<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 MARCH 31, 1999 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 April 30, 1999: 307,881,775 shares.
<PAGE>
INTERNATIONAL PAPER COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months Ended March 31, 1999 and 1998 1
Consolidated Balance Sheet -
March 31, 1999 and December 31, 1998 2
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statement of Common Shareholders' Equity -
Three Months Ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Other Financial Information 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 22
* Omitted since no answer is called for, answer is in the negative or inapplicable.
</TABLE>
<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
MARCH 31,
--------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
NET SALES $ 4,962 $ 4,868
------------------- -------------------
COSTS AND EXPENSES
Cost of products sold 3,789 3,655
Selling and administrative expenses 378 374
Depreciation and amortization 307 298
Distribution expenses 221 224
Taxes other than payroll and income taxes 45 50
Equity earnings from investment in Scitex (1) (1)
------------------- -------------------
TOTAL COSTS AND EXPENSES 4,739 4,600
------------------- -------------------
EARNINGS BEFORE INTEREST, INCOME TAXES AND MINORITY INTEREST 223 268
Interest expense, net 114 127
------------------- -------------------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 109 141
Income tax provision 33 46
Minority interest expense, net of taxes 32 20
------------------- -------------------
NET EARNINGS $ 44 $ 75
------------------- -------------------
------------------- -------------------
EARNINGS PER COMMON SHARE $ .14 $ .25
------------------- -------------------
------------------- -------------------
EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ .14 $ .25
------------------- -------------------
------------------- -------------------
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 307.0 302.3
------------------- -------------------
------------------- -------------------
CASH DIVIDENDS PER COMMON SHARE $ .25 $ .25
------------------- -------------------
------------------- -------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
INTERNATIONAL PAPER COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------------- ----------------------
<S>
ASSETS
Current Assets <C> <C>
Cash and temporary investments $ 403 $ 477
Accounts and notes receivable, net 2,562 2,469
Inventories 2,651 2,719
Other current assets 343 345
-------------------- ----------------------
Total Current Assets 5,959 6,010
Plants, Properties and Equipment, Net 11,834 12,079
Forestlands 2,777 2,795
Investments 1,063 1,075
Goodwill 2,593 2,625
Deferred Charges and Other Assets 1,914 1,772
-------------------- ----------------------
TOTAL ASSETS $ 26,140 $ 26,356
-------------------- ----------------------
-------------------- ----------------------
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current maturities of long-term debt $ 1,097 $ 1,074
Accounts payable 1,386 1,525
Accrued payroll and benefits 290 304
Other accrued liabilities 935 733
-------------------- ----------------------
Total Current Liabilities 3,708 3,636
-------------------- ----------------------
Long-Term Debt 6,380 6,407
Deferred Income Taxes 2,849 2,860
Other Liabilities 1,124 1,138
Minority Interest 1,597 1,608
International Paper - Obligated Mandatorily Redeemable Preferred
Securities of Subsidiaries Holding International Paper Debentures 1,805 1,805
Common Shareholders' Equity
Common stock, $1 par value, 1999 - 307.7 shares, 1998 - 307.7 shares 308 308
Paid-in capital 3,874 3,877
Retained earnings 5,083 5,116
Accumulated other comprehensive income (loss) (548) (375)
-------------------- ----------------------
8,717 8,926
Less: Common stock held in treasury, at cost, 1999 - 0.9 shares,
1998 - 0.6 shares 40 24
-------------------- ----------------------
Total Common Shareholders' Equity 8,677 8,902
-------------------- ----------------------
TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $ 26,140 $ 26,356
-------------------- ----------------------
-------------------- ----------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
INTERNATIONAL PAPER COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------------
1999 1998
------------------- -------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net earnings $ 44 $ 75
Depreciation and amortization 307 298
Deferred income tax (benefit) provision (16) 20
Payments related to restructuring and legal reserves (27) (18)
Other, net 16 (7)
Changes in current assets and liabilities
Accounts and notes receivable (145) (51)
Inventories 1 (15)
Accounts payable and accrued liabilities 86 (53)
Other 3 (22)
------------------- -------------------
CASH PROVIDED BY OPERATIONS 269 227
------------------- -------------------
INVESTMENT ACTIVITIES
Invested in capital projects (148) (206)
Mergers and acquisitions, net of cash acquired (23) (156)
Proceeds from divestitures 16 81
Other (22) (31)
------------------- -------------------
CASH USED FOR INVESTMENT ACTIVITIES (177) (312)
------------------- -------------------
FINANCING ACTIVITIES
Issuance of common stock 6 37
Issuance of preferred securities by subsidiary 170
Issuance of debt 390 97
Reduction of debt (399) (101)
Change in bank overdrafts (41) 53
Dividends paid (77) (75)
Other (36) 37
------------------- -------------------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (157) 218
------------------- -------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (9) 3
------------------- -------------------
CHANGE IN CASH AND TEMPORARY INVESTMENTS (74) 136
CASH AND TEMPORARY INVESTMENTS
Beginning of the period 477 398
------------------- -------------------
End of the period $ 403 $ 534
------------------- -------------------
------------------- -------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
INTERNATIONAL PAPER COMPANY
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 307,701 $308 $3,877 $5,116 ($375) 552 $24 $8,902
Issuance of stock for various
plans 4 (3) (245) (11) 8
Repurchase of stock 620 27 (27)
Cash dividends - Common
stock ($0.25 per share) (77) (77)
Comprehensive income (loss)
Net earnings 44 44
Change in cumulative
foreign currency
translation adjustment (173) (173)
------
Total comprehensive
income (loss) (129)
