-----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, DcJiO4cuDGSas+HFITxi/99EmpL5Mux2AyqJ2ZfHoqRr+P91KoucekIDSYlfl5jO 3j5GPeDDUcVnF1nWl00C9A== 0000950117-01-000558.txt : 20010327 0000950117-01-000558.hdr.sgml : 20010327 ACCESSION NUMBER: 0000950117-01-000558 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL PAPER CO /NEW/ CENTRAL INDEX KEY: 0000051434 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 130872805 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03157 FILM NUMBER: 1578973 BUSINESS ADDRESS: STREET 1: TWO MANHATTANVILLE RD CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9143971500 MAIL ADDRESS: STREET 1: TWO MANHATTANVILLE ROAD CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL PAPER & POWER CORP DATE OF NAME CHANGE: 19710527 10-K 1 0001.txt INTERNATIONAL PAPER COMPANY 10-K - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K (MARK ONE) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-3157 ------------------- INTERNATIONAL PAPER COMPANY (EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER) ------------------- NEW YORK 13-0872805 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYEE INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 400 ATLANTIC STREET 06921 STAMFORD, CONNECTICUT (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: 203-358-7000 ------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, $1 per share par value New York Stock Exchange 7 7/8% Debentures due 2038 New York Stock Exchange
------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] ------------------- The aggregate market value of the common stock of the Company outstanding as of March 16, 2001, held by non-affiliates of the Company was $17,250,072,809, calculated on the basis of the closing price on the Composite Tape on March 16, 2001. For this computation, the Company has excluded the market value of all common stock beneficially owned by all executive officers and directors of the Company and their associates as a group and treasury stock. Such exclusion is not to signify in any way that members of this group are 'affiliates' of the Company. The number of shares outstanding of the Company's common stock, as of March 16, 2001
OUTSTANDING IN TREASURY ----------- ----------- 482,973,450 1,194,696
The following documents are incorporated by reference into the parts of this report indicated below: 2000 ANNUAL REPORT TO SHAREHOLDERS PARTS I, II, AND IV (INSIDE FRONT COVER AND PAGES 6 THROUGH 65) PROXY STATEMENT DATED MARCH 26, 2001 PART III
- -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL International Paper Company (the Company or International Paper, which may be referred to as we or us), is a global forest products, paper and packaging company that is complemented by an extensive distribution system, with primary markets and manufacturing operations in the United States, Canada, Europe, the Pacific Rim, and South America. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to available industry capacity and general economic conditions. We are a New York corporation and were incorporated in 1941 as the successor to the New York corporation of the same name organized in 1898. Our home page on the Internet is www.internationalpaper.com. You can learn more about us by visiting that site. In the United States at December 31, 2000, the Company operated 35 pulp, paper and packaging mills, 105 converting and packaging plants, 46 wood products facilities, seven specialty panels and laminated products plants and eight specialty chemicals plants. Production facilities at December 31, 2000 in Europe, Asia, Latin America, South America and Canada included 15 pulp, paper and packaging mills, 48 converting and packaging plants, 15 wood products facilities, three specialty panels and laminated products plants and seven specialty chemicals plants. We distribute printing, packaging, graphic arts, maintenance and industrial products through over 300 distribution branches located primarily in the United States. At December 31, 2000, we owned or managed approximately 12 million acres of forestlands in the United States, mostly in the South, 1.5 million acres in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned timberlands in Canada. Through Carter Holt Harvey, a New Zealand company which is approximately 50.4% owned by International Paper, the Company operates five mills producing pulp, paper, packaging and tissue products, 26 converting and packaging plants and 56 wood products manufacturing and distribution facilities, primarily in New Zealand and Australia. Carter Holt Harvey distributes paper and packaging products through seven distribution branches located in New Zealand and Australia. In New Zealand, Carter Holt Harvey owns approximately 820,000 acres of forestlands. For financial reporting purposes, our businesses are separated into six segments: Printing Papers; Industrial and Consumer Packaging; Distribution; Forest Products; Chemicals and Petroleum; and Carter Holt Harvey. A description of these business segments can be found on pages 7 through 13 of our 2000 Annual Report to Shareholders (Annual Report), which information is incorporated herein by reference. From 1995 through 2000, International Paper's capital expenditures approximated $8.8 billion, excluding mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and environmental performance, lower costs, and improve forestlands. Capital spending in 2000 was $1.4 billion and is budgeted to be approximately $1.2 billion in 2001. This amount is below our annual depreciation and amortization expense of $2 billion. You can find more information about capital expenditures on pages 13 and 14 of our Annual Report, which information is incorporated herein by reference. Discussions of mergers and acquisitions can be found on pages 6, 13, 14, 39 and 40 of the Annual Report, which information is incorporated herein by reference. You can find discussions of restructuring charges and other special items on pages 15 through 23 and 41 through 49 of the Annual Report, which information is incorporated herein by reference. Throughout this 10-K report, we 'incorporate by reference' certain information in parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC permits us to disclose important information by referring to it in that manner. Please refer to such information. FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS The financial information concerning segments is set forth on pages 30 and 31 of the Annual Report, which information is incorporated herein by reference. FINANCIAL INFORMATION ABOUT INTERNATIONAL AND DOMESTIC OPERATIONS The financial information concerning international and domestic operations and export sales is set forth on page 31 of the Annual Report, which information is incorporated herein by reference. 1 COMPETITION AND COSTS Despite the size of the Company's manufacturing capacities for paper, paperboard, packaging and pulp products, the markets in all of the cited product lines are large and highly fragmented. The markets for wood and specialty products are similarly large and fragmented. There are numerous competitors, and the major markets, both domestic and international, in which the Company sells its principal products are very competitive. These products are in competition with similar products produced by others, and in some instances, with products produced by other industries from other materials. Many factors influence the Company's competitive position, including prices, costs, product quality and services. You can find more information about the impact of prices and costs on operating profits on pages 6 through 13 of the Annual Report, which information is incorporated herein by reference. MARKETING AND DISTRIBUTION The Company sells paper and packaging products through our own sales organization directly to users or converters for manufacture. Sales offices are located throughout the United States as well as internationally. We also sell significant volumes of products through paper merchants and distributors, including facilities in our distribution network. We market our U.S. production of lumber and plywood through independent and Company-owned distribution centers. Specialty products are marketed through various channels of distribution. DESCRIPTION OF PRINCIPAL PRODUCTS The Company's principal products are described on pages 7 through 9 of the Annual Report, which information is incorporated herein by reference. Production of major products for 2000, 1999 and 1998 was as follows: PRODUCTION BY PRODUCT (UNAUDITED)
2000(A) 1999 1998 ------- ---- ---- Printing papers (In thousands of tons) White papers and bristols............................... 6,046 5,393 5,188 Coated papers........................................... 2,020 1,308 1,241 Market pulp(A).......................................... 2,584 2,082 2,020 Newsprint............................................... 109 100 95 Packaging (In thousands of tons) Containerboard.......................................... 4,454 4,837 4,670 Bleached packaging board................................ 2,113 2,122 2,148 Industrial papers....................................... 993 898 894 Industrial and consumer packaging(B).................... 5,240 5,112 4,919 Specialty products (In thousands of tons) Tissue.................................................. 164 158 148 Forest products (In millions) Panels (sq. ft 3/8" basis)(C)........................... 2,620 2,106 1,818 Lumber (board feet)..................................... 3,372 2,927 2,726 MDF (sq.ft 3/4" basis).................................. 335 209 297 Particleboard (sq. ft 3/4" basis)....................... 380 196 195
- --------- (A) Production includes Champion International Corporation (Champion) from the date of acquisition. (B) This excludes market pulp purchases. (C) A significant portion of this tonnage was fabricated from paperboard and paper produced at the Company's mills and is included in the containerboard, bleached packaging board and industrial papers amounts in this table. (D) Panels include plywood and oriented strand board. 2 RESEARCH AND DEVELOPMENT The Company operates research and development centers at Sterling Forest, New York; Cincinnati, Ohio; Kaukauna, Wisconsin; West Chicago, Illinois; Odenton, Maryland; Jacksonville, Florida; Savannah, Georgia; Saint-Priest, France; Annecy, France; a regional center for applied forest research in Bainbridge, Georgia; a forest biotechnology center in Rotorua, New Zealand; and several product laboratories. We direct research and development activities to short-term, long-term and technical assistance needs of customers and operating divisions; process, equipment and product innovations; and improve profits through tree generation and propagation research. Activities include studies on improved forest species and management; innovation and improvement of pulping, bleaching, chemical recovery, papermaking and coating processes; packaging design and materials development; reduction of environmental discharges; re-use of raw materials in manufacturing processes; recycling of consumer and packaging paper products; energy conservation; applications of computer controls to manufacturing operations; innovations and improvement of products; and development of various new products. Our development efforts specifically address product safety as well as the minimization of solid waste. The cost to the Company of its research and development operations in 2000 was $92 million, including Champion for the period of July-December, $88 million in 1999, and $144 million in 1998. ENVIRONMENTAL PROTECTION The Company is subject to extensive federal and state environmental regulation as well as similar regulations in all other jurisdictions in which it operates. Our continuing objectives are to: (1) control pollutants discharged into the air, water and groundwater to avoid adverse impacts on the environment, (2) make continual improvements in environmental performance, and (3) maintain 100% compliance with applicable laws and regulations. A total of $190 million was spent in 2000 for capital projects to control environmental releases into the air and water, and to assure environmentally sound management and disposal of waste. We expect to spend approximately $136 million in 2001 for similar capital projects, including the costs to comply with the Environmental Protection Agency's (EPA) Cluster Rule regulations. Amounts to be spent for environmental control projects in future years will depend on new laws and regulations and changes in legal requirements and environmental concerns. Taking these uncertainties into account, our preliminary estimate for additional environmental appropriations during the period 2002 through 2003 is approximately $307 million in total. On April 15, 1998, the EPA issued final Cluster Rule regulations that established new requirements regarding air emissions and wastewater discharges from pulp and paper mills to be met by 2006. The projected costs included in our estimate related to the Cluster Rule regulations for the years 2001 through 2002 are $116 million. Projected Cluster Rule costs for 2003 through 2006 are in the range of $330 million to $370 million. Included in these estimates are costs associated with combustion source standards for the pulp and paper industry, which were issued by the EPA on January 12, 2001. The final cost depends on the outcome of the Cluster Rule water regulations for pulp and paper categories other than bleached kraft and soda. Regulations for these categories are not likely to become final until late 2001. We estimate that annual operating costs, excluding depreciation, will increase approximately $22 million when these regulations are fully implemented. Additional regulatory requirements that may affect future spending include the EPA's requirements for states to assess current surface water loading from industrial and area sources. This process, called Total Maximum Daily Load (TMDL) allocation, could result in reduced allowable treated effluent discharges from our manufacturing sites. To date there have been no significant impacts due to the TMDL process, as the majority of our manufacturing sites operate at levels significantly below allowable waste loadings. In recent years, the EPA has undertaken significant air quality initiatives associated with nitrogen oxide emissions, regional haze, and national ambient air quality standards. When regulatory requirements for new and changing standards are finalized, we will add any resulting future cost projections to our expenditure forecast. The Company has been named as a potentially liable party in a number of environmental remediation actions under various federal and state laws, including the Comprehensive Environmental 3 Response, Compensation and Liability Act (CERCLA). Related costs are recorded in the financial statements when they are probable and reasonably estimable. As of December 31, 2000, these liabilities totaled approximately $170 million. Completion of these actions is not expected to have a material adverse effect on the Company's financial condition or results of operations. The Company expects the significant effort it has made in the analysis of environmental issues and the development of environmental control technology responses will enable it to keep costs for compliance with environmental regulations at, or below, industry averages. You can find a further discussion of environmental issues on pages 24 and 25 of the Annual Report, which information is incorporated herein by reference. You can also find additional information about environmental matters in the Company's 1999-2000 Environment, Health & Safety Annual Environmental Report, which can be obtained by contacting the Company or through the Company's website. EMPLOYEES As of December 31, 2000, we had approximately 112,900 employees, 77,000 of whom were located in the United States. Of the domestic employees, approximately 49,000 are hourly employees, approximately 23,000 of whom are represented by the Paper, Allied-Industrial, Chemical and Energy International Union. At December 31, 2000, employee reductions relating to the Union Camp merger totaled approximately 2,200, based on a comparison of year end 2000 actual head count versus 1998 budget. During 2000, we completed the Union Camp merger-related integration benefits program, eliminating 1,062 employees of the combined company. Under a Union Camp restructuring plan implemented in 1998 before the merger, another 540 positions were eliminated. Approximately 600 additional positions of the combined company were eliminated where the individuals affected were not eligible for benefits under these programs. During 2000, labor agreements were ratified at seven mills. During 2001, labor agreements are scheduled to be negotiated at five mills: Georgetown, Erie, Pensacola, Sartell and Hudson River. During 2000, 27 labor agreements were settled in non-papermill operations. Settlements included 12 in paper converting, six in building materials, six in distribution and three in chemicals. At year end, one open contract existed where negotiations were in progress. During 2001, 26 non-papermill operations will negotiate new labor agreements. RAW MATERIALS For information on the sources and availability of raw materials essential to our business, see Item 2. Properties. FORWARD-LOOKING STATEMENTS Our disclosure and analysis in this report and in our Annual Report, and in particular, statements found in Management's Discussion and Analysis in the Annual Report, contain some forward-looking statements. Forward-looking statements reflect our expectations or forecasts of future events. These statements do not relate strictly to historical or current facts. They use words such as 'estimate,' 'anticipate,' 'plan,' 'expect,' 'project,' 'intend,' 'believe,' and similar meanings in connection with any discussion of future operating or financial performance. These include statements relating to future actions, future performance or the outcome of contingencies, such as legal proceedings and financial results. We also provide oral or written forward-looking statements in other materials we release to the public. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include, among other things, whether conditions influencing the recent economic slowdown will continue or worsen, changes 4 in overall demand, whether our initiatives relating to balancing our supply with demand will be successful, changes in domestic or foreign competition, changes in the cost or availability of raw materials, the cost of compliance with environmental laws and regulations, and whether anticipated savings from merger and other restructuring activities and facility rationalizations can be achieved. In view of such uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You should consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the SEC. ITEM 2. PROPERTIES FORESTLANDS The principal raw material used by International Paper is wood in various forms. As of December 31, 2000, the Company or its subsidiaries owned or controlled approximately 12 million acres of forestlands in the United States, 1.5 million acres in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned timberlands in Canada. An additional 820,000 acres of forestlands in New Zealand were held through Carter Holt Harvey, a consolidated subsidiary of International Paper. During 2000, the U.S. forestlands supplied 16 million tons of roundwood to the Company's U.S. facilities. This amounted to the following percentages of the roundwood requirements of its U.S. mills and forest products facilities: 15% in its Northern mills and 38% in its Southern mills. The balance was acquired from other private industrial and nonindustrial forestland owners, with only an insignificant amount coming from public lands of the United States government. In addition, in 2000, seven million tons of wood were sold to other users. In November 1994, we adopted the Sustainable Forestry Principles developed by the American Forest and Paper Association in August 1994. MILLS AND PLANTS A listing of our production facilities can be found in Appendix I hereto, which is incorporated herein by reference. The Company's facilities are in good operating condition and are suited for the purposes for which they are presently being used. We continue to study the economics of modernizing or adopting other alternatives for higher cost facilities. CAPITAL INVESTMENTS AND DISPOSITIONS Given the size, scope and complexity of our business interests, we continuously examine and evaluate a wide variety of business opportunities and planning alternatives, including possible acquisitions and sales or other dispositions of properties. You can find planned capital investments for 2001, dispositions, and restructuring activities as of December 31, 2000 on pages 6 and 13 through 23 of the Annual Report, which information is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS MASONITE LITIGATION Three nationwide class action lawsuits filed against International Paper have been settled in recent years. The first suit alleged that hardboard siding manufactured by Masonite fails prematurely, allowing moisture intrusion that in turn causes damage to the structure underneath the siding. The class consisted of all U.S. property owners having Masonite hardboard siding installed on and incorporated into buildings between 1980 and January 15, 1998. Final approval of the settlement was granted by the Court on January 15, 1998. The settlement provides for monetary compensation to class members meeting the 5 settlement requirements on a claims-made basis. It also provides for the payment of attorneys' fees equaling 15% of the settlement amounts paid to class members, with a non-refundable advance of $47.5 million plus $2.5 million in costs. The second suit made similar allegations with regard to Omniwood siding manufactured by Masonite (Omniwood Lawsuit). The class consisted of all U.S. property owners having Omniwood siding installed on and incorporated into buildings from January 1, 1992 to January 6, 1999. The third suit alleged that Woodruf roofing manufactured by Masonite is defective and causes damage to the structure underneath the roofing (Woodruf Lawsuit). The class consisted of all U.S. property owners who had incorporated and installed Masonite Woodruf roofing from January 1, 1980 to January 6, 1999. Final approval of the settlements of the Omniwood and Woodruf lawsuits was granted by the Court on January 6, 1999. The settlements provide for monetary compensation to class members meeting the settlement requirements on a claims-made basis, and provide for payment of attorneys' fees equaling 13% of the settlement amounts paid to class members with a non-refundable advance of $1.7 million plus $75,000 in costs for each of the two cases. Reserves for these matters total $92 million at December 31, 2000, net of expected future insurance recoveries of $51 million. This amount includes $25 million added to the reserve for hardboard siding claims in the fourth quarter of 1999 (some of which has now been paid to claimants) and an additional $125 million added to that reserve in the third quarter of 2000 to cover an expected shortfall, resulting primarily from a higher number of hardboard siding claims than anticipated. It is reasonably possible that the higher number of hardboard siding claims might be indicative of the need for one or more future additions to this reserve. However, whether or not any future additions to this reserve become necessary, we believe that these settlements will not have a material adverse effect on our consolidated financial position or results of operations. Through December 31, 2000, net settlement payments of $277 million, including the $51 million of non-refundable advances of attorneys' fees discussed above, have been made. Included in the non-refundable advances of attorneys' fees is $5 million, which has been paid to the attorneys for the plaintiffs in the Omniwood and Woodruf lawsuits. Also, we have received $27 million related to these matters from our insurance carriers through December 31, 2000. International Paper and Masonite have the right to terminate each of the settlements after seven years from the dates of final approval. The liability for these matters will be retained after the planned sale of Masonite is completed. OTHER LITIGATION In March and April 2000, Champion and 10 members of its board of directors were served with six lawsuits that have been filed in the Supreme Court for the State of New York, New York County. Each of the suits purports to be a class action filed on behalf of Champion shareholders and alleges that the defendants breached their fiduciary duties in connection with the proposed merger with UPM-Kymmene Corporation and the merger proposal from International Paper. Champion has filed a motion to dismiss, which as of February 26, 2001 has not been decided. On May 14, 1999, and May 18, 1999, two lawsuits were filed against International Paper, the former Union Camp Corporation (Union Camp) and other manufacturers of linerboard. These suits allege that the defendants conspired to fix prices for linerboard and corrugated sheets during the period October 1, 1993, through November 30, 1995. Both lawsuits were filed seeking nationwide class certification. The lawsuits allege that various purchasers of corrugated sheets and corrugated containers were injured as a result of the alleged conspiracy. The cases have been consolidated in federal court in the Eastern District of Pennsylvania. Defendants' motions to dismiss the cases were denied on October 4, 2000. Plaintiffs filed motions for class certification on January 10, 2001, which were pending as of February 26, 2001. Purchasers of high-pressure laminates have filed a number of purported class actions under the federal antitrust laws in various federal district courts in different states, alleging that International Paper's Nevamar division participated in a price-fixing conspiracy with competitors. These cases have been consolidated in federal district court in New York. Indirect and direct purchasers of high-pressure 6 laminates have also filed similar purported class action cases under various state antitrust and consumer protection statutes in California, Florida, Maine, Michigan, Minnesota, New Mexico, New York, North Dakota, South Dakota, Tennessee and the District of Columbia. International Paper filed a motion to dismiss one of the cases in federal court, which was denied by the court without prejudice. The federal plaintiffs filed a consolidated amended complaint on February 22, 2001. As of February 26, 2001, International Paper has filed a motion to dismiss the case pending in New York State court and has filed answers in California, New Mexico, South Dakota and one of two complaints filed in Michigan. Answers are not yet due in the remaining state cases. OTHER ENVIRONMENTAL In April 1999, the Franklin, Virginia mill received a Notice of Violation (NOV) from the EPA, Region 3 in Philadelphia, and an NOV from the Commonwealth of Virginia alleging that the mill violated the Prevention of Significant Deterioration (PSD) regulations. The Franklin mill was owned by Union Camp at that time and was one of seven paper mills in Region 3 owned by different companies that received similar notices of violation. Union Camp merged with International Paper on April 30, 1999, and International Paper has entered into negotiations with the EPA and the Commonwealth of Virginia. The Franklin mill NOVs were issued in connection with the EPA's well publicized PSD air permit enforcement initiative against the paper industry. In 1999, our paper mills in Kaukauna, Wisconsin and Augusta, Georgia received requests for information from the EPA regarding compliance with the PSD regulations. Three additional facilities received information requests in 2000, and the EPA's initiative may result in similar actions at other facilities. In August 1998, the former Union Camp Corporation informed the Virginia Department of Environmental Quality (DEQ) of certain New Source Performance Standards (NSPS) permitting discrepancies related to a power boiler at the paper mill in Franklin, Virginia. On April 11, 2000, International Paper and the DEQ entered into a consent order that resolved the matter for a civil penalty of $134,000. In November 1999, the Wisconsin Department of Natural Resources filed a civil complaint alleging past exceedences of air permit limits at the former Union Camp flexible packaging facility located in Tomah, Wisconsin. The matter was settled on November 2, 2000 for a civil penalty of $60,000. On December 30, 1999, the Company entered into a Consent Order with the Florida Department of Environmental Protection relating to alleged violations of the wastewater discharge permit at the Company's Pensacola, Florida, mill. The Consent Order requires the Company to take additional steps to control the discharge of suspended solids, nutrients and oxygen-consuming material in the mill's wastewater and to pay a civil penalty of $137,730. The Consent Order has not yet become effective due to the filing of administrative appeals by third parties. In February 2000, the Town of Lyman, South Carolina, issued an administrative order alleging past violations of a wastewater pretreatment permit at the former Union Camp folding carton facility in Spartanburg, South Carolina. While International Paper has satisfied the terms of the order, the Town of Lyman recently indicated it may seek penalties and other surcharges that together may exceed $100,000. We are engaged in settlement discussions with the Town of Lyman. As of February 26, 2001, there were no other pending judicial proceedings, brought by governmental authorities against International Paper, for alleged violations of applicable environmental laws or regulations. International Paper is engaged in various other proceedings that arise under applicable environmental and safety laws or regulations, including approximately 97 active proceedings under the CERCLA and comparable state laws. Most of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under the CERCLA, as a practical matter, liability for CERCLA cleanups is allocated among the many potential responsible parties. Based upon previous experience with respect to the cleanup of hazardous substances and upon presently available information, International Paper believes that it has no or de minimis liability with respect to 18 of these sites; that liability is not likely to be significant at 51 sites; and that estimates of liability at 28 of 7 these sites is likely to be significant but not material to International Paper's consolidated financial position or results of operations. On June 19, 2000, before International Paper completed the acquisition of Champion, Champion entered into a Consent Order with the Maine Department of Environmental Protection that resolved allegations of past wastewater and reporting deficiencies at Champion's lumber mills in Milford and Passadumkeag, Maine. The U.S. EPA and the U.S. Attorney's Office in Maine have since that time commenced a grand jury investigation of the same allegations. We are also involved in other contractual disputes, administrative and legal proceedings and investigations of various types. While any litigation, proceeding or investigation has an element of uncertainty, we believe that the outcome of any proceeding, lawsuit or claim that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2000. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Dividend per share data on the Company's common stock and the high and low sale prices for the Company's common stock are set forth on page 62 of the Annual Report and are incorporated herein by reference. As of March 16, 2001, there were 39,887 holders of record of the Company's common stock. ITEM 6. SELECTED FINANCIAL DATA The Company's columnar table showing selected financial data for the Company is set forth on pages 62 and 63 of the Annual Report and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis on the consolidated financial statements are set forth on pages 6 through 29 of the Annual Report and are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are set forth on pages 27 through 29 of the Annual Report and are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements, the notes thereto and the reports of the independent public accountants and Company management are set forth on pages 32 through 61 of the Annual Report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to the directors of the Company is included on pages 10 through 12 of the Company's Proxy Statement, dated March 26, 2001 (Proxy Statement), which information is incorporated herein by reference. Information with respect to the executive officers of the Company is set forth below: John T. Dillon, 62, chairman and chief executive officer since 1996. Prior to that he was executive vice president-packaging from 1987 to 1995, when he became president and chief operating officer. C. Wesley Smith, 61, executive vice president since 1992. John V. Faraci, 51, executive vice president and chief financial officer since 2000. Prior to that he was senior vice president-finance and chief financial officer from 1999. From 1995 until 1999 he was chief executive officer and managing director of Carter Holt Harvey Limited of New Zealand. Robert M. Amen, 51, executive vice president since 2000. He served as President of International Paper -- Europe from 1997 to 2000 and prior to that was vice president. James P. Melican Jr., 60, executive vice president since 1991. 9 David W. Oskin, 58, executive vice president since 1995. Marianne M. Parrs, 57, executive vice president since 1999. She was senior vice president and chief financial officer from 1995 to 1999. Andrew R. Lessin, 58, vice president-finance and chief accounting officer since 2000. From 1995 to that time he was vice president and controller. William B. Lytton, 52, senior vice president and general counsel since January 1999. From 1996 to 1999 he was vice president and general counsel. Executive officers of International Paper are elected to hold office until the next annual meeting of the Board of Directors following the annual meeting of shareholders and until election of successors, subject to removal by the Board. Information with respect to compliance with Section 16(a) of the Securities and Exchange Act is set forth on page 16 of the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION A description of the compensation of the Company's executive officers is set forth on pages 18 through 22 of the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A description of the security ownership of certain beneficial owners and management is set forth on pages 7 and 8 of the Proxy Statement and is incorporated herein by reference. The table showing ownership of the Company's common stock held by individual directors and by directors and executive officers as a group is set forth on pages 7 and 8 of the Proxy Statement, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS A description of certain relationships and related transactions is set forth on page 6 of the Proxy Statement and is incorporated herein by reference. 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 the Company and consolidated subsidiaries listed below are incorporated herein by reference to the following pages of the Annual Report:
PAGE ---- Consolidated statement of earnings for fiscal years ended December 31, 2000, 1999 and 1998.......................... 33 Consolidated balance sheet at December 31, 2000 and 1999.... 34 Consolidated statement of cash flows for fiscal years ended December 31, 2000, 1999 and 1998.......................... 35 Consolidated statement of common shareholders' equity....... 36 Notes to consolidated financial statements.................. 37-61 Report of independent public accountants.................... 32
2. Financial statement schedule The following additional financial data should be read in conjunction with the financial statements in the Annual Report. Schedules not included with this additional financial data have been omitted 10 because they are not applicable, or the required information is shown in the financial statements or notes thereto. ADDITIONAL FINANCIAL DATA 2000, 1999 AND 1998 Report of Independent Public Accountants on Financial Statement Schedule........................................ 13 Consolidated Schedule: II -- Valuation and Qualifying Accounts................. 14
3. Exhibits (2.1) -- Agreement and Plan of Merger by and among International Paper Company, International Paper-37, Inc. and Shorewood Packaging Corporation dated as of February 16, 2000, (incorporated by reference to the Schedule TO of International Paper Company and International Paper-37, Inc. dated February 29, 2000). (2.2) -- Agreement and Plan of Merger dated as of May 12, 2000, among Champion International Corporation, International Paper Company and Condor Acquisition Corporation (incorporated by reference to Exhibit 2 to International Paper Company's Registration Statement on Form S-4, as amended on June 2, 2000 and June 9, 2000). (3.1) -- Form of Restated Certificate of Incorporation of International Paper (incorporated by reference to International Paper's Report on Form 8-K dated November 20, 1990). (3.2) -- Certificate of Amendment to the Certificate of Incorporation of International Paper Company (incorporated herein by reference to Exhibit (3)(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). (3.3) -- By-laws of the Company as amended. (4.1) -- Specimen Common Stock Certificate (incorporated by reference to Exhibit 2-A to the Company's registration statement on Form S-7, No. 2-56588, dated June 10, 1976). (4.2) -- Indenture, dated as of April 12, 1999, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to International Paper's Report on Form 8-K filed on June 29, 2000). (4.3) -- Floating Rate Notes Supplemental Indenture, dated as of June 14, 2000, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.2 to International Paper's Report on Form 8-K filed on June 29, 2000). (4.4) -- 8% Notes Due July 8, 2003 Supplemental Indenture, dated as of June 14, 2000, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.3 to International Paper's Report on form 8-K filed on June 29, 2000). (4.5) -- 8 1/8% Notes Due July 8, 2005 Supplemental Indenture dated as of June 14, 2000, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.4 to International Paper's Report on Form 8-K filed on June 29, 2000). (4.6) -- Credit Agreement, dated as of June 14, 2000, among International Paper, International Paper Financial Services, Inc., various lenders and Credit Suisse First Boston, New York Branch, as Administrative agent, Lead Arranger and Book Manager (incorporated by reference to Exhibit 4.5 to International Paper's Report on Form 8-K filed on June 29, 2000). (4.7) -- Form of New Floating Rate Notes due July 8, 2002 (incorporated by reference to Exhibit 4.1 to International Paper Company's Registration Statement on Form S-4, dated October 23, 2000, as amended November 15, 2000). (4.8) -- Form of New 8% Notes due July 8, 2003 (incorporated by reference to Exhibit 4.1 to International Paper Company's Registration Statement on Form S-4 dated October 23, 2000, as amended November 15, 2000). (4.9) -- Form of New 8 1/8% Note due July 8, 2005 (incorporated by reference to Exhibit 4.1 to International Paper Company's Registration Statement on Form S-4 dated October 23, 2000, as amended November 15, 2000).
11 (4.10) -- Credit Agreement, dated as of June 14, 2000, among International Paper Company, International Paper Financial Services, Inc., various lenders and Credit Suisse First Boston, New York Branch, as Administrative Agent, Lead Arranger and Book Manager (incorporated by reference to Exhibit 4.5 to International Paper Company's Report on Form 8-K filed on June 29, 2000). (10.1) -- Long-Term Incentive Compensation Plan. (10.2) -- Restricted Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 99 to the Company's Quarterly Report on Form 10-Q dated August 16, 1999, for the quarter ended June 30, 1999). (10.3) -- Champion Merger Integration Chief Executive Officer Performance Plan (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). (10.4) -- Champion Merger Integration Savings and Synergy Plan (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). (10.5) -- Union Camp Corporation 1989 Stock Option and Stock Award Plan (incorporated by reference to Exhibit 99.1 to Registration No. 333-75235, dated May 3, 1999). (10.6) -- International Paper Company Stock Option Plan (incorporated by reference to Registration No. 333-85051, dated August 12, 1999). (10.7) -- Management Incentive Plan (incorporated by reference to Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998). (10.8) -- Form of individual option agreement under Company Option Plan (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). (10.9) -- Form of individual executive continuity award under Company Long Term Incentive Compensation Plan (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). (10.10a) -- Form of Termination Agreement -- Tier I (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). (10.l0b) -- Form of Termination Agreement -- Tier II (incorporated by reference to Exbibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). (10.10c) -- Form of Termination Agreement -- Tier III (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). (10.11) -- International Paper Company Unfunded Savings Plan. (10.12) -- International Paper Company Pension Restoration Plan for Salaried Employees. (10.13) -- International Paper Company Unfunded Supplemental Plan for Senior Managers. (11) -- Statement of Computation of Per Share Earnings. (12) -- Computation of Ratio of Earnings to Fixed Charges. (13) -- 2000 Annual Report to Shareholders of the Company. (21) -- List of Subsidiaries of Registrant. (22) -- Proxy Statement dated March 26, 2001 (incorporated by reference to the Company's Proxy Statement dated March 26, 2001, filed on March 26, 2001 pursuant to Rule 14a-6). (23.1) -- Consent of Independent Public Accountants (Arthur Andersen LLP). (23.2) -- Consent of Independent Auditors (PricewaterhouseCoopers LLP). (24) -- Power of Attorney. (99.1) -- Report of Independent Auditors (PricewaterhouseCoopers LLP). (99.2) -- Focus.
(b) Reports on Form 8-K International Paper filed a report on Form 8-K on October 18, 2000 under Item 5 reporting earnings for the quarter ended September 30, 2000, the closure of three mills and the scaling back of one mill. International Paper filed a report on Form 8-K on January 25, 2001 under Item 5, reporting earnings for quarter ended December 31, 2000, merger synergies with Champion International Corporation, and the status of capacity rationalizations and realignment initiatives. 12 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE TO INTERNATIONAL PAPER COMPANY: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in the Company's 2000 Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 13, 2001. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, based on our audits and the report of other auditors, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, N.Y. February 13, 2001 13 SCHEDULE II INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 2000 ----------------------------------------------------------------- BALANCE AT ADDITIONS ADDITIONS DEDUCTIONS BALANCE AT BEGINNING CHARGED TO CHARGED TO FROM END DESCRIPTION OF PERIOD EARNINGS OTHER ACCOUNTS RESERVES OF PERIOD ----------- --------- -------- -------------- -------- --------- (IN MILLIONS) Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts -- current.... $106 $ 46 $ (24)(a) $128 Restructuring reserves.......... 115 248 (121)(b) 242
FOR THE YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------------------------- BALANCE AT ADDITIONS ADDITIONS DEDUCTIONS BALANCE AT BEGINNING CHARGED TO CHARGED TO FROM END DESCRIPTION OF PERIOD EARNINGS OTHER ACCOUNTS RESERVES OF PERIOD ----------- --------- -------- -------------- -------- --------- (IN MILLIONS) Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts -- current.... $115 $ 34 $ (43)(a) $106 Restructuring reserves.......... 71 149 (105)(b) 115
FOR THE YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------ BALANCE AT ADDITIONS ADDITIONS DEDUCTIONS BALANCE AT BEGINNING CHARGED TO CHARGED TO FROM END DESCRIPTION OF PERIOD EARNINGS OTHER ACCOUNTS RESERVES OF PERIOD ----------- --------- -------- -------------- -------- --------- (IN MILLIONS) Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts -- current.... $108 $ 39 $ (32)(a) $115 Restructuring reserves.......... 91 81 (101)(b) 71
- --------- (a) Includes write-offs, less recoveries, of accounts determined to be uncollectible and other adjustments. (b) Includes deductions for reversals of previously established reserves that were no longer required. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL PAPER COMPANY By: /s/ BARBARA L. SMITHERS .................................. BARBARA L. SMITHERS VICE PRESIDENT AND SECRETARY March 26, 2001 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 T. DILLON Chairman of the Board, Chief March 26, 2001 .......................................... Executive Officer and Director JOHN T. DILLON /s/ C. WESLEY SMITH* Executive Vice President and March 26, 2001 ......................................... Director C. WESLEY SMITH /s/ PETER I. BIJUR* Director March 26, 2001 ......................................... PETER I. BIJUR /s/ ROBERT J. EATON* Director March 26, 2001 ......................................... ROBERT J. EATON /s/ SAMIR G. GIBARA* Director March 26, 2001 ......................................... SAMIR G. GIBARA /s/ JAMES R. HENDERSON* Director March 26, 2001 ......................................... JAMES R. HENDERSON /s/ JOHN R. KENNEDY* Director March 26, 2001 ......................................... JOHN R. KENNEDY /s/ ROBERT D. KENNEDY* Director March 26, 2001 ......................................... ROBERT D. KENNEDY /s/ W. CRAIG MCCLELLAND* Director March 26, 2001 ......................................... W. CRAIG MCCLELLAND /s/ DONALD F. MCHENRY* Director March 26, 2001 ......................................... DONALD F. MCHENRY
15
SIGNATURE TITLE DATE --------- ----- ---- /s/ PATRICK F. NOONAN* Director March 26, 2001 ......................................... PATRICK F. NOONAN /s/ JANE C. PFEIFFER* Director March 26, 2001 ......................................... JANE C. PFEIFFER /s/ JEREMIAH J. SHEEHAN* Director March 26, 2001 ......................................... JEREMIAH J. SHEEHAN /s/ CHARLES R. SHOEMATE* Director March 26, 2001 ......................................... CHARLES R. SHOEMATE /s/ JOHN V. FARACI Executive Vice President and Chief March 26, 2001 ......................................... Financial Officer JOHN V. FARACI /s/ ANDREW R. LESSIN Vice President -- Finance and Chief March 26, 2001 ......................................... Accounting Officer ANDREW R. LESSIN *By: /s/ BARBARA L. SMITHERS ......................................... BARBARA L. SMITHERS ATTORNEY-IN-FACT
16 APPENDIX I 2000 LISTING OF FACILITIES PRINTING AND COMMUNICATIONS PAPERS BUSINESS PAPERS, COATED PAPERS, FINE PAPERS AND PULP U.S.: Courtland, Alabama Selma, Alabama (Riverdale Mill) Pine Bluff, Arkansas Mira Loma, California (C & D Center) Pensacola, Florida Augusta, Georgia Bastrop, Louisiana (Louisiana Mill) Springhill, Louisiana (C & D Center) Bucksport, Maine Jay, Maine (Androscoggin Mill) West Springfield, Massachusetts Westfield, Massachusetts (C & D center) Quinnesec, Michigan Sturgis, Michigan (C & D Center) Sartell, Minnesota Moss Point, Mississippi Corinth, New York (Hudson River Mill) Ticonderoga, New York Riegelwood, North Carolina Wilmington, North Carolina (Reclaim Center) Hamilton, Ohio Saybrook, Ohio (C & D center) Erie, Pennsylvania Hazleton, Pennsylvania (C & D Center) Lock Haven, Pennsylvania Eastover, South Carolina Georgetown, South Carolina Sumter, South Carolina (C & D Center) Texarkana, Texas Franklin, Virginia International: Maresquel, France Saillat, France Saint Die, France (Anould Mill) Strasbourg, France (La Robertsau Mill) Bergisch Gladbach, Germany (Gorhrsmuhle Mill) Duren, Germany (Reflex Mill) Klucze, Poland Kwidzyn, Poland Svetogorsk, Russia Inverurie, Scotland CONSUMER AND INDUSTRIAL PACKAGING INDUSTRIAL PAPERS U.S.: Lancaster, Ohio De Pere, Wisconsin Kaukauna, Wisconsin Menasha, Wisconsin International: Limburg, Netherlands INDUSTRIAL PACKAGING CONTAINERBOARD U.S.: Prattville, Alabama Savannah, Georgia Terre Haute, Indiana Mansfield, Louisiana Pineville, Louisiana Vicksburg, Mississippi Oswego, New York Roanoke Rapids, North Carolina Georgetown, South Carolina International: Arles, France CORRUGATED CONTAINER U.S.: Bay Minette, Alabama Decatur, Alabama Conway, Arkansas Fordyce, Arkansas Jonesboro, Arkansas Russellville, Arkansas Carson, California Hanford, California Modesto, California Stockton, California Vernon, California Putnam, Connecticut Auburndale, Florida Forest Park, Georgia Savannah, Georgia Statesboro, Georgia Chicago, Illinois Des Plaines, Illinois Fort Wayne, Indiana Lexington, Kentucky LaFayette, Louisiana Shreveport, Louisiana Springhill, Louisiana Auburn, Maine Howell, Michigan Kalamazoo, Michigan Monroe, Michigan Minneapolis, Minnesota Houston, Mississippi Jackson, Mississippi Kansas City, Missouri West Deptford, New Jersey Geneva, New York King's Mountain, North Carolina Statesville, North Carolina Cincinnati, Ohio Solon, Ohio Wooster, Ohio Lancaster, Pennsylvania Mount Carmel, Pennsylvania Washington, Pennsylvania Georgetown, South Carolina Spartanburg, South Carolina Morristown, Tennessee Murfreesboro, Tennessee Dallas, Texas Edinburg, Texas El Paso, Texas Ft. Worth, Texas San Antonio, Texas Richmond, Virginia Cedarburg, Wisconsin Fond du Lac, Wisconsin Emerging Markets Ranagua, Chile Bayamon, Puerto Rico International: Las Palmas, Canary Islands (2 locations) Tenerife, Canary Islands Arles, France Chalon-sur-Saone, France Chantilly, France Creil, France LePuy, France Mortagne, France Guadeloupe, French West Indies Asbourne, Ireland Bellusco, Italy Catania, Italy Pedemonte, Italy Pomezia, Italy San Felice, Italy Alcala, Spain Almeria, Spain Barcelona, Spain Bilbao, Spain Valencia, Spain Valladolid, Spain Thrapston, United Kingdom Winsford, United Kingdom KRAFT PAPER Savannah, Georgia Moss Point, Mississippi Roanoke Rapids, North Carolina A-1 CONSUMER PACKAGING BLEACHED BOARD Pine Bluff, Arkansas Augusta, Georgia Moss Point, Mississippi Riegelwood, North Carolina Georgetown, South Carolina Prosperity, South Carolina Texarkana, Texas BEVERAGE PACKAGING U.S.: Turlock, California Plant City, Florida Cedar Rapids, Iowa Kansas City, Kansas Framingham, Massachusetts Kalamazoo, Michigan Raleigh, North Carolina International: London, Ontario, Canada Longueuil, Quebec, Canada Shanghai, China Santiago, Dominican Republic San Salvador, El Salvador St. Priest, France Fukusaki, Japan Seoul, Korea Taipei, Taiwan Guacara,Venezuela RETAIL PACKAGING La Grange, Georgia Thomaston, Georgia Springdale, Ohio FOODSERVICE U.S.: Visalia, California Shelbyville, Illinois Clinton, Iowa Hopkinsville, Kentucky Wilmington, North Carolina Kenton, Ohio Jackson, Tennessee International: Brisbane, Australia Santiago, Chile Shanghai, China Bogota, Columbia Bombay, India Manila, Philippines FLEXIBLE PACKAGING U.S.: Monticello, Arkansas Hanford, California Griffin, Georgia Tifton, Georgia Seymour, Indiana Sibley, Iowa Hazleton, Pennsylvania Spartanburg, South Carolina Tomah, Wisconsin International: Bolsaflex Buenos Aires, Argentina SHOREWOOD PACKAGING U.S.: Waterbury, Connecticut LaGrange, Georgia Indianapolis, Indiana Louisville, Kentucky East Flat Rock, North Carolina Weaverville, North Carolina Clifton, New Jersey Edison, New Jersey Englewood, New Jersey Harrison, New Jersey Moonachie, New Jersey Cincinnati, Ohio Springfield, Oregon Danville, Virginia Newport News, Virginia Roanoke, Virginia International: Smith Falls, Onta rio, Canada Brockville, Ontario, Canada Toronto, Ontario, Canada Guangzhou, China DISTRIBUTION WHOLESALE AND RETAIL DISTRIBUTION (270 distribution branches) XPEDX U.S.: Stores Group Chicago, Illinois 139 locations nationwide Southeast Region Greensboro, North Carolina 27 branches in the Middle Atlantic States and Southeast 4 Nationwide branches West Region Denver, Colorado 32 branches in the West, Midwest and South 17 Nationwide branches Specialty Business Group Erlanger, Kentucky 3 branches nationwide Central Region Erlanger, Kentucky 10 branches in Midwest 4 Nationwide branches Northeast Region East Granby, Connecticut 14 branches in New England and Middle Atlantic States 1 Nationwide branch International: Aussedat Rey France Distribution S.A., Pantin, France 3 locations Chihuahua, Mexico 6 locations Recom Papers Nijmegen, Netherlands Scaldia Papier BV, Nijmegen, Netherlands Aalbers Paper Products Veenendaal, Netherlands Impap Warsaw, Poland 7 locations CHEMICALS AND PETROLEUM CHEMICALS U.S.: Panama City, Florida Pensacola, Florida Port St. Joe, Florida Savannah, Georgia Valdosta, Georgia Oakdale, Louisiana Picayune, Mississippi Dover, Ohio International: Oulu, Finland Valkeakoski, Finland Niort, France Greaker, Norway Sandarne, Sweden Chester-Le-Street, United Kingdom Bedlington, United Kingdom CHEMICAL CELLULOSE PULP Natchez, Mississippi PETROLEUM Alvin, Texas Midland, Texas FORESTLANDS FOREST RESOURCES Approximately 12 million arces in the South, Northeast and West REALTY PROJECTS Haig Point Plantation Daufuskie Island, South Carolina BUILDING MATERIALS WOOD PRODUCTS Chapman, Alabama Citronelle, Alabama Maplesville, Alabama Opelika, Alabama Thorsby, Alabama Tuscaloosa, Alabama Gurdon, Arkansas Leola, Arkansas Whelen Springs, Arkansas McDavid, Florida Whitehouse, Florida Augusta, Georgia Cordele, Georgia Folkston, Georgia Meldrim, Georgia Washington, Georgia Waycross, Georgia Springhill, Louisiana Costigan, Maine Passadumkeag, Maine Morton, Mississippi Wiggins, Mississippi A-2 Joplin, Missouri Madison, New Hampshire Armour, North Carolina Seaboard, North Carolina Johnston, South Carolina Newberry, South Carolina Sampit, South Carolina Camden, Texas Corrigan, Texas Henderson, Texas Jefferson, Texas Nacogdoches, Texas New Boston, Texas Slaughter Dallas, Texas 2 branches in the Southwest and Northwest Franklin, Virginia DECORATIVE PRODUCTS Particleboard Franklin, Virginia Stuart, Virginia Waverly, Virginia SPECIALTY PANELS U.S.: Chino, California Glasgow, Kentucky Odenton, Maryland Statesville, North Carolina Tarboro, North Carolina Hampton, South Carolina Oshkosh, Wisconsin International: Bergerac, France (Couze mill) Ussel, France Barcelona, Spain (Durion mill) MASONITE U.S.: Ukiah, California Lisbon Falls, Maine Laurel, Mississippi Towanda, Pennsylvania Danville, Virginia International: Carrick-on-Shannon, Ireland Masonite Africa Limited Estcourt Plant Kunpo-shi, Korea CARTER HOLT HARVEY FORESTLANDS Approximately 820,000 acres in New Zealand WOOD PRODUCTS Sawmills and Processing Plants Mt. Gambier, South Australia Myrtleford, New South Wales, Australia Oberon, New South Wales, Australia Kopu, New Zealand Nelson, New Zealand Putaruru, New Zealand Rotorua, New Zealand Taupo, New Zealand Tokoroa, New Zealand Timber Merchants Box Hill, Victoria, Australia Hamilton Central, Queensland, Australia Sydney, New South Wales, Australia Plywood Mills Myrtleford, New South Wales, Australia Nangwarry, South Australia Tokoroa, New Zealand Whangarei, Marsden Point, New Zealand Panel Production Plants Gympie, Queensland Australia Mt. Gambier, South Australia (2 plants) Oberon, New South Wales, Australia Tumut, New South Wales, Australia Auckland, New Zealand Kopu, New Zealand Rangiora, New Zealand Building Supplies Retail Outlets Retail Outlets, 35 branches in New Zealand PULP AND PAPER Kraft Paper, Pulp, Coated and Uncoated Papers and Bristols Kinleith, New Zealand Cartonboard Whakatane, New Zealand Containerboard Kinleith, New Zealand Penrose, New Zealand Fiber Recycling Operation Auckland, New Zealand Conversion Site Auckland, New Zealand TISSUE Pulp and Tissue Box Hill, Victoria, Australia Kawerau, New Zealand Conversion Sites Box Hill, Victoria, Australia Clayton, Victoria, Australia Keon Park, Victoria, Australia Suva, Fiji Auckland, New Zealand (2 plants) Kawerau, New Zealand Te Rapa, New Zealand PACKAGING Case Manufacturing Suva, Fiji Central (Levin, New Zealand) Northern (Auckland, New Zealand) Solid Fibre (Hamilton, New Zealand) Southern (Christchurch, New Zealand) Carton Manufacturing Crestmead, Queensland, Australia Dandenong, Victoria, Australia Reservoir, Victoria, Australia Smithfield, New South Wales, Australia Woodville, Australia Auckland, New Zealand Christchurch, New Zealand Corrugated Manufacturing Sydney, Australia Melbourne, Australia Paper Bag Manufacturing Auckland, New Zealand Paper Cups Brisbane, Australia Plastic Packaging Santiago, Chile DISTRIBUTION Paper Merchant Warehousing and Distribution Centers, Australia, 3 locations New Zealand, 4 locations PAPEL e CELULOSE FORESTLANDS Approximately 1.5 million acres in Brazil PULP AND PAPER Amapa, AP, Brazil Arapoti, PR, Brazil Mogi Guacu, SP, Brazil WELDWOOD OF CANADA LIMITED WOOD PRODUCTS Burns Lake, British Columbia (3 plants) Houston, British Columbia 100 Mile House, British Columbia Quesnel, British Columbia Williams Lake, British Columbia Hinton, Alberta Strachan, Alberta Sundre, Alberta NBSK PULP Hinton, Alberta Quesnel, British Columbia A-3 STATEMENT OF DIFFERENCES ------------------------ The registered trademark symbol shall be expressed as.................... 'r' The copyright symbol shall be expressed as............................... 'c' The trademark symbol shall be expressed as .............................. 'TM' EX-3 2 0002.txt EXHIBIT 3.3 ================================================================================ BY-LAWS OF INTERNATIONAL PAPER COMPANY ------------------------ AS AMENDED FEBRUARY 13, 2001 ------------------------ INTERNATIONAL [LOGO] PAPER ================================================================================ BY-LAWS OF INTERNATIONAL PAPER COMPANY --------------------- ARTICLE I STOCKHOLDERS' MEETINGS SECTION 1. Annual Meeting. The annual meeting of the Stockholders of the Corporation for the election of Directors, and for the transaction of such other business as may come before the meeting, shall be held on such date and at such place within or without the State of New York as shall have been fixed by the Board of Directors on a timely basis. SECTION 2. Special Meetings. Special meetings of the Stockholders, unless otherwise provided by statute, or by the Certificate of Incorporation or other certificate filed pursuant to law, at any time may be called or caused to be called by a majority of the Board of Directors or by the Chairman of the Board, or by the President. Special meetings shall be held at such place within or without the State of New York as is specified in the call thereof. SECTION 3. Notice of Meetings. Unless otherwise required by statute, the notice of every meeting of the Stockholders shall be in writing and shall state the place, date and hour of the meeting. