<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
--------------------------------------
For Quarter Ended June 30, 1998 Commission file number 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York 13 0872805
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Two Manhattanville Road, Purchase, NY 10577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 914-397-1500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common stock outstanding on July 31, 1998: 307,247,628 shares.
<PAGE>
INTERNATIONAL PAPER COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months and Six Months Ended June 30, 1998 and 1997 3
Consolidated Balance Sheet -
June 30, 1998 and December 31, 1997 4-5
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1998 and 1997 6
Consolidated Statement of Common Shareholders' Equity -
Three Months and Six Months Ended June 30, 1998 and 1997 7-8
Notes to Consolidated Financial Statements 9-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-17
Item 3. Other Financial Information 18-21
PART II. Other Information
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In millions, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 4,707 $ 5,034 $ 9,575 $ 9,896
---------- ---------- ---------- ----------
Costs and Expenses
Cost of products sold 3,524 3,786 7,178 7,422
Selling and administrative expenses 371 391 745 770
Depreciation and amortization 291 318 589 638
Distribution expenses 198 233 422 470
Taxes other than payroll and income taxes 49 53 99 105
Write off of in-process research and development costs
acquired by an investee company 6 6
Business improvement charge 535 535
Provision for legal reserve 150 150
---------- ---------- ---------- ----------
Total Costs and Expenses 4,439 5,466 9,039 10,090
---------- ---------- ---------- ----------
Earnings (Loss) Before Interest, Income Taxes and Minority Interest 268 (432) 536 (194)
Interest expense, net 128 125 255 255
---------- ---------- ---------- ----------
Earnings (Loss) Before Income Taxes and Minority Interest 140 (557) 281 (449)
Income tax provision (benefit) 38 (167) 84 (127)
Minority interest expense, net of taxes 16 29 36 63
---------- ---------- ---------- ----------
Net Earnings (Loss) $ 86 $ (419) $ 161 $ (385)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (Loss) Per Common Share $ 0.28 $ (1.39) $ 0.53 $ (1.28)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (Loss) Per Common Share - Assuming Dilution $ 0.28 $ (1.39) $ 0.53 $ (1.28)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average Shares of Common Stock Outstanding 306.7 301.1 304.5 300.9
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.50 $ 0.50
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current Assets
Cash and temporary investments $ 578 $ 398
Accounts and notes receivable, net 2,316 2,404
Inventories 2,670 2,760
Other current assets 491 383
------------ ------------
Total Current Assets 6,055 5,945
------------ ------------
Plants, Properties and Equipment, Net 12,177 12,369
Forestlands 2,752 2,969
Investments 1,151 1,166
Goodwill 2,517 2,557
Deferred Charges and Other Assets 1,889 1,748
------------ ------------
Total Assets $ 26,541 $ 26,754
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- ---------------
<S> <C> <C>
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 1,791 $ 2,212
Accounts payable 1,084 1,338
Accrued liabilities 1,150 1,330
---------------- ---------------
Total Current Liabilities 4,025 4,880
---------------- ---------------
Long-Term Debt 7,045 7,154
Deferred Income Taxes 2,687 2,681
Other Liabilities 1,200 1,236
Minority Interest 1,571 1,643
International Paper-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiaries Holding International
Paper Subordinated Debentures 1,000 450
Common Shareholders' Equity
Common stock, $1 par value, issued
1998 - 307.7 shares, 1997 - 302.9 shares 308 303
Paid-in capital 3,872 3,654
Retained earnings 5,195 5,186
Accumulated other comprehensive income (loss) (350) (396)
---------------- ---------------
9,025 8,747
Less: Common stock held in treasury, at cost,
1998 - 0.3 shares, 1997 - 0.7 shares 12 37
---------------- ---------------
Total Common Shareholders' Equity 9,013 8,710
---------------- ---------------
Total Liabilities and Common Shareholders' Equity $ 26,541 $ 26,754
---------------- ---------------
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1998 1997
-------------- ----------------
<S> <C> <C>
Operating Activities
Net earnings (loss) $ 161 $ (385)
Depreciation and amortization 589 638
Deferred income taxes 46 (176)
Business improvement charge 535
Provision for legal reserve 150
Payments related to restructuring and legal reserves (63) (12)
Write off of in-process research and development
costs acquired by an investee company 6
Other, net (32) 72
Changes in current assets and liabilities
Accounts and notes receivable (7) (160)
Inventories (23) (82)
Accounts payable and accrued liabilities (140) (60)
Other (4) (23)
-------------- ----------------
Cash Provided by Operations 533 497
-------------- ----------------
Investment Activities
Invested in capital projects (472) (460)
Mergers and acquisitions, net of cash acquired (202)
Proceeds from divestitures 230
Other (48) (69)
-------------- ----------------
Cash Used for Investment Activities (492) (529)
-------------- ----------------
Financing Activities
Issuance of common stock 67 91
Issuance of preferred securities by subsidiaries 720
Issuance of debt 121 299
Reduction of debt (503) (203)
Change in bank overdrafts (68) 47
Dividends paid (152) (150)
Other (23) 74
-------------- ----------------
Cash Provided by Financing Activities 162 158
-------------- ----------------
Effect of Exchange Rate Changes on Cash (23) (23)
-------------- ----------------
Change in Cash and Temporary Investments 180 103
Cash and Temporary Investments
Beginning of the period 398 352
-------------- ----------------
End of the period $ 578 $ 455
-------------- ----------------
-------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Three Months Ended June 30, 1998
<TABLE>
Common Stock Issued Treasury Stock
----------------------- -----------------------
Accumulated Other
Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Shares Amount
----------- --------- ----------- ----------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1998 302,944 $ 303 $ 3,647 $ 5,186 $ (475) 379 $ 19
Issuance of stock for acquisition 4,683 5 227
Issuance of stock for various plans 48 (2) (749) (38)
Repurchase of stock 630 31
Cash dividends - common stock
($.25 per share) (77)
Comprehensive income
Net earnings 86
Change in cumulative foreign
currency translation adjustment 125
Total comprehensive income
----------- --------- ----------- ----------- --------------- ----------- ----------
Balance, June 30, 1998 307,675 $ 308 $ 3,872 $ 5,195 $ (350) 260 $ 12
----------- --------- ----------- ----------- --------------- ----------- ----------
----------- --------- ----------- ----------- --------------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
Total Common
Shareholders'
Equity
---------------
<S> <C>
Balance, March 31, 1998 $ 8,642
Issuance of stock for acquisition 232
Issuance of stock for various plans 36
Repurchase of stock (31)
Cash dividends - common stock
