<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
FOR FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 1-3157
------------------------
INTERNATIONAL PAPER COMPANY
(Exact name of Company as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 13-0872805
(State or other jurisdiction (I.R.S. Employee Identification
of No.)
incorporation or
organization)
</TABLE>
<TABLE>
<S> <C>
TWO MANHATTANVILLE ROAD, PURCHASE, N.Y. 10577
(Address of principal executive offices) (Zip Code)
</TABLE>
COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: 914-397-1500
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ----------------------------------------------------------------------------------------- -----------------------------
<S> <C>
Common Stock, $1 per share par value New York Stock Exchange
7 7/8% Debentures due 2038 New York Stock Exchange
</TABLE>
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The Aggregate market value of the common stock of the Company outstanding as of
March 18, 1999, held by non-affiliates of the Company was $13,899,334,203,
calculated on the basis of the closing price on the Composite Tape on March 18,
1999. For this computation, the Company has excluded the market value of all
common stock beneficially owned by all executive officers and directors of the
Company and their associates as a group and treasury stock. Such exclusion is
not to signify in any way that members of this group are "affiliates" of the
Company.
The number of shares outstanding of the Company's common stock, as of March 18,
1999:
<TABLE>
<CAPTION>
OUTSTANDING IN TREASURY
<S> <C>
306,851,559 867,331
</TABLE>
The following documents are incorporated by reference into the parts of this
report indicated below:
Proxy Statement dated April 27, 1999 (to be filed on or about April 27,
1999) Part III
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C> <C>
PART I
ITEM 1. BUSINESS
General 1
Financial Information Concerning Industry Segments 2
Financial Information About International and Domestic 2
Operations 2
Competition and Costs 2
Marketing and Distribution 2
Description of Principal Products 2
Production by Product 3
Research and Development 4
Environmental Protection 4
Employees 5
Raw Materials 5
ITEM 2. PROPERTIES
Forestlands 5
Mills and Plants 5
Capital Investments and Dispositions 6
ITEM 3. LEGAL PROCEEDINGS 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
SPECIAL ITEM EXECUTIVE OFFICERS OF THE COMPANY 7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 9
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Corporate Overview 14
Description of Industry Segments 15
Industry Segment Results 17
Liquidity and Capital Resources 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk 38
</TABLE>
i
<PAGE>
INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C> <C>
Value at Risk 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Industry Segment and Geographic Area Information 42
Report of Management on Financial Statements 46
Report of Independent Public Accountants 47
Consolidated Statement of Earnings 48
Consolidated Balance Sheet 49
Consolidated Statement of Cash Flows 50
Consolidated Statement of Common Shareholders' Equity 51
Notes to Consolidated Financial Statements 52
Interim Financial Results 81
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 82
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 82
ITEM 11. EXECUTIVE COMPENSATION 82
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 83
FORWARD-LOOKING INFORMATION 83
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 83
Reports on Form 8-K 84
Additional Financial Data 84
Report of Independent Public Accountants on Financial Statement Schedule 85
Schedule II--Valuation and Qualifying Accounts 86
SIGNATURES 87
APPENDIX I 1998 LISTING OF FACILITIES A-1
</TABLE>
ii
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
International Paper Company, (referred to subsequently as the "Company" or
"International Paper") a New York corporation incorporated in 1941 as the
successor to the New York corporation of the same name organized in 1898, is a
global paper and forest products company that produces printing and writing
papers, pulp, tissue, paperboard and packaging and wood products. It also
manufactures specialty chemicals and specialty panels and laminated products.
The Company's primary markets and manufacturing and distribution operations are
in the United States, Europe and the Pacific Rim.
In the United States at December 31, 1998, the Company operated 26 pulp, paper
and packaging mills, 58 converting and packaging plants, 31 wood products
facilities, 9 specialty panels and laminated products plants and 6 specialty
chemicals plants. Production facilities at December 31, 1998 in Europe, Asia,
Latin America and Canada included 14 pulp, paper and packaging mills, 35
converting and packaging plants, 4 wood products facilities, 3 specialty panels
and laminated products plants and 5 specialty chemicals plants. The Company
distributes printing, packaging, graphic arts and industrial supply products,
primarily manufactured by other companies, through over 250 distribution
branches located primarily in the United States, and also engages in oil and gas
and real estate activities in the United States. At December 31, 1998, the
Company controlled approximately 5.9 million acres of forestlands in the United
States.
Through Carter Holt Harvey, the Company, primarily in New Zealand and Australia,
operates 6 mills producing pulp, paper, packaging and tissue products, 27
converting and packaging plants and 52 wood products manufacturing and
distribution facilities. Carter Holt Harvey distributes paper and packaging
products through 19 distribution branches located in New Zealand and Australia.
In New Zealand, Carter Holt Harvey controls approximately 820,000 acres of
forestlands.
From 1991 through 1998, International Paper's capital expenditures approximated
$9.7 billion, excluding mergers and acquisitions. These expenditures reflect the
continuing efforts to improve product quality and environmental performance,
lower costs, expand production capacity, and acquire and improve forestlands.
Capital spending in 1998 was approximately $1.0 billion and is budgeted to be
just under $1.0 billion in 1999. A further discussion of capital expenditures
can be found on page 23 of Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Discussions of mergers and acquisitions can be found on pages 14 and 23 of Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations and on pages 55 and 56 of Item 8. Financial Statements and
Supplementary Data, Note 5. Mergers and Acquisitions.
Discussions of restructuring charges and other special items can be found on
pages 25 through 33 of Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and on pages 56 through 64 of Item 8.
Financial Statements and Supplementary Data, Note 6. Restructuring and Other
Charges.
1
<PAGE>
FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS
The financial information concerning segments is set forth on pages 42 through
44 of Item 8. Financial Statements and Supplementary Data.
FINANCIAL INFORMATION ABOUT INTERNATIONAL AND DOMESTIC OPERATIONS
The financial information concerning international and domestic operations and
export sales is set forth on page 45 of Item 8. Financial Statements and
Supplementary Data.
COMPETITION AND COSTS
Despite the size of the Company's manufacturing capacities for paper,
paperboard, packaging and pulp products, the markets in all of the cited product
lines are large and highly fragmented. The markets for wood and specialty
products are similarly large and fragmented. There are numerous competitors, and
the major markets, both domestic and international, in which the Company sells
its principal products are very competitive. These products are in competition
with similar products produced by others, and in some instances, with products
produced by other industries from other materials.
Many factors influence the Company's competitive position, including prices,
costs, product quality and services. Information on the impact of prices and
costs on operating profits is contained on pages 14 through 22 of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
MARKETING AND DISTRIBUTION
Paper and packaging products are sold through the Company's own sales
organization directly to users or converters for manufacture. Sales offices are
located throughout the United States as well as internationally. Significant
volumes of products are also sold through paper merchants and distributors,
including facilities in the Company's distribution network.
The Company's U.S. production of lumber and plywood is marketed through
independent and Company-owned distribution centers. Specialty products are
marketed through various channels of distribution.
DESCRIPTION OF PRINCIPAL PRODUCTS
The Company's principal products are described on pages 15 through 17 of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2
<PAGE>
Production of major products for 1998, 1997 and 1996 was as follows:
PRODUCTION BY PRODUCT
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997 1996(D,E)
--------- --------- -----------
<S> <C> <C> <C>
Printing Papers (In thousands of tons)
White Papers and Bristols 3,742 3,986 3,875
Coated Papers 1,241 1,304 1,089
Market Pulp (A) 1,907 2,148 2,007
Newsprint 95 86 94
Packaging (In thousands of tons)
Containerboard 2,887 2,945 2,702
Bleached Packaging Board 2,148 2,191 1,885
Industrial Papers 614 691 667
Industrial and Consumer Packaging (B) 3,503 3,379 3,313
Specialty Products (In thousands of tons)
Tissue 148 147 126
Forest Products (In millions)
Panels (sq. ft. 3/8"-basis) (C) 1,588 1,445 1,242
Lumber (board feet) 2,200 2,153 1,815
MDF (sq. ft. 3/4"-basis) 174 204 285
Particleboard (sq. ft. 3/4"-basis) 195 188 192
</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.