------- ---- ------ ------ -------- ---- --- ------
BALANCE, MARCH 31, 1999 307,705 $308 $3,874 $5,083 ($548) 927 $40 $8,677
------- ---- ------ ------ -------- ---- --- ------
------- ---- ------ ------ -------- ---- --- ------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 302,910 $303 $3,654 $5,186 ($396) 726 $37 $8,710
Issuance of stock for various
plans 34 (7) (957) (46) 39
Repurchase of stock 610 28 (28)
Cash dividends - Common
stock ($0.25 per share) (75) (75)
Comprehensive income (loss)
Net earnings 75 75
Realized foreign currency
translation adjustment
related to divestitures 11 11
Change in cumulative
foreign currency
translation adjustment (90) (90)
---------
Total comprehensive
income (loss) (4)
--------- -------- -------- --------- ------ ------- ------- --------
BALANCE, MARCH 31, 1998 302,944 $303 $3,647 $5,186 ($475) 379 $19 $8,642
--------- -------- -------- --------- ------ -------- ------- ---------
--------- -------- -------- --------- ------ -------- ------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<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, 1998, 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
MARCH 31,
-----------------------------------
IN MILLIONS 1999 1998
- ----------- --------------- ---------------
<S> <C> <C>
NET EARNINGS $ 44 $ 75
Effect of dilutive securities
Preferred securities of subsidiary trust
--------------- ---------------
NET EARNINGS - ASSUMING DILUTION $ 44 $ 75
--------------- ---------------
--------------- ---------------
AVERAGE COMMON SHARES OUTSTANDING 307.0 302.3
Effect of dilutive securities
Long-term incentive plan deferred compensation (1.2) (0.9)
Stock options 0.5 1.8
Preferred securities of subsidiary trust
--------------- ---------------
AVERAGE COMMON SHARES OUTSTANDING - ASSUMING DILUTION 306.3 303.2
--------------- ---------------
--------------- ---------------
EARNINGS PER COMMON SHARE $ 0.14 $ 0.25
--------------- ---------------
--------------- ---------------
EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ 0.14 $ 0.25
--------------- ---------------
--------------- ---------------
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
3. In December 1998, the Company completed the previously announced
acquisition of OAO Svetogorsk, a Russia-based pulp and paper business,
which should enhance the Company's ability to serve growing market demand
in Eastern Europe. Also in December 1998, Carter Holt Harvey and
International Paper jointly acquired Marinetti S.A.'s paper cup division
based in Chile. This acquisition will enable the foodservice business to
serve markets in South America.
In July 1998, International Paper acquired the Zellerbach distribution
business from the Mead Corporation for approximately $261 million in cash.
Zellerbach has been integrated into XPEDX, the Company's distribution
business.
5
<PAGE>
In April 1998, Weston Paper and Manufacturing Company (Weston) was acquired
by exchanging about 4.7 million International Paper common shares valued at
approximately $232 million for all of the outstanding Weston shares in a
noncash transaction.
Carter Holt Harvey, a subsidiary of the Company, acquired Riverwood
International, an Australia-based folding carton business for approximately
$46 million in cash. The results of this acquisition are included in the
consolidated financial statements beginning in April 1998.
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 surrounding countries. Also in February 1998, Carter
Holt Harvey and International Paper jointly acquired Australia-based
Continental Cup. This acquisition has allowed Carter Holt Harvey and
International Paper's Foodservice Division to offer a full line of
foodservice products in the Australian and New Zealand markets.
All of the acquisitions completed in 1998 were accounted for using the
purchase method. The operating results of these mergers and acquisitions
have been included in the consolidated statement of earnings from the dates
of acquisition.
4. 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.
5. In September 1998, the Company completed the last in a series of five
transactions relating to the sale of a subsidiary partnership interest in
approximately 175,000 acres of forestlands in Pennsylvania and New York.
The third quarter 1998 transaction resulted in a gain of approximately $37
million before taxes. A similar transaction was completed in each of the
previous four quarters.
6. In September 1998, International Paper Capital Trust III issued $805
million of International Paper-obligated mandatorily redeemable preferred
securities. International Paper Capital Trust III is a wholly-owned
consolidated subsidiary of International Paper and its sole assets are
International Paper 7 7/8% debentures. The obligations of International
Paper Capital Trust III related to its preferred securities are fully and
unconditionally guaranteed by International Paper. These preferred
securities are mandatorily redeemable on December 1, 2038.
In June 1998, IP Finance (Barbados) Limited, a non-U.S. wholly-owned
consolidated subsidiary of International Paper, issued $550 million of
preferred securities with a dividend payment based on LIBOR. These
preferred securities are mandatorily redeemable on June 30, 2008.
In March 1998, Timberlands Capital Corp. II, Inc., a wholly-owned
consolidated subsidiary of International Paper, issued $170 million of
7.005% preferred securities as part of the financing to repurchase the
outstanding units of IP Timberlands, Ltd. These securities are not
mandatorily redeemable and are classified in the consolidated balance sheet
as a minority interest liability.
In the third quarter of 1995, International Paper Capital Trust (the Trust)
issued $450 million of International Paper-obligated mandatorily redeemable
preferred securities. The Trust is a wholly-owned consolidated subsidiary
of International Paper, and its sole assets are International Paper 5 1/4%
convertible subordinated debentures. The obligations of the Trust related
to its preferred securities are fully and unconditionally guaranteed by
International Paper. These preferred securities are convertible into
International Paper common stock.
6
<PAGE>
Distributions paid under all of the Company's subsidiary preferred
securities were $42 million and $6 million for the 1999 and 1998 first
quarters, respectively.