($.25 per share) (77)
Comprehensive income
Net earnings 86
Change in cumulative foreign
currency translation adjustment 125
---------------
Total comprehensive income 211
---------------
Balance, June 30, 1998 $ 9,013
---------------
---------------
</TABLE>
Three Months Ended June 30, 1997
<TABLE>
Common Stock Issued Treasury Stock
----------------------- -----------------------
Accumulated Other
Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Shares Amount
----------- --------- ----------- ----------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
------------ --------- ----------- ----------- --------------- ---------- ----------
Balance, March 31, 1997 301,337 $ 301 $ 3,614 $ 5,598 $ (177) 541 $ 23
Issuance of stock for various plans 1,102 1 35 (503) (22)
Repurchase of stock 640 29
Cash dividends - common stock
($.25 per share) (75)
Comprehensive income
Net earnings (loss) (419)
Change in cumulative foreign
currency translation adjustment (55)
Total comprehensive income (loss)
------------ --------- ----------- ----------- --------------- ---------- ----------
Balance, June 30, 1997 302,439 $ 302 $ 3,649 $ 5,104 $ (232) 678 $ 30
------------ --------- ----------- ----------- --------------- ---------- ----------
------------ --------- ----------- ----------- --------------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Total Common
Shareholders'
Equity
---------------
<S> <C>
Balance, March 31, 1997 $ 9,313
Issuance of stock for various plans 58
Repurchase of stock (29)
Cash dividends - common stock (75)
($.25 per share)
Comprehensive income
Net earnings (loss) (419)
Change in cumulative foreign
currency translation adjustment (55)
---------------
Total comprehensive income (loss) (474)
---------------
Balance, June 30, 1997 $ 8,793
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock
----------------------- -----------------------
Accumulated Other
Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Shares Amount
----------- --------- ----------- ----------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
------------ --------- ----------- ----------- --------------- ---------- ----------
Balance, December 31, 1997 302,910 $ 303 $ 3,654 $ 5,186 $ (396) 726 $ 37
Issuance of stock for acquisition 4,683 5 227
Issuance of stock for various plans 82 (9) (1,706) (84)
Repurchase of stock 1,240 59
Cash dividends - common stock
($.50 per share) (152)
Comprehensive income
Net earnings 161
Realized foreign currency
translation related to divestitures 11
Change in cumulative foreign
currency translation adjustment 35
Total comprehensive income
----------- --------- ----------- ----------- --------------- ------------ --------
Balance, June 30, 1998 307,675 $ 308 $ 3,872 $ 5,195 $ (350) 260 $ 12
----------- --------- ----------- ----------- --------------- ------------ --------
----------- --------- ----------- ----------- --------------- ------------ --------
</TABLE>
<TABLE>
<CAPTION>
Total Common
Shareholders'
Equity
---------------
<S> <C>
Balance, December 31, 1997 $ 8,710
Issuance of stock for acquisition 232
Issuance of stock for various plans 75
Repurchase of stock (59)
Cash dividends - common stock
($.50 per share) (152)
Comprehensive income
Net earnings 161
Realized foreign currency 11
Change in cumulative foreign
currency translation adjustment 35
----------------
Total comprehensive income 207
----------------
Balance, June 30, 1998 $ 9,013
----------------
----------------
</TABLE>
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Common Stock Issued Treasury Stock
----------------------- -----------------------
Accumulated Other
Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Shares Amount
----------- --------- ----------- ----------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
------------ --------- ----------- ----------- --------------- ---------- ----------
Balance, December 31, 1996 300,824 $ 301 $ 3,599 $ 5,639 $ (173) 554 $ 22
Issuance of stock for various plans 1,615 1 50 (1,123) (46)
Repurchase of stock 1,247 54
Cash dividends - common stock
($.50 per share) (150)
Comprehensive income
Net earnings (loss) (385)
Change in cumulative foreign
currency translation adjustment (59)
Total comprehensive income (loss)
------------ --------- ----------- ----------- --------------- ------------ ---------
Balance, June 30, 1997 302,439 $ 302 $ 3,649 $ 5,104 $ (232) 678 $ 30
------------ --------- ----------- ----------- --------------- ------------ ---------
------------ --------- ----------- ----------- --------------- ------------ ---------
</TABLE>
<TABLE>
<CAPTION>
Total Common
Shareholders'
Equity
---------------
<S> <C>
Balance, December 31, 1996 $ 9,344
Issuance of stock for various plans 97
Repurchase of stock (54)
Cash dividends - common stock
($.50 per share) (150)
Comprehensive income
Net earnings (loss) (385)
Change in cumulative foreign
currency translation adjustment (59)
----------------
Total comprehensive income (loss) (444)
----------------
Balance, June 30, 1997 $ 8,793
----------------
----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
INTERNATIONAL PAPER COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, in the
opinion of Management, include all adjustments (consisting only of normal
recurring accruals) which are necessary for the fair presentation of
results for the interim periods. It is suggested that these consolidated
financial statements be read in conjunction with the audited financial
statements and the notes thereto incorporated by reference in the Company's
Form 10-K for the year ended December 31, 1997, which has previously been
filed with the Commission.
2. Earnings per common share were computed by dividing net earnings by the
weighted average number of common shares outstanding. Earnings per common
share-assuming dilution were computed assuming that all potentially
dilutive securities were converted into common shares at the beginning of
each period. A reconciliation of the amounts included in the computation of
earnings per common share and earnings per common share-assuming dilution
is as follows.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
In millions 1998 1997 1998 1997
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 86 $ (419) $ 161 $ (385)
Effect of dilutive securities
Preferred securities of subsidiary trust
------------- ------------- -------------- --------------
Net earnings (loss) - assuming dilution $ 86 $ (419) $ 161 $ (385)
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Average common shares outstanding 306.7 301.1 304.5 300.9
Effect of dilutive securities
Long-term incentive plan deferred compensation (0.8) (0.7) (0.8) (0.7)
Stock options 2.0 1.9
Preferred securities of subsidiary trust
------------- ------------- -------------- --------------
Average common shares outstanding-assuming dilution 307.9 300.4 305.6 300.2
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Earnings (loss) per common share $ 0.28 $ (1.39) $ 0.53 $ (1.28)
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Earnings (loss) per common share - assuming dilution $ 0.28 $ (1.39) $ 0.53 $ (1.28)
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
</TABLE>
If an amount does not appear in the above table, the security was antidilutive
for the period presented.