(D) Includes Federal Paper Board from March 12, 1996.
(E) Certain reclassifications and adjustments have been made to prior-year
amounts.
3
<PAGE>
RESEARCH AND DEVELOPMENT
The Company operates research and development centers at Sterling Forest, New
York; Cincinnati, Ohio; Panama City, Florida; Erie, Pennsylvania; Kaukauna,
Wisconsin; West Chicago, Illinois; Odenton, Maryland; Saint-Priest, France;
Annecy, France; a regional center for applied forest research in Bainbridge,
Georgia; a forest biotechnology center in Rotorua, New Zealand; and several
product laboratories. Research and development activities are directed to
short-term, long-term and technical assistance needs of customers and operating
divisions; process, equipment and product innovations; and improvement of
profits through tree generation and propagation research. Activities include
studies on improved forest species and management; innovation and improvement of
pulping, bleaching, chemical recovery, papermaking and coating processes;
packaging design and materials development; innovation and improvement of
printing plates, pressroom/plate chemistries and plate processors; reduction of
environmental discharges; re-use of raw materials in manufacturing processes;
recycling of consumer and packaging paper products; energy conservation;
applications of computer controls to manufacturing operations; innovations and
improvement of products; and development of various new products. Product
development efforts specifically address product safety as well as the
minimization of solid waste. The cost to the Company of its research and
development operations was $89.5 million in 1998, $99.9 million in 1997 and
$112.5 million in 1996.
ENVIRONMENTAL PROTECTION
Controlling pollutants discharged into the air, water and groundwater to avoid
adverse impacts on the environment, making continual improvements in
environmental performance and achieving 100% compliance with applicable laws and
regulations are continuing objectives of the Company. The Company has invested
substantial funds to modify facilities to assure compliance, and plans to make
substantial capital expenditures for this purpose in the future.
A total of $100 million was spent in 1998 to control environmental releases into
the air and water and to assure environmentally sound management and disposal of
solid and hazardous waste. The Company expects to spend approximately $80
million in 1999 for similar capital programs. Amounts to be spent for
environmental control projects in future years will depend on new laws and
regulations, changes in legal requirements and changes in environmental
concerns. Taking these uncertainties into account, the Company's preliminary
estimate for additional environmental appropriations during the period 2000
through 2001 is approximately $230 million.
On April 15, 1998, the United States Environmental Protection Agency (EPA)
promulgated new pulp and paper mill standards for air emissions and water
discharges from bleached kraft mills to be met three to eight years after final
promulgation (the "Cluster Regulations"). The estimated spending for 1999
through 2001 includes the cost of these regulations as well as other
environmental projects. The Company has spent $206 million over the last five
years to convert 15 of its U.S. and European bleached mills to Elemental
Chlorine Free (ECF) pulping, one of the requirements of the Cluster Regulations,
and for certain other environmental projects related to the Cluster Regulations.
The additional cost related to the Cluster Regulations for the three years 1999
to 2001 is estimated to be $194 million. Projected Cluster costs for the
following five years are in the range of $120 to $180 million. The final cost
depends on the outcome of Cluster water regulations for pulp and paper
subcategories other than bleached papergrade kraft. Regulations for these
subcategories are not likely to become final until late 2000 or 2001.
The Company now estimates that annual operating costs, excluding depreciation,
will increase approximately $20 million when these regulations are fully
implemented.
The Company expects the significant effort it has made in the analysis of
environmental issues and the development of environmental control technology to
enable it to keep costs for compliance with environmental regulations, at, or
below, industry averages.
4
<PAGE>
A further discussion of environmental issues can be found on pages 34 and 35 of
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Additional information is available in the Company's annual environmental report
published in September of 1998.
EMPLOYEES
As of December 31, 1998, the Company had approximately 80,000 employees, of whom
54,000 were located in the United States and the remainder overseas. Of the
domestic employees, approximately 35,500 were hourly employees, approximately
15,000 of whom were represented by the Paper, Allied-Industrial, Chemical and
Energy International Union.
During 1998, new labor agreements were reached at the Louisiana and Moss Point
mills. Pine Bluff mill negotiations were still in progress at year end. During
1999, a labor agreement at the Erie mill is scheduled to be negotiated. During
2000, labor agreements are scheduled to be negotiated at the Camden, Natchez,
Reigelwood and Hamilton mills.
During 1998, labor agreements expired at four packaging, three building
materials, two chemical and two distribution locations. New labor agreements
were negotiated at each location. An initial contract at one distribution
location was still in progress at year end; one additional packaging location
has a contract open from a previous year; two additional packaging locations
settled contracts which expired in a previous year.
RAW MATERIALS
For information as to the sources and availability of raw materials essential to
the Company's business, see Item 2. PROPERTIES.
ITEM 2. PROPERTIES
FORESTLANDS
The principal raw material used by International Paper is wood in various forms.
At December 31, 1998, the Company controlled approximately 5.9 million acres of
forestlands in the United States. An additional 820,000 acres of forestlands in
New Zealand were held through Carter Holt Harvey, a consolidated subsidiary of
International Paper.
During 1998, the U.S. forestlands supplied 3.2 million cords of roundwood to the
Company's U.S. facilities. This amounted to the following percentages of the
roundwood requirements of its U.S. mills and forest products facilities: 12% in
its Northern mills and 29% in its Southern mills. The balance was acquired from
other private industrial and nonindustrial forestland owners, with only an
insignificant amount coming from public lands of the United States government.
In addition, 3.0 million cords of wood were sold to other users in 1998. In
November 1994, the Company adopted the Sustainable Forestry Principles developed
by the American Forest and Paper Association in August 1994.
MILLS AND PLANTS
A listing of the Company's production facilities can be found in Appendix I
hereto, which information is incorporated herein by reference.
The Company's facilities are in good operating condition and are suited for the
purposes for which they are presently being used. The Company continues to study
the economics of modernizing or adopting other alternatives for higher cost
facilities. Further discussions of new mill and plant projects can be found on
page 23 of Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
5
<PAGE>
CAPITAL INVESTMENTS AND DISPOSITIONS
Given the size, scope and complexity of its business interests, International
Paper continuously examines and evaluates a wide variety of business
opportunities and planning alternatives, including possible acquisitions and
sales or other dispositions of properties. Planned capital investments for 1999
are set forth on pages 14 and 23 of Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
ITEM 3. LEGAL PROCEEDINGS
MASONITE LITIGATION
A lawsuit which was certified as a nationwide class action and was filed against
the Company and Masonite Corporation, a wholly owned subsidiary of the Company
(Masonite), on December 27, 1994, in Mobile County Circuit Court, Mobile,
Alabama has been settled. This lawsuit alleged that hardboard siding, which is
used as exterior cladding for residential dwellings and is manufactured by
Masonite, fails prematurely, allowing moisture intrusion. It alleged further
that the presence of moisture in turn causes the failure of the structure
underneath the siding. The class consists of all owners of homes in the United
States having Masonite hardboard siding incorporated into buildings between 1980
and January 15, 1998. It is impossible to know how many homes have this siding,
but it is estimated that there are between three and four million. As previously
reported, a Phase I trial was conducted in August and September of 1996 to
determine the sole issue of inherent product defect. The jury, in attempting to
apply the various laws of all the states on a nationwide basis, returned a mixed
decision that found in favor of the Company and Masonite in some jurisdictions
and in favor of the plaintiffs in other jurisdictions. As also previously
reported, a Phase II trial was set for July 14, 1997, on the remaining issues in
the case. The Phase II trial was not conducted owing to the settlement.