7. The following table shows the impact of special items on 1998 pre-tax
earnings by quarter:
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------------------
IN MILLIONS FIRST SECOND THIRD FOURTH YEAR
- ----------- ---------- --------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
PRE-TAX EARNINGS BEFORE SPECIAL CHARGES $ 141 $ 146 $ 116 $ 118 $ 521
Reversals of reserves no longer required 45 38 83
Gain on sale of Veratec business 20 20
Oil and gas impairment charges (55) (56) (111)
Restructuring charges and write-off of
acquired in-process research and
development costs by Scitex (6) (10) (16)
Restructuring and other charges (105) (105)
---------- ----------- ---------- ----------- ------------
PRE-TAX EARNINGS AFTER SPECIAL CHARGES $ 141 $ 140 $ 11 $ 100 $ 392
---------- ----------- ---------- ----------- ------------
---------- ----------- ---------- ----------- ------------
</TABLE>
In June 1998, a $6 million pre-tax charge ($4 million after taxes) 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.
During the 1998 third quarter the Company recorded special items resulting
in a pre-tax charge of $105 million ($56 million after taxes and minority
interest). These items included a $45 million pre-tax gain ($27 million
after taxes) for the reversal of previously established reserves that were
no longer required and a $20 million pre-tax gain ($12 million after taxes)
from the sale of the Veratec nonwovens business. The Company also recorded
a $55 million pre-tax charge ($33 million after taxes) to write down the
value of its oil and gas assets. This write-down was made in accordance
with the Securities and Exchange Commission's regulation that companies
that use the full-cost method of accounting for oil and gas activities
perform a ceiling test on a quarterly basis. Also during the third quarter,
the Company recorded restructuring and other charges of $105 million ($56
million after taxes and minority interest) consisting of $56 million of
asset write-downs and $49 million of severance costs and $10 million ($6
million after taxes) which represents International Paper's share of a
restructuring reserve taken by Scitex to exit its digital video business.
In December, the Company recorded a pre-tax charge of $56 million
($35 million after taxes) for the further impairment of its oil and gas
assets due to declining prices. After further analysis of previously
established reserves, an additional $38 million ($23 million after taxes)
was returned to earnings in the fourth quarter of 1998.
A full discussion of these charges is included in the Company's 1998 Annual
Report filed on Form 10-K.
7
<PAGE>
The following table is a roll forward of the severance costs included in
the 1998 restructuring plan:
<TABLE>
<CAPTION>
IN MILLIONS SEVERANCE
----------- -------------------
<S> <C>
Opening balance - third quarter 1998 $ 49
Cash charges - fourth quarter 1998 (11)
-------------------
Balance, December 31, 1998 38
Cash charges - first quarter 1999 (18)
-------------------
Balance, March 31, 1999 $ 20
-------------------
-------------------
</TABLE>
The severance reserve recorded in the 1998 third quarter is related to
1,968 employees. At December 31, 1998, 945 employees had been terminated.
At March 31, 1999, 1,765 employees had been terminated. We anticipate that
substantially all of the remaining reserve will be utilized by December 31,
1999.
In June 1997, a $535 million pre-tax business improvement charge ($385
million after taxes) was established under a plan to improve the Company's
financial performance through closing or divesting of operations that no
longer met financial or strategic objectives. The charge included
approximately $230 million for asset write-downs, $210 million for the
estimated losses on sales of businesses and $95 million for severance and
other expenses. The severance charge was based on a head count reduction of
3,015 employees. At December 31, 1998, 2,446 employees had been terminated.
At March 31, 1999, 2,549 employees had been terminated. A full discussion
of this reserve is included in the Company's 1998 Annual Report filed on
Form 10-K.
The following table is a roll forward of the severance and other costs
included in the 1997 restructuring plan:
<TABLE>
<CAPTION>
SEVERANCE
IN MILLIONS AND OTHER
- ----------- -------------------
<S> <C>
Opening balance - second quarter 1997 $ 95
1997 Activity
Asset write-downs (18)
Cash charges (15)
-------------------
Balance, December 31, 1997 62
1998 Activity
Asset write-downs (4)
Reserve reversals (9)
Cash charges (40)
-------------------
Balance, December 31, 1998 9
1999 Activity
Cash charges (2)
-------------------
Balance, March 31, 1999 $ 7
-------------------
-------------------
</TABLE>
8
<PAGE>
8. Inventories by major category include:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
IN MILLIONS 1999 1998
- ----------- ------------- ---------------
<S> <C> <C>
Raw materials $ 430 $ 466
Finished pulp, paper and packaging products 1,487 1,536
Finished lumber and panel products 174 169
Operating supplies 394 402
Other 166 146
------------- -----------
TOTAL $ 2,651 $ 2,719
------------- -----------
------------- -----------
</TABLE>
9. Interest payments made during the three month periods ended March 31, 1999
and 1998 were $97 million and $149 million, respectively. Capitalized net
interest costs were less than $1 million for the quarter ended March 31,
1999. The Company capitalized net interest costs of $12 million for the
1998 first quarter. Total interest expense was $133 million for the 1999
first quarter and $150 million for the 1998 first quarter. The Company
received a net income tax refund of $11 million during the 1999 first
quarter and made a net payment of $38 million during the first quarter of
1998.
10. Temporary investments with a maturity of three months or less are treated
as cash equivalents and are stated at cost. Temporary investments totaled
$194 million and $280 million at March 31, 1999 and December 31, 1998,
respectively.
11. Accumulated depreciation was $10.7 billion at March 31, 1999 and $10.6
billion at December 31, 1998. The allowance for doubtful accounts was $99
million at March 31, 1999 and $97 million at December 31, 1998.
12. The Company's equity investments consist primarily of Scitex and Carter
Holt Harvey's 30% ownership in COPEC, which it holds through a joint
venture. Both Scitex and COPEC are publicly traded companies. At March 31,
1999, the carrying amounts of these investments and their market values
based on the closing per share amounts were as follows:
<TABLE>
<CAPTION>
IN MILLIONS SCITEX COPEC
- ----------- ----------------- -----------------
<S> <C> <C>
Carrying amount $ 31 $ 865
Market value $ 55 $ 1,165
</TABLE>
For various reasons, the market values on the closing per share amount may
be higher or lower than the amount that could be realized if these
investments were sold.