3. In April 1998, International Paper completed the previously announced
acquisition of Weston Paper and Manufacturing Company by exchanging about
4.7 million International Paper common shares valued at approximately $232
million for the outstanding Weston shares in a non cash transaction.
In February 1998, the Company entered into a joint venture with Olmuksa in
Turkey for the manufacture of containerboard and corrugated boxes for
markets in Turkey and Europe. Also in February 1998, Carter Holt Harvey and
International Paper jointly acquired Australian-based Continental Cup. This
acquisition will allow Carter Holt Harvey and International Paper's cup
subsidiary, Imperial Bondware, to offer a full line of food service
products in the Australian and New Zealand markets.
9
<PAGE>
In September 1997, the Company acquired Merbok Formtec, a company that has
pioneered the development of door facing products through postforming
medium-density fiberboard. In November 1997, the stock of Taussig Graphics
Supply, Inc. was acquired.
All of the above acquisitions were accounted for using the purchase method.
4. In June 1998, a $6 million pre-tax charge ($4 million after taxes or $.01
per share) was recorded to write off in-process research and development
costs related to an acquisition by Scitex, an investee company owned
approximately 13% by International Paper.
5. In June 1998, IP Timberlands, Ltd. completed the fourth in a series of
transactions relating to the sale of a subsidiary partnership interest in
approximately 175,000 acres of forestlands in Pennsylvania and New York.
This second-quarter 1998 transaction resulted in a gain of approximately
$37 million before taxes. A similar transaction was completed in the
1998 first quarter.
6. In March 1998, IP Forest Resources Company, a wholly-owned subsidiary of
International Paper, in accordance with the IP Timberlands, Ltd.
partnership agreement, purchased all of the 7,299,500 publicly traded
Class A Depositary Units of IP Timberlands, Ltd. for a cash purchase price
of $13.6325 per unit.
7. 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. Dividend payments on these securities are
included in minority interest expense in the consolidated statement of
earnings.
8. In June 1997, a $535 million pre-tax business improvement reserve ($385
million after taxes or $1.28 per share) was established under a plan to
improve the Company's financial performance through closing or divesting of
operations that no longer meet financial or strategic objectives. It
included approximately $230 million for asset write-downs, $210 million for
the estimated losses on sales of businesses included in the reserve and $95
million for severance and other expenses. The majority of the reserve
related to the restructuring of the printing papers business in the United
States and overseas and the sale of certain specialty businesses. In
December 1997, an additional pre-tax charge of $125 million ($80 million
after taxes or $.26 per share) was recorded for anticipated losses on the
sale of the remaining imaging businesses.
9. Also in June 1997, the Company recorded a $150 million pre-tax charge ($93
million after taxes or $.31 per share) to add to its legal reserves. On
July 14, 1997, Masonite Corporation, a wholly-owned subsidiary of the
Company, announced that it had reached a proposed settlement in a class
action pending in Mobile County, Alabama. The Company believes its legal
reserves are adequate to cover any amounts to be paid pursuant to the
proposed settlement, which is now final.
10. In December 1997, the Company recorded a $170 million pre-tax gain ($97
million after taxes and minority interest expense or $.32 per share) from
the redemption of certain retained west coast partnership interests and the
release of a related debt guaranty.
10
<PAGE>
11. In the third quarter of 1995, International Paper Capital Trust (the Trust)
issued $450 million of International Paper-obligated mandatorily redeemable
preferred securities. The Trust is a wholly-owned consolidated subsidiary
of International Paper and its sole assets are International Paper 5 1/4%
convertible subordinated debentures. The obligations of the Trust related
to its preferred securities are fully and unconditionally guaranteed by
International Paper. These preferred securities are convertible into
International Paper common stock. Preferred securities distributions of $12
million were paid during each of the six months ended June 30, 1998 and
1997.
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.
Distributions related to each of the above preferred securities are
classified as minority interest expense in the consolidated statement of
earnings.
12. Inventories by major category include (in millions):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------------- --------------------
<S> <C> <C>
Raw materials $ 447 $ 478
Finished pulp, paper and packaging products 1,495 1,466
Finished lumber and panel products 175 160
Operating supplies 384 387
Other 169 269
--------------------- --------------------
Total $ 2,670 $ 2,760
--------------------- --------------------
--------------------- --------------------
</TABLE>
13. Interest payments made during the six month periods ended June 30, 1998 and
1997 were $326 million and $361 million, respectively. The Company
capitalized net interest costs of $24 million for the six months ended June
30, 1998 and $34 million for the six months ended June 30, 1997. Total
interest expense was $300 million for the 1998 six months and $288
million for the 1997 six months. Income tax payments made during the six
months ended June 30, 1998 and 1997 were $96 million and $82 million,
respectively.
14. Temporary investments with a maturity of three months or less are treated
as cash equivalents and are stated at cost. Temporary investments totaled
$277 million and $268 million at June 30, 1998 and December 31, 1997,
respectively.
15. Accumulated depreciation was $10.2 billion at June 30, 1998 and $10.0
billion at December 31, 1997. The allowance for doubtful accounts was $92
million at June 30, 1998 and $93 million at December 31, 1997.
16. The Company uses financial instruments primarily to hedge its exposure to
currency and interest rate risk. To qualify as hedges, financial
instruments must reduce the currency or interest rate risk associated with
the related underlying items and be designated as hedges by management.
Gains or losses from the revaluation of financial instruments which do not
qualify for hedge accounting treatment are recognized in earnings.
The Company has a policy of financing a portion of its investments in
overseas operations with borrowings denominated in the same currency as the
investment or by entering into foreign exchange contracts in tandem with
U.S. dollar borrowings. These contracts are effective in providing a hedge
against fluctuations in currency exchange rates. Gains or losses from the
revaluation of these contracts, which are fully offset by
11
<PAGE>
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 are 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.
The Company also utilizes foreign exchange contracts to hedge certain
transactions that are denominated in foreign currencies, primarily export
sales and equipment purchases from nonresident vendors. These contracts
serve to protect the Company from currency fluctuations between the
transaction and settlement dates. Gains or losses from the revaluation of
these contracts, based on published currency exchange rates, along with
offsetting gains or losses resulting from the revaluation of the underlying
transactions, are recognized in earnings or deferred and recognized in the
basis of the underlying transaction when completed. Any gains or losses
arising from the cancellation of the underlying transactions or early
termination of the foreign currency contracts are included in earnings.