Final approval of the settlement was granted by the Mobile County Circuit Court
on January 15, 1998. The settlement provides for monetary compensation to class
members meeting the requirements of the settlement agreement on a claims-made
basis for a period of seven years for those having Masonite hardboard siding
manufactured between 1980 and 1989 and for a period of ten years for those
having Masonite hardboard siding manufactured between 1990 and January 15, 1998,
with certain specified deductions based on years of use. The settlement also
provides for the payment of attorneys' fees equaling 15% of settlement amounts
paid to class members, with a non-refundable advance of $47.5 million plus $2.5
million in costs, both of which have been paid. Through December 31, 1998,
approximately $7.6 million has been paid to class members pursuant to the
settlement, and additionally an approximate $2.5 million has been paid in
administrative costs, including costs to administer the compensation program and
to provide notice to class members of the settlement. While the amounts that
will be paid in the future to class members and to pay for administrative costs
are not presently known with certainty, it is believed that this settlement will
not have a material adverse effect on the Company's consolidated financial
position or results of operations. The Company and Masonite have the right, in
their sole discretion, to terminate this settlement after seven years from the
date of final approval.
A more detailed discussion of the Masonite litigation can be found on pages 34
through 36 of Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and pages 67 and 68 of Item 8. Financial
Statements and Supplementary Data, Note 11. Commitments and Contingent
Liabilities.
OTHER LITIGATION
As of March 30, 1999, there were no other pending judicial proceedings, brought
by governmental authorities against the Company, for alleged violations of
applicable environmental laws or regulations. The Company is engaged in various
administrative proceedings that arise under applicable environmental and safety
laws or regulations, including approximately 71 active proceedings under the
Comprehensive
6
<PAGE>
Environmental Response, Compensation and Liability Act ("CERCLA") and comparable
state laws. Most of these proceedings involve the cleanup of hazardous
substances at large commercial landfills that received waste from many different
sources. While joint and several liability is authorized under the CERCLA, as a
practical matter, liability for CERCLA cleanups is allocated among the many
potential responsible parties. Based upon previous experience with respect to
the cleanup of hazardous substances and upon presently available information,
the Company believes that it has no or DE MINIMIS liability with respect to 12
of these sites; that liability is not likely to be significant at 44 sites; and
that estimates of liability at 15 of these sites is likely to be significant but
not material to the Company's consolidated financial position or results of
operations.
The Company's majority-owned subsidiary, Carter Holt Harvey, has an indirect
shareholding of 30.05% in Chile's largest industrial company, COPEC. This
shareholding is held through Carter Holt Harvey's 50% interest in Inversiones y
Desarrollo Los Andes S.A. ("Los Andes"), which holds 60.1% of the shares of
COPEC. The other 50% of Los Andes is owned by Inversiones Socoroma S.A.
("Socoroma"), a Chilean investment company. In late 1993, Carter Holt Harvey
commenced several actions in Chilean courts challenging certain corporate
governance documents of Los Andes, as well as agreements between Carter Holt
Harvey's subsidiary and Socoroma. All of those actions have now been terminated.
In December 1994, Socoroma commenced an arbitration action seeking to expel
Carter Holt Harvey from Los Andes at a price which is less than the carrying
value. In April 1998, the arbitrator dismissed Socoroma's request, but granted
it the right to claim monetary damages for Carter Holt Harvey's breach of
certain of its obligations as a participant in the Los Andes joint venture.
While any proceeding or litigation has an element of uncertainty, the Company
believes that the resolution of this issue will not have a material adverse
effect on its consolidated financial position or results of operations.
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, 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
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
SPECIAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY
INTERNATIONAL PAPER COMPANY
EXECUTIVE OFFICERS
AS OF MARCH 30, 1999
INCLUDING NAME, AGE, OFFICES AND POSITIONS HELD (1) AND
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS
John T. Dillon, 60, chairman and chief executive officer since 1996. Prior to
that he was executive vice president-packaging from 1987 to 1995 when he assumed
the position of president and chief operating officer.
C. Wesley Smith, 59, executive vice president-operations group since 1998. Prior
thereto he was executive vice president-printing papers from 1992 and
president-International Paper Europe from 1989.
7
<PAGE>
James P. Melican, Jr., 58, executive vice president-legal and external affairs.
He assumed his current position in 1991.
David W. Oskin, 56, executive vice president-consumer packaging since 1995, and
was CEO and managing director of Carter Holt Harvey Limited of New Zealand from
1992 to 1995.
Milan J. Turk(2), 60, executive vice president-specialty businesses since 1996.
Prior thereto he was senior vice president-specialty products from 1993.
Marianne M. Parrs, 55, executive vice president-administration and chief
financial officer since March 9, 1999. She was senior vice
president-administration and chief financial officer since 1998, and prior
thereto was senior vice president and chief financial officer from 1995. She was
staff vice president-tax from 1993-1995, and controller-printing papers from
1985 to 1993.
Andrew R. Lessin, 56, vice president and controller since 1995. Prior thereto he
was the controller from 1990.
William B. Lytton, 50, senior vice president and general counsel since January
1999. Prior thereto he was vice president and general counsel since 1996. He was
vice president and associate general counsel for Martin Marietta from 1993 to
1995, and vice president and general counsel for Lockheed Martin Electronics
from 1995 to 1996.
- ------------------------
(1) Executive officers of International Paper are elected to hold office until
the next annual meeting of the board of directors following the annual
meeting of shareholders and until election of successors, subject to removal
by the board.
(2) Mr. Turk will retire on December 31, 1999.
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Dividend per share data on the Company's common stock and the high and low sale
prices for the Company's common stock for each of the four quarters in 1998 and
1997 are set forth on page 81 of Item 8. Financial Statements and Supplementary
Data.
As of March 18, 1999, there were 30,570 holders of record of the Company's
common stock.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
ELEVEN-YEAR FINANCIAL SUMMARY
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES
<TABLE>
<CAPTION>
1998 1997 1996 1995
---------- --------- --------- -------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $ 19,541 $ 20,096 $ 20,143 $19,797
Costs and expenses, excluding
interest 18,756 19,760 19,403 17,276
Earnings before income taxes,
minority interest,
extraordinary item and
cumulative effect of
accounting changes 392(1) 16(2) 802(3) 2,028
Minority interest expense, net
of taxes 76(1) 129(2) 169(3) 156
Extraordinary item
Cumulative effect of
accounting changes
Net earnings (loss) 236(1) (151)(2) 303(3) 1,153
Earnings (loss) applicable to
common shares 236(1) (151)(2) 303(3) 1,153
---------- --------- --------- -------
FINANCIAL POSITION
Working capital $ 2,374 $ 1,065 $ 104 $ 1,010
Plants, properties and
equipment, net 12,079 12,369 13,217 10,997
Forestlands 2,795 2,969 3,342 2,803
Total assets 26,356 26,754 28,252 23,977
Long-term debt 6,407 7,154 6,691 5,946
Common shareholders' equity 8,902 8,710 9,344 7,797
---------- --------- --------- -------
PER SHARE OF COMMON
STOCK--ASSUMING
NO DILUTION(9)
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes $ .77 $ (.50) $ 1.04 $ 4.50
Extraordinary item
Cumulative effect of
accounting changes
Earnings (loss) .77 (.50) 1.04 4.50
Cash dividends 1.00 1.00 1.00 .92
Common shareholders' equity 28.99 28.82 31.13 29.87
---------- --------- --------- -------
COMMON STOCK PRICES (9)
High 55 1/4 61 44 5/8 45 3/4
Low 35 1/2 38 5/8 35 5/8 34 1/8
Year-end 44 13/16 43 1/8 40 1/2 37 7/8