13. 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 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'
9
<PAGE>
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. The counterparties to the Company's interest rate swap agreements
and foreign exchange contracts consist of a number of major international
financial institutions. The Company continually monitors its positions with
and the credit quality of these financial institutions and does not expect
nonperformance by the counterparties.
14. 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).
The Company has not yet quantified the impact of adopting the Statement on
its consolidated financial statements and has not determined the timing of
or method of the adoption. However, adoption of the provisions of the
Statement could increase volatility in earnings and other comprehensive
income.
15. Certain reclassifications have been made to prior-year amounts to conform
with the current-year presentation.
10
<PAGE>
16. On November 24, 1998, the Company announced that it had reached an
agreement to merge with Union Camp Corporation (Union Camp), a diversified
paper and forest products company. The transaction was approved by Union
Camp and International Paper shareholders on April 30, 1999. Union Camp
shareholders have received 1.4852 International Paper common shares for
each Union Camp share held. The exchange ratio was calculated based on an
average closing price of International Paper of $47.80625 per share. The
average closing price of International Paper common shares was determined
from ten randomly selected days during the 20 trading day period from March
26 through April 23. Based on this exchange ratio and International Paper's
closing price on April 28 of $57.375 per share, the equity value of the
transaction is approximately $6.3 billion, or $85.21 per Union Camp share.
The total value of the transaction, including the assumption of debt, is
approximately $7.9 billion.
International Paper will issue approximately 110 million shares for
approximately 74 million Union Camp shares, including options. On a
proforma basis, assuming dilution, approximately 417 million shares of
International Paper will be outstanding after the merger is completed.
Union Camp shareowners will own 26.3 percent of International Paper after
the merger. The merger will be accounted for as a pooling of interests.
On April 30, 1999, International Paper shareholders approved an amendment
to the Company's certificate of incorporation increasing the number of
authorized common shares from 400,000,000 to 1,000,000,000. The authorized
shares were increased to fulfill the requirements of the merger and for
general corporate purposes.
On April 30, 1999, Carter Holt Harvey, a subsidiary of International Paper,
announced the acquisition of the corrugated packaging business of Stone
Australia, a subsidiary of Smurfit-Stone Container Corporation. The
business consists of two sites in Melbourne and Sydney which serve
industrial and primary produce customers.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
International Paper's first quarter 1999 net sales were $5.0 billion, even with
1998 fourth quarter and slightly ahead of 1998 first quarter net sales of $4.9
billion.
First quarter 1999 earnings were $44 million or $.14 per share compared with net
earnings of $66 million or $.21 per share before special items in the 1998
fourth quarter and $75 million or $.25 per share in the 1998 first quarter.
Fourth quarter 1998 net earnings were $54 million or $.17 per share after a
non-cash charge for impairment of oil and gas properties of $35 million after
taxes, or $.11 per share, and a non-cash credit of $23 million, or $.07 per
share, from the reversal of previously established restructuring reserves that
were no longer needed.
First quarter 1999 operating profit declined by $35 million to $245 million from
the 1998 first quarter's $280 million. Lower prices for most of our paper and
board products reduced operating profit by about $190 million. This was largely
offset by lower manufacturing and raw material costs amounting to $120 million
and better results in the Forest Products segment.
After a slow start, market conditions improved and each of the business segments
performed considerably better in the latter part of the quarter. Price increases
in U.S. Printing Papers, containerboard, and wood products were in place by the
end of the first quarter and these favorable conditions are continuing into the
second quarter.
U.S. and European Papers 1999 first quarter net sales of $1.2 billion were down
from $1.3 billion in the 1998 first quarter and even with the 1998 fourth
quarter. Operating profit for the 1999 first quarter was $10 million, up from
break even in the 1998 fourth quarter and down from $70 million in the 1998
first quarter. The increase in earnings from the previous quarter is due to high
sales volumes and lower costs at our U.S. mills. U.S. Papers earnings increased
about 65 percent over the previous quarter. Although U.S. Pulp posted a loss in
the 1999 first quarter, there was an improvement of about 25 percent from the
1998 fourth quarter. The decrease in earnings from the 1998 first quarter is
primarily due to sharply lower prices. Compared to the 1998 first quarter, U.S.
Papers earnings were down about 60 percent while U.S. Pulp earnings were down
approximately 50 percent and European Papers results declined 83 percent.
Industrial and Consumer Packaging 1999 first quarter net sales were $1.1
billion, about even with the 1998 fourth and first quarters. First quarter 1999
operating profit of $45 million was even with the previous quarter and down from
the first quarter 1998 operating profit of $55 million. Consumer Packaging
earnings were about 18 percent lower than the previous quarter due to a weaker
mix while Industrial Packaging results were about twice as much as the previous
quarter due to increased volumes and lower prices. As compared to the 1998 first
quarter, a 12 percent increase in earnings in Consumer Packaging was more than
offset by a 67 percent decline in Industrial Packaging earnings due to a
decrease in prices.
Distribution 1999 first quarter net sales of $1.5 billion were below 1998 fourth
quarter of $1.6 billion but ahead of the 1998 first quarter of $1.2 billion. The
increase in sales over the 1998 first quarter is mainly due to the acquisition
of Zellerbach. Operating profit was $20 million for the 1999 first quarter
compared to $25 million in the 1998 fourth quarter and $15 million in the 1998
first quarter. Compared to the 1998 fourth quarter, current quarter results
reflect seasonal reductions in sales volume levels. The increase from the 1998
first quarter is primarily attributable to the Zellerbach acquisition as well as
to programs to improve margins.
