 1999 included an after-tax gain of $14.0 million, or $.14 per share, basic and diluted, from the sale of nonstrategic timberlands. Sales for the year were affected by weak pricing primarily due to global overcapacity combined with a strong U.S. dollar. During the second half of fiscal 1999, pressures from lower-priced imported coated printing papers began to ease as demand increased for papers used in catalogue and direct mail applications. Late in the third quarter, the company announced a $60 per ton price increase for coated web-offset paper products, as well as price increases on other grades, including linerboard and bleached paperboard. Export sales from the United States increased compared to 1998 and accounted for 18% of the company's consolidated sales. Total sales outside of the United States, including sales of foreign operating subsidiaries, accounted for approximately 24% of consolidated sales compared to 25% in the prior year. Gross profit margin for the year improved to 20% compared with 19% for the prior year, due mainly to cost improvement initiatives. Fiscal year 1999 operating results also benefited from an increase in non-cash pension credits of $26.9 million, reflecting cumulative favorable investment returns on pension plan assets. Packaging segment sales for 1999 decreased 6.8% from the prior year to $1.46 billion in 1999, due to decreases in price and product mix of 5.3% and volume of 1.5%. Markets for the company's paperboard products continue to be very competitive, and net sales realizations per ton were below 1998 levels. Operating profit for 1999 decreased 8.2% to $190.5 million primarily due to product pricing pressures which offset the company's progress in cost improvement initiatives. Rigesa accounted for 13% of 1999 packaging segment operating profit compared to 17% for the 1998 comparable period, due primarily to the 64% devaluation of the Brazilian real during the year, following the Brazilian government's decision to allow the real to float. In the local currency, Rigesa's sales for the year increased 12% compared to the year earlier period. During 1999, approximately 26% of packaging segment sales were made to the tobacco industry for packaging tobacco products compared to approximately 28% for 1998. Approximately 18% of segment sales were exported or used to produce products for export with the remaining 8% made for the domestic tobacco industry for sale in the United States. Paper segment sales for the 1999 fiscal year of $1.03 billion increased marginally from the prior year, due to an increase in volume of 7.1% offset by a decrease in price and product mix of 6.8%. Markets for the company's paper products continued to be very competitive, resulting in net sales realizations being substantially below 1998 levels. Paper shipments for the fourth quarter of 1999 were up approximately 15% compared to the same prior year period. Late in the third quarter, the company announced the first price increase since 1996 for coated paper products. Operating profit for the paper segment for the year was $62.0 million, lower than the $84.8 million reported for fiscal year 1998, due mainly to lower prices. Chemicals segment sales for 1999 decreased by 5.3% from 1998 to $314.5 million. Favorable changes in price and product mix of 3.3% were more than offset by a decrease in volume of 8.6%. Operating profit for the chemicals segment was $52.5 million compared to $53.2 million in 1998. "Other income [expense]" increased compared to 1998 due to an increase in gains on the sales of timberlands. Interest expense increased 12% for the year compared to 1998, due to lower levels of capitalized interest and increased use of commercial paper. The effective tax rate for 1999 decreased to 24.9% compared to 35.4% in the prior year, principally due to the reduction in the deferred state income tax liability to reflect a lower effective state income rate, as described above. LIQUIDITY AND CAPITAL RESOURCES At October 31, 2000, the ratio of current assets to current liabilities was 1.9 compared to 1.7 and 1.6 in 1999 and 1998, respectively. The twelve-month average collection period for trade receivables was 34 days in 2000 and 1999 and 35 days in 1998. Cash flows from operations were $583 million for 2000, compared to $413 million in 1999 and $407 million in 1998. Management believes that the company's ability to generate cash from operations and its capacity to issue short-term and long-term debt are adequate to fund working capital, capital spending and other needs in the foreseeable future. New investment in plant and timberlands was $212 million for 2000, compared to $232 million in 1999 and $420 million in 1998. Cash payments for these investments totaled $214 million in 2000, $229 million in 1999 and $423 million in 1998. As part of its program to improve return on investment, Westvaco plans to continue to hold annual capital spending below annual depreciation and amortization levels over the next few years. At October 31, 2000, the funds required to complete all authorized capital projects were approximately $249 million. Capital expenditures for 2001 are expected to be approximately $275 million, reflecting acquisitions and the postponement of capital projects that were expected to occur during fiscal year 2000. These expenditures will be used to support our current primary production capacity levels and address requirements of packaging facilities to satisfy anticipated customer needs. The company maintains a $500 million revolving credit agreement, and there was no borrowing under this arrangement during the current year period. The interest rate may be at rates approximating prime or the London Interbank Offered Rate (LIBOR) at the company's option. The ratio of debt to total capital employed was 46% at October 31, 2000, and 34% for 1999 and 1998. Short-term borrowings amounting to $270 million, whose repayment terms can be extended under the loan agreement and which are intended to be outstanding more than one year, have been classified as long-term debt. In November 1999, the company issued $200 million of 6.85% five-year notes and $200 million of 7.10% ten-year notes, and in January 2000, the company issued $400 million of 8.20% thirty-year notes in part to fund the purchases of the Evadale mill and Mebane Packaging Group. The remainder was added to the company's general corporate funds and available for repayment of existing debt, future capital outlays and working capital purposes. In connection with the acquisition of IMPAC discussed above, the company issued $200 million of floating rate three-year notes, at LIBOR plus 0.9% reset quarterly and $200 million of 8.40% seven-year notes on June 5, 2000. During 2000, 80,000 common shares were purchased, under a repurchase program approved by the Board of Directors in 1997, at a cost of $2.3 million and 514,633 shares were issued out of treasury to satisfy stock option exercises. ENVIRONMENTAL MATTERS In 1995, the company authorized the removal of elemental chlorine from all of our pulp bleaching processes. This important initiative, completed during 1997 at a cost of approximately $110 million, represented a major step by Westvaco in anticipating EPA regulations for the U.S. pulp and paper industry regarding air and water quality. A portion of the anticipated environmental capital expenditures will be in connection with the company's implementation of the Cluster Rule, issued by EPA in April 1998. The Cluster Rule regulations established new requirements regarding air emissions and wastewater discharges from pulp and paper mills to be met by the year 2006. While the company has taken major steps to implement the Cluster Rule, we currently anticipate related expenditures of approximately $80 million over the next five years. Additional operating expenses in the range of $3 million to $ 7 million annually will be incurred as capital installations required by the Cluster Rule are put into service. Environmental organizations are challenging the Cluster Rule in the U.S. Court of Appeals. Westvaco and other companies are participating in that litigation. If the legal challenge by environmental organizations to the regulations is successful, the company could face additional compliance costs of up to $150 million over the next several years. The company is currently named as a potentially responsible party with respect to the cleanup of a number of hazardous waste sites under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar state laws. While joint and several liability is authorized under CERCLA, as a practical matter, remediation costs will be allocated among the waste generators and others involved. The company has accrued approximately $5 million for estimated potential cleanup costs based upon our close monitoring of ongoing activities and our past experience with these matters. In addition, the company is involved in the remediation of certain other than CERCLA sites and has accrued approximately $11 million for remediation of these sites. The company is involved in various legal proceedings and environmental actions, generally arising in the normal course of its business. Although the ultimate outcome of such matters cannot be predicted with certainty, the company does not believe that the outcome of any proceeding, lawsuit or claim that is pending or threatened, or all of them combined, will have a material adverse effect on its consolidated financial position, liquidity or long-term results of