---------- --------- --------- -------
FINANCIAL RATIOS
Current ratio 1.7 1.2 1.0 1.2
Total debt to capital ratio 31.4 38.9 38.9 38.5
Return on equity 2.7(1,10) (1.7)(2,10) 3.4(3,10) 16.1
Return on investment 2.8(1,10) 1.2(2,10) 3.3(3,10) 8.4
---------- --------- --------- -------
CAPITAL EXPENDITURES $ 1,049 $ 1,111 $ 1,394 $ 1,518
---------- --------- --------- -------
NUMBER OF EMPLOYEES 80,000 82,000 87,000 81,500
---------- --------- --------- -------
---------- --------- --------- -------
</TABLE>
10
<PAGE>
ELEVEN-YEAR FINANCIAL SUMMARY (CONTINUED)
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES
<TABLE>
<CAPTION>
1994 1993 1992 1991
------- --------- ------- -------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $14,966 $ 13,685 $13,598 $12,703
Costs and expenses, excluding
interest 13,902 12,837 13,125(6) 11,695(7)
Earnings before income taxes,
minority interest,
extraordinary item and
cumulative effect of
accounting changes 715(4) 538 226(6) 693(7)
Minority interest expense, net
of taxes 47 36 15 42
Extraordinary item (6)
Cumulative effect of
accounting changes (75) (50) (215)
Net earnings (loss) 357(4) 289(5) 86(6) 184(7)
Earnings (loss) applicable to
common shares 357(4) 289(5) 86(6) 184(7)
------- --------- ------- -------
FINANCIAL POSITION
Working capital $ 796 $ 472 $ (165) $ 404
Plants, properties and
equipment, net 9,139 8,872 8,884 7,848
Forestlands 802 786 759 743
Total assets 17,836 16,631 16,516 14,941
Long-term debt 4,464 3,601 3,096 3,351
Common shareholders' equity 6,514 6,225 6,189 5,739
------- --------- ------- -------
PER SHARE OF COMMON
STOCK--ASSUMING
NO DILUTION(9)
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes $ 1.73 $ 1.17 $ .58 $ 1.80
Extraordinary item (.02)
Cumulative effect of
accounting changes (.30) (.21) (.97)
Earnings (loss) 1.43 1.17 .35 .83
Cash dividends .84 .84 .84 .84
Common shareholders' equity 25.87 25.12 25.23 25.52
------- --------- ------- -------
COMMON STOCK PRICES(9)
High 40 1/4 35 39 1/4 39 1/8
Low 30 3/8 28 3/8 29 1/4 25 1/4
Year-end 37 3/4 33 7/8 33 3/8 35 3/8
------- --------- ------- -------
FINANCIAL RATIOS
Current ratio 1.2 1.1 .96 1.1
Total debt to capital ratio 41.2 38.5 38.0 39.1
Return on equity 5.6(4) 4.7(5) 1.4(6) 3.2(7)
Return on investment 4.2(4) 3.6(5) 2.0(6) 3.5(7)
------- --------- ------- -------
CAPITAL EXPENDITURES $ 1,114 $ 954 $ 1,368 $ 1,197
------- --------- ------- -------
NUMBER OF EMPLOYEES 70,000 72,500 73,000 70,500
------- --------- ------- -------
------- --------- ------- -------
</TABLE>
11
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ELEVEN-YEAR FINANCIAL SUMMARY (CONTINUED)
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES
<TABLE>
<CAPTION>
1990 1989 1988
------- ------- -------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $12,960 $11,378 $ 9,587
Costs and expenses, excluding
interest 11,695(8) 9,739 8,199
Earnings before income taxes,
minority interest,
extraordinary item and
cumulative effect of
accounting changes 988(8) 1,434 1,223
Minority interest expense, net
of taxes 33 26 22
Extraordinary item
Cumulative effect of
accounting changes
Net earnings (loss) 569(8) 864 754
Earnings (loss) applicable to
common shares 569(8) 845 733
------- ------- -------
FINANCIAL POSITION
Working capital $ 784 $ 366 $ 781
Plants, properties and
equipment, net 7,287 6,238 5,456
Forestlands 751 764 772
Total assets 13,669 11,582 9,462
Long-term debt 3,096 2,324 1,853
Common shareholders' equity 5,632 5,147 4,557
------- ------- -------
PER SHARE OF COMMON
STOCK--ASSUMING NO DILUTION
(9)
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes $ 2.61 $ 3.86 $ 3.28
Extraordinary item
Cumulative effect of
accounting changes
Earnings (loss) 2.61 3.86 3.28
Cash dividends .84 .77 .64
Common shareholders' equity 25.67 23.67 20.57
------- ------- -------
COMMON STOCK PRICES (9)
High 29 7/8 29 3/8 24 3/4
Low 21 3/8 22 5/8 18 1/4
Year-end 26 3/4 28 1/4 23 1/4
------- ------- -------
FINANCIAL RATIOS
Current ratio 1.2 1.1 1.5
Total debt to capital ratio 36.1 33.9 25.8
Return on equity 10.5(8) 17.8 17.0
Return on investment 7.2(8) 11.3 11.0
------- ------- -------
CAPITAL EXPENDITURES $ 1,267 $ 887 $ 645
------- ------- -------
NUMBER OF EMPLOYEES 69,000 63,500 55,500
------- ------- -------
------- ------- -------
</TABLE>
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ELEVEN-YEAR FINANCIAL SUMMARY (CONTINUED)
FINANCIAL GLOSSARY
Current ratio--
current assets divided by current liabilities
Total debt to capital ratio--
long-term debt plus notes payable and current maturities of long-term debt
divided by long-term debt, notes payable and current maturities of long-term
debt, deferred income taxes, minority interest, other liabilities, preferred
securities and total common shareholders' equity.
Return on equity--
net earnings divided by average common shareholders' equity (computed monthly).
Return on investment--
net earnings plus after-tax interest expense and minority interest expense
divided by an average of total assets minus accounts payable and accrued
liabilities.
FOOTNOTES TO ELEVEN-YEAR FINANCIAL SUMMARY
(1) Includes a $20 million pre-tax gain ($12 million after taxes) on the sale of
the Company's Veratec nonwovens business, an $83 million pre-tax gain ($50
million after taxes) from the reversal of previously established reserves
that are no longer required, a $111 million pre-tax charge ($68 million
after taxes) for the impairment of oil and gas reserves due to low prices, a
$105 million pre-tax restructuring and asset impairment charge ($56 million
after taxes and minority interest) and $16 million of pre-tax charges ($10
million after taxes) related to our share of charges taken by Scitex, a 13%
investee company, for the write-off of in-process research and development
related to an acquisition and costs to exit the digital video business.
(2) Includes a pre-tax business improvement charge of $535 million ($385 million
after taxes), a $150 million pre-tax provision for legal reserve ($93
million after taxes), a pre-tax charge of $125 million ($80 million after
taxes) for anticipated losses associated with the sale of the imaging
businesses, and a pre-tax gain of $170 million ($97 million after taxes and
minority interest expense) from the redemption of certain retained west
coast partnership interests and the release of a related debt guaranty.
(3) Includes a pre-tax restructuring and asset impairment charge of $515 million
($362 million after taxes), a $592 million pre-tax gain on the sale of a
west coast partnership interest ($336 million after taxes and minority
interest), a $155 million pre-tax charge ($99 million after taxes) for the
write-down of the investment in Scitex and a $10 million pre-tax charge ($6
million after taxes) for our share of a restructuring charge announced by
Scitex in November 1996.
(4) Includes $17 million ($10 million after taxes) of additional earnings
related to the change in accounting for start-up costs.
(5) Includes $25 million of additional income tax expense to revalue deferred
tax balances to reflect the increase in the U.S. statutory federal income
tax rate.
(6) Includes restructuring and other charges totaling $398 million ($263 million
after taxes).
(7) Includes a $60 million pre-tax restructuring charge ($37 million after
taxes) and additional expenses related to the adoption of SFAS No. 106 of
$25 million ($16 million after taxes).
(8) Includes a $212 million pre-tax restructuring charge ($137 million after
taxes).
(9) Per share data and common stock prices have been adjusted to reflect a
two-for-one stock split in September 1995. All per share amounts are
computed before the effects of dilutive securities.
(10) Return on equity was 3.5% and return on investment was 3.2% in 1998 before
special items. Return on equity was 3.3% and return on investment was 3.0%
in 1997 before special items. Return on equity was 4.8% and return on
investment was 3.6% in 1996 before special items.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CORPORATE OVERVIEW
RESULTS OF OPERATIONS
International Paper's 1998 net sales totaled $19.5 billion, declining 3% from
$20.1 billion in 1997 and 1996. In 1998, the impact of acquisitions and sales of
businesses largely offset each other. The decline in sales resulted from lower
sales volumes and prices and the weakening New Zealand dollar. Sales outside the
United States declined to $4.7 billion in 1998, or 24% of consolidated net
sales, from $5.7 billion, or 28% of consolidated net sales in 1997. Export sales
from the U.S. were at a disadvantage because of the strong U.S. dollar and
declined to $1.2 billion from $1.4 billion in 1997 and 1996. Total 1998
international sales of $5.9 billion compared with $7.1 billion in 1997 and $7.3
billion in 1996.