The Company uses cross-currency and interest rate swap agreements to manage
the composition of its fixed and floating rate debt portfolio. Amounts to
be paid or received as interest under these agreements are recognized over
the life of the swap agreements as adjustments to interest expense. Gains
or losses from the revaluation of cross-currency swap agreements that
qualify as hedges of investments are recorded as translation adjustments in
common shareholders' equity. Gains or losses from the revaluation of
cross-currency swap agreements that do not qualify as hedges of investments
are included in earnings. The related amounts payable to or receivable from
the counterparties to the agreements are included in accrued liabilities or
accounts receivable. If swap agreements are terminated early, the resulting
gain or loss is deferred and amortized over the remaining life of the
related debt.
The Company does not hold or issue financial instruments for trading
purposes.
17. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes 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. The Statement requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
The Statement is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance. The Statement cannot be applied
retroactively. The Statement must be applied to (a) derivative instruments
and (b) certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December 31, 1997
(and, at the company's election, before January 1, 1998).
We have not yet quantified the impacts of adopting the Statement on our
consolidated financial statements and have not determined the timing of or
method of our adoption. However, adoption of the provisions of the
Statement could increase volatility in earnings and other comprehensive
income.
12
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information", which requires the presentation of
segment information on a basis consistent with that used by management for
operating decisions. The provisions of this statement will be adopted in
the 1998 fourth quarter.
18. Certain reclassifications have been made to prior-year amounts to
conform with the current-year presentation.
19. Subsequent Events
In the 1998 third quarter, the Veratec nonwovens business was sold
for $282 million as part of the Company's previously announced
restructuring plan.
Also in the 1998 third quarter, the Zellerbach distribution business
was acquired from the Mead Corporation for approximately $263 million.
In June 1998, the Company signed an agreement to purchase OAO Svetogorsk,
a Russia-based pulp and paper business. This acquisition is expected to be
completed by the end of 1998.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
International Paper's second-quarter 1998 net sales were $4.7 billion compared
with 1997 second-quarter net sales of $5.0 billion and 1998 first-quarter net
sales of $4.9 billion. The decline in net sales reflects lower pricing for some
products and the sale of businesses under the Company's restructuring
program.
Second-quarter 1998 earnings were $90 million or $.29 per share before special
items compared with net earnings of $75 million or $.25 per share in the 1998
first quarter and $59 million or $.20 per share before special items in the 1997
second quarter. Second-quarter 1998 net earnings were $86 million or $.28 per
share after a $6 million pretax charge ($4 million after taxes or $.01 per
share) to write off in-process research and development costs related to an
acquisition by Scitex, a 13% investee company of International Paper.
Second-quarter 1997 results were a net loss of $419 million or $1.39 per share
after a $535 million pretax business improvement charge ($385 million after
taxes or $1.28 per share) and a $150 million pretax charge ($93 million after
taxes or $.31 per share) to add to the Company's legal reserves.
Although net sales declined from the 1998 first quarter and the 1997 second
quarter, earnings before special items improved as the result of cost reduction
efforts and the disposition of certain businesses that were generating operating
losses. Despite the improvement in earnings, industry market conditions in the
second quarter were more difficult than expected. The paper and forest products
industry benefited from healthy economies in the United States and Europe but
was negatively impacted by the continued weakness in Asian demand and the strong
U.S. dollar. The Company continues to closely monitor inventory levels and
customer demand and took about 300,000 tons of market and maintenance related
downtime in the second quarter.
Second-quarter 1998 operating profit totaled $305 million compared with $290
million in the 1998 first quarter and $270 million in the 1997 second quarter
before special items. After consideration of the components of the special items
which impacted the segment operating results, an overall operating loss of $255
million was recorded for the 1997 second-quarter. Following are further
discussions of 1998 second-quarter results for each of the business segments.
These discussions are based on earnings before the special items that were
recorded in the 1997 second quarter.
Printing Papers 1998 second-quarter net sales of $1.3 billion were about even
with the 1997 second quarter and down slightly from the 1998 first quarter.
Operating profit for the 1998 second quarter was $50 million, down from $70
million in the previous quarter and double the $25 million recorded in the 1997
second quarter. The decline from the 1998 first quarter reflects the
continuation of the poor pulp market and lower sales volumes and price declines
for uncoated grades. However, pricing improved during the quarter for coated
grades despite lower volumes. The increase over the 1997 second quarter results
from ongoing cost reduction efforts and higher prices for uncoated and coated
grades that offset lower pulp earnings.
Packaging 1998 second-quarter net sales increased to $1.3 billion from $1.2
billion in the 1998 first quarter and were about even with the 1997 second
quarter. Second-quarter 1998 operating profit increased to $90 million from $60
million in the 1998 first quarter primarily due to increased bleached board
demand and cost reduction efforts. Second-quarter 1998 operating profit was also
ahead of the $60 million recorded in the 1997 second quarter reflecting improved
results for containerboard and bleached board. Results for Carter Holt Harvey
improved slightly over the 1998 first quarter but were below the 1997 second
quarter due to the continued weakness in Asian markets.
14
<PAGE>
Distribution 1998 second-quarter net sales of $1.2 billion were ahead of the
1997 second quarter and about even with the 1998 first quarter. Operating profit
remained at $20 million for the 1998 second quarter, even with the previous
quarter and below the $25 million recorded in the 1997 second quarter due to
lower margins. The current quarter included the results of Taussig Graphic
Supply that was acquired in November of 1997.
Specialty Products 1998 second-quarter net sales declined to $625 million, down
from $750 million in the 1998 first quarter and $890 million in the 1997 second
quarter, primarily due to the divestiture of the imaging products businesses and
lower Carter Holt Harvey sales. Second-quarter operating profit for the
specialty products segment was $55 million, up slightly from the $50 million
posted in the 1998 first quarter but down significantly from $90 million in the
1997 second quarter. Lower oil and gas prices, the sale of the imaging
businesses and lower earnings for Carter Holt Harvey's tissue business
were primarily responsible for the decline in operating profit from the 1997
second quarter. The decline in the New Zealand dollar currency exchange rate
versus the U.S. dollar was partially responsible for the lower Carter Holt
Harvey results.
