<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
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)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
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
PART I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000 Updated and Revised
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR 2000
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 and significant vendors and customers. Our program recognizes
that date sensitive systems may fail at different points in time depending on
their function. Forward looking production and procurement systems may fail
earlier and require corrective actions sooner to allow for reasonable testing.
Other applications, including gauging and recording systems, may fail only
during the transition to Year 2000.
We are utilizing internal personnel, contract programmers and vendors to
identify Year 2000 noncompliance problems, modify code and test the
modifications. In some cases, non-compliant software and hardware will be
replaced.
We rely on third party suppliers for raw materials, water, utilities,
transportation and other key services. Interruption of supplier operations
due to Year 2000 issues could affect Company operations. We have initiated
efforts to evaluate the status of suppliers' efforts and to determine
alternatives and contingency plan requirements. While approaches to reducing
risks of interruption due to supplier failures will vary by business and
facility, options include identification of alternate suppliers and
accumulation of inventory to assure production capability where feasible or
warranted. These activities are intended to provide a means of managing risk,
but cannot eliminate the potential for disruption due to third party failure.
We are also dependent upon our customers for sales and cash flow. Year 2000
interruptions in our customers' operations could result in reduced sales,
increased inventory or receivable levels and cash flow reductions. While these
events are possible, our customer base is broad enough to minimize the affects
of a single occurrence. We are, however, taking steps to monitor the status of
our customers as a means of determining risks and alternatives.
Our manufacturing facilities (mills and converting plants) rely on control
systems which include production monitoring, power, emissions and safety. The 46
pulp and paper mills operated by the Company utilize various complex control
systems comprised of roughly 1,000 - 2,000 components per mill to monitor and
regulate power, emissions and production operations. Failure to identify,
correct and test Year 2000 sensitive systems at any one of these facilities
could result in manufacturing interruptions, possible environmental
contamination or safety
<PAGE>
hazards. Annual sales for our larger U.S. mills range from approximately $100
million to $500 million at each site.
Control systems used at the 219 converting facilities cover comparable
operations, but are typically comprised of 300-500 components per facility.
The production impact of a Year 2000 related interruption varies
significantly between facilities, but would be typically much smaller in
terms of sales than a comparable event at a pulp and paper mill.
While comparable control systems are used, specific facility related
configurations exist to meet the needs of production equipment at each of our
mills and plants. If a failure were to occur, the potential impact would be
isolated to the affected facility. Also, in many cases, we have the
capability of manufacturing the same product at different facilities. The
consequences of a Year 2000 related event could range from an orderly
shutdown of one or more facilities to a sudden halt at one or more facilities
with possible safety, environmental and equipment impact. The likelihood of
either type of event, or the related financial impact, is not reasonably
predictable.
Recovery under existing insurance policies should be available depending upon
the circumstances of a Year 2000 related event and the type of facility
involved. Generally, no recovery would be available in the event of an
orderly shutdown which does not result in damage to a facility. Potential
recoveries in the event of facility damage, including business interruption,
would be subject to deductibles which range from $100,000 to $10 million.
The Company has adopted a nine-step process toward Year 2000 readiness: (1)
planning and awareness; (2) inventory; (3) triage (assess risks and
prioritize efforts); (4) detailed assessment (identification of where
failures may occur, solutions and workarounds and plans to repair or
replace); (5) resolution (repair, replace or retire systems that cannot
properly process Year 2000 dates; create bridges to other systems and perform
unit testing); (6) test planning; (7) test execution (some manufacturing
systems require scheduling of equipment downtime); (8) deployment of
compliant systems; and (9) fallout (remove bridges and patches; recertify).
The first three steps, planning and awareness, inventory and triage, are
largely complete.
We also rely on various administrative and financial applications (e.g.,
order processing and collection systems) that require correction to properly
handle Year 2000 dates. In the event one of these systems was not corrected,
our ability to capture, schedule and fulfill customer demands could be
impaired. Likewise, if a collection processing system were to fail, we may
not be able to properly apply payments to customer balances or correctly
determine cash balances. Centrally controlled administrative applications are
approximately 50% complete, with the remainder in the process of code
correction or testing. Various non-centrally controlled systems are also
utilized by our businesses. The impact of a failure of these systems would be
limited to the business using the affected system, and then only to the
extent that manual or other alternate processes were not able to meet
processing requirements. Such an occurrence is not expected to have a
significant adverse impact on the Company.