Full-year 1998 net earnings of $236 million or $.77 per share included special
items that reduced net earnings by $72 million or $.23 per share. This compared
with a 1997 net loss of $151 million or $.50 per share and 1996 net earnings of
$303 million or $1.04 per share. Special items totaling a net loss of $461
million or $1.53 per share and $131 million or $.45 per share were recorded in
1997 and 1996, respectively. Earnings before special items were $308 million or
$1.00 per share in 1998 compared with earnings before special items of $310
million or $1.03 per share in 1997 and $434 million or $1.49 per share in 1996.
Operating profit totaled $1.1 billion in both 1998 and 1997, down from $1.4
billion in 1996. Lower sales volumes and prices for many of our products reduced
1998 operating profit by about $400 million as compared with 1997. However, this
decline was offset by $300 million of manufacturing and other cost reductions
and lower material costs as well as higher profits from forestland sales. In
1998, we curtailed production by 1 million tons at our U.S. pulp and paper
mills, more than 60% of which was market-related. In 1997, lower prices cost our
U.S. businesses over $500 million in earnings compared with 1996, more than
negating the impact of profit improvement programs that added over $300 million
to 1997 earnings.
Excluding special items, return on investment was 3.2% in 1998 compared with
3.0% in 1997 and 3.6% in 1996. Despite progress, management recognizes that
current financial returns are not satisfactory and continues to focus on
company-wide business improvement initiatives. These are described more fully in
the section titled "Special Items Including Restructuring and Business
Improvement Actions" and in the discussion and analysis of each business
segment.
Despite the negative effect that unsettled global economic conditions had on the
paper and forest products industry, we accomplished a great deal in 1998. We
have significantly reduced costs, improved our performance with customers,
learned how to more efficiently manage capacity in weak markets, sharpened our
focus on winning businesses, and completed the sale of about $1 billion of
nonstrategic assets. Focusing on improvement in our core businesses, we
completed several acquisitions during the year to improve our competitive
position and to better serve our customers. Significant among these acquisitions
were the Zellerbach distribution business, the Weston Paper industrial packaging
business, and OAO Svetogorsk, a Russian pulp and paper manufacturer. Carter Holt
Harvey also expanded its folding carton and cup operations into Australia, the
latter jointly with our U.S. foodservice business.
Our most significant move in 1998 was the negotiation of a merger with Union
Camp Corporation, a leading U.S. manufacturer of paper, packaging, chemicals and
wood products and a significant forestland owner. The merger, valued at
approximately $6.6 billion including the assumption of debt, is subject to
approval by International Paper and Union Camp shareholders. Under the terms of
the merger agreement, Union Camp shareholders will receive International Paper
common shares worth $71 for each Union Camp share. The merger, which will be
accounted for as a pooling of interests, should be completed early
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<PAGE>
in the second quarter of 1999. Cost savings from combining the two companies are
expected to be about $300 million annually.
We expect that there will be significant one-time costs in 1999 associated with
the Union Camp merger. These include the direct expenses of the merger, which we
estimate to be about $40 million, and those charges associated with actions to
be taken to achieve the $300 million of annual cost savings.
In 1999, we anticipate that global economic conditions and excess worldwide
capacity will continue to present sizable challenges for our industry. Both the
U.S. and Europe should grow more slowly than in 1998. We expect recovery in
Asian markets, although it is likely to be slow. Nevertheless, we are seeing
signs of improvement in supply and demand relationships and are more optimistic
about the latter part of 1999 and beyond. Reflecting this, we announced price
increases for linerboard, uncoated papers and pulp in the 1999 first quarter.
DESCRIPTION OF INDUSTRY SEGMENTS
U.S. AND EUROPEAN PAPERS
UNCOATED PAPERS: International Paper is one of the largest U.S. producers of
uncoated papers, with production of nearly 2 million tons annually. Products
include reprographics paper, offset printing papers, and converting grades for
tablets and envelopes. Market franchises include the HAMMERMILL and SPRINGHILL
brands. We also make uncoated bristols for file folders, tags, tickets and index
cards.
COATED PAPERS: We supply over 1.3 million tons of coated papers and bristols
from 6 U.S. mills for book and magazine publishing, catalogs, and direct-mail
and other print advertising. The Company ranks fourth among U.S. coated
groundwood producers and manufactured about 525,000 tons in 1998. We also
produce coated freesheet, such as ACCOLADE, for upscale catalogs and magazines
and we make coated bristols used for book covers and commercial printing
applications.
PULP: We produced about 1.4 million tons of market pulp in the U.S. in 1998.
Grades range from pulp used to make paper, to fluff pulp for hygiene products,
to specialty pulps used in items such as cigarette filters and fabrics.
Approximately 22% of our production is specialty pulps, which exhibit more price
stability than paper pulps.
EUROPEAN PAPERS: We are a leading supplier of office, coated and specialty
papers in European markets supplying over 2 million tons annually from 12 mills
in France, Germany, Poland, the United Kingdom and Russia. International Paper
S.A. is Europe's second largest producer of reprographics paper. Zanders
produces premium coated papers such as IKONO, used in high-end marketing
brochures and annual reports. Kwidzyn produces office papers, pulp, coated board
and newsprint in Poland. Klucze is a leading supplier of brand facial tissue in
Poland. Our December 1998 acquisition of a low-cost pulp and paper mill in
Svetogorsk, Russia, complements our existing operations in Europe producing
liquid packaging board, office papers and market pulp.
INDUSTRIAL AND CONSUMER PACKAGING
INDUSTRIAL PACKAGING: International Paper is the third largest manufacturer of
containerboard in the U.S. and is capable of producing 3 million tons annually
from 6 mills. Nearly one third is specialty grades such as PINELINER, COLORBRITE
and BRITETOP. About 60% of our production is converted into corrugated boxes and
other packaging by our 32 U.S. container plants. These include 11 plants
acquired through our merger with Weston Paper in April 1998. In Europe, we have
1 recycled mill in France and 17 container plants in the United Kingdom, Italy,
Spain and France that produce 850,000 tons annually. Our plants in Southern
Europe are the leading providers of corrugated packaging for agricultural
products. In March 1998, we added 3 corrugated container plants and a recycled
containerboard mill to our global reach by partnering
15
<PAGE>
with a producer of industrial packaging in Turkey. We also produce 300,000 tons
of kraft paper each year that is used in multiwall and retail bags.
CONSUMER PACKAGING: As the world's largest producer of bleached board, we
supply 2 million tons annually from 6 U.S. mills. Our EVEREST and STARCOTE
brands are used globally for folding cartons for food, cosmetics,
pharmaceuticals, computer software and tobacco, and in beverage packaging for
juice and milk. Over one third of our bleached board is made into packaging and
other products in our own plants. Our 21 beverage packaging plants throughout
the world offer complete systems, from cartons to filling machines, for both
fresh and aseptic packaging. In the U.S., 13 plants provide folding cartons for
retail use and disposable packaging to the foodservice industry. We also have
joint ventures with Carter Holt Harvey in Australia and Chile.
DISTRIBUTION
Through XPEDX, our North American merchant distribution business, we supply
industry, wholesalers and end users with a vast array of printing, packaging,
graphic arts, maintenance and industrial products. XPEDX operates over 90
warehouses, 130 sales offices and 180 retail stores in the U.S. and Mexico. The
segment also includes the operations of Zellerbach acquired in August and
integrated with XPEDX during 1998. Overseas, Papeteries de France, Scaldia in
the Netherlands and Impap in Poland serve European markets. About 20% of
distribution sales are products produced by International Paper's own
facilities.
SPECIALTY PRODUCTS
INDUSTRIAL PAPERS: We produce 370,000 tons of specialty industrial papers used
in applications such as pressure-sensitive labels, food and industrial
packaging, industrial sealant and tapes, and consumer hygiene products.
CHEMICALS: Arizona Chemical is a leading processor of crude tall oil and crude
sulfate turpentine, natural by-products of the papermaking process. Products
also include specialty resins used in adhesives and inks, made at 11 plants in
the U.S. and Europe.