Forest Products 1998 second-quarter net sales were $575 million compared with
$590 million for the 1998 first quarter and $680 million for the 1997 second
quarter. Operating profit of $90 million for the 1998 second quarter was even
with the 1998 first quarter and improved over the $70 million recorded in the
1997 second quarter. Sales and earnings for Carter Holt Harvey's forest products
business declined from the 1997 second quarter due to significant reductions in
prices and log exports into Asian markets. The 1998 second quarter benefited
from a $37 million gain before taxes from the sale of a partnership interest in
the Company's Allegheny forestlands. This sale was the fourth in a series of
transactions announced in the 1997 second quarter.
Carter Holt Harvey reported net sales of $365 million in the 1998 second
quarter, down from $415 million in the 1998 first quarter and $525 million in
the 1997 second quarter. Second-quarter 1998 operating profit for Carter Holt
Harvey declined to $10 million from $35 million in the 1997 second quarter
largely due to the weak Asian markets that have particularly affected log
exports and pulp prices, disruptions to production associated with the
Kinleith mill modernization and a lower contribution from Carter Holt
Harvey's investments in Chile. About $5 million of the earnings decline from
the prior year is due to unfavorable currency exchange rate changes. Carter
Holt Harvey's results, which have been adjusted to conform with U.S.
generally accepted accounting principles and International Paper's
classifications, are included in the preceding segment discussions as
applicable.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $533 million for the 1998 first half
compared with $497 million in the 1997 six-month period. Improved earnings
together with lower working capital requirements accounted for the increase.
Investments in capital projects totaled $472 million for the 1998 six months,
slightly ahead of the $460 million spent during the 1997 six-month period.
Mergers and acquisitions totaled $202 million for the 1998 first half. A
description of the acquisitions completed during the first half of 1998 is
included in the following mergers and acquisitions section. Proceeds from
divested businesses totaled $230 million which included certain imaging
businesses, the label business and the building products business of Carter Holt
Harvey.
Cash flow generated by operations is anticipated to be adequate to fund
expected capital expenditures, which have been lowered to approximately $1.1
billion for 1998, below expected 1998 depreciation expense. Capital spending
will continue to be focused on the Company's stronger, more competitive
businesses and is expected to be less than $1.0 billion for 1999.
15
<PAGE>
Financing activities for the 1998 first half include a $382 million net
reduction in primarily short-term debt compared with net borrowings of $96
million for the 1997 first half. During the 1998 first quarter, $170 million
of 7.005% preferred securities were issued by a subsidiary of the Company as
part of the financing to repurchase the outstanding units of IP Timberlands,
Ltd. These preferred securities are classified in the consolidated balance
sheet as a minority interest liability. In June 1998, a non-US subsidiary of
the Company issued $550 million of preferred securities with a dividend
payment that is based on LIBOR. Proceeds from the latter transaction were
used to retire short-term borrowings and for other corporate purposes.
Dividend payments on both of these preferred securities will be included in
minority interest expense.
Common stock dividend payments were $152 million or $.50 per common share for
the 1998 first half, even with the prior-year period on a per share basis.
MERGERS AND ACQUISITIONS
In February 1998, the Company entered into a joint venture with Olmuksa in
Turkey for the manufacture of containerboard and corrugated boxes for markets in
Turkey and Europe.
In February 1998, Carter Holt Harvey and International Paper jointly acquired
Australian-based Continental Cup. This acquisition will allow Carter Holt Harvey
and International Paper's cup subsidiary, Imperial Bondware, to offer a full
line of food service products in the Australian and New Zealand markets.
In March 1998, IP Forest Resources Company, a subsidiary of International Paper,
purchased all of the 7,299,500 publicly traded Class A Depositary Units of IP
Timberlands, Ltd. for a cash purchase price of $13.6325 per unit. Early in the
1998 second quarter, Carter Holt Harvey acquired the Australian folding carton
business of Riverwood International.
In April 1998, the Company completed the acquisition of Weston Paper and
Manufacturing Company, a corrugated manufacturer, in a noncash transaction by
exchanging approximately 4.7 million shares of International Paper common stock
worth approximately $232 million for all of the outstanding Weston Paper shares.
In June 1998, the Company signed an agreement to purchase OAO Svetogorsk, a
Russia-based pulp and paper business. This acquisition should complement
International Paper's leading European position in business papers and
should enhance the Company's ability to serve growing market demand in
Russia and Eastern Europe. This acquisition is expected to be completed by the
end of 1998.
In the 1998 third quarter, the Company acquired the Zellerbach distribution
business from the Mead Corporation for approximately $263 million. This
business will be combined with the Company's xpedx distribution operations.
RESTRUCTURING ACTIONS
Certain of the imaging products printing and graphic arts businesses were sold
in late February 1998 and the remaining imaging businesses were sold early in
the 1998 second quarter. The Company's label business and Carter Holt
Harvey's building products business were also sold during the 1998 second
quarter. The sale of the Veratec nonwovens business was completed in the
1998 third quarter.
16
<PAGE>
With the sale of the Veratec nonwovens business, the Company has successfully
completed the sale of approximately $1 billion of assets previously announced as
part of its 1997 restructuring plan. In addition to these divestitures, an
incremental $500 million of non-strategic assets are expected to be sold over
the next nine months.
OTHER
Minority interest expense for the 1998 second quarter declined primarily due to
lower earnings for Carter Holt Harvey, which is owned approximately 50% by
International Paper.
The effective income tax rate for the 1998 first half declined to 30% from 34%
in the 1997 first half before special items primarily due to certain state tax
credits and changes in the mix of estimated annual earnings.
YEAR-2000 COSTS
The Year-2000 problem concerns the inability of information systems to properly
recognize and process date-sensitive information beyond January 1, 2000.
Many of our systems and related software are year-2000 compliant. However, we
have a program in place designed to bring the remaining software and systems
into year-2000 compliance in time to minimize any significant detrimental
effects on operations. The program covers information systems infrastructure,
financial and administrative systems, process control and manufacturing
operating systems, significant vendors and customers. We are utilizing
internal personnel, contract programmers and vendors to identify year-2000
noncompliance problems, modify code and test the modifications. In some
cases, noncompliant software and hardware will be replaced.