12
<PAGE>
Specialty Products 1999 first quarter net sales of $310 million were even with
the 1998 fourth quarter and down 10 percent from the 1998 first quarter. In
general, market conditions were slow as we entered the year and gained momentum
as the quarter progressed. First quarter operating profit was $20 million, a
reduction of about 30 percent from the 1998 fourth quarter, and 45 percent lower
than the 1998 first quarter. Industrial Papers showed a five-fold earnings
improvement from the 1998 fourth quarter as a result of downtime taken in the
fourth quarter to balance inventories with demand. This improvement was not
enough to offset lower oil and gas prices and lower sales in our Chemical
business. Our cost reduction efforts across these businesses are showing results
particularly in our Fine Papers business, which had a 60 percent earnings
improvement compared to the 1998 first quarter. Lower prices across the
remaining businesses have more than offset our realized cost reductions and are
the principal cause for the lower earnings performance versus the 1998 first
quarter.
Forest Products 1999 first quarter net sales were $685 million compared with
$670 million in the 1998 fourth quarter and $615 million in the 1998 first
quarter. Operating profit of $150 million for the 1999 first quarter was down
from $160 million in the 1998 fourth quarter but ahead of the $100 million in
the 1998 first quarter. Building Materials' earnings more than doubled over the
previous quarter. However, this improvement was offset by lower earnings in
Forest Resources, which had near record earnings in the fourth quarter. Strong
sales prices in Wood Products combined with favorable wood costs were the
drivers behind the increased earnings from 1998 fourth quarter. From the 1998
first quarter, Wood Products results improved sharply and contributed about one
half of the segments increase. Masonite and Decorative Products earnings
improved about 20 percent in the current quarter compared to the 1998 first
quarter. Forest Resources results in the current quarter were about equal to
the 1998 first quarter, before a large timber sale in the 1999 first quarter
and a gain from the sale of a partnership interest in the 1998 first quarter,
as higher harvest volumes offset the effect of lower stumpage prices for both
sawtimber and pulpwood.
Carter Holt Harvey reported net sales of $365 million in the 1999 first quarter
compared with $380 million in the 1998 fourth quarter and $415 million in the
1998 first quarter. First quarter 1999 operating profit for Carter Holt Harvey
was breakeven, down from $5 million in the 1998 fourth and first quarters.
Compared to the 1998 first quarter, the current quarter results reflect
improvements in Packaging due mainly to acquisitions. This improvement was
offset by price declines in the Wood Products, Pulp, Paper and Tissue and
Packaging businesses. Pulp, Paper and Tissue also experienced a decrease in
volumes from the 1998 first quarter. Pulp, Paper and Tissue was the main driver
of the decrease in earnings from the 1998 fourth quarter. A price improvement
for pulp and linerboard was more than offset by a decline in volumes.
International Paper's results for this segment differ from those reported by
Carter Holt Harvey in New Zealand due to (1) Carter Holt Harvey's fiscal year
ends March 31 versus our calendar year, (2) our segment earnings include only
our share of Carter Holt Harvey's operating earnings while 100% of sales are
included, (3) our results are in U.S. dollars while Carter Holt Harvey reports
in New Zealand dollars, and (4) Carter Holt Harvey reports under New Zealand
accounting standards while our segment results comply with U.S. generally
accepted accounting principles. The major accounting differences relate to cost
of timber harvested, COPEC and start-up costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $269 million for the 1999 first quarter
compared with $227 million in the 1998 first quarter. Lower earnings for the
1999 first quarter were offset by decreased working capital requirements.
Working capital on a cash flow basis increased $55 million during the first
quarter of 1999 compared with an increase of $141 million for the first quarter
of 1998.
Investments in capital projects totaled $148 million for the 1999 first quarter
compared to the $206 million spent in the 1998 first quarter. The decrease is
consistent with the Company's plan to decrease capital spending in 1999.
13
<PAGE>
Cash flow generated by operations, supplemented as necessary by short- or
long-term borrowings, is anticipated to be adequate to fund expected capital
expenditures. Capital expenditures for 1999 are anticipated to be below expected
1999 depreciation expense. Discretionary capital spending will be primarily for
reducing costs, stabilizing processes and improving services.
Financing activities for the 1999 and 1998 first quarters include a $9 million
and $4 million net reduction in primarily short-term debt, respectively. 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 securities are classified in the
consolidated balance sheet as a minority interest liability and the dividend
payments are included in minority interest expense.
Common stock dividend payments were $77 million or $.25 per common share for the
1999 first quarter, even with the prior-year period on a per share basis.
MERGERS AND ACQUISITIONS
On November 24, 1998, the Company announced that it had reached an agreement to
merge with Union Camp Corporation (Union Camp), a diversified paper and forest
products company. The transaction was approved by Union Camp and International
Paper shareholders on April 30, 1999. Union Camp shareholders have received
1.4852 International Paper common shares for each Union Camp share held. The
exchange ratio was calculated based on an average closing price of International
Paper of $47.80625 per share. The average closing price of International Paper
common shares was determined from ten randomly selected days during the 20
trading day period from March 26 through April 23. Based on this exchange ratio
and International Paper's closing price on April 28 of $57.375 per share, the
equity value of the transaction is approximately $6.3 billion, or $85.21 per
Union Camp share. The total value of the transaction, including the assumption
of debt, is approximately $7.9 billion.
International Paper will issue approximately 110 million shares for
approximately 74 million Union Camp shares, including options. On a proforma
basis, assuming dilution, approximately 417 million shares of International
Paper will be outstanding after the merger is completed. Union Camp shareowners
will own 26.3 percent of International Paper after the merger.
The merger will be accounted for as a pooling of interests. The merger is
expected to result in at least $300 million in annual cost savings by the end of
the year 2000 through a combination of reductions in overhead, process
improvements, facility rationalization, purchasing and logistics savings. We
expect that there will be significant one-time costs in 1999 associated with the
merger. These include the direct expenses to effect the merger, which are
estimated to be just under $50 million, and those charges, primarily
severance, associated with actions to be taken to achieve the cost savings.