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called. A copy of the notice of any meeting shall be given personally, electronically or by mail, not less than ten nor more than fifty days before the date of the meeting, to each Stockholder entitled to vote at the meeting and to each Stockholder who, by reason of any action proposed at such meeting, is entitled by law to notice thereof. If mailed, it shall be directed to a Stockholder at his address as it appears on the record of Stockholders or, if he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, then directed to him at such other address. If transmitted electronically, such notice is given when directed to the Shareholder's electronic mail address as supplied by the Shareholder to the Secretary of the Corporation or as otherwise directed pursuant to the Shareholder's authorization or instructions. SECTION 4. Quorum. Proxies. Voting. Except as otherwise provided by law or by the Certificate of Incorporation or other certificate filed pursuant to law, at any meeting of the Stockholders there must be present in person or by proxy the holders of record of stock representing at least one-third of the number of votes entitled to be cast upon any question to be considered at the meeting in order to constitute a quorum for the determination of such question, but a less interest may adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum be present, and thereupon any business may be transacted at the adjourned meeting which might have been transacted at the meeting as originally called. Except as otherwise provided by law or by the Certificate of Incorporation or other certificate filed pursuant to law or by the By-Laws of the Corporation, a majority vote of a quorum at a meeting shall decide any question brought before such meeting. Every holder of record of stock of a class entitled to vote at a meeting shall be entitled to one vote for every share of such stock standing in his name on the books of the Corporation, and may vote either in person or by proxy. SECTION 5. Presiding Officer and Secretary. At all meetings of the Stockholders the Chairman of the Board, or in his absence the President, or in his absence a Vice Chairman of the Board or a Vice President designated by the Board of Directors, or if none be present, the appointee of the meeting, shall preside. The Secretary of the Corporation, or in his absence an Assistant Secretary, or if none be present, the appointee of the Presiding Officer of the meeting, shall act as Secretary of the meeting. SECTION 6. Inspectors. At each meeting of Stockholders at which Directors are to be elected the Presiding Officer shall appoint two Inspectors of Election who shall perform the duties required by the statute at that meeting and any adjournment thereof. If any Inspector shall refuse to serve, or neglect to attend at the election or his office becomes vacant, the Presiding Officer shall appoint an Inspector in his place. The Presiding Officer of any meeting may also appoint, at such meeting, two Inspectors with authority to count and report upon the votes cast at such meeting upon such questions (other than the election of Directors) as may be voted upon by ballot. Inspectors shall be sworn. SECTION 7. Stockholders' Meetings. No business may be transacted at an annual meeting of Stockholders of the Corporation, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or any duly authorized committee thereof, (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors or any duly authorized committee thereof or (c) otherwise properly brought before the annual meeting by any Stockholder of the Corporation (i) who is a Stockholder of record on the date of the giving of the notice provided for in this Section and on the record date for the determination of Stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section. Business shall be brought before the annual meeting by any Stockholder of the Corporation by notice in writing delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation at the principal executive offices of the Corporation, and received by such person not less than ninety (90) days nor more than one-hundred twenty (120) days prior to any meeting of the Stockholders. At Stockholder's notice to the Secretary shall set forth as to each matter such Stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such Stockholder, (iii) the number of shares of stock of the Corporation which are owned beneficially or of record by such Stockholder, (iv) a description of all arrangements or understandings between such Stockholder and any other person or persons (including their names) in connection with the proposal of such business by such Stockholder and any material interest of such Stockholder in such business and (v) a representation that such Stockholder intends to appear in person or by proxy at the meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of Stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section, provided, however, that once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section shall be deemed to preclude discussion by any Stockholder of any such business. The Presiding Officer of the meeting may, if the facts warrant, determine and declare to the meeting that business was not properly brought before the annual meeting in accordance with the foregoing procedure, and if such person should so determine, he or she shall so declare to the meeting and such business shall not be transacted. Nothing in this Section 7 shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act and to put before such meeting any proposals so included in the Corporation's proxy statement at his or her request. For purposes of this Section 7 and Article II, Section 9, 'public disclosure' shall mean disclosure in a communication sent by first class mail to Stockholders, in a press release reported by the Dow Jones News Service, Reuters Information Services, Inc., Associated Press or comparable national news service or in a document filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. ARTICLE II BOARD OF DIRECTORS SECTION 1. Number. Election. Vacancies. Term of Office. Within the limits provided by the Corporation's Certificate of Incorporation or other certificate filed pursuant to law, the Board of Directors shall determine from time to time the number of Directors who shall constitute the entire Board of Directors. Any such determination made by the Board of Directors shall continue in effect 2 unless and until changed by the Board of Directors, but no such changes shall affect the term of any Director then in office and, in case any of the Directors then in office shall have been elected by holders of the Cumulative $4 Preferred Stock in accordance with the provisions of the Certificate of the Corporation filed May 31, 1946 pursuant to Section Thirty-six of the Stock Corporation law (hereafter in this Section 1 referred to as the 'Certificate filed May 31, 1946'), no increase in the number of Directors then in office shall be made which would reduce the number of Directors then in office elected as aforesaid to less than one-third (or the nearest whole number thereto) of the total number of Directors then in office. The Board of Directors shall from time to time make such determinations pursuant to this Section 1 as shall be necessary or appropriate in order to ensure that, under any circumstances, the holders of each series of the Serial Preferred Stock shall be able, giving effect to all applicable provisions of the Corporation's Certificate of Incorporation, and of these By-Laws (including, without limitation, the preceding sentence), duly and effectively to exercise any exclusive right conferred upon them by the Certificate of Incorporation or any certificate filed pursuant to law to elect Directors of the Corporation. Except as otherwise provided in the Certificate of Incorporation or other certificate filed pursuant to law, at each annual meeting of the Stockholders, the successors to the class of Directors whose terms shall then expire, up to the number determined in accordance with the foregoing provisions and with the provisions of the Certificate of Incorporation or other certificate filed pursuant to law, shall be elected by ballot or by proxy by the holders of the Common Stock by a plurality of the votes cast at such election. Except as otherwise provided by law or in the Certificate of Incorporation or other certificate filed pursuant to law and except as otherwise provided in this paragraph, any vacancy in the Board occurring during the year, occurring as a result of an increase in the number of Directors who shall constitute the Board or any other vacancy, may be filled only by the vote of the Board provided that a quorum is then in office and present, or by a majority of the Directors then in office, if less than a quorum is then in office or by a sole remaining Director. Any vacancy in the Board occurring during the year with respect to Directors who may have been elected by holders of the Cumulative $4 Preferred Stock in accordance with the provisions of the Certificate filed May 31, 1946 may only be filled by the holders of the Cumulative $4 Preferred Stock at a special meeting of such holders in the same manner as at an annual meeting. Except as otherwise provided by statute, or in the Certificate of Incorporation or other certificate filed pursuant to law, the term of office of each Director heretofore or hereafter elected shall be from the time of his election and qualification until the third annual meeting next following his election and until his successor shall have been duly elected and shall have qualified. Directors need not be Stockholders. SECTION 2. Resignations. Any Director may resign his office at any time by delivering his resignation in writing to the Corporation, and the acceptance of such resignation, unless required by the terms thereof, shall not be necessary to make such resignation effective. SECTION 3. Method of Electing Entirely New Board. In case the entire Board of Directors shall die or resign, any Stockholder may call a special meeting in the same manner that the Chairman of the Board may call such meeting, and Directors for the unexpired terms may be elected at any such special meeting in the manner provided for their election at annual meetings. SECTION 4. Powers. Except as provided by law, or by the Certificate of Incorporation or other certificate of the Corporation filed pursuant to law, or by these By-Laws, the powers, business and affairs of the Corporation shall be exercised and managed by the Board of Directors. SECTION 5. Meetings. Regular meetings of the Board of Directors shall be held at such regular intervals and at such fixed time and place as from time to time may be determined by the Board, and no notice of such meetings shall be required. Special meetings of the Board of Directors shall be held whenever called by direction of the Chairman of the Board, or of a Vice Chairman of the Board, or of the President, or of any two of the Directors for the time being in office. 3 The Secretary shall give notice of each special meeting by mailing the same not later than the second day before the meeting, or personally or by telegraphing or telephoning the same not later than the day before the meeting, to each Director, but such notice may be waived by any Director. The Chairman of the Board, or in his absence, the President, or in his absence, a Vice Chairman (to be designated by the persons present at the meeting in the event of more than one Vice Chairman being present) shall preside at all meetings of the Board of Directors. If all of the aforesaid officers be absent or decline to act, the persons present may choose one of their number to act as chairman of the meeting. At the first meeting held after the annual meeting of Stockholders, the Board of Directors shall elect the Executive Officers of the Corporation, each of whom shall hold his office until the next annual election of Officers and until another is elected and qualified in his stead, unless sooner removed. Any Director may vote or act on behalf of the Corporation in contracting with any other company, notwithstanding he may be an Officer, Director or Stockholder therein. Any one or more members of the Board of Directors or any Committee thereof may participate in a meeting of the Board of Directors of such Committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. SECTION 6. Quorum. One-third of the total number of Directors determined pursuant to Section 1 of this Article as constituting the Board of Directors shall constitute a quorum for the transaction of business, but if there shall be less than a quorum at any meeting of the Board, a majority of those present (or if only one be present, then that one) may adjourn the meeting from time to time and the meeting may be held as adjourned without further notice. SECTION 7. Committees. The Board of Directors may appoint an Executive Committee and such other committee or committees as they may determine. Such committee or committees shall have such powers as shall be specified by resolution of the Board of Directors. The Executive Committee, so far as permitted by law, may be vested with all of the powers of the Board of Directors when the Board of Directors is not in session. One-third of the total number of Directors appointed to a Committee shall constitute a quorum for the transaction of business. SECTION 8. Compensation of Directors. Directors shall be entitled to reasonable compensation for their services. They may be paid a fixed salary and may also receive a fee for attendance at any meeting of the Board of Directors or of any Committee of the Board. The amount of compensation shall be determined by resolution of the Board. Nothing herein contained shall preclude any Director from serving in any other capacity and receiving compensation therefor. SECTION 9. Nominations. Nominations for election to the Board of Directors of the Corporation at a meeting of the Stockholders may be made (a) by the Board, or on behalf of the Board by any nominating committee appointed by the Board, or (b) by any Stockholder of the Corporation (i) who is a Stockholder of record on the date of the giving of the notice provided for in this Section and on the record date for the determination of Stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section. Stockholder nominations shall be made by notice in writing delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation at the principal executive offices of the Corporation, and received by such person not less than ninety (90) days nor more than one-hundred twenty (120) days prior to any meeting of the Stockholders called for the election of Directors. Such notice shall set forth (a) as to each proposed nominee who is not an incumbent Director (i) the name, age, business address and residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee, and (iv) any other information concerning the nominee that must be disclosed of nominees in proxy solicitations pursuant to Section 14 of the Securities Exchange Act of 1934, as amended from time to time (the 'Exchange Act') and the rules and regulations promulgated thereunder and (b) as to the Stockholder giving the notice (i) the 4 name and record address of such Stockholder, (ii) the number of shares of stock of the Corporation which are beneficially owned by such Stockholder, (iii) a description of all arrangements or understandings between such Stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such Stockholder, (iv) a representation that such Stockholder intends to appear in person or by proxy at the annual meeting to nominate the persons named in its notice and (v) any other information relating to such Stockholder that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice shall be accompanied by the written consent of each proposed nominee to serve as a Director of the Corporation. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth herein. The Presiding Officer of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if such person should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III OFFICERS AND AGENTS SECTION 1. General. The Elected Officers of the Corporation shall be elected by the Board of Directors. The Elected Officers of the Corporation may include a Chief Executive Officer, a President, one or more Executive Vice Presidents, Senior Vice Presidents, and Vice Presidents, a Treasurer, a Secretary and such other Elected Officers as may be deemed necessary or desirable. Any two or more such offices may be held by the same person, except the offices of President and Secretary. The Board of Directors, at any time and from time to time, may appoint or authorize the Chief Executive Officer, to appoint one or more Vice Presidents, a Controller, an Auditor, a Chief Tax Officer, one or more Assistant Treasurers and one or more Assistant Secretaries, and such other Officers or agents as may be deemed necessary or desirable, and may prescribe or authorize the Chief Executive Officer to prescribe the powers and duties of each, and fill any vacancy which may occur in any such office. All Elected Officers shall be subject to removal at any time by the affirmative vote of a majority of the whole Board of Directors. All other Officers, and all heads of departments, managers, assistant managers, agents and employees of the Corporation, may be removed at any time, by vote of the Board of Directors, or by the Officer appointing them, or by any other superior Officers or any Committee thereunto authorized by the Board. SECTION 2. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Stockholders and of the Board of Directors. He shall have such other powers and perform such other duties as may, from time to time, be specified by the Board of Directors. SECTION 3. Vice Chairman of the Board. A Vice Chairman of the Board, in the absence of the Chairman of the Board and the President, shall preside at meetings of the Stockholders and of the Board of Directors. He shall have such other powers and perform such other duties as may, from time to time, be specified by the Board of Directors or by the chief executive officer of the Corporation. He shall be subject to the control of the Board of Directors and to the powers of the chief executive officer of the Corporation. SECTION 4. President. The President, in the absence of the Chairman of the Board, shall preside at meetings of the Stockholders and of the Board of Directors. He shall have such other powers and perform such other duties as may, from time to time, be specified by the Board of Directors or by the the chief executive officer of the Corporation. He shall be subject to the control of the Board of Directors and to the powers of the chief executive officer of the Corporation. SECTION 5. Chief Executive Officer. The chief executive officer shall have general charge of the business of the Corporation and the power to formulate all plans and policies in connection therewith, 5 subject to the control of the Board of Directors. He shall keep the Board of Directors fully informed and shall freely consult with the Board concerning the business of the Corporation. He shall have such other powers and perform such other duties as may, from time to time, be specified by the Board of Directors. SECTION 6. Vice Presidents. Any Vice President shall have such powers and perform such duties as may, from time to time, be specified by the Board of Directors or by the chief executive officer of the Corporation. SECTION 7. Treasurer. The Treasurer shall have the care and custody of the funds and securities of the Corporation and shall have such powers and perform such duties as are incident to the office of Treasurer, or as may, from time to time, be specified by the Board of Directors or by the chief executive officer of the Corporation. He shall be subject to the control of the Board of Directors and to the powers of the chief executive officer of the Corporation. SECTION 8. Assistant Treasurers. Any Assistant Treasurer shall perform such duties as the Treasurer or the chief executive officer of the Corporation or the Board of Directors may from time to time assign to him. SECTION 9. Secretary. The Secretary shall have the care and custody of the seal and minute books of the Corporation and shall have such powers and perform such duties as are incident to the office of Secretary or as may, from time to time, be specified by the Board of Directors. He shall be subject to the control of the Board of Directors. SECTION 10. Assistant Secretaries. Any Assistant Secretary shall perform such duties as the Secretary or the chief executive officer of the Corporation of the Board of Directors may from time to time assign to him. SECTION 11. Controller. If a Controller shall have been elected, he shall be the chief accounting officer of the Corporation and shall have such powers and perform such duties as may, from time to time, be specified by the Board of Directors or the chief executive officer of the Corporation. SECTION 12. Auditor. If an Auditor shall have been elected, he shall have full charge of the auditing of all accounts of every kind, subject to the control of the Board of Directors, and shall also perform such other duties as the Board of Directors or the chief executive officer of the Corporation may from time to time direct. SECTION 13. Chief Tax Officer. The Chief Tax Officer shall have responsibility for all tax matters of the Corporation, subject to control of the Board of Directors, and shall have such powers and perform such other duties as the Board of Directors or the chief executive officer or the chief financial officer may from time to time direct. ARTICLE IV CAPITAL STOCK SECTION 1. Certificates of Shares and Uncertificated Shares. The shares of each class of the capital stock of the Corporation shall be represented by certificates or shall be uncertificated. Each registered holder of shares, upon request to the Company, shall be provided with a certificate of stock representing the number of shares owned by such holder. Certificates of stock shall be issued in such forms, not inconsistent with law or with the Certificate of Incorporation or other certificate filed pursuant to law, as shall be approved by the Board of Directors. SECTION 2. Transfers of Shares of Stock. Transfers of shares shall only be made upon the books of the Corporation by the holder in person, or by the power of attorney duly executed and filed with the Corporation, and on the surrender and cancellation of the certificate or certificates of such shares properly assigned. The Board of Directors shall have power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration of certificates of shares in the capital stock of the Corporation. 6 SECTION 3. Record Dates. For the purpose of determining the Stockholders entitled to notice of or to vote at any meeting of Stockholders or any adjournment thereof, or for the purpose of determining Stockholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board may fix, in advance, a date as the record for any such determination of Stockholders. Such date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. SECTION 4. Lost Certificates. No certificate of shares in the capital stock of the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed, except on delivery to the Corporation of a bond of indemnity, against such lost, stolen or destroyed certificate, with such surety or security, if any, as shall be approved by the Treasurer or Secretary. Proper and legal evidence of such loss, theft or destruction shall be produced to the Treasurer or Secretary, if they require the same. The Treasurer or Secretary may (except as otherwise provided in any agreement executed and delivered on behalf of the Corporation and authorized by the Board of Directors) in their discretion refuse to issue such new certificate, save upon the order of the court having jurisdiction in such matters. ARTICLE V DIVIDENDS Dividends may be declared and paid out of funds of the Corporation legally available therefor as often and at such times and to such extent as the Board of Directors may determine, consistent with the provisions of the Certificate of Incorporation or other certificate filed pursuant to law. ARTICLE VI SEAL The seal of the Corporation shall consist of a flat-faced circular die with the name of the Corporation in a circle and the year of its incorporation in the center. ARTICLE VII WAIVER Any notice required by the By-Laws of the Corporation to be given to Directors or Stockholders for any meeting may be waived by any Director or Stockholder in writing, signed by such Director or Stockholder or by his attorney thereunto authorized, and filed with the Secretary of the Corporation. ARTICLE VIII CHECKS, DRAFTS, NOTES, ETC. Funds of the Corporation on deposit with banks shall be disbursed by checks or drafts signed by such officer or officers as the Board of Directors from time to time designate or by such person or persons as shall from time to time be designated either by the Board of Directors or by such officer or officers as the Board shall from time to time authorize so to do. Notes, drafts, acceptances, bills of exchange, or other obligation for the payment of money (other than checks and drafts on banks with which the Corporation has funds on deposit) made, accepted, or endorsed, shall be signed by such officer or officers or person or persons as the Board of Directors shall from time to time designate. ARTICLE IX INDEMNIFICATION The Corporation shall indemnify each Officer or Director who is made, or threatened to be made, a party to any action by reason of the fact that he or she is or was an Officer or Director of the Corporation, or is or was serving at the request of the Corporation in any capacity for the Corporation or any other enterprise, to the fullest extent permitted by applicable law. The Corporation may, so far as permitted by law, enter into an agreement to indemnify and advance expenses to any Officer or Director who is made, or threatened to be made, a party to any such action. 7 ARTICLE X AMENDMENTS These By-Laws, or any of them, may be altered, amended, or repealed, and new By-Laws may be adopted, at any annual meeting of the Stockholders, or at any special meeting called for that purpose, by a vote of a majority of the shares represented and entitled to vote thereat. The Board of Directors shall have the power, by a majority vote of the whole Board, to alter or amend or repeal these By-Laws, but any such action of the Board of Directors may be amended or repealed by the Stockholders at any annual meeting. EX-10 3 0003.txt EXHIBIT 10.1 (Exhibit 10.1) INTERNATIONAL PAPER COMPANY LONG-TERM INCENTIVE COMPENSATION PLAN 1. Purpose and Effective Date This plan shall be known as the International Paper Company Long-Term Incentive Compensation Plan (the "Plan"). The purpose of this Plan is to provide incentive for senior management officers and employees of the Company and its subsidiaries (the "Company") to improve the performance of the Company on a long-term basis, and to attract and retain in the employ of the Company persons of outstanding competence. The terms "subsidiary" and "subsidiaries" as used herein shall mean corporations which are owned or controlled by International Paper Company, directly or indirectly. The effective date of the Plan is January 1, 1989. The Plan was amended in 1994, 1999, and 2000 by a vote of shareholders. 2. Administration of the Plan (a) The Plan shall be administered by a committee (the "Committee") which shall be composed of members of the Board of Directors of the Company and which shall be constituted so as to permit the Plan to comply with the provisions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act") (or any successor rule) and Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Committee is authorized to administer and interpret the Plan, to authorize, change, and waive the restrictions and conditions imposed on awards and stock options under the Plan, to delegate the granting of awards hereunder, and to adopt such rules and regulations for carrying out the Plan as it may deem appropriate. Decisions of the Committee or its delegates on all matters relating to the Plan shall be in the Committee's sole discretion and shall be conclusive and binding on all parties, including the Company, the shareholders and the participants. (b) No member of the Committee or any employee acting on its behalf shall incur any liability for any action or failure to act in connection with this Plan. The Company shall indemnify each member of the Committee and any employee acting on its behalf against any and all claims, losses, damages, expenses and liabilities arising from any action or failure to act. 3. Participants (a) Participation in this Plan shall be limited to senior managers and other key employees of the Company as determined by the Committee or its delegates. Awards of stock and stock appreciation rights and grants of stock options may be made to such employees and for such respective numbers of Shares, as the Committee or its delegates. in their absolute discretion shall determine (all such individuals to whom awards and options shall be granted being herein called "participants"). (b) Members of the Board of Directors who are also employees of the Company shall be eligible to participate in the Plan. However, members of the Board of Directors who are not also employees of the Company shall be ineligible for awards under this Plan. Notwithstanding the foregoing, any members of the Board of Directors who are also retired employees of the Company shall be entitled to the portions of their awards which are earned or vested pursuant to the provisions of the Plan. (c) A person who is compensated on the basis of a fee or retainer, as distinguished from salary, shall not be eligible for participation in the Plan. (d) Participation in this Plan, or receipt of an award or option under this Plan, shall not give a participant any right to a subsequent award or option, nor any right to continued employment by the Company for any period, nor shall the granting of an award or option give the Company any right to continued services of the participant for any period. Likewise, participation in the Plan will not in any way affect the Company's right to terminate the employment of the participant at any time with or without cause. 4. Definitions (a) "Stock" or "Share" shall mean a share of the common stock of $1.00 par value of International Paper Company. (b) "Performance Shares" shall mean Shares contingently awarded with respect to an Award Period and issued with the restriction that the holder may not sell, transfer, pledge, or assign such Shares, and with such other restrictions as the Committee in its sole discretion may determine (including, without limitation, restrictions with respect to forfeiture of the Shares and with respect to reinvestment of dividends in additional restricted Shares), which restrictions may lapse separately or in combination at such time or times (in installments or otherwise) as the Committee may determine. (c) "Stock Appreciation Right" or "SAR" shall mean a right included in an award under this Plan to receive upon exercise of the SAR a payment equal to the amount of the appreciation in the fair market value of a Share over the exercise price which is set forth in the SAR provided that the exercise price is not less than the fair market value of a Share on the date the SAR is granted. Payment upon exercise of an SAR may be in the form of cash, or restricted stock, or unrestricted stock, or a combination, as determined by the Committee in its sole discretion. SARs may be awarded separately or in combination with other awards and stock options under this Plan pursuant to terms and conditions contained in an award agreement as determined by the Committee. (d) "Change of Control of the Company" shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the 1934 Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act (other than employee benefit plans sponsored by the Company) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company, cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election, by the Company's shareholders of each new director was approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of the period. 5. Stock Available for the Plan Subject to the adjustments permitted by Section 6 of the Plan, an aggregate of twenty-five million five-hundred thousand (25,500,000) Shares shall be available under the Plan as amended by the shareholders at the 1999 Annual Meeting for delivery pursuant to the future awards, and options granted pursuant to the Plan, together with any Shares previously authorized by shareholders under the Plan, as previously amended, which are not yet issued to, or are reacquired from, participants in the Plan as previously amended. Such Shares shall be either previously unissued Shares or reacquired Shares. Shares covered by awards which are not earned, or which are settled in cash, or which are forfeited or terminated for any reason, and options which expire unexercised or which are exchanged for other awards, shall again be available for other awards and stock options under the Plan. Shares received by the Company in connection with the exercise of stock options by delivery of other Shares, and received in connection with payment of withholding taxes, shall again be available for delivery under the Plan. Shares reacquired by the Company on the open market using the cash proceeds received by the Company from the exercise of stock options granted under the Plan as previously amended shall be available for awards and options up to the number of Shares issued upon option exercises which generated such proceeds, provided any such exercise occurred on or after January 1, 1989. Notwithstanding the foregoing, the maximum number of Shares available for delivery pursuant to future awards, options and SARs to executive officers of the Company who, at the time of grant, are subject to the provisions of Section 16 of the 1934 Act shall not exceed 14,600,000 Shares, subject to the adjustments permitted by Section 6 of the Plan. Notwithstanding any other provision of this Plan, subject, however, to the adjustments permitted by Section 6 of the Plan, the aggregate number of Shares that can be covered by future stock options or SARs granted to any individual in any period of three consecutive fiscal years shall be 1,800,000 and the aggregate number of restricted Shares issued under this Plan after the 1999 annual meeting of shareholders may not exceed 3,000,000 Shares. 6. Changes in Stock and Exercise Price of Stock Options and SARs In the event of any stock dividend, split-up, reclassification or other analogous change in capitalization or any distribution (other than regular cash dividends) to holders of the Company's common stock, the Committee shall make such adjustments, if any, as it deems to be equitable in the exercise price of outstanding options and SARs, and in the number of Performance Shares awarded and earned, and in the number of Shares covered by any outstanding stock options and SARs, granted under this Plan, and in the aggregate number of Shares covered by this Plan. 7. Time of Granting Awards and Stock Options Nothing contained in this Plan, or in any resolution adopted or to be adopted by the Board of Directors or the shareholders of the Company, shall constitute the granting of an award or stock option under this Plan. The granting of an award or stock option pursuant to the Plan shall take place only when authorized by the Committee or its delegates. 8. Death or Disability of a Participant In the event of the death of a participant, a stock option or an SAR may be exercised within one year of the participant's death by the participant's designated beneficiary or beneficiaries (or if no beneficiary has been designated or survives the participant, by the person or persons who have acquired the rights of the participant by will or under the laws of descent and distribution). If a participant becomes disabled, the participant may exercise a stock option or an SAR within one year after the date of the disability. For purposes of this Plan, the term "disabled" shall refer to the condition of total disability defined in the Company's long-term disability plan. A participant may file with the Committee a designation of a beneficiary or beneficiaries on a form approved by the Committee, which designation may be changed or revoked by the participant's sole action, provided that the change or revocation is filed with the Committee on a form approved by it. In case of the death of the participant, before termination of employment or after retirement or disability, any portions of the participant's award to which the participant's designated beneficiary or estate is entitled under the Plan and the award agreement, shall be paid to the beneficiary or beneficiaries so designated or, if no beneficiary has been designated or survives such participant, shall be delivered as directed by the executor or administrator of the participant's estate. 9. Retirement of Holder of Stock Option or SAR If a participant retires under a Company pension plan, the participant may exercise a stock option or an SAR within its remaining term unless otherwise provided in the award agreement. Retirement under any of the Company's pension plans shall cause incentive stock options to be treated for federal income tax purposes as non-qualified stock options on a date which is three months after the date of retirement. For purposes of this section, retirement shall be given the meaning used under the Company's pension plan for salaried employees. 10. Non-Transferability of Awards No award, stock option or SAR under this Plan, and no rights or interests therein, shall be assignable or transferable by a participant (or legal representative), except at death by will or by the laws of descent and distribution unless otherwise permitted by the Committee and by law and, in the case of incentive stock options, to the extent consistent with Section 422 of the Code. 11. Modification of the Plan The Board of Directors, without further approval of the shareholders, may at any time amend the Plan to take into account and comply with any changes in applicable securities or federal income tax laws and regulations, or other applicable laws and regulations, including without limitation, any modifications to Rule 16b-3 under the 1934 Act or Section 162(m) of the Code (or any successor rule, provision or regulation), terminate or modify or suspend (and if suspended, may reinstate) any or all of the provisions of this Plan, except that no modification of this Plan shall without the approval of the Company's shareholders increase the total number of Shares for which awards, stock options and SARs may be granted under the Plan (except pursuant to Section 6). RESTRICTED PERFORMANCE SHARE AWARDS 12. Terms and Conditions of Awards of Performance Shares (a) Each award of Performance Shares under this Plan shall be contingently awarded with respect to a period of consecutive calendar years as determined by the Committee (herein called an "Award Period") and shall be made from reacquired Shares. The first complete Award Period under this Plan began with the year 1989. A new Award Period shall commence at the beginning of each calendar year. (b) The Performance Shares awarded under this Plan will be earned by a participant on the basis of the Company's financial performance over the Award Period for which it was awarded, on the basis of pre-established performance goals determined by the Committee in its sole discretion. The Performance measurement criteria used for Performance Shares shall be limited to one or more of: earnings per share, return on stockholders equity, return on investment, return on assets, growth in earnings, growth in sales revenue, and shareholder returns. Such criteria may be measured based on the Company's results or on the Company's performance as measured against a group of peer companies selected by the Committee. In applying such criteria, earnings may be calculated based on the exclusion of discontinued operations and extraordinary items. Subject to the adjustments permitted by Section 6 of the Plan, the maximum number of Performance Shares that can be earned for any one individual for any future Award Period is 100,000. Subject to such maximum number of Shares, the amount, if any, that may be earned by a participant receiving Performance Shares may vary in accordance with the level of achievement of the performance goal or goals established by the Committee. (c) A participant's rights with respect to all unearned Performance Shares shall terminate at the end of each Award Period. (d) The number of Shares determined by the Committee to have been earned with respect to any Award Period shall be final, conclusive and binding upon all parties, including the Company, the shareholders and the participants. (e) All dividend equivalents credited on Performance Shares during an Award Period shall be reinvested in additional Performance Shares (which shall be allocated to the same Award Period, and shall be subject to being earned by the participant on the same basis as the original award). (f) All dividends paid on earned restricted Shares under this part of the Plan shall be paid in cash. (g) As a condition of any award of Performance Shares under this Plan, each participant shall enter into an award agreement authorized by the Committee. The Committee may in its sole discretion, include additional conditions and restrictions in the award agreement entered into under this Plan. Settlements in Shares may be subject to forfeiture and other contingencies as the Committee may determine. (h) At the discretion of the Committee, SARs may be awarded separately or in combination with other awards or grants under this portion of the Plan. (i) In the event a Change of Control of the Company occurs, then (A) all restrictions shall be immediately removed with respect to all earned Performance Shares and (B) a pro rata portion of each outstanding Award that would have been earned were Company performance to reach the goals established by the Committee for each uncompleted Award Period shall be deemed earned (based on the number of months of the total Award Period which have been completed prior to the Change of Control), and all restrictions shall be immediately removed with respect to that number of shares; the remaining portion of each Award shall remain outstanding as Performance Shares subject to the provisions of this Plan and the participant's award agreements. STOCK OPTION AWARDS 13. Terms and Conditions of Stock Options (a) The Committee and its delegates shall have the sole authority to grant stock options under this Plan. Such grants may consist of non-qualified stock options, or Incentive Stock Options, or any combination thereof, as the Committee shall decide from time to time. The aggregate fair market value (determined at the time the option is granted) of the Stock with respect to which Incentive Stock Options are exercisable for the first time by an individual during a calendar year shall not exceed $100,000 as determined under Section 422A of the Internal Revenue Code or comparable legislation. The maximum number of Shares for which stock options can be awarded to any one individual over any consecutive three-year period commencing on the effective date of the amendment to the Plan is 1,800,000 Shares, subject to the adjustments permitted by Section 6 of the Plan. (b) The term of each option granted under the Plan shall be set by the Committee, but in no event shall an Incentive Stock Option be exercised after ten years following the date of its grant under this Plan. (c) The exercise price of each option granted under the Plan shall be no less than the fair market value of the underlying Stock at the time the option is granted as determined by the Committee. (d) Prior to the exercise of the option and delivery of the Stock represented thereby, the participant shall have no rights to any dividends nor be entitled to any voting rights on any Stock represented by outstanding options. (e) As a condition of any grant of a stock option under this Plan, each participant shall enter into an award agreement authorized by the Committee. The Committee may, in its sole discretion, include additional conditions and restrictions in the award agreement entered into under this Plan. (f) At the discretion of the Committee, SARs may be awarded separately or in combination with other awards or grants under this part of the Plan. 14. Exercise of Stock Options (a) Each stock option granted under this Plan shall be exercisable as provided in accordance with the document evidencing the option by full payment of the option price in cash or at the discretion of the Committee in Stock owned by the participant (including Performance Shares and other restricted Shares awarded under this Plan). Unless otherwise provided herein, a participant may exercise a stock option only if he or she is an employee of the Company and has continuously been an employee of the Company since the date the option was granted. (b) If a stock option under this Plan is exercised by a participant, then, at the discretion of the Committee, the participant may receive a replacement option under this part of the Plan to purchase a number of Shares equal to the number of Shares which the participant purchased on the exercise of the option, with an exercise price equal to the current fair market value, and with a term extending to the expiration date of the original stock option. If a stock option is exercised by delivery of restricted Shares, then the participant shall receive an equal number of identically restricted Shares; the remaining option exercise Shares shall contain any applicable restrictions which are set forth in the participant's award agreement and shall otherwise be unrestricted. (c) In the event a Change of Control of the Company occurs, all stock options granted under this part of the Plan shall be immediately exercisable, and all restrictions on Shares issued under this plan pursuant to the exercise of stock option shall be immediately removed. CONTINUITY AWARDS 15. Terms and Conditions of Executive Continuity Awards (a) Executive Continuity Awards may be made from time to time under this Plan at the discretion of the Committee, in such amounts and upon such terms and conditions as are established by the Committee under this portion of the Plan. (b) An executive Continuity Award shall consist of a tandem grant of restricted Shares together with a related non-qualified stock option (options to be granted in accordance with the provisions of sections 13-14 of this Plan) to purchase a specified number of Shares, in such amounts as may be determined by the Committee. All dividends paid on the restricted Shares shall be reinvested in additional shares of restricted Shares (subject to the same restrictions, terms and conditions). Upon attainment of age 65, (or death or the executive's becoming disabled) or such other age as is determined in the sole discretion of the Committee, or upon a Change of Control of the Company (as limited under subsection (h) below), the restrictions on the award will be removed, and the award will vest in the following manner, except as otherwise determined by the Committee: (i) If the current realizable gain on a tandem stock option is greater than the current market value of the related restricted Shares (including re-invested dividends), then all such shares of restricted Shares shall be canceled and the term of the stock option shall continue for the term set forth in the award agreement. (ii) If the current market value of the restricted Shares (including re-invested dividends) is greater than the current realizable gain on any related tandem stock option, then the option shall be canceled and the restrictions shall be removed from all of the related restricted Shares. (c) If a stock option granted under this portion of the Plan is exercised prior to the executive's attainment of an age determined by the Committee, the related shares of restricted Shares shall be canceled, and the additional Shares issued upon the exercise of the stock option shall be restricted and subject to either forfeiture or repurchase by the Company at the option exercise price for a period ranging up to 12 years from the date of the grant of the option, or longer, as determined by the Committee and set forth in the award agreement. (d) A stock option granted under this portion of the Plan shall be exercisable as provided in accordance with the document evidencing the option by full payment of the option price in cash or, at the discretion of the Committee, in Stock owned by the participant (including Performance Shares awarded under this Plan). At the discretion of the Committee, the participant may receive a replacement stock option to purchase a number of shares equal to the number of shares purchased by the participant in exercising the option, with an exercise price equal to the current market value, and with a term extending to the expiration date of the original stock option. If an option is exercised by delivery of restricted Shares, then the participant shall receive an equal number of identically restricted Shares; the remaining option exercise Shares shall be subject to the Company's right to impose restrictions on such Shares as described in subsection (c) above. (e) As a condition of any executive Continuity Award under this Plan, each participant shall enter into an award agreement authorized by the Committee. The Committee may, in its sole discretion, include additional conditions and restrictions in the award agreement. (f) At the discretion of the Committee, SARs may be awarded separately or in combination with other awards or grants under this portion of the Plan. (g) In the event a Change of Control of the Company occurs, all restrictions shall be immediately removed with respect to the exercise of stock options under this part of the Plan and with respect to Shares issued upon the exercise of any stock option. A Change of Control, for these purposes, shall not include a transaction initiated by management such as a management led buyout or recapitalization except where such transaction (i) is in response to the acquisition of 10% or more of the Company's stock or the announcement of a tender offer for 20% or more of the Company's stock (other than by employee benefit plans sponsored by the Company); or (ii) is approved by the Board in accordance with the standards set forth in Section 717 of the New York Business Corporation Law or any successor provision. 16. Terms and Conditions of Other Continuity Awards (a) Awards of restricted stock, hereinafter called "continuity awards" may be made from time to time under the Plan at the discretion of the Committee or its delegates, in such amounts and upon such terms and conditions as are established by the Committee or its delegates under this portion of the Plan. (b) As a condition of any such continuity award under this Plan, each participant shall enter into an award agreement authorized by the Committee or its delegates. The Committee or its delegates, in their sole discretion, may include additional conditions or restrictions in the award agreement. (c) In the event a Change of Control of the Company occurs, all restrictions shall be immediately removed with respect to Shares issued as a continuity award. A Change of Control, for these purposes, shall not include a transaction initiated by management, such as a management led buyout or recapitalization except where such transaction (i) is in response to the acquisition of 10% or more of the Company's stock or the announcement of a tender offer for 20% or more of the Company's stock (other than by employee benefit plans sponsored by the Company); or (ii) is approved by the Board in accordance with the standards set forth in Section 717 of the New York Business Corporation Law or any successor provision. MISCELLANEOUS 17. Prior Awards Awards of stock options and Performance Shares made under the Plan prior to the amendments approved by shareholders at the 1994 annual meeting continued to be subject to the terms of the Plan and the instruments evidencing such awards prior to such amendments becoming effective. 18. Tax Withholding The Company shall have the right to deduct from any settlement of an award made under the Plan, including the delivery or vesting of Shares, a sufficient amount to cover withholding of any federal, state, local or foreign jurisdiction taxes required by law, or to take such other action as may be necessary to satisfy any such withholding obligations. The Committee may permit or require Shares to be used to satisfy required tax withholding and such Shares shall be valued at the fair market value as of the settlement date of the applicable award. EX-10 4 0004.txt EXHIBIT 10.11 IP Benefits You Unfunded Savings Plan [Graphic] INTERNATIONAL [LOGO] PAPER IP Benefits You [Graphic] Overview of the Plan Who Is Eligible How to Enroll Participation How the Plan Works How Participation in the Plan Affects Your Other Benefits Types of Contributions Basic Contributions Company Matching Contributions Supplemental Contributions MIP Deferral Election Changing Your Rate of Contributions Investment Options Basic and Supplemental Contributions Company Matching Contributions Changing Investment of Future Contributions Investment Fund Equivalents The Stable Value Fund Equivalent The Bond Fund Equivalent The Balanced Fund Equivalent The S&P 500 Index Fund Equivalent The Small Cap Fund Equivalent The Growth Fund Equivalent The International Stock Fund Equivalent The Company Stock Fund Equivalent Rate of Return on Your Investment Valuation of Your Account Interfund Transfers Transfers of Basic Contributions and Supplemental Contributions Transfers of Company Matching Contributions Vesting Rights Vesting of Your Contributions Vesting of Company Matching Contributions Withdrawals Designated at Initial Plan Participation Designated After Initial Plan Participation Distributions Termination of Employment Retirement or Disability How Payments Are Made Distributions Upon Death Other Information Nonassignability of Interest If You Are Transferred Federal Income Tax Information General Administration of the Plan Introduction The International Paper Company Unfunded Savings Plan (the USP or Plan) is a savings plan designed to provide you with an opportunity to save through your own deferrals of pay and through company matching contributions. The USP is an unfunded deferred compensation plan. This means that the pay which you defer under the USP and any company matching contributions credited to your account are not invested in a separate trust. Instead, all deferred amounts will be paid directly by the company out of its general assets at the time when benefits become due and payable under the Plan. The Plan was amended and restated effective January 1, 1995. This booklet reflects provisions effective February 1, 2000, unless otherwise indicated. This booklet is intended to help you better understand your benefits under the Plan. If there is any conflict between the information in this summary plan description and the provisions of the Plan, the plan document always will control. IP Benefits You [Graphic] Overview of the Plan o You have the opportunity to defer more than the statutory maximum allowed in the International Paper Company Salaried Savings Plan (the SSP); o Company matching contributions are credited on your basic contributions; o Basic contributions and supplemental contributions may be credited with earnings based on your choice of eight investment fund equivalents -- the Stable Value Fund Equivalent, the Bond Fund Equivalent, the Balanced Fund Equivalent, the S&P 500 Index Fund Equivalent, the Small Cap Fund Equivalent, the Growth Fund Equivalent, the International Stock Fund Equivalent and the Company Stock Fund Equivalent; o Company matching contributions are credited with earnings based on the Company Stock Fund Equivalent; o Taxes are deferred on your contributions, company matching contributions and earnings credited to your account until distributed from the Plan; o The value of your contributions is vested immediately, and a vesting schedule is applied to company matching contributions; o While you are actively employed, distributions of specific dollar amounts may be made from your contributions without penalty or suspension, provided you designate the amounts and dates of distribution prior to initial plan participation; o While you are actively employed, withdrawals of your contributions may be made with a 10 percent forfeiture penalty and 12-month suspension of contributions, if the withdrawal distribution is requested after initial plan participation; o On and after February 1, 2000, you may transfer the balance of your basic and supplemental contributions among the eight investment fund equivalents daily; o Beginning with the year you attain age 55, you may transfer all or part of the balance of your company matching contributions from the Company Stock Fund Equivalent among the other investment fund equivalents. This provision is effective October 1, 1999; o If you retire or become disabled, you may receive your account balance in a lump sum or installments, or you may defer commencement up to age 70 1/2. Who Is Eligible You are eligible to participate in the Plan if you are: o Eligible to participate in the Salaried Savings Plan; and o Employed in Position Level 18 or above (or equivalent) or have SSP plan compensation in excess of $160,000 (indexed for cost of living) for the preceding calendar year. In order to participate, you must enroll in the Plan and be actively contributing to the Salaried Savings Plan. 1 IP Benefits You [Graphic] How to Enroll When you become eligible, you will be given an enrollment packet. You may make your elections by calling Savings Plan PAL. If you choose to make contributions to the Plan, you will: o Select the percentage of total pay you want to contribute under the SSP and the USP, in combination; o Authorize the company to make payroll deductions for your contributions; o Choose the investment fund equivalent(s) for your contributions; o Designate any in-service distribution(s) to be paid to you; and o Select your beneficiary(ies). Important Note - If you choose not to join the Plan when you first become eligible, you may join at a later date by calling Savings Plan PAL. Participation How the Plan Works If you choose to participate in the USP, your SSP and USP contributions are determined in combination and are allocated between the two plans based on the following: o The percentage of compensation which you wish to save; and o Your choice to either maximize before-tax contributions or to maximize contributions to the SSP. You also have the following optional choice: o Your USP contributions may be limited to the maximum basic rate available. When you become a participant in the Plan, an account is established for you. Your account contains all the details relating to your contributions, company matching contributions and any investment fund equivalent gains or losses. This information is recorded separately for each investment fund equivalent in which you have amounts credited. How Participation in the Plan Affects Your Other Benefits Most salaried pensions under the Retirement Plan of International Paper Company are based on final average earnings. In general, earnings included in the pension calculation are base pay, bonuses, salary deferrals to the SSP and to Internal Revenue Code Section 125 Plans (including Health and Dependent Day Care contributions), but not salary deferred as contributions under this Plan. Thus, making contributions to the Plan during your final years of employment, when final average earnings are calculated, could reduce your annual pension from the Retirement Plan. However, if your Retirement Plan pension is reduced by your contributions to this Plan, the amount of the reduction will be paid as a benefit from the International Paper Company Pension Restoration Plan at retirement. The Pension Restoration Plan is a nonqualified plan with benefits paid from the general assets of the company. Important Note - Making contributions to this Plan will not lower your life insurance or disability insurance benefits from the company. 