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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 estimate of $65 million is the result of the identification
of more production facility systems that need to be modified as detailed
inventories are completed. These systems represent our greatest area of risk and
plans are currently being formulated to reduce the risk of noncompliance of
these systems. While we believe our efforts will provide reasonable assurance
that material disruptions will not occur due to internal failure, the potential
for interruption still exists. 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.
There is a risk that our plans for achieving Year 2000 compliance may not be
completed on time. 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 alternate 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, OUR ABILITY TO DISCOVER AND CORRECT
THE POTENTIAL YEAR 2000 SENSITIVE PROBLEMS WHICH COULD HAVE A SERIOUS IMPACT ON
SPECIFIC FACILITIES, AND THE ABILITY OF SUPPLIERS TO BRING THEIR SYSTEMS INTO
YEAR 2000 COMPLIANCE.
3
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10) International Paper Company Management Incentive Plan, as
amended and restated as of January 1, 1998.
(b) Reports on Form 8-K - none.
4
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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 31, 1998 By /s/MARIANNE M. PARRS
-----------------------
Marianne M. Parrs
Senior Vice President and
Chief Financial Officer
Date: August 31, 1998 By /s/ANDREW R. LESSIN
-----------------------
Andrew R. Lessin
Vice President,Controller and
Chief Accounting Officer
<PAGE>
(EXHIBIT 10)
INTERNATIONAL PAPER COMPANY - MANAGEMENT INCENTIVE PLAN (MIP)
AMENDED AND RESTATED AS OF JANUARY 1, 1998
I. Purposes of the Plan
The purposes of this Amended and Restated Management Incentive Plan
are: (a) to provide greater incentive for Participants to exert
their best efforts to increase the profitability of the Company, (b)
to attract and retain in the employ of the Company persons of
outstanding competence, and (c) to further the identity of interests
of Plan Participants with the interests of the Company's
shareholders. The awards made under the Plan are not a form of
deferred regular compensation with respect to the Participants'
normal performance of their regular duties, but are instead intended
to provide an incentive to achieve higher than expected levels of
performance. Defined terms used herein shall have the meanings set
forth in Article II.
II. Definitions
Business Unit: "Business Unit" means a business unit or sector,
composed of an aggregate of Mill/Facilities and identified in a list
each Plan Year by the Committee.
Committee: "Committee" means the Management Development and
Compensation Committee of the Company's Board of Directors.
Company: "Company" means International Paper Company, a New York
corporation, together with its subsidiaries.
Company Peer Group: "Company Peer Group" means those companies
engaged in the forest products industry which the Committee
determines from time to time to be a representative group of
companies with which the Company competes.
Company ROI: "Company ROI" means, with respect to any Plan Year, the
Company's Return on Investment for such Plan Year compared to its
budgeted Return on Investment for such Plan Year.
Competitive ROI: "Competitive ROI" means a comparison of the Company
ROI with the ROI of the Company's Peer Group, calculated on a
weighted basis, as determined from time to time by the Committee.
Corporate Participants: "Corporate Participants " means those
Participants not included in the list of Participants attached to a
specific Business Unit or Mill/ Facility.
Employees: "Employees" mean those persons who are full time
employees of the Company.
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Incentive Compensation Fund: "Incentive Compensation Fund" means,
with respect to any Plan Year, the aggregate amount available for
incentive compensation payments under the Plan, as determined in
accordance with Article VI hereof.
Key Initiatives: "Key Initiatives" means areas that have been
specifically targeted for growth and development by the unit to
which such Key Initiatives relate.
Mill/Facility: "Mill/Facility" means a mill, facility, forest region
or similar subdivision of a Business Unit as identified in a list
compiled each Plan Year by the Committee.
Non-financial Goals: "Non-financial Goals" means, with respect to
any Plan Year, a comparison of how well the Company performed in
certain non-financial areas compared to targeted performance in such
areas.
Participant: "Participant" means a person who has been designated as
a participant in the Plan pursuant to Article V hereof.
Performance Factor: "Performance Factor" means the percentage amount
assigned by the Committee to a Performance Measure for a level of
achievement and representing a percentage of Target Award, pursuant
to Article VI(C) hereof.