operations. In any given quarter or quarters, however, it is possible such proceedings or matters could have a material effect on results of operations. ACCOUNTING CHANGES The company is required to adopt a new accounting standard issued by the Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, in fiscal year 2001. The company does not believe that the adoption of this statement will have a material effect on the company's financial position or results of operations. In 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, (SAB 101) Revenue Recognition in Financial Statements. SAB 101 clarifies the basic principles of revenue recognition in generally accepted accounting principles. SAB 101 is required to be implemented by our fourth quarter of fiscal year 2001. The company anticipates no material effect on income from operations or financial position from the adoption of SAB 101. In September 2000, the Emerging Issues Task Force reached a consensus on Issue No. 00-10 (EITF 00-10), Accounting for Shipping and Handling Fees and Costs. EITF 00-10 implementation is consistent with the requirements of SAB 101. The company intends to adopt EITF 00-10 in the fourth quarter of 2001 and reclassify shipping and handling costs from sales to cost of goods sold. The reclassification will have no effect on income from operations or financial position. For further discussion, see the "Summary of significant accounting policies" in the "Notes to the Financial Statements." FORWARD-LOOKING STATEMENTS Certain statements in this document and elsewhere by management of the company that are neither reported financial results nor other historical or present information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such information includes, without limitation, the business outlook, assessment of market conditions, anticipated financial and operating results, strategies, future plans, contingencies and contemplated transactions of the company. Such forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors which may cause or contribute to actual results of company operations, or the performance or achievements of the company, or industry results, to differ materially from those expressed in or implied by the forward-looking statements. In addition to any such risks, uncertainties and other factors discussed elsewhere herein, risks, uncertainties and other factors that could cause or contribute to actual results differing materially from those expressed in or implied by the forward-looking statements include, but are not limited to, demand and competitive pricing for the company's products; developments in information technology as well as other technological developments; the success of new businesses and facilities acquired; ongoing cost reduction efforts; changes in the availability and cost of raw materials and energy; unanticipated manufacturing and distribution disruptions; changes in production capacities; changes in economic growth in the U.S. and international economies, especially in Asia, Europe and Brazil; stability of financial markets; governmental policies and regulations, including but not limited to those affecting the environment and the tobacco industry; restrictions on trade; interest rates and currency movements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make on related subjects in our 10-Q, 8-K and next 10-K reports filed with the SEC. FOURTH QUARTER RESULTS Sales were $1.0 billion for the fourth quarter of 2000, compared to sales of $771.5 million for the fourth quarter of 1999. In the fourth quarter of 2000, the company recorded net income of $80.7 million, or $.80 per share, basic and diluted, compared to net income of $23.7 million, or $.24 per share, basic and diluted, for the prior year period. Fiscal fourth quarter 2000 net income reflects a charge of $.02 per share for completion of a restructuring plan begun in the third quarter 2000, bringing the total charge for the plan to $.18 per share. The restructuring charge resulted principally from a writedown of U.S. assets due to an expected decline in sales of folding cartons to domestic tobacco markets. Fourth quarter 2000 results also reflect a gain of $.04 cents per share from the sale of a minority interest in a packaging operation in China and the impact of a provision of $.06 to reflect inventories at LIFO value. In the fouth quarter of fiscal 1999, unusual items included a credit of $.15 per share, for a release of deferred taxes and a charge of $.49 per share for a restructuring plan. The restructuring plan in 1999 involved a series of actions, principally non-cash reductions in book value of assets, that enhanced the strength and focus of Westvaco's packaging-related businesses. INVESTOR SERVICES PLAN At year end, 15,160 shareholders, including members of the company's savings and investment plans for salaried and hourly employees, representing 15,622,448 shares of Westvaco common stock, were participants in the company's Investor Services Plan. NUMBER OF SHAREHOLDERS At year end, the number of individuals and institutions owning Westvaco common shares was about 19,000. This number includes 12,400 members of the company's salaried and hourly savings and investment plans. The plans, established in 1968 and 1995, respectively, hold 14,303,823 shares of Westvaco common stock for the accounts of participants. This represents 14% of the 100,662,409 shares of common stock outstanding at year end. PAYROLL AND BENEFIT COSTS The total cost of payroll and benefits was $742 million, compared with $623 million in 1999. This includes $52.5 million in Social Security taxes in 2000 and $44.7 million in 1999. Payroll and benefit costs were 20% of sales in 2000 and 22% in 1999. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share Year ended October 31 2000 1999 1998 Sales $3,662,991 $2,801,849 $2,885,917 Other income, net [expense] 56,940 29,384 18,747 ---------- ---------- ---------- 3,719,931 2,831,233 2,904,664 ---------- ---------- ---------- Cost of products sold [excludes depreciation shown separately below] 2,512,486 1,969,515 2,071,011 Selling, research and administrative expenses 281,694 230,963 238,097 Depreciation and amortization 313,948 280,470 280,981 Restructuring charges 16,086 78,771 - Interest expense 192,145 123,538 110,162 ----------- ---------- ---------- 3,316,359 2,683,257 2,700,251 ----------- ---------- ---------- Income before taxes 403,572 147,976 204,413 Income taxes 148,900 36,800 72,400 ---------- ---------- ---------- Income before extraordinary charge 254,672 111,176 132,013 Extraordinary charge - extinguishment of debt, net of taxes of $5,500 (8,803) - - ---------- ---------- ---------- Net income $ 245,869 $ 111,176 $ 132,013 ========== ========== ========== Net income per share - basic and diluted: Income before extraordinary item $ 2.53 $1.11 $1.30 Extraordinary item (.09) - - ---------- ---------- ---------- Net income $ 2.44 $1.11 $1.30 ========== ========== ========== Shares used to compute net income per share: Basic 100,578 100,236 101,311 Diluted 100,916 100,495 101,788
The accompanying notes are an integral part of these financial statements. WESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS In thousands At October 31 2000 1999 ASSETS Cash and marketable securities $ 225,308 $ 108,792 Receivables 421,707 318,369 Inventories 333,284 248,963 Prepaid expenses and other current assets 83,378 61,884 ---------- ---------- Current assets 1,063,677 738,008 Plant and timberlands: Machinery 5,673,455 5,094,773 Buildings 794,114 672,744 Other property, including plant land 248,761 226,977 --------- ---------- 6,716,330 5,994,494 Less: accumulated depreciation 2,916,402 2,779,199 --------- --------- 3,799,928 3,215,295 Timberlands-net 268,699 266,386 Construction in progress 127,956 99,702 ---------- ----------- 4,196,583 3,581,383 Other assets 1,309,643 577,301 ---------- ---------- $6,569,903 $4,896,692 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 523,187 $ 361,959 Notes payable and current maturities of long-term obligations 30,098 50,200 Income taxes 13,633 12,955 ---------- ---------- Current liabilities 566,918 425,114 Long-term debt 2,686,674 1,426,854 Other long-term obligations 75,979 75,323 Deferred income taxes 907,739 798,113 Shareholders' equity: Common stock, $5 par, at stated value Shares authorized: 300,000,000 Shares issued: 103,170,667 [1999-103,170,667] 767,552 765,810 Retained income 1,761,764 1,607,504 Accumulated other comprehensive income [loss] [135,731] [129,981] Common stock in treasury, at cost Shares held: 2,508,258 [1999-2,877,824] [60,992] [72,045] ---------- ---------- 2,332,593 2,171,288 $6,569,903 $4,896,692 ========= ==========
The accompanying notes are an integral part of these financial statements. WESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY In thousands