We now estimate that the incremental costs will be approximately $135 million
plus or minus 30%, exclusive of software and systems that are being replaced
or upgraded in the normal course of business. The majority of these costs are
expected to be incurred during the next twelve months. The increase over the
previously reported forecast of $65 million is the result of the
identification of more production facility systems that need to be modified
as detailed inventories are being completed. These systems represent our
greatest area of risk and plans are currently being formulated to reduce the
risk of non-compliance of these systems.
Our policy is to expense as incurred information system maintenance and
modification costs and to capitalize the cost of new software and amortize it
over the assets' useful lives.
In the event our plan for achieving Year-2000 compliance is not completed on
time, critical processes may not work which could result in safety and
environmental exposures and significant losses in production. However,
failure to meet critical milestones identified in our plans would provide
advance notice and steps would be taken to prevent injuries to employees and
others and to prevent environmental contamination. Customers and suppliers
would also receive advance notice allowing them to implement alternative plans.
THE ESTIMATES AND CONCLUSIONS HEREIN CONTAIN FORWARD-LOOKING STATEMENTS AND ARE
BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS. RISKS TO COMPLETING
THE PLAN INCLUDE THE AVAILABILITY OF RESOURCES AND THE ABILITY OF SUPPLIERS TO
BRING THEIR SYSTEMS INTO YEAR-2000 COMPLIANCE.
17
<PAGE>
ITEM 3. OTHER FINANCIAL INFORMATION
Financial Information by Industry Segment
(Unaudited)
(In millions)
Net Sales by Industry Segment
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Printing Papers $ 1,255 $ 1,340 $ 2,635 $ 2,720
Packaging 1,285 1,255 2,485 2,445
Distribution 1,205 1,125 2,430 2,215
Specialty Products 625 890 1,375 1,750
Forest Products 575 680 1,165 1,285
Less: Intersegment Sales (238) (256) (515) (519)
--------------- ---------------- --------------- ----------------
Net Sales $ 4,707 $ 5,034 $ 9,575 $ 9,896
--------------- ---------------- --------------- ----------------
--------------- ---------------- --------------- ----------------
</TABLE>
The above amounts include Carter Holt Harvey net sales of $365 million and $525
million for the three months ended June 30, 1998 and 1997, respectively, and
$780 million and $995 million for the six months ended June 30, 1998 and 1997,
respectively.
Operating Profit by Industry Segment
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
Six Months Before After
Ended June 30, Special Special Special
1998 Items Items(2) Items
-------------------- ----------------- --------------- ----------------
-------------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Printing Papers $ 120 $ 25 $ (215) $ (190)
Packaging 150 115 (45) 70
Distribution 40 50 (15) 35
Specialty Products 105 170 (200) (30)
Forest Products 180 160 (50) 110
-------------------- ----------------- --------------- ----------------
-------------------- ----------------- --------------- ----------------
Operating Profit (Loss) 595 520 (525) (5)
Corporate items, net (59) (1) (29) (160) (189)
Interest expense, net (255) (255) (255)
Income tax (provision) benefit (84) (1) (80) 207 127
Minority interest expense, net of taxes (36) (63) (63)
-------------------- ----------------- --------------- ----------------
-------------------- ----------------- --------------- ----------------
Net Earnings (Loss) $ 161 (1) $ 93 $ (478) $ (385)
-------------------- ----------------- --------------- ----------------
-------------------- ----------------- --------------- ----------------
</TABLE>
The above amounts include Carter Holt Harvey operating profit of $20 million and
$65 million for the six months ended June 30, 1998 and 1997, respectively.
(1) Includes a $6 million pre-tax charge ($4 million after taxes or $.01 per
share) to write off in-process research and development costs related to an
acquisition by an investee company.
(2) Includes a $535 million pre-tax business improvement charge ($385 million
after taxes or $1.28 per share ) and a $150 million pre-tax provision for legal
reserve ($93 million after taxes or $.31 per share).
18
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
Assets by Industry Segment 1998 1997
--------------------- ---------------------
<S> <C> <C>
Printing Papers $ 7,747 $ 7,810
Packaging 6,330 6,198
Distribution 1,447 1,421
Specialty Products 2,715 3,106
Forest Products 4,540 4,868
Equity Investments 1,014 1,046
Corporate 2,748 2,305
--------------------- ---------------------
--------------------- ---------------------
Assets $ 26,541 $ 26,754
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
19
<PAGE>
Financial Information by Geographic Area
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Net Sales by Geographic Area Six Months Ended June 30,
----------------------------------------------
1998 1997
--------------------- ---------------------
<S> <C> <C>
United States $ 7,270 $ 7,180
Europe 1,510 1,735
Pacific Rim 845 1,080
Other 110 105
Less: Intergeographic Sales (160) (204)
--------------------- ---------------------
Net Sales $ 9,575 $ 9,896
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
Operating Profit by Geographic Area
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
-------------------------------------------------------
Six Months Before After
Ended June 30, Special Special Special
1998 Items Items (1) Items
-------------------- ---------------- ---------------- ----------------
-------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
United States $ 510 $ 395 $ (340) $ 55
Europe 55 45 (185) (140)
Pacific Rim 20 70 70
Other 10 10 10
-------------------- ---------------- ---------------- ----------------
Operating Profit (Loss) $ 595 $ 520 $ (525) $ (5)
-------------------- ---------------- ---------------- ----------------
-------------------- ---------------- ---------------- ----------------
</TABLE>
(1) Includes a $535 million pre-tax business improvement charge ($385 million
after taxes or $1.28 per share).
Assets by Geographic Area
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
--------------------- ------------------------
--------------------- ------------------------
<S> <C> <C>
United States $ 15,748 $ 15,650
Europe 3,506 3,635
Pacific Rim 3,348 3,929
Other 177 189
Equity Investments 1,014 1,046
Corporate 2,748 2,305
--------------------- ------------------------
Assets $ 26,541 $ 26,754
--------------------- ------------------------
--------------------- ------------------------
</TABLE>
20
<PAGE>
Production by Products
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ --------------------------------------------
1998 1997 1998 1997
--------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Printing Papers (In thousands of tons)
White Papers and Bristols 916 978 1,906 2,005
Coated Papers 308 334 640 644
Market Pulp (A) 438 526 950 1,101
Newsprint 23 19 47 40
Packaging (In thousands of tons)
Containerboard 698 698 1,407 1,397
Bleached Packaging Board 551 542 1,072 1,091
Industrial Papers 151 167 312 339
Industrial and Consumer Packaging (B) 936 897 1,718 1,704
Specialty Products (In thousands of tons)
Tissue 37 39 72 71
Forest Products (In millions)
Panels (sq. ft. 3/8" basis) (C) 414 369 774 670
Lumber (board feet) 563 545 1,092 1,026
MDF (sq. ft. 3/4" basis) 49 54 97 106
Particleboard (sq. ft. 3/4" basis) 48 47 95 92
</TABLE>
(A) This excludes market pulp purchases.