RESTRUCTURING AND SPECIAL ITEMS
There were no restructuring charges or special items recorded during the 1999
first quarter. However, we continually evaluate our operations for
improvement. When any such plans are finalized we may incur costs or charges
in future periods related to the implementation of any such plans. During
1999, up to $20 million in severance costs may be required to implement the
next phase of the U.S. Papers program to improve the cost position of its
mills. Additional operations are under active review.
14
<PAGE>
OTHER
Interest expense decreased from $150 million for the first quarter of 1998 to
$133 million in the 1999 first quarter. During 1998 about $1.5 billion of
preferred securities of subsidiaries were issued and debt was reduced by
approximately $1.8 billion. The distributions of the preferred securities are
included in minority interest expense. This decrease in debt was the primary
reason for the decline in interest expense from the 1998 first quarter. Lower
capitalized interest partially offset the decline.
Minority interest expense for the 1999 first quarter increased due to increased
expense related to preferred securities partially offset by lower earnings at
Carter Holt Harvey, which is owned approximately 50.1% by International Paper.
The effective income tax rate for the 1999 first quarter declined to 30% from
33% in the 1998 first quarter primarily due to changes in the mix of estimated
annual earnings. The fourth quarter 1998 rate of 16%, included adjustments to
lower the full year 1998 rate to 25%. The adjustments were a result of the
impact of state tax credits, changes in the geographic mix of overall taxable
earnings, and permanent tax benefits on sales of non-U.S. businesses and
non-strategic timberland assets.
YEAR 2000 READINESS
The Year 2000 problem concerns the inability of systems to properly recognize
and process date-sensitive information beyond January 1, 2000.
We have a program in place to ensure that we can operate without a material
disruption to our business up to and through the year 2000 with a targeted
completion date of June 30, 1999. The program covers information systems
infrastructure, financial and administrative systems, process control and
manufacturing operating systems. It also includes readiness assessment of
significant vendors and customers, and contingency planning.
Some systems will be addressed after June 1999 for practical business reasons.
These exceptions are few in number and do not present major risks to the
continued operation of the Company. Examples include:
- There were replacement projects initiated before the Year 2000 plan was
developed which will be kept on schedule to avoid disruption and
additional cost. While these projects solve some of our Year 2000
problems, their implementation was driven by efficiency considerations
and would have been conducted irrespective of the Year 2000 plan.
- Some systems will be remediated during normal facility maintenance
shut-downs scheduled after June 30, 1999, because this is the most
feasible time to complete the work.
- There are cases where system remediation is resolved through workarounds
that cannot be scheduled before late 1999. An example would be shutting a
system down on December 31, 1999, and restarting it on January 1, 2000.
The Company has adopted a 9-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 4 steps, planning and awareness, inventory,
triage and detailed assessment, are largely complete. Steps 5 through 9 were
approximately 25% complete at the end of 1998. We reached 75% at the end of
March 1999 and expect to complete these efforts by the end of June 1999.
15
<PAGE>
Our estimate of the incremental Year 2000-related costs remains at $100
million exclusive of software and systems that are being replaced or upgraded
in the normal course of business. The majority of these costs relate to
production facility systems. Spending through March 1999 was $39 million.
Work efforts and costs associated with addressing these issues are becoming
more efficient as we near completion. While it is possible that our spending
will be less than the $100 million reflected earlier; sufficient information
is not available to revise our estimate at this time. 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.
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. An ongoing program is in
place to evaluate the status of suppliers' efforts and to determine alternatives
and contingency plan requirements. This program includes both written
correspondence with suppliers and visits to supplier facilities to assess their
readiness. We are receiving assurances from our supplier base that they will be
able to handle the transition to the Year 2000. These activities are intended to
provide a means of managing risk, but cannot entirely eliminate the potential
for disruption due to third-party failure. Approaches to reduce the risks of
interruption due to supplier failures vary by business and facility. Contingency
options include identification of alternate suppliers and accumulation of
inventory to assure production capability where feasible or warranted. We
believe that no individual vendor is material to our total business.
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 effects
of a single occurrence. We are, however, monitoring the status of our customers
through discussions and correspondence as a means of determining risks and
alternatives. We believe that no individual customer is material to our total
business. None of our larger customers are significant as defined by the
provisions of Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
Our manufacturing facilities (mills and converting plants) rely on control
systems that include production monitoring, power, emissions and safety. The
pulp and paper mills operated by the Company utilize various complex control
systems 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 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. 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. Our contingency planning
16
<PAGE>
efforts include consideration of reduced operations or shutdowns over the new
year. Decisions regarding the need or feasibility of such actions are not
expected to be made until later in 1999.
Production facility systems represent our greatest area of risk, and plans are
in place to reduce the risk of noncompliance of these systems, including
contingency planning. 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. Production facility shutdowns could
have a material adverse effect on the Company's results of operations, financial
condition and cash flows. 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 that does not result in damage to a facility.
Potential recoveries in the event of facility damage, including business
interruption, would be subject to deductibles that range from $100,000 to $10
million.
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 that 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 81%
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.
As mentioned previously, the merger between International Paper and Union Camp
Corporation was approved on April 30, 1999. Like International Paper, Union Camp
is well underway in their Year 2000 project plan. Their targeted date for
completion is September 30, 1999. The following is an update to Union Camp's
Year 2000 readiness program provided at year end 1998. As of March 31, 1999, 50%
of their business systems and 78% of process control systems are in compliance.
To date, Union Camp has spent $5 million on the Year 2000 project. The project
budget is $15 million. Union Camp expects to have contingency plans completed by
September 30, 1999, to mitigate the effects of the company's or significant
supplier's failure to remediate the Year 2000 problem in a timely manner.