FINE PAPERS: We produce and market over 130,000 tons annually of premium
quality text, cover, coated and business papers under the brand names BECKETT,
STRATHMORE, HAMMERMILL PREMIUM and ZANDERS DEZIGN.
PETROLEUM: This business manages mineral rights on Company-owned and leased
land, and explores for and develops oil and gas reserves. These assets
contribute to our results and serve as a partial hedge against fluctuating
energy prices.
FOREST PRODUCTS
FOREST RESOURCES: International Paper owns or manages about 5.9 million acres
of forestlands in the U.S., mostly in the South. In 1998, these forestlands
supplied over 20% of the Company's wood requirements.
WOOD PRODUCTS: Our 21 U.S. plants produce southern pine lumber, plywood and
oriented strand board (OSB). These plants are located in the southern U.S. near
our forestlands. We produce approximately 1.8 billion board feet of lumber, over
650 million square feet of plywood and 925 million square feet of OSB.
MASONITE: From 8 locations in North America and Europe, Masonite manufactures
and markets CRAFTMASTER door facings and other molded products for residential
and commercial construction, as well as a broad line of hardboard exterior
siding, industrial hardboard and a wide range of softboard products for the home
and office. Our worldwide capacity for door facings is approximately 1.2 billion
square feet.
16
<PAGE>
DECORATIVE PRODUCTS: We produce high- and low-pressure laminates, particleboard
and graphic arts products. Markets served include residential and commercial
construction, furniture, store fixtures, graphic arts and specialty niche
markets.
CARTER HOLT HARVEY
Carter Holt Harvey is 50.3% owned by International Paper. It is one of the
largest forest products companies in the Southern Hemisphere, with operations in
New Zealand, Australia and Chile. The Australasian market accounts for 85% of
its sales. Asia, particularly Korea and Japan, is an important market for its
logs. Carter Holt Harvey's forest operations own 820,000 acres of sustainable
radiata pine plantations in New Zealand currently yielding 5 million cubic
meters of logs annually. This yield is expected to increase to 7 million cubic
meters by 2005. About 75% of the harvest is processed through Carter Holt
Harvey's wood products and pulp and paper businesses. Their access to one of the
largest low-cost softwood fiber bases in the Southern Hemisphere is a key
strength.
Carter Holt Harvey is the largest Trans-Tasman company producing lumber, plywood
and engineered wood products. It has 600 million board feet of lumber capacity.
Carter Holt Harvey is New Zealand's largest manufacturer and marketer of pulp
and paper products, with overall annual capacity of 850,000 tons at 4 mills. Its
major products are linerboard and pulp. Carter Holt Harvey produces 150,000 tons
of tissue products from 2 mills and 7 converting facilities and is the market
leader and largest manufacturer in Australia. SORBENT is the most recognized
local tissue brand in this market. Carter Holt Harvey produces corrugated boxes
and plastic packaging with a focus on the horticulture, primary produce and
foodservice markets in New Zealand and Australia. It also has a significant
share of the Australian cup market through its Continental Cup joint venture
with International Paper. The distribution business comprises the Carters
building supplies chain in New Zealand and paper merchants B. J. Ball in New
Zealand and Raleigh Paper in Australia.
Carter Holt Harvey owns a 50% stake in a joint venture that holds 60% of
Compania de Petroleos de Chile (COPEC), Chile's largest industrial conglomerate,
which is listed on the Santiago, Chile, Stock Exchange. COPEC owns and manages
the largest forest reserves in Chile, comprising 1.2 million acres of mainly
radiata pine; has annual pulp capacity of over 1.3 million tons; and is a major
producer of sawtimber.
INDUSTRY SEGMENT RESULTS
U.S. AND EUROPEAN PAPERS
U.S. and European Papers posted sales of $4.9 billion compared with $5.2 billion
in 1997 and 1996. Economic turmoil in Asia significantly affected the worldwide
supply/demand balance during 1998, causing weak markets and prices for the
Company's pulp and paper products. Despite the success of management actions to
reduce costs, operating profit fell to $135 million in 1998 from $170 million in
1997 and $180 million in 1996.
U.S. PAPERS sales were $2.7 billion, down from $2.9 billion in 1997 and $2.8
billion in 1996. The decline between 1998 and 1997 reflects weaker sales volumes
for uncoated papers and bristols, offset to some extent by higher prices for
coated papers. Demand in the U.S. began to weaken in the second quarter of 1998
and continued to wane throughout the year. The U.S. net trade balance suffered
considerably--soft export markets, a strong U.S. dollar and rising imports all
playing a part. In view of these weak markets, we curtailed production at our
U.S. mills to avoid building inventories. U.S. Papers operating profit in 1998
improved considerably from 1997 levels but was below 1996.
Uncoated papers sales were $1.6 billion in 1998, a decline of 10% from 1997 and
15% from 1996. Prices fell steadily during 1998 and, on average, were flat with
1997. Shipments were down by 10% from 1997. Following profitable results in 1997
and 1996, a loss was reported in 1998.
17
<PAGE>
U.S. Coated Papers sales of $1.1 billion increased 4% over 1997 and 20% over
1996. Operating profit improved considerably in 1998 after declining 30% in
1997, primarily as the result of start-up costs associated with production of
ACCOLADE, our new lightweight coated free sheet product. On average, prices
increased nearly $40 per ton, about 4% over 1997. The first half of 1998 was
characterized by strong demand for both coated groundwood and our premium coated
paper product, ACCOLADE. However, demand weakened significantly by mid-year as
customers liquidated inventories. The market was adversely impacted by imports
as well, and prices fell steadily as the year progressed.
PULP sales from our U.S. facilities were $590 million in 1998 and declined 17%
from 1997. The business reported a loss in 1998 compared with profits in 1997
and 1996. Average paper pulp prices were 8% below 1997. Volume was lower as
well, owing to weak export markets and generally soft paper demand. Sales for
specialty pulp were also lower, due to weakness in Asia for cigarette filter tow
and declining demand for rayon.
EUROPEAN PAPERS sales were $1.6 billion, about 5% lower than in 1997 and 1996.
European demand for paper grew modestly in 1998, but markets were weak
especially in the second half of 1998. Market-related downtime was taken in
uncoated and coated papers in the second half of the year. European Paper's 1998
shipments of uncoated and coated papers were off 2% to 3%. Prices were lower
than in 1997 across all product lines, considerably so for coated papers and
pulp, and a strong U.S. dollar reduced the value of our sales even further.
Despite lower sales, operating profit for our European operations improved more
than 30% from 1997 as productivity and cost-reduction efforts more than offset
lower sales. Zanders reported an operating profit for the second consecutive
year. Kwidzyn's performance was particularly strong, as the mill achieved record
newsprint and boxboard production.
Our U.S. and European Papers businesses completed a number of actions that will
help improve future profits. We completed a restructuring program that reduced
our U.S. Papers capacity by 400,000 tons. We undertook a major new program to
improve the cost position of our U.S. mills. The first phase is the reduction of
750 jobs at 3 mills. A recent upgrade at our Natchez, Miss., mill should boost
specialty pulp sales in 1999. And we plan to aggressively market our HAMMERMILL
brand and expect its increased sales will enrich our sales mix. In December
1998, we purchased a paper mill in Svetogorsk, Russia, near Finland, that houses
one of Europe's widest uncoated papers machines, capable of producing 250,000
tons annually.
As 1999 began, prices were lower than in 1998 for most products. Inventories of
pulp are relatively low, customer inventories are at normal levels and we
believe that prices have bottomed. However, we see only gradual price recovery
this year. As a result, 1999 average prices are expected to be well below the
1998 average. The profit improvement programs now underway are expected to
contribute $200 million annually to pre-tax earnings of the U.S. and European
Papers segment, which will partially offset the impact of lower prices.
INDUSTRIAL AND CONSUMER PACKAGING
Industrial and Consumer Packaging sales totaled $4.6 billion in 1998, up from
$4.4 billion in 1997. 1998 operating profit increased to $265 million from $170
million in 1997. The improvement in both sales and earnings in 1998 was driven
mainly by higher average prices for containerboard and corrugated boxes. Sales
were $4.3 billion in 1996 and operating profit was $375 million.