ACCUMULATED COMMON OTHER TOTAL OUTSTANDING COMMON STOCK IN RETAINED COMPREHENSIVE SHAREHOLDERS' SHARES STOCK TREASURY INCOME INCOME [LOSS] EQUITY Balance at October 31, 1997 101,930 $761,522 $[32,310] $1,549,356 $ - $2,278,568 Comprehensive income Net income - - - 132,013 - 132,013 Foreign currency translation - - - - [32,167] [32,167] Comprehensive income 99,846 Cash dividends - - - [89,300] - [89,300] Repurchases of common stock [1,822] - [50,176] - - [50,176] Issuance 218 3,052 7,595 [3,137] - 7,510 ---------- -------- --------- ---------- ------------ ----------- Balance at October 31, 1998 100,326 764,574 [74,891] 1,588,932 [32,167] 2,246,448 Comprehensive income Net income - - - 111,176 - 111,176 Foreign currency translation - - - - [97,814] [97,814] Comprehensive income 13,362 Cash dividends - - - [88,191] - [88,191] Repurchases of common stock [499] - [11,961] - - [11,961] Issuance 466 1,236 14,807 [4,413] - 11,630 ---------- -------- --------- ---------- ------------ ----------- Balance at October 31, 1999 100,293 765,810 [72,045] 1,607,504 [129,981] 2,171,288 Comprehensive income Net income - - - 245,869 - 245,869 Foreign currency translation - - - - [5,750] [5,750] Comprehensive income 240,119 Cash dividends - - - [88,494] - [88,494] Repurchases of common stock [145] - [4,441] - - [4,441] Issuance 514 1,742 15,494 [3,115] - 14,121 ---------- -------- --------- ---------- ------------ ----------- Balance at October 31, 2000 100,662 $767,552 $[60,992] $1,761,764 $[135,731] $2,332,593 ========== ======== ========= ========== ============ ===========
The accompanying notes are an integral part of these financial statements. WESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES FINANCIAL STATEMENTS Consolidated statementS of cash flows In thousands
Year ended October 31 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: - --------------------------------------------------------------------------------------------- Net income $ 245,869 $111,176 $132,013 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 313,948 280,470 280,981 Provision for deferred income taxes 94,914 32,286 57,244 Restructuring charges 16,086 80,500 - Pension credit and other employee benefits [92,858] [78,658] [50,869] [Gains] losses on sales of plant and timberlands [26,822] [17,891] 894 Foreign currency transaction [gains] losses 917 3,601 2,506 Loss on extinguishment of debt, net of taxes 8,803 - - Net changes in assets and liabilities 25,305 [2,577] [17,063] Other, net [3,017] 3,806 1,000 ------------ ---------- --------- Net cash provided by operating activities 583,145 412,713 406,706 CASH FLOWS FROM INVESTING ACTIVITIES: - --------------------------------------------------------------------------------------------- Additions to plant and timberlands [213,976] [228,879] [422,984] Payments for acquisitions, net of cash acquired [1,342,858] [22,659] - Proceeds from sales of assets 81,639 22,781 6,905 Other, net 160 [1,135] 50 ------------ ---------- --------- Net cash used in investing activities [1,475,035] [229,892] [416,029] CASH FLOWS FROM FINANCING ACTIVITIES: - --------------------------------------------------------------------------------------------- Proceeds from issuance of common stock 9,266 9,122 3,766 Proceeds from issuance of debt 2,611,504 881,518 548,194 Dividends paid [88,494] [88,191] [89,300] Treasury stock purchases [2,345] [10,792] [49,484] Repayment of notes payable and long-term debt [1,523,702] [952,230] [470,146] ------------ ---------- --------- Net cash provided by [used in] financing 1,006,229 [160,573] [56,970] activities Effect of exchange rate changes on cash 2,177 [18,506] [4,011] ------------ ---------- --------- Increase [decrease] in cash and marketable 116,516 3,742 [70,304] securities Cash and marketable securities: At beginning of period 108,792 105,050 175,354 ------------ ---------- --------- At end of period $ 225,308 $108,792 $105,050 ------------ ---------- ---------
The accompanying notes are an integral part of these financial statements. WESTVACO CORPORATION AND CONSOLIDATED SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS NOTES TO FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation and preparation of financial statements: The consolidated financial statements include the accounts of all subsidiaries more than 50% owned. Investments in 20%- to 50%- owned companies are accounted for using the equity method. Accordingly, the company's share of the earnings of these companies is included in consolidated net income. In accordance with generally accepted accounting principles, the preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain prior years' amounts have been reclassified to conform with the current year's presentation. Accounting standards changes: In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities which requires derivative instruments to be recorded in the balance sheet at their fair value, with changes in their fair value being recognized in earnings unless specific hedge accounting criteria are met. Given the current level of its derivative and hedging activities, the company believes the impact of this new standard, effective in fiscal year 2001, will not be material. In 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 clarifies the basic principles of revenue recognition in existing generally accepted accounting principles. SAB 101 is required to be implemented no later than the fourth quarter of fiscal years beginning after December 15, 1999. The company anticipates no material effect on income from operations or financial position from the adoption of SAB 101. In September 2000, the Emerging Issues Task Force reached a consensus on Issue No. 00-10 (EITF 00-10), Accounting for Shipping and Handling Fees and Costs. EITF 00-10 implementation is consistent with the requirements of SAB 101. The company intends to adopt EITF 00-10 in the fourth quarter of 2001 and reclassify shipping and handling costs from "Sales" to "Cost of products sold." The reclassification will have no effect on income from operations or financial position. Environmental matters: Environmental expenditures that increase useful lives are capitalized, while other environmental expenditures are expensed. Liabilities are recorded when remedial efforts are probable and the costs can be reasonably estimated. The estimated closure costs for existing landfills based on current environmental requirements and technologies are accrued over the expected useful lives of the landfills. The company is currently named as a potentially responsible party with respect to the cleanup of a number of hazardous waste sites under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar state laws. While joint and several liability is authorized under CERCLA, as a practical matter, remediation costs will be allocated among the waste generators and others involved. The company has accrued approximately $5 million for estimated potential cleanup costs based upon its close monitoring of ongoing activities and its past experience with these matters. In addition, the company is involved in the remediation of certain other than CERCLA sites and has accrued approximately $11 million for remediation of these sites. Translation of foreign currencies: Generally, the local currency is the functional currency for the company's operations outside the United States. The assets and liabilities of the company's foreign subsidiaries are translated into U.S. dollars using period-end exchange rates and adjustments resulting from these financial statement translations are included in "Accumulated other comprehensive income NOTES TO FINANCIAL STATEMENTS [loss]" in the balance sheet. Revenues and expenses are translated at average rates prevailing during the period. Marketable securities: For financial statement purposes, highly liquid securities purchased three months or less from maturity are considered to be cash equivalents. Inventories: Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for substantially all raw materials, finished goods and production materials of U.S. manufacturing operations. Cost of all other inventories, including stores and supplies inventories and inventories of non-U.S. manufacturing operations, is determined by the first-in, first-out (FIFO) or average cost method. Plant and timberlands: Owned assets are recorded at cost. Also included in the cost of these assets is interest on funds borrowed during the construction period. When assets are sold, retired or disposed of, their cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in "Other income [expense]." Costs of renewals and betterments of properties are capitalized; costs of maintenance and repairs are charged to income. Costs of reforestation of timberlands are capitalized. Depreciation, amortization and impairment of long-lived assets: The cost of plant and equipment is depreciated, generally by the straight-line method, over the estimated useful lives of the respective assets, which range from 20 to 40 years for buildings and 5 to 30 years for machinery and equipment. The cost of standing timber is amortized as timber is cut, at rates determined annually based on the relationship of unamortized timber costs to the estimated volume of recoverable timber. The company periodically evaluates whether current events or circumstances indicate that the carrying value of its long-lived assets to be held and used may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists pursuant to SFAS No. 121. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of the fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. The company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value. Other assets: Included in "Other assets" are goodwill, other intangibles and prepaid pension costs. Goodwill represents the excess of the cost over the fair value of net assets of purchased businesses and is being amortized on a straight-line basis over periods not exceeding 40 years. The cost of other acquired intangibles is amortized on a straight-line basis over their estimated useful lives. The company continually evaluates the carrying value of goodwill and other intangible assets pursuant to SFAS No. 121, as described above. Goodwill included in "Other assets" was $606,220,000 at October 31, 2000 (1999-$5,063,000). Amortization expense charged to operations for 2000 was $7,243,000 (1999-$30,000, 1998 -$0). Revenue recognition: The company recognizes revenues at the point of passage of title, which is at the time of shipment. Income taxes: Deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the enacted tax rates in effect for the years the differences are expected to reverse. Income per share: Basic net income per share for all the periods presented has been calculated using the weighted average shares outstanding. In computing diluted net income per share, incremental shares issuable upon the assumed exercise of stock options have been added to the weighted average shares outstanding. For the year ended October 31, 2000, stock options for shares of 3.9 million were not included because their effect was antidilutive (1999-1.9 million, 1998-4.4 million). NOTES TO FINANCIAL STATEMENTS A. ACQUISITIONS In December 1999, the company completed its acquisition of Temple-Inland's bleached paperboard mill in Evadale, TX (Evadale). The total purchase price, net of $82 million of debt assumed, was $566 million. The company used existing cash reserves, commercial paper and $400 million of debentures issued in November 1999 to fund the purchase. In January 2000, the company completed the purchase of Mebane Packaging Group (Mebane), a leading supplier of packaging for pharmaceutical products and personal care items, based in Mebane, NC. The company used existing cash reserves, commercial paper and a portion of the $400 million of debentures issued in January 2000 to fund the purchase. In July 2000, the company completed its acquisition of IMPAC Group, Inc. (IMPAC), a leading global supplier of packaging for entertainment products, cosmetics and health and beauty aids with 13 plants in Europe and eight plants in the United States. The company used existing cash reserves, commercial paper and $400 million of notes issued in June 2000 to fund the purchase. Also, in July 2000, Rigesa, Ltda. (Rigesa), Westvaco's Brazilian subsidiary, acquired all of the assets of Agaprint Embalagens, a leading supplier of consumer packaging in Brazil. In August 2000, IMPAC Europe Limited, a Westvaco subsidiary, acquired the privately held DuBOIS Holdings Limited, global licenser and European manufacturer of the DVD-Safe (TM) (or Amaray(R)) DVD pack, the world's top-selling DVD package. In October 2000, IMPAC Europe acquired Sony Music Printing (Holland) BV. Sony Music Printing is located adjacent to Sony's CD/DVD distribution center in Haarlem, The Netherlands, and produces printed booklets, folders and inlay cards for Sony as well as multimedia products sold to Sony and other companies throughout Europe. The company accounted for all of these transactions using the purchase method of accounting. Accordingly, the assets and liabilities of the acquired businesses are included in the "Consolidated Balance Sheets" at October 31, 2000. The purchase price for these acquisitions, including transaction costs, has been allocated to assets acquired and liabilities assumed based on estimated market values at the date of acquisition. The purchase price allocation for these acquisitions is preliminary and further refinements are likely to be made upon completion of final valuation studies. Related goodwill of approximately $610 million, which represents the excess of purchase price over fair value of net tangible and intangible assets acquired, is amortized on a straight-line basis over 40 years, which is the expected period to be benefited. Goodwill has been recorded in the "Other assets" on the balance sheet. The following unaudited pro forma consolidated results of operations are presented as if the Evadale mill, Mebane and IMPAC acquisitions had been made at the beginning of the periods presented. The following unaudited pro forma data for the fiscal year 2000 reflects 308 days, 299 days and 113 days of Westvaco's operation of the Evadale mill, Mebane and IMPAC, respectively. The balance of the fiscal year 2000 and all of the prior year reflect the results of these operations under the management of the prior owners. The unaudited pro forma amounts of the other fiscal year 2000 acquisitions are not included as their effect is not material to the company's financial position or results of operations. NOTES TO FINANCIAL STATEMENTS Pro forma in thousands, Except per share [unaudited] 2000 1999 ---- ---- Net sales $3,634,767 $3,985,558 Income before extraordinary items 235,395 75,487 Per share of common stock: Basic $2.34 $.75 Diluted 2.33 .75 Net income $ 226,592 $ 75,487 Per share of common stock: Basic $2.25 $.75 Diluted 2.25 .75 The pro forma consolidated results of operations include adjustments to give effect to depreciation, amortization of goodwill on a straight-line basis over 40 years and interest expense on acquisition debt, together with related income tax effects. The pro forma information is not necessarily indicative of the results of operations that would have occurred had the purchases been made at the beginning of the periods presented, nor is it necessarily indicative of the future results of the combined operations. B. PROVISIONS FOR RESTRUCTURING During the third quarter of 2000, due to an anticipated decline in future sales of folding cartons to U.S. tobacco markets that has not yet occurred, the company reviewed certain long-lived assets in its consumer packaging business for impairment. As a result of the review, production facilities were written down to their fair value using an assets-held-for-use model and a pretax impairment charge of $24.3 million, including $3.3 million of associated goodwill, was recorded in the third quarter of 2000 in "Restructuring charges" in the "Consolidated Statement of Income." The impairment was recorded because undiscounted cash flows were less than the carrying value of the assets prior to the impairment charge. During the fourth quarter of 2000, the company recorded an additional pretax charge of $2.9 million due to the adjustment of the earlier charge and related employee costs. During the second quarter of fiscal 2000, the liquid packaging plant was sold, resulting in a pretax gain of $11.2 million, which is included in the "Restructuring charges." As noted below, the liquid packaging plant was written down in fiscal 1999 in connection with the restructuring charge recorded in the fourth quarter. The gain resulted from a change in facts and circumstances existing during the fourth quarter of fiscal 1999. During the fourth quarter of 1999, following completion of its strategic review process, the company adopted a plan to improve the company's performance, principally to enhance the strength and focus of its packaging-related businesses. Additionally, the company reviewed certain long-lived assets in its business for impairment. As a result of these initiatives, a pretax charge of $80.5 million was recorded in the fourth quarter of 1999. Included in this charge are certain assets of the company's liquid packaging plant that were written down to reflect the plant's planned shutdown. This charge was primarily due to the writedown of impaired long-lived assets, involuntary employee termination and other exit costs. Production facilities were written down to their fair value using an assets-held-for-use model. An impairment of $67.4 million was recorded as undiscounted cash flows were less than the carrying value of the assets prior to the impairment. Further, the company wrote off a paper machine and certain equipment with a total carrying value of $8.6 million and abandoned the assets. During the fourth quarter of fiscal 1999, in addition to the asset impairments described above, the company also recognized inventory writedowns of $1.7 million, which have been included within the "Cost of products sold", employee termination costs of $1.5 million and other exit costs of $1.2 million. Such NOTES TO FINANCIAL STATEMENTS reserves at October 31, 2000 for these activities were substantially utilized. C. OTHER INCOME (EXPENSE) Components of other income (expense) are as follows: In thousands 2000 1999 1998 - ------------ -------- --------- --------- Gains [losses] on sales of plant, equipment And timberlands $26,822 $17,891 $ [894] Interest income 28,417 15,115 18,010 Foreign currency transaction gains [losses [917] [3,601] [2,506] Other, net 2,618 [21] 4,137 -------- --------- --------- $56,940 $29,384 $18,747 ======== ========= ========= D. RESEARCH AND DEVELOPMENT Expenditures of $49,527,000 (1999-$47,321,000, 1998-$45,139,000) were expensed as incurred. E. INCOME TAXES Income before provision for income taxes consisted of: In thousands 2000 1999 1998 - ------------ ----------- ----------- ----------- Domestic $354,387 $113,350 $157,075 Foreign 49,185 34,626 47,338 ---------- ---------- ---------- $403,572 $147,976 $204,413 ======== ========= ======== The provision for income taxes is composed of: 2000 1999 1998 --------- ---------- --------- In thousands Current: Federal $38,112 $ 4,430 $ 9,254 State 7,622 [4,634] [3,243] Foreign 8,252 4,718 9,145 --------- ---------- --------- 53,986 4,514 15,156 -------- ---------- -------- Deferred: Federal 85,750 43,254 45,871 State 7,923 [15,366] 11,792 Foreign 1,241 4,398 [419] ----------- ---------- --------- 94,914 32,286 57,244 ---------- --------- -------- $148,900 $ 36,800 $72,400 ======== ========= ======= The net deferred income tax liability at October 31, 2000 and 1999 includes the following components: In thousands 2000 1999 - ------------ -------------- ----------- Current deferred tax assets: Employee benefits $ 19,321 $ 15,397 Other 38,078 28,089 ---------- -------- 57,399 43,486 NOTES TO FINANCIAL STATEMENTS Noncurrent deferred tax assets: Alternative minimum tax carryforward 111,983 143,802 --------- ------- Noncurrent deferred tax liabilities: Depreciation 686,517 654,604 Pension and other employee benefits 199,421 161,512 State and local taxes 98,133 91,662 Other 35,651 34,137 ----------- ---------- 1,019,722 941,915 Total net deferred tax liability $ 850,340 $ 754,627 ======== ======== The differences (expressed as a percentage of pretax income) between the U.S. statutory federal income tax rate and the effective income tax rate as reflected in the accompanying "Consolidated Statements of Income" are: 2000 1999 1998 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local taxes 2.5 [8.8] 2.7 Foreign income at other than U.S. rates [1.7] [1.3] [2.6] Other, net 1.1 - 0.3 ------ ------- ------ Effective tax rate 36.9% 24.9% 35.4% ------ ------- ------ At October 31, 2000, for tax purposes, the company had available $112 million of alternative minimum tax credit carryforwards, which do not expire under current laws. At October 31, 2000 the company had available $5.3 million of foreign tax credit carryforwards, which, if unused, will expire in fiscal years 2001 to 2005. The increase in the company's fiscal 2000 income tax expense compared to fiscal 1999 is primarily attributable to a one-time $15 million reduction in the state deferred tax liability, resulting from a business reorganization completed during fiscal 1999. The reorganization lowered the state tax rates at which certain temporary differences, principally depreciation, are expected to reverse. Provision has not been made for income taxes which would become payable upon remittance of $189 million of the October 31, 2000 undistributed earnings of certain foreign subsidiaries representing that portion of such earnings which the company considers to have been indefinitely reinvested in the subsidiaries, principally in Brazil. Computation of the potential deferred tax liability associated with these undistributed earnings is not practicable. Current deferred taxes of $57,399,000 (1999-$43,486,000) are included in "Prepaid expenses and other current assets." F. CURRENT ASSETS Marketable securities of $22,032,000 (1999-$39,349,000) are valued at cost, which approximates market value. Receivables include $15,915,000 from sources other than trade (1999-$12,438,000), and have been reduced by allowances for discounts and doubtful accounts of $17,615,000 (1999-$12,828,000). Inventories at October 31 are composed of: In thousands 2000 1999 - ------------ --------- ------- Raw materials $ 73,064 $ 45,453 Production materials, stores and supplies l78,824 66,191 Finished and in process goods 181,396 137,319 --------- -------- $333,284 $248,963 ========= ======== If inventories had been valued at current cost, they would have been $469,456,000 in 2000 (1999-$368,105,000). Inventories valued on the LIFO basis were $202,419,000 in 2000. (1999-$157,036,000). NOTES TO FINANCIAL STATEMENTS G. INTEREST CAPITALIZATION In 2000, $197,671,000 of interest cost was incurred (1999-$132,428,000, 1998-$130,914,000) of which $5,526,000 was capitalized (1999-$8,890,000, 1998-$20,752,000). H. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at October 31: In thousands 2000 1999 ------------ --------- ---------- Accounts payable: Trade $156,398 $118,413 Other 34,914 18,812 Accrued expenses: Taxes, other than income 25,518 18,989 Interest 52,824 32,927 Payroll and employee benefit costs 118,198 85,179 Other 135,335 87,639 --------- ---------- $523,187 $361,959 ========= ========== I. CASH FLOWS Changes in assets and liabilities are as follows: NOTES TO FINANCIAL STATEMENTS
In thousands 2000 1999 1998 ------------ ------------- ------------- ---------- [Increase] decrease in: Receivables $ [15,594] $ [41,054] $ 12,765 Inventories [788] 24,545 [17,249] 1,898 [1,148] [5,905] Prepaid expenses and other current assets Increase [decrease] in: Accounts payable and accrued expenses 38,960 24,766 [5,597] Income taxes payable 829 [9,686] [1,077] ------------- ----------- ------------ $ 25,305 $ [2,577] $ [17,063] ======= ======= ========
Reconciliation of capital expenditures on a cash basis:
In thousands 2000 1999 1998 ------------ ----------- ----------- ----------- New investment in plant and timberlands $212,263 $232,292 $419,705 Less: debt assumed [260] [158] [4] net change in related current l 1,973 [3,255] 3,283 ----------- ----------- ----------- Cash additions to plant and timberlands $213,976 $228,879 $422,984 ======== ========= ========
Cash payments for interest, excluding amounts capitalized, were $167,145,000 in 2000 (1999-$112,066,000, 1998-$108,082,000). Cash payments for income taxes were $40,203,000 in 2000 (1999-$12,108,000, 1998-$13,744,000). Dividends paid per share were $.88 for 2000, 1999 and 1998. J. LEASING ACTIVITIES AND OTHER COMMITMENTS The company leases a variety of assets for use in its operations. Leases for administrative offices, converting plants and storage facilities generally contain options which allow the company to extend lease NOTES TO FINANCIAL STATEMENTS terms for periods up to 25 years, or to purchase the properties. Certain leases provide for escalation of the lease payments as maintenance costs and taxes increase. The company has no significant capital lease liabilities. Minimum rental payments under operating leases that have noncancellable lease terms in excess of 12 months are as follows: In thousands Operating leases ------------ ---------------- 2001 $ 35,534 2002 31,934 2003 24,236 2004 19,163 2005 15,927 Later years 65,000 -------------- Minimum lease payments $ 191,794 ============== Rental expense under operating leases was $48,411,000 in 2000 (1999-$38,412,000, 1998-$40,179,000). At October 31, 2000, commitments required to complete currently authorized capital projects are approximately $249 million. K. LONG-TERM DEBT Long-term debt consists of the following at October 31: In thousands 2000 1999 ------------- ---- ---- Notes: 6.85%, due 2004 $ 200,000 $ - 7.10%, due 2009 200,000 - 8.40%, due 2007 200,000 - Floating rate, due 2003 200,000 - Debentures: 8.20%, due 2030 400,000 - 9.65%, due 2002 100,000 100,000 9 3/4%, due 2020 100,000 100,000 Sinking Fund Debentures: 7%, due 2004-2023 150,000 150,000 7 1/2%, due 2008-2027 150,000 150,000 7.65%, due 2008-2027 150,000 150,000 7.75%, due 2004-2023 150,000 150,000 8 1/8%, due 2001-2007 14,750 19,450 8.30%, due 2003-2022 125,000 125,000 10 1/8%, due 2000-2019 - 100,000 10 1/4%, due 2000-2018 - 85,000 10.30%, due 2000-2019 - 100,000 Pollution Control Revenue Bonds: 5.85-6.65%, due 2004-2018 26,620 26,620 5 7/8-5.9%, due 2001-2003 4,875 6,740 5 7/8-6.2%, due 2001-2007 10,930 11,480 5.9-6.2%, due 2004-2008 5,900 5,900 NOTES TO FINANCIAL STATEMENTS 6 3/8%, due 2026 5,740 5,740 7 1/8%, due 2001 - 2,000 8 1/4%, due 2001-2010 3,890 3,995 9 1/8-9.6%, due 2006-2015 10,100 10,100 10 1/2%, due 2004 1,500 1,500 Industrial Revenue Bonds: 7-7.67%, due 2001-2027 94,145 94,530 Floating rate, due 2001-2014 44,383 - Economic Development Bonds: 8 3/4%, due 2001-2010 4,080 4,190 Notes payable and other 364,859 74,809 ------------ ------------ Subtotal 2,716,772 1,477,054 Less installments due within one year [30,098] [50,200] ------------ ------------ Total $2,686,674 $1,426,854 =========== =========== Outstanding noncurrent debt maturing in the next five years are (in millions); 2001-$30.1; 2002-$295.3; 2003-$331.9; 2004-$241.9; 2005-$40.6. The company has a revolving credit agreement for $500 million which expires November 16, 2005. Borrowings under the agreement may be in unsecured domestic or Eurodollar notes and may be at rates approximating prime or the London Interbank Offered Rate (LIBOR), at the company's option. There is a nominal commitment fee on the unused funds. These facilities are used to support commercial paper borrowings. The revolving credit agreement contains financial covenants relating to the ratio of total debt to total capitalization. There were no borrowings under this facility during 2000 or 1999. Included in "Notes payable and other" in the prior table are short-term borrowings amounting to $270 million, which have been classified as long-term obligations. These borrowings have repayment terms that can be extended under the loan agreement and are intended to be outstanding more than one year. In November 1999, the company issued $200 million of 6.85% five-year notes and $200 million of 7.10% ten-year notes, and in January 2000, the company issued $400 million of 8.20% thirty-year notes in part to fund the purchases of the Evadale mill and Mebane Packaging Group. In connection with the acquisition of IMPAC Group, the company issued $200 million of floating rate three-year notes, at LIBOR plus 0.9% reset quarterly and $200 million of 8.40% seven-year notes on June 5, 2000. During the second quarter of fiscal 2000, the company recorded an extraordinary charge of $8.8 million after tax, or $.09 per share, from the early retirement of $270 million of higher interest rate debt. At October 31, 2000, the book value of financial instruments included in long-term debt was $2,716,772,000 (1999-$1,477,054,000), and the fair