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 PROBLEMS THAT COULD HAVE A SERIOUS IMPACT ON SPECIFIC
FACILITIES, 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
MARCH 31,
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
U.S. and European Papers $ 1,235 $ 1,325
Industrial and Consumer Packaging 1,100 1,100
Distribution 1,530 1,225
Specialty Products 310 345
Forest Products 685 615
Carter Holt Harvey 365 415
Corporate and Intersegment Sales (1) (263) (157)
------------------ ------------------
NET SALES $ 4,962 $ 4,868
------------------ ------------------
------------------ ------------------
</TABLE>
OPERATING PROFIT BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
U.S. and European Papers $ 10 $ 70
Industrial and Consumer Packaging 45 55
Distribution 20 15
Specialty Products 20 35
Forest Products 150 100
Carter Holt Harvey (2) 5
------------------ ------------------
OPERATING PROFIT 245 280
Interest Expense, Net (114) (127)
Minority Interest Adjustment 4 16
Corporate Items, Net (1) (3) (26) (28)
------------------ ------------------
EARNINGS BEFORE INCOME TAXES
AND MINORITY INTEREST $ 109 $ 141
------------------ ------------------
------------------ ------------------
</TABLE>
(1) Includes results from operations that were disposed of in 1998 and 1997.
(2) Includes equity earnings (in millions) of $1 in 1999 and $5 in 1998. Half
of these equity earnings amounts are in the Carter Holt Harvey segment and
half are in the minority interest adjustment.
(3) Includes goodwill amortization related to Federal Paper Board of $10
million in 1999 and 1998.
18
<PAGE>
<TABLE>
<CAPTION>
PRODUCTION BY PRODUCT
THREE MONTHS ENDED
MARCH 31,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Printing Papers (In thousands of tons)
White Papers and Bristols 938 990
Coated Papers 316 332
Market Pulp (a) 486 512
Newsprint 23 24
Packaging (In thousands of tons)
Containerboard 691 709
Bleached Packaging Board 550 521
Industrial Papers 160 161
Industrial and Consumer Packaging (b) 950 782
Specialty Products (In thousands of tons)
Tissue 42 35
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) (c) 419 360
Lumber (board feet) 642 529
MDF (sq. ft. 3/4" - basis) 23 48
Particleboard (sq. ft. 3/4" - basis) 46 47
</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.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MASONITE LITIGATION
Three nationwide class action lawsuits filed against the Company have been
settled.
The first suit alleged that hardboard siding manufactured by Masonite fails
prematurely, allowing moisture intrusion that in turn causes damage to the
structure underneath the siding. The class consisted of all U.S. property owners
having Masonite hardboard siding installed on and incorporated into buildings
between 1980 and January 15, 1998. Final approval of the settlement was granted
by the court on January 15, 1998. The settlement provides for monetary
compensation to class members meeting the settlement requirements on a
claims-made basis. It also provides for the payment of attorneys' fees equaling
fifteen percent of the settlement amounts paid to class members, with a
nonrefundable advance of $47.5 million plus $2.5 million in costs.
The second suit made similar allegations with regard to Omniwood siding
manufactured by Masonite ( the "Omniwood Lawsuit"). The class consists of all
U.S. property owners having Omniwood siding installed on and incorporated into
buildings from January 1, 1992 to January 6, 1999. The third suit alleged that
Woodruf roofing manufactured by Masonite is defective and causes damage to the
structure underneath the roofing (the "Woodruf lawsuit"). The class consists of
all U.S. property owners on which Masonite Woodruf roofing has been incorporated
and installed from January 1, 1980 to January 6, 1999.
Final approval of the settlements of the Omniwood and Woodruf lawsuits was
granted by the Court on January 6, 1999. The settlements provide for monetary
compensation to class members meeting the settlement requirements on a
claims-made basis, and provides for payment of attorneys' fees equaling thirteen
percent of the settlement amounts paid to class members with a nonrefundable
advance of $1.7 million plus $75,000 in costs for each of the two cases.
While the total cost of these three settlements is not presently known with
certainty, the Company believes its reserves, totaling $122 million at March
31, 1999, are adequate to cover any amounts to be paid and that these
settlements will not have a material adverse effect on its consolidated
financial position or results of operations. The reserve balance is net of
$58 million of expected insurance recoveries (apart from the insurance
recoveries to date). Through March 31, 1999, settlement payments of $98
million, including the $49 million of nonrefundable advances of attorneys'
fees discussed above, have been made. Also, we have received $19 million from
our insurance carriers through March 31, 1999. The Company and Masonite have
the right to terminate each of the settlements after seven years from the
dates of final approval.
OTHER LITIGATION
On April 19, 1999, the Franklin, Virginia mill received a Notice of Violation
("NOV") from the U.S. Environmental Protection Agency ("EPA"), Region 3 in
Philadelphia, and subsequently an NOV from the Commonwealth of Virginia alleging
that the mill violated the Prevention of Significant Deterioration ("PSD")
regulations. The Franklin mill was owned by Union Camp Corporation at that time
and was one of seven paper mills in Region 3 from different companies which
received similar notices of violation. Union Camp merged with the Company on
April 30, 1999 and the Company has entered into negotiations with the EPA and
the Commonwealth of Virginia.
The Company is also involved in other contractual disputes, administrative
and legal proceedings and investigations of various types. While any
litigation, proceeding or investigation has an element of uncertainty,
20
<PAGE>
the Company believes that the outcome of any proceeding, lawsuit or claim
that is pending or threatened, or all of them combined, will not have a
material adverse effect on its consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders of the common stock of the Company was held on
April 30, 1999. The shareholders voted on, and the results of that vote are as
follows:
a) Approval of the issuance of shares of common stock, par value $1.00 per
share, of International Paper to stockholders of Union Camp Corporation pursuant
to the Agreement and Plan of Merger dated as of November 24, 1998, among Union
Camp, a Virginia corporation, International Paper and Maple Acquisition, Inc., a
Delaware corporation and wholly-owned subsidiary of International Paper.