INDUSTRIAL PACKAGING revenues were $2.3 billion in 1998, up from $2.1 billion in
1997 and flat with 1996. After posting a loss in 1997, operating profit in 1998
was one half that of 1996. Following a period of strength in 1997, industrial
packaging markets weakened during 1998. Excess capacity, rising imports and a
collapse of export markets all played a role. Furthermore, U.S. industry box
shipments grew only 1%, considerably less than in 1997. Over the course of the
year, we curtailed our production by 400,000 tons to control our inventories.
Although containerboard prices declined as 1998 progressed, on average they were
12% higher than in 1997.
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<PAGE>
During 1998, our Industrial Packaging businesses made progress on several
fronts. In March, we entered into a joint venture with a manufacturer in Turkey,
building our presence in Eastern Europe and Asia. Our merger with Weston, which
owned a corrugated medium mill and 11 box plants, strengthened our capability in
those U.S. markets where we did not previously have container plants. Also, it
enabled us to increase the amount of company-produced containerboard used in our
plants to 60%. Several manufacturing initiatives were accomplished in 1998 as
well. We completed a capital project at our Mansfield, La., mill, which was
successful in improving quality and production efficiency. We increased fiber
yield and purchasing efficiency, reducing our per-ton costs by 3% to 4%. And we
made organizational changes to foster better customer focus and sales mix.
We expect industrial packaging prices to recover in 1999 as downsizing by
several North American producers should reduce U.S. industry capacity by 6%. We
shut down our Gardiner, Ore., mill in late 1998 for an indefinite period of time
due to the excess capacity in our Industrial Packaging business. Some price
improvement was evident as 1999 began. Earnings improvement in 1999 will come
from cost containment and marketing initiatives.
CONSUMER PACKAGING sales were $2.3 billion, flat with 1997 and up from $2.0
billion in 1996. Operating profit was essentially flat with 1997 and 12% below
1996. 1998 results continued to be hurt by the downturn in worldwide markets.
Our shipments of bleached board were down nearly 4%, and those into export
markets were off 10%. Weak international markets adversely affected both prices
and sales mix in domestic markets as well. At year-end, prices for folding
carton board were 6% lower than a year earlier.
Weak market conditions obscured the positive impact of a number of operating
improvements in 1998. Our mills ran well, raw material and energy costs were
down, and per-ton manufacturing costs were lower by 3%. We reorganized our
operations to align more closely with customers and the markets they serve--
beverage packaging, retail packaging and foodservice--thereby sharpening
customer focus and our ability to offer total packaging solutions. We made two
acquisitions with Carter Holt Harvey enabling us to jointly offer a full line of
foodservice products in new markets: Continental Cup in Australia and the paper
cup division of Marinetti S.A. in Chile.
As 1999 began, prices for consumer packaging products remained under pressure.
While there are signs that conditions in Asia are stabilizing and the slump in
export markets is easing, we do not expect significant price recovery this year.
Therefore, earnings improvement will depend on internal initiatives.
DISTRIBUTION
North American and European distribution sales totaled $5.5 billion in 1998
compared with $4.6 billion in 1997 and $4.5 billion in 1996. Operating profit
was $80 million in 1998, declining from $85 million in 1997 and $100 million in
1996. Profit on sales declined from 1.9% in 1997 to 1.4% in 1998 due largely to
lower margins.
XPEDX, our North American distribution operation, posted sales of $5.2 billion
in 1998, up 22% from 1997 and 1996. The increase over 1997 was driven by unit
sales growth of 5% and the acquisition of Zellerbach in August 1998. Excluding
Zellerbach and Taussig Graphics Supply, acquired in late 1997, sales were $4.5
billion in 1998. Despite sales growth, operating profit declined 10% mainly
because of weaker margins. The margin decline was caused by lower sales prices
and increasingly competitive markets for printing papers as both merchants and
customers consolidate. Certain nonrecurring costs also reduced 1998 operating
profit. These included marketing costs aimed at strengthening the XPEDX brand
name, as well as costs related to the Zellerbach integration. Operating profit
in the second half of 1998 improved over the first half, reflecting better
operating efficiencies and the impact of Zellerbach.
The successful integration of Zellerbach was largely completed in 1998. We
combined the companies, retaining only those customers and markets that met our
strategic and financial objectives. Of Zellerbach's 38 primary locations, 25
were merged with XPEDX facilities in 1998, 2 were closed and 7 remain as stand-
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<PAGE>
alone operations in markets not previously served by XPEDX. The last 4 were
merged in early 1999. As of year-end 1998, we had surpassed our goal to
eliminate 1,000 jobs. XPEDX enters 1999 poised to better serve customers with a
broader range of products and the best capabilities of both organizations.
Furthermore, XPEDX continued its ongoing program of consolidating warehousing
operations into more efficient regional distribution centers.
XPEDX plans to achieve higher sales and earnings in 1999, with the full-year
impact of Zellerbach, further volume growth and ongoing profit-improvement
initiatives. In 1999, the adoption of a sophisticated purchasing discipline will
yield many advantages, among them lower working capital and better service
capability.
Our European distribution operations--Papeteries de France, Scaldia in the
Netherlands and Impap in Poland--posted sales of $340 million, increasing 4%
from 1997 and 1996. Operating profit was flat with 1997 and 1996.
Overall, we expect higher sales and earnings for the distribution businesses in
1999.
SPECIALTY PRODUCTS
Specialty Products sales in 1998 were $1.3 billion compared with $1.4 billion in
1997 and 1996. Sales were lower across this group of businesses, especially
Chemicals and Petroleum. Results were affected by the downturn in the Asian
markets and new competitive capacity. Earnings were $125 million in 1998,
declining from $155 million last year and $175 million in 1996. Restructuring
and cost-reduction programs had a very positive impact, and the primary reasons
for the decline in earnings were lower oil and gas and industrial paper prices.
INDUSTRIAL PAPERS sales were $540 million, down slightly from $550 million in
1997 and 1996. Operating earnings in 1998 were down 35% versus 1997 and were one
half that of 1996. U.S. demand for release-backing products grew only 3% in
1998, lower than in recent years. At the same time, new capacity entered the
market with overseas demand weakening. Prices were down 3% to 5%. Plans are
underway to take substantial costs out of this business.
FINE PAPERS sales in 1998 were $295 million, 6% lower than 1997 and 10% below
1996. Despite lower sales, operating earnings increased slightly over both 1997
and 1996 due to restructuring actions taken over the past two years. We
consolidated production on our most efficient machines, reduced fixed costs, and
centralized our converting and finishing operations. There should be additional
positive carryover effects of these actions in 1999.
CHEMICALS sales were $410 million in 1998, down 10% from 1997 and 4% from 1996,
while operating earnings improved 14% over 1997 and 43% over 1996. Sales volumes
declined in 1998 due to competitive pricing and product substitution in both the
U.S. and Europe. We reduced fixed costs by 15% and improved both product quality
and the reliability of our operations. These actions more than offset the impact
of lower sales. In 1999, we expect additional earnings improvement.
PETROLEUM posted 1998 sales of $75 million compared with $105 million in 1997
and $120 million in 1996. Operating profit in 1998 declined nearly 60% and was
one third that of 1996. Both sales and profits were severely hurt by oil and gas
prices. Oil prices, adjusted for inflation, were at 50-year lows. In 1998,
average oil prices fell by 35%, and gas prices by 18%. Price declines
necessitated write-downs of our oil and gas properties in 1998. See the section
titled "Special Items Including Restructuring and Business Improvement Actions"
for further details. If oil and gas prices continue to fall, additional
write-downs may be required in 1999. The Company's exploration program, which is
focused on West Texas, the Gulf Coast and the Gulf of Mexico, yielded new
reserves in 1998 that exceeded production by 40%. Earnings in 1999 will depend
mainly on oil and gas pricing.