value was estimated to be $2,627,696,000 (1999-$1,495,290,000). The company has estimated the fair value of financial instruments based upon quoted market prices for the same or similar issues or on the current interest rates available to the company for debt of similar terms and maturities. L. SHAREHOLDERS' EQUITY During 2000, the company repurchased 80,000 shares (1999-460,000, 1998-1,800,000) of company stock under a repurchase program authorized in 1997 by the Board of Directors. The program was initiated to satisfy issuances under the company's stock option plans. There were no purchases in 1998, 1999 or 2000 under the stock repurchase program authorized in 1987 by the Board of Directors. NOTES TO FINANCIAL STATEMENTS At October 31, 2000, there were 44,170 shares of nonvoting $100 par value cumulative preferred stock authorized and 10 million shares of preferred stock without par value authorized and available for issue. Pursuant to a Rights Agreement approved by the company's Board of Directors in 1997, in the event a person or group were to acquire a 15% or greater position in Westvaco, each right would entitle its holder (other than the acquiror) to buy that number of shares of common stock of Westvaco which, at the time of the 15% acquisition, had a market value of two times the exercise price of the rights. If, after the rights have been triggered, an acquiring company were to merge or otherwise combine with Westvaco, or Westvaco were to sell 50% or more of its assets or earning power, each right would entitle its holder (other than the acquiror) to buy that number of shares of common stock of the acquiring company which, at the time of such transaction, would have a market value of two times the exercise price of the rights. The rights have no effect on earnings per share until they become exercisable. The rights expire in December 2007. M. STOCK OPTION PLANS At October 31, 2000, the company had five stock option plans. The 1983 and 1988 Stock Option and Stock Appreciation Rights Plans, 1995 Salaried Employee Stock Incentive Plan and the 1999 Salaried Employee Stock Incentive Plan provide for the granting of up to 4,725,000, 4,500,000, 4,837,500 and 5,000,000, respectively, of stock options and stock appreciation rights to key employees. The 1995 Non-Employee Director Stock Incentive Plan provides for the granting of up to 112,500 stock options and stock appreciation rights to outside directors. For the employee plans, stock options may be granted with or without stock appreciation rights and are granted at market value. They are exercisable after a period of six months to one year and expire not later than ten years from the date of grant. Under each employee plan, stock options may be granted with or without limited stock appreciation rights, which are exercisable upon the occurrence of certain events related to changes in corporate control. In 1999, nearly all outstanding limited stock appreciation rights, which had previously been granted to employees were cancelled or surrendered. Subject to limited exceptions, no new grants for stock appreciation rights were awarded during 2000. The company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its plans and, accordingly, no compensation cost has been recognized. If compensation cost for the company's stock options had been determined based on the fair value method of SFAS 123, Accounting for Stock-Based Compensation, the company's net income and net income per share would have been reduced to the unaudited pro forma amounts as follows: In thousands, except per share ------------------------------ Net income 2000 1999 1998 ----------- ----------- ----------- As reported $245,869 $111,176 $132,013 Pro forma 240,774 107,924 127,470 Income per share - basic As reported $2.44 $1.11 $1.30 Pro forma 2.39 1.08 1.26 Income per share - diluted As reported $2.44 $1.11 $1.30 Pro forma 2.39 1.07 1.25 NOTES TO FINANCIAL STATEMENTS In determining the fair value of options for pro forma purposes, the company used the Black-Scholes option pricing model and assumed the following for options granted in 2000, 1999 and 1998, respectively: risk-free interest rate of 6.13%, 4.72% and 5.80%; dividend yield of 2.87%, 3.05% and 2.71%; an expected option life of six years for each year; and an expected volatility of 22%, 20% and 20% for each year. The weighted average fair values of the options granted during 2000, 1999 and 1998 were $7.65, $5.34 and $7.61 per share, respectively. The following table summarizes activity in the plans for 2000, 1999 and 1998: Weighted average Options exercise price ------- ---------------- Outstanding at October 31, 1997 4,376,212 $24.84 Granted 981,780 32.53 Exercised [218,159] 20.44 Cancelled [992] 18.75 ---------- Outstanding at October 31, 1998 5,138,841 26.49 Granted 1,001,655 28.78 Exercised [466,169] 22.31 Cancelled [19,527] 26.71 ---------- Outstanding at October 31, 1999 5,654,800 27.24 Granted 1,079,455 30.63 Exercised [514,611] 24.48 Cancelled [9,087] 27.33 ---------- Outstanding at October 31, 2000 6,210,557 28.08 ========== NOTES TO FINANCIAL STATEMENTS The following table shows various information about stock options outstanding at October 31, 2000:
Range of exercise prices ------------------------ $18.29 - $25.06 - Over $24.25 $27.50 $27.50 Total ------- -------- -------- -------- Number outstanding 799,750 2,406,967 3,003,840 6,210,557 Weighted average price $23.31 $26.41 $30.68 $28.08 Weighted average remaining life (in years)2.04 5.31 8.10 6.24 Number exercisable 799,750 2,406,967 1,937,885 5,144,602 Weighted average price $23.31 $26.41 $30.71 $27.55
There were 4,417,999 shares available for grant as of October 31, 2000 (1999-5,488,367, 1998-1,470,495). At October 31, 2000, 595,171 outstanding options had related limited stock appreciation rights. N. EMPLOYEE RETIREMENT, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PENSION AND RETIREMENT PLANS The company provides retirement benefits for substantially all domestic employees under several noncontributory trusteed plans and also provides benefits to employees whose retirement benefits exceed maximum amounts permitted by current tax law under an unfunded benefit plan. Benefits are based on a final average pay formula for the salaried plans and a unit benefit formula for the hourly paid plans. Prior service costs are amortized on a straight-line basis over the average remaining service period for active employees. Contributions are made to the funded plans in accordance with ERISA requirements. Plan assets are comprised mainly of listed stocks, including $68,491,000 of company stock, money market and fixed income investments. The 2000 net pension credit relating to employee pension and retirement benefits was $108,247,000 (1999-$82,280,000, 1998-$55,337,000). The net pension credits reflect cumulative favorable investment returns on plan assets. The components of the net pension credit for 2000, 1999 and 1998 are as follows: In thousands 2000 1999 1998 ------------ -------- --------- ------- Service cost-benefits earned $ 28,638 $ 28,966 $26,934 during the period Interest cost on projected benefit obligation 74,199 71,714 71,293 Expected return on plan assets [187,501] [171,223] [148,042] Net transition asset [6,940] [6,940] [6,940] Amortization of prior service cost 5,498 5,473 5,312 Net gain [22,141] [10,270] [3,894] -------- --------- ------- Net pension credit $ [108,247] $ [82,280] $ [55,337] ======== ========= ======== NOTES TO FINANCIAL STATEMENTS POSTRETIREMENT BENEFITS The company provides life insurance for substantially all retirees and medical benefits to certain retirees in the form of cost subsidies until medicare eligibility is reached and to certain other retirees, medical benefits up to a maximum lifetime amount. None of these benefits is funded. The components of net periodic postretirement benefits cost for the fiscal years ended October 31, 2000, 1999 and 1998 are as follows: In thousands 2000 1999 1998 ------------ -------- --------- ------- Service cost-benefits earned $ 1,300 $ 1,200 $ 1,400 during the period Interest cost 1,300 1,200 1,500 Net amortization [900] [1,100] [800] -------- --------- ------- Net periodic postretirement benefits cost $ 1,700 $ 1,300 $ 2,100 ======== ========= ======== The changes in the consolidated prepaid pension asset for defined benefit plans and the accrued postretirement benefit obligation are shown on the next page. The net prepaid pension cost, from the following table, is included in "Other assets," except for an obligation of $25.7 million for an unfunded excess benefit plan which is recorded as a long-term liability. The following table sets forth the funded status of the plans and amounts recognized in the "Consolidated Balance Sheets" at October 31, based on a valuation date of July 31:
Pension and In thousands retirement benefits Postretirement benefits ------------ -------------------------- ----------------------- 200 1999 2000 1999 -------------------------- --------- ---------- Change in benefit obligation $1,123,389 $1,084,468 $19,900 $ 23,200 Benefit obligation at beginning of year Service cost 28,638 28,966 1,300 1,200 Interest cost 74,199 71,714 1,300 1,200 Actuarial gain [loss] 718 [13,833] [500] [2,800] Plan amendments 20,631 380 - - Acquisitions 9,662 - - - Termination benefits - 1,491 - - Benefits paid [53,078] [49,797] [2,400] [2,900] ------------ ----------- -------- -------- $1,204,159 $1,123,389 $19,600 $19,900 Benefit obligation at end ============ =========== ======== ========= of year