(B) A significant portion of this tonnage was fabricated from paperboard and
paper produced at the Company's own mills and included in the
containerboard, bleached packaging board, and industrial papers amounts in
this table.
(C) Panels include plywood and oriented strand board.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the common stock of the Company was held
on May 12, 1998. The shareholders voted on*:
(a) the election of three directors to Class I. The votes for and those withheld
for each nominee were:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Mr. Bijur 243,047,662 2,235,079
Mr. Dillon 242,997,831 2,284,910
Mr. Kennedy 243,076,566 2,206,175
</TABLE>
(b) the appointment of Arthur Andersen LLP as independent auditors for 1998 was
approved and the votes were:
<TABLE>
<CAPTION>
For: Against: Abstentions:
<S> <C> <C>
244,271,893 434,775 576,073
</TABLE>
(c) the shareholder proposal for a schedule of total phaseout of
chlorine-containing compounds for papermaking was defeated and the votes were:
<TABLE>
<CAPTION>
For: Against: Abstentions:
<S> <C> <C>
5,903,541 194,206,666 8,756,997
</TABLE>
- ------------
*If a specific category for, against withheld, abstentions and broker no-votes
is omitted, the number is zero.
22
<PAGE>
ITEM 5. OTHER INFORMATION
The Company announced changes in senior management responsibility and the
appointment of an additional officer.
The executive officers of the Company are now:
John T. Dillon, 59, Chairman and Chief Executive Officer;
James P. Melican, 57, Executive Vice President-Legal & External Affairs,
responsible for Business Development and Planning, Corporate Communications,
Public Affairs, Investor Relations, Legal, Secretary's Office, IP Realty
and the Company's business development in Asia and Latin/South America;
David W. Oskin, 55, Executive Vice President-Consumer Packaging, responsible for
the Company's Bleached Board, Liquid Packaging, Folding Carton and
Imperial Bondware businesses, and for Carter Holt Harvey;
C. Wesley Smith, 59, Executive Vice President-Operations Group, responsible for
Technology, Logistics, Environment Health & Safety, Work Systems, Quality
Management staff organizations, the Land & Timber, and Logging & Fiber Supply
operations;
Milan J. Turk, 59, Executive Vice President-Specialty Businesses, responsible
for Arizona Chemical, Petroleum & Minerals, Industrial Papers, Fine Papers and
Pulp;
Robert M. Amen, 49, President of International Paper-Europe, responsible for
Aussedat Rey, Zanders, Tait and Kwidzyn operations;
Robert M. Byrnes, 61, Senior Vice President-Human Resources, responsible for
Human Resources;
Thomas E. Costello, 59, Senior Vice President-Distribution, responsible for the
Company's distribution activities;
Douglas Fox, 50, Senior Vice President-Marketing, responsible for Marketing and
Corporate Advertising;
Newland A. Lesko, 53, Senior Vice President-Industrial Packaging, responsible
for the Company's Containerboard & Kraft businesses, U.S. Container and
International Container;
Marianne M. Parrs, 54, Senior Vice President-Administration and Chief Financial
Officer, responsible for Finance, Information Technology and Human Resources;
William H. Slowikowski, 54, Senior Vice President-Printing Papers, responsible
for Printing & Office Papers, Coated Publication & Bristols, and Converting and
Specialty;
Manco Snapp, 55, Senior Vice President-Building Materials, responsible for the
Company's Decorative Products, Masonite and Wood Products businesses;
Dennis W. Thomas, 54, Senior Vice President-Public Affairs and Communications;
Andrew R. Lessin, 55, Vice President and Controller;
William B. Lytton, 49, Vice President and General Counsel.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10) International Paper Company Long-Term
Incentive Compensation Plan.
(11) Statement of Computation of Per Share Earnings
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
Reports on Form 8-K were filed on April 14, 1998 and June 9,
1998. The April 14, 1998 Report on Form 8-K attached a press
release announcing first-quarter earnings. The June 9, 1998
Report on Form 8-K announced a restructuring of the company,
changes in senior management responsibility and the appointment
of additional officers.
24
<PAGE>
SIGNATURES
Pursuant to the requirements 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
(Registrant)
Date: August 14, 1998 By /s/ MARIANNE M. PARRS
---------------------
Marianne M. Parrs
Senior Vice President
and Chief Financial Officer
Date: August 14, 1998 By /s/ ANDREW R. LESSIN
--------------------
Andrew R. Lessin
Vice President, Controller and
Chief Accounting Officer
25
<PAGE>
(Exhibit 10)
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 this Plan is January 1, 1989. Subject to approval of
this Plan by a majority of shareholders of the Company entitled to vote on the
matter at the 1994 annual meeting of shareholders certain amendments to the Plan
will also be effective. The Plan supersedes and replaces the International
Paper Company Performance Share Plan and the International Paper Company Stock
Option Plan which were approved by shareholders in 1983 (the "1983 Plans"). No
further contingent awards or grants of options will be made under the 1983
Plans, and outstanding contingent awards and deferred awards under the 1983
Plans and earlier plans will be converted to comparable awards under the
provisions of this Plan with the consent of the award holders.
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, and to adopt such
rules and regulations for carrying out the Plan as it may deem appropriate.
Decisions of the Committee 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. 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 in
its 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.
A-1
<PAGE>
(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
An aggregate of five million Shares shall be available under the Plan as
amended by the shareholders at the 1994 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 1983 Plans or the Plan
which are not yet issued to, or are reacquired from, participants in the 1983
Plans or the Plan. 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 and the 1983
Plans 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
A-2
<PAGE>
of grant, are subject to the provisions of Section 16 of the 1934 Act shall not
exceed 7,300,000 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 900,000.
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.
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
A-3
<PAGE>
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. Outstanding contingent awards and deferred awards under the
1983 Performance Share Plan shall be converted to comparable awards under this
Plan with the consent of the award holders. The first complete Award Period
under this Plan shall begin 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 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. Adjustments in
the number of shares earned can be made by the Committee with any such
adjustments offset by reductions in other awards made under the Company's
Long-Term Incentive Compensation Plan or other Company bonus awards. 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 commencing after the effective date of the amendment to the Plan is
50,000. 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
A-4
<PAGE>
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
(i) all restrictions shall be immediately removed with respect to
all earned Performance Shares and
(ii) 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 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 900,000 Shares.