2 IP Benefits You [Graphic] Types of Contributions The following sections describe the various types of contributions you may make to the SSP and USP, as well as any company matching contributions which may be credited to your accounts under the SSP and USP. You must designate the percentage of your total pay which you wish to contribute to the combined SSP/USP. Your contributions will be designated as basic or supplemental. Basic Contributions The first contributions which you make will be designated as basic contributions. The range of percentages permitted for basic contributions is listed in the Appendix. Basic contributions are credited with company matching contributions. Company Matching Contributions The company will credit matching contributions to your SSP or USP account in an amount equal to a percentage of the basic contributions which you make. The company matching percentage is listed in the Appendix. Supplemental Contributions If you make the maximum basic contributions permitted, any excess contributions will be designated as supplemental contributions. The range of percentages permitted for supplemental contributions is listed in the Appendix. Supplemental contributions are not eligible for company matching contributions. MIP Deferral Election As a participant in the company's Management Incentive Plan (MIP), you have the option of making a separate election as to the rate of contributions to be applied to your MIP award. Midyear, you will receive communications outlining the process to make this election. Changing Your Rate of Contributions Once a month you may: o Increase or decrease the percentage of total pay you contribute under the combined SSP/USP; or o Suspend your contributions. To make a change, enter the change on Savings Plan PAL. The change will take effect as soon as administratively possible after the month in which the change is made. Investment Options The Plan has eight investment options: the Stable Value Fund Equivalent; the Bond Fund Equivalent; the Balanced Fund Equivalent; the S&P 500 Index Fund Equivalent; the Small Cap Fund Equivalent; the Growth Fund Equivalent; the International Stock Fund Equivalent and the Company Stock Fund Equivalent. Since this is an unfunded plan, your contributions and any company matching contributions are not invested in a separate trust. Instead, your account is simply credited with the same investment gain or loss that it would have received had it been invested in the Stable Value Fund, Bond Fund, Balanced Fund, S&P 500 Index Fund, Small Cap Fund, Growth Fund, International Stock Fund and/or Company Stock Fund of the SSP. Basic and Supplemental Contributions You may invest your basic and supplemental contributions among the Stable Value Fund Equivalent, the Bond Fund Equivalent, the Balanced Fund Equivalent, the S&P 500 Index Equivalent, the Small Cap Fund Equivalent, the Growth Fund Equivalent, the International Stock Fund Equivalent and the Company Stock Fund Equivalent, in multiples of 1 percent. 3 IP Benefits You [Graphic] Company Matching Contributions Company matching contributions are invested in the Company Stock Fund Equivalent. Changing Investment of Future Contributions You may change your choice of investment fund equivalents for your future basic and supplemental contributions daily. Your investment selection will be processed with the next available payroll cycle. Investment Fund Equivalents The Stable Value Fund Equivalent The Stable Value Fund Equivalent is based on the SSP Stable Value Fund which seeks to preserve capital while earning a competitive rate of return by investing in a diversified portfolio of contracts backed by high-quality bonds and investment contracts issued by insurance companies and banks. The rate of return earned by the SSP fund will be a function of the rates earned on each of the fund's holdings, which are actively managed, and will be impacted by changes in interest rates. The Bond Fund Equivalent The Bond Fund Equivalent is based on the SSP Bond Fund which seeks a high level of interest income and some capital appreciation by investing in a diversified portfolio representative of the U. S. bond market. The fund invests primarily in U.S. government, investment grade corporate, and mortgage-backed securities. The fund's value will usually change in response to interest rates. When interest rates rise, the value of the fund can generally be expected to decline; conversely, when interest rates fall, the value of the fund can generally be expected to rise. The Balanced Fund Equivalent The Balanced Fund Equivalent is based on the SSP Balanced Fund which seeks long-term capital growth and income through investment in a managed mutual fund of 60-70 percent stocks and 30-40 percent high-quality bonds. The stocks are held for potential growth and income from dividends, while the bonds are held for income and relative stability. The value of your investment will fluctuate with the market prices of and income earned by the mutual fund's holdings. The S&P 500 Index Fund Equivalent The S&P 500 Index Fund Equivalent is based on the SSP S&P 500 Index Fund which seeks long-term growth of capital and income by investing in a mutual fund which holds the 500 most widely held stocks in the U.S. in an attempt to match the performance and risk characteristics of the Standard & Poor's 500 Composite Stock Price Index. The value of your investment will fluctuate with the market prices of and dividends paid on the various stocks held in the mutual fund. The Small Cap Fund Equivalent The Small Cap Fund Equivalent is based on the SSP Small Cap Fund which seeks long-term growth of capital by investing in stocks that are among the smallest companies in the stock market (these stocks generally have market capitalizations of less than $2.5 billion). In aggregate, this fund has a blended orientation, holding stocks that have both a growth- and value-orientation. The value of your investment will fluctuate with the market prices of the various stocks held in the fund. 4 IP Benefits You [Graphic] The Growth Fund Equivalent The Growth Fund Equivalent is based on the SSP Growth Fund which seeks long-term growth of capital by investing in a managed mutual fund of common stocks of mid- to large-capitalization companies exhibiting above-average prospects for growth. Dividend income is a secondary consideration. The value of your investment will fluctuate primarily with the market prices of the various stocks held by the mutual fund. The International Stock Fund Equivalent The International Stock Fund Equivalent is based on the SSP International Stock Fund which seeks long-term growth of capital by investing in a diversified mutual fund of stocks of companies outside the United States, normally investing in at least five different countries. The value of your investment will fluctuate with the market prices of the various stocks held by the mutual fund and can be affected by currency exchange rates. The Company Stock Fund Equivalent The Company Stock Fund Equivalent is based on the SSP Company Stock Fund which is invested in International Paper Company common stock. Dividends are reinvested in additional shares of International Paper Company common stock. The value of the SSP fund fluctuates depending upon dividends paid and the market value of the stock. Rate of Return on Your Investment Any investment involves some degree of financial risk. Furthermore, since your USP contributions are not in a separate trust but are part of the company's general assets, participation in this Plan involves greater risks than participation in the Salaried Savings Plan. The annual investment results will vary depending on the growth of the equivalent investment fund which is being mirrored. Investment results will be reported to you quarterly. Valuation of Your Account Each of the investment fund equivalents is valued every day that the New York Stock Exchange (NYSE) is open using the daily price on the NYSE. The value of your account is equal to: the amounts you originally contributed, plus your company matching contributions, plus deemed reinvested earnings, plus any equivalent increase or less any equivalent decrease in the market value of your investments, less any distributions from your account. Quarterly, you will receive a statement showing the value of your account. This statement will show all savings activity, including your contributions, company matching contributions, investment experience and any transfers or distributions made in that investment period. Interfund Transfers Transfers of Basic Contributions and Supplemental Contributions On a daily basis, you may transfer the balance of your basic and supplemental contributions in the Plan among the Stable Value Fund Equivalent, the Bond Fund Equivalent, the Balanced Fund Equivalent, the S&P 500 Index Fund Equivalent, the Small Cap Fund Equivalent, the Growth Fund Equivalent, the International Stock Fund Equivalent and the Company Stock Fund Equivalent so that the resulting investments in such investment fund equivalents are in multiples of 1 percent. The transfers will take effect each day the NYSE is open, provided the request is entered by close of business, generally 4 p.m. Eastern time. Transfers of Company Matching Contributions Beginning with the year in which you attain age 55 or older, you may transfer all or a part of the balance of company matching contributions in the Company Stock Fund Equivalent so that it is reallocated among the 5 IP Benefits You [Graphic] Stable Value Fund Equivalent, the Bond Fund Equivalent, the Balanced Fund Equivalent, the S&P 500 Index Fund Equivalent, the Small Cap Fund Equivalent, the Growth Fund Equivalent, the International Stock Fund Equivalent and/or the Company Stock Fund Equivalent. This transfer may be made on a daily basis during the calendar year and will take effect each day that the NYSE is open, provided the request is entered by close of business, generally 4 p.m. Eastern time. You must designate the percentage of your account to be transferred, in multiples of 1 percent. The balance must be invested in the available investment fund equivalents in multiples of 1 percent. To make a transfer, enter the transfer request on Savings Plan PAL. Transfers are processed every day that the NYSE is open, as of the close of business, generally 4 p.m. Eastern time. Vesting Rights Vesting of Your Contributions You always are 100 percent vested in the value of your contributions to the Plan. Vesting of Company Matching Contributions You become vested in the value of company matching contributions as follows:
Years of Service Vested Completed Percentage ------------------------------------------ Less than 3 0% ------------------------------------------ 3 but less than 4 35% ------------------------------------------ 4 but less than 5 70% ------------------------------------------ 5 or more 100% ------------------------------------------
Withdrawals To offer you the financial flexibility you may need, the Plan gives you access to your account during your active employment through withdrawals, subject to certain penalties described below. Designated at Initial Plan Participation At initial plan participation, you may designate specific dollar amount(s) to be paid at specific date(s) in the future. These withdrawals are made from the balance of your basic and supplemental contributions to the extent such amount(s) are available and provided the designated date(s) occur before your termination of employment. There are no penalties associated with this type of withdrawal. Designated After Initial Plan Participation After initial plan participation, you may request a withdrawal, for any reason and in any amount, to be paid from the balance of your basic and supplemental contributions. The withdrawal payment will be made in the year following your request, on the date you designate. Because of the IRS tax-deferred status of accounts under the Plan, your contributions to the Plan will be suspended for the year during which the withdrawal is paid and your withdrawal amount will be reduced by 10 percent. Important Note - Any withdrawal may be restricted to the extent necessary to comply with certain statutory limitations regarding the five officers subject to proxy disclosure reporting. 6 IP Benefits You [Graphic] Distributions Distribution of your account balance is made under a form of payment described below, based on the event causing distribution. Termination of Employment If your employment terminates before retirement or disability, your account balance will be distributed to you in a lump sum at termination. Retirement or Disability Normal Form Under the normal form, if your employment terminates due to retirement at or after age 55 with 10 years of service or due to disability, your account balance will be distributed to you in a lump sum in January following your retirement. Optional Form If you do not want your distribution paid in the normal form, you may make a choice prior to your retirement to have your distribution paid in an optional form. Under this choice, you may defer receipt of your account balance to a designated date beginning any time in the year following retirement and up to age 70 1/2 , and you may choose to receive distribution in either a lump sum or installments over 5 to 20 years. If you elect the optional form, you must forward a completed distribution and deferral form to the savings plan service center prior to your retirement date. How Payments Are Made The value of your account will be determined as soon as practicable after your distribution date. Your distribution will be processed by the end of the month following your termination. Interest and dividends will be credited to your account until the valuation date. All distributions will be made in cash. Distribution requests will be processed as soon as practicable following the receipt of the distribution form. In general, distributions are processed on a monthly cycle, with interest and dividend equivalents credited to your account to the payment date. A detailed schedule of distribution processing cycles is available from the savings plan service center. Distributions Upon Death If you die while actively employed or before distribution of your account balance, the value of your account will be paid to your designated beneficiary(ies) in a lump sum as soon as practicable following your death. If you die while receiving installment payments, the remaining installment payments will continue to your designated beneficiary(ies). The plan administrator, in its discretion, may choose to pay the balance in a lump sum to your beneficiary(ies). Other Information Nonassignability of Interest Apart from your right to name one or more beneficiaries to receive any distribution payable in the event of your death, federal law requires that no right to payment under the Plan can be subject to sale, transfer, pledge, assignment, attachment or encumbrance of any kind. If You Are Transferred If you are transferred to a subsidiary or group that is not covered by the Plan and, as a result, are no longer eligible to make deferrals under the Plan, your account will remain in the Plan until distributed. However, you will not be able to make contributions under the Plan, and the company will not credit any additional company matching contributions to your account. 7 IP Benefits You [Graphic] Federal Income Tax Information While any amount you choose to defer as USP contributions will reduce the amount of your current reportable total pay for federal income and certain state and local income tax purposes, your deferral will not reduce the amount of your reportable total pay which is subject to Social Security and Medicare taxes. All amounts deferred (and company matching contributions as they "vest") are included in your Social Security and Medicare wage bases subject to the statutory annual Social Security maximum wage base (the Medicare wage base is unlimited). When you receive a payment from the Plan, you will be responsible for paying any income taxes that apply in the year you receive your payment. The total amount of your distribution (including withdrawals) will be reflected on your Form W-2 from the company and will be taxable as additional compensation in the year of payment. Federal and state laws require that applicable federal, state and local income taxes be withheld from your distribution. The plan administrator will provide you with a distribution statement showing the details. Because the Plan is an unfunded, non-qualified deferred compensation plan, the rollover rules are not available. General Administration of the Plan Plan Sponsor The Plan described in this summary plan description is sponsored by: International Paper Company Two Manhattanville Road Purchase, NY 10577 (914) 397-1500 Plan Administrator The administration of the Plan is the responsibility of the plan administrator, who is: Senior Vice President - Human Resources International Paper c/o Employee Benefits Department 6400 Poplar Avenue Memphis, TN 38197 (901) 763-6000 As an officer of the company, the plan administrator serves at the discretion of the company's board of directors. No charge is made to the employee accounts under this Plan for compensation of the plan administrator. Amendment and Termination The company reserves the right to amend, suspend or terminate the Unfunded Savings Plan at any time, provided that any such action shall not adversely affect any plan participant's right to receive payment, pursuant to the terms of this Plan, of any unpaid vested amounts. 8 IP Benefits You [Graphic] ERISA Classification The Plan is an unfunded employee pension benefit savings plan which is maintained by the company "for the purpose of providing deferred compensation for a select group of management or highly compensated employees." The Plan is, therefore, exempt from Parts 2, 3 and 4 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA) which pertains to participation and vesting, funding and fiduciary responsibilities. Pursuant to regulations issued by the Secretary of Labor in 29 CFR 2520.104-23, the Plan is exempted from the reporting and disclosure provisions of Part 1 of Subtitle B of Title I of ERISA, except for providing plan documents to the Secretary of Labor upon request. Title IV of ERISA relating to plan termination insurance does not apply to the Plan, and insurance benefits of the type specified in Title IV of ERISA will not be extended to plan participants or their beneficiaries. Available Information The company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act) and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the Commission). Copies of such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; the Commission's regional offices at 26 Federal Plaza, Room 1102, New York, New York 10278; and 219 S. Dearborn Street, Chicago, Illinois 60604. Copies of such material also can be obtained at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005, where the shares of the company's common stock are listed. The company hereby undertakes to provide without charge to each participant, upon written or oral request of such person to the company at the address set forth below, a copy of its most recent annual report to shareholders, as well as any and all information that has been incorporated by reference in the Registration Statement of which this document is a part, excluding exhibits to the information incorporated by reference unless such exhibits are specifically incorporated herein. Additional updating information with respect to the securities and the Plan covered herein may be provided in the future by means of updates to this document. Such written or oral requests should be directed to: International Paper Company Two Manhattanville Road Purchase, NY 10577 Attn: Investor Relations Department (914) 397-1500 The company hereby incorporates by reference into this document the following documents filed with the Commission: o The company's Annual Report on Form 10-K; o All other reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act by the company and by the Plan; and o The description of the common stock of the company contained in the Registration Statements filed pursuant to Section 12 of the Exchange Act relating thereto, including any amendment or report filed for the purpose of updating such description. All documents filed by the company pursuant to Section 13, 14 or 15(d) of the Exchange Act after the date of this document and before the termination of this offering of the company's common stock will be deemed to be incorporated by reference into this document and to be part hereof from the date of filing of such documents. 9 IP Benefits You [Graphic] Unfunded Savings Plan Appendix
Basic Supplemental Company Contributions Contributions Matching Organization (Percent of Pay) (Percent of Pay) Contributions - -------------------------------------------------------------------------------------------- International Paper 1 - 8% 1 - 77% 70% of basic up to 4%; locations with SIP 50% of basic up to next 4% - -------------------------------------------------------------------------------------------- xpedx 1 - 7.5% .5 - 77.5% 50% of basic - --------------------------------------------------------------------------------------------
SAL_USPA-2000 Printed September 1999 INTERNATIONAL [LOGO] PAPER September 1999 International Paper is an equal opportunity employer. M/F/D/V USP_SAL99 Printed on Regalia'r' by Hammermill, Olde Porcelain, 80 lb., Text, Smooth. EX-10 5 0005.txt EXHIBIT 10.12 INTERNATIONAL PAPER COMPANY PENSION RESTORATION PLAN FOR SALARIED EMPLOYEES Effective April 1, 1991 As Amended Effective January 1, 1993 PREAMBLE The purpose of this International Paper Company Pension Restoration Plan for Salaried Employees (the "Plan") is to provide for the payment of supplemental pension benefits, out of the general assets of International Paper Company (the "Company"), to an eligible salaried employee in situations where such employee's full accrued pension benefits cannot be paid out of the trust established under the tax-qualified retirement plan or plans sponsored by the Company or any of its subsidiaries in which such employee participates because of statutory limitations imposed by Internal Revenue Code Sections 415 and 401(a)(17) and other statutes and regulations. The portion of this unfunded plan which provides benefits solely as a result of the impact of Internal Revenue Code Section 415 is an "excess benefit plan" as defined in Section 3 (36) of the Employee Retirement Income Security Act of 1974, as amended (and related provisions of the Internal Revenue Code of 1986, as amended). The Plan was authorized, effective April 1, 1991, by a resolution of the Board of Directors of the Company dated April 9, 1991. Effective January 1, 1993, the Plan was amended to recognize compensation deferred under a non-qualified savings plan of the Company or its United States subsidiaries and awards deferred under the Company's Management Incentive Plan. ARTICLE I DEFINITIONS 1.01 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 1.02 "Company" shall mean International Paper Company and any successor by merger, purchase or otherwise. 1.03. "Effective Date" shall mean April 1, 1991. 1.04. "Eligible Participant" shall mean any salaried employee of the Company or any of its United States subsidiaries or affiliated business entities who is a participant in a Pension Plan on or after the Effective Date and whose pension benefits determined on the basis of the provisions of such Pension Plan (without regard to the limitations of the Code) would exceed the Maximum Benefit permitted under Sections 415 and 401(a)(17) and other provisions of the Code, and who is not eligible for a comparable statutory limitation excess benefit under any other plan sponsored by the Company or its subsidiaries. 1.05 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.06 "Maximum Benefit" shall mean the monthly equivalent of the maximum benefit permitted by the Code to be paid to an Eligible Participant by a Pension Plan under Sections 415, 401(a)(17) and other provisions of the Code. 1.07 "Pension Plan" shall mean the Retirement Plan of International Paper Company as amended, and any other defined benefit tax-qualified retirement plan for salaried employees sponsored by the Company or any of its United States subsidiaries or affiliated business entities in which an Eligible Participant is a participant. 1.08 "Plan" shall mean the International Paper Company Pension Restoration Plan for Salaried Employees as from time to time amended or restated, a portion of which shall be an unfunded excess benefit plan as defined in ERISA Section 3(36). 1.09 "Unrestricted Benefit" shall mean the maximum monthly Normal or Early Retirement Benefit (whichever is applicable), determined on the basis of the provisions of a Pension Plan without regard to the limitations imposed under Sections 415 and 401(a)(17) of the Code or other statutory limitations, and by including in the Pension Plan's definition of "Compensation" any compensation deferred under a non-qualified savings plan sponsored by the Company or its United States subsidiaries and awards deferred under the Company's Management Incentive Plan, in the calendar year of deferral. ARTICLE II BENEFITS UNDER THIS PLAN 2.01 Normal Retirement Benefit: Upon the Normal Retirement of an Eligible Participant (as provided under the applicable Pension Plan), such Eligible Participant shall be entitled to a monthly benefit from this Plan equal to the amount of his or her Unrestricted Benefit less the Maximum Benefit. 2.02 Early Retirement Benefit: Upon the Early Retirement of an Eligible Participant (as provided under the applicable Pension Plan), such Eligible Participant shall be entitled to a monthly benefit from this Plan equal to his or her Unrestricted Benefit less the Maximum Benefit. 2.03 Surviving Spouse's Benefit: In the event an Eligible Participant dies before benefit payments commence under Section 2.05 below, and his or her spouse is eligible for a surviving spouse's benefit under an applicable Pension Plan, the Eligible Participant's surviving spouse shall be entitled to a monthly benefit from this Plan equal to the surviving spouse's benefit determined in accordance with the provisions of the applicable Pension Plan (without regard to the limitations under the Code) less the Maximum Benefit. 2.04 Coordination of Benefit Payments: In the event an Eligible Participant or surviving spouse entitled to a benefit under this Plan is also entitled to a benefit under the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers, the benefit determined under Section 2.01, 2.02 or 2.03 above shall be reduced by the amount of such other plan's benefit, determined on the same basis as this Plan's benefit. 2.05 Forms of Benefit Payment: The forms of benefit payment available under this Plan (including joint and survivor annuity benefit options) shall be the same as under the provisions of the applicable Pension Plan. Any election made by an Eligible Participant as to form of benefit payment under the provisions of the Pension Plan shall be deemed also to have been made with respect to the benefit payable under this Plan, and any early retirement or actuarial reduction factors applied to the benefit elected under the Pension Plan shall be similarly applied to the benefit payable under this Plan. Benefits payable under this Article II shall commence at the same time benefits payable under the applicable Pension Plan commence. 2.06 Benefit Not Assignable: An Eligible Participant's rights under this Plan shall not be subject to assignment, encumbrance, garnishment, attachment or charge (whether voluntary or involuntary), and, in the event of any such assignment, action or proceeding, any benefit otherwise payable under this Plan shall be deemed terminated or forfeited. ARTICLE III GENERAL PROVISIONS 3.01 Administration of Plan: The Plan Administrator of this Plan shall be the Vice President - Human Resources of the Company. This Plan shall be administered by the Plan Administrator who shall have discretion to interpret the provisions of the Plan, to determine the amount of benefits payable under the Plan, and to decide any questions or disputes arising under the Plan. All such decisions made by the Plan Administrator shall be final and binding on the Company, its subsidiaries, the Eligible Participants and their heirs or beneficiaries. 3.02 Amendment or Termination of Plan: The Company reserves the right to amend, modify or terminate this Plan at any time by authority of its Board of Directors, provided that such action shall not adversely affect any Eligible Participant's rights to a benefit which has become payable pursuant to the provisions of this Plan prior to such action. 3.03 Termination of Employment: Nothing contained in this Plan shall be construed as a contract of employment between the Company or a subsidiary and any Eligible Participant, or as a right of any Eligible Participant to be continued in employment of the Company or a subsidiary, or as a limitation on the right of the Company or a subsidiary to discharge any of its employees, with or without cause. EX-10 6 0006.txt EXHIBIT 10.13 (Exhibit 10.13) INTERNATIONAL PAPER COMPANY UNFUNDED SUPPLEMENTAL RETIREMENT PLAN FOR SENIOR MANAGERS As Amended Effective December 1, 1993 PREAMBLE This Plan was originally established as the International Paper Company Unfunded Excess-Benefit Plan for Senior Managers and became effective as of November 1, 1983, pursuant to a resolution of the Board of Directors of International Paper Company ("the Company") dated October 11, 1983. Effective as of November 12, 1985, the name of the Plan was changed to the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers, and additional benefit provisions were added to the Plan as set forth herein pursuant to a resolution of the Board of Directors of the Company dated November 12, 1985. The Plan was amended effective as of April 1, 1991, pursuant to a resolution of the Board of Directors of the Company dated April 9, 1991, to delete the statutory limitation excess benefit provision from this Plan, because the Company has established a separate plan to provide statutory limitation excess benefits to salaried employees of the Company and its United States subsidiaries. The Plan was amended effective September 8, 1992, pursuant to a resolution of the Board of Directors of the Company dated September 8, 1992, to change the calculation of the Supplemental Benefit payable under the Plan. The Plan was amended effective July 1, 1993, pursuant to a resolution of the Board of Directors of the Company dated July 13, 1993, to change the definition of Compensation under the Plan. The Plan was amended effective December 1, 1993, pursuant to a resolution of the Board of Directors of the Company dated December 14, 1993, to specify the optional forms of benefit payment and death benefits. 1. Name and Purpose. This Plan shall be known as the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers (the "Plan"). The Plan is an unfunded plan maintained by the Company for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of the exemption provisions of Parts 2, 3 and 4 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended (and related regulations and provisions of the Internal Revenue Code of 1986, as amended). This Plan is maintained for the purpose of providing for the payment of a supplemental retirement benefit to an Eligible Employee which is in addition to the amount of the retirement benefits payable to such person under the standard 1.67% benefit formula provisions for salaried employees of the Retirement Plan of International Paper Company (the "Retirement Plan") and any statutory limitation excess pension benefits payable to such person under any other plan maintained by the Company or its subsidiaries. The Supplemental Benefit 1 provided under this Plan becomes effective immediately and is not dependent upon having a vested pension benefit under the Retirement Plan. 2. Funding of Benefits. The benefits payable under this Plan will be paid from the Company's general assets as payments become due under the Plan, and will not be funded in advance through an IRS qualified trust arrangement or through insurance annuity contracts. From time to time the Company may arrange for insurance annuity contracts on the lives of Eligible Employees (the proceeds of which are payable to the Company) in order to insure the Company for part or all of the payments which the Company will make under the Plan. All Eligible Employees participating in the Plan agree to authorize the Company to purchase such insurance contracts. Eligible Employees participating in the Plan (and their beneficiaries) will not have any beneficial interest in such insurance contracts or in the proceeds of such insurance contracts. With respect to claims for benefits under the Plan, Eligible Employees and their beneficiaries shall be general unsecured creditors of the Company. 3. Eligible Employees. The persons who are eligible to receive benefits under this Plan ("Eligible Employees") are persons who are salaried employees of the Company and its subsidiaries on or after the effective date of this Plan who are designated by the Chief Executive Officer of the Company as eligible to participate in this Plan and who are also participants in the Retirement Plan. All of the terms and conditions of this Plan shall be binding upon any surviving spouse, beneficiaries, executor, administrator, heirs, or successors of an Eligible Employee. 4. Amount and Time of Payment of Supplemental Benefit. The amount of the monthly supplemental retirement benefit payable to an Eligible Employee under this Plan (the "Supplemental Benefit") is an amount (in the form of a monthly benefit payable as a single-life annuity on an unreduced basis starting at age 62) determined as set forth below: (A) Calculation of the Amount of the Supplemental Benefit. The Supplemental Benefit is calculated in the manner set forth for determining an "Accrued Benefit" under the standard 1.67% salaried benefit formula of the Retirement Plan, using the terms "Compensation", "Benefit Service" and "Primary Social Security Benefit" as such terms are defined in the Retirement Plan, except that the term "Compensation" shall also include, in the calendar year of deferral, compensation deferred under a non-qualified plan sponsored by the Company and awards deferred under the Company's Management Incentive Plan, except that the term "Benefit Service" may also include service with an acquired company, to the extent granted by the Plan Administrator, and except that the formula shall be the greater of Paragraph (i) or (ii) below. (i) An amount equal to the lesser of (a) or (b), reduced by (c) below: 2 (a) 3.25% of the Eligible Employee's Compensation for the calendar year in which the Eligible Employee had the highest Compensation during the three consecutive calendar years prior to the determination date multiplied by the number of years of Benefit Service. (b) Fifty percent (50%) of the Eligible Employee's Compensation for the calendar year in which the Eligible Employee had the highest Compensation during the three consecutive calendar years prior to the determination date. (c) The product of: (1) 3.25% of the Eligible Employee's Primary Social Security Benefit multiplied by the number of years of Benefit Service projected to age 65 subject to a maximum of 50% of the Eligible Employee's Primary Social Security Benefit, and (2) The ratio of years of Benefit Service at the determination date to Benefit Service projected to age 65. (ii) Twenty-five percent (25%) of the Eligible Employee's Compensation for the calendar year in which the Eligible Employee had the highest Compensation during the three consecutive calendar years prior to the determination date; and the amount calculated under the formula set forth above shall be reduced by all of the following amounts: (i) the actual amount of the Eligible Employee's vested benefit under the Retirement Plan or any other qualified pension benefit plan maintained by the Company or its subsidiaries (converted to a single life annuity); and (ii) the single-life annuity actuarial equivalent of any retirement benefit paid or payable directly from the Company or any of its subsidiaries under a similar contractual-type arrangement (but not payments made pursuant to the International Paper Company Salaried Savings Plan or any other defined contribution or non-qualified savings plan). (B) Time of Payment of the Supplemental Benefit. As specified in Section 5 below, payment of the Supplemental Benefit may commence on the first day of any month on or after an Eligible Employee's retirement following attainment of age 62. Payment of the Supplemental Benefit may commence prior to age 62 with the consent of the Management Development and Compensation Committee of the Board of Directors of the Company. 3 5. Forms of Benefit Payment. (A) The forms of benefit payment available under this Plan (including joint and survivor annuity benefit options) shall be the same as under the provisions of the Retirement Plan. Any election as to form of benefit payment and time of benefit payment made by an Eligible Employee under the provisions of the Retirement Plan shall be deemed also to have been made with respect to the Supplemental Benefit payable under this Plan, and any early retirement or actuarial reduction factors applied to the benefit elected under the Retirement Plan shall be similarly applied to the Supplemental Benefit. Payment of the Supplemental Benefit shall commence on January 1 of the year following an Eligible Employee's retirement date, provided that, solely at the Plan Administrator's discretion and direction, payment of the Supplemental Benefit may commence on a date beginning on or after the Eligible Employee's retirement date. (B) Notwithstanding the foregoing, with the consent of the Plan Administrator, an Eligible Employee may elect payment of the Supplemental Benefit in the form of a lump-sum distribution or annual installments payable over a designated period ranging from two to 15 years. An Eligible Employee may make this election at any time beginning with the calendar year in which he or she attains age 61, but must make an election before his or her retirement date. Payment of the lump-sum distribution or installments so elected shall commence on January 1 of the year following his or her retirement date. This election may be made only once during the applicable election period and is irrevocable, except as provided in Subsection (D) below. Prior to the commencement of benefit payment under this election, a portion of the supplemental Benefit may be paid to the Eligible Employee in accordance with Subsection (A) above, solely at the Plan Administrator's discretion and direction, on a single life annuity basis with no reductions, beginning on or after the Eligible Employee's retirement date. (C) Both the lump-sum distribution and installment payment amounts under Subsection (B) above shall be computed on a cost neutral basis to the Company, using a discount rate as recommended by the Company's Chief Financial Officer with the advice of the Company's actuary. An Eligible Employee has the choice of having the discount rate determined at the time of election or on the December 31 preceding the January 1 payment commencement date. The availability of the lump-sum distribution and installment forms of payment shall be subject to the Company's financial requirements. (D) An Eligible Employee's election under Subsection (B) above may be revoked, with the consent of the Plan Administrator, in the event such Eligible Employee suffers a significant life change following such election, but prior to his or her retirement date. The marriage or divorce of an Eligible Employee or death of an Eligible Employee's spouse shall constitute a significant life change. Upon revocation of the election under Subsection (B) above, the Eligible Employee shall make a new election, prior to his or her retirement date, as to payment of the Supplemental Benefit in a form available under Subsection (A) or (B) above. 4 (E) In the event an Eligible Employee dies on or after attainment of age 62, but prior to his or her retirement date, the Supplemental Benefit shall be payable to his or her surviving spouse, if any, in the form of a pre-retirement surviving spouse's benefit, based on the provision of the Retirement Plan. Upon the recommendation of the Management Development and Compensation Committee, a pre-retirement surviving spouse's benefit may be provided in the event of an Eligible Employee's death prior to age 62. (F) In the event an Eligible Employee dies on or after his or her retirement date, but prior to the January 1 on which an annuity under Subsection (A) is to commence, the Eligible Employee's named annuitant or beneficiary, if any shall receive the payments due under the annuity option elected. In the event an Eligible Employee dies on or after his or her retirement date but prior to the January 1 on which a lump-sum distribution elected under Subsection (B) is to be paid, the Eligible Employee's beneficiary shall be paid the value of the Supplemental Benefit which was to have been paid on such January 1, in a lump-sum. In the event an Eligible Employee who has elected installment payments under Subsection (B) above dies on or after his or her retirement date but prior to having received the full number of installment payments, the Eligible Employee's beneficiary shall receive the remaining installment payments, provided that the Plan Administrator has the discretion to convert the remaining installment payments into a lump-sum payable to the beneficiary. The provisions of this Subsection (F) shall apply regardless of whether, at the direction of the Plan Administrator as provided in Subsections (A) and (B) above, a portion of the Supplemental Benefit was paid to the Eligible Employee during the calendar year which includes his or her retirement date. (G) In the event an Eligible Employee who has made an election under Subsection (B) above with respect to the payment of his or her Supplemental Benefit under this Plan is also entitled to a benefit under the International Paper Company Pension Restoration Plan for Salaried Employees, the benefit under such other plan shall be paid in the same form as that elected under Subsection (B) above for benefits payable under this Plan. At the time benefit payment is to commence, the benefit payable under the International Paper Company Pension Restoration Plan for Salaried Employees shall be transferred to the Plan for Payment. 6. Benefit Not Assignable. An Eligible Employee's rights under this Plan shall not be subject to assignment, encumbrance, garnishment, attachment or charge, whether voluntary or involuntary, and in the event of any such assignment, action or proceeding, any benefit otherwise payable under this Plan shall be deemed terminated or forfeited. 7. Termination of Benefit/Repayment of Benefit. 5 (A) Eligibility of a person to participate in this Plan, or to receive payment of any benefit under this Plan, shall be subject to being terminated by the Management Development and Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"), in the Committee's sole discretion, if the person: (i) shall, without the consent of the Committee or without "good reason" as defined below, voluntarily terminate employment with the Company (or retire from the Company) prior to attaining age 62; for purposes of this subparagraph "good reason" for voluntary resignation or retirement before age 62 shall mean any of the following: (a) the assignment of any duties inconsistent with the person's status as a senior manager of the Company or a substantial alteration in the nature or status of the person's responsibilities; (b) a reduction in the person's base salary (except for across-the-board salary reductions similarly affecting all managers of the Company); (c) the failure of the Company to continue in effect any vacation plan or any material compensation plan in which the person participates, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the person's participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of participation, relative to other participants; (d) the failure by the Company, except as necessary to comply with applicable laws, to continue to provide the person with benefits substantially similar to those enjoyed under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the person previously participated, or the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the person of any material fringe benefit previously enjoyed by the person; (ii) shall, without the consent of the Committee, become a proprietor, director, officer, partner, employee or consultant of, or otherwise become connected with, any business which is in competition with the Company or a subsidiary of the Company (other than as a shareholder with a non-substantial interest in any such business); or (iii) shall have been involuntarily terminated by the Company for "good cause" (as defined below), or shall have been found by the Committee to have engaged in any action inimical to the interests of the Company, dishonesty or other serious misconduct in connection with the person's employment 6 by the Company or a subsidiary; for purposes of this subparagraph "good cause" for involuntary termination shall mean termination upon (a) the willful and continued failure substantially to perform properly assigned duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand is delivered by the Board which specifically identifies the manner in which the Board believes that properly assigned duties have not been substantially performed, or (b) the willful engaging in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; for purposes of this subsection, no act, or failure to act, shall be deemed "willful" unless done (or omitted to be done) not in good faith and without reasonable belief that the action or omission was in the best interest of the Company; notwithstanding the foregoing, a person shall not be deemed to have been terminated for "good cause" unless and until there shall have been delivered a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board (after reasonable notice to the person and an opportunity, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board the person was guilty of conduct set forth in clauses (a) or (b) above and specifying the particulars thereof in detail. (B) In the event an Eligible Employee who has retired and received payment of the Supplemental Benefit in the form of a lump-sum distribution or installments enters into competition with the Company or a subsidiary of the Company, as set forth in paragraph (A) (ii) above, he or she shall repay to the Company a portion of the Supplemental Benefit received. The amount which shall be repaid is the difference between the amount of Supplemental Benefit the Eligible Employee has received from the Company by the time the Committee notifies the Eligible Employee of its objection to such competition and the amount the eligible Employee would have received by the time of such notification had the Supplemental Benefit been paid on a single-life annuity basis, plus reasonable interest as recommended by the Company's Chief Financial Officer. 8. Amendment or Termination of Plan. The Company reserves the right to amend, modify or terminate this Plan at any time by action of its Board of Directors, provided that such action shall not adversely affect any Eligible Employee's right to a benefit which accrued pursuant to the provisions of this Plan prior to such action. 9. Administration of Plan. The Senior Vice President of Human Resources of the Company shall be the Plan Administrator of this Plan. The Plan Administrator shall have discretion to interpret the Plan, to determine eligibility and amounts of benefits under this Plan and to decide any questions or disputes under this Plan (except for any necessary decisions by the Board of Directors of the Company or by the Management Development and Compensation 7 Committee of the Board pursuant to Section 7 of the Plan). All decisions which are made by the Board of Directors of the Company or by the Management Development and Compensation Committee of the Board or by the Plan Administrator with respect to the Plan shall be final and binding on the Company and the Eligible Employees (and their heirs or beneficiaries). 10. Change of Control of International Paper Company. (A) If a "Change of Control" of the Company occurs (as defined below), the minimum amount under the formula set forth in Section 4(A)(iv) above shall be increased from 25% to 50% of the Eligible Employee's Compensation for the calendar year in which the Eligible Employee had the highest Compensation during the three consecutive calendar years prior to the determination date, and the Eligible Employee's Supplemental Benefit under this Plan shall become vested and nonforfeitable, and shall not be subject to termination pursuant to any of the provisions of Section 7 of this Plan. (B) For purposes of this Section 10, the term "Change of Control" of the Company shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14a of Regulation 14A promulgated under the Securities Exchange Act of 1934 as amended ("Exchange Act"); provided that without limitation, such change of control shall be deemed to have occurred if (i) any "person" as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act (other than employee benefit plans sponsored by the Company) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company, cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election, by the Company's shareowners of each new director was approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of the period. 8 EX-11 7 0007.txt EXHIBIT 11 (Exhibit 11) INTERNATIONAL PAPER COMPANY STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (In millions, except per share amounts)
Year to Date December 31 ------------------------ 2000 1999 1998 ---- ---- ---- Net earnings $142 $183 $247 Effect of dilutive securities Preferred securities of subsidiary trust ---- ---- ---- Net earnings assuming dilution $142 $183 $247 ---- ---- ---- ---- ---- ---- Average common shares outstanding 449.6 413.0 411.0 Effect of dilutive securities Long-term incentive plan deferred compensation Stock options 0.4 3.1 3.2 Preferred securities of subsidiary trust Average common shares outstanding - ---- ---- ---- assuming dilution 450.0 416.1 414.2 ----- ----- ----- ----- ----- ----- Earnings per common share $0.32 $0.44 $0.60 ----- ----- ----- ----- ----- ----- Earnings per common share - assuming dilution $0.32 $0.44 $0.60 ----- ----- ----- ----- ----- -----
Note: if an amount does not appear in the above table, the security was antidilutive for the period presented. EX-12 8 0008.txt EXHIBIT 12 (Exhibit 12) INTERNATIONAL PAPER COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in millions) (Unaudited)
For the Years Ended December 31 ------------------------------- TITLE 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- A) Earnings before income taxes, minority interest and extraordinary items $2,742.0 $ 939.0 $ 143.0 $ 429.0 $ 448.0 $ 723.0 B) Minority interest expense, net of taxes (166.0) (180.0) (140.0) (87.0) (163.0) (238.0) C) Fixed charges excluding capitalized interest 740.3 802.1 826.6 866.7 820.9 1,151.5 D) Amortization of previously capitalized interest 29.6 34.2 37.0 38.8 17.0 23.5 E) Equity in undistributed earnings of affiliates (94.5) 6.2 (40.4) 23.7 (41.6) 5.6 --------- --------- ------- --------- --------- -------- F) Earnings before income taxes, extraordinary items and fixed charges $3,251.4 $1,601.5 $ 826.2 $1,271.2 $1,081.3 $1,665.6 --------- --------- ------- --------- --------- -------- FIXED CHARGES G) Interest and amortization of debt expense $ 664.9 $ 699.5 $ 720.0 $ 716.9 $ 611.5 $ 938.1 H) Interest factor attributable to rentals 64.8 79.0 83.0 80.7 76.3 72.8 I) Preferred dividends of subsidiary 10.6 23.6 23.6 69.1 133.1 140.6 J) Capitalized interest 66.9 71.2 71.6 53.4 29.3 25.2 --------- --------- ------- --------- --------- -------- K) Total fixed charges $ 807.2 $ 873.3 $ 898.2 $ 920.1 $ 850.2 $1,176.7 --------- --------- ------- --------- --------- -------- L) Ratio of earnings to fixed charges 4.03 1.83 1.38 1.27 1.42 M) Deficiency in earnings necessary to cover fixed charges $(72.0) -------
EX-13 9 0009.txt EXHIBIT 13 International Paper [Logo] 20OO ANNUAL REPORT Financial Highlights International Paper
- -------------------------------------------------------------------------------------------------- Dollar amounts and shares in millions, except per share amounts 2000 1999 - -------------------------------------------------------------------------------------------------- Financial Summary Net Sales $28,180 $24,573 Operating Profit 2,712(a) 1,808(a) Earnings Before Income Taxes, Minority Interest and Extraordinary Items 723(b) 448(d) Net Earnings 142(b,c) 183(d,e) Total Assets 42,109 30,268 Common Shareholders' Equity 12,034 10,304 Return on Investment Before Extraordinary Items 3.3%(b) 2.6%(d) Return on Investment Before Special and Extraordinary Items 5.3% 4.0% Per Share of Common Stock Earnings Before Extraordinary Items $ 0.82(b) $ 0.48(d) Earnings--Assuming Dilution 0.32(b,c) 0.44(d,e) Cash Dividends 1.00 1.01(f) Common Shareholders'Equity 24.85 24.85 Shareholder Profile Shareholders of Record at December 31 39,486 32,881 Shares Outstanding at December 31 484.2 414.6 Average Shares Outstanding 449.6 413.0