Performance Measure: "Performance Measure" means one of the three
separate measurements of corporate performance used in determining
the Incentive Compensation Fund.
Plan: "Plan" means this Amended and Restated Management Incentive
Plan, as the same may be amended from time to time.
Plan Year: "Plan Year" means the twelve month period corresponding
to the Company's fiscal year.
Pool Funding Factor: "Pool Funding Factor" means, with respect to
any given Plan Year, the sum of all Performance Measures, after
giving effect to the weighting of each Performance Measure and after
multiplication of each Performance Measure by its Performance Factor.
Return on Investment/ROI: "Return on Investment" or "ROI" means
earnings before interest and after taxes divided by capital employed.
Target Award: "Target Award" means an amount equal to the percentage
of salary range midpoint applicable to the actual position level of
each Participant, as set forth in Appendix A hereto.
Unit Non-financial Rating: "Unit Non-financial Rating" means, with
respect to any given Plan year, the numerical rating which can range
from .50 to 1.75 awarded the
2
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Corporate Participants as a group, and each Business Unit and
Mill/Facility as a measure of such unit's achievement of its
respective non-financial goals.
III. Plan Description
The Plan establishes a maximum fund based on corporate performance
compared to Plan Year financial and non-financial objectives as
described herein. Funds are allocated proportionally to Corporate,
Business Unit and Mill/Facility Participants based on performance
levels established for the organizational units to which such
Participants are allocated. Individual Participant awards are based
on a proportionate share of their respective fund, adjusted for
individual performance. A separate Special Recognition Fund may be
established to reward special contributions by Employees during the
Plan Year.
IV. Administration of the Plan
The Plan shall be administered under the direction of the Committee.
The Committee is authorized to exercise considerable discretion and
judgment in interpreting the Plan and in adopting, from time to
time, rules and regulations governing the administration of the Plan.
Decisions of the Committee shall be final, conclusive and binding
upon all parties, including the Company, its shareholders and
employees.
V. Participation in the Plan
Participants in the Plan shall be limited to officers and employees
of the Company, as determined from time to time by the Chief
Executive Officer. Recommendations with respect to the final
determination of the Participants who are to receive incentive
awards for each Plan Year and to the amount of the awards for each
Plan Year, shall be made each year to the Committee by the Chief
Executive Officer under such procedures as may from time to time be
prescribed by the Committee. Employees who are eligible for
participation in any business unit or divisional variable cash
compensation plan of the Company shall not be eligible for an
incentive award under this Plan based upon the same period of
service, and amounts paid under such plans shall not be regarded as
awards under this Plan. Participation in this Plan, or receipt of an
award under this Plan, shall not give a Participant or Employee any
right to a subsequent award, nor any right to continued employment
by the Company for any period, nor shall the granting of an award
give the Company any right to continued services of the Participant
or Employee for any period. Likewise, participation in the Plan will
not in any way affect the Company's right to terminate the
employment of the Participant or Employee at any time with or
without cause.
VI. Amount Available for Incentive Awards
3
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A. Incentive Compensation Fund. The amount available in any
Plan Year in the Incentive Compensation Fund shall be
determined in accordance with this Article VI.
B. Performance Measures. In establishing the Incentive
Compensation Fund, three separate measurements of corporate
performance shall be used. These measurements shall include
Company ROI, Competitive ROI and Non-financial Goals.
Weighting factors of forty percent (40%), thirty-five
percent (35%) and twenty-five percent (25%), shall be given,
respectively, to the Performance Measures reflecting Company
ROI, Competitive ROI and Non-financial Goals.
C. Performance Factor. Each Performance Measure shall be
multiplied by a Performance Factor ranging from fifty
percent (50%) to one hundred seventy-five percent (175%) .
The Committee shall determine the Performance Factor
applicable to each Performance Measure and shall have broad
discretion in determining such Performance Factors. In
connection with Company ROI and Competitive ROI, the
Committee may take into account, without limitation, such
items as unforeseen changes in economic conditions and the
like. In connection with Non-financial Goals, the Committee
may take into account, without limitation, such items as
changes in the law, technology, natural disasters or
catastrophic occurrences.