For: Against: Abstentions:
223,356,454 2,310,804 1,590,156
b) Approval of an amendment to International Paper's restated certificate of
incorporation increasing the number of authorized International Paper common
stock, par value $1.00 per share, from 400,000,000 to 1,000,000,000 shares as
contemplated by the merger agreement.
For: Against: Abstentions:
219,139,555 5,402,991 2,714,867
ITEM 5. OTHER INFORMATION
The Company announced the following changes in senior management:
Charles Greiner, formerly of Union Camp Corporation, became Senior Vice
President-U.S. Papers as of May 4, 1999.
Jerry N. Carter, formerly of Union Camp Corporation, became Senior Vice
President-Human Resources as of May 4, 1999.
John V. Faraci, formerly Chief Executive Officer and Managing Director of
Carter Holt Harvey, will become Senior Vice President and Chief Financial
Officer as of June 1, 1999; he will have corporate-level responsibility
for Carter Holt Harvey.
Marianne M. Parrs, current Executive Vice President-Administration and Chief
Financial Officer, will continue, effective June 1, 1999, as Executive Vice
President with responsibility for the Information Technology and Human
Resources functions and will assume additional responsibilities in
accelerating performance improvement in the Company's business and service
groups and in the completion of the integration with Union Camp.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(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 January 5, March 11, April 16,
and May 14, 1999
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: May 17, 1999 By /S/ MARIANNE M. PARRS
---------------------
Marianne M. Parrs
Executive Vice President -
Administration and Chief Financial
Officer
Date: May 17, 1999 By /S/ ANDREW R. LESSIN
--------------------
Andrew R. Lessin
Vice President and Controller and
Chief Accounting Officer
22
<PAGE>
<TABLE>
<CAPTION>
(EXHIBIT 11)
INTERNATIONAL PAPER COMPANY
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
NET EARNINGS $ 44 $ 75
Effect of dilutive securities
Preferred securities of subsidiary trust
------------------- ------------------
NET EARNINGS - ASSUMING DILUTION $ 44 $ 75
------------------- ------------------
------------------- ------------------
AVERAGE COMMON SHARES OUTSTANDING 307.0 302.3
Effect of dilutive securities
Long-term incentive plan deferred compensation (1.2) (0.9)
Stock options 0.5 1.8
Preferred securities of subsidiary trust
------------------- ------------------
AVERAGE COMMON SHARES OUTSTANDING - ASSUMING DILUTION 306.3 303.2
------------------- ------------------
------------------- ------------------
EARNINGS PER COMMON SHARE $ .14 $ .25
------------------- ------------------
------------------- ------------------
EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ .14 $ .25
------------------- ------------------
------------------- ------------------
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
<PAGE>
<TABLE>
<CAPTION>
(EXHIBIT 12)
INTERNATIONAL PAPER COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------------
TITLE 1994 1995 1996 1997 1998 1998 1999
- ------------------------------------------ --------- --------- -------- --------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
A) Earnings before income taxes,
minority interest, extraordinary item
and accounting changes $ 715.0 $2,028.0 $802.0 $16.0 $392.0 $141.0 $109.0
B) Less: Minority interest expense, net
of taxes (47.0) (156.0) (169.0) (129.0) (76.0) (20.0) (32.0)
C) Add: Fixed charges excluding
capitalized interest 412.3 605.9 672.4 686.6 724.8 171.3 179.7
D) Add: Amortization of previously
capitalized interest 12.8 13.0 17.8 20.0 20.8 5.4 5.4
E) Less: Equity in undistributed
earnings of affiliates (49.1) (94.5) 6.2 (40.4) 23.7 2.7 10.1
------ --------- --------- -------- --------- -------- -------
F) EARNINGS BEFORE INCOME TAXES,
MINORITY INTEREST, EXTRAORDINARY
ITEM, ACCOUNTING CHANGES AND FIXED
CHARGES $1,044.0 $2,396.4 $1,329.4 $553.2 $1,085.3 $300.4 $272.2
-------- -------- -------- ------ -------- ------ ------
-------- -------- -------- ------ -------- ------ ------
FIXED CHARGES
G) Interest and amortization of debt
expense $371.0 $542.3 $582.8 $593.0 $588.0 $150.5 $133.2
H) Interest factor attributable to rentals 41.3 53.0 66.0 70.0 67.7 14.9 14.6
I) Preferred dividends of subsidiary 10.6 23.6 23.6 69.1 5.9 31.9
J) Capitalized interest 18.0 58.0 66.7 61.9 42.5 11.7
-------- -------- -------- ------- -------- ------- -------
K) TOTAL FIXED CHARGES $430.3 $663.9 $739.1 $748.5 $767.3 $183.0 $179.7
-------- -------- -------- ------- -------- ------- -------
-------- -------- -------- ------- -------- ------- -------
L) RATIO OF EARNINGS TO FIXED CHARGES 2.43 3.61 1.80 1.41 1.64 1.51
-------- -------- -------- -------- ------- -------
-------- -------- -------- -------- ------- -------
M) DEFICIENCY IN EARNINGS NECESSARY
TO COVER FIXED CHARGES $195.3
------
------
</TABLE>
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<S> <C>
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<PERIOD-END> MAR-31-1999
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<RECEIVABLES> 2,661
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<PP&E> 22,556
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1,805
0
<COMMON> 308
<OTHER-SE> 8,369
<TOTAL-LIABILITY-AND-EQUITY> 26,140
<SALES> 4,962
<TOTAL-REVENUES> 4,962
<CGS> 3,789
<TOTAL-COSTS> 4,739
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> 109
<INCOME-TAX> 33
<INCOME-CONTINUING> 44
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
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