(a) See the operating profit table on page 30 for details of operating profit by industry segment. Results of equity investees are not included in operating profit. (b) Includes a charge before taxes and minority interest of $949 million ($589 million after taxes and minority interest) for asset shutdowns of excess internal capacity, cost reduction actions, and additions to existing Masonite legal reserves, a $54 million pre-tax charge ($33 million after taxes) for merger-related expenses and a $34 million pre-tax credit ($21 million after taxes) for the reversals of reserves no longer required. (c) Includes an extraordinary gain of $385 million before taxes and minority interest ($134 million after taxes and minority interest) on the sale of our investment in Scitex and Carter Holt Harvey's sale of its share of COPEC, an extraordinary loss of $460 million before taxes ($310 million after taxes) related to the impairment of our Zanders and Masonite businesses to be sold, an extraordinary pre-tax gain of $368 million ($183 million after taxes and minority interest) related to the sale of Bush Boake Allen, an extraordinary loss of $5 million before taxes and minority interest ($2 million after taxes and minority interest) related to Carter Holt Harvey's sale of its Plastics division, and an extraordinary pre-tax charge of $373 million ($231 million after taxes) related to impairments of our Argentine investments, as well as the Chemical Cellulose pulp business and Fine Papers businesses to be sold. (d) Includes a $148 million pre-tax charge ($97 million after taxes) for Union Camp merger-related termination benefits, a $107 million pre-tax charge ($78 million after taxes) for merger-related expenses, a $298 million charge before taxes and minority interest ($180 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $10 million pre-tax charge ($6 million after taxes) to increase existing environmental remediation reserves related to certain former Union Camp facilities, a $30 million pre-tax charge ($18 million after taxes) to increase existing legal reserves and a $36 million pre-tax credit ($27 million after taxes) for the reversals of reserves no longer required. (e) Includes an extraordinary loss of $26 million before taxes ($16 million after taxes) for the extinguishment of high-interest debt that was assumed in the merger with Union Camp. (f) The International Paper dividend was $1.00 per share in 1999. However, dividends on a per share basis were restated to include dividends paid by Union Camp which merged with International Paper during 1999 in a transaction accounted for as a pooling-of-interests. [PHOTO of John Dillon] To International Paper Shareowners I believe this past year at International Paper can best be characterized by our FOCUS. We focused on our three core businesses--Paper, Packaging and Forest Products--further defining and strengthening these businesses. The course for 2000 and beyond was set in mid-1999, when we announced our long-term strategy to investors following our Union Camp acquisition. We said then that International Paper is a company on the move, changing and improving in ways we never have before. We said that we are dedicated to strengthening our businesses and improving shareowner value. Specifically, we made a commitment in 1999 to make strong businesses stronger, shut down excess capacity and achieve non-price improvement. Today, as we look back on the year 2000, it's clear that we did what we said we would do. First, we narrowed the portfolio of International Paper to paper, packaging, and forest products, and, in turn, achieved the necessary focus to win in these core businesses. The Champion International acquisition in mid-2000 was a key component in providing this focus and strengthening of our businesses. Second, in October we took aggressive and bold steps to improve our returns through a rationalization and realignment program, which addresses our commitment to improve competitiveness. Third, we not only proceeded with a $3 billion divestiture program, we increased the target to $5 billion, including timberland sales. Through February of this year, we have made major progress toward our non-price improvement target. In fact, $.66 per share, or 31%, of our 2000 EPS before special and extraordinary items came from results in this area. Acquisitions - -------------------------------------------------------------------------------- Successful acquisitions during the past few years have provided the platform for focusing on our core businesses. As a consequence of acquiring Federal Paper Board in 1996, we were able to build a world class consumer packaging business. With the addition of Union Camp in 1999, we gained world class assets and a very strong position in uncoated papers and industrial packaging. The Champion International acquisition in mid-2000 significantly strengthened our coated papers position, while also giving us a strategically important printing papers business in Brazil, low-cost U.S. uncoated assets, and the Weldwood business in Canada. Both Union Camp and Champion strengthened 1 xpedx--our distribution business. And all three companies brought major timberlands and important wood products operations. In terms of results, the Union Camp integration continues to progress very well, is ahead of our plan, and is considered a real home run. Our merger with Champion International is also doing very well. This move allowed us to take major actions to bring our cost structure down and significantly sharpen our focus on core businesses. There is a lot more to do and we have a plan to get the results this year. In fact, the Champion merger synergies target has been increased by nearly 20 percent, from $425 million to $500 million. Overall, our focus on core businesses is dramatically different from just a few years ago. In 1997, for example, 78% of our invested capital was directed at the paper, packaging, and forest products businesses. Today, almost 95% of our invested capital is directed to these core businesses. Capacity Rationalization and Realignment - -------------------------------------------------------------------------------- On another positive front, International Paper's capacity rationalization and realignment initiatives are right on schedule. As a result of the Union Camp and Champion acquisitions, we added further uncoated paper capacity to our manufacturing system in the United States. The contribution of these assets allowed us to re-evaluate our manufacturing system, which resulted in some important decisions to rationalize and realign capacity in order to improve our cost position, enrich the customer/product mix, increase production efficiencies, and improve our financial performance. In fourth quarter 2000, we announced that we were taking 1.2 million tons of capacity out of the International Paper system. Our actions removed 18% of our U.S. uncoated papers capacity and 7% of our U.S. market pulp capacity. This was accomplished through an indefinite shutdown of our Mobile, Alabama mill; the staged closure of our Lock Haven, Pennsylvania facility; and the downsizing of the Courtland, Alabama mill. In addition, by closing our Camden, Arkansas facility and realigning our Kraft papers production, we reduced our U.S. containerboard system capacity by 5%. To sum up, the 2000 rationalization and realignment activities are a significant step in improving the competitiveness of the International Paper system for printing papers and containerboard. It takes excess 2 capacity out of our system and allows us to fully concentrate our resources on very competitive facilities. In short, these actions ensure a more profitable company. At International Paper, we believe that we must manage capacity to meet customer demand without building inventory. And we continued to take downtime to keep production in line with demand. International Paper effectively balanced our supply to meet the demands of our customers in 2000, and took about 1.7 million tons of market-related downtime. As we move through 2001, we will continue to manage our system consistent with the orders that we receive from our customers. Divestitures - -------------------------------------------------------------------------------- As with all other activities in 2000 and this year to date, our divestiture program allows for increased focus on our core businesses. The businesses that we sold, and are in the process of selling, are very good businesses--but don't fit with our focused strategy. Originally, we set a goal for asset divestitures of $3 billion, excluding timberlands. In December, after further study, we revised our goal upward to $5 billion in asset divestitures, including timberlands. Non-price Improvements - -------------------------------------------------------------------------------- When we established our non-price improvement program in 1999, we set a target to achieve ROI improvement of 400 basis points, excluding the impact of price, by year-end 2002. Included in this program are non-price initiatives, such as our FAST (Focus, Align, Simplify, and Time) change initiative, other business-specific performance improvement initiatives, and our merger synergies from Union Camp and Champion. In 2000, even with increased raw material and energy costs, we were able to make significant strides toward reaching our target. Indeed, we are about halfway to our target as we enter the second half of the program, and are in an excellent position to continue our efforts and achieve our goal. 2000 Financial Performance - -------------------------------------------------------------------------------- Earnings for the year 2000 were $969 million ($2.16 per share) before special and extraordinary items, compared with 1999 full year net earnings of $551 million ($1.33 per share) before special and extraordinary items. Sales in 2000 of $28.2 billion were up from $24.6 billion 3 in sales for 1999 primarily due to the Champion acquisition. Full year 2000 net earnings after special and extraordinary items were $142 million ($.32 per share). Net earnings for 1999 after special and extraordinary items were $183 million ($.44 per share). Financial Flexibility - -------------------------------------------------------------------------------- International Paper is committed to regaining financial flexibility, using proceeds from the divestiture program and free cash flow to pay down debt. In fact, International Paper has paid down over $1 billion in debt since the Champion acquisition and will continue to use this discipline in 2001. Looking Ahead - -------------------------------------------------------------------------------- As we move forward, I am confident that we are on the right course. The number one goal at International Paper is to improve our profitability. We remain dedicated to improving shareowner value at a rate faster than our competition. I am convinced that the hard decisions we have made, and continue to make, are resulting in a stronger and more profitable International Paper. They are the right decisions for our future. The achievements of last year not only reflect this, but also serve as a catalyst for 2001 as we strive to improve performance. I've said this before, but it bears repeating that I believe we have the most engaged, the most focused--in short, we have the best employees in our industry. The value of their contributions on a daily basis is terrific. As we continue our efforts to build a diverse employee community, it is clear we could not reach our objectives without such a dedicated team of employees. At International Paper, the key word is focus. As we continue to focus on our three core businesses and our success drivers--People, Customers and Operational Excellence--we will continue our march to improve profitability. And in so doing, we will become the world's best paper and forest products company. John T. Dillon John T. Dillon Chairman and Chief Executive Officer March 1, 2001 4 Table of Contents - ----------------------------------------------------------- Management's Discussion and Analysis of Financial 6 Condition and Results of Operations Corporate Overview 6 Description of Industry Segments 7 Industry Segment Results 9 Printing Papers 9 Industrial and Consumer Packaging 10 Distribution 10 Forest Products 11 Chemicals and Petroleum 12 Carter Holt Harvey 12 Liquidity and Capital Resources 13 - ----------------------------------------------------------- Financial Information by Industry Segment 30 and Geographic Area - ----------------------------------------------------------- Report of Management on Financial Statements 32 - ----------------------------------------------------------- Report of Independent Public Accountants 32 - ----------------------------------------------------------- Consolidated Statement of Earnings 33 - ----------------------------------------------------------- Consolidated Balance Sheet 34 - ----------------------------------------------------------- Consolidated Statement of Cash Flows 35 - ----------------------------------------------------------- Consolidated Statement of Common 36 Shareholders' Equity - ----------------------------------------------------------- Notes to Consolidated Financial Statements 37 - ----------------------------------------------------------- Six-Year Financial Summary 62 - ----------------------------------------------------------- Interim Financial Results 64
Management's Discussion and Analysis Corporate Overview - -------------------------------------------------------------------------------- Results of Operations International Paper's 2000 results of operations include Champion International Corporation (Champion), a company acquired on June 20, 2000 in a transaction accounted for as a purchase from the acquisition date. Earnings per share before special and extraordinary items in 2000 were 62% above 1999 and 157% above 1998. Although markets during the first half of 2000 were stable, the U.S. economy slowed at an accelerating rate during the second half of the year, which adversely impacted demand for our products. As a result, through market related down-time, we curtailed production during 2000 by 1.7 million tons throughout our mill system in order to align production with our customer demand. In addition, we are realigning our production to increase efficiency and reduce costs. To this end, we have announced the closures of our Mobile, Alabama, Lock Haven, Pennsylvania, and Camden, Arkansas paper mills and the downsizing of our Courtland, Alabama mill. These actions will permanently remove over 1.2 million tons of capacity per year from our system. Rapidly rising energy costs increased our manufacturing costs and eroded profit margins throughout our North American system. Where possible, mills switched to less costly alternative fuels. However, overall energy costs were more than $200 million above 1999 levels and continue to be high as we enter 2001. During 2000, International Paper increasingly focused on its three core businesses--paper, packaging and forest products. In support of this strategy, we announced a $5 billion divestiture program to exit those businesses that are considered to be non-core or do not meet our return on investment criteria. As of March 1, 2001, we have completed the dispositions of our interests in Bush Boake Allen, Zanders Feinpapiere AG (Zanders), the Argentine packaging assets, the oil and gas assets, the Hamilton, Ohio mill, and the former Champion headquarters building. We have entered into agreements to sell our Masonite business and certain western forestlands, and we are exploring strategic alternatives for, including the possible sales of, the Arizona Chemical, Flexible Packaging, Decorative Products, Fine Papers and Chemical Cellulose pulp businesses, and our hydroelectric assets. Non-strategic timberlands in east Texas are also planned for sale and are included in our $5 billion divestiture target. Approximately $740 million in proceeds were received during 2000 from these divestitures, and we expect to complete most of the remaining dispositions by the end of 2001. Our 2000 net sales of $28.2 billion increased 15% and 18% over 1999 and 1998 net sales of $24.6 billion and $24.0 billion, respectively. The increase was due primarily to the Champion acquisition. Excluding contributions from Champion, 2000 sales increased about 2% over 1999 sales and about 4% over sales reported in 1998. International net sales (including U.S. exports) totaled $7.6 billion, or 27% of total sales in 2000. This was well above sales of $6.9 billion in 1999 and $6.8 billion in 1998. These increases are attributable mainly to contributions from Brazilian and Canadian operations from the Champion acquisition. Export sales from the U.S. increased slightly in 2000 to $1.6 billion compared with $1.5 billion in both 1999 and 1998. Earnings before special and extraordinary items in 2000 improved to $969 million, or $2.16 per share, compared with earnings before special and extraordinary items of $551 million, or $1.33 per share, in 1999, and $345 million, or $.84 per share, in 1998. Special charges after taxes and minority interest totaled $601 million, or $1.34 per share, in 2000, $352 million, or $.85 per share, in 1999, and $98 million, or $.24 per share, in 1998. About 85% of the 2000 special charges related to facility rationalizations. Extraordinary items were a loss of $226 million, or $.50 per share, in 2000, and $16 million, or $.04 per share, in 1999. After special and extraordinary items, net earnings were $142 million, or $.32 per share, in 2000, $183 million, or $.44 per share, in 1999, and $247 million, or $.60 per share, in 1998. Operating profit of $2.7 billion in 2000 was up 50% from the $1.8 billion in 1999, and almost double the 1998 level of $1.4 billion. Profit contributions from Champion accounted for approximately $325 million of the increases compared with both 1999 and 1998. Additionally, $400 million of operating improvement was driven mainly by enhanced sales mix and lower costs resulting from our profit improvement initiatives and merger benefit programs. These improvements were partially offset by sharply rising domestic energy costs, which reduced profits by about $200 million in 2000 compared with 1999. Improved prices increased operating profit by almost $500 million in 2000 compared with 1999. This increase was offset, in part, by a $200 million reduction due to market related downtime. Excluding special and extraordinary items, return on investment was 5.3% in 2000, 33% above the 4.0% in 1999 and 89% above the 2.8% in 1998. The integration of International Paper and Champion is proceeding well. We realized approximately $70 million in merger benefits in the fourth quarter of 2000 and are on schedule to meet our annualized target of $500 million by the end of 2001. We realized our Union Camp integration goal of $425 million in annualized merger benefits by year-end 2000. 6 Management's Discussion and Analysis International Paper is committed to improving return on investment by 400 basis points through non-price improvements by the end of 2002 as compared to the first quarter of 1999. In addition to our announced asset sales, we have budgeted 2001 capital spending at $1.2 billion, down from $1.4 billion in 2000. Description of Industry Segments - -------------------------------------------------------------------------------- Printing Papers International Paper is the world's leading producer of printing and writing papers. These products include uncoated and coated papers. Bristols and market pulp are other major products included in this segment. Uncoated Papers: This business includes office papers for use in desktop printing and copiers, offset paper used in commercial printing, and a variety of papers that are converted by our customers into such products as envelopes, forms and file folders. Our brands include: - -------------------------------------------------------------------------------- U.S. Office Papers Hammermill Great White Commercial Printing Williamsburg Bristols Carolina - -------------------------------------------------------------------------------- Europe Office Papers Reylux Polspeed Ballet - --------------------------------------------------------------------------------
The mills producing uncoated papers are located in the U.S., Scotland, France, Poland, and Russia. These mills have uncoated paper production capacity of 5.7 million tons annually. Coated Papers: Coated papers are used in a variety of printing and publication end uses. Products include coated free sheet, coated groundwood and supercalendered ground-wood papers. These products are used in catalogs, magazines, inserts and commercial printing. International Paper's position in this business was significantly expanded with the acquisition of Champion. Production capacity in the U.S. amounts to 2.2 million tons annually. In January 2001, International Paper sold its interest in Zanders, a German producer of high-quality coated papers. The results of Zanders are included in this segment for 2000. Market Pulp: Market pulp is an intermediate product used by non-integrated paper mills and synthetic fiber makers, and in the production of sanitary products such as diapers. International Paper is a major supplier of market pulp. Products include softwood pulp, both northern and southern, birch, northern and southern hardwood paper pulp as well as fluff pulp. These products are produced in the U.S., Canada, France, Poland and Russia, and are sold around the world. These facilities have annual pulp capacity of about 2.2 million tons. Brazil: Through the Champion acquisition, we have added operations in Brazil, which function through International Paper do Brasil, Ltda. These operations have an annual production capacity of 670,000 tons of coated and uncoated papers. We own or manage 1.5 million acres of forestlands. Industrial and Consumer Packaging Industrial Packaging: With a capacity of about 5 million tons annually, International Paper is the second largest manufacturer of containerboard in the U.S. Nearly one-third of our production is specialty grades, such as PineLiner, SunLiner, Polarboard, Coastliner, BriteTop and Spra White. About 60% of our production is converted into corrugated boxes and other packaging by our 53 U.S. container plants. In Europe, our operations include one recycled fiber mill in France and 23 container plants in France, Ireland, Italy, Spain and the United Kingdom. Our global presence also includes operations in Puerto Rico, Chile, Turkey, and China. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives. We also have the capacity to produce over 600,000 tons of kraft paper each year for use in multiwall and retail bags. Consumer Packaging: With annual production capacity of 2 million tons, International Paper is the world's largest producer of bleached packaging board. Our Everest and Starcote brands are used in packaging applications for juice, milk, food, cosmetics, pharmaceuticals, computer software and tobacco products. Approximately 40% of our bleached board production is converted into packaging products in our own plants. Our Beverage Packaging business has 17 plants worldwide offering complete packaging systems, from paper to filling machines, using fresh and aseptic technologies including Tru-Taste brand barrier board technology for premium long-life juices. Shorewood Packaging Corporation (Shorewood), acquired in March 2000, operates 20 plants worldwide, producing packaging with high-impact graphics for a variety of consumer markets, including tobacco, cosmetics and home entertainment. The Foodservice business offers cups, lids, cartons, bags, containers, beverage carriers, trays and plates from seven domestic plants and through six international joint ventures. Industrial Papers: We produce 370,000 tons of specialty industrial papers annually used in applications such as pressure-sensitive labels, food and industrial packaging, industrial sealants and tapes and consumer hygiene products. 7 Management's Discussion and Analysis Distribution Through xpedx, our North American merchant distribution business, we supply industry wholesalers and end users with a vast array of printing, packaging, graphic arts, maintenance and industrial products. xpedx operates over 116 warehouses, 138 sales offices and 139 retail stores in the U.S. and Mexico. Overseas, Papeteries de France, Scaldia in the Netherlands, and Impap in Poland serve European accounts. About 22% of our worldwide distribution sales are products manufactured by International Paper's own facilities. Forest Products Forest Resources: International Paper owns or manages about 12 million acres of forestlands in the U.S., mostly in the South. About 26% of our wood requirements in 2000 were supplied by these forestlands. Wood Products: International Paper owns and operates 38 U.S. plants producing southern pine lumber, oriented strand board (OSB), plywood and engineered wood products. The majority of these plants are located in the southern U.S. near our forestlands. We can produce up to 2.8 billion board feet of lumber, 1.8 billion square feet of plywood and 950 million square feet of OSB annually. Canadian Wood Products: Weldwood of Canada Limited produces about 1.1 billion board feet of lumber and 410 million square feet of plywood annually. We have, through licenses and forest management agreements, harvesting rights on government-owned timberlands in Canada. Masonite: From eight locations in North America, Europe and Korea, Masonite manufactures and markets CraftMaster door facings and other molded products for residential and commercial construction, as well as a broad line of hardboard exterior siding, industrial hardboard and a wide range of softboard products for the home and office. Our worldwide capacity for door facings is approximately 1.2 billion square feet annually. Decorative Products: We produce high- and low-pressure laminates, particleboard and graphic arts products from 13 facilities. Our customers include residential and commercial construction, furniture, store fixtures and graphic arts businesses as well as customers with specialty niche applications. Chemicals and Petroleum Chemicals: Arizona Chemical is a leading processor of crude tall oil and crude sulfate turpentine, natural by-products of the papermaking process. Products also include specialty resins used in adhesives and inks made at 15 plants in the U.S. and Europe. In addition, we produce chemical specialty pulp, primarily utilized in cigarette filters and fabrics. Bush Boake Allen: International Paper sold its 68.2% interest in Bush Boake Allen on November 8, 2000. During our ownership, Bush Boake Allen, which conducted operations on six continents and had locations in 39 countries, supplied flavors and fragrances for use in foods, beverages, cosmetics and toiletries. Petroleum: In January 2001, International Paper conveyed its oil and gas properties and royalty interests to a third party. We have retained management of other mineral rights on company-owned and leased lands. During 2000, our petroleum business managed mineral rights and explored and developed oil and gas reserves, generally by establishing partnerships with other independent oil and gas producing companies. Carter Holt Harvey Carter Holt Harvey is approximately 50.4% owned by International Paper. It is one of the largest forest products companies in the Southern Hemisphere, with operations mainly in New Zealand and Australia. The Australasian region accounts for approximately 84% of its sales. Asian countries, particularly Japan, Korea and China, are important markets for its logs, pulp and linerboard. Carter Holt Harvey's forest operations include ownership of 820,000 productive acres of predominantly sustainably managed radiata pine plantations located in New Zealand, currently yielding 7.4 million tons of logs annually. This yield is expected to increase to over 7.9 million tons by 2002. About 50% of the harvest is processed through Carter Holt Harvey's wood products and pulp and paper businesses. Their access to one of the largest low-cost softwood fiber bases in the Southern Hemisphere is a key strength. 8 Management's Discussion and Analysis Carter Holt Harvey is the largest Australasian producer of lumber, plywood, laminated veneer lumber and panel products. It has over 600 million board feet of lumber capacity. The panels business is comprised of two medium density fiberboard mills and six particleboard facilities with approximately 605 million square feet of annual capacity. Carter Holt Harvey is New Zealand's largest manufacturer and marketer of pulp and paper products, with overall annual capacity of 825,000 tons at three mills. Its major products are linerboard and pulp. Carter Holt Harvey produces 140,000 tons of tissue products from two mills and eight converting facilities and is the largest manufacturer of tissue in Australia. Sorbent is the most recognized local tissue brand in this market. Carter Holt Harvey also produces corrugated boxes, cartons and paper bags with a focus on the horticulture, primary produce and foodservice markets in New Zealand and Australia. It is a leading producer of cups in Australia through its Continental Cup joint venture with International Paper. Its distribution business comprises Carters, a building supplies chain in New Zealand, and paper merchants B.J. Ball Papers in New Zealand and Raleigh Paper in Australia. In January 2000, Carter Holt Harvey sold its equity interest in Compania de Petroleos de Chile (COPEC). Industry Segment Results - -------------------------------------------------------------------------------- Printing Papers Printing Papers posted sales of $8.0 billion compared with $5.8 billion in 1999 and 1998. About $2.0 billion of the increase in sales was a result of the Champion acquisition. Operating profit rose to $959 million in 2000 from $254 million in 1999 and $178 million in 1998, due mainly to contributions from Champion in the second half of 2000. Excluding Champion, operating profit increased 170% over 1999 due to significant price improvements, favorable mix and cost reduction actions. Printing Papers
- -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Sales $7,960 $5,840 $5,815 Operating Profit $ 959 $ 254 $ 178
Uncoated Papers sales were $4.9 billion in 2000, up from $4.1 billion in 1999 and $4.0 billion in 1998. The increase in sales was due both to a 13% rise in domestic shipments, primarily as a result of the Champion acquisition mid-year, and an increase in pricing year-over-year. Paper prices averaged 8% higher than in 1999 and were strongest in the first half of 2000. As demand softened mid-year, we significantly curtailed production at our mills to balance production with orders and control our inventories. Operating profit was up 156% over 1999 and nearly three times the 1998 level. Our profit improvement and cost reduction initiatives have been effective and have positively impacted earnings. However, the continued strengthening of the U.S. dollar in 2000 depressed the translated value of our non-U.S. sales and increased pulp costs. Additionally, raw material and energy price increases in 2000 continue to negatively impact earnings. Our continued expansion in Central and Eastern Europe, coupled with low-cost production, resulted in another strong performance from our Kwidzyn facility in Poland and a successful year for Svetogorsk, our Russian operation. Coated Papers sales were $1.9 billion, $575 million of which resulted from the Champion acquisition in the second half of the year, compared with $1.2 billion in 1999 and $1.3 billion in 1998. Operating profit was up about 80% compared with 1999 and 1998. Excluding Champion, results of operations rose about 16% in 2000 from both the 1999 and 1998 level. Average prices in 2000 were up about 13% in the U.S., but down slightly in Europe compared with 1999. In addition to price improvement, enhanced mix also contributed to the increase. The increase was offset somewhat by higher pulp and raw material costs, driven mainly by the cost of energy. Market Pulp sales from our U.S., European and Canadian facilities were $925 million in 2000 compared with $535 million and $480 million in 1999 and 1998, respectively. While Champion sales of $270 million were a factor, a 32% market pulp price improvement over the 1999 level also contributed to the increase. After incurring operating losses in 1999 and 1998, an operating profit was realized in 2000. Brazil is included since the date of the Champion acquisition, June 20, 2000. The Brazilian business reported sales of $270 million. Looking ahead to 2001, we expect profits in U.S. Printing Papers to improve as we continue to drive our profit improvement initiatives and balance our production to our orders. We expect uncoated markets to experience some pressure on pricing while maintaining stable volumes. European sales volumes are also expected to remain solid. With the sale of Zanders, our strategy will be to focus on value-added uncoated grades. With this focus and ongoing cost improvements, our outlook is good. 9 Management's Discussion and Analysis Industrial and Consumer Packaging Industrial and Consumer Packaging sales totaled $7.6 billion in 2000, 9% better than the two previous years'sales of $7.0 billion. Operating profit of $773 million in 2000 improved 38% from the $562 million of 1999, mainly due to additional benefits from synergies realized from the Union Camp merger and manufacturing and commercial initiatives implemented across all of the businesses. Improved pricing during the first half of the year was offset by softer second half demand that resulted in significant mill production slowdowns to match our supply with demand. Higher fourth quarter energy costs also adversely affected results. Sales were $7.0 billion in 1998 and operating profit was $334 million. Industrial and Consumer Packaging
- -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Sales $7,625 $7,050 $7,010 Operating Profit $ 773 $ 562 $ 334
Industrial Packaging revenues were $4.0 billion in 2000, up from $3.8 billion the previous year and $3.7 billion in 1998. Profits in 2000 improved 67% over 1999, after substantial improvement from 1998. While improved pricing benefited operating results, internal initiatives coupled with further savings from the Union Camp merger and the 2000 acquisition of Champion were the major reasons for the year-to-year profit gains. Demand remained healthy through the first half of 2000, but weakened progressively over the balance of the year. Domestic box shipments were about the same as 1999, but were slightly better than experienced across the industry despite the closure of four unprofitable facilities during the year. Second half mill production cutbacks were necessary to counter the market softness. Published domestic linerboard prices, after increasing in February, remained steady through the remainder of the year despite softer demand. Markets for our European converting operations improved during 2000, with volumes slightly better than 1999. The strong U.S. dollar, however, adversely impacted results reported by our non-U.S. operations, and detracted from our competitiveness in containerboard export markets. The inclusion of Champion's Roanoke Rapids, North Carolina, manufacturing facility in the second half of 2000 also contributed to the year-over-year earnings improvement. During 2000, the Industrial Packaging business took more than one million tons of market related downtime in container-board, representing more than 20% of our system capacity. Most of the downtime was taken during the third and fourth quarters as demand weakened significantly. Going forward, we expect continued softness in demand for the domestic business beyond the seasonally weak January/February time frame. Although the strong dollar has now retreated somewhat, it will take considerable time to regain our former position in export markets. Mill production will be managed as needed to keep our inventories in line with customer demand. Consumer Packaging sales were $3.6 billion, up from $3.2 billion in 1999 and $3.3 billion in 1998. The revenue increase was mainly due to the acquisition of Shorewood in March 2000. Consumer Packaging's 2000 operating profit was comparable with both 1999 and 1998. Our internal process improvement program, which began in the mill system during 1999 and expanded into the converting businesses during 2000, has proven to be a major success and continues to add to earnings. However, weaker market conditions for most of the Consumer Packaging businesses and higher input costs offset most of the progress in 2000. Overall, bleached board prices were 5% higher than 1999. However, softening demand during the second half of the year resulted in production curtailments in the fourth quarter to balance internal supply with customer demand. A restructuring of the converting business in 2000, along with the addition of Shorewood, allowed us to move more quickly away from commodity grades. We closed or offered for sale certain facilities producing retail and beverage packaging, and are exploring strategic alternatives for our Flexible Packaging business, including its possible sale. Looking ahead, markets are expected to remain under pressure in the short term. Success in 2001 will come from a focused execution of marketing and manufacturing initiatives, as well as from realignment in our converting businesses. Distribution North American and European distribution sales totaled $7.3 billion in 2000 compared with $6.9 billion in 1999 and $6.3 billion in 1998. Operating profit in 2000 increased 14% from 1999 and 40% from 1998. Sales margins increased from 1.5% in 1999 to 1.7% in 2000 due largely to operating efficiencies. Market conditions were highly competitive throughout the year. Distribution
- -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Sales $7,255 $6,850 $6,280 Operating Profit $ 120 $ 105 $ 86
10 Management's Discussion and Analysis xpedx, our North American distribution operation, posted sales of $6.9 billion, up 6% from 1999, and 17% from 1998. The increase over 1999 was driven primarily by the acquisition of Nationwide, Champion's distribution operation. Excluding Nationwide, xpedx had sales of $6.5 billion in 2000, up 3% from 1999, reflecting slightly higher product prices and volumes. In 1999, xpedx and Alling & Cory, the distribution company acquired with Union Camp, were combined. Our integration strategy was to retain market segments that met our strategic and financial objectives. This strategy, coupled with a highly competitive pricing environment in 2000, and an economic slowdown in the fourth quarter resulted in a reduction in sales. However, operating profits rose as a result of cost reductions, which helped offset weaker market conditions in the second half of 2000. In 2000, xpedx and Nationwide employed the same successful integration strategies used in the earlier Alling & Cory and Zellerbach acquisitions. By the end of 2000, integrations were complete in 21 of 28 metropolitan areas, eliminating duplicate facilities and causing a reduction of over 350 employees. Integrations at the remaining seven sites are targeted for completion in early 2001. Our European distribution operations--Papeteries de France, Scaldia in the Netherlands and Impap in Poland--posted sales of $370 million, increasing 6% from 1999 and 9% from 1998. Operating profit increased 44% over 1999 and 81% over 1998. Looking ahead, we expect pricing pressure and a continuing economic slowdown to negatively impact our business. Forest Products Forest Products sales were $3.5 billion, up from $3.2 billion in 1999 and $2.9 billion in 1998. Operating profit in 2000 of $602 million was down from $724 million in 1999 and $622 million in 1998. This decline was attributable to lower average building materials prices and sales volumes. Forest Products
- -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Sales $3,465 $3,205 $2,930 Operating Profit $ 602 $ 724 $ 622
Forest Resources sales in 2000 were $848 million compared with $653 million in 1999 and $553 million in 1998. Operating profit was 23% higher than 1999 and 14% higher than 1998 primarily due to the inclusion of Champion results in the second half of 2000. While harvest volumes in 2000 were higher than 1999 and 1998, average prices declined from 1999, which were below the record levels seen in 1998. Average pine sawtimber and pulpwood prices in 2000 were lower than 1999 average prices by about 5% and 11%, respectively. Stumpage prices entering 2001 are well below comparable prices at the beginning of 1999. Furthermore, customer wood inventory levels at pulp and paper mills and wood products plants are generally at or near targeted levels. As a result, we do not expect any significant price improvement in early 2001, and we anticipate full-year prices will average less than 2000, and well below 1999. Harvest volumes in 2001 are also projected to be lower than the record volumes in 2000. Wood Products sales in 2000 of $1.3 billion were off slightly from $1.4 billion in 1999, but higher than 1998 sales of $1.2 billion. This business reported a loss for the current year following a strong performance in 1999. The loss was due largely to significant pricing pressure and weak demand resulting from lower housing starts and increasing interest rates. Prices in 2000, compared with 1999, were off 21% for lumber, and about 26% in panels. We expect similar market conditions early in 2001 and will continue to manage capacity to keep supply in line with customer demand. Canadian Wood Products, a former Champion business operated through Weldwood of Canada, reported sales of $190 million for the second half of 2000. By year-end, lumber prices had dropped significantly versus 1999. High inventories and low prices are expected to continue to negatively impact this business in 2001. Masonite sales were $465 million in 2000, 9% below 1999 sales of $512 million and 7% below 1998 sales of $499 million. The sales decline was principally the result of a lower demand for siding and hardboard products as well as increased global competition in the molded door facings market. Prices for molded door facings continued to decline in 2000. Shipments in all business lines declined in the second half of the year as market conditions slowed. Operating profits for the year declined due to lower sales volumes, lower prices and higher input costs. Masonite is included in our program to divest non-strategic assets. In September 2000, we reached an agreement to sell Masonite to a third party. Decorative Products sales were $619 million, down slightly from 1999 sales of $624 million and 6% from 1998 sales of $658 million. The decline in sales from 1998 reflects the closure and sale of several facilities in late 1998 and early 1999. Although sales were relatively flat in 2000, operating profits declined due to higher raw material, energy and manufacturing costs. Demand in the second half of the year was weak, particularly in particleboard, resulting in reduced operating schedules at several locations. We are exploring strategic alternatives for this business, including its possible sale. 11 Management's Discussion and Analysis Chemicals and Petroleum Chemicals and Petroleum sales were $1.4 billion in 2000, down slightly from $1.5 billion in 1999 and 1998. Earnings were $161 million in 2000, up about 30% from the $124 million in 1999 and 18% from $136 million in 1998. Petroleum operations drove the improvements, which were offset, in part, by declines in the other businesses. Chemicals and Petroleum
- -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Sales $1,395 $1,455 $1,465 Operating Profit $ 161 $ 124 $ 136
Chemicals sales were $845 million in 2000, compared with $885 million and $905 million in 1999 and 1998, respectively. Operating profit declined 23% from 1999 and 39% from 1998. The decline was primarily due to increased costs in the Chemical Cellulose pulp business. Offsetting this decline somewhat was an improved sales mix of higher valued products and a reduction of manufacturing costs from facility rationalizations in the commodity chemical and specialty adhesive resins businesses. These positive business strategies reduced the unfavorable impact of higher energy costs, higher raw material costs, and unfavorable foreign exchange rates. We are exploring strategic alternatives for our commodity chemical and specialty adhesive resins businesses and our Chemical Cellulose pulp business, including their possible sales. Bush Boake Allen results are included up to November 8, 2000, the date we sold our interest in the company. Sales included for 2000 were $425 million compared with full year 1999 and 1998 sales of $500 million and $485 million, respectively. The 2000 partial year operating profit was about 12% higher than the full year 1999 operating profit, but about 15% lower than in 1998. Petroleum sales of $125 million were well ahead of the $70 million in 1999 and $75 million in 1998. Operating profit was almost 150% higher than 1999 and nearly four times 1998 profits. Higher oil and gas prices had a positive impact on this business. Year-over-year average prices for oil and gas rose about 70%. Our exploration program, generally operated through joint ventures, was focused on West Texas, the Gulf Coast and the Gulf of Mexico and generated additional reserves that were slightly higher than production in 2000. On January 31, 2001, the oil and gas assets were conveyed to a third party. Carter Holt Harvey International Paper's results for this segment differ from those reported by Carter Holt Harvey in New Zealand in four major respects: 1. Carter Holt Harvey's reporting period is a fiscal year ending March 31. Our segment results are for the calendar year. 2. Our segment earnings include only our share of Carter Holt Harvey's operating earnings. Segment sales, however, represent 100% of Carter Holt Harvey's sales. 3. Carter Holt Harvey reports in New Zealand dollars but our segment results are reported in U.S. dollars. The weighted average currency exchange rate used to translate New Zealand dollars to U.S. dollars was 0.46 in 2000, 0.52 in 1999 and 0.54 in 1998. 4. Carter Holt Harvey reports under New Zealand accounting standards, but our segment results comply with U.S. generally accepted accounting principles. The major differences relate to cost of timber harvested (COTH), land sales, equity investment in COPEC and start-up costs. These differences reduced segment earnings by about $20 million in 2000, $50 million in 1999 and $40 million in 1998. Carter Holt Harvey
- -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Sales $1,675 $1,605 $1,505 Operating Profit $ 71 $ 39 $ 20
Carter Holt Harvey's segment sales were $1.7 billion in 2000 compared with $1.6 billion in 1999 and $1.5 billion in 1998. Operating profit of $71 million was up over 80% from the $39 million in 1999 and more than triple the $20 million reported in 1998. The increase was mainly due to improved demand in Asia and Australia, improved operational performance at the Kinleith pulp and paper mill, increased harvest volumes and added contribution from an Australian panels business acquired in May 2000. 12 Management's Discussion and Analysis Forests sales were up 27% due to increased harvest volumes and some price improvement in both domestic and export markets. Wood Products net sales improved by 37%, due to the acquisition of an Australian panels business during the year. The slowdown in residential construction led to lower timber sales volumes while log costs were higher than 1999. Net sales for the pulp, paper and tissue business were up 20%, and operating profit was significantly higher than a year ago. The enhanced performance was driven by rising prices for pulp and linerboard, while the Kinleith mill operations improved due to the completion of a major mill modernization. A number of production records were set at the Kinleith mill during the year including total annual output. The 24,000-ton Mataura fine paper mill was shut down during the year for an indefinite period. The tissue business was adversely impacted by higher pulp prices, while markets remained very competitive. Although packaging markets in New Zealand and Australia also remained highly competitive, some price improvement helped to offset higher linerboard costs. The packaging operations reported a profit for the year. The plastics packaging business was sold during the fourth quarter. The outlook is mixed with pricing for export logs, pulp and linerboard dependent upon the overall level of economic activity in Asia. Construction markets in Australia and New Zealand, which slowed during 2000, appear to have leveled but we are not expecting early improvement. Liquidity and Capital Resources - -------------------------------------------------------------------------------- Cash Provided by Operations Cash provided by operations totaled $2.4 billion for 2000, compared with $1.7 billion in 1999 and $2.1 billion in 1998. The largest factor in the increase in operating cash flow in 2000 was higher earnings before special and extraordinary items. Excluding special and extraordinary items, after taxes and minority interest, net earnings for 2000 increased $418 million from 1999. The largest factors in the decrease in operating cash flow in 1999 were payments related to the Union Camp merger and restructuring and legal reserves. Excluding special and extraordinary items, after taxes and minority interest, net earnings for 1999 increased $206 million compared with 1998. An increase in working capital reduced 2000 operating cash flow by $146 million. Working capital changes decreased 1999 operating cash flow by $32 million and increased 1998 operating cash flow by $74 million. Depreciation and amortization expense was $1.9 billion in 2000 and $1.7 billion in 1999 and 1998. Investment Activities Capital spending was $1.4 billion in 2000, or 71%, of depreciation and amortization as compared to $1.1 billion, or 68%, of depreciation and amortization in 1999, and $1.3 billion, or 80%, of depreciation and amortization in 1998. The increase in spending in 2000 was the result of capital projects for Champion and Shorewood. As part of our program to improve return on investment, we plan to continue to hold capital spending well below depreciation and amortization. We plan to spend $1.2 billion in capital in 2001. The following table presents capital spending by each of our business segments for the years ended December 31, 2000, 1999 and 1998.
- -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Printing Papers $ 447 $ 382 $ 302 Industrial and Consumer Packaging 333 287 391 Distribution 24 16 19 Forest Products 262 189 222 Chemicals and Petroleum 90 104 170 Carter Holt Harvey 100 99 166 ------ ------ ------ Subtotal 1,256 1,077 1,270 Corporate and other 96 62 52 ------ ------ ------ Total $1,352 $1,139 $1,322 ====== ====== ======
On June 20, 2000, International Paper completed the previously announced acquisition of Champion, a leading manufacturer of paper for business communications, commercial printing and publications with significant market pulp, plywood and lumber manufacturing operations. Champion shareholders received $50 in cash and $25 worth of International Paper common stock for each Champion share. The acquisition was completed for approximately $5 billion in cash and 68.7 million shares of International Paper common stock with a market value of $2.4 billion. Approximately $2.8 billion of Champion debt was assumed. On March 31, 2000, we acquired Shorewood, a leader in the manufacture of premium retail packaging, for approximately $640 million in cash and the assumption of $280 million of debt. On April 28, 2000, Carter Holt Harvey purchased CSR Limited's (CSR) medium density fiberboard and particleboard businesses and its Oberon sawmill for approximately $200 million in cash. 13 Management's Discussion and Analysis The Champion, Shorewood and CSR acquisitions were accounted for using the purchase method. Their results of operations are included in International Paper's consolidated statement of earnings from their respective dates of acquisition. The accompanying consolidated balance sheet as of December 31, 2000, reflects preliminary purchase price allocations for Champion, Shorewood and CSR to the fair value of the assets and liabilities acquired. In connection with the Champion acquisition, we announced a divestment program that we now estimate will generate gross proceeds of approximately $5 billion by the end of 2001. As of March 1, 2001, about $1.2 billion of proceeds have been realized under the program, primarily from the dispositions of Bush Boake Allen, the oil and gas interests, Zanders and the former Champion headquarters building. It is possible that additional charges will be required in 2001 as specific businesses are identified for sale. See Note 7--Businesses Held for Sale for information related to the planned sales under this program. Also, at the time of the Champion acquisition, Moody's lowered our long-term debt rating to Baa1. At December 31, 2000, outstanding debt included approximately $2.1 billion of borrowings with interest rates that fluctuate based on market conditions and our credit rating. The merger with Union Camp was completed on April 30, 1999. Union Camp shareholders received 1.4852 International Paper common shares for each Union Camp share held. The total value of the transaction, including the assumption of debt, was approximately $7.9 billion. International Paper issued 110 million shares for 74 million Union Camp shares, including options. The merger was accounted for as a pooling-of-interests. Also in April 1999, Carter Holt Harvey acquired the corrugated packaging business of Stone Australia, a subsidiary of Smurfit-Stone Container Corporation. The business consists of two sites in Melbourne and Sydney, which serve industrial and primary produce customers. During 1998, International Paper acquired the Zellerbach distribution business from the Mead Corporation for $261 million in cash, Weston Paper and Manufacturing Company through the exchange of 4.7 million International Paper common shares valued at $232 million, and Svetogorsk AO, a Russia-based pulp and paper business. Carter Holt Harvey and International Paper jointly acquired Marinetti S.A.'s paper cup division based in Chile, and Australia-based Continental Cup. Carter Holt Harvey separately acquired Riverwood International, an Australia-based folding carton business. We also entered into a joint venture with Olmuksa in Turkey to manufacture containerboard and corrugated boxes. Finally, a wholly owned subsidiary of International Paper purchased all of the publicly-traded Class A depository units of IP Timberlands, Ltd. for $100 million in cash. All of the above acquisitions were accounted for using the purchase method, with the exception of the Union Camp acquisition, which was accounted for as a pooling-of-interests. The operating results of those acquisitions accounted for under the purchase method have been included in the consolidated statement of earnings from the dates of acquisition. In November 2000, International Paper sold its interest in Bush Boake Allen for $640 million, resulting in an extraordinary gain of $183 million after taxes and minority interest. This transaction was completed as part of our asset sale program. Bush Boake Allen, which had been included in the Chemicals and Petroleum segment, contributed sales of $425 million, $500 million and $485 million and operating earnings of $31 million, $28 million and $37 million for each of the three years ended December 31, 2000, 1999 and 1998, respectively. In January 2000, International Paper sold its equity interest in Scitex for $79 million, and Carter Holt Harvey sold its equity interest in Compania de Petroleos de Chile (COPEC) for just over $1.2 billion. These sales resulted in a combined extraordinary gain of $134 million after taxes and minority interest. The gains on these sales are recorded as extraordinary items pursuant to the pooling-of-interests rules. Financing Activities Financing activities during 2000 included $6.3 billion of debt issuance. This increase included $4.3 billion in long-term debt and $2 billion of short-term debt instruments (largely commercial paper) issued mainly to finance the Champion and Shorewood acquisitions. In addition, we assumed approximately $3 billion of debt associated with acquisitions, and subsequently reduced the acquired debt balances by $450 million. We repaid $600 million of maturing long-term debt and $1.0 billion in short-term debt from divestiture proceeds and operating cash flows, as well as $700 million of Carter Holt Harvey debt from proceeds received on the sale of their interest in COPEC. Financing activities during 1999 included an early extinguishment of $275 million of high interest debt that was assumed in the acquisition of Union Camp, at an after tax cost of $16 million, which is reflected as an extraordinary item in the 1999 statement of earnings. Other debt, primarily short-term, was reduced by $540 million. Financing activities during 1998 included $1.9 billion in net reductions, primarily of short-term debt, and the issuance of $1.5 billion of preferred securities of subsidiaries. Dividend payments were $447 million, $418 million and $431 million in 2000, 1999 and 1998, respectively. On a per share basis, dividend payments were $1.00 in 2000, $1.01 in 14 Management's Discussion and Analysis 1999, and $1.05 in 1998. The International Paper dividend remained at $1.00 per share during the three-year period. However, dividend payments on a per share basis for 1999 and 1998 have been restated to include dividends paid by Union Camp. At December 31, 2000, cash and temporary investments totaled $1.2 billion compared to $453 million at December 31, 1999. This increase was due primarily to $500 million remaining from Carter Holt Harvey's sale of COPEC. The balance of the increase was related to the operations in Brazil and Canada that were acquired through the Champion acquisition. Capital Resources Outlook for 2001 Our financial condition continues to be strong. We anticipate that cash flow from operations, supplemented by proceeds from sales of our divested businesses and certain other assets and short- or long-term borrowings as necessary, will be adequate to fund our capital expenditures, to service and reduce existing debt, and to meet working capital and dividend requirements during 2001. Other Financial Statement Items Net interest expense increased to $816 million in 2000 compared with $541 million in 1999 and $614 million in 1998. The increase reflects the net increase in total debt outstanding, after adjusting for the effects of currency translation, from December 1999 to December 2000. Proceeds received from the sale of assets in 1998, 1999 and 2000, as well as proceeds from the issuance of preferred securities, were used to reduce debt and for other general corporate purposes. Minority interest increased to $238 million of expense in 2000, compared with $163 million in 1999 and $87 million in 1998. The increase in 2000 was mainly due to the minority shareholders'portion of the gain on the sale of Carter Holt Harvey's investment in COPEC in January 2000. The increase in minority interest expense from the year ended December 31, 1998, to the year ended December 31, 1999, was primarily due to an increase in earnings at Carter Holt Harvey in 1999, and the fact that preferred securities of subsidiaries issued during 1998 were outstanding for the full year in 1999. Net periodic pension results for the U.S. defined benefit plans were income of $101 million, $49 million and $77 million in 2000, 1999 and 1998, respectively. The variation between pension income in 2000 and 1999 was primarily due to the acquisition of Champion. The variation between pension income in 1999 and 1998 was primarily due to the expiration of International Paper's transition asset amortization that reduced 1999 pension income by $26 million as compared to 1998. On June 1, 1999, International Paper enhanced pension benefits for its major union groups. As a result, the pension plan was revalued. The revaluation assumed a discount rate of 7.25% and a rate of compensation increase of 4.5%. These actions had the net effect of reducing the pension benefit obligation by $179 million. Special Items Including Restructuring and Business Improvement Actions 2000: Special items reduced 2000 net earnings by $601 million, 1999 net earnings by $352 million and 1998 net earnings by $98 million. The following table and discussion presents the impact of special items for 2000:
- -------------------------------------------------------------------------------- In millions 2000 - -------------------------------------------------------------------------------- Earnings Earnings (Loss) (Loss) Before Income After Income Taxes and Taxes and Minority Minority Interest Interest - -------------------------------------------------------------------------------- Before special and extraordinary items $1,692 $ 969 Merger-related expenses (54) (33) Restructuring and other charges (824) (509) Provision for legal reserves (125) (80) Reversals of reserves no longer required 34 21 ------ ----- After special items $ 723 $ 368 ====== =====
During 2000, special charges before taxes and minority interest of $969 million ($601 million after taxes and minority interest) were recorded. These special items included a $54 million pre-tax charge ($33 million after taxes) for merger-related expenses, an $824 million charge before taxes and minority interest ($509 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $125 million pre-tax charge ($80 million after taxes) for additional Masonite legal reserves and a $34 million pre-tax credit ($21 million after taxes) for the reversals of reserves no longer required. A further discussion of the Masonite legal reserves, can be found in Note 11--Commitments and Contingent Liabilities. The merger-related expenses of $54 million consisted primarily of travel, systems integration, employee retention, and other one-time cash costs related to the Champion acquisition and Union Camp merger. The $824 million charge for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $71 million charge in the second quarter of 2000 and a $753 million charge in the fourth quarter of 2000. 15 Management's Discussion and Analysis The second quarter charge of $71 million consisted of $40 million of asset write-downs and $31 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- -------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - -------------------------------------------------------------------- Printing Papers (a) $22 $ 7 $29 Consumer Packaging (b) 7 9 16 Industrial Papers (c) 9 4 13 Other (d) 2 11 13 --- --- --- $40 $31 $71 === === ===