D. Calculation of Incentive Compensation Fund. The sum of all
Performance Measures, after giving effect to the weighting
of each Performance Measure and after multiplication of each
Performance Measure by its Performance Factor, shall equal
the "Pool Funding Factor." The sum of Target Awards for all
Participants shall be multiplied by the Pool Funding Factor
and the amount so obtained shall constitute the Incentive
Compensation Fund for the applicable Plan Year. Examples of
the methodology to be used in applying Performance Factors
and Performance Measures to the determination of Target
Awards are set forth in Appendix B hereto.
VII. Allocation of Incentive Compensation Fund Among Participants
A. General. Amounts available under the Incentive Compensation
Fund for payment of individual awards shall be allocated
among Corporate, Business Unit and Mill/ Facility
Participants based on organizational level performance.
B. Corporate Level Performance. To the extent feasible under
the applicable portion of the Incentive Compensation Fund,
the attainment of Participant Target awards by Corporate
Participants, subject to adjustment under Section VII E
below, shall be
(1) eighty percent (80%) of the sum of a figure based (a)
seventy percent (70%) on overall Company performance and (b)
thirty percent (30%) on Key Initiatives in the Participant's
specific area plus (2) twenty percent (20%) of the Unit
Non-financial Rating.
4
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C. Business Unit Performance. To the extent feasible under the
applicable portion of the Incentive Compensation Fund, the
attainment of Participant Target awards by Business Unit
Participants, subject to adjustment under Section VII E
below, shall be (1) eighty percent (80%) of the sum of a
figure based (a) fifty percent (50%) on Company performance
and (b) fifty percent (50%) on Business Unit performance
plus (2) twenty percent (20%) of the Unit Non-financial
Rating. The Company portion of such performance shall be
based entirely on overall Company performance. The remaining
fifty percent (50%) shall be based on the particular
Business Unit's Performance, with seventy percent (70%) of
such amount based on actual ROI, or, if such an ROI
measurement is determined, in the sole discretion of the
Committee to be inappropriate, based on such other financial
measurements as the Committee shall deem appropriate,
compared to budgeted ROI, and thirty percent (30%) of such
amount based on Key Initiatives in the Participant's Unit.
D. Mill/Facility Performance. To the extent feasible under the
applicable portion of the Incentive Compensation Fund, the
attainment of Participant Target Awards by Mill/Facility
Participants, subject to adjustment under Section VII E
below, shall be (1) eighty percent (80%) of the sum of a
figure based (a) twenty-five percent (25%) on overall
Company performance, (b) twenty-five percent (25%) on
Business Unit ROI and Key Initiatives measurements for that
Business Unit in which the Mill/Facility is included and (c)
the remaining fifty percent (50%) on such Mill/Facility's
performance plus (2) twenty percent (20%) of the Unit
Non-financial Rating. In determining Mill/Facility
performance, seventy percent (70%) of such amount based on
actual ROI against budgeted ROI or, if such an ROI
measurement is determined, in the sole discretion of the
Committee to be inappropriate, based on such other financial
measurements as the Committee shall deem appropriate, and
thirty percent (30%) of such amount based on Key
Initiatives.
E. Individual Awards. Individual awards for Participants shall
be based on each Participant's share of the relevant fund
established in connection with Corporate performance,
Business Unit performance and Mill/Facility performance, as
the case may be, factored by the individual performance of
the Participant, within a range of 0 percent (0%) to one
hundred twenty percent (120%).
VIII. Special Recognition Fund.
The Committee may approve the establishment of a discretionary fund to
be used to reward Employees whose contribution during the Plan Year
merits special recognition.
Such awards shall be recommended by the Chief Executive Officer of the
Company and, in the aggregate, may not exceed two percent (2%) of the
total Incentive Compensation Fund approved by the Committee for the
Plan Year.
IX. Award Recommendations.
5
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A. Recommendations. The Chief Executive Officer shall submit to
the Committee at the end of each Plan Year recommendations
with respect to the Participants who should receive
incentive awards for that Plan Year, together with the
proposed amount of such individual awards.
B. Granting of Awards. The Committee, in its sole discretion,
may approve, revise or disapprove any recommended award to a
Participant as it deems appropriate. Any award to an
Officer-Director shall be subject to approval by the full
Board of Directors of the Company.