Change in plan assets Fair value of plan assets at beginning of year $2,614,295 $2,337,713 $ - $ - Actual return on plan assets 179,787 324,716 - - Company contributions 1,905 1,663 2,400 2,900 Acquisitions 10,804 - - - Benefits paid [53,078] [49,797] [2,400] [2,900] ------------ ------------ --------- ------- $2,753,713 $2,614,295 $ - Fair value of plan assets ============ ============ ======== ========= at end of year $ -
NOTES TO FINANCIAL STATEMENTS
Funded status of the plans $1,549,554 $1,490,906 $[19,600] $[19,900] Unrecognized net actuarial gain [986,706] [1,017,279] [6,800] [7,100] Unrecognized prior service cost 62,151 47,018 - [100] [credit] Unrecognized net transition [9,026] [15,966] - - obligation - ------------ ------------ --------- --------- $ 615,973 $ 504,679 $[26,400] $[27,100] ============ ============ ========= =========
The assumptions used in the measurement of the company's benefit obligations are as follows: 2000 1999 1998 ---- ---- ---- Pension and retirement benefits Discount rate 6.75% 6.75% 6.75% Expected return on plan assets 8.75% 8.75% 9.50% Rate of compensation increase 5.00% 5.00% 5.00% Postretirement benefits Discount rate 6.75% 6.75% 6.75% Rate of compensation increase 5.00% 5.00% 5.00% The annual rate of increase in health care costs was assumed at 7% for 1999, 6% for 2000 and 5% thereafter. The effect of a 1% increase in the assumed health care cost trend rate would increase the July 31, 2000 accumulated postretirement benefit obligation by $284,000 and the net postretirement benefits cost for 2000 by $76,000. The effect of a 1% decrease in the assumed health care cost trend rate would decrease the July 31, 2000 accumulated postretirement benefit obligation by $248,000 and the net postretirement benefits cost for 2000 by $68,000. The company also has defined contribution plans that cover substantially all U.S. employees. Expense for company matching contributions under these plans was approximately $24.6 million in 2000 and $18.0 million in 1999 and 1998. POSTEMPLOYMENT BENEFITS The company provides limited postemployment benefits to former or inactive employees, including short-term disability, workers' compensation and severance. O. LEGAL AND ENVIRONMENTAL MATTERS The company is involved in various legal proceedings and environmental actions, generally arising in the normal course of its business. Although the ultimate outcome of such matters cannot be predicted with certainty, the company does not believe that the outcome of any proceeding, lawsuit or claim that is NOTES TO FINANCIAL STATEMENTS pending or threatened, or all of them combined, will have a material adverse effect on its consolidated financial position, liquidity or results of operations. P. BUSINESS SEGMENT INFORMATION Westvaco is a leading manufacturer of packaging, paper and chemicals serving both U.S. and international markets. The company's operating divisions have been classified into reportable segments based upon the nature of their products and services within these three major product categories, with separate disclosure of Rigesa, Ltda., our wholly owned Brazilian packaging subsidiary. Following is a description of our reportable business segments: The packaging segment manufactures, markets and distributes bleached paperboard, kraft paper and board, and premium packaging for consumer products markets. These products are manufactured at three domestic mills and two mills located in Brazil; paper and board are converted into packaging products at plants located in the United States, Brazil and Europe. These products are sold primarily in the United States with additional markets located in Brazil, Europe, Asia and the Pacific Rim. In Brazil, Rigesa is a major producer of paperboard and corrugated packaging for the markets of that country. Operating results for Rigesa are subject to the economic conditions in Brazil, including its inflation and currency fluctuations. The paper segment is engaged in the manufacturing and marketing of printing grade papers and envelopes. All of this segment's operations are in the United States. It operates three mills in the eastern half of the country and manufactures envelopes at nine domestic plants. The chemical segment manufactures products at four domestic locations. Major product groups are: activated carbon products and services; printing ink resins and lignin-based surfactants; tall oil fatty acid, rosin and derivative products. The corporate and other segment includes the company's forestry operations and income and expense items and activities not directly associated with segment operations, including corporate support staff services and related assets and liabilities. The segments are measured on operating profits before restructuring charges, interest expense, income taxes, extraordinary items and cumulative effect of accounting changes, except for Rigesa in the packaging segment, whose operating profit includes interest income of $10.0 million in 2000 (1999- $13.2 million, 1998- $14.6 million) and interest expense of $5.3 million in 2000 (1999- $4.6 million, 1998- $4.5 million). The segments follow the same accounting principles described in the Summary of Significant Accounting Policies. Sales between the segments are recorded primarily at market prices. The 2000 restructuring charge of $27.2 million related to the expected decline in sales of folding cartons to U.S. tobacco markets and the gain of $11.2 million from the sale of the liquid packaging plant relate to the packaging segment. The 1999 restructuring charge following the completion of the company's strategic review related to packaging, paper and chemicals was $57.7 million, $21.2 million and $1.6 million, respectively. No single customer accounts for 10% or more of consolidated trade sales in 2000 and 1999. In 1998, sales to a single customer accounted for approximately 11% of consolidated sales primarily from the company's packaging segment. Total sales outside of the United States, including sales of our foreign operating subsidiaries, accounted for approximately $808,494,000 in 2000 (1999-$663,483,000, 1998-$709,567,000). Export sales from the United States amounted to $590,807,000 in 2000 (1999-$504,480,000, 1998-$499,792,000). Income of foreign subsidiaries included in consolidated net income amounted to $49,185,000 in 2000 (1999-$40,518,000, 1998 $38,612,000). Long-lived assets located outside the United States are $326,350,000 (1999-$195,104,000). ). Long-lived assets located in the United States are $5,179,876,000 (1999-$3,963,580,000). NOTES TO FINANCIAL STATEMENTS Financial information by business segment follows:
Sales Depreciation ------------------------------ Inter- Operating and Segment Capital (In millions) Trade Segment Total Profitamortization assets expenditures YEAR ENDED OCTOBER 31, 2000 - ------------------------------------------------------------------------------------------------- Packaging $1,974.0 $ 4.4 $1,978.4 $318.7 $161.9 $3,555.8 $104.6 Rigesa 166.9 - 166.9 32.5 10.8 285.1 13.6 ------------------------------------------------------------------------- Packaging total 2,140.9 4.4 2,145.3 351.2 172.7 3,840.9 118.2 - ------------------------------------------------------------------------------------------------- Paper 1,145.5 20.2 1,165.7 140.6 96.7 1,383.7 39.7 - ------------------------------------------------------------------------------------------------- Chemical 319.1 25.1 344.2 64.5 23.5 321.4 10.8 - ------------------------------------------------------------------------------------------------- Corporate and other 57.5 39.1 96.6 [152.7] 21.0 1,023.9 43.6 - ------------------------------------------------------------------------------------------------- Total 3,663.0 88.8 3,751.8 406.6 313.9 6,569.9 212.3 - ------------------------------------------------------------------------------------------------- Intersegment eliminations [88.8] [88.8] - ------------------------------------------------------------------------------------------------- Consolidated totals $3,663.0 $ - $3,663.0 $403.6 $313.9 $6,569.9 $212.3 ========================================================================= YEAR ENDED OCTOBER 31, 1999 - ------------------------------------------------------------------------------------------------ Packaging $1,316.9 $ 4.0 $1,320,9 $165.3 $128.6 $2,043.5 $ 99.8 Rigesa 140.8 - 140.8 25.2 9.4 257.4 31.0 ------------------------------------------------------------------------- Packaging total 1,457.7 4.0 1,461.7 190.5 138.0 2,300.9 130.8 - ------------------------------------------------------------------------------------------------- Paper 1,005.1 23.4 1,028.5 62.0 100.6 1,441.8 60.0 - ------------------------------------------------------------------------------------------------- Chemical 293.9 20.6 314.5 52.5 23.8 314.7 18.1 - ------------------------------------------------------------------------------------------------- Corporate and other 45.1 35.7 80.8 [157.0] 18.1 839.3 23.4 - ------------------------------------------------------------------------------------------------- Intersegment eliminations [83.7] [83.7] - ------------------------------------------------------------------------------------------------- Consolidated totals 2,801.8 83.7 2,885.5 148.0 280.5 4,896.7 232.3 YEAR ENDED OCTOBER 31, 1998 - --------------------------- Packaging $1,380.2 $ 4.0 $1,384.2 $ 172.3 $128.1 $2,146.6 $158.6 - ------------------------------------------------------------------------------------------------- Rigesa 184.0 - 184.0 35.2 12.4 322.4 41.1 - ------------------------------------------------------------------------------------------------- Packaging total 1,564.2 4.0 1,568.2 207.5 140.5 2,469.0 199.7 - ------------------------------------------------------------------------------------------------- Paper 972.9 52.7 1,025.6 84.8 100.1 1,497.2 157.8 - ------------------------------------------------------------------------------------------------- Chemical 310.9 21.2 332.1 53.2 22.6 326.6 38.0 - ------------------------------------------------------------------------------------------------- Corporate and other 37.9 34.8 72.7 [141.1] 17.8 715.9 24.2 - ------------------------------------------------------------------------------------------------- Total 2,885.9 112.7 2,998.9 204.4 281.0 5,008.7 419.7 - ------------------------------------------------------------------------------------------------- Intersegment elimination [112.7] [112.7] - ------------------------------------------------------------------------------------------------- Consolidated totals $2,885.9 $ - $2,885.9 $ 204.4 $281.0 $5,008.7 $419.7 =========================================================================