(a) The Printing Papers business shut down the Millers Falls, Massachusetts mill in August 2000 due to excess internal capacity. Charges associated with the shutdown included $22 million to write down the assets to their estimated fair market value of zero, $2 million of severance costs covering the termination of 119 employees, and other exit costs of $3 million. The Millers Falls mill had revenues of $33 million, $39 million and $44 million in 2000, 1999 and 1998, respectively. The mill had no operating income in 2000 and operating income of $3 million in both 1999 and 1998. At December 31, 2000, all 119 employees had been terminated. Also, a severance charge of $2 million was recorded covering the elimination of 108 salaried positions at the Franklin, Virginia mill in a continuing effort to improve its cost effectiveness and long-term competitive position. At December 31,2000,103 employees had been terminated. (b) The Consumer Packaging business implemented a plan to reduce excess internal capacity and streamline administrative functions at several of its locations as a result of the Shorewood acquisition. As a result, the Richmond, Virginia facility was shut down in June 2000. Charges associated with this shutdown included $6 million to write down assets to their fair market value of zero, $2 million of severance costs covering the termination of 126 employees, and other exit costs of $1 million. This facility had revenues of $8 million, $23 million and $37 million in 2000, 1999 and 1998, respectively. The Richmond facility had operating losses of $2 million and $1 million in 2000 and 1999, respectively, and operating income of $3 million in 1998. At December 31, 2000, 125 employees had been terminated. Management also permanently idled the lithographic department of the Clinton, Iowa facility. This action will allow the Retail Packaging business to better focus its resources for further profit improvement. Related charges included $1 million of asset write-downs, $3 million of severance costs covering the termination of 187 employees, and $2 million of other exit costs. At December 31, 2000, 151 employees had been terminated. A severance reserve of $1 million was also established to streamline the Consumer Packaging business. This reserve covers the termination of 17 employees. At December 31,2000, all 17 employees had been terminated. (c) Industrial Papers shut down the Knoxville, Tennessee converting facility in December 2000 to reduce excess internal capacity. Assets were written down $9 million to their estimated fair market value and a severance charge of $1 million was recorded to terminate 120 employees. Other exit costs totaled $3 million. The Knoxville facility had revenues of $46 million, $62 million and $56 million in 2000, 1999 and 1998, respectively. This facility had operating income of $2 million in 2000 and 1999, and an operating loss of $2 million in 1998. At December 31, 2000, the head count had been reduced by 106 employees. (d) Other includes $8 million related to Industrial Packaging, primarily for the shutdown of the Tupelo, Mississippi sheet plant. The Industrial Packaging charge included $2 million of asset write-offs, $5 million of severance costs covering the termination of 221 employees and $1 million of other cash costs. At December 31, 2000, 212 employees had been terminated. Other also includes $5 million related to the indefinite shutdown of Carter Holt Harvey's Mataura paper mill. This charge included $3 million of severance costs covering the termination of 158 employees and $2 million of other cash costs. At December 31, 2000, all 158 employees had been terminated. 16 Management's Discussion and Analysis The fourth quarter charge of $753 million consisted of $536 million of asset write-downs and $217 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- ----------------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - ----------------------------------------------------------------------------- Printing Papers (a) $293 $103 $396 Consumer Packaging (b) 86 7 93 Industrial Packaging (c) 114 46 160 Chemicals and Petroleum (d) 16 18 34 Forest Products (e) 15 20 35 Distribution (f) 3 19 22 Carter Holt Harvey (g) 1 4 5 Other (h) 8 - 8 ---- ---- ---- $536 $217 $753 ==== ==== ====
(a) The Printing Papers business announced the indefinite closure of the Mobile, Alabama mill and permanent closure of the Lock Haven, Pennsylvania mill. The announcement was in conjunction with the business's plan to realign and rationalize papermaking capacity to benefit future operations. Charges associated with the Mobile shutdown included $223 million to write assets down to their salvage value, $31 million of severance costs covering the termination of 760 employees, and other exit costs of $41 million. The Mobile mill had revenues of $274 million, $287 million and $258 million in 2000, 1999 and 1998, respectively. This mill had operating earnings of $34 million and $8 million in 2000 and 1999, respectively, and an operating loss of $43 million in 1998. Charges associated with the Lock Haven shutdown included $70 million to write the assets down to their salvage value, $16 million of severance costs covering the termination of 589 employees, and other exit costs of $15 million. The Lock Haven mill had revenues of $267 million in 2000 and $225 million in each of 1999 and 1998. This mill had an operating loss of $21 million in 2000, and operating earnings of $12 million and $27 million in 1999 and 1998, respectively. (b) The Consumer Packaging business announced shutdowns of the beverage packaging converting plant in Jamaica and the packaging facility in Cincinnati, Ohio. Production at the Jamaica plant was moved to Venezuela to increase plant utilization. The Cincinnati facility was closed in order to better align our manufacturing system with customer demand. Charges associated with these shutdowns included $6 million of asset write-downs, $5 million of severance costs covering the termination of 239 employees, and other exit costs of $2 million. The Consumer Packaging charge also included an $80 million asset impairment due to continuing losses in its aseptic business. The aseptic assets were written down to their estimated fair market value based on expected future discounted cash flows. (c) The Industrial Packaging business charge of $160 million is related to the closure of the Camden, Arkansas mill, the shutdown of the Pedemonte, Italy container plant and the write-down of the Walsum No. 10 paper machine. The Camden mill, which produced unbleached kraft and multi-wall paper, was closed due to the declining kraft paper market, excess internal capacity and shrinking customer demand. The mill's assets were written down $102 million to their salvage value, and severance costs of $24 million were recorded to cover the termination of 613 employees. Other exit costs totaled $15 million. The Camden mill had revenues of $151 million, $162 million and $153 million and operating earnings of $14 million, $22 million and $18 million in 2000, 1999 and 1998, respectively. Charges associated with the Pedemonte plant shutdown included $2 million of asset write-downs, $3 million of severance costs covering the termination of 83 employees, and $4 million of other exit costs. The Pedemonte plant had revenues of $9 million, $11 million and $15 million in 2000, 1999 and 1998, respectively. This plant had operating losses of $2 million in 2000 and 1999 and $1 million in 1998. The business also wrote down the Walsum No. 10 paper machine acquired in the Union Camp merger by $10 million to its estimated fair market value. (d) The Chemicals and Petroleum business charge of $34 million was related to the announced closure of the Oakdale, Louisiana plant. This is part of the business's Asset Rationalization Program to increase earnings, improve plant efficiencies and reduce excess internal capacity. A portion of the facility was shut down at the end of 2000, with the remainder to be closed by the end of 2001. The charge included $16 million to write the assets down to their estimated fair market value of zero, $1 million of severance costs covering the termination of 61 employees, and $17 million of other exit costs. The Oakdale plant had revenues of $31 million, $30 million and $32 million and operating earnings of $3 million, zero and $6 million in 2000, 1999 and 1998, respectively. 17 Management's Discussion and Analysis (e) The Forest Products business charge of $35 million was primarily related to the announced shutdown of the Washington, Georgia lumber mill and restructuring costs associated with the Mobile mill closure. The Washington lumber mill will be closed due to unfavorable market conditions and excess internal capacity. The mill had revenues of $54 million, $66 million and $62 million in 2000, 1999 and 1998, respectively. This facility had an operating loss of $6 million in 2000, operating income of $2 million in 1999, and an operating loss of $3 million in 1998. The total Forest Products business charge included $15 million of asset write-downs, $7 million of severance costs covering the termination of 264 employees, and $13 million of other exit costs. (f) xpedx, our distribution business, implemented a restructuring plan to consolidate duplicate facilities, eliminate excess internal capacity and increase productivity. The $22 million charge associated with this plan included $3 million of asset write-downs, $15 million of severance costs covering the termination of 433 employees, and $4 million of other cash costs. (g) The Carter Holt Harvey charge of $5 million is related to cost reduction actions primarily associated with the tissue and packaging businesses. This charge included $1 million of asset write-downs and $4 million of severance covering the termination of 145 employees. (h) This $8 million charge relates to the write-down of our investment in PaperExchange.com, an online provider of e-commerce for the paper industry, to its estimated fair market value. Also, a pre-tax credit of $28 million was recorded for excess 1999 second and fourth quarter restructuring reserves no longer required, and a pre-tax credit of $6 million was recorded for excess Union Camp merger-related termination benefits reserves no longer required. The following table presents a roll forward of the severance and other costs included in the 2000 restructuring plans:
- -------------------------------------------------------------------------------- Severance In millions and Other - -------------------------------------------------------------------------------- Opening Balance (second quarter 2000) $ 31 Additions (fourth quarter 2000) 217 2000 Activity Cash charges (19) ---- Balance, December 31, 2000 $229 ====
The severance charges recorded in the second and fourth quarters of 2000 related to 4,243 employees. As of December 31, 2000, 991 employees had been terminated. 1999: The following table and discussion presents the impact of special items for 1999:
- --------------------------------------------------------------------------------- In millions 1999 - --------------------------------------------------------------------------------- Earnings Earnings (Loss) (Loss) Before Income After Income Taxes and Taxes and Minority Minority Interest Interest - --------------------------------------------------------------------------------- Before special and extraordinary items $1,005 $ 551 Union Camp merger-related termination benefits (148) (97) Merger-related expenses (107) (78) Restructuring and other charges (298) (180) Environmental remediation charge (10) (6) Provision for legal reserves (30) (18) Reversals of reserves no longer required 36 27 ------ ----- After special items $ 448 $ 199 ====== =====
During 1999, special charges before taxes and minority interest of $557 million ($352 million after taxes and minority interest) were recorded. These special items included a $148 million pre-tax charge ($97 million after taxes) for Union Camp merger-related termination benefits, a $107 million pre-tax charge ($78 million after taxes) for merger-related expenses, a $298 million charge before taxes and minority interest ($180 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $10 million pre-tax charge ($6 million after taxes) to increase existing environmental remediation reserves related to certain former Union Camp facilities, a $30 million pre-tax charge ($18 million after taxes) to increase existing legal reserves, and a $36 million pre-tax credit ($27 million after taxes) for the reversals of reserves that were no longer required. The merger-related expenses of $107 million consisted of $49 million of merger costs and $58 million of post-merger expenses. The merger costs were primarily investment banker, consulting, legal and accounting fees. Post-merger integration expenses included costs related to employee retention, such as stay bonuses, and other cash costs related to the integration of Union Camp. 18 Management's Discussion and Analysis The Union Camp merger-related termination benefits charge related to employees terminating after the effective date of the merger under an integration benefits program. Under this program, 1,218 employees of the combined company were originally identified for termination. An additional 346 employees left the company after the merger was announced, but were not eligible for benefits under the integration benefits program completed in the third quarter of 2000. Benefits payable under this program for certain senior executives and managers were paid from the general assets of International Paper. Benefits for remaining employees were primarily paid from plan assets of our qualified pension plan. In total, 1,062 employees were terminated. Related cash payments approximated $71 million (including payments related to our nonqualified pension plans). The remainder of the costs incurred primarily represented an increase in the projected benefit obligation of our qualified pension plan. Upon termination of the program in the third quarter of 2000, $6 million of the original reserve of $148 million was reversed to income. The following table is a roll forward of the Union Camp merger-related termination benefits charge:
- -------------------------------------------------------------------------------- Termination Dollars in millions Benefits - -------------------------------------------------------------------------------- Special charge (1,218 employees) $ 148 1999 incurred costs (787 employees) (116) 2000 incurred costs (275 employees) (26) Reversal of reserve no longer required (6) ----- Balance, December 31, 2000 $ -- =====
Note: Benefit costs are treated as incurred on the termination date of the employee. The $298 million charge for asset shutdowns of excess internal capacity consisted of a $113 million charge in the second quarter of 1999 and a $185 million charge in the fourth quarter of 1999. The second quarter $113 million charge for the asset shutdowns of excess internal capacity and cost reduction actions included $57 million of asset write-downs and $56 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- -------------------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - -------------------------------------------------------------------------------- Printing Papers (a) $ 6 $ 27 $ 33 European Papers (b) 3 7 10 Consumer Packaging (c) 19 12 31 Industrial Packaging (d) 12 - 12 Chemicals and Petroleum (e) 10 3 13 Industrial Papers (f) 7 7 14 ---- ---- ---- $ 57 $ 56 $113 ==== ==== ====
(a) International Paper recorded a charge of $24 million for severance related to the second phase of the Printing Papers business plan to improve the cost position of its mills. The charge, pursuant to an ongoing severance program, covered a reduction of approximately 289 employees at several mills in the U.S. At December 31, 2000, 258 employees had been terminated. Also, management approved a decision to permanently shut down the Hudson River mill No. 4 paper machine located in Corinth, New York and the No. 2 paper machine at the Franklin, Virginia mill due to excess internal capacity. Both machines have now been shut down. The machines were written down by $6 million to their estimated fair market value of zero. Severance costs of $3 million were recorded to cover the termination of 147 employees. At December 31, 2000, 142 employees had been terminated. (b) The charge for European Papers, which covered the shutdown of two mills, consisted of $3 million in asset write-downs, $6 million in severance costs and $1 million of other exit costs. The Lana mill in Docelles, France was shut down due to excess internal capacity. The Lana mill produced high-end uncoated specialty paper that was shifted to the La Robertsau mill in Strasbourg, France. The mill's fixed assets were written down $3 million to their estimated fair market value of zero. Costs of $1 million related to the site closure and severance of $4 million related to the termination of 42 employees were also recorded. The Lana mill had revenues of $12 million and an operating loss of $2 million for the year ended December 31, 1999. At December 31, 2000, all 42 employees had been terminated. The Corimex coating plant in Clermont-Ferrand, France was shut down in April 1999. The assets at this plant had been considered to be impaired in 1997 and were written down at that time because of a decline in the market for thermal fax paper. A $2 million severance charge was recorded during the second quarter of 1999 to cover the costs of terminating 81 employees. Corimex had revenues of $6 million and an operating loss of $3 million for the year ended December 31, 1999. At December 31, 2000, all 81 employees had been terminated. 19 Management's Discussion and Analysis (c) The Consumer Packaging business implemented a plan to improve the overall performance of the Moss Point, Mississippi mill. Included in this plan was the shutdown of the No. 3 paper machine, which produced labels. This production was transferred to the Hudson River mill. The machine was written down $6 million to its estimated fair market value of zero. Severance costs including, but not limited to, employees associated with the No. 3 machine totaled $10 million and covered the elimination of 360 positions. At December 31, 2000, 331 employees had been terminated. Consumer Packaging also shut down the Beverage Packaging facility in Itu, Brazil in an effort to reduce excess internal capacity in Latin America. The related assets were written down $13 million to their estimated fair market value of zero, and a severance charge of $1 million covering the elimination of 29 positions was recorded. Other exit costs totaled $1 million. At December 31, 2000, 27 employees had been terminated. (d) With the merger of Union Camp, International Paper negotiated the resolution of contractual commitments related to an Industrial Packaging investment in Turkey. As a result of these negotiations and evaluation of this entity, it was determined that the investment was impaired. A $12 million charge was recorded to reflect this impairment and the related costs of resolving the contractual commitments. (e) As a result of an overall reduction in demand for dissolving pulp, a decision was made to downsize the Natchez, Mississippi mill. Charges associated with capacity reduction totaled $10 million and included the shutdown of several pieces of equipment. A severance charge of $3 million was recorded to eliminate 89 positions. At December 31, 2000, all 89 employees had been terminated. (f) The Industrial Papers business implemented a plan to reduce excess internal capacity at several of its locations. The Toronto, Canada plant was closed. Equipment at the Kaukauna, Wisconsin, Knoxville, Tennessee and Menasha, Wisconsin facilities was taken out of service. The total amount related to the write-down of these assets was $7 million. Severance costs related to these shutdowns were $5 million, based on a personnel reduction of 81 employees. Other exit costs totaled $2 million. At December 31, 2000, 73 employees had been terminated. The $185 million fourth quarter charge for shutdowns of excess internal capacity and cost reduction actions included $92 million of asset write-downs and $93 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- ----------------------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - ----------------------------------------------------------------------------------- Printing Papers (a) $ 7 $ 5 $ 12 Consumer Packaging (b) 14 22 36 Industrial Packaging (c) 7 14 21 Chemicals and Petroleum (d) 30 20 50 Building Materials (e) 10 6 16 Distribution (f) 6 17 23 Carter Holt Harvey (g) 18 9 27 ---- ---- ---- $ 92 $ 93 $185 ==== ==== ====
(a) The Printing Papers charge encompassed a $2 million severance charge related to a production curtailment at the Erie, Pennsylvania mill due to lower demand, a $3 million write-off of deferred software costs as the result of a decision to discontinue the installation of a Union Camp order entry system, and a $7 million impairment of our investment in the Otis Hydroelectric plant. In November 1999, the Erie mill changed from a seven-day, four-crew schedule to a three-crew schedule in order to balance operating capacity with sales demand. This production curtailment resulted in the termination of 99 employees. At December 31, 2000, all 99 employees had been terminated. We wrote down our investment in the Otis Hydroelectric partnership to the approximate fair market value of the investment based upon our offer to acquire the other partner's interest. (b) The Consumer Packaging charge of $36 million was related to the shutdown of facilities, capacity optimization and a deferred software write-off. The Philadelphia, Pennsylvania plant was shut down in June 2000 and the Edmonton, Alberta plant was shut down in April 2000. Charges associated with these shutdowns included $7 million of asset write-downs, $1 million of severance costs covering the termination of 194 employees, and other exit costs of $5 million. At December 31, 2000, all 194 employees had been terminated. Charges related to eliminating excess internal capacity included $7 million of asset write-downs and a severance charge of $11 million for the termination of 512 employees. The capacity reductions related to the aseptic and flexible packaging businesses. At December 31, 2000, 381 employees had been terminated. The business also discontinued the implementation of a Union Camp order management system. The write-off of deferred software costs related to this system was $5 million. 20 Management's Discussion and Analysis (c) The Industrial Packaging business shut down the following plants and shifted production to other facilities: the Terre Haute, Indiana box plant; the Northlake, Illinois box plant; the Columbia, Tennessee sheet plant; and the Montgomery, Alabama sheet plant. The design center in Spartanburg, South Carolina was also closed. The functions performed in Spartanburg will continue in Memphis, Tennessee. Charges associated with the consolidation and improvement of the Industrial Packaging business totaled $21 million and included $7 million of asset write-downs, a $12 million severance charge covering the termination of 426 employees, and other exit costs of $2 million. At December 31, 2000, 309 employees had been terminated. (d) The Chemicals and Petroleum charge of $50 million related to the partial shutdown of the Chester-le-Street plant located in northeast England and additional costs related to the 1998 shutdown of the Springhill, Louisiana plant. The Chester-le-Street plant was a fully integrated site comprised of a crude tall oil fractionation plant, a rosin resin upgrading plant and a dimer plant. The crude tall oil and rosin resin upgrading facilities at the site were closed and production shifted to other Arizona Chemical facilities. Asset write-downs for this plant totaled $30 million. A severance charge of $3 million covered the termination of 83 employees. Other costs of $12 million included demolition and contract cancellations. At December 31, 2000, all 83 employees had been terminated. We also recorded an additional charge of $5 million related to the 1998 closure of the Springhill plant, covering other exit costs including demolition and cleanup. (e) The Building Materials charge of $16 million included $3 million for a program to improve the profitability of the decorative surfaces business and $13 million for the shutdown of the Pilot Rock, Oregon mill. The Decorative Products business developed an improvement plan to consolidate certain manufacturing activities and streamline administrative functions. As a result, a reserve was established to cover asset write-offs totaling $2 million, and severance charges of $1 million were recorded related to the reduction of 65 employees. At December 31, 2000, 38 employees had been terminated. International Paper announced in October 1999 that it would shut down the Pilot Rock, Oregon mill due to excess capacity within the Masonite manufacturing system. Soft-board production was moved to our Ukiah, California and Lisbon Falls, Maine facilities. The related charge included $8 million of asset write-downs, a $2 million severance charge covering the termination of 155 employees, and $3 million of other exit costs. At December 31, 2000, 149 employees had been terminated. (f) xpedx implemented a plan to consolidate duplicate facilities and eliminate excess internal capacity. The $23 million charge associated with this plan included $6 million of asset write-downs, a severance charge of $5 million for the termination of 211 employees, and other costs of $12 million. Other costs consisted primarily of lease cancellations. At December 31, 2000, 197 employees had been terminated. (g) This charge related to the shutdown of the No. 5 paper machine at Carter Holt Harvey's Kinleith mill. The machine had been idled due to a reconfiguration project at the mill. Plans for alternative uses for the machine were reexamined and it was determined that based on current competitive conditions it would not provide adequate returns on the capital required and that it would be scrapped. Accordingly, the machine was written down by $18 million to its estimated salvage value. Also, severance costs of $9 million were recorded to cover the costs of terminating 300 employees. At December 31, 2000, all 300 employees had been terminated. The $30 million pre-tax charge to increase existing legal reserves included $25 million added to the reserve for hard-board siding claims. A further discussion of this charge can be found in Note 11--Commitments and Contingent Liabilities. The $36 million pre-tax credit for reserves no longer required consisted of $30 million related to a retained exposure at the Lancey mill in France and $6 million of excess severance reserves previously established by Union Camp. The Lancey mill was sold to an employee group in October 1997. In April 1999, International Paper's remaining exposure to potential obligations under this sale was resolved, with the reserve returned to income in the second quarter. The following table presents a roll forward of severance and other costs included in the 1999 restructuring plans:
- --------------------------------------------------------------------------------- Severance In millions and Other - --------------------------------------------------------------------------------- Opening Balance (second quarter 1999) $ 56 Additions (fourth quarter 1999) 93 1999 Activity Cash charges (34) 2000 Activity Cash charges (75) Other charges (13) Reversals of reserves no longer required (14) ---- Balance, December 31, 2000 $ 13 ====
21 Management's Discussion and Analysis The severance reserves recorded in the second and fourth quarters of 1999 related to 3,163 employees. At December 31, 2000, 2,793 employees had been terminated. Reserves of $14 million were determined to no longer be required and reversed to income in the fourth quarter of 2000. The remaining $13 million of reserves represents costs to be incurred or severance to be paid in the first quarter of 2001. 1998: The following table and discussion presents the impact of special items for 1998:
- -------------------------------------------------------------------------------- In millions 1998 - -------------------------------------------------------------------------------- Earnings Earnings (Loss) (Loss) Before Income After Income Taxes and Taxes and Minority Minority Interest Interest - -------------------------------------------------------------------------------- Before special items $ 598 $ 345 Oil and gas impairment charges (111) (68) Restructuring and other charges (161) (92) Gain on sale of business 20 12 Reversals of reserves no longer required 83 50 ----- ----- After special items $ 429 $ 247 ===== =====
During 1998, International Paper recorded $111 million of oil and gas impairment charges ($68 million after taxes); $56 million ($35 million after taxes) in the fourth quarter and $55 million ($33 million after taxes) in the third quarter. International Paper had oil and gas exploration and production operations in West Texas, the Gulf Coast and the Gulf of Mexico. The Securities and Exchange Commission's regulations for companies that use the full-cost method of accounting for oil and gas activities require companies to perform a ceiling test on a quarterly basis. As a result of low oil and gas prices, the value of International Paper's properties was written down through these noncash charges. Also in 1998, International Paper recorded a $145 million pre-tax restructuring charge ($82 million after taxes and minority interest) consisting of $64 million of asset write-downs and $81 million of severance costs, and recorded pre-tax charges of $16 million ($10 million after taxes) related to International Paper's share of write-offs taken by Scitex, a then-owned 13% investee company, related to an acquisition of in-process research and development and its exit from the digital video business. The Scitex items were reflected as equity losses from the investment in Scitex in the consolidated statement of earnings. International Paper sold its equity interest in Scitex in January 2000. In addition, International Paper recorded a $20 million pre-tax gain ($12 million after taxes) on the sale of its Veratec nonwovens division, and an $83 million pre-tax credit ($50 million after taxes) from the reversals of previously established reserves that were no longer required. These reserves had been established in 1996 and 1997 and were primarily associated with the Veratec and Imaging businesses. The sales of these businesses were completed in 1998, and those reserves not required were returned to earnings. The following table and discussion presents additional detail related to the $145 million restructuring charge:
- ------------------------------------------------------------------- Asset In millions Write-downs Severance Total - ------------------------------------------------------------------- Distribution (a) $ 20 $ 10 $ 30 Printing Papers (b) 13 14 27 Carter Holt Harvey (c) 15 3 18 Industrial Packaging (d) 8 7 15 Union Camp (e) 8 32 40 Other (f) -- 15 15 ---- ---- ---- $ 64 $ 81 $145 ==== ==== ====
(a) After the acquisition of Zellerbach, management of xpedx terminated certain software projects that were in process and began to use Zellerbach's systems in certain of its regions. Accordingly, $20 million of deferred software costs were written off. In addition, a $10 million severance charge was recorded to terminate 274 xpedxemployees at duplicate facilities and locations. At December 31, 1999, all 274 employees had been terminated. (b) International Paper's Printing Papers business shut down equipment at the Mobile, Alabama mill and announced the termination of 750 employees at the Mobile, Alabama, Lock Haven, Pennsylvania, and Ticonderoga, New York mills. At the Mobile mill, International Paper permanently shut down a paper machine and related equipment with a net book value of $13 million. These assets were written down to their estimated fair market value of zero. The severance charge associated with the employee reductions at the three mills was $14 million. At December 31, 1999, all employees under this program had been terminated. (c) This charge primarily consisted of a $15 million asset write-down associated with the closure of two Carter Holt Harvey facilities, Myrtleford and Taupo. Myrtleford, a tissue pulp mill located in Australia, was closed due to excess capacity in its tissue pulp system. Carter Holt Harvey will be able to produce the volume at lower costs at its Kawerau tissue pulp mill located in New Zealand. Carter Holt Harvey also closed the Taupo, New Zealand 22 Management's Discussion and Analysis sawmill due to excess capacity in its sawmill system as the result of recent productivity improvements. The $3 million severance charge represented the cost of terminating 236 employees. At December 31, 1999, all 236 employees had been terminated. International Paper's consolidated financial statements included revenues of $21 million and operating income of $1 million from these facilities in 1998. (d) Management indefinitely closed the Gardiner, Oregon mill because of excess capacity in International Paper's containerboard system. As a result, the net plant, property and equipment assets of this mill were reduced from $13 million to the estimated salvage value of $5 million. In connection with this decision to close, 298 employees at the mill were terminated and a $7 million severance charge was recorded. This mill had revenues of $78 million and operating losses of $16 million in 1998. (e) During 1998, Union Camp recorded a pre-tax special charge of $40 million. Included in the charge was $32 million related to the termination of 540 positions and $8 million of asset write-downs. Approximately 190 of these positions related to a reorganization and restructuring of Union Camp's research and development activities. Another 190 positions related to a consolidation of the packaging group's administrative support functions. The remaining 160 positions related to a series of other organizational changes. At December 31, 1999, all 540 employees had been terminated. The asset write-downs were principally attributable to the impairment of goodwill specific to two packaging businesses, the Chase packaging facility and Union Camp's 1996 purchase of a 50% interest in a packaging plant in Turkey. Upon reviewing the historical and projected operating results for these businesses, management concluded that expected future cash flows did not fully support the carrying value of these assets. (f) The $15 million severance charge was recorded as a result of an announcement by International Paper of a plan to consolidate its land and timber and logging and fiber supply divisions into a new division called Forest Resources, and the consolidation of the Consumer Packaging group. Of the $15 million charge, $10 million related to a head count reduction of 200 employees in the Forest Resources group and the remaining $5 million was based on a personnel reduction of 210 employees in the Consumer Packaging group. At December 31, 1999, all 410 employees had been terminated. The following table presents a roll forward of the severance costs included in the 1998 restructuring plan:
- ---------------------------------------------------------------------------- In millions Severance - ---------------------------------------------------------------------------- Opening Balance (third quarter 1998) $ 81 1998 Activity Cash charges (19) 1999 Activity Cash charges (56) Reversal of reserve no longer required (6) ---- Balance, December 31, 1999 $ -- ====
The severance reserve recorded in the third quarter of 1998 related to 2,508 employees. As of December 31, 1999, all employees had been terminated. Ongoing Profit Improvement Review International Paper continually evaluates its operations for improvement. When any such plans are finalized, we may incur costs or charges in future periods related to improvement plans when and if such plans are implemented. Income Taxes Before special and extraordinary items, the 2000 and 1999 effective income tax rate was 28% of pre-tax earnings, increasing from 26% in 1998. The effective income tax rates are below the U.S. statutory tax rate primarily because of the geographic mix of overall taxable earnings and the impact of state tax and other credits. After special items, the effective income tax rate was 16%, 19% and 22% for 2000, 1999 and 1998, respectively. We estimate that the 2001 effective income tax rate will be approximately 31% based on expected earnings and business conditions, which are subject to change. 23 Management's Discussion and Analysis The following tables present the impact of the special items on the effective income tax rate for the three years. Taxes on special charges were provided at statutory rates except for those charges that represent tax deductions that management does not believe will be realized.
- -------------------------------------------------------------------------------- In millions 2000 - -------------------------------------------------------------------------------- Earnings (Loss) Before Income Income Taxes Tax Effective and Minority Provision Tax Interest (Benefit) Rate - -------------------------------------------------------------------------------- Before special and extraordinary items $1,692 $ 480 28% Merger-related expenses (54) (21) 39% Restructuring and other charges (824) (310) 38% Provision for legal reserves (125) (45) 36% Reversals of reserves no longer required 34 13 38% ------ ----- After special items $ 723 $ 117 16% ====== =====
- -------------------------------------------------------------------------------- In millions 1999 - -------------------------------------------------------------------------------- Earnings (Loss) Before Income Income Taxes Tax Effective and Minority Provision Tax Interest (Benefit) Rate - -------------------------------------------------------------------------------- Before special and extraordinary items $1,005 $ 281 28% Union Camp merger-related termination benefits (148) (51) 34% Merger-related expenses (107) (29) 27% Restructuring and other charges (298) (108) 36% Environmental remediation charge (10) (4) 40% Provision for legal reserves (30) (12) 40% Reversals of reserves no longer required 36 9 25% ------ ----- After special items $ 448 $ 86 19% ====== =====
- -------------------------------------------------------------------------------- In millions 1998 - -------------------------------------------------------------------------------- Earnings (Loss) Before Income Income Taxes Tax Effective and Minority Provision Tax Interest (Benefit) Rate - -------------------------------------------------------------------------------- Before special items $ 598 $158 26% Oil and gas impairment charges (111) (43) 39% Restructuring and other charges (161) (61) 38% Gain on sale of business 20 8 40% Reversals of reserves no longer required 83 33 40% ----- ----- After special items $ 429 $ 95 22% ===== =====
Recent Accounting Developments In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured by its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. International Paper will adopt SFAS No. 133 (as amended by SFAS No. 138) as of January 1, 2001. We estimate that adoption will require a one-time, non-cash charge before taxes and minority interest of approximately $23 million ($14 million after taxes and minority interest), which will be recorded as a cumulative change in accounting method. Legal and Environmental Issues International Paper is subject to extensive federal and state environmental regulation as well as similar regulations in all other jurisdictions in which we operate. Our continuing objectives are to: (1) control pollutants discharged into the air, water and groundwater to avoid adverse impacts on the environment, (2) make continual improvements in environmental performance, and (3) maintain 100% compliance with applicable laws and regulations. A total of $190 million was spent in 2000 for capital projects to control environmental releases into the air and water, and to assure environmentally sound management and disposal of waste. We expect to spend approximately $136 million in 2001 for similar capital projects, including the costs to comply with the Environmental Protection Agency's (EPA) Cluster Rule regulations. Amounts to be spent for environmental control projects in future years will depend on new laws and regulations and changes in legal requirements and environmental concerns. Taking these uncertainties into account, our preliminary estimate for additional environmental appropriations during the period 2002 through 2003 is approximately $307 million in total. On April 15, 1998, the EPA issued final Cluster Rule regulations that established new requirements regarding air emissions and wastewater discharges from pulp and paper mills to be met by 2006. The projected costs included in our estimate related to the Cluster Rule regulations for the years 2001 through 2002 are $116 million. Projected Cluster Rule costs for 2003 through 2006 are in the range of $330 million 24 Management's Discussion and Analysis to $370 million. Included in these estimates are costs associated with combustion source standards for the pulp and paper industry, which were issued by the EPA on January 12, 2001. The final cost depends on the outcome of the Cluster Rule water regulations for pulp and paper categories other than bleached kraft and soda. Regulations for these categories are not likely to become final until late 2001. We estimate that annual operating costs, excluding depreciation, will increase approximately $22 million when these regulations are fully implemented. Additional regulatory requirements that may affect future spending include the EPA's requirements for states to assess current surface water loading from industrial and area sources. This process, called Total Maximum Daily Load (TMDL) allocation, could result in reduced allowable treated effluent discharges from our manufacturing sites. To date there have been no significant impacts due to the TMDL process, as the majority of our manufacturing sites operate at levels significantly below allowable waste loadings. In recent years, the EPA has undertaken significant air quality initiatives associated with nitrogen oxide emissions, regional haze, and national ambient air quality standards. When regulatory requirements for new and changing standards are finalized, we will add any resulting future cost projections to our expenditure forecast. International Paper has been named as a potentially liable party in a number of environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act. Related costs are recorded in the financial statements when they are probable and reasonably estimable. As of December 31, 2000, these liabilities totaled approximately $170 million. Completion of these actions is not expected to have a material adverse effect on our financial condition or results of operations. The significant effort International Paper has made in the analysis of environmental issues and the development of environmental control technology responses will enable us to keep costs for compliance with environmental regulations at, or below, industry averages. Masonite Litigation: Three nationwide class action lawsuits filed against International Paper have been settled in recent years. The first suit alleged that hardboard siding manufactured by Masonite fails prematurely, allowing moisture intrusion that in turn causes damage to the structure underneath the siding. The class consisted of all U.S. property owners having Masonite hardboard siding installed on and incorporated into buildings between 1980 and January 15, 1998. Final approval of the settlement was granted by the Court on January 15, 1998. The settlement provides for monetary compensation to class members meeting the settlement requirements on a claims-made basis. It also provides for the payment of attorneys'fees equaling 15% of the settlement amounts paid to class members, with a non-refundable advance of $47.5 million plus $2.5 million in costs. The second suit made similar allegations with regard to Omniwood siding manufactured by Masonite (Omniwood Lawsuit). The class consisted of all U.S. property owners having Omniwood siding installed on and incorporated into buildings from January 1, 1992 to January 6, 1999. The third suit alleged that Woodruf roofing manufactured by Masonite is defective and causes damage to the structure underneath the roofing (Woodruf Lawsuit). The class consisted of all U.S. property owners who had incorporated and installed Masonite Woodruf roofing from January 1, 1980 to January 6, 1999. Final approval of the settlements of the Omniwood and Woodruf lawsuits was granted by the Court on January 6, 1999. The settlements provide for monetary compensation to class members meeting the settlement requirements on a claims-made basis, and provide for payment of attorneys' fees equaling 13% of the settlement amounts paid to class members with a non-refundable advance of $1.7 million plus $75,000 in costs for each of the two cases. Reserves for these matters total $92 million at December 31, 2000, net of expected future insurance recoveries of $51 million. This amount includes $25 million added to the reserve for hardboard siding claims in the fourth quarter of 1999 (some of which has now been paid to claimants) and an additional $125 million added to that reserve in the third quarter of 2000 to cover an expected shortfall, resulting primarily from a higher number of hardboard siding claims than anticipated. It is reasonably possible that the higher number of hardboard siding claims might be indicative of the need for one or more future additions to this reserve. However, whether or not any future additions to this reserve become necessary, we believe that these settlements will not have a material adverse effect on our consolidated financial position or results of operations. 25 Management's Discussion and Analysis Through December 31, 2000, net settlement payments of $277 million, including the $51 million of non-refundable advances of attorneys' fees discussed above, have been made. Included in the non-refundable advances of attorneys' fees is $5 million, which has been paid to the attorneys for the plaintiffs in the Omniwood and Woodruf lawsuits. Also, we have received $27 million related to these matters from our insurance carriers through December 31, 2000. International Paper and Masonite have the right to terminate each of the settlements after seven years from the dates of final approval. The liability for these matters will be retained after the planned sale of Masonite is completed. Other Litigation: In March and April 2000, Champion and 10 members of its board of directors were served with six lawsuits that have been filed in the Supreme Court for the State of New York, New York County. Each of the suits purports to be a class action filed on behalf of Champion shareholders and alleges that the defendants breached their fiduciary duties in connection with the proposed merger with UPM-Kymmene Corporation and the merger proposal from International Paper. Champion has filed a motion to dismiss, which as of February 26, 2001 has not been decided. On May 14, 1999, and May 18, 1999, two lawsuits were filed against International Paper, the former Union Camp Corporation and other manufacturers of linerboard. These suits allege that the defendants conspired to fix prices for linerboard and corrugated sheets during the period October 1, 1993, through November 30, 1995. Both lawsuits were filed seeking nationwide class certification. The lawsuits allege that various purchasers of corrugated sheets and corrugated containers were injured as a result of the alleged conspiracy. The cases have been consolidated in federal court in the Eastern District of Pennsylvania. Defendants'motions to dismiss the cases were denied on October 4, 2000. Plaintiffs filed motions for class certification on January 10, 2001, which were pending as of February 26, 2001. Purchasers of high-pressure laminates have filed a number of purported class actions under the federal antitrust laws in various federal district courts in different states, alleging that International Paper's Nevamar division participated in a price-fixing conspiracy with competitors. These cases have been consolidated in federal district court in New York. Indirect and direct purchasers of high-pressure laminates have also filed similar purported class action cases under various state antitrust and consumer protection statutes in California, Florida, Maine, Michigan, Minnesota, New Mexico, New York, North Dakota, South Dakota, Tennessee and the District of Columbia. International Paper filed a motion to dismiss one of the cases in federal court, which was denied by the court without prejudice. The federal plaintiffs filed a consolidated amended complaint on February 22, 2001. As of February 26, 2001, International Paper has filed a motion to dismiss the case pending in New York State court and has filed answers in California, New Mexico, South Dakota and one of two complaints filed in Michigan. Answers are not yet due in the remaining state cases. Other Environmental: In April 1999, the Franklin, Virginia mill received a Notice of Violation (NOV) from the EPA, Region 3 in Philadelphia, and an NOV from the Commonwealth of Virginia alleging that the mill violated the Prevention of Significant Deterioration (PSD) regulations. The Franklin mill was owned by Union Camp Corporation at that time and was one of seven paper mills in Region 3 owned by different companies that received similar notices of violation. Union Camp merged with International Paper on April 30, 1999, and International Paper has entered into negotiations with the EPA and the Commonwealth of Virginia. The Franklin mill NOVs were issued in connection with the EPA's well publicized PSD air permit enforcement initiative against the paper industry. In 1999, our paper mills in Kaukauna, Wisconsin and Augusta, Georgia received requests for information from the EPA regarding compliance with the PSD regulations. Three additional facilities received information requests in 2000, and the EPA's initiative may result in similar actions at other facilities. In August 1998, the former Union Camp Corporation informed the Virginia Department of Environmental Quality (DEQ) of certain New Source Performance Standards (NSPS) permitting discrepancies related to a power boiler at the paper mill in Franklin, Virginia. On April 11, 2000, International Paper and the DEQ entered into a consent order that resolved the matter for a civil penalty of $134,000. In November 1999, the Wisconsin Department of Natural Resources filed a civil complaint alleging past exceedences of air permit limits at the former Union Camp flexible packaging facility located in Tomah, Wisconsin. The matter was settled on November 2, 2000 for a civil penalty of $60,000. In February 2000, the Town of Lyman, South Carolina, issued an administrative order alleging past violations of a wastewater pretreatment permit at the former Union Camp folding carton facility in Spartanburg, South Carolina. While International Paper has satisfied the terms of the order, the Town of Lyman recently indicated it may seek penalties and other surcharges that together may exceed $100,000. We are engaged in settlement discussions with the Town of Lyman. 26 Management's Discussion and Analysis As of February 26, 2001, there were no other pending judicial proceedings, brought by governmental authorities against International Paper, for alleged violations of applicable environmental laws or regulations. International Paper is engaged in various other proceedings that arise under applicable environmental and safety laws or regulations, including approximately 97 active proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and comparable state laws. Most of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under the CERCLA, as a practical matter, liability for CERCLA cleanups is allocated among the many potential responsible parties. Based upon previous experience with respect to the cleanup of hazardous substances and upon presently available information, International Paper believes that it has no or de minimis liability with respect to 18 of these sites; that liability is not likely to be significant at 51 sites; and that estimates of liability at 28 of these sites is likely to be significant but not material to International Paper's consolidated finan-cial position or results of operations. On June 19, 2000, before International Paper completed the acquisition of Champion, Champion entered into a Consent Order with the Maine Department of Environmental Protection that resolved allegations of past wastewater and reporting deficiencies at Champion's lumber mills in Milford and Passadumkeag, Maine. The U.S. EPA and the U.S. Attorney's Office in Maine have since that time commenced a grand jury investigation of the same allegations. We are also involved in other contractual disputes, administrative and legal proceedings and investigations of various types. While any litigation, proceeding or investigation has an element of uncertainty, we believe that the outcome of any proceeding, lawsuit or claim that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial position or results of operations. Impact of the Euro The introduction of the euro for noncash transactions took place on January 1, 1999, with 11 countries participating in the first wave: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. The euro has been trading on world currency exchanges since 1999 and is used by our businesses in transactions. On January 2, 2002, new euro-denominated bills and coins will be issued and legacy currencies will be completely withdrawn from circulation that year. In general, the euro has increased price transparency for our products in Europe. The major impact on International Paper has been on its businesses within the euro zone, which make up approximately 9% of sales. Each of our European businesses has a plan in place to deal with the introduction of the euro. Over the three-year transition period, our computer systems will be updated to ensure euro compliance. Also, we are reviewing our marketing and operational policies and procedures to ensure our ability to continue to successfully conduct all aspects of our business in this new market. In general, our product lines are likely to become somewhat more international, with some leveling of prices that is not expected to significantly impact our operations. We anticipate that the total costs in connection with the euro conversion will not be material. Further, we do not anticipate that the conversion from the legacy currencies to the euro will have a material adverse effect on our consolidated financial position or results of operations. Effect of Inflation General inflation has had minimal impact on our operating results in the last three years. Sales prices and volumes are more strongly influenced by supply and demand factors in specific markets and by exchange rate fluctuations than by inflationary factors. Market Risk We use financial instruments, including fixed and variable rate debt, to finance operations, for capital spending programs and for general corporate purposes. Additionally, financial instruments, including swap and forward contracts, are used to hedge exposures to interest rate and foreign currency risks. We do not use financial instruments for trading purposes. Our exposure to market risk for changes in interest rates relates primarily to investments in marketable securities, and short- and long-term debt obligations. We invest in high-credit-quality securities with major international financial institutions while limiting exposure to any one issuer. Our debt obligations outstanding as of December 31, 2000, expressed in U.S. dollar equivalents, are summarized as to their principal cash flows and related weighted average interest rates by year of maturity in the following table. Our investments in marketable securities at December 31, 2000 were not significant. 27 Management's Discussion and Analysis
- ----------------------------------------------------------------------------------------------------------------------------------- U.S. dollars in millions 2001 2002 2003 2004 2005 Thereafter Total Fair Value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. commercial paper and bank notes 7.3% average interest rate $ 879 $ - $ - $637 $ - $ - $ 1,516 $ 1,516 Euro commercial paper and bank notes 5.1% average interest rate 178 - - - - - 178 178 Chinese renminbi bank notes 6.0% average interest rate 18 - - - - - 18 18 Euro fixed rate notes 5 3/8% average interest rate - - - - - 223 223 214 New Zealand dollar bank notes 7.1% average interest rate 285 - - - - - 285 285 Fixed rate debt--7.8% average interest rate 397 484 1,432 683 1,177 3,218 7,391 7,518 5 7/8% Swiss franc debentures 67 - - - - - 67 71 Medium term notes--8.2% average interest rate 146 79 30 9 - 43 307 312 Environmental and industrial development bonds 6.3% average interest rate 44 75 6 32 77 2,100 2,334 2,431 Brazilian real notes 13.4% average interest rate 24 24 22 18 100 6 194 194 Floating rate notes--7.9% average interest rate - 2,100 - - - - 2,100 2,100 Other 77 15 10 8 6 34 150 147 ------ ------ ------ ------ ------ ------ ------- ------- Total Debt $2,115 $2,777 $1,500 $1,387 $1,360 $5,624 $14,763 $14,984 ====== ====== ====== ====== ====== ====== ======= =======
For debt obligations, the table above presents principal cash flows and related weighted average interest rates by year of maturity. Variable interest rates disclosed represent the weighted average rates at the end of the period. For financial statement classification, $750 million of short-term debt has been classified as long-term pursuant to line of credit agreements. We use cross-currency and interest rate swap agreements to manage the composition of our fixed and floating rate debt portfolio. Amounts to be paid or received as interest under these agreements are recognized over the life of the swap agreements as adjustments to interest expense. The impact on earnings and our net liability under these agreements was not significant. Our cross-currency and interest rate swap agreements outstanding at December 31, 2000, expressed in U.S. dollar equivalents, by year of maturity, are presented in the following table.
- ------------------------------------------------------------------------------------------------------------------------------- U.S. dollars in millions 2001 2002 2003 2004 2005 Thereafter Total Fair Value - ------------------------------------------------------------------------------------------------------------------------------- U.S. dollar variable to fixed rate swaps $ - $ 45 $200 $300 $- $500 $1,045 $ 97 Average pay rate 6.3% / Average receive rate 6.9% U.S. dollar fixed to variable rate swaps - 45 200 550 - 500 1,295 (98) Average pay rate 7.6% / Average receive rate 6.8% U.S. dollar to New Zealand dollar cross-currency swap - 150 - - - - 150 (5) Australian dollar to New Zealand dollar cross-currency swap - 130 - - - - 130 25 Swiss franc to New Zealand dollar cross-currency swaps 68 - - - - - 68 1
28 Management's Discussion and Analysis We also transact business in many currencies and are subject to currency exchange rate risk. We address this risk through a risk management program that involves financing a portion of our investments in overseas operations with borrowings denominated in the same currency as the investment or by entering into currency exchange contracts in tandem with U.S. dollar borrowings. These contracts are effective in providing hedges against fluctuations in currency exchange rates. Additionally, we utilize currency exchange contracts to hedge certain transactions that are denominated in foreign currencies, primarily export sales and equipment purchased from nonresident vendors. These contracts serve to protect us from currency fluctuations between the transaction and settlement dates. The following table presents information about our foreign currency forward contracts outstanding as of December 31, 2000, expressed in U.S. dollar equivalents. The majority of the contracts have maturities of less than 12 months. This information should be read in conjunction with Note 14--Financial Instruments to the consolidated financial statements which can be found on pages 54 through 56.