C. Death, Disability or Retirement of a Participant. A
Participant whose employment terminates during a Plan Year
because of death, retirement or disability (or who is
granted a leave of absence) may, at the discretion of the
Committee and under such rules as the Committee may from
time to time prescribe, be eligible for consideration for a
pro-rata award based on the period of active employment
during the Plan Year. If a Participant's employment with the
Company is terminated for any reason other than death,
disability, retirement, or the grant of a leave of absence,
prior to actual payment of an award hereunder, such award
shall be canceled and the Participant shall have no right to
receive payment on account of such award.
X Method and Time of Payment of Awards
A. Type of Payment. As soon as practicable after an individual
incentive award under this Plan has been approved by the
Committee (or approved by the Board of Directors with
respect to an award to an Officer-Director), the award shall
be paid to the Participant in cash unless the Participant
has elected to defer payment as described in Article X(C).
B. Payment to Beneficiaries. If a Participant dies prior to
receipt of an approved award under the Plan, the award shall
be paid to such beneficiary or beneficiaries as the
Participant shall designate in writing. The beneficiary
designation shall state whether payment shall be made in a
lump-sum or in quarterly installments over a specified
period of time (not to exceed forty calendar quarters). If a
Participant dies without having filed a beneficiary
designation as set forth above, the award shall be paid in a
lump-sum to the Participant's estate.
C. Deferral of Payment (1998 Award Years and After). Subject to
the approval of the Committee and for any Award Year
beginning in 1998, any Participant may elect to defer
payment of all or any portion of an award under this Plan by
filing a written irrevocable Election to Defer Payment with
the Company by a date determined by the Company. Awards or
portions thereof so elected to be deferred shall be invested
in the Participant's accounts under the Company's Unfunded
Savings Plan as directed by the Participant.
6
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XI. Modification, Suspension or Termination of Plan.
The Board of Directors may at any time suspend, terminate,
modify or amend any or all of the provisions of this Plan.
XII. Governing Law.
The Plan shall be governed by the laws of the State of New
York.
XIII. Tax Withholding.
The Company shall have the right to deduct from any award
made under the Plan, a sufficient amount to cover
withholding of any federal, state, local or foreign
jurisdiction taxes required by law, or to take such other
action as may be necessary to satisfy any such withholding
obligations.
XIV. Non-Transferability of Awards.
No award, under this Plan, and no rights or interests
therein, shall be assignable or transferable by a
Participant (or legal representative).
XV. Effective Date
This Plan shall become effective as of January 1, 1998.
7
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Appendix A
Management Incentive Plan (MIP)
Target Awards
<TABLE>
<CAPTION>
Position MIP
Level Target
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<S> <C> <C>
43 75%
36 55%
35 55%
34 55%
33 50%
32 50%
31 50%
30 45%
29 45%
28 45%
27 40%
26 40%
25 40%
24 36%
23 30%
22 30%
21 25%
20 20%
19 20%
18 15%
</TABLE>
8
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Appendix B
Management Incentive Plan (MIP)
Calculation of Incentive Compensation Fund
Financial and Non-Financial Performance Rating
<TABLE>
<CAPTION>
Goal Achievement Performance Rating
---------------- ------------------
<S> <C> <C>
125% and above 1.75
100% 1.00
70% 0.50
69% and below 0.00
</TABLE>
Financial Performance Factor
<TABLE>
<CAPTION>
Goal Performance Performance
Goals Achievement Rating Weighting Factor
- ----- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
ROI vs. Budget 78.9% .648 .40 .324
ROI vs. Peers 100.0 .700 .35 .175
--- ----
Total .75 .499
</TABLE>
Non-Financial Performance Factor
<TABLE>
<CAPTION>
Goal Performance Performance
Goals Achievement Rating Weighting Factor
- ----- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Quality 115.0% 1.45 .0833 .121
Safety & Environment 113.0 1.39 .0833 .116
People Development 103.0 1.09 .0833 .091
----- ----
Total .2500 .328
</TABLE>
Company Performance Factor
Financial Performance Factor (.499) +
Non-Financial Performance Factor(.328) = .827
Preliminary Management Incentive Plan Fund Projection
Company Performance Factor x Aggregate Target Awards
.827 x $23.312MM = $19.279MM
9