(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.
A-5
<PAGE>
(b) If a stock option under the 1983 Plan or 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.
EXECUTIVE 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 stock option or grant
of restricted Shares, or 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 as
such condition is determined in the sole discretion of the Committee, if
earlier) or upon a Change of Control of the Company (as limited under subsection
(g) below), the restrictions on the award will be removed, and the award will
vest in the following manner:
(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 age 65, 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
A-6
<PAGE>
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.
MISCELLANEOUS
16. 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 shall
continue to be subject to the terms of the Plan and the instruments evidencing
such awards prior to such amendments becoming effective.
17. 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.
A-7
<PAGE>
(Exhibit 11)
INTERNATIONAL PAPER COMPANY
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
(In millions, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ----------------------------
1998 1997 1998 1997
-------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 86 $ (419) $ 161 $ (385)
Reduction in minority interest expense, net of taxes, assuming
conversion of preferred securities of subsidiary trust
-------------- -------------- ----------- -------------
Net earnings (loss) - assuming dilution $ 86 $ (419) $ 161 $ (385)
-------------- -------------- ----------- -------------
-------------- -------------- ----------- -------------
Average common shares outstanding 306.7 301.1 304.5 300.9
Shares assumed to be repurchased using long-term
incentive plan deferred compensation at average
market price (0.8) (0.7) (0.8) (0.7)
Shares assumed to be issued upon exercise of
stock options, net of treasury buyback at average
market price 2.0 1.9
Shares assumed to be issued upon conversion of preferred
securities of subsidiary trust
-------------- -------------- ----------- -------------
Average common shares outstanding - assuming dilution 307.9 300.4 305.6 300.2
-------------- -------------- ----------- -------------
-------------- -------------- ----------- -------------
Earnings (loss) per common share $ 0.28 $ (1.39) $ 0.53 $ (1.28)
-------------- -------------- ----------- -------------
-------------- -------------- ----------- -------------
Earnings (loss) per common share - assuming dilution $ 0.28 $ (1.39) $ 0.53 $ (1.28)
-------------- -------------- ----------- -------------
-------------- -------------- ----------- -------------
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
<PAGE>
(Exhibit 12)
INTERNATIONAL PAPER COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
(Unaudited)
<TABLE>
<CAPTION>
For the Years Ended December 31,
TITLE 1993 1994 1995 1996 1997
- ------------------------------------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
A) Earnings (loss) before income taxes,
minority interest and
accounting changes $ 538.0 $ 715.0 $2,028.0 $ 802.0 $ 16.0
B) Less: Minority interest expense, net of
taxes (36.0) (47.0) (156.0) (169.0) (129.0)
C) Add: Fixed charges excluding
capitalized interest 365.3 412.3 605.9 672.4 686.6
D) Add: Amortization of previously
capitalized interest 12.2 12.8 13.0 17.8 20.0
E) Less: Equity in undistributed
earnings of affiliates (25.9) (49.1) (94.5) 6.2 (40.4)
----------- ----------- ----------- ------------ -----------
F) Earnings (loss) before income taxes,
minority interest, accounting
changes and fixed charges $ 853.6 $ 1,044.0 $ 2,396.4 $ 1,329.4 $ 553.2
----------- ----------- ----------- ------------ -----------
----------- ----------- ----------- ------------ -----------
Fixed Charges
G) Interest and amortization of debt expense $ 334.5 $ 371.0 $ 542.3 $ 582.8 $ 593.0
H) Interest factor attributable to rentals 30.8 41.3 53.0 66.0 70.0
I) Preferred dividends of subsidiary 10.6 23.6 23.6
J) Capitalized interest 12.2 18.0 58.0 66.7 61.9
----------- ----------- ----------- ------------ -----------
K) Total fixed charges $ 377.5 $ 430.3 $ 663.9 $ 739.1 $ 748.5
----------- ----------- ----------- ------------ -----------
----------- ----------- ----------- ------------ -----------
L) Ratio of earnings to fixed charges 2.26 2.43 3.61 1.80
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
M) Deficiency in earnings necessary
to cover fixed charges $ 195.3
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
TITLE 1997 1998
- ------------------------------------------ ---------- -----------
<S> <C> <C>
A) Earnings (loss) before income taxes,
minority interest and accounting
changes $ (449.0) $ 281.0
B) Less: Minority interest expense, net of
taxes (63.0) (36.0)
C) Add: Fixed charges excluding
capitalized interest 329.8 341.0
D) Add: Amortization of previously
capitalized interest 9.8 10.3
E) Less: Equity in undistributed
earnings of affiliates (7.1) 11.8
---------- -----------
F) Earnings (loss) before income taxes,
minority interest, accounting
changes and fixed charges $(179.5) $ 608.1
---------- -----------
---------- -----------
Fixed Charges
G) Interest and amortization of debt expense $ 288.0 $ 300.0
H) Interest factor attributable to rentals 30.0 29.2
I) Preferred dividends of subsidiary 11.8 11.8
J) Capitalized interest 33.8 24.1
---------- -----------
K) Total fixed charges $ 363.6 $ 365.1
---------- -----------
L) Ratio of earnings to fixed charges 1.67
-----------
-----------
M) Deficiency in earnings necessary
to cover fixed charges $ 543.1
----------
----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 578
<SECURITIES> 0
<RECEIVABLES> 2,408
<ALLOWANCES> 92
<INVENTORY> 2,670
<CURRENT-ASSETS> 6,055
<PP&E> 22,373
<DEPRECIATION> 10,196
<TOTAL-ASSETS> 26,541
<CURRENT-LIABILITIES> 4,025
<BONDS> 7,045
0
0
<COMMON> 308
<OTHER-SE> 8,705
<TOTAL-LIABILITY-AND-EQUITY> 26,541
<SALES> 9,575
<TOTAL-REVENUES> 9,575
<CGS> 7,178
<TOTAL-COSTS> 9,039
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 16
<INTEREST-EXPENSE> 255
<INCOME-PRETAX> 281
<INCOME-TAX> 84
<INCOME-CONTINUING> 161
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 161
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
</TABLE>