- -------------------------------------------------------------------------------------- Weighted Net Average Unrealized Contract Exchange Gain U.S. dollars in millions Amount Rate (Loss) - -------------------------------------------------------------------------------------- Pay U.S. dollars / Receive European euros $1,072 0.89 $(10) Pay British pounds / Receive European euros 70 0.59 1 Pay U.S. dollars / Receive British pounds 129 1.46 (2) Pay European euros / Receive British pounds 39 1.63 - Receive New Zealand dollars / Pay Australian dollars 475 1.31 15 Pay U.S. dollars / Receive New Zealand dollars 350 0.46 (5) Receive Swedish kronas / Pay U.S. dollars 30 9.64 - Receive U.S. dollars / Pay European euros 29 0.88 (1) Receive U.S. dollars / Pay British pounds 18 1.44 - Receive U.S. dollars / Pay New Zealand dollars 440 0.41 (25)
We have an additional $31 million in a number of smaller forward contracts to purchase or sell other currencies with a related net unrealized immaterial gain. We also purchase foreign exchange option contracts, with terms that generally do not exceed one year, to hedge export sales. Premiums paid under these contracts are expensed over the life of the option contract. Gains arising on these options are recognized at the time the options are exercised. Option contracts outstanding at December 31, 2000 amounted to $121 million. Value at Risk Value at risk is used to describe an approach for measuring market risk exposure that utilizes statistical models that are based on historical price and volatility patterns to estimate the probability of the value of a financial instrument falling above or below a specified amount at a specified confidence level and over a given time period. Our analysis uses variance-covariance statistical modeling techniques and includes substantially all interest rate-sensitive debt and swaps, and currency exchange contracts. The model estimates the potential loss in fair value or earnings we could incur from adverse changes in interest rates or currency exchange rates. We believe the effects of interest rate or currency exchange movements on the respective underlying hedged transactions would substantially offset any loss incurred. The results of our analysis at a 95% confidence level were not significant to our consolidated common shareholders' equity, earnings or daily change in market capitalization. Forward-Looking Statements Certain statements in this 2000 Annual Report to Shareholders, and in particular, statements found in Management's Discussion and Analysis, that are not historical in nature may constitute forward-looking statements. These statements are often identified by the words, "believe," "expect," "plan," "appear," "project," "estimate," "intend," and words of similar import. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ include, among other things, whether conditions influencing the recent economic slowdown will continue or worsen, changes in overall demand, whether our initiatives relating to balancing our supply with demand will be successful, changes in domestic or foreign competition, changes in the cost or availability of raw materials, the cost of compliance with environmental laws and regulations, and whether anticipated savings from merger and other restructuring activities and facility rationalizations can be achieved. In view of such uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. International Paper does not assume any obligation to update these forward-looking statements. 29 Financial Information by Industry Segment and Geographic Area For information about our industry segments, see the "Description of Industry Segments" included in management's discussion and analysis of financial condition and results of operations. For management purposes, we report the operating performance of each business based on earnings before interest and income taxes ("EBIT") excluding special and extraordinary items and gains or losses on sales of businesses. Our Carter Holt Harvey segment includes our share, about half, of their operating earnings adjusted for U.S. generally accepted accounting principles. The remaining half is included in the minority interest adjustment. Intersegment sales and transfers are recorded at current market prices. Corporate sales include the Imaging and Veratec businesses that were sold in 1998. Sales for these businesses were $220 million in 1998. Corporate operating profit includes an operating loss of $2 million for these businesses in 1998 as well as corporate expenses. Corporate assets include these businesses for the applicable years in addition to other assets not allocated to our segments. External Sales by Major Product is determined by aggregating sales from each segment based on similar products or services. External sales are defined as those that are made to parties outside International Paper's consolidated group whereas sales by segment in the Net Sales table are determined by the management approach and include intersegment sales. Capital Spending by Industry Segment is reported on page 13 of management's discussion and analysis of financial condition and results of operations. Information by Industry Segment
Net Sales - -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Printing Papers(a) $ 7,960 $ 5,840 $ 5,815 Industrial and Consumer Packaging 7,625 7,050 7,010 Distribution 7,255 6,850 6,280 Forest Products 3,465 3,205 2,930 Chemicals and Petroleum 1,395 1,455 1,465 Carter Holt Harvey 1,675 1,605 1,505 Corporate and Intersegment Sales(a,b,c) (1,195) (1,432) (1,026) ------- ------- ------- Net Sales $28,180 $24,573 $23,979 ======= ======= =======
Assets - -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Printing Papers $11,692 $ 7,929 $ 8,213 Industrial and Consumer Packaging 8,187 7,316 7,389 Distribution 1,989 1,893 1,903 Forest Products 7,454 3,819 3,644 Chemicals and Petroleum 1,056 1,531 1,614 Carter Holt Harvey(d) 3,141 4,183 4,475 Corporate(c) 8,590 3,597 4,228 ------- ------- ------- Assets $42,109 $30,268 $31,466 ======= ======= =======
Operating Profit(a) - -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Printing Papers $ 959 $ 254 $ 178 Industrial and Consumer Packaging 773 562 334 Distribution 120 105 86 Forest Products 602 724 622 Chemicals and Petroleum 161 124 136 Carter Holt Harvey(e) 71 39 20 Corporate(b) 26 -- -- ------- ------- ------- Operating Profit 2,712 1,808 1,376 Interest expense, net (816) (541) (614) Minority interest adjustment(e) 108 74 57 Corporate items, net (312) (336) (237)(c) Merger integration costs (54) (255) -- Restructuring and other charges (949) (338) (256) Reversals of reserves no longer required 34 36 83 Gain on sale of business -- -- 20 ------- ------- ------- Earnings Before Income Taxes, Minority Interest and Extraordinary Items $ 723 $ 448 $ 429 ======= ======= =======
30 Financial Information by Industry Segment and Geographic Area
Restructuring and Other Charges - -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Printing Papers $425 $ 55 $ 32 Industrial and Consumer Packaging 290 114 46 Distribution 22 23 31 Forest Products 35 16 14 Chemicals and Petroleum 34 63 4 Carter Holt Harvey 10 27 18 Corporate(a) 133 40 111 ---- ---- ----- Restructuring and Other Charges $949 $338 $256 ==== ==== =====
Depreciation and Amortization - -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Printing Papers(f) $ 635 $ 556 $ 535 Industrial and Consumer Packaging 487 466 447 Distribution 35 32 25 Forest Products(f) 273 196 218 Chemicals and Petroleum 91 99 106 Carter Holt Harvey(f) 177 201 193 Corporate 218 115 136 ------- ------- ------- Depreciation and Amortization $ 1,916 $ 1,665 $ 1,660 ======= ======= =======
External Sales by Major Product - -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Printing Papers $ 7,210 $ 5,069 $ 5,475 Packaging 8,051 7,361 7,360 Distribution 7,275 6,926 6,235 Forest Products 4,226 3,759 3,430 Chemicals and Petroleum 1,418 1,458 1,230 Corporate Sales(c) -- -- 249 ------- ------- ------- Net Sales $28,180 $24,573 $23,979 ======= ======= =======
(a) Certain reclassifications and adjustments have been made to prior year amounts. (b) Includes results of operations from Champion, which was acquired on June 20, 2000. Beginning on July 1, 2000, the results of the former Champion business have been included in the appropriate business segment. (c) Includes results or assets, as applicable, from operations disposed of in 1998. (d) Includes equity investments (in millions) of $16 in 2000, $876 in 1999 and $956 in 1998. (e) Includes equity earnings (in millions) of $11 in 2000, $54 in 1999 and $20 in 1998. Half of these equity earnings amounts are in the Carter Holt Harvey segment and half are in the minority interest adjustment. (f) Includes cost of timber harvested. Information by Geographic Area
Net Sales(g) - -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- United States(h) $22,131 $19,152 $18,682 Europe 3,353 3,257 3,251 Pacific Rim(i) 1,923 1,865 1,731 Americas, other than U.S.(k) 773 299 315 ------- ------- ------- Net Sales $28,180 $24,573 $23,979 ======= ======= =======
European Sales by Industry Segment - -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Printing Papers $ 1,637 $ 1,514 $ 1,423 Industrial and Consumer Packaging 736 750 772 Distribution 370 347 323 Forest Products 196 200 208 Chemicals and Petroleum 414 446 465 Other Businesses(c) -- -- 60 ------- ------- ------- European Sales $ 3,353 $ 3,257 $ 3,251 ======= ======= =======
Long-Lived Assets(j) - -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- United States $17,026 $12,325 $13,149 Europe 1,213 1,888 2,101 Pacific Rim(i) 2,291 2,625 2,793 Americas, other than U.S.(k) 1,313 77 74 Corporate 134 387 296 ------- ------- ------- Long-Lived Assets $21,977 $17,302 $18,413 ======= ======= =======
(g) Net sales are attributed to countries based on location of seller. (h) Export sales to unaffiliated customers (in billions) were $1.6 in 2000, and $1.5 in 1999 and 1998. (i) Operations in New Zealand and Australia account for most of the Pacific Rim amounts. (j) Long-Lived Assets includes Forestlands and Plants, Properties and Equipment, net. (k) Increases in 2000 reflect operations in Brazil and Canada acquired with Champion. 31 Report of Management on Financial Statements The management of International Paper Company is responsible for the fair presentation of the information contained in the financial statements in this annual report. The statements are prepared in accordance with U.S. generally accepted accounting principles and reflect management's best judgment as to our financial position, results of operations and cash flows. International Paper maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are properly recorded and summarized so that reliable financial records and reports can be prepared and assets safeguarded. The internal controls system includes our long-standing policy on ethical business conduct and careful selection and training of supervisory and management personnel, appropriate delegation of authority and division of responsibility, dissemination of accounting and business policies throughout International Paper, and an extensive program of internal audits with management follow-up. The independent public accountants provide an objective, independent review of management's discharge of its responsibility for the fairness of our financial statements. They review our internal accounting controls and conduct tests of procedures and accounting records to enable them to form the opinion set forth in their report. The Board of Directors monitors management's administration of International Paper's financial and accounting policies and practices, and the preparation of these financial statements. The Audit and Finance Committee (Committee), which consists of five non-employee directors, meets regularly with representatives of management, the independent public accountants and the Internal Auditor to review their activities. The Committee has reviewed and discussed the consolidated financial statements for the year ended December 31, 2000 with management and the independent public accountants. The Committee's report recommending the inclusion of such financial statements in this Annual Report is set forth in our Proxy Statement. The independent public accountants and the Internal Auditor both have free access to the Committee and meet regularly with the Committee, with and without management representatives in attendance. JOHN V. FARACI John V. Faraci Executive Vice President and Chief Financial Officer Report of Independent Public Accountants To the Shareholders of International Paper Company: We have audited the accompanying consolidated balance sheets of International Paper Company (a New York corporation) and subsidiaries as of December 31, 2000 and 1999, and the related statements of earnings, common shareholders' equity and cash flows for each of the three years ended December 31, 2000. These financial statements are the responsibility of International Paper's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Union Camp Corporation (a company acquired during 1999 in a transaction accounted for as a pooling-of-interests) prior to 1999. The Union Camp financial statements reflect total assets and total revenues of 16% and 19% in 1998 of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for that entity, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of International Paper Company and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years ended December 31, 2000 in conformity with generally accepted accounting principles in the United States. ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP New York, N.Y. February 13, 2001 32 Consolidated Statement of Earnings International Paper
- -------------------------------------------------------------------------------------------------------------- In millions, except per share amounts, for the years ended December 31 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Net Sales $28,180 $24,573 $23,979 ------- ------- ------- Costs and Expenses Cost of products sold 20,082 17,960 17,758 Selling and administrative expenses 2,283 2,083 2,032 Depreciation and amortization 1,916 1,665 1,660 Distribution expenses 1,104 1,098 1,087 Taxes other than payroll and income taxes 287 226 231 Equity (earnings) losses from investment in Scitex -- (5) 15 Merger integration costs 54 255 -- Restructuring and other charges 949 338 256 ------- ------- ------- Total Costs and Expenses 26,675 23,620 23,039 Reversals of reserves no longer required 34 36 83 Gain on sale of business -- -- 20 ------- ------- ------- Earnings Before Interest, Income Taxes, Minority Interest and Extraordinary Items 1,539 989 1,043 Interest expense, net 816 541 614 ------- ------- ------- Earnings Before Income Taxes, Minority Interest and Extraordinary Items 723 448 429 Income tax provision 117 86 95 Minority interest expense, net of taxes 238 163 87 ------- ------- ------- Earnings Before Extraordinary Items 368 199 247 Impairment losses on businesses to be sold, net of taxes (541) -- -- Net gain on sales of investments and businesses, net of taxes and minority interest 315 -- -- Loss on extinguishment of debt, net of taxes -- (16) -- ------- ------- ------- Net Earnings $ 142 $ 183 $ 247 ======= ======= ======= Earnings Per Common Share--Before Extraordinary Items $ 0.82 $ 0.48 $ 0.60 Earnings (Loss) Per Common Share--Extraordinary Items (0.50) (0.04) -- ------- ------- ------- Earnings Per Common Share $ 0.32 $ 0.44 $ 0.60 ======= ======= ======= Earnings Per Common Share--Assuming Dilution $ 0.32 $ 0.44 $ 0.60 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 33 Consolidated Balance Sheet International Paper
- --------------------------------------------------------------------------------------------------------- In millions at December 31 2000 1999 - --------------------------------------------------------------------------------------------------------- Assets Current Assets Cash and temporary investments $ 1,198 $ 453 Accounts and notes receivable, less allowances of $128 in 2000 and $106 in 1999 3,433 3,227 Inventories 3,182 3,203 Assets of businesses held for sale 1,890 -- Other current assets 752 358 ------- ------- Total Current Assets 10,455 7,241 ------- ------- Plants, Properties and Equipment, net 16,011 14,381 Forestlands 5,966 2,921 Investments 269 1,044 Goodwill 6,310 2,596 Deferred Charges and Other Assets 3,098 2,085 ------- ------- Total Assets $42,109 $30,268 ======= ======= Liabilities and Common Shareholders' Equity Current Liabilities Notes payable and current maturities of long-term debt $ 2,115 $ 920 Accounts payable 2,113 1,870 Accrued payroll and benefits 511 423 Liabilities of businesses held for sale 541 -- Other accrued liabilities 2,133 1,169 ------- ------- Total Current Liabilities 7,413 4,382 ------- ------- Long-Term Debt 12,648 7,520 Deferred Income Taxes 4,699 3,344 Other Liabilities 2,155 1,332 Minority Interest 1,355 1,581 International Paper-Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries Holding International Paper Debentures--Note 8 1,805 1,805 Commitments and Contingent Liabilities--Note 11 Common Shareholders' Equity Common stock, $1 par value, 2000--484.2 shares, 1999--414.6 shares 484 415 Paid-in capital 6,501 4,078 Retained earnings 6,308 6,613 Accumulated other comprehensive income (loss) (1,142) (739) ------- ------- 12,151 10,367 Less: Common stock held in treasury, at cost, 2000--2.7 shares, 1999--1.2 shares 117 63 ------- ------- Total Common Shareholders' Equity 12,034 10,304 ------- ------- Total Liabilities and Common Shareholders' Equity $42,109 $30,268 ======= =======
The accompanying notes are an integral part of these financial statements. 34 Consolidated Statement of Cash Flows International Paper
- ---------------------------------------------------------------------------------------- In millions for the years ended December 31 2000 1999 1998 - ---------------------------------------------------------------------------------------- Operating Activities Net earnings $ 142 $ 183 $ 247 Depreciation and amortization 1,916 1,665 1,660 Deferred income tax provision (benefit) (323) (208) 132 Payments related to restructuring and legal reserves (233) (191) (82) Payments related to mergers (58) (172) - Merger integration costs 54 255 - Restructuring and other charges 949 338 256 Reversals of reserves no longer required (34) (36) (83) Gains on sales of investments and businesses (748) - (20) Loss on extinguishment of debt - 26 - Impairment losses on businesses to be sold 833 - - Other, net 78 (100) (86) Changes in current assets and liabilities Accounts and notes receivable (59) (361) 152 Inventories (143) (121) 51 Accounts payable and accrued liabilities 19 449 (113) Other 37 1 (16) ------- ------- ------- Cash Provided by Operations 2,430 1,728 2,098 ------- ------- ------- Investment Activities Invested in capital projects (1,352) (1,139) (1,322) Mergers and acquisitions, net of cash acquired (5,677) (54) (498) Proceeds from divestitures 2,116 119 523 Other (1) (11) (51) ------- ------- ------- Cash Used for Investment Activities (4,914) (1,085) (1,348) ------- ------- ------- Financing Activities Issuance of common stock 25 246 115 Issuance of preferred securities by subsidiary - - 1,525 Issuance of debt 6,328 1,023 348 Reduction of debt (2,770) (1,563) (2,213) Change in bank overdrafts 118 102 68 Dividends paid (447) (418) (431) Other 140 (96) (63) ------- ------- ------- Cash Provided by (Used for) Financing Activities 3,394 (706) (651) ------- ------- ------- Effect of Exchange Rate Changes on Cash (165) (17) 1 ------- ------- ------- Change in Cash and Temporary Investments 745 (80) 100 Cash and Temporary Investments Beginning of the year 453 533 433 ------- ------- ------- End of the year $ 1,198 $ 453 $ 533 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 35 Consolidated Statement of Common International Paper Shareholders'Equity
- -------------------------------------------------------------------------------------------------------------------------------- Accumulated Total Common Stock Issued Other Com- Treasury Stock Common In millions, except share amounts -------------------- Paid-in Retained prehensive ---------------- Shareholders' in thousands Shares Amount Capital Earnings Income (Loss) Shares Amount Equity - -------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1998 408,174 $ 408 $ 3,659 $ 7,032 $ (415) 726 $ 37 $ 10,647 Issuance of stock for acquisition 4,683 5 227 -- -- -- -- 232 Issuance of stock for various plans 605 1 23 -- -- (2,694) (128) 152 Repurchase of stock (277) (1) (13) -- -- 2,520 115 (129) Cash dividends--Common stock ($1.05 per share) -- -- -- (431) -- -- -- (431) Comprehensive income (loss) Net earnings -- -- -- 247 -- -- -- 247 Minimum pension liability adjustment (less tax benefit of $5) -- -- -- -- (8) -- -- (8) Change in cumulative foreign currency translation adjustment (less tax benefit of $2) -- -- -- -- 21 -- -- 21 Realized foreign currency translation adjustment related to divestitures (less tax benefit of $4) -- -- -- -- 7 -- -- 7 -------- Total comprehensive income 267 ------- ----- ------- ------- ------- ------ ------ -------- Balance, December 31, 1998 413,185 413 3,896 6,848 (395) 552 24 10,738 Issuance of stock for various plans 1,399 2 182 -- -- (1,866) (87) 271 Repurchase of stock -- -- -- -- -- 2,530 126 (126) Cash dividends--Common stock ($1.01 per share) -- -- -- (418) -- -- -- (418) Comprehensive income (loss) Net earnings -- -- -- 183 -- -- -- 183 Minimum pension liability adjustment (less tax expense of $1) -- -- -- -- 2 -- -- 2 Change in cumulative foreign currency translation adjustment (less tax expense of $31) -- -- -- -- (346) -- -- (346) -------- Total comprehensive (loss) (161) ------- ----- ------- ------- ------- ------ ------ -------- Balance, December 31, 1999 414,584 415 4,078 6,613 (739) 1,216 63 10,304 Issuance of stock for acquisition 68,706 69 2,360 -- -- -- -- 2,429 Issuance of stock for various plans 870 -- 63 -- -- (236) (12) 75 Repurchase of stock -- -- -- -- -- 1,710 66 (66) Cash dividends--Common stock ($1.00 per share) -- -- -- (447) -- -- -- (447) Comprehensive income (loss) Net earnings -- -- -- 142 -- -- -- 142 Minimum pension liability adjustment (less tax benefit of $13) -- -- -- -- (23) -- -- (23) Change in cumulative foreign currency translation adjustment (less tax expense of $123) -- -- -- -- (380) -- -- (380) -------- Total comprehensive (loss) (261) ------- ----- ------- ------- ------- ------ ------ -------- Balance, December 31, 2000 484,160 $ 484 $ 6,501 $ 6,308 $(1,142) 2,690 $ 117 $ 12,034 ======= ===== ======= ======= ======= ====== ======= ========
The cumulative foreign currency translation adjustment (in millions) was $(1,113), $(733) and $(387) at December 31, 2000, 1999 and 1998, respectively, and is included as a component of accumulated other comprehensive income (loss). The accompanying notes are an integral part of these financial statements. 36 Notes to Consolidated Financial Statements 1 Summary of Significant Accounting Policies - -------------------------------------------------------------------------------- Nature of Our Business International Paper is a global forest products, paper and packaging company that is complemented by an extensive distribution system, with primary markets and manufacturing operations in the U.S., Canada, Europe, the Pacific Rim and South America. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to available industry capacity and general economic conditions. For a further discussion of our business, see pages 6 through 29 of management's discussion and analysis of financial condition and results of operations. Financial Statements The preparation of these financial statements in conformity with U.S. generally accepted accounting principles requires the use of management's estimates. For a further discussion of significant estimates and assumptions that affect the reported amounts of assets and liabilities, results of operations, and disclosure of contingent assets and liabilities, see the legal and environmental issues section beginning on page 24. Actual future results could differ from management's estimates. See page 29 for a description of factors which could cause future results to differ from management's estimates. On June 20, 2000, International Paper acquired Champion International Corporation (Champion) in a transaction accounted for as a purchase. The accompanying financial statements include Champion's results of operations from the date of acquisition. On April 30, 1999, International Paper completed the merger with Union Camp Corporation (Union Camp) in a transaction accounted for as a pooling-of-interests. The accompanying financial statements include the financial position and results of operations for both Union Camp and International Paper for all periods presented. Revenue Recognition Revenues are recognized when goods are shipped except for export and timberland sales. Export sales revenue is recognized at the point title passes, generally at the destination port. Timberland sales revenue is recognized when title and risk of loss pass to the buyer. Shipping and Handling Costs Shipping and handling costs, such as freight to our customers' destinations, are included in distribution expenses in the consolidated statement of earnings. These costs when included in the sales price charged for our products are recognized in net sales. Consolidation The consolidated financial statements include the accounts of International Paper and its subsidiaries. Minority interest represents minority shareholders' proportionate share of the equity in several of our consolidated subsidiaries, primarily Carter Holt Harvey Limited, Zanders Feinpapiere AG (Zanders), Georgetown Equipment Leasing Associates, L.P., Trout Creek Equipment Leasing, L.P. and, prior to its sale in 2000, Bush Boake Allen. International Paper sold its interest in Zanders in January 2001. All significant intercompany balances and transactions are eliminated. Investments in affiliated companies are accounted for by the equity method, including companies owned 20% to 50% and our 13% investment in Scitex Corporation, Ltd. prior to its sale in 2000. International Paper's share of affiliates' earnings is included in the consolidated statement of earnings. Temporary Investments Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost, which approximates market. Inventories Inventory values include all costs directly associated with manufacturing products: materials, labor and manufacturing overhead. These values are presented at cost or market, if it is lower. In the U.S., costs of raw materials and finished pulp and paper products are generally determined using the last-in, first-out method. Other inventories are primarily stated using the first-in, first-out or average cost method. Plants, Properties and Equipment Plants, properties and equipment are stated at cost, less accumulated depreciation. Expenditures for betterments are capitalized whereas normal repairs and maintenance are expensed as incurred. For financial reporting purposes, the units-of-production method of depreciation is used for major pulp and 37 Notes to Consolidated Financial Statements paper mills and certain wood products facilities and the straight-line method for other plants and equipment. Annual straight-line depreciation rates are buildings, 2 1/2% to 8 1/2%, and machinery and equipment, 5% to 33%. For tax purposes, depreciation is computed using accelerated methods. Interest costs related to the development of certain long-term assets are capitalized and amortized over the related assets' estimated useful lives. Capitalized net interest costs were $25 million in 2000, $29 million in 1999 and $53 million in 1998. Interest payments made during 2000, 1999 and 1998 were $816 million, $594 million and $766 million, respectively. Total interest expense was $938 million in 2000, $611 million in 1999 and $706 million in 1998. Forestlands At December 31, 2000, International Paper and its subsidiaries controlled about 12 million acres of forestlands in the U.S., 1.5 million acres in Brazil, 820,000 acres in New Zealand, and had, through licenses and forest management agreements, harvesting rights on government-owned timberlands in Canada. Forestlands include owned property as well as certain timber harvesting rights with terms of one or more years, and are stated at cost, less cost of timber harvested. Costs attributable to timber are charged against income as trees are cut. The rate charged is determined annually based on the relationship of incurred costs to estimated current volume. Cost of timber harvested is included in depreciation and amortization in the consolidated statement of earnings. Goodwill Goodwill, the cost in excess of assigned value of businesses acquired, is amortized over its estimated period of benefit on a straight-line basis, not to exceed 40 years. Accumulated amortization was $574 million and $487 million at December 31, 2000 and 1999, respectively. Goodwill amortization expense is included in depreciation and amortization in the consolidated statement of earnings. Impairment of Long-Lived Assets Long-lived assets, including allocated goodwill, are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate the carrying value of the assets may not be recoverable, as measured by comparing their net book value to the estimated future cash flows generated by their use. Impaired assets are recorded at the lesser of their carrying value or fair market value as determined by their expected future discounted cash flows. Enterprise-level goodwill is periodically reviewed for impairment by comparing expected undiscounted cash flows to the carrying value of goodwill. Enterprise-level goodwill would be written down to fair market value if it were impaired. Stock-Based Compensation Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Environmental Remediation Costs Costs associated with environmental remediation obligations are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are discounted to their present value when the expected cash flows are reliably determinable. Translation of Financial Statements Balance sheets of international operations are translated into U.S. dollars at year-end exchange rates, while statements of earnings are translated at average rates. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in accumulated other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in earnings. Reclassifications Certain reclassifications have been made to prior-year amounts to conform with the current-year presentation. 38 Notes to Consolidated Financial Statements 2 Earnings Per Common Share - -------------------------------------------------------------------------------- Earnings per common share before extraordinary items is computed by dividing earnings before extraordinary items by the weighted average number of common shares outstanding. Earnings per common share before extraordinary items, assuming dilution, is computed assuming that all potentially dilutive securities were converted into common shares at the beginning of each year. A reconciliation of the amounts included in the computation of earnings per common share before extraordinary items and earnings per common share before extraordinary items, assuming dilution, is as follows:
- -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Earnings before extraordinary items $ 368 $ 199 $ 247 Effect of dilutive securities Preferred securities of subsidiary trust - - - ----- ----- ----- Earnings before extraordinary items-- assuming dilution $ 368 $ 199 $ 247 ===== ===== ===== Average common shares outstanding 449.6 413.0 411.0 Effect of dilutive securities Long-term incentive plan deferred compensation - - - Stock options 0.4 3.1 3.2 Preferred securities of subsidiary trust - - - ----- ----- ----- Average common shares outstanding-- assuming dilution 450.0 416.1 414.2 ===== ===== ===== Earnings per common share before extraordinary items $0.82 $0.48 $0.60 ===== ===== ===== Earnings per common share before extraordinary items--assuming dilution $0.82 $0.48 $0.60 ===== ===== =====
Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. 3 Industry Segment Information - -------------------------------------------------------------------------------- Financial information by industry segment and geographic area for 2000, 1999 and 1998 is presented on pages 30 and 31. 4 Recent Accounting Developments - -------------------------------------------------------------------------------- In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured by its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. International Paper will adopt SFAS No. 133 (as amended by SFAS No. 138) as of January 1, 2001. We estimate that adoption will require a one-time, non-cash charge before taxes and minority interest of approximately $23 million ($14 million after taxes and minority interest), which will be recorded as a cumulative change in accounting method. 5 Mergers, Acquisitions and Divestitures - -------------------------------------------------------------------------------- On June 20, 2000, International Paper completed the previously announced acquisition of Champion, a leading manufacturer of paper for business communications, commercial printing and publications with significant market pulp, plywood and lumber manufacturing operations. Champion shareholders received $50 in cash and $25 worth of International Paper common stock for each Champion share. The acquisition was completed for approximately $5 billion in cash and 68.7 million shares of International Paper common stock with a market value of $2.4 billion. Approximately $2.8 billion of Champion debt was assumed. On March 31, 2000, we acquired Shorewood Packaging Corporation (Shorewood), a leader in the manufacture of premium retail packaging, for approximately $640 million in cash and the assumption of $280 million of debt. On April 28, 2000, Carter Holt Harvey purchased CSR Limited's (CSR) medium density fiberboard and particleboard businesses and its Oberon sawmill for approximately $200 million in cash. 39 Notes to Consolidated Financial Statements The Champion, Shorewood and CSR acquisitions were accounted for using the purchase method. Their results of operations are included in International Paper's consolidated statement of earnings from their respective dates of acquisition. The accompanying consolidated balance sheet as of December 31, 2000 reflects preliminary purchase price allocations for Champion, Shorewood and CSR to the fair value of the assets and liabilities acquired. The following table presents unaudited pro forma financial information that reflects the combined results of operations of International Paper, Champion and Shorewood as if the acquisitions had occurred as of the beginning of each of the respective periods. This pro forma information does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations of the combined companies.
- -------------------------------------------------------------------------------- In millions, except per share amounts, for the twelve months ended December 31, 2000 1999 - -------------------------------------------------------------------------------- Net sales $31,050 $30,549 Earnings before extraordinary items 304 169 Net earnings 78 149 Earnings per common share before extraordinary items 0.63 0.35 Earnings per common share 0.16 0.31
International Paper announced a divestment program in connection with the Champion acquisition that it now estimates will generate gross proceeds of approximately $5 billion by the end of 2001. As of March 1, 2001, about $1.2 billion of proceeds have been realized under the program, primarily from the dispositions of Bush Boake Allen, the oil and gas interests, Zanders and the former Champion headquarters building. It is possible that additional charges will be required in 2001 as specific businesses are identified for sale. See Note 7-Businesses Held for Sale for information related to the planned sales under this program. The merger with Union Camp was completed on April 30, 1999. Union Camp shareholders received 1.4852 International Paper common shares for each Union Camp share held. The total value of the transaction, including the assumption of debt, was approximately $7.9 billion. International Paper issued 110 million shares for 74 million Union Camp shares, including options. The merger was accounted for as a pooling-of-interests. Also in April 1999, Carter Holt Harvey acquired the corrugated packaging business of Stone Australia, a subsidiary of Smurfit-Stone Container Corporation. The business consists of two sites in Melbourne and Sydney that serve industrial and primary produce customers. During 1998, International Paper acquired the Zellerbach distribution business from the Mead Corporation for $261 million in cash, Weston Paper and Manufacturing Company through the exchange of 4.7 million International Paper common shares valued at $232 million, and Svetogorsk AO, a Russia-based pulp and paper business. Carter Holt Harvey and International Paper jointly acquired Marinetti S.A.'s paper cup division based in Chile, and Australia-based Continental Cup. Carter Holt Harvey separately acquired Riverwood International, an Australia-based folding carton business. International Paper also entered into a joint venture with Olmuksa in Turkey to manufacture containerboard and corrugated boxes. Finally, a wholly owned subsidiary of International Paper purchased all of the publicly traded Class A depository units of IP Timberlands, Ltd. for $100 million in cash. All of the above acquisitions were accounted for using the purchase method, with the exception of the Union Camp acquisition, which was accounted for as a pooling-of-interests. The operating results of those acquisitions accounted for under the purchase method have been included in the consolidated statement of earnings from the dates of acquisition. In November 2000, International Paper sold its interest in Bush Boake Allen, for $640 million, resulting in an extraordinary gain of $183 million after taxes and minority interest. This transaction was completed as part of the asset sale program. Bush Boake Allen, which had been included in the Chemicals and Petroleum segment, contributed sales of $425 million, $500 million and $485 million and operating earnings of $31 million, $28 million and $37 million for each of the three years ended December 31, 2000, 1999 and 1998, respectively. In January 2000, International Paper sold its equity interest in Scitex for $79 million, and Carter Holt Harvey sold its equity interest in Compania de Petroleos de Chile (COPEC) for just over $1.2 billion. These sales resulted in a combined extraordinary gain of $134 million after taxes and minority interest. The gains on these sales are recorded as extraordinary items pursuant to the pooling-of-interests rules. 40 Notes to Consolidated Financial Statements 6 Special Items Including Restructuring and Business Improvement Actions - -------------------------------------------------------------------------------- 2000: Special items reduced 2000 net earnings by $601 million, 1999 net earnings by $352 million and 1998 net earnings by $98 million. The following table and discussion presents the impact of special items for 2000:
- ------------------------------------------------------------------------------- In millions 2000 - ------------------------------------------------------------------------------- Earnings Earnings (Loss) (Loss) Before Income After Income Taxes and Taxes and Minority Minority Interest Interest - ------------------------------------------------------------------------------- Before special and extraordinary items $1,692 $ 969 Merger-related expenses (54) (33) Restructuring and other charges (824) (509) Provision for legal reserves (125) (80) Reversals of reserves no longer required 34 21 ------ ------ After special items $ 723 $ 368 ====== ======
During 2000, special charges before taxes and minority interest of $969 million ($601 million after taxes and minority interest) were recorded. These special items included a $54 million pre-tax charge ($33 million after taxes) for merger-related expenses, an $824 million charge before taxes and minority interest ($509 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $125 million pre-tax charge ($80 million after taxes) for additional Masonite legal reserves and a $34 million pre-tax credit ($21 million after taxes) for the reversals of reserves no longer required. A further discussion of the Masonite legal reserves, can be found in Note 11-Commitments and Contingent Liabilities. The merger-related expenses of $54 million consisted primarily of travel, systems integration, employee retention, and other one-time cash costs related to the Champion acquisition and Union Camp merger. The $824 million charge for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $71 million charge in the second quarter of 2000 and a $753 million charge in the fourth quarter of 2000. The second quarter charge of $71 million consisted of $40 million of asset write-downs and $31 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- -------------------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - -------------------------------------------------------------------------------- Printing Papers (a) $22 $ 7 $29 Consumer Packaging (b) 7 9 16 Industrial Papers (c) 9 4 13 Other (d) 2 11 13 --- --- --- $40 $31 $71 === === ===
(a) The Printing Papers business shut down the Millers Falls, Massachusetts mill in August 2000 due to excess internal capacity. Charges associated with the shutdown included $22 million to write down the assets to their estimated fair market value of zero, $2 million of severance costs covering the termination of 119 employees, and other exit costs of $3 million. The Millers Falls mill had revenues of $33 million, $39 million and $44 million in 2000, 1999 and 1998, respectively. The mill had no operating income in 2000 and operating income of $3 million in both 1999 and 1998. At December 31, 2000, all 119 employees had been terminated. Also, a severance charge of $2 million was recorded covering the elimination of 108 salaried positions at the Franklin, Virginia mill in a continuing effort to improve its cost effectiveness and long-term competitive position. At December 31, 2000, 103 employees had been terminated. (b) The Consumer Packaging business implemented a plan to reduce excess internal capacity and streamline administrative functions at several of its locations as a result of the Shorewood acquisition. As a result, the Richmond, Virginia facility was shut down in June 2000. Charges associated with this shutdown included $6 million to write down assets to their fair market value of zero, $2 million of severance costs covering the termination of 126 employees, and other exit costs of $1 million. This facility had revenues of $8 million, $23 million and $37 million in 2000, 1999 and 1998, respectively. The Richmond facility had operating losses of $2 million and $1 million in 2000 and 1999, respectively, and operating income of $3 million in 1998. At December 31, 2000, 125 employees had been terminated. 41 Notes to Consolidated Financial Statements Management also permanently idled the lithographic department of the Clinton, Iowa facility. This action will allow the Retail Packaging business to better focus its resources for further profit improvement. Related charges included $1 million of asset write-downs, $3 million of severance costs covering the termination of 187 employees, and $2 million of other exit costs. At December 31, 2000, 151 employees had been terminated. A severance reserve of $1 million was also established to streamline the Consumer Packaging business. This reserve covers the termination of 17 employees. At December 31, 2000, all 17 employees had been terminated. (c) Industrial Papers shut down the Knoxville, Tennessee converting facility in December 2000 to reduce excess internal capacity. Assets were written down $9 million to their estimated fair market value and a severance charge of $1 million was recorded to terminate 120 employees. Other exit costs totaled $3 million. The Knoxville facility had revenues of $46 million, $62 million and $56 million in 2000, 1999 and 1998, respectively. This facility had operating income of $2 million in 2000 and 1999, and an operating loss of $2 million in 1998. At December 31, 2000, the head count had been reduced by 106 employees. (d) Other includes $8 million related to Industrial Packaging, primarily for the shutdown of the Tupelo, Mississippi sheet plant. The Industrial Packaging charge included $2 million of asset write-offs, $5 million of severance costs covering the termination of 221 employees and $1 million of other cash costs. At December 31, 2000, 212 employees had been terminated. Other also includes $5 million related to the indefinite shutdown of Carter Holt Harvey's Mataura paper mill. This charge included $3 million of severance costs covering the termination of 158 employees and $2 million of other cash costs. At December 31, 2000, all 158 employees had been terminated. The fourth quarter charge of $753 million consisted of $536 million of asset write-downs and $217 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- -------------------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - -------------------------------------------------------------------------------- Printing Papers (a) $293 $103 $396 Consumer Packaging (b) 86 7 93 Industrial Packaging (c) 114 46 160 Chemicals and Petroleum (d) 16 18 34 Forest Products (e) 15 20 35 Distribution (f) 3 19 22 Carter Holt Harvey (g) 1 4 5 Other (h) 8 - 8 ---- ---- ---- $536 $217 $753 ==== ==== ====
(a) The Printing Papers business announced the indefinite closure of the Mobile, Alabama mill and permanent closure of the Lock Haven, Pennsylvania mill. The announcement was in conjunction with the business's plan to realign and rationalize papermaking capacity to benefit future operations. Charges associated with the Mobile shutdown included $223 million to write assets down to their salvage value, $31 million of severance costs covering the termination of 760 employees, and other exit costs of $41 million. The Mobile mill had revenues of $274 million, $287 million and $258 million in 2000, 1999 and 1998, respectively. This mill had operating earnings of $34 million and $8 million in 2000 and 1999, respectively, and an operating loss of $43 million in 1998. Charges associated with the Lock Haven shutdown included $70 million to write the assets down to their salvage value, $16 million of severance costs covering the termination of 589 employees, and other exit costs of $15 million. The Lock Haven mill had revenues of $267 million in 2000 and $225 million in each of 1999 and 1998. This mill had an operating loss of $21 million in 2000, and operating earnings of $12 million and $27 million in 1999 and 1998, respectively. (b) The Consumer Packaging business announced shutdowns of the beverage packaging converting plant in Jamaica and the packaging facility in Cincinnati, Ohio. Production at the Jamaica plant was moved to Venezuela to increase plant utilization. The Cincinnati facility was closed in order to better align our manufacturing system with customer demand. Charges associated with these shutdowns included $6 million of asset write-downs, $5 million of 42 Notes to Consolidated Financial Statements severance costs covering the termination of 239 employees, and other exit costs of $2 million. The Consumer Packaging charge also included an $80 million asset impairment due to continuing losses in its aseptic business. The aseptic assets were written down to their estimated fair market value based on expected future discounted cash flows. (c) The Industrial Packaging business charge of $160 million is related to the closure of the Camden, Arkansas mill, the shutdown of the Pedemonte, Italy container plant and the write-down of the Walsum No. 10 paper machine. The Camden mill, which produced unbleached kraft and multi-wall paper, was closed due to the declining kraft paper market, excess internal capacity and shrinking customer demand. The mill's assets were written down $102 million to their salvage value, and severance costs of $24 million were recorded to cover the termination of 613 employees. Other exit costs totaled $15 million. The Camden mill had revenues of $151 million, $162 million and $153 million and operating earnings of $14 million, $22 million and $18 million in 2000, 1999 and 1998, respectively. Charges associated with the Pedemonte plant shutdown included $2 million of asset write-downs, $3 million of severance costs covering the termination of 83 employees, and $4 million of other exit costs. The Pedemonte plant had revenues of $9 million, $11 million and $15 million in 2000, 1999 and 1998, respectively. This plant had operating losses of $2 million in 2000 and 1999 and $1 million in 1998. The business also wrote down the Walsum No. 10 paper machine acquired in the Union Camp merger by $10 million to its estimated fair market value. (d) The Chemicals and Petroleum business charge of $34 million was related to the announced closure of the Oakdale, Louisiana plant. This is part of the business's Asset Rationalization Program to increase earnings, improve plant efficiencies and reduce excess internal capacity. A portion of the facility was shut down at the end of 2000, with the remainder to be closed by the end of 2001. The charge included $16 million to write the assets down to their estimated fair market value of zero, $1 million of severance costs covering the termination of 61 employees, and $17 million of other exit costs. The Oakdale plant had revenues of $31 million, $30 million and $32 million and operating earnings of $3 million, zero and $6 million in 2000, 1999 and 1998, respectively. (e) The Forest Products business charge of $35 million was primarily related to the announced shutdown of the Washington, Georgia lumber mill and restructuring costs associated with the Mobile mill closure. The Washington lumber mill will be closed due to unfavorable market conditions and excess internal capacity. The mill had revenues of $54 million, $66 million and $62 million in 2000, 1999 and 1998, respectively. This facility had an operating loss of $6 million in 2000, operating income of $2 million in 1999, and an operating loss of $3 million in 1998. The total Forest Products business charge included $15 million of asset write-downs, $7 million of severance costs covering the termination of 264 employees, and $13 million of other exit costs. (f) xpedx, our distribution business, implemented a restructuring plan to consolidate duplicate facilities, eliminate excess internal capacity and increase productivity. The $22 million charge associated with this plan included $3 million of asset write-downs, $15 million of severance costs covering the termination of 433 employees, and $4 million of other cash costs. (g) The Carter Holt Harvey charge of $5 million is related to cost reduction actions primarily associated with the tissue and packaging businesses. This charge included $1 million of asset write-downs and $4 million of severance covering the termination of 145 employees. (h) This $8 million charge relates to the write-down of our investment in PaperExchange.com, an online provider of e-commerce for the paper industry, to its estimated fair market value. Also, a pre-tax credit of $28 million was recorded for excess 1999 second and fourth quarter restructuring reserves no longer required, and a pre-tax credit of $6 million was recorded for excess Union Camp merger-related termination benefits reserves no longer required. 43 Notes to Consolidated Financial Statements The following table presents a roll forward of the severance and other costs included in the 2000 restructuring plans:
- -------------------------------------------------------------------------------- Severance In millions and Other - -------------------------------------------------------------------------------- Opening Balance (second quarter 2000) $ 31 Additions (fourth quarter 2000) 217 2000 Activity Cash charges (19) ---- Balance, December 31, 2000 $229 ====
The severance charges recorded in the second and fourth quarters of 2000 related to 4,243 employees. As of December 31, 2000, 991 employees had been terminated. 1999: The following table and discussion presents the impact of special items for 1999:
- -------------------------------------------------------------------------------- In millions 1999 - -------------------------------------------------------------------------------- Earnings Earnings (Loss) (Loss) Before Income After Income Taxes and Taxes and Minority Minority Interest Interest - -------------------------------------------------------------------------------- Before special and extraordinary items $1,005 $ 551 Union Camp merger-related termination benefits (148) (97) Merger-related expenses (107) (78) Restructuring and other charges (298) (180) Environmental remediation charge (10) (6) Provision for legal reserves (30) (18) Reversals of reserves no longer required 36 27 ----- ----- After special items $ 448 $ 199 ===== =====
During 1999, special charges before taxes and minority interest of $557 million ($352 million after taxes and minority interest) were recorded. These special items included a $148 million pre-tax charge ($97 million after taxes) for Union Camp merger-related termination benefits, a $107 million pre-tax charge ($78 million after taxes) for merger-related expenses, a $298 million charge before taxes and minority interest ($180 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $10 million pre-tax charge ($6 million after taxes) to increase existing environmental remediation reserves related to certain former Union Camp facilities, a $30 million pre-tax charge ($18 million after taxes) to increase existing legal reserves, and a $36 million pre-tax credit ($27 million after taxes) for the reversals of reserves that were no longer required. The merger-related expenses of $107 million consisted of $49 million of merger costs and $58 million of post-merger expenses. The merger costs were primarily investment banker, consulting, legal and accounting fees. Post-merger integration expenses included costs related to employee retention, such as stay bonuses, and other cash costs related to the integration of Union Camp. The Union Camp merger-related termination benefits charge related to employees terminating after the effective date of the merger under an integration benefits program. Under this program, 1,218 employees of the combined company were originally identified for termination. An additional 346 employees left the company after the merger was announced, but were not eligible for benefits under the integration benefits program completed in the third quarter of 2000. Benefits payable under this program for certain senior executives and managers were paid from the general assets of International Paper. Benefits for remaining employees were primarily paid from plan assets of our qualified pension plan. In total, 1,062 employees were terminated. Related cash payments approximated $71 million (including payments related to our nonqualified pension plans). The remainder of the costs incurred primarily represented an increase in the projected benefit obligation of our qualified pension plan. Upon termination of the program in the third quarter of 2000, $6 million of the original reserve of $148 million was reversed to income. The following table is a roll forward of the Union Camp merger-related termination benefits charge:
- -------------------------------------------------------------------------------- Termination Dollars in millions Benefits - -------------------------------------------------------------------------------- Special charge (1,218 employees) $ 148 1999 incurred costs (787 employees) (116) 2000 incurred costs (275 employees) (26) Reversal of reserve no longer required (6) ----- Balance, December 31, 2000 $ -- =====
Note: Benefit costs are treated as incurred on the termination date of the employee. The $298 million charge for asset shutdowns of excess internal capacity consisted of a $113 million charge in the second quarter of 1999 and a $185 million charge in the fourth quarter of 1999. 44 Notes to Consolidated Financial Statements The second quarter $113 million charge for the asset shutdowns of excess internal capacity and cost reduction actions included $57 million of asset write-downs and $56 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- ------------------------------------------------------------------------------ Asset Severance In millions Write-downs and Other Total - ------------------------------------------------------------------------------ Printing Papers (a) $ 6 $27 $ 33 European Papers (b) 3 7 10 Consumer Packaging (c) 19 12 31 Industrial Packaging (d) 12 -- 12 Chemicals and Petroleum (e) 10 3 13 Industrial Papers (f) 7 7 14 --- --- ---- $57 $56 $113 === === ====