NOTES TO FINANCIAL STATEMENTS Q. SUBSEQUENT EVENT [UNAUDITED] On December 6, 2000, the company announced the formation of Paxonix, a new Internet-enabled packaging solutions business offering a unique array of integrated software applications, expert professional services and best-in-class resources around the world. Paxonix's mission is to help consumer product companies develop packaging solutions, shorten package development cycles and increase the speed of product launches and relaunches in one country, a region or globally. As the creator of Paxonix, Westvaco intends to provide the initial funding of about $50 million. A select group of 17 companies have joined Westvaco as charter members of Paxonix. These charter members operate in 60 countries and collectively possess expertise that spans advertising, branding, graphic and structural design, packaging materials and packaging production. R. SELECTED QUARTERLY INFORMATION [UNAUDITED]
In thousands, except per share data Quarter 20001 19992 19983 ------- ---- ---- ---- Sales First $ 799,593 $ 650,715 $ 702,113 Second 904,658 679,481 724,187 Third 928,022 700,202 727,826 Fourth 1,030,718 771,451 731,791 --------- ---------- ---------- Year $3,662,991 $2,801,849 $2,885,917 ======== ========= ========= Gross profit First $ 175,433 $ 119,239 $ 133,682 Second 211,288 127,052 139,135 Third 216,473 139,515 130,835 Fourth 244,740 176,907 139,644 ---------- ---------- ---------- Year $ 847,934 $ 562,713 $ 543,296 ======== ======== ======== Net income before extraordinary charge First $ 50,225 $ 25,222 $ 32,516 Second 70,168 27,295 34,606 Third 53,552 34,986 31,674 Fourth 80,727 23,673 33,217 ----------- ------------ ----------- Year $ 254,672 $ 111,176 $ 132,013 ======= ======== ========= Net income First $ 50,225 $ 25,222 $ 32,516 Second 61,365 27,295 34,606 Third 53,552 34,986 31,674 Fourth 80,727 23,673 33,217 ----------- ----------- ------------ Year $ 245,869 $ 111,176 $ 132,013 ========== ========== =========== NOTES TO FINANCIAL STATEMENTS Net income before extraordinary charge per common share- First $ .50 $ .25 $ .32 Second .70 .27 .34 Third .53 .35 .31 Fourth .80 .24 .33 ------- ------- ------- Year $2.53 $1.11 $1.30 ======= ======= ======= Net income per common share- basic and diluted First $ .50 $ .25 $ .32 Second .61 .27 .34 Third .53 .35 .31 Fourth .80 .24 .33 ------- ------- ------- Year $2.44 $1.11 $1.30 ======= ======= =======
1) Results for the 2000 second quarter include an extraordinary charge of $8.8 million after tax, or $.09 per share, from the retirement of higher coupon debt and a pretax gain of $11.2 million, or $.07 per share from the sale of a liquid packaging plant previously written down as part of the 1999 restructuring charge. Third quarter 2000 results include a pretax charge of $24.3 million, or $.16 per share, as a result of restructuring. Fourth quarter 2000 results include a pretax charge of $3.0 million, or $.02 per share, for the completion of the third quarter restructuring and a pretax gain of $3.6 million, or $.04 per share, resulting from the sale of our equity interest in a foreign operation. Fourth quarter results also include a pretax LIFO provision of $9.0 million, or $.06 per share. 2) Results for the 1999 fourth quarter include a pretax charge of $80.5 million, or $.49 per share, as a result of restructuring, and a $15.0 million tax benefit, or $.15 per share, resulting from a release of deferred taxes. 3) Results for the 1998 fourth quarter include a pretax charge of $5.0 million, or $.03 per share, as a result of restructuring. RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the information and representations in the accompanying consolidated financial statements and related notes as well as all other financial information contained in this report. These financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and by necessity include some amounts determined using informed estimates and judgments. Management is responsible for establishing and maintaining a system of internal control. The company's accounting systems include internal controls which management believes provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. In establishing the basis for reasonable assurance, management balances the cost of the internal controls with the benefits they provide. Additionally, it has long been the policy of the company to conduct its business affairs in accordance with high ethical standards, as set forth in the Westvaco Code of Conduct. PricewaterhouseCoopers LLP, the company's independent accountants, were engaged to audit the consolidated financial statements and were responsible for conducting their audit in accordance with auditing standards generally accepted in the United States of America. The appointment of PricewaterhouseCoopers LLP as the company's independent accountants by the Board of Directors, on the recommendation of the Audit Committee, has been ratified each year by the shareholders. Their report immediately follows this statement. The Audit Committee of the Board of Directors, composed solely of nonmanagement directors, meets regularly with the company's management, the internal audit manager and the independent accountants to discuss accounting and financial reporting matters and the nature, scope and results of audits. The Audit Committee meets with the independent accountants both with and without the presence of management. The committee also meets with the company's general counsel to review the company's legal compliance program as well as significant litigation issues. The independent accountants and the internal audit manager have full and free access to the Audit Committee. John A. Luke, Jr. Chairman, President and Chief Executive Officer Karen R. Osar Senior Vice President and Chief Financial Officer November 20, 2000 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Westvaco Corporation In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Westvaco Corporation and its subsidiaries at October 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York November 20, 2000 EX-21 4 december21-exh21.txt EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ---------- SUBSIDIARIES OF THE REGISTRANT DOMESTIC SUBSIDIARIES FOREIGN SUBSIDIARIES Westvaco Development Rigesa, Ltda. Corporation Valinhos, Sao Paulo, Brazil Summerville, South Carolina Westvaco Kentucky, L.P. Westvaco Asia, K.K. Wickliffe, Kentucky Tokyo, Japan The Forest Technology Group, Westvaco Europe, S.A. Inc. Brussels, Belgium Summerville, South Carolina Westvaco Virginia, Inc. Westvaco Canada, Ltd. Covington, Virginia Toronto, Canada Westvaco Texas, L.P. Westvaco (Barbados) Foreign Delaware Sales Corporation Bridgtown, Barbados AGI Incorporated Illinois Westvaco Hong Kong, Ltd. Hong Kong Klearfold, Inc. Pennsylvania Westvaco Korea, Ltd. Seoul, South Korea Westvaco Brand Security Westvaco de Mexico, S.A. de C.V. Upland Resources, Inc. Mexico City, Mexico West Virginia Westvaco Pacific Pty. Limited MPC Packaging Corporation Sydney, Australia North Carolina Westvaco Singapore Pte., Ltd. Mebane Packaging Group, Inc. Singapore North Carolina Westvaco Specialty Products, S.A. Mebane Tennessee, Inc. Brussels, Belgium Tennessee Westvaco South Africa (Pty) Ltd. Mebane Packaging Group de Puerto Cape Town, South Africa Rico Delaware Westvaco Svitavy, SPOL. S R.O. IMPAC Group, Inc. (U.S.) Svitavy, Czech Republic Delaware Westvaco Taiwan, Ltd. COGEN SOUTH L.L.C. Taipei, Taiwan Westvaco Worldwide Distribution, S.A. Neuchatel, Switzerland FOREIGN SUBSIDIARIES (continued) Westvaco Graphics, S.A. Switzerland Shore Islands, S.L. Spain IMPAC Group, Inc. (Europe) England and Wales Sony Music Printing Group The Netherlands DuBOIS Holdings, Ltd. Hannover, Germany EX-23 5 december21-exh23.txt EXHIBIT 23 - CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 ---------- CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-50703, 2-94699, 33-26823, 33-57879, 33-57881, 333-87275 and 333-50711) and in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 333-51423) of Westvaco Corporation of our report dated November 20, 2000 relating to the Westvaco Corporation financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP New York, New York December 20, 2000 -----END PRIVACY-ENHANCED MESSAGE-----