(a) International Paper recorded a charge of $24 million for severance related to the second phase of the Printing Papers business plan to improve the cost position of its mills. The charge, pursuant to an ongoing severance program, covered a reduction of approximately 289 employees at several mills in the U.S. At December 31, 2000, 258 employees had been terminated. Also, management approved a decision to permanently shut down the Hudson River mill No. 4 paper machine located in Corinth, New York and the No. 2 paper machine at the Franklin, Virginia mill due to excess internal capacity. Both machines have now been shut down. The machines were written down by $6 million to their estimated fair market value of zero. Severance costs of $3 million were recorded to cover the termination of 147 employees. At December 31, 2000, 142 employees had been terminated. (b) The charge for European Papers, which covered the shutdown of two mills, consisted of $3 million in asset write-downs, $6 million in severance costs and $1 million of other exit costs. The Lana mill in Docelles, France was shut down due to excess internal capacity. The Lana mill produced high-end uncoated specialty paper that was shifted to the La Robertsau mill in Strasbourg, France. The mill's fixed assets were written down $3 million to their estimated fair market value of zero. Costs of $1 million related to the site closure and severance of $4 million related to the termination of 42 employees were also recorded. The Lana mill had revenues of $12 million and an operating loss of $2 million for the year ended December 31, 1999. At December 31, 2000, all 42 employees had been terminated. The Corimex coating plant in Clermont-Ferrand, France was shut down in April 1999. The assets at this plant had been considered to be impaired in 1997 and were written down at that time because of a decline in the market for thermal fax paper. A $2 million severance charge was recorded during the second quarter of 1999 to cover the costs of terminating 81 employees. Corimex had revenues of $6 million and an operating loss of $3 million for the year ended December 31, 1999. At December 31, 2000, all 81 employees had been terminated. (c) The Consumer Packaging business implemented a plan to improve the overall performance of the Moss Point, Mississippi mill. Included in this plan was the shutdown of the No. 3 paper machine, which produced labels. This production was transferred to the Hudson River mill. The machine was written down $6 million to its estimated fair market value of zero. Severance costs including, but not limited to, employees associated with the No. 3 machine totaled $10 million and covered the elimination of 360 positions. At December 31, 2000, 331 employees had been terminated. Consumer Packaging also shut down the Beverage Packaging facility in Itu, Brazil in an effort to reduce excess internal capacity in Latin America. The related assets were written down $13 million to their estimated fair market value of zero, and a severance charge of $1 million covering the elimination of 29 positions was recorded. Other exit costs totaled $1 million. At December 31, 2000, 27 employees had been terminated. (d) With the merger of Union Camp, International Paper negotiated the resolution of contractual commitments related to an Industrial Packaging investment in Turkey. As a result of these negotiations and evaluation of this entity, it was determined that the investment was impaired. A $12 million charge was recorded to reflect this impairment and the related costs of resolving the contractual commitments. (e) As a result of an overall reduction in demand for dissolving pulp, a decision was made to downsize the Natchez, Mississippi mill. Charges associated with capacity reduction totaled $10 million and included the shutdown of several pieces of equipment. A severance charge of $3 million was recorded to eliminate 89 positions. At December 31, 2000, all 89 employees had been terminated. 45 Notes to Consolidated Financial Statements (f) The Industrial Papers business implemented a plan to reduce excess internal capacity at several of its locations. The Toronto, Canada plant was closed. Equipment at the Kaukauna, Wisconsin, Knoxville, Tennessee and Menasha, Wisconsin facilities was taken out of service. The total amount related to the write-down of these assets was $7 million. Severance costs related to these shutdowns were $5 million, based on a personnel reduction of 81 employees. Other exit costs totaled $2 million. At December 31, 2000, 73 employees had been terminated. The $185 million fourth quarter charge for shutdowns of excess internal capacity and cost reduction actions included $92 million of asset write-downs and $93 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- ---------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - ---------------------------------------------------------------------- Printing Papers (a) $ 7 $ 5 $ 12 Consumer Packaging (b) 14 22 36 Industrial Packaging (c) 7 14 21 Chemicals and Petroleum (d) 30 20 50 Building Materials (e) 10 6 16 Distribution (f) 6 17 23 Carter Holt Harvey (g) 18 9 27 --- --- ---- $92 $93 $185 === === ====
(a) The Printing Papers charge encompassed a $2 million severance charge related to a production curtailment at the Erie, Pennsylvania mill due to lower demand, a $3 million write-off of deferred software costs as the result of a decision to discontinue the installation of a Union Camp order entry system, and a $7 million impairment of our investment in the Otis Hydroelectric plant. In November 1999, the Erie mill changed from a seven-day, four-crew schedule to a three-crew schedule in order to balance operating capacity with sales demand. This production curtailment resulted in the termination of 99 employees. At December 31, 2000, all 99 employees had been terminated. We wrote down our investment in the Otis Hydroelectric partnership to the approximate fair market value of the investment based upon our offer to acquire the other partner's interest. (b) The Consumer Packaging charge of $36 million was related to the shutdown of facilities, capacity optimization and a deferred software write-off. The Philadelphia, Pennsylvania plant was shut down in June 2000 and the Edmonton, Alberta plant was shut down in April 2000. Charges associated with these shutdowns included $7 million of asset write-downs, $1 million of severance costs covering the termination of 194 employees, and other exit costs of $5 million. At December 31, 2000, all 194 employees had been terminated. Charges related to eliminating excess internal capacity included $7 million of asset write-downs and a severance charge of $11 million for the termination of 512 employees. The capacity reductions related to the aseptic and flexible packaging businesses. At December 31, 2000, 381 employees had been terminated. The business also discontinued the implementation of a Union Camp order management system. The write-off of deferred software costs related to this system was $5 million. (c) The Industrial Packaging business shut down the following plants and shifted production to other facilities: the Terre Haute, Indiana box plant; the Northlake, Illinois box plant; the Columbia, Tennessee sheet plant; and the Montgomery, Alabama sheet plant. The design center in Spartanburg, South Carolina was also closed. The functions performed in Spartanburg will continue in Memphis, Tennessee. Charges associated with the consolidation and improvement of the Industrial Packaging business totaled $21 million and included $7 million of asset write-downs, a $12 million severance charge covering the termination of 426 employees, and other exit costs of $2 million. At December 31, 2000, 309 employees had been terminated. (d) The Chemicals and Petroleum charge of $50 million related to the partial shutdown of the Chester-le-Street plant located in northeast England and additional costs related to the 1998 shutdown of the Springhill, Louisiana plant. The Chester-le-Street plant was a fully integrated site comprised of a crude tall oil fractionation plant, a rosin resin upgrading plant and a dimer plant. The crude tall oil and rosin resin upgrading facilities at the site were closed and production shifted to other Arizona Chemical facilities. Asset write-downs for this plant totaled $30 million. A severance charge of $3 million covered the termination of 83 employees. Other costs of $12 million included demolition and contract cancellations. At December 31, 2000, all 46 Notes to Consolidated Financial Statements 83 employees had been terminated. We also recorded an additional charge of $5 million related to the 1998 closure of the Springhill plant, covering other exit costs including demolition and cleanup. (e) The Building Materials charge of $16 million included $3 million for a program to improve the profitability of the decorative surfaces business and $13 million for the shutdown of the Pilot Rock, Oregon mill. The Decorative Products business developed an improvement plan to consolidate certain manufacturing activities and streamline administrative functions. As a result, a reserve was established to cover asset write-offs totaling $2 million, and severance charges of $1 million were recorded related to the reduction of 65 employees. At December 31, 2000, 38 employees had been terminated. International Paper announced in October 1999 that it would shut down the Pilot Rock, Oregon mill due to excess capacity within the Masonite manufacturing system. Softboard production was moved to our Ukiah, California and Lisbon Falls, Maine facilities. The related charge included $8 million of asset write-downs, a $2 million severance charge covering the termination of 155 employees, and $3 million of other exit costs. At December 31, 2000, 149 employees had been terminated. (f) xpedx implemented a plan to consolidate duplicate facilities and eliminate excess internal capacity. The $23 million charge associated with this plan included $6 million of asset write-downs, a severance charge of $5 million for the termination of 211 employees, and other costs of $12 million. Other costs consisted primarily of lease cancellations. At December 31, 2000, 197 employees had been terminated. (g) This charge related to the shutdown of the No. 5 paper machine at Carter Holt Harvey's Kinleith mill. The machine had been idled due to a reconfiguration project at the mill. Plans for alternative uses for the machine were reexamined and it was determined that based on current competitive conditions it would not provide adequate returns on the capital required and that it would be scrapped. Accordingly, the machine was written down by $18 million to its estimated salvage value. Also, severance costs of $9 million were recorded to cover the costs of terminating 300 employees. At December 31, 2000, all 300 employees had been terminated. The $30 million pre-tax charge to increase existing legal reserves included $25 million added to the reserve for hardboard siding claims. A further discussion of this charge can be found in Note 11-Commitments and Contingent Liabilities. The $36 million pre-tax credit for reserves no longer required consisted of $30 million related to a retained exposure at the Lancey mill in France and $6 million of excess severance reserves previously established by Union Camp. The Lancey mill was sold to an employee group in October 1997. In April 1999, International Paper's remaining exposure to potential obligations under this sale was resolved, with the reserve returned to income in the second quarter. The following table presents a roll forward of severance and other costs included in the 1999 restructuring plans:
- -------------------------------------------------------------------------------- Severance In millions and Other - -------------------------------------------------------------------------------- Opening Balance (second quarter 1999) $ 56 Additions (fourth quarter 1999) 93 1999 Activity Cash charges (34) 2000 Activity Cash charges (75) Other charges (13) Reversals of reserves no longer required (14) ---- Balance, December 31, 2000 $ 13 ====
The severance reserves recorded in the second and fourth quarters of 1999 related to 3,163 employees. At December 31, 2000, 2,793 employees had been terminated. Reserves of $14 million were determined to no longer be required and reversed to income in the fourth quarter of 2000. The remaining $13 million of reserves represents costs to be incurred or severance to be paid in the first quarter of 2001. 1998: The following table and discussion presents the impact of special items for 1998:
- -------------------------------------------------------------------------------- In millions 1998 - -------------------------------------------------------------------------------- Earnings Earnings (Loss) (Loss) Before Income After Income Taxes and Taxes and Minority Minority Interest Interest - -------------------------------------------------------------------------------- Before special items $ 598 $345 Oil and gas impairment charges (111) (68) Restructuring and other charges (161) (92) Gain on sale of business 20 12 Reversals of reserves no longer required 83 50 ----- ---- After special items $ 429 $247 ===== ====
47 Notes to Consolidated Financial Statements During 1998, International Paper recorded $111 million of oil and gas impairment charges ($68 million after taxes); $56 million ($35 million after taxes) in the fourth quarter and $55 million ($33 million after taxes) in the third quarter. International Paper had oil and gas exploration and production operations in West Texas, the Gulf Coast and the Gulf of Mexico. The Securities and Exchange Commission's regulations for companies that use the full-cost method of accounting for oil and gas activities require companies to perform a ceiling test on a quarterly basis. As a result of low oil and gas prices, the value of International Paper's properties was written down through these noncash charges. Also in 1998, International Paper recorded a $145 million pre-tax restructuring charge ($82 million after taxes and minority interest) consisting of $64 million of asset write-downs and $81 million of severance costs, and recorded pre-tax charges of $16 million ($10 million after taxes) related to International Paper's share of write-offs taken by Scitex, a then-owned 13% investee company, related to an acquisition of in-process research and development and its exit from the digital video business. The Scitex items were reflected as equity losses from the investment in Scitex in the consolidated statement of earnings. International Paper sold its equity interest in Scitex in January 2000. In addition, International Paper recorded a $20 million pre-tax gain ($12 million after taxes) on the sale of its Veratec nonwovens division, and an $83 million pre-tax credit ($50 million after taxes) from the reversals of previously established reserves that were no longer required. These reserves had been established in 1996 and 1997 and were primarily associated with the Veratec and Imaging businesses. The sales of these businesses were completed in 1998, and those reserves not required were returned to earnings. The following table and discussion presents additional detail related to the $145 million restructuring charge:
- ------------------------------------------------------------------ Asset In millions Write-downs Severance Total - ------------------------------------------------------------------ Distribution (a) $20 $10 $ 30 Printing Papers (b) 13 14 27 Carter Holt Harvey (c) 15 3 18 Industrial Packaging (d) 8 7 15 Union Camp (e) 8 32 40 Other (f) -- 15 15 --- --- ---- $64 $81 $145 === === ====
(a) After the acquisition of Zellerbach, management of xpedx terminated certain software projects that were in process and began to use Zellerbach's systems in certain of its regions. Accordingly, $20 million of deferred software costs were written off. In addition, a $10 million severance charge was recorded to terminate 274 xpedx employees at duplicate facilities and locations. At December 31, 1999, all 274 employees had been terminated. (b) International Paper's Printing Papers business shut down equipment at the Mobile, Alabama mill and announced the termination of 750 employees at the Mobile, Alabama, Lock Haven, Pennsylvania, and Ticonderoga, New York mills. At the Mobile mill, International Paper permanently shut down a paper machine and related equipment with a net book value of $13 million. These assets were written down to their estimated fair market value of zero. The severance charge associated with the employee reductions at the three mills was $14 million. At December 31, 1999, all employees under this program had been terminated. (c) This charge primarily consisted of a $15 million asset write-down associated with the closure of two Carter Holt Harvey facilities, Myrtleford and Taupo. Myrtleford, a tissue pulp mill located in Australia, was closed due to excess capacity in its tissue pulp system. Carter Holt Harvey will be able to produce the volume at lower costs at its Kawerau tissue pulp mill located in New Zealand. Carter Holt Harvey also closed the Taupo, New Zealand sawmill due to excess capacity in its sawmill system as the result of recent productivity improvements. The $3 million severance charge represented the cost of terminating 236 employees. At December 31, 1999, all 236 employees had been terminated. International Paper's consolidated financial statements included revenues of $21 million and operating income of $1 million from these facilities in 1998. (d) Management indefinitely closed the Gardiner, Oregon mill because of excess capacity in International Paper's containerboard system. As a result, the net plant, property and equipment assets of this mill were reduced from $13 million to the estimated salvage value of $5 million. In connection with this decision to close, 298 employees at the mill were terminated and a $7 million severance charge was recorded. This mill had revenues of $78 million and operating losses of $16 million in 1998. 48 Notes to Consolidated Financial Statements (e) During 1998, Union Camp recorded a pre-tax special charge of $40 million. Included in the charge was $32 million related to the termination of 540 positions and $8 million of asset write-downs. Approximately 190 of these positions related to a reorganization and restructuring of Union Camp's research and development activities. Another 190 positions related to a consolidation of the packaging group's administrative support functions. The remaining 160 positions related to a series of other organizational changes. At December 31, 1999, all 540 employees had been terminated. The asset write-downs were principally attributable to the impairment of goodwill specific to two packaging businesses, the Chase packaging facility and Union Camp's 1996 purchase of a 50% interest in a packaging plant in Turkey. Upon reviewing the historical and projected operating results for these businesses, management concluded that expected future cash flows did not fully support the carrying value of these assets. (f) The $15 million severance charge was recorded as a result of an announcement by International Paper of a plan to consolidate its land and timber and logging and fiber supply divisions into a new division called Forest Resources, and the consolidation of the Consumer Packaging group. Of the $15 million charge, $10 million related to a head count reduction of 200 employees in the Forest Resources group and the remaining $5 million was based on a personnel reduction of 210 employees in the Consumer Packaging group. At December 31, 1999, all 410 employees had been terminated. The following table presents a roll forward of the severance costs included in the 1998 restructuring plan:
- --------------------------------------------------------------------------- In millions Severance - --------------------------------------------------------------------------- Opening Balance (third quarter 1998) $ 81 1998 Activity Cash charges (19) 1999 Activity Cash charges (56) Reversal of reserve no longer required (6) ---- Balance, December 31, 1999 $ -- ====
The severance reserve recorded in the third quarter of 1998 related to 2,508 employees. As of December 31, 1999, all employees had been terminated. 7 Businesses Held for Sale - -------------------------------------------------------------------------------- During 2000, International Paper announced plans to sell by the end of 2001, approximately $5 billion of assets that are not strategic to its core businesses. The decision to sell these businesses and certain other assets resulted from International Paper's acquisition of Champion and the completion of its strategic analysis to focus on its core businesses of paper, packaging and forest products. The following table presents the businesses held for sale at December 31, 2000 along with their sales and operating earnings for each of the three years ended December 31, 2000, 1999 and 1998:
- ---------------------------------------------------------------------------- In millions for the years ended December 31 2000 1999 1998 - ---------------------------------------------------------------------------- Arizona Chemical (Chemicals and Petroleum) Sales $ 630 $ 677 $ 673 Operating earnings 63 54 64 Chemical Cellulose (Chemicals and Petroleum) Sales 215 208 232 Operating earnings (loss) (14) 9 16 Fine Papers (Printing Papers) Sales 262 265 294 Operating earnings 21 10 22 Masonite (Forest Products) Sales 465 512 499 Operating earnings 5 26 36 Petroleum & Minerals (Chemicals and Petroleum) Sales 125 70 75 Operating earnings 81 33 21 Zanders (Printing Papers) Sales 626 594 626 Operating earnings (loss) (4) 8 9 Other (Various) Sales 102 18 12 Operating earnings (loss) (22) -- (1) Total Sales $2,425 $2,344 $2,411 Operating earnings $ 130 $ 140 $ 167
Note: Other, for the year ended December 31, 2000, includes the Hamilton mill, which was acquired in the June 20, 2000 Champion acquisition. 49 Notes to Consolidated Financial Statements In the third quarter of 2000, the assets of Masonite and Zanders were written down to their fair market values based on estimated sales proceeds. This resulted in an extraordinary pre-tax charge of $460 million ($310 million after taxes). In the fourth quarter of 2000, Fine Papers, the Chemical Cellulose pulp business and International Paper's Flexible Packaging businesses in Argentina (included in Other) were written down to their fair market values based on estimated sales proceeds, resulting in an extraordinary pre-tax charge of $373 million ($231 million after taxes). These charges are presented as extraordinary items, net of taxes, in the consolidated statement of earnings in accordance with the pooling-of-interests rules. The assets of the businesses held for sale, totaling $1.9 billion, are included in "assets of businesses held for sale" in current assets in the accompanying consolidated balance sheet. The liabilities of these businesses, totaling $541 million, are included in "liabilities of businesses held for sale" in current liabilities in the accompanying consolidated balance sheet. An agreement to sell Masonite to Premdor Inc. of Toronto, Canada was entered into September 30, 2000, and is subject to closing conditions and regulatory approval. See Note 19-Subsequent Events for a discussion of the completion of the dispositions of Zanders, the Argentine businesses, the oil and gas interests and the Hamilton mill. International Paper is currently soliciting or evaluating bids on the remaining businesses. 8 Preferred Securities of Subsidiaries - -------------------------------------------------------------------------------- In September 1998, International Paper Capital Trust III issued $805 million of International Paper-obligated mandatorily redeemable preferred securities. International Paper Capital Trust III is a wholly owned consolidated subsidiary of International Paper and its sole assets are International Paper 7 7/8% debentures. The obligations of International Paper Capital Trust III related to its preferred securities are fully and unconditionally guaranteed by International Paper. These preferred securities are mandatorily redeemable on December 1, 2038. In June 1998, IP Finance (Barbados) Limited, a non-U.S. wholly owned consolidated subsidiary of International Paper, issued $550 million of preferred securities with a dividend payment based on LIBOR. These preferred securities are mandatorily redeemable on June 30, 2008. In March 1998, Timberlands Capital Corp. II, Inc., a wholly owned consolidated subsidiary of International Paper, issued $170 million of 7.005% preferred securities as part of the financing to repurchase the outstanding units of IP Timberlands, Ltd. These securities are not mandatorily redeemable and are classified in the consolidated balance sheet as a minority interest liability. In the third quarter of 1995, International Paper Capital Trust (the Trust) issued $450 million of International Paper-obligated mandatorily redeemable preferred securities. The Trust is a wholly owned consolidated subsidiary of International Paper and its sole assets are International Paper 5 1/4% convertible subordinated debentures. The obligations of the Trust related to its preferred securities are fully and unconditionally guaranteed by International Paper. These preferred securities are convertible into International Paper common stock. Distributions paid under all of the preferred securities noted above were $141 million, $134 million and $54 million in 2000, 1999 and 1998, respectively. The expense related to these preferred securities is shown in minority interest expense in the consolidated statement of earnings. 9 Sale of Limited Partnership Interests - -------------------------------------------------------------------------------- During 1993, International Paper contributed assets with a fair market value of approximately $900 million to two newly formed limited partnerships, Georgetown Equipment Leasing Associates, L.P. and Trout Creek Equipment Leasing, L.P. These partnerships are separate and distinct legal entities from International Paper and have separate assets, liabilities, business functions and operations. However, for accounting purposes, these assets continue to be consolidated, with the minority shareholders' interests reflected as minority interest in the accompanying financial statements. The purpose of the partnerships is to invest in and manage a portfolio of assets including pulp and paper equipment used at the Georgetown, South Carolina and Ticonderoga, New York mills. This equipment is leased to International Paper under long-term leases. Partnership assets also include floating rate notes and cash. During 1993, outside investors purchased a portion of our limited partner interests for $132 million and also contributed an additional $33 million to one of these partnerships. At December 31, 2000, International Paper held aggregate general and limited partner interests totaling 63% in Georgetown Equipment Leasing Associates, L.P. and 57% in Trout Creek Equipment Leasing, L.P. 50 Notes to Consolidated Financial Statements 10 Income Taxes - -------------------------------------------------------------------------------- International Paper uses the asset and liability method of accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are revalued to reflect new tax rates in the periods rate changes are enacted. The components of earnings before income taxes, minority interest and extraordinary items by taxing jurisdiction were:
- ---------------------------------------------------------------------- In millions 2000 1999 1998 - ---------------------------------------------------------------------- Earnings U.S. $202 $237 $297 Non-U.S. 521 211 132 ---- ---- ---- Earnings before income taxes, minority interest and extraordinary items $723 $448 $429 ==== ==== ====
The provision for income taxes by taxing jurisdiction was:
- ---------------------------------------------------------------------- In millions 2000 1999 1998 - ---------------------------------------------------------------------- Current tax provision (benefit) U.S. federal $130 $259 $(64) U.S. state and local 41 27 (6) Non-U.S. 102 8 33 ---- ---- ---- 273 294 (37) ==== ==== ==== Deferred tax provision (benefit) U.S. federal (31) (108) 117 U.S. state and local (65) (103) (12) Non-U.S. (60) 3 27 ---- ---- ---- (156) (208) 132 ==== ==== ==== Income tax provision $117 $ 86 $ 95 ==== ==== ====
International Paper made income tax payments, net of refunds, of $298 million, $68 million and $144 million in 2000, 1999 and 1998, respectively. A reconciliation of income tax expense using the statutory U.S. income tax rate compared with actual income tax expense follows:
- ---------------------------------------------------------------------- In millions 2000 1999 1998 - ---------------------------------------------------------------------- Earnings before income taxes, minority interest and extraordinary items $723 $448 $429 Statutory U.S. income tax rate 35% 35% 35% ---- ---- ---- Tax expense using statutory U.S. income tax rate 253 157 150 State and local income taxes (15) (20) (11) Non-U.S. tax rate differences (80) (52) 20 Permanent benefits on sales of non-U.S. businesses - (2) (33) Permanent benefits on sales of non-strategic timberland assets - - (29) Nondeductible business expenses 10 30 9 Foreign sales corporation benefit (18) (9) (9) Minority interest (82) (56) (31) Goodwill amortization 39 21 21 Net U.S. tax on non-U.S. dividends 28 15 10 Tax credits - (12) (1) Other, net (18) 14 (1) ---- ---- ---- Income tax provision $117 $ 86 $ 95 ==== ==== ==== Effective income tax rate 16% 19% 22% ==== ==== ====
The net deferred income tax liability as of December 31, 2000 and 1999 includes the following components:
- ---------------------------------------------------------------------- In millions 2000 1999 - ---------------------------------------------------------------------- Current deferred tax asset $ 562 $ 196 Noncurrent deferred tax asset 311 240 Noncurrent deferred tax liability (4,699) (3,344) ------- ------- Total $(3,826) $(2,908) ======= =======
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 2000 and 1999 were as follows:
- ---------------------------------------------------------------------- In millions 2000 1999 - ---------------------------------------------------------------------- Plants, properties and equipment $(3,344) $(2,995) Prepaid pension costs (326) (339) Forestlands (1,686) (534) Postretirement benefit accruals 199 225 Alternative minimum and other tax credits 432 390 Net operating loss carryforwards 264 235 Other 635 110 ------- ------- Total $(3,826) $(2,908) ======= =======
51 Notes to Consolidated Financial Statements Net operating loss carryforwards, most of which are applicable to non-U.S. subsidiaries, expire as follows: years 2001 through 2007--$130 million, years 2019 through 2020--$273 million and indefinite carryforward--$363 million. Deferred taxes are not provided for temporary differences of approximately $1.7 billion, $1.2 billion and $1.1 billion as of December 31, 2000, 1999 and 1998, respectively, representing earnings of non-U.S. subsidiaries that are intended to be permanently reinvested. Computation of the potential deferred tax liability associated with these undistributed earnings is not practicable. 11 Commitments and Contingent Liabilities - -------------------------------------------------------------------------------- Certain property, machinery and equipment are leased under cancelable and noncancelable agreements. At December 31, 2000, total future minimum rental commitments under noncancelable leases were $977 million, due as follows: 2001-- $170 million, 2002--$143 million, 2003--$121 million, 2004--$111 million, 2005--$100 million and thereafter--$332 million. Rent expense was $218 million, $229 million and $237 million for 2000, 1999 and 1998, respectively. International Paper has entered into an agreement to guarantee, for a fee, a contractual credit agreement of an unrelated third party. The maximum amount of the guarantee is $110 million and expires in 2008. The guaranty fees are payable to International Paper at the time the borrowings under the agreement are repaid to the third party lenders. Three nationwide class action lawsuits filed against International Paper have been settled in recent years. The first suit alleged that hardboard siding manufactured by Masonite fails prematurely, allowing moisture intrusion that in turn causes damage to the structure underneath the siding. The class consisted of all U.S. property owners having Masonite hardboard siding installed on and incorporated into buildings between 1980 and January 15, 1998. Final approval of the settlement was granted by the Court on January 15, 1998. The settlement provides for monetary compensation to class members meeting the settlement requirements on a claims-made basis. It also provides for the payment of attorneys' fees equaling 15% of the settlement amounts paid to class members, with a non-refundable advance of $47.5 million plus $2.5 million in costs. The second suit made similar allegations with regard to Omniwood siding manufactured by Masonite (Omniwood Lawsuit). The class consisted of all U.S. property owners having Omniwood siding installed on and incorporated into buildings from January 1, 1992 to January 6, 1999. The third suit alleged that Woodruf roofing manufactured by Masonite is defective and causes damage to the structure underneath the roofing (Woodruf Lawsuit). The class consisted of all U.S. property owners who had incorporated and installed Masonite Woodruf roofing from January 1, 1980 to January 6, 1999. Final approval of the settlements of the Omniwood and Woodruf lawsuits was granted by the Court on January 6, 1999. The settlements provide for monetary compensation to class members meeting the settlement requirements on a claims-made basis, and provide for payment of attorneys' fees equaling 13% of the settlement amounts paid to class members with a non-refundable advance of $1.7 million plus $75,000 in costs for each of the two cases. Reserves for these matters total $92 million at December 31, 2000, net of expected future insurance recoveries of $51 million. This amount includes $25 million added to the reserve for hardboard siding claims in the fourth quarter of 1999 (some of which has now been paid to claimants) and an additional $125 million added to that reserve in the third quarter of 2000 to cover an expected shortfall, resulting primarily from a higher number of hardboard siding claims than anticipated. It is reasonably possible that the higher number of hardboard siding claims might be indicative of the need for one or more future additions to this reserve. However, whether or not any future additions to this reserve become necessary, International Paper believes that these settlements will not have a material adverse effect on its consolidated financial position or results of operations. Through December 31, 2000, net settlement payments of $277 million, including the $51 million of non-refundable advances of attorneys' fees discussed above, have been made. Included in the non-refundable advances of attorneys' fees is $5 million, which has been paid to the attorneys for the plaintiffs in the Omniwood and Woodruf lawsuits. Also, International Paper has received $27 million related to these matters from our insurance carriers through December 31, 2000. International Paper and Masonite have the right to terminate each of the settlements after seven years from the dates of final approval. The liability for these matters will be retained after the planned sale of Masonite is completed. 52 Notes to Consolidated Financial Statements International Paper is also involved in various other inquiries, administrative proceedings and litigation relating to contracts, sales of property, environmental protection, tax, antitrust and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, International Paper believes that the outcome of any lawsuit or claim that is pending or threatened, or all of them combined, will not have a material adverse effect on its consolidated financial position or results of operations. 12 Supplementary Balance Sheet Information - -------------------------------------------------------------------------------- Inventories by major category were:
- ---------------------------------------------------------------------- In millions at December 31 2000 1999 - ---------------------------------------------------------------------- Raw materials $ 431 $ 484 Finished pulp, paper and packaging products 1,912 1,869 Finished lumber and panel products 261 178 Operating supplies 473 486 Other 105 186 ------ ------ Inventories $3,182 $3,203 ====== ======
The last-in, first-out inventory method is used to value most of International Paper's U.S. inventories. Approximately 68% of total raw materials and finished products inventories were valued using this method. If the first-in, first-out method had been used, it would have increased total inventory balances by approximately $264 million and $250 million at December 31, 2000 and 1999, respectively. Plants, properties and equipment by major classification were:
- ---------------------------------------------------------------------- In millions at December 31 2000 1999 - ---------------------------------------------------------------------- Pulp, paper and packaging facilities Mills $22,710 $21,288 Packaging plants 3,464 3,233 Wood products facilities 2,358 2,117 Other plants, properties and equipment 1,522 2,889 ------- ------- Gross cost 30,054 29,527 Less: Accumulated depreciation 14,043 15,146 ------- ------- Plants, properties and equipment, net $16,011 $14,381 ======= =======
13 Debt and Lines of Credit - -------------------------------------------------------------------------------- A summary of long-term debt follows:
- ---------------------------------------------------------------------- In millions at December 31 2000 1999 - ---------------------------------------------------------------------- 8 7/8% to 10.5% notes, due 2001-2012 $ 522 $ 563 8 7/8% to 9.7% notes, due 2001-2004 564 600 9 1/4% sinking fund debentures, due 2001-2021 8 34 8.5% to 9.5% debentures, due 2002-2022 246 246 8 3/8% to 9 1/2% debentures, due 2015-2024 300 300 8% to 8 1/8% notes, due 2003-2005 2,197 - 7% to 7 7/8% notes, due 2001-2007 1,343 1,373 6 7/8% to 8 1/8% notes, due 2023-2029 742 741 6.65% notes, due 2037 92 - 6.5% notes, due 2007 148 148 6.4% to 7.75% debentures, due 2023-2027 865 - 6 1/8% notes, due 2003 200 200 5 7/8% Swiss franc debentures, due 2001 67 68 5 3/8% euro notes, due 2006 223 249 12% to 16% Brazilian real notes, due 2001-2006 194 - 5 1/8% debentures, due 2012 90 88 Medium-term notes, due 2001-2009(a) 307 331 Floating rate notes, due 2002(b) 2,100 - Environmental and industrial development bonds, due 2001-2033(c,d) 2,334 1,352 Commercial paper and bank notes(e) 637 1,325 Other(f) 157 416 ------- ------ Total(g) 13,336 8,034 Less: Current maturities 688 514 ------- ------ Long-term debt $12,648 $7,520 ======= =======
(a) The weighted average interest rate on these notes was 8.2% in 2000 and 8.3% in 1999. (b) The weighted average interest rate on these notes was 7.9% in 2000. (c) The weighted average interest rate on these bonds was 6.3% in 2000 and 6.1% in 1999. (d) Includes $130 million of bonds at December 31, 2000 and $149 million at December 31, 1999, which may be tendered at various dates and/or under certain circumstances. (e) The weighted average interest rate was 7.2% in 2000. Includes $708 million in 1999 of non-U.S. dollar denominated borrowings with a weighted average interest rate of 5.6%. (f) Includes $19 million in 2000 and $14 million in 1999 of French franc borrowings with a weighted average interest rate of 2.2% in 2000 and 2.8% in 1999, $5 million in 2000 of Canadian dollar borrowings with an interest rate of 9.0%, and $132 million in 1999 of German mark borrowings with a weighted average interest rate of 4.7%. (g) The fair market value was approximately $13.5 billion and $8.1 billion at December 31, 2000 and 1999, respectively. 53 Notes to Consolidated Financial Statements Total maturities of long-term debt over the next five years are 2001--$688 million, 2002--$2.8 billion, 2003--$1.5 billion, 2004--$1.4 billion and 2005--$1.4 billion. At December 31, 2000 and 1999, International Paper, including Carter Holt Harvey, classified $750 million and $1.5 billion, respectively, of tenderable bonds, commercial paper and bank notes as long-term debt. International Paper and this subsidiary have the intent and ability to renew or convert these obligations through 2001 and into future periods. At December 31, 2000, unused bank lines of credit amounted to $2.3 billion. The agreements generally provide for interest rates at a floating rate index plus a margin predetermined by International Paper's credit rating. The principal line, which is cancelable only if International Paper's bond rating drops below investment grade, provides for $750 million of credit through March 2004, and has a facility fee of 0.13% that is payable quarterly. International Paper also has a 364-day facility that provides for $1.0 billion of credit through March 2001 and has a facility fee of 0.09% that is payable quarterly. Additionally, International Paper has a $1.8 billion 364-day facility that provides credit through June 2001, and has a facility fee of 0.10% paid quarterly. Carter Holt Harvey also has two principal lines of credit that support its commercial paper programs. A $360 million line of credit matures in April 2002 and has a 0.15% facility fee that is payable quarterly and a 250 million New Zealand dollar line of credit matures in February 2002 with a 0.13% facility fee that is payable quarterly. At December 31, 2000, notes payable included $517 million of non-U.S. dollar denominated debt with maturities of less than twelve months and a weighted average interest rate of 6.3%. At December 31, 2000, outstanding debt included approximately $2.1 billion of commercial paper and bank notes with interest rates that fluctuate based on market conditions and our credit rating. On June 20, 2000, International Paper issued $5 billion of debt to finance the acquisition of Champion and assumed $2.8 billion of Champion debt. At the time of the acquisition announcement, Moody's lowered International Paper's long-term debt rating to Baa1 from A3. At December 31, 2000, $6.7 billion of debt related to the Champion acquisition remained outstanding. In 1999, International Paper recorded an extraordinary loss of $16 million after taxes for the extinguishment of high interest debt that was assumed in connection with the merger with Union Camp. International Paper extinguished approximately $275 million of long-term debt with interest rates ranging from 8.5% to 10%. 14 Financial Instruments - ------------------------------------------------------------------------------ Financial instruments are used primarily to hedge exposure to currency and interest rate risk. To qualify as hedges, financial instruments must reduce the currency or interest rate risk associated with the related underlying items and be designated as hedges by management. Gains or losses from the revaluation of financial instruments that do not qualify for hedge accounting treatment are recognized in earnings. International Paper's policy has been to finance a portion of our investments in non-U.S. operations with borrowings denominated in the same currency as the investment or by entering into foreign exchange contracts in tandem with U.S. dollar borrowings. These contracts are effective in providing a hedge against fluctuations in currency exchange rates. Gains or losses from the revaluation of these contracts, which are fully offset by gains or losses from the revaluation of the net assets being hedged, are determined monthly based on published currency exchange rates and are recorded as translation adjustments in common shareholders' equity. Upon liquidation of the net assets being hedged or early termination of the foreign exchange contracts, the gains or losses from the revaluation of foreign exchange contracts would be included in earnings. Amounts payable to or due from the counterparties to the foreign exchange contracts are included in accrued liabilities or accounts receivable as applicable. Financial instruments outstanding at December 31, 2000 used to hedge net investments in non-U.S. operations consisted of non-U.S. dollar denominated debt totaling $600 million. Also outstanding were foreign currency forward contracts totaling $1.7 billion, substantially all having maturities of less than twelve months, as noted in the following table expressed in U.S. dollar equivalents. The average amount of outstanding contracts was $1.5 billion and $1.0 billion during 2000 and 1999, respectively. 54 Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------- Weighted Net Average Unrealized Contract Exchange Gain U.S. dollars in millions Amount Rate (Loss) - ------------------------------------------------------------------------------- Pay U.S. dollars / Receive European euros $955 0.88 $(11) Pay U.S. dollars / Receive British pounds 128 1.46 (2) Receive New Zealand dollars / Pay Australian dollars 413 1.31 15 Pay U.S. dollars / Receive New Zealand dollars 202 0.44 9 Receive Swedish kronas / Pay U.S. dollars 30 9.64 -
Foreign exchange contracts are also used to hedge certain transactions that are denominated in non-U.S. currencies, primarily export sales and equipment purchased from nonresident vendors. These contracts serve to protect International Paper from currency fluctuations between the transaction and settlement dates. Gains and losses from the revaluation of these contracts, based on published currency exchange rates, along with offsetting gains and losses resulting from the revaluation of the underlying transactions, are recognized in earnings or deferred and recognized in the basis of the underlying transaction when completed. Any gains or losses arising from the cancellation of the underlying transactions or early termination of the foreign currency exchange contracts would be included in earnings. Financial instruments outstanding at December 31, 2000 used to hedge transactions denominated in non-U.S. currencies consisted of foreign currency forward contracts totaling $955 million, a majority having maturities of less than twelve months, as noted in the following table expressed in U.S. dollar equivalents. The average amount of outstanding contracts during 2000 and 1999 was $825 million and $454 million, respectively.
- ------------------------------------------------------------------------------- Weighted Net Average Unrealized Contract Exchange Gain U.S. dollars in millions Amount Rate (Loss) - ------------------------------------------------------------------------------- Pay U.S. dollars / Receive European euros $117 0.90 $ 1 Pay British pounds / Receive European euros 70 0.59 1 Pay European euros / Receive British pounds 39 1.63 - Receive New Zealand dollars / Pay Australian dollars 62 1.27 - Pay U.S. dollars / Receive New Zealand dollars 148 0.48 (14) Receive U.S. dollars / Pay European euros 29 0.88 (1) Receive U.S. dollars / Pay British pounds 18 1.44 - Receive U.S. dollars / Pay New Zealand dollars 440 0.41 (25)
Note: International Paper has an additional $32 million in a number of smaller forward contracts to purchase or sell other currencies with a related net immaterial unrealized loss. International Paper also purchases foreign exchange option contracts, with terms that generally do not exceed one year, to hedge export sales. Premiums paid under these contracts are expensed over the life of the option contract. Gains arising on these options are recognized at the time the options are exercised. Option contracts outstanding at December 31, 2000 amounted to $121 million. Cross-currency and interest rate swap agreements are used to manage the composition of our fixed and floating rate debt portfolio. Amounts to be paid or received as interest under these agreements are recognized over the life of the swap agreements as adjustments to interest expense. Gains or losses from the revaluation of cross-currency swap agreements are included in earnings. The related amounts payable to or due from the counterparties to the agreements are included in accrued liabilities or accounts receivable as applicable. If swap agreements are terminated early, the resulting gain or loss would be deferred and amortized over the remaining life of the related debt. The following table presents notional amounts and principal cash flows for currency and interest rate swap agreements by year of maturity expressed in U.S. dollar equivalents. The impact on our earnings and net liability under these agreements was not significant. 55 Notes to Consolidated Financial Statements
- ----------------------------------------------------------------------------------------------------------------------------------- U.S. dollars in millions 2001 2002 2003 2004 2005 Thereafter Total Fair Value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. dollar variable to fixed rate swaps $ - $ 45 $200 $300 $ - $ 500 $1,045 $ 97 Average pay rate 6.3% / Average receive rate 6.9% U.S. dollar fixed to variable rate swaps - 45 200 550 - 500 1,295 (98) Average pay rate 7.6% / Average receive rate 6.8% U.S. dollar to New Zealand dollar cross-currency swap - 150 - - - - 150 (5) Australian dollar to New Zealand dollar cross-currency swap - 130 - - - - 130 25 Swiss franc to New Zealand dollar cross-currency swaps 68 - - - - - 68 1
International Paper does not hold or issue financial instruments for trading purposes. The counterparties to interest rate swap agreements and foreign exchange contracts consist of a number of major international financial institutions. International Paper continually monitors its positions with and the credit quality of these financial institutions and does not expect nonperformance by the counterparties. 15 Capital Stock - ------------------------------------------------------------------------------- The authorized capital stock at both December 31, 2000 and 1999 consisted of 990,850,000 shares of common stock, $1 par value; 400,000 shares of cumulative $4 nonredeemable preferred stock, without par value (stated value $100 per share); and 8,750,000 shares of serial preferred stock, $1 par value. The serial preferred stock is issuable in one or more series by the Board of Directors without further shareholder action. 16 Retirement Plans - -------------------------------------------------------------------------------- International Paper maintains pension plans that provide retirement benefits to substantially all employees. Employees generally are eligible to participate in the plans upon completion of one year of service and attainment of age 21. The plans provide defined benefits based on years of credited service and either final average earnings (salaried employees), hourly job rates or specified benefit rates (hourly and union employees). U.S. Defined Benefit Plans International Paper makes contributions that are sufficient to fully fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). Net periodic pension income for qualified and nonqualified defined benefit plans comprised the following:
- --------------------------------------------------------------------------------- In millions 2000 1999 1998 - --------------------------------------------------------------------------------- Service cost $ (98) $(101) $ (97) Interest cost (397) (303) (297) Expected return on plan assets 615 469 455 Amortization of net transition asset (obligation) (2) - 26 Actuarial loss (5) (6) (3) Amortization of prior service cost (19) (16) (12) Curtailment gain (loss) (2) 6 5 Settlement gain 9 - - ----- ----- ----- Net periodic pension income $ 101 $ 49 $ 77 ===== ===== =====
56 Notes to Consolidated Financial Statements The following table presents the changes in benefit obligation and plan assets for 2000 and 1999 and the plans' funded status and amounts recognized in the consolidated balance sheet as of December 31, 2000 and 1999.
- ------------------------------------------------------------------------------------ In millions 2000 1999 - ------------------------------------------------------------------------------------ Change in benefit obligation: Benefit obligation, January 1 $4,323 $4,492 Service cost 98 101 Interest cost 397 303 Actuarial (gain) loss 171 (439) Benefits paid (451) (322) Acquisitions(a) 1,796 - Divestitures (42) - Curtailment gain (2) (10) Special termination benefits(b) 10 92 Plan amendments 19 106 ------- ------- Benefit obligation, December 31(c) $6,319 $4,323 ======= ======= Change in plan assets: Fair value of plan assets, January 1 $5,612 $4,942 Actual return on plan assets (106) 950 Company and participants' contributions 83 42 Benefits paid (451) (322) Acquisitions 2,144 - Divestitures (29) - ------- ------- Fair value of plan assets, December 31 $7,253 $5,612 ======= ======= Funded status(d) $934 $1,289 Unrecognized actuarial (gain) loss 292 (615) Unamortized prior service cost 170 183 Unrecognized net transition obligation - 2 ------- ------- Prepaid benefit cost $1,396 $ 859 ======= ======= Amounts recognized in the consolidated balance sheet consist of: Prepaid benefit cost $1,515 $ 928 Accrued benefit liability (168) (85) Intangible asset 3 6 Minimum pension liability adjustment included in accumulated other comprehensive income 46 10 ------- ------- Net amount recognized $1,396 $ 859 ======= =======
(a) Includes $76.5 million in special termination benefits attributable to the elimination of 500 positions in connection with a severance program provided to employees whose jobs were eliminated as a result of the acquisition of Champion. Also included was a curtailment gain of $17.9 million. (b) Included in restructuring and other charges for 2000 was $10 million for special termination benefits attributable to the elimination of approximately 268 positions in connection with a facility rationalization program. Included in merger integration costs for 1999 was $92 million for special termination benefits attributable to the elimination of approximately 1,171 positions in connection with an employee integration benefits program provided to employees whose jobs were eliminated as a result of the merger of International Paper and Union Camp. In 2000, $6 million of this reserve relating to 171 positions, was included in reversals of reserves no longer required. (c) Includes nonqualified unfunded plans with projected benefit obligations of $212 million and $110 million at December 31, 2000 and 1999, respectively. (d) The Union Camp and Alling & Cory domestic qualified pension plans were merged with the International Paper domestic qualified pension plan effective September 30, 1999. The funded status information for 1999 reflects this merger. Prior to the plan merger, the Union Camp domestic qualified hourly plan had an accumulated benefit obligation in excess of the fair value of plan assets. As of December 31, 1998, the projected benefit obligation, accumulated benefit obligation and fair market value of plan assets for the Union Camp hourly plan were $290 million, $290 million and $269 million, respectively. Plan assets are held in master trust accounts and include investments in International Paper common stock in the amounts of $467 million and $401 million at December 31, 2000 and 1999, respectively. Weighted average assumptions as of December 31, 2000, 1999 and 1998 were as follows:
- ------------------------------------------------------------------------------- 2000 1999 1998(a,b) - ------------------------------------------------------------------------------- Discount rate 7.50% 7.75% 6.60% Expected long-term return on plan assets 10.00% 10.00% 9.90% Rate of compensation increase 4.75% 5.00% 4.20%
(a) On June 1, 1999 International Paper enhanced pension benefits for its major union groups. As a result, the pension plan was revalued. The revaluation assumed a discount rate of 7.25% and a rate of compensation increase of 4.5%. These actions had the net effect of reducing the pension benefit obligation by $179 million. (b) The 1998 rate is a blended average of the Union Camp and International Paper plan assumptions. The International Paper discount rate, expected long-term return on plan assets and rate of compensation increase for 1998 was 6.5%, 10.0% and 4.0%, respectively. 57 Notes to Consolidated Financial Statements Non-U.S. Defined Benefit Plans Generally, our non-U.S. pension plans are funded using the projected benefit as a target, except in certain countries where funding of benefit plans is not required. Net periodic pension expense for our non-U.S. plans was not significant for 2000, 1999 or 1998. The non-U.S. plans' projected benefit obligation in excess of plan assets at fair market value at December 31, 2000 and 1999 was $87 million and $43 million, respectively. Plan assets are composed principally of common stocks and other fixed income securities. Other Plans We sponsor several defined contribution plans to provide substantially all U.S. salaried and certain hourly employees of International Paper an opportunity to accumulate personal funds for their retirement. Contributions may be made on a before-tax basis to substantially all of these plans. As determined by the provisions of each plan, International Paper matches the employees' basic voluntary contributions. Such matching contributions to the plans were approximately $65 million, $67 million and $58 million for the plan years ending in 2000, 1999 and 1998, respectively. The net assets of these plans approximated $4.7 billion as of the 2000 plan year-end. 17 Postretirement Benefits - -------------------------------------------------------------------------------- International Paper provides certain retiree health care and life insurance benefits covering a majority of U.S. salaried and certain hourly employees. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. An amendment in 1992 to one of the plans limits the maximum annual company contribution for health care benefits for retirees after January 1, 1992, based on age at retirement and years of service after age 50. Amortization of this plan amendment, which reduced annual net postretirement benefit cost, was completed in 1999. International Paper does not prefund these benefits and has the right to modify or terminate certain of these plans in the future. The components of postretirement benefit expense in 2000, 1999 and 1998 were as follows:
- -------------------------------------------------------------------------------- In millions 2000 1999 1998 - -------------------------------------------------------------------------------- Service cost $ 10 $ 11 $ 11 Interest cost 45 30 33 Actuarial loss - 2 1 Amortization of prior service cost (6) (12) (21) Curtailment gain (2) - - Settlement gain (2) - - ---- ---- ---- Net postretirement benefit cost $ 45 $ 31 $ 24 ==== ==== ====
The following table presents the plans' funded status as of December 31, 2000 and 1999 and changes in benefit obligation and plan assets for 2000 and 1999.
- -------------------------------------------------------------------------------- In millions 2000 1999 - -------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation, January 1 $ 446 $ 503 Service cost 10 11 Interest cost 45 30 Participants' contributions 21 16 Actuarial gain (5) (66) Benefits paid (73) (44) Plan amendments (8) (15) Acquisitions(a) 385 - Divestitures (1) - Curtailment loss - 4 Special termination benefits(b) 2 7 ----- ----- Benefit obligation, December 31 $ 822 $ 446 ===== ===== Change in plan assets: Fair value of plan assets, January 1 $ - $ - Company contributions 52 28 Participants' contributions 21 16 Benefits paid (73) (44) ----- ----- Fair value of plan assets, December 31 $ - $ - ===== ===== Funded status $(822) $(446) Unamortized prior service cost (45) (47) Unrecognized actuarial (gain) loss (2) 4 ----- ----- Accrued benefit cost $(869) $(489) ===== =====
(a) Includes $9.5 million in special termination benefits attributable to the elimination of 500 positions in connection with a severance program provided to employees whose jobs were eliminated as a result of the Champion acquisition. Also included was a curtailment gain of $2.1 million. 58 Notes to Consolidated Financial Statements (b) Included in restructuring and other charges in 2000 were charges of $2 million for special termination benefits attributable to the elimination of approximately 100 positions in connection with a facility rationalization program. Included in merger integration costs for 1999 were charges of $7 million for special termination benefits attributable to the elimination of approximately 313 positions in connection with an integration benefits program provided to employees whose jobs were eliminated as a result of the Union Camp merger. Future benefit costs were estimated assuming medical costs would increase at a 6.50% annual rate, decreasing to a 5% annual growth rate ratably over the next three years and then remaining at a 5% annual growth rate thereafter. A 1% increase in this annual trend rate would have increased the accumulated postretirement benefit obligation at December 31, 2000 by $63 million. A 1% decrease in the annual trend rate would have decreased the accumulated postretirement benefit obligation at December 31, 2000 by $57 million. The effect on net postretirement benefit cost from a 1% increase or decrease would not be material. The weighted average discount rate used to estimate the accumulated postretirement benefit obligation at December 31, 2000 was 7.50% compared with 7.75% at December 31, 1999. In addition to the U.S. plan, certain Canadian employees are eligible for retiree health care and life insurance. Costs and obligations for this plan were not significant. 18 Incentive Plans - -------------------------------------------------------------------------------- International Paper currently has a Long-Term Incentive Compensation Plan that includes a Stock Option Plan, a Restricted Performance Share Plan and an Executive Continuity Award Plan, administered by a committee of nonemployee members of the Board of Directors (Committee) who are not eligible for awards. The Plan allows stock appreciation rights to be awarded, although none were outstanding at December 31, 2000 or 1999. We also have other performance-based restricted share/unit plans available to senior executives and directors. We apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our plans and the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Accordingly, no compensation cost has been recognized for the stock option plan. Stock Option Plan Under the current plan, officers and certain other employees may be granted options to purchase International Paper common stock. The option price is the market price of the stock at the date of grant. Options are immediately exercisable under the plan; however, the underlying shares cannot be sold and carry profit forfeiture provisions during the initial two years following grant. Upon exercise of an option, a replacement option may be granted with the exercise price equal to the current market price and with a term extending to the expiration date of the original option. For purposes of the pro forma disclosure on page 61, the fair market value of each option grant has been estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2000, 1999 and 1998, respectively:
- -------------------------------------------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------- Initial Options(a) Risk-Free Interest Rate 6.17% 4.78% 5.05% Price Volatility 45.00% 33.00% 29.28% Dividend Yield 2.50% 2.08% 2.38% Expected Term in Years 2.50(c) 4.39 5.31 Replacement Options(b) Risk-Free Interest Rate 6.45% 5.47% 5.51% Price Volatility 45.00% 33.00% 31.09% Dividend Yield 2.50% 2.05% 2.17% Expected Term in Years 2.10 2.09 2.12
(a) The average fair market values of initial option grants during 2000, 1999 and 1998 were $11.86, $13.14 and $10.83, respectively. (b) The average fair values of replacement option grants during 2000, 1999 and 1998 were $13.44, $10.14 and $9.40, respectively. (c) In 2000, the vesting period for current and prospective option grants under the stock option plan was reduced from four to two years. 59 Notes to Consolidated Financial Statements A summary of the status of the Stock Option Plan as of December 31, 2000, 1999 and 1998 and changes during the years ended on those dates is presented below:
- ----------------------------------------------------------------------------------- Weighted Average Exercise Options(a,b) Price - ----------------------------------------------------------------------------------- Outstanding at January 1, 1998 18,124,084 $38.03 Granted 4,820,970 42.96 Exercised (3,314,612) 35.85 Forfeited (789,621) 42.82 Expired (154,915) 49.97 ----------- --------- Outstanding at December 31, 1998 18,685,906 39.39 Granted 4,521,627 49.76 Exercised (6,531,818) 36.56 Forfeited (522,214) 42.91 Expired (354,566) 51.41 ----------- --------- Outstanding at December 31, 1999 15,798,935 43.14 Granted 9,527,442 43.29 Exercised (1,052,107) 41.84 Forfeited (233,724) 51.96 Expired (177,568) 49.97 ----------- --------- Outstanding at December 31, 2000 23,862,978 $43.12 ===========
(a) The table does not include Executive Continuity Award tandem options described below. No fair value is assigned to these options under SFAS No. 123. The tandem restricted shares accompanying these options are expensed over their vesting period. (b) The table does include options outstanding under two acquired company plans under which options may no longer be granted. The following table summarizes information about stock options outstanding at December 31, 2000:
- -------------------------------------------------------------------------------- Outstanding and Exercisable -------------------------------------- Weighted Weighted Average Average Options Remaining Exercise Range of Exercise Prices Outstanding Life Price - -------------------------------------------------------------------------------- $25.79-$29.87 5,211,154 9.7 $29.30 $30.00-$41.00 5,484,960 5.1 $35.90 $41.12-$46.00 4,750,379 6.6 $43.82 $46.06-$57.38 4,042,725 3.3 $52.43 $57.43-$69.63 4,373,760 8.5 $59.27
Performance-Based Restricted Shares Under the Restricted Performance Share Plan, contingent awards of International Paper's common stock are granted by the Committee. Awards are earned on the basis of International Paper's financial performance over a period of consecutive calendar years as determined by the Committee. The Restricted Performance Share Plan in effect at the beginning of 1999 was cancelled during 1999. Prior to the amended plan, which commences in January 2001, a one-time Transitional Performance Unit Plan has been in effect since July 1, 1999, which provides a cash award upon successful achievement of pre-established performance criteria. The following summarizes the activity of all performance-based plans for the three years ending December 31, 2000:
- -------------------------------------------------------------------------------- Shares - -------------------------------------------------------------------------------- Outstanding at January 1, 1998 1,161,069 Granted 330,656 Issued (156,935) Forfeited (50,100) ---------- Outstanding at December 31, 1998 1,284,690 Granted 95,035 Issued (227,553) Forfeited(a) (1,067,153) ---------- Outstanding at December 31, 1999 85,019 Granted - Issued (26,537) Forfeited (58,482) ---------- Outstanding at December 31, 2000 - ==========
(a) Includes 974,734 shares forfeited under the Restricted Performance Share Plan in 1999. 60 Notes to Consolidated Financial Statements Executive Continuity Award Plan The Executive Continuity Award Plan provides for the granting of tandem awards of restricted stock and/or nonqualified stock options to key executives. Grants are restricted and awards conditioned on attainment of specified age and years of service requirements. Awarding of a tandem stock option results in the cancellation of the related restricted shares. The following summarizes the activity of the Executive Continuity Award Plan for the three years ending December 31, 2000:
- -------------------------------------------------------------------------------- Shares - -------------------------------------------------------------------------------- Outstanding at January 1, 1998 580,258 Granted 24,000 Issued (5,500) Forfeited (5,000) -------- Outstanding at December 31, 1998 593,758 Granted 71,900 Issued (65,412) Forfeited(a) (89,390) -------- Outstanding at December 31, 1999 510,856 Granted 76,165 Issued (18,303) Forfeited(a) (112,000) -------- Outstanding at December 31, 2000 456,718 ========
(a) Includes restricted shares cancelled when tandem stock options were awarded. 560,000 and 440,000 tandem options were awarded in 2000 and 1999, respectively. At December 31, 2000 and 1999, a total of 22.5 million and 30.1 million shares, respectively, were available for grant under the Long-Term Incentive Compensation Plan. In 1999, shareholders approved an additional 25.5 million shares to be made available for grant, with 3 million of these shares reserved specifically for the granting of restricted stock. No additional shares were made available during 2000. A total of 4.2 million shares were available for the granting of restricted stock as of December 31, 2000 and 1999. The compensation cost charged to earnings for all the incentive plans was $28 million, $3 million and $15 million for 2000, 1999 and 1998, respectively. Earnings in 1999 included income of $20 million recognized upon cancellation of a majority of the awards under the Restricted Performance Share Plan. Had compensation cost for International Paper's stock-based compensation plans been determined consistent with the provisions of SFAS No. 123, its net earnings, earnings per common share and earnings per common share--assuming dilution would have been reduced to the pro forma amounts indicated below:
- -------------------------------------------------------------------------------- In millions, except per share amounts 2000 1999 1998 - -------------------------------------------------------------------------------- Net Earnings As reported $ 142 $ 183 $ 247 Pro forma 104 152 223 Earnings Per Common Share As reported $0.32 $0.44 $0.60 Pro forma 0.23 0.37 0.54 Earnings Per Common Share-- assuming dilution As reported $0.32 $0.44 $0.60 Pro forma 0.23 0.37 0.54
The effect on 2000, 1999 and 1998 pro forma net earnings, earnings per common share and earnings per common share--assuming dilution of expensing the estimated fair market value of stock options is not necessarily representative of the effect on reported earnings for future years due to the vesting period of stock options and the potential for issuance of additional stock options in future years. 19 Subsequent Events - -------------------------------------------------------------------------------- As of March 1, 2001 the dispositions of certain businesses discussed in Note 7-Businesses Held for Sale were completed. Zanders, the Argentine businesses and the Hamilton mill were sold for approximately $130 million. In addition, the oil and gas interests were conveyed to a third party for approximately $260 million. On February 15, 2001, International Paper announced that an agreement was reached to sell approximately 265,000 acres of forestlands in the state of Washington for approximately $500 million. 61 Six-Year Financial Summary International Paper
- ----------------------------------------------------------------------------------------------------------------------------- Dollar amounts in millions, except per share amounts and stock prices 2000 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Results of Operations Net sales $ 28,180 $24,573 $23,979 $ 24,556 $ 24,182 $24,140 Costs and expenses, excluding interest 26,675 23,620 23,039 23,976 23,193 20,791 Earnings before income taxes, minority interest and extraordinary items 723(a) 448(c) 429(e) 143(f) 939(g) 2,742 Minority interest expense, net of taxes 238(a) 163(c) 87(e) 140(f) 180(g) 166 Extraordinary items (226)(b) (16)(d) - - - - Net earnings (loss) 142(a,b) 183(c,d) 247(e) (80)(f) 379(g) 1,595 Earnings (loss) applicable to common shares 142(a,b) 183(c,d) 247(e) (80)(f) 379(g) 1,595 -------- ------- ------- -------- -------- ------- Financial Position Working capital $ 3,042 $ 2,859 $ 2,675 $ 1,476 $ 454 $ 1,471 Plants, properties and equipment, net 16,011 14,381 15,320 15,707 16,570 14,347 Forestlands 5,966 2,921 3,093 3,273 3,637 3,030 Total assets 42,109 30,268 31,466 31,971 33,357 28,838 Long-term debt 12,648 7,520 7,697 8,521 7,943 7,144 Common shareholders' equity 12,034 10,304 10,738 10,647 11,349 9,837 -------- ------- ------- -------- -------- ------- Per Share of Common Stock-- Assuming No Dilution(i) Earnings (loss) before extraordinary items $ 0.82 $ 0.48 $ 0.60 $ (0.20) $ 0.95 $ 4.41 Extraordinary items (0.50) (0.04) - - - - Earnings (loss) 0.32 0.44 0.60 (0.20) 0.95 4.41 Cash dividends 1.00 1.01 1.05 1.05 1.05 0.98 Common shareholders' equity 24.85 24.85 25.99 26.10 27.95 26.73 -------- ------- ------- -------- -------- ------- Common Stock Prices(i) High 60 59 1/2 55 1/4 61 44 5/8 45 3/4 Low 26 5/16 39 1/2 35 1/2 38 5/8 35 5/8 34 1/8 Year-end 40 13/16 56 7/16 44 13/16 43 1/8 40 1/2 37 7/8 -------- ------- ------- -------- -------- ------- Financial Ratios Current ratio 1.4 1.7 1.6 1.3 1.1 1.3 Total debt to capital ratio 49.3 38.1 39.0 46.1 45.6 43.7 Return on equity 1.2(a,b,h) 1.7(c,d,h) 2.3(e,h) (0.7)(f,h) 3.4(g) 17.6 Return on investment before extraordinary items 3.3(a,h) 2.6(c,d,h) 2.5(e,h) 1.5(f,h) 3.3(g) 9.0 -------- ------- ------- -------- -------- ------- Capital Expenditures $ 1,352 $ 1,139 $ 1,322 $ 1,448 $ 1,780 $ 1,785 -------- ------- ------- -------- -------- ------- Number of Employees 112,900 98,700 98,300 100,900 106,300 99,800 ======== ======= ======= ======== ======== =======
Financial Glossary Current ratio--current assets divided by current liabilities. Total debt to capital ratio--long-term debt plus notes payable and current maturities of long-term debt divided by long-term debt, notes payable and current maturities of long-term debt, minority interest, preferred securities and total common shareholders' equity. Return on equity--net earnings divided by average common shareholders' equity (computed monthly). Return on investment--earnings before income taxes, minority interest and extraordinary items, less after-tax interest expense, divided by an average of total assets minus accounts payable and accrued liabilities (computed monthly). 62 Six-Year Financial Summary Footnotes to Six-Year Financial Summary (a) Includes a $54 million pre-tax charge ($33 million after taxes) for merger related expenses, a $125 million pre-tax charge ($80 million after taxes) for additional Masonite legal reserves, an $824 million charge before taxes and minority interest ($509 million after taxes and minority interest) for asset shutdowns and a $34 million pre-tax credit ($21 million after taxes) for the reversals of reserves no longer required. (b) Includes an extraordinary gain of $385 million before taxes and minority interest ($134 million after taxes and minority interest) on the sale of International Paper's investment in Scitex and Carter Holt Harvey's sale of its share of COPEC, an extraordinary loss of $460 million before taxes ($310 million after taxes) related to the impairment of the Zanders and Masonite businesses to be sold, an extraordinary gain before taxes and minority interest of $368 million ($183 million after taxes and minority interest) related to the sale of Bush Boake Allen, an extraordinary loss of $5 million before taxes and minority interest ($2 million after taxes and minority interest) related to Carter Holt Harvey's sale of its Plastics division, and an extraordinary pre-tax charge of $373 million ($231 million after taxes) related to impairments of the Argentine investments, as well as the Chemical Cellulose pulp business and Fine Papers businesses to be sold. (c) Includes a $148 million pre-tax charge ($97 million after taxes) for Union Camp merger-related termination benefits, a $107 million pre-tax charge ($78 million after taxes) for merger-related expenses, a $298 million pre-tax charge ($180 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $10 million pre-tax charge ($6 million after taxes) to increase existing environmental remediation reserves related to certain former Union Camp facilities, a $30 million pre-tax charge ($18 million after taxes) to increase existing legal reserves and a $36 million pre-tax credit ($27 million after taxes) for the reversals of reserves that were no longer required. (d) Includes an extraordinary loss of $26 million before taxes ($16 million after taxes) for the extinguishment of high-interest debt that was assumed in the merger with Union Camp. (e) Includes a $20 million pre-tax gain ($12 million after taxes) on the sale of the Veratec nonwovens business, an $83 million pre-tax credit ($50 million after taxes) from the reversals of previously established reserves that were no longer required, a $111 million pre-tax charge ($68 million after taxes) for the impairment of oil and gas reserves due to low prices, a $145 million pre-tax restructuring and asset impairment charge ($82 million after taxes and minority interest expense) and $16 million of pre-tax charges ($10 million after taxes) related to International Paper's share of charges taken by Scitex, a 13% investee company, for the write-off of in-process research and development related to an acquisition and costs to exit the digital video business. (f) Includes a pre-tax business improvement charge of $535 million ($385 million after taxes), a $150 million pre-tax provision for legal reserve ($93 million after taxes), a pre-tax charge of $125 million ($80 million after taxes) for anticipated losses associated with the sale of the Imaging businesses, and a pre-tax gain of $170 million ($97 million after taxes and minority interest) from the redemption of certain retained West Coast partnership interests and the release of a related debt guaranty. (g) Includes a pre-tax restructuring and asset impairment charge of $554 million ($386 million after taxes), a $592 million pre-tax gain on the sale of a West Coast partnership interest ($336 million after taxes and minority interest), a $155 million pre-tax charge ($99 million after taxes) for the write-down of the investment in Scitex and a $10 million pre-tax charge ($6 million after taxes) for International Paper's share of a restructuring charge announced by Scitex in November 1996. (h) Return on equity was 8.3% and return on investment was 5.3% in 2000 before special and extraordinary items. Return on equity was 5.2% and return on investment was 4.0% in 1999 before special and extraordinary items. Return on equity was 3.2% and return on investment was 2.8% in 1998 before special items. Return on equity was 3.4% and return on investment was 3.0% in 1997 before special items. Return on equity was 4.7% and return on investment was 3.8% in 1996 before special items. (i) Per share data and common stock prices have been adjusted to reflect a two-for-one stock split in September 1995. All per share amounts are computed before the effects of dilutive securities. 63 Interim Financial Results (unaudited) International Paper
- ---------------------------------------------------------------------------------------------------------------- In millions, except per share amounts and stock prices 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ---------------------------------------------------------------------------------------------------------------- 2000 Net Sales $6,371 $6,780 $7,801 $7,228 Gross Margin(a) 1,850 2,044 2,253 1,951 Earnings (Loss) Before Income Taxes, Minority Interest and Extraordinary Items 435(b) 480(d) 311(e) (503)(h) Net Earnings (Loss) 378(b,c) 270(d) (135)(e,f) (371)(h,i) Per Share of Common Stock Earnings (Loss) $0.91 $0.64 $(0.38)(g) $(0.85)(j) Earnings (Loss)--Assuming Dilution 0.91 0.64 (0.38)(g) (0.85)(j) Dividends 0.25 0.25 0.25 0.25 Common Stock Prices High 60 45 15/16 36 13/16 43 Low 32 7/8 29 9/16 27 26 5/16 1999 Net Sales $6,032 $5,996 $6,251 $6,294 Gross Margin(a) 1,497 1,619 1,690 1,807 Earnings (Loss) Before Income Taxes, Minority Interest and Extraordinary Items 94 (36)(k) 242(l) 148(m) Net Earnings (Loss) 32 (71)(k) 142(l) 80(m) Per Share of Common Stock Earnings (Loss) $0.08 $(0.17) $0.34 $0.19 Earnings (Loss)--Assuming Dilution 0.08 (0.17) 0.34 0.19 Dividends 0.26 0.25 0.25 0.25 Common Stock Prices High 47 1/4 59 1/2 56 1/16 57 11/16 Low 39 1/2 42 11/16 46 15/16 43 9/16 - ------------------------------------------------------------------------ In millions, except per share amounts and stock prices Year - ------------------------------------------------------------------------ 2000 Net Sales $28,180 Gross Margin(a) 8,098 Earnings (Loss) Before Income Taxes, Minority Interest and Extraordinary Items 723(b,d,e,h) Net Earnings (Loss) 142(b-f,h,i) Per Share of Common Stock Earnings (Loss) $0.32 Earnings (Loss)--Assuming Dilution 0.32 Dividends 1.00 Common Stock Prices High 60 Low 26 5/16 1999 Net Sales $24,573 Gross Margin(a) 6,613 Earnings (Loss) Before Income Taxes, Minority Interest and Extraordinary Items 448(k,l,m) Net Earnings (Loss) 183(k,l,m) Per Share of Common Stock Earnings (Loss) $0.44 Earnings (Loss)--Assuming Dilution 0.44 Dividends 1.01 Common Stock Prices High 59 1/2 Low 39 1/2
64 Interim Financial Results Footnotes to Interim Financial Results (a) Gross margin represents net sales less cost of products sold. (b) Includes an $8 million pre-tax charge ($5 million after taxes) for Union Camp merger integration costs. (c) Includes an extraordinary gain of $385 million before taxes and minority interest ($134 million after taxes and minority interest) on the sale of International Paper's investment in Scitex and Carter Holt Harvey's sale of its share of COPEC. (d) Includes a $4 million pre-tax charge ($3 million after taxes) for merger-related costs and a $71 million pre-tax charge ($42 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions. (e) Includes a $15 million pre-tax charge ($9 million after taxes) for merger-related expenses, a $6 million pre-tax credit ($4 million after taxes) for the reversal of merger-related termination benefits reserves no longer required, and a $125 million pre-tax charge ($80 million after taxes) for additional Masonite legal reserves. (f) Includes an extraordinary loss of $460 million before taxes ($310 million after taxes) related to the impairment of the Zanders and Masonite businesses to be sold. (g) In order for the 2000 third quarter earnings per share to add up to the year-to-date earnings per share, a loss of $.38 per share is required. On the basis of the weighted-average number of shares outstanding for the third quarter, the loss per share was $.28. The difference between the two calculations relates to the 68.7 million shares that were issued in connection with the Champion acquisition. (h) Includes a $27 million pre-tax charge ($16 million after taxes) for Union Camp and Champion merger-related items, a charge of $753 million before taxes and minority interest ($467 million after taxes and minority interest) for shutdown and restructuring reserves, and a $28 million pre-tax credit ($17 million after taxes) for the reversals of reserves no longer required. (i) Includes an extraordinary pre-tax gain of $368 million ($183 million after taxes) related to the sale of Bush Boake Allen. Also included is an extraordinary loss of $5 million before taxes and minority interest ($2 million after taxes and minority interest) related to Carter Holt Harvey's sale of its Plastics division, and an extraordinary pre-tax charge of $373 million ($231 million after taxes) related to impairments of the Argentine investments, as well as the Chemical Cellulose pulp business and Fine Papers businesses to be sold. (j) In order for the year-to-date earnings per share to equal the sum of the quarters, a loss of $.85 is required in the fourth quarter. On the basis of the weighted-average shares outstanding for the fourth quarter, the loss per share was $.77. The difference between the two calculations relates to the 68.7 million shares that were issued in connection with the Champion acquisition. (k) Includes a $98 million pre-tax charge ($67 million after taxes) for Union Camp merger-related termination benefits, a $59 million pre-tax charge ($49 million after taxes) for other Union Camp merger-related expenses, a $113 million pre-tax charge ($69 million after taxes) for asset shutdowns of excess internal capacity and cost reduction actions, and a $36 million pre-tax credit ($27 million after taxes) for the reversals of reserves that were no longer required. (l) Includes a $50 million pre-tax charge ($30 million after taxes) for Union Camp merger-related termination benefits, an $18 million pre-tax charge ($11 million after taxes) for other Union Camp merger-related expenses, and a $10 million pre-tax charge ($6 million after taxes) to increase existing environmental remediation reserves related to certain former Union Camp facilities. (m) Includes a $185 million pre-tax charge ($111 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $30 million pre-tax charge ($18 million after taxes) for merger-related expenses, and a $30 million pre-tax charge ($18 million after taxes) to increase existing legal reserves. 65 Shareholder Information Corporate Headquarters International Paper Company 400 Atlantic Street Stamford, CT 06921 203-541-8000 Annual Meeting The next annual meeting of shareholders will be held at 8:30 a.m., Tuesday, May 8, 2001 at the Manhattanville College, Purchase, New York. Transfer Agent For services regarding your account such as change of address, lost certificates or dividend checks, change in registered ownership, or the dividend reinvestment program, write or call: Mellon Investor Services, LLC Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 1-800-678-8715 Stock Exchange Listings Common shares (symbol: IP) are traded on the following exchanges: New York, Montreal, Swiss and Amsterdam. International Paper options are traded on the Chicago Board of Options Exchange. Direct Purchase Plan Under our plan you may invest all or a portion of your dividends, and you may purchase up to $20,000 of additional shares each year. International Paper pays most of the brokerage commissions and fees. You may also deposit your certificates with the transfer agent for safekeeping. For a copy of the plan prospectus, call or write to the Corporate Secretary at corporate headquarters. Independent Public Accountants Arthur Andersen LLP 1345 Avenue of the Americas New York, NY 10105 Reports and Publications Additional copies of this annual report, SEC filings and other publications are available by calling 1-800-332-8146 or writing to the Investor Relations department at corporate headquarters. Copies of our most recent environment, health and safety report are available by calling 1-800-654-3889 or 901-387-5555. Additional information is also available on our Web site, http://www.internationalpaper.com. Investor Relations Investors desiring further information about International Paper should contact the Investor Relations department at corporate headquarters, 203-541-8625. Credits Papers used in this report--Cover: Carolina, 8 pt. C2S, made by our employees at the Riegelwood, N.C., Mill. Text: pages 1-4, Preference Dull, 80 lb. text, made by our employees at the Quinnesec, Mich., Mill; pages 5-68, Beckett Expression, 70 lb. text, Snow, made by our employees at the Erie, Pa., Mill. Designed by Inside Out Design, New York, in collaboration with Stephen Loges Graphic Design, New York. Photo of Mr. Dillon by Keith Renard, Memphis. Printed by Sandy Alexander, Clifton, N.J. Products and brand designations appearing in italics are trademarks of International Paper or a related company. 'c'2001 International Paper Company. All rights reserved. 66 Directors Peter I. Bijur W. Craig McClelland Board Committees Former Chairman and Former Chairman and Chief Executive Officer Chief Executive Officer Audit and Finance Committee Texaco Inc. Union Camp Corporation Charles R. Shoemate, Chair Peter I. Bijur John T. Dillon Donald F. McHenry Samir G. Gibara Chairman and Distinguished James A. Henderson Chief Executive Officer Professor of Diplomacy Robert D. Kennedy International Paper Georgetown University Management Development and Robert J. Eaton Patrick F. Noonan Compensation Committee Former Chairman of the Chairman and Robert J. Eaton, Chair Board of Management Chief Executive Officer Peter I. Bijur DaimlerChrysler AG The Conservation Fund James A. Henderson Robert D. Kennedy Samir G. Gibara Jane C. Pfeiffer Donald F. McHenry Chairman and Management Consultant Charles R. Shoemate Chief Executive Officer The Goodyear Tire & Jeremiah J. Sheehan Governance Committee Rubber Company Former Chairman and Donald F. McHenry, Chair Chief Executive Officer Robert J. Eaton James A. Henderson Reynolds Metals Company Samir G. Gibara Former Chairman and John R. Kennedy Chief Executive Officer Charles R. Shoemate Patrick F. Noonan Cummins Engine Company Former Chairman, President and Jane C. Pfeiffer Chief Executive Officer Jeremiah J. Sheehan John R. Kennedy Bestfoods Former President and Public Policy and Environment Chief Executive Officer C. Wesley Smith Committee Federal Paper Board Company, Inc. Executive Vice President Patrick F. Noonan, Chair International Paper John R. Kennedy Robert D. Kennedy W. Craig McClelland Former Chairman and Jane C. Pfeiffer Chief Executive Officer Jeremiah J. Sheehan Union Carbide Corporation C. Wesley Smith Executive Committee John T. Dillon, Chair Donald F. McHenry Charles R. Shoemate
67 Senior Leadership John T. Dillon William H. Slowikowski William Hoel Matthew Mitchell Chairman and Senior Vice President Vice President Corporate Auditor Chief Executive Officer Consumer Packaging Panels & Engineered Wood Products Jean-Philippe Montel Robert M. Amen Manco Snapp Chairman Executive Vice President Senior Vice President Newell E. Holt IP S.A., France Building Materials Vice President John V. Faraci Bleached Board Karl W. Moore Executive Vice President & Dennis Thomas Director, Finance Chief Financial Officer Senior Vice President Robert M. Hunkeler IP Europe Public Affairs Vice President James P. Melican and Communications Investments Maximo Pacheco Executive Vice President President David A. Bailey Ernest James International Paper David W. Oskin Managing Director Vice President Latin America Executive Vice President European Papers East Corporate Sales Deborah Parr Marianne M. Parrs John N. Balboni Thomas C. Jorling Vice President Executive Vice President Vice President Vice President People Development e-Business Environmental Affairs, Health C. Wesley Smith & Safety Carol L. Roberts Executive Vice President H. Wayne Brafford Vice President Vice President Thomas Kadien Industrial Packaging Michael J. Balduino Converting, Specialty Vice President Senior Vice President & Pulp Commercial Printing & David L. Robinson Sales and Marketing Fine Papers Vice President Dennis J. Colley Industrial Packaging Jerome N. Carter Vice President Paul Karre Senior Vice President Industrial Packaging Vice President Ethel Scully Human Resources Human Resources Vice President William P. Crawford Corporate Marketing Thomas E. Costello Vice President Jeffrey F. Kass Senior Vice President Logistics Vice President Marc Shore Distribution Strategic Planning President Hans-Peter Daroczi Shorewood Packaging Charles H. Greiner Vice President Timothy P. Keneally Senior Vice President International Container Vice President Bennie R. Smith Printing & Communications Industrial Packaging Performance Vice President Papers Art Douville & Packaging Systems Industrial Packaging Executive Vice President Paul Herbert xpedx Walter Klein Barbara L. Smithers President Vice President Vice President and IP Europe C. Cato Ealy Strategic Planning Corporate Secretary Vice President Newland Lesko Business Development and Ken Krieg Peter M. Springford Senior Vice President Planning Vice President President Industrial Packaging Office and Consumer Papers International Paper Asia Odair Garcia William B. Lytton President & Executive Director Austin Lance Larry J. Stowell Senior Vice President & IP Brazil Vice President Vice President General Counsel Coated & SC Papers Operations Arizona Chemical Thomas E. Gestrich George A. O'Brien Vice President Peter F. Lee Tobin J. Treichel Senior Vice President Beverage Packaging Vice President Vice President Forest Resources Research & Development Finance Jeff Hearn Richard B. Phillips President & CEO Andrew R. Lessin Carol S. Tutundgy Senior Vice President Weldwood of Canada Limited Vice President Vice President Technology Finance Investor Relations Barry Hentz LH Puckett Vice President Art McGowen Lyn M. Withey Senior Vice President Foodservice Business Vice President Vice President Coated & SC Papers Lumber Products Public Affairs J. Chris Scalet Gerald C. Marterer Senior Vice President and Vice President Chief Information Officer Industrial Papers
68 Offices Corporate Headquarters 400 Atlantic Street Stamford, CT 06921 1-203-541-8000 Operational Headquarters 6400 Poplar Avenue Memphis, TN 38197 1-901-763-6000 European Coordination Center International Paper Chaussee de la Hulpe, 166 1170 Brussels, Belgium 32-2-774-1211 International Paper Asia 1201-1203 Central Plaza 18 Harbour Road Wanchai, Hong Kong 852-2824-3000 International Paper Latin America Miraflores 222, Piso 13 Santiago, Chile 56-2638-3585 Forest Products Forest Resources, Lumber Products and Panels & Engineered Wood Products 1201 West Lathrop Avenue Savannah, GA 31415 1-912-238-6000 xpedx-Distribution 50 East River Center Boulevard Suite 700 Covington, KY 41011 1-859-655-2000 Ace Packaging 7986 N. Telegraph Road Newport, MI 48166 1-734-586-9800 Shorewood Packaging 277 Park Avenue, 30th Fl New York, NY 10172 1-212-508-5693 Weldwood of Canada Limited 1055 West Hastings Street Vancouver, British Columbia 1-604-687-7366 Carter Holt Harvey 640 Great South Road Manukau City Auckland, New Zealand 64-9-262-6000 [INTERNATIONAL PAPER LOGO] 400 Atlantic Street Stamford, CT 06921 203-541-8000 www.internationalpaper.com Equal Opportunity Employer (M/F/D/V) EX-21 10 0010.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Percentage of voting securities owned by its United States Incorporated immediate parent - ------------- ------------ ------------------- Masonite Corporation Delaware 100% Sustainable Forests, LLC Delaware 100% Other than United States - ------------------------ Carter Holt Harvey New Zealand 50.4% International paper S.A. France 99.92%
The names of other subsidiaries have been omitted since these subsidiaries considered in the aggregate as a single entry do not constitute a significant subsidiary. EX-23 11 0011.txt EXHIBIT 23.1 (Exhibit 23.1) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To International Paper Company: As independent public accountants, we hereby consent to the incorporation of our reports dated February 13, 2001, included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-11117, 33-32527, 33-41374, 33-50438, 33-51447, 33-61335, 33-62283, 333-01667, 333-02137, 333-24869, 333-47583, 333-62661, 333-75235, 333-85051, 333-48434, 333-37390, 333-00843 and 333-85133. Arthur Andersen LLP New York, New York March 23, 2001 EX-23 12 0012.txt EXHIBIT 23.2 (Exhibit 23.2) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements (Registration Statement File Nos. 33-11117, 33-32527, 33-41374, 33-50438, 33-51447, 33-61335, 33-62283, 333-01667, 333-02137, 333-24869, 333-47583, 333-62661, 333-75235, 333-85051, 333-48434, 333-37390, 333-00843 and 333-85133) of International Paper Company of our report dated February 5, 1999, relating to the financial statements and financial statement schedule of Union Camp Corporation, which report appears in this Form 10-K. PricewaterhouseCoopers LLP New York, New York March 23, 2001 EX-24 13 0013.txt EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY Know all Men By these Presents, that the undersigned hereby constitutes and appoints BARBARA L. SMITHERS, WILLIAM B. LYTTON AND JAMES P. MELICAN and each of them (with full power to each of them to act alone) their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for them on their behalf and in their name, place and stead, in any and all capacities, to sign execute and affix their seal thereto and file the Annual Report of International Paper Company on Form 10-K (or any other appropriate form), under the Securities Exchange Act of 1934, as amended, together with any and all amendments to such Annual Report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, for all intents and purposes, and that the undersigned hereby ratify and confirm all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Executed on the 13th day of March 2001 at Purchase, New York.
NAME TITLE /s/ John T. Dillon - ------------------------------- John T. Dillon Director and Chairman of the Board (Chief Executive Officer) /s/ C. Wesley Smith - ------------------------------- C. Wesley Smith Director and Executive Vice President /s/ Peter I. Bijur - ------------------------------- Peter I. Bijur Director /s/ Robert J. Eaton - ------------------------------- Robert J. Eaton Director /s/ Samir G. Gibara - ------------------------------- Samir G. Gibara Director
NAME TITLE /s/ James A. Henderson - ------------------------------- James A. Henderson Director /s/ John R. Kennedy - ------------------------------- John R. Kennedy Director /s/ Robert D. Kennedy - ------------------------------- Robert D. Kennedy Director /s/ W. Craig McClelland - ------------------------------- W. Craig McClelland Director /s/ Donald F. McHenry - ------------------------------- Donald F. McHenry Director /s/ Patrick F. Noonan - ------------------------------- Patrick F. Noonan Director /s/ Jane C. Pfeiffer - ------------------------------- Jane C. Pfeiffer Director /s/ Jeremiah J. Sheehan - ------------------------------- Jeremiah J. Sheehan Director /s/ Charles R. Shoemate - ------------------------------- Charles R. Shoemate Director
EX-99 14 0014.txt EXHIBIT 99.1 Report of Independent Accountants To the Stockholders and Board of Directors Of Union Camp Corporation In our opinion, the consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year ended December 31, 1998 of Union Camp Corporation and its subsidiaries (not presented separately herein) present fairly, in all material respects, the results of operations and cash flows of Union Camp Corporation and its subsidiaries for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year ended December 31, 1998 "Valuation and Qualifying Accounts" (not presented separately herein) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Union Camp Corporation for any period subsequent to December 31, 1998. As described in Note 1 to the consolidated financial statements, the Company changed its method of accounting for costs of computer software developed, or obtained for internal use effective January 1, 1998. PricewaterhouseCoopers LLP New York, New York February 5, 1999 EX-99 15 0015.txt EXHIBIT 99.2 Exhibit 99.2 FOCUS on our core businesses: paper paper: Our business mission is to create value for customers by providing superior solutions every minute of every day--around the world. packaging packaging: From technologically advanced graphics and design services to high-performance packages, our people are dedicated to providing innovative packaging products and solutions to thousands of customers around the globe. forest products forest products: We are absolutely committed to and passionate about our sustainable forestry practices and providing our customers with superior building products and the world-class service they expect. Focus on Our Core Businesses I believe this past year at International Paper can best be characterized by our FOCUS. We focused on our three core businesses--Paper, Packaging and Forest Products--and we made a series of acquisitions, most notably Champion International and Shorewood Packaging, which further defined and strengthened those core businesses. We also made some hard decisions, choosing to divest a number of businesses which did not fit that focus and rationalizing and realigning our manufacturing capacity by shutting down several facilities. I am convinced the decisions we have made, and continue to make, are resulting in a stronger, more customer-focused and more profitable International Paper. The number one goal at International Paper is to improve our profitability. We remain dedicated to improving shareowner value at a rate faster than our competition. And we will win going forward because of our talented team of employees. In my view, our employees are the most engaged, the most focused--in short, the best employees in our industry. As we continue to focus on our three core businesses, and our success drivers--People, Customers and Operational Excellence--we will achieve results that distinguish us from our competitors. And in so doing, we will become the world's best paper and forest products company. John T. Dillon Chairman and Chief Executive Officer March 1, 2001 2000 Sales by Segment Papers 27% Packaging 26% Distribution 24% Carter Holt Harvey 6% Forest Products 12% Chemicals and Petroleum 5% 2000 Operating Profit by Segment Papers 35% Packaging 29% Distribution 4% Chemicals and Petroleum 6% Corporate 1% Carter Holt Harvey 3% Forest Products 22% 2000 Geographic Sales United States 78% Europe 12% Pacific Rim 7% Other 3% paper We are one of the world's leading manufacturers of uncoated and coated papers. Our paper business produces uncoated and coated papers in the U.S., Brazil and Europe. We serve customers in more than 100 countries with high-quality products. Our uncoated paper products include papers used in photocopiers, desktop, laser and digital imaging printers, as well as in advertising and promotional materials such as brochures, greeting cards, books, annual reports, and direct mail publications. We also provide paper for envelopes, tablets, forms, security papers and file folders. Our fine papers are used in high- quality text, cover, business correspondence and artist papers. Market pulp customers around the world rely on us for paper, fluff and chemical cellulose pulps. IP's coated papers serve the catalog, magazine, commercial printing and direct mail markets. We also manufacture papers used to produce inserts, brochures and annual reports. Some of the customers served include TIME, Inc., National Geographic, Conde Nast, Forbes, Lands' End, and Talbots. With $6.9 billion in annual sales, xpedx is a customer-driven distributor of printing papers, packaging, facility and graphic imaging supplies and equipment. Through a consultative selling approach, xpedx is committed to creating value for customers. The xpedx market focus is commercial printing, on-demand printing, manufacturing, retail, the auto industry and publishing. Focus on Global Leadership: Svetogorsk, Russia Svetogorsk, Russia is a world away from the Adirondack Mountains of New York where IP was founded more than a century ago. But, to our multinational team that manages our mill there, it feels like home. When IP bought the Svetogorsk Mill more than two years ago, it had not seen a profit since its privatization six years earlier. But, we found an eager and highly educated work force, world class assets and a vast Russian market rich with opportunity. Many on the team who were called to the job at Svetogorsk had worked on the transition of our mill in Kwidzyn, Poland. They'd seen what could develop. Drawing on IP's technology resources and knowledge of European markets, the team quickly brought the paper machines at Svetogorsk up to western standards. Within a year, the mill started to set records and became profitable. Today, the Svetogorsk Mill is the market leader in Russia for photocopy paper and exports substantial quantities of paper to western Europe. The rewards of this success are shared by the employees and people of Svetogorsk. With regular paychecks for the workers and a steady tax base for the community, the town has come to life. New roads and parks are just a few of the signs of progress. For one member of the team, IP's success in Svetogorsk is simple, "We know how to operate paper mills and bring value to customers. With the right people--whether in the U.S. or Russia--we can succeed." Focus on eBusiness Solutions: xpedx As part of its ongoing eBusiness initiatives, xpedx launched xpedx.com, an interactive internet site driven by customers' needs. xpedx.com provides customers with real-time connection to xpedx operating systems and a variety of information, tools and features. The site enables customers to place and review orders, check order status, conduct a purchasing analysis, and make inventory inquiries. xpedx.com also includes customer-specific pricing. With this tool, customers have access to operational information that is current and available when they need it. From real-time access to order status and inventory, and the ability to create custom purchasing analysis reports, xpedx.com continues to enhance IP's competitive advantage in the market by helping to secure new business and improve our position with current customers. "We had never done online buying before," said Mike Dean, top purchasing agent for Herald Printing, an xpedx customer in Cleveland, Ohio. "xpedx.com has helped us streamline our purchase order process by eliminating two steps--proofreading and data entry. We will save thousands of dollars annually and now have a more accurate process with a legible, online print-out of orders and more timely information." Focus on the Customer: Lands' End Being "passionate about the customer" often means taking a creative approach to solving a customer's specific challenge. In the case of valued customer Lands' End, International Paper worked to build a cooperative three-party relationship that resulted in business solutions, increased efficiencies and more productive dialogues among International Paper, Lands' End, and the printers of the popular Lands' End catalog. As a premier direct clothing merchant, Lands' End mailed about 260 million catalogs worldwide last year. Through a program, created by IP, called L.E.E.P. (Lands' End Efficiency Program), the printers now talk directly to International Paper along with Lands' End. This has resulted in more realistic time frames for paper delivery, an improved order tracking process, reduced warehouse storage time, and less paper handling. The consultative team selling approach and realigned expectations have produced notable financial savings for Lands' End. This collaborative effort has also increased our credibility for other programs with this customer and helped foster deeper customer intimacy. Forging more secure relationships with customers like Lands' End, through the development of such innovative solutions, will continue to increase profits for all involved. v xpedx delivers solutions to customers through nearly 120 wholesale distribution centers and more than 200 stores across the U.S. and Mexico. v HammerMill'r' recently introduced stronger and more colorful reams of Jet Print, Laser Print and Color Copy papers. Each is labeled in English, French and Spanish. v "Thinking outside of the box" is one way our employees find innovative solutions to problems, as illustrated in one of our recent commercials. v Our employees enjoy exercising at the renovated sports hall in Svetogorsk, Russia. IP funded the renovation as part of our goal to be responsible members of the communities where we live and work. v You probably receive catalogs in the mail at home. IP is proud to supply the paper for this Lands' End catalog and many others. packaging We provide cutting edge packaging solutions to customers throughout the world. Consumer Packaging, Industrial Packaging and Industrial Papers are the three main businesses within International Paper's Packaging group. Consumer Packaging manufactures and converts premium bleached board grades to provide a wide variety of packaging solutions and applications to a number of different end-use segments, including foodservice, cosmetics, pharmaceuticals, computer software, entertainment, personal care, dairy, juice, specialty beverage and frozen foods. The businesses within Consumer Packaging are Bleached Board, Beverage Packaging, Foodservice business and Shorewood Packaging. Industrial Packaging, one of the world's largest producers of containerboard and corrugated boxes, manufactures and converts containerboard to produce corrugated boxes and displays, and shipping containers for agricultural, poultry, retail, automotive and industrial end-use segments. They also produce kraft and saturated kraft. The Container and Containerboard & Kraft businesses are both part of Industrial Packaging. The Industrial Papers business produces lightweight papers, paper composite structures and silicone coated release liners for use by customers in a variety of industrial, food packaging, pressure sensitive and hygiene segments. Focus on Profitability: Mt. Carmel Container Plant When a plant posts record increases in profitability and return on investment in just one year, others want to know the secret of success. After making these improvements last year, the Mt. Carmel, Pa., Container plant leadership cited the Market Optimization Process (MOP) as the single most important factor in their gains. MOP is a market-driven approach to improve profitability. In redefining success, Mt. Carmel leaders employed MOP and began focusing on making the right amount of product for our customers instead of producing more than we could sell. They also implemented a professionally managed sales process and a customer- focused capital allocation. Engaging the help of the sales force and the entire employee team, Mt. Carmel's leadership shifted from a manufacturing to a marketing focus. They concentrated on targeting the right customers, understanding their needs and then finding unique ways to serve them better than the competition. In redefining their approach, Mt. Carmel has optimized their product mix and customers. The success of MOP has extended past Mt. Carmel throughout the Container business. Focus on Optimization: Savannah, Georgia With a large asset base, the Savannah Mill has the responsibility of producing outstanding returns on its investment. Instead of further capital spending to add new equipment to older, existing hardware, the mill chose to optimize what existed. High repair costs and low paper machine availability contributed to high operating costs. Through optimization, the Savannah Mill aimed to improve its financial performance. After becoming part of IP in May 1999, the Savannah Optimization Team was formed. People from across the company met monthly to set goals, create balanced scorecards, develop cross-functional teams, and review progress. The team focused on three areas needing immediate improvement: safety/ environment, reliability and operational excellence through benchmarking. As a result, safety performance improved from a total incidence rate (TIR) of 6.0 in 1998 to 1.5 in 2000. (TIR is one incident per 200,000 work hours.) The mill team worked 2.48 million hours without a lost time incident. Environmental incidents were virtually eliminated in 2000, and improved reliability, operational excellence and employee involvement cut customer complaints in half. Paper machine performance improved dramatically, with availability (the amount of time the machine works) increasing by 4 percent. Maintenance costs shrunk more than 25 percent. These and other improvements reduced costs by almost 12 percent. Focus on Growth: Shanghai Beverage Packaging IP identified China as a growing market for paperboard packaging in the 1990s. At that time, Chinese dairies packaged milk in glass bottles or plastic pouches to serve China's population of more than 1.3 billion people. IP began to penetrate this market by importing paper cartons from IP's Taiwan Beverage Packaging plant, and Chinese dairies discovered that the cost-effective packaging helped maintain the nutritional value and taste of milk. IP built a plant in Shanghai to better serve local customers, and production began in December 1999. The Chinese performance-based culture, coupled with the spirit of teamwork exhibited by IP employees worldwide, enhanced the success of the Shanghai plant. In addition, they recruited and trained the best local people. They identified the right customer segments and offered system sales from the paper to the machine. They provided value-added products and services and developed long term strategic partnerships with key customers. The use of Chinese characters dictated specific printing needs, so converting and printing technology was used to produce attractive packaging. The business worked jointly with customers to develop marketing strategies. The plant celebrated its grand opening in March 2000 and hosted the company's first international family forum. (Family forums offer employees and their families the opportunity to hear about our progress and goals.) This plant makes International Paper an innovative leader in gable top packaging in China. v International Paper cartons make juice a healthy and convenient refreshment for kids. v At our Conway, Ark., Container plant, we inspect boxes to make sure all seals are perfect before shipping to our customers. v The Beverage Packaging business created packaging that has improved the nutritional value and taste of milk consumed by China's population. v Designing products to fit customers' specific needs is the mission of our packaging design centers. v Our research and development teams create innovative solutions like DEFOR'TM' boxes, which meet the produce shipping needs of customers around the world. forest products We produce a variety of high-quality wood products for the building industry and sustainably manage all our forestland around the globe. The Forest Products team remains focused on two broad goals. The first is our commitment to and passion for sustainable forestry practices, and the second is to provide superior wood products for our customers. The businesses consist of Forest Resources, Lumber Products, Panels & Engineered Wood Products and Weldwood of Canada Limited. As one of the largest private landowners in the world, International Paper owns, manages or has an interest in 22.9 million acres of forestlands. We also grow more than 500 million seedlings a year in our nurseries and orchards. Our leadership role in the American Forest & Paper Association's Sustainable Forestry Initiative (SFISM) exemplifies our commitment to manage our forestlands in an environmentally responsible manner. More than 10.1 million acres in the U.S. are third-party certified to SFI standards, with 7.3 million of that acreage also ISO 14001 certified. Lumber Products manufactures wood products for use in residential and commercial construction throughout North America and Europe. This business is the largest supplier of yellow pine in the world. Its high-grade, top quality lumber is branded for sale at several retail home improvement warehouses. Panels & Engineered Wood Products produces plywood, oriented strand board, treated poles and laminated veneer lumber products used for residential and commercial construction throughout North America and Europe. One product is Solarboard'r', a heat-resistant panel used for roofing. To meet the changing needs of our customers, our business has a technology center that develops new and next-generation wood composites. Weldwood of Canada Limited, an IP subsidiary, manufactures pulp, lumber, plywood and laminated veneer lumber for global markets. Among the company's expansive, customer-focused product lines are metric-sized lumber for export customers, and engineered and treated wood products. Weldwood also manages 8 million acres of land under various provincial government agreements. More than 5.4 million acres are Canadian Standards Association certified. Carter Holt Harvey is Australasia's leading integrated forestry and wood products company and is New Zealand's largest private forest owner, controlling 1.1 million acres of forestlands. Other operations include lumber, plywood and laminated veneer lumber. The company's four pulp and paper mills produce pulp, linerboard, cartonboard and recycled medium which are converted at the company's packaging and tissue facilities or sold externally. Carter Holt Harvey is the region's leader in tissue products. Other businesses include building products distribution through 35 branches in New Zealand, and paper distribution in Australia and New Zealand. IP holds more than a 50 percent interest in Carter Holt Harvey. Focus on Innovation: Panels & Engineered Wood Products The year 2000 proved to be an award-winning year for IP's Panels & Engineered Wood Products business as Centex Homes'TM', one of the largest home builders in the United States, named the business its Supplier of the Year. Centex Homes is one of our largest wood panel customers and led the way in introducing IP's Solarboard Radiant Barrier Sheathing, one of our new engineered wood products designed to reduce energy consumption and lower consumer energy costs. High-quality products are not the only reason that Panels & Engineered Wood Products earned the distinguished honor from Centex Homes. Customer service also played a role. The Panels sales team worked with Centex Homes purchasing group, CTX Builders Supply, to help them control their inventory and better manage their costs. Centex Homes has chosen International Paper as its single-source supplier for wood panel products. John Mikkelson, president of CTX Builders Supply, said that IP is always receptive and willing to entertain non-traditional approaches in addressing specific requirements and expectations. Focus on Customers: Forest Resources IP's Forest Resources business supplies more than 80 million tons of fiber to our manufacturing operations annually. The cost of fiber is the company's largest cost component. To provide the lowest cost fiber to our operations, Forest Resources formed joint teams at each fiber-using manufacturing site in the company. These teams, comprised of mill and forestry team members, work together to ensure each mill's unique fiber needs are met. Within Forest Resources, such customer-related actions include maximizing production of fiber from our lands while improving the productivity of outside wood suppliers. The team set specifications based on mill operational needs, including the appropriate mix of hardwoods and softwoods, delivery schedules, and in many cases, the size and quality of wood chips. In 2000, joint teams in the wood business had reduced fiber costs by more than $42 million. Focus on Opportunity: Weldwood of Canada Weldwood of Canada's Wood Products business has found innovative ways to seize new market opportunities in Japan. A few years ago, the company took some strategic steps to grow its volume of sales in Japan. It opened a sales office in Tokyo, hired staff fluent in Japanese at its Vancouver sales office, and constructed a mill designed to manufacture products for Japanese customers. Weldwood also certified its lumber mills and plywood mills to the Japanese Agricultural Standard and established an export reload facility where products from all Weldwood sites can be centralized and shipped to meet customer needs for on-time shipments. Weldwood's long-term commitment to this region through people, customers, operational excellence, and capital investment has resulted in an increase in lumber exports from 40 million board feet to 170 million. Plywood exports have increased from 55 million square feet to 76 million. Weldwood's success in Japan was based on three key elements: dealing directly with product end users, maintaining close relationships with customers and creating customer value. This was achieved by understanding design, delivery and leadership. IP researchers use a peeper camera to observe red-cockaded woodpeckers. IP won the World Environment Center's Gold Medal for protecting this endangered species on our lands. The great white egret is one of the many beautiful creatures protected by IP's environmentally friendly policies. Our wide range of products include home improvement store services, as featured in a recent IP television commercial. Another example of our leadership is in the building products industry, where International Paper is the world's largest producer of southern yellow pine lumber. Weldwood of Canada Limited is a major Canadian forest products company manufacturing pulp, lumber, plywood and laminated veneer lumber. Financial Highlights for the year ending Dollar amounts and shares in millions except per share amounts December 31, 2000 Financial Summary Net Sales $28,180 Operating Profit 2,712 Earnings Before Income Taxes, Minority Interest and Extraordinary Items 723 Net Earnings 142 (a) Earnings per Average Common Share--Assuming Dilution 0.32 (a) Cash Dividends per Common Share 1.00 Common Shareholders' Equity per Average Common Share 26.77 Shareholder Profile Shareholders of Record at December 31 39,486 Shares Outstanding at December 31 484.2 Average Shares Outstanding 449.6 (a) During 2000, we incurred merger-related costs, restructuring and other special and extraordinary items which reduced net earnings by $827 million and earnings per common share by $1.84. Before these charges, net earnings would have been $969 million or $2.16 per common share. Condensed Consolidated Balance Sheet In millions December 31, 2000 Assets Current Assets $10,455 Plant, Property and Equipment, Net 16,011 Forestlands 5,966 Other Assets 9,677 ------- Total Assets $42,109 ======= Liabilities and Common Shareholders' Equity Current Liabilities $ 7,413 Long-Term Debt 12,648 Deferred Income Taxes 4,699 Other Liabilities 5,315 Common Shareholders' Equity 12,034 ------- Total Liabilities and Common Shareholders' Equity $42,109 ======= Note: Certain statements in this document that are not historical in nature may constitute forward-looking statements. These statements are often identified by the words, "believe," "expect," "plan," "project," "intend," and words of similar import. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include, among other things, changes in overall demand, changes in domestic or foreign competition, changes in the cost or availability of raw materials, our ability to bring new products online, the cost of compliance with environmental laws and regulations, and whether anticipated savings from merger and other restructuring activities can be achieved. In view of such uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. International Paper does not assume any obligation to update these forward-looking statements. Our goal at International Paper is to have the best people the best customer service the best operations Senior Leadership John T. Dillon Chairman and Chief Executive Officer Robert M. Amen Executive Vice President John V. Faraci Executive Vice President & Chief Financial Officer James P. Melican Executive Vice President David W. Oskin Executive Vice President Marianne M. Parrs Executive Vice President C. Wesley Smith Executive Vice President Michael J. Balduino Senior Vice President Sales and Marketing Jerome N. Carter Senior Vice President Human Resources Thomas E. Costello Senior Vice President Distribution Charles H. Greiner Senior Vice President Printing & Communications Papers Paul Herbert President IP Europe Newland Lesko Senior Vice President Industrial Packaging William B. Lytton Senior Vice President & General Counsel George A. O'Brien Senior Vice President Forest Resources Richard B. Phillips Senior Vice President Technology LH Puckett Senior Vice President Coated & SC Papers J. Chris Scalet Senior Vice President and Chief Information Officer William H. Slowikowski Senior Vice President Consumer Packaging Manco Snapp Senior Vice President Building Materials Dennis Thomas Senior Vice President Public Affairs and Communications David A. Bailey Managing Director European Papers East John N. Balboni Vice President e-Business H. Wayne Brafford Vice President Converting, Specialty & Pulp Dennis J. Colley Vice President Industrial Packaging William P. Crawford Vice President Logistics Hans-Peter Daroczi Vice President International Container Art Douville Executive Vice President xpedx C. Cato Ealy Vice President Business Development and Planning Odair Garcia President & Executive Director IP Brazil Thomas E. Gestrich Vice President Beverage Packaging Jeff Hearn President & CEO Weldwood of Canada Limited Barry Hentz Vice President Foodservice Business William Hoel Vice President Panels & Engineered Wood Products Newell E. Holt Vice President Bleached Board Robert M. Hunkeler Vice President Investments Ernest James Vice President Corporate Sales Thomas C. Jorling Vice President Environmental Affairs, Health & Safety Thomas Kadien Vice President Commercial Printing & Fine Papers Paul Karre Vice President Human Resources Jeffrey F. Kass Vice President Strategic Planning Timothy P. Keneally Vice President Industrial Packaging Performance & Packaging Systems Walter Klein Vice President Strategic Planning Ken Krieg Vice President Office and Consumer Papers Austin Lance Vice President Coated & SC Papers Operations Peter F. Lee Vice President Research & Development Andrew R. Lessin Vice President Finance Art McGowen Vice President Lumber Products Gerald C. Marterer Vice President Industrial Papers Matthew Mitchell Corporate Auditor Jean-Philippe Montel Chairman IP S.A., France Karl W. Moore Director, Finance IP Europe Maximo Pacheco President International Paper Latin America Deborah Parr Vice President People Development Carol L. Roberts Vice President Industrial Packaging David L. Robinson Vice President Industrial Packaging Ethel Scully Vice President Corporate Marketing Marc Shore President Shorewood Packaging Bennie R. Smith Vice President Industrial Packaging Barbara L. Smithers Vice President and Corporate Secretary Peter M. Springford President International Paper Asia Larry J. Stowell Vice President Arizona Chemical Tobin J. Treichel Vice President Finance Carol S. Tutundgy Vice President Investor Relations Lyn M. Withey Vice President Public Affairs Reports and Publications Additional copies of this publication, our annual report, SEC filings and other publications are available by calling 1-800-332-8146 or writing to the Investor Relations department at corporate headquarters. Copies of our most recent environment, health and safety report are available by calling 1-800-654-3889 or 901-387-5555. Additional information is also available on our Web site, http://www.international paper.com. Investor Relations Investors desiring further information about International Paper should contact the Investor Relations department at corporate headquarters, 203-541-8625. Credits Papers used in this report Cover: Carolina, 8 pt. C2S, made by our employees at the Riegelwood, N.C., Mill. Text: Preference Dull, 80 lb. text, made by our employees at the Quinnesec, Mich., Mill; pages 1-2, 27-28, BriteHue, 60 lb. text, Ultra Grape; pages 3-4, 25-26, BriteHue, 60 lb. text, Red; pages 5-6, 23-24, BriteHue, 60 lb. text, Green. BriteHue was made by our employees at the Erie, Pa., Mill. Design Inside Out Design, New York, in collaboration with Stephen Loges Graphic Design, New York Photography Major Photography: Jack Kenner, Memphis John Dillon's Portrait: Keith Renard, Memphis Pages 5, 16, 23: Gary McCoy, Dallas Page 10: Tom Trivett, Greensboro, N.C. Page 11: Alexander Gronsky, St. Petersburg, Russia Page 19: Dave Patterson, Vancouver, B.C., Canada Printing Sandy Alexander, Clifton, N.J. Photo Identification Pages 1 & 8: Paper thanks to the Erie, Pa., Mill. Pages 3 & 12: Corrugated thanks to the Conway, Ark., Container Plant. Pages 5 & 16: Lumber thanks to the Wood Products Distribution Center, Dallas, Texas. Page 10: Rickey Oakes is an xpedx driver for the Greensboro, N.C., division. Page 11: Peter, son of Joe Armbruster, senior credit manager of Export, Memphis, Tenn. Page 11: IP retiree Page Williamson. Page 11: Natalja Ruchkova, engineer of IT department; Olga Ermakova, engineer of IT department; Ekaterina Kisteneva, engineer of IT department; Irina Mikheeva, engineer of Energy department; Irina Ankhimova, assistant to manager, Purchasing department; Marina Dubailova, engineer of Technical department; Lilja Chulkova, engineer of Effluent treatment plant, at the Svetogorsk, Russia, Mill. Page 14: Bonnie Reed at the Conway, Ark., Container plant. Page 15: Erik Domingues, son of Mario Domingues, production team leader at the Plant City, Fla., Beverage Packaging Plant. Page 15: Napier Liang, IT systems programmer. Page 15: Jim Justice, packaging designer. Page 15: Dan, son of Rich Rudolph, senior research scientist at the Packaging Development Center in Loveland, Ohio. Page 18: Shawn Posey, Jennifer Christman, Paul Durfield and Julie Durfield of the Southlands Experiment Forest, Bainbridge, Ga. Page 19: Emily, daughter of Jack Holzknecht, group manager at the Corporate Research Center, Tuxedo, N.Y. Page 23: Tonya Fisher, Louis Taylor, Jean Irwin, Pat Pickett, John Hardy, Krishna Mohan, Greg Bush, Jo Jo Schneckenaichner, Jacque Hodge, Gene Williams, Larry Booth, Victor Holguin, Carolyn Turrentine, Roy Haley, Elbert Hayden, Johnny Apodaca, Chuck Sears, Jeannie Miller, Jan McCoy, Lee Akin, Mary Cavitt, Janice Hurt, Arcellias Davis, Thelma Howard, Melanie Curtis, Ray Sellars, Ben Dennis, at the Texarkana, Texas, Mill. Page 25: An Nguyen, Jamie Pitre, Trecie O'Bannon, Oyama Hampton and Jeff Hester are part of the Service Excellence team. Page 27: Augustus Stevens, Ronnie Hand and James Dixon in the control room at the Riverdale, Ala., Mill. Products and brand designations appearing in italics are trademarks of International Paper or a related company. 'c' 2001 International Paper Company. All rights reserved. Directors Peter I. Bijur Former Chairman and Chief Executive Officer Texaco Inc. John T. Dillon Chairman and Chief Executive Officer International Paper Robert J. Eaton Former Chairman of the Board of Management DaimlerChrysler AG Samir G. Gibara Chairman and Chief Executive Officer The Goodyear Tire & Rubber Company James A. Henderson Former Chairman and Chief Executive Officer Cummins Engine Company John R. Kennedy Former President and Chief Executive Officer Federal Paper Board Company, Inc. Robert D. Kennedy Former Chairman and Chief Executive Officer Union Carbide Corporation W. Craig McClelland Former Chairman and Chief Executive Officer Union Camp Corporation Donald F. McHenry Distinguished Professor of Diplomacy Georgetown University Patrick F. Noonan Chairman and Chief Executive Officer The Conservation Fund Jane C. Pfeiffer Management Consultant Jeremiah J. Sheehan Former Chairman and Chief Executive Officer Reynolds Metals Company Charles R. Shoemate Former Chairman, President and Chief Executive Officer Bestfoods C. Wesley Smith Executive Vice President International Paper -----END PRIVACY-ENHANCED MESSAGE-----