20
<PAGE>
FOREST PRODUCTS
Forest Products sales were $2.5 billion in 1998, down from $2.7 billion in 1997
and flat with 1996. Operating profit of $505 million improved from $475 million
in 1997 and $390 million in 1996 as stronger forestland operations more than
offset weakness in our building materials businesses.
FOREST RESOURCES revenues increased 8% to $450 million in 1998 from $410 million
in 1997. Sales in 1996 were $450 million. 1998 operating profit increased nearly
30% over year-earlier levels. The increase reflects the completion in 1998 of a
series of sales of partnership interests involving over 100,000 acres of
forestlands in Pennsylvania and New York. Results also benefited from higher
average sawtimber prices, which were 4% above 1997, and lower minority interest
expense because of the repurchase of IP Timberlands, Ltd.'s publicly traded
Class A Units in March. As planned, 1998 harvest volumes were slightly lower
than in 1997 due to the age class limitations of our timber holdings.
As 1999 began, sawtimber prices were slightly above early-1998 levels. On
average, we expect prices in 1999 to be lower than in 1998. Our harvest volumes
will be lower too, again reflecting the age of our forests. However, we project
that our harvest will increase significantly over the next decade as high-yield
plantations reach maturity. We will continue to sell nonstrategic forestlands
when a tract's sales value represents a premium over its hold-and-operate value
and the tract is not a critical supply factor to our mills.
WOOD PRODUCTS sales declined nearly 9% to $950 million in 1998 and were down
from $1 billion in 1997. 1996 sales were $835 million. Profits for this business
weakened significantly. Most of the decline was the result of considerably lower
lumber prices, caused by soft export markets, especially in Asia, and an
increase in Canadian imports. Conversely, oriented strand board markets
strengthened and prices reached record levels during the year. Plywood pricing
was flat with 1997. Lower sales prices, as well as higher fiber costs, were
offset to some extent by better operations, improved yields and a higher margin
sales mix. During the year, several high-cost plants in the U.S. industry were
forced to close. By year-end the supply/demand balance improved and lumber
markets began to stabilize.
MASONITE sales were $500 million in 1998, which was 12% below 1997 sales of $565
million. 1996 sales were $590 million. The decline was caused in part by
industry capacity additions and weak Asian demand during 1998, which reduced
pricing for door facings. For the same reasons, operating profit fell below 1997
levels to about one half of 1996.
DECORATIVE PRODUCTS sales were $620 million in 1998 as compared with $635
million in 1997 and $670 million in 1996. Operating profit declined slightly in
1998 after falling 11% in 1997. In 1998, weak sales of both high- and
low-pressure laminates were largely offset by improvements in other product
lines. During the year, we closed 2 unprofitable medium-density fiberboard
plants.
In 1999, we expect higher building materials earnings to come mainly from higher
volumes and internal cost reduction initiatives.
CARTER HOLT HARVEY
International Paper's results for this segment differ from those reported by
Carter Holt Harvey in New Zealand in four major respects:
1. Carter Holt Harvey's reporting period is a fiscal year ending March 31. Our
segment results are for the calendar year.
2. Our segment earnings include only our share of Carter Holt Harvey's
operating earnings. Segment sales, however, represent 100% of Carter Holt
Harvey's sales.
3. Carter Holt Harvey reports in New Zealand dollars but our segment results
are reported in U.S. dollars. The weighted average currency exchange rate
used to translate New Zealand dollars to U.S. dollars was .54 in 1998, .66
in 1997 and .69 in 1996.
21
<PAGE>
4. Carter Holt Harvey reports under New Zealand accounting standards but our
segment results comply with U.S. generally accepted accounting principles.
The major differences relate to cost of timber harvested, COPEC and start-up
costs. These differences reduced segment earnings by about $40 million in
1998 and $30 million in each of the years 1997 and 1996.
Carter Holt Harvey's segment sales of $1.5 billion in 1998 were below 1997 sales
of $2.0 billion. The translation effect of the weakening New Zealand dollar
accounted for 76% of the decline. Also, Carter Holt Harvey sold its building
products business in April 1998. 1996 sales were $2.1 billion. Results were
severely impacted by the weakness in Asian economies during this period as well
as that of New Zealand, which depressed pricing and demand for logs, timber,
pulp and paper products. Earnings were also adversely affected by downtime
associated with the modernization of the Kinleith pulp and paper mill and
related start-up costs. Segment operating profit declined to $20 million in 1998
from $90 million in 1997 and $130 million in 1996.
Forests results were negatively impacted by volume and price declines resulting
from the near collapse of the Korean log markets early in 1998 and the slowdown
of the Japanese economy. However, log exports, although remaining below 1997,
improved sharply in the fourth quarter. For 1998, under U.S. accounting
principles after adjusting for cost of timber harvested, Forests operated at a
loss. Wood products earnings were only slightly below 1997 as operations in
Australia performed strongly, but were offset by weakness in New Zealand. Carter
Holt Harvey's Pulp, Paper and Tissue group reported a 88% decline in earnings
caused by substantially lower prices for pulp and paper, as well as a loss of
production due to downtime associated with the Kinleith project. However, the
tissue business is performing well, with slightly higher earnings from volume
increases associated with market share gains and productivity improvements.
Packaging earnings were below those of 1997 due to significant erosion of both
prices and volumes caused by the weak New Zealand economy and competitive
pressure. Two 1998 acquisitions in Australia performed well: a joint-venture cup
business with International Paper and the folding carton business of Riverwood
International. The distribution business reported a loss in both 1998 and 1997,
but its performance had returned to break-even by the fourth quarter of 1998.
Earnings from Carter Holt Harvey's equity investments, primarily COPEC, were
also down significantly principally due to lower pulp sales volumes and prices
and the weakening of the Chilean peso against the U.S. dollar.
Carter Holt Harvey made significant progress in 1998 to reduce costs. The
"Genesis" margin improvement program continues to make a significant
contribution to earnings. The EBIT contribution from "Genesis" in 1998 was $30
million and the annual run rate for projects now underway is $50 million. Our
share, about half, is included in these segment results.
Looking forward to 1999, Carter Holt Harvey anticipates improved economic
conditions in New Zealand and in some Asian markets. As the year began, log and
pulp markets have improved from their low levels. Linerboard and pulp prices are
showing some signs of recovery. Furthermore, a lower cost structure and the
benefits of the Kinleith mill modernization are expected to improve results in
1999.
LIQUIDITY & CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS
Cash provided by operations totaled $1.7 billion for 1998 compared with $1.2
billion in 1997 and $1.7 billion in 1996. The increase over 1997 was primarily
due to working capital changes. After adjusting for noncash special items on an
after-tax basis, net earnings were about even with 1997 and about $125 million
below 1996. Depreciation and amortization expense was $1.2 billion for 1998
compared with $1.3 billion in 1997 and $1.2 billion in 1996. A decrease in
working capital added about $45 million to 1998 operating cash flow. Working
capital reduced operating cash flow by $400 million in 1997 and $50 million in
1996.
22
<PAGE>
INVESTMENT ACTIVITIES
Capital spending was $1.0 billion in 1998, slightly lower than 1997 spending of
$1.1 billion and substantially below 1996 spending of $1.4 billion. Capital
spending is expected to be just under $1.0 billion in 1999. The following table
presents capital spending by each of our business segments.
CAPITAL SPENDING BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
IN MILLIONS FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
U.S. and European Papers $ 262 $ 273 $ 452
Industrial and Consumer Packaging 259 239 273
Distribution 19 20 14
Specialty Products 136 106 120
Forest Products 165 178 261
Carter Holt Harvey 166 230 161
--------- --------- ---------
Subtotal 1,007 1,046 1,281
Corporate and other 42 65 113
--------- --------- ---------
Total $ 1,049 $ 1,111 $ 1,394
--------- --------- ---------
--------- --------- ---------
</TABLE>
Under a 1997 business improvement plan, we undertook the sale of $1 billion of
nonstrategic assets. This program was substantially completed in 1998.
Divestitures completed during 1998 included the Imaging printing and graphic
arts businesses, the label business, the Veratec nonwovens division and Carter
Holt Harvey's building products business. Substantially all of these proceeds
were used to reduce debt or for general corporate purposes.
In December 1998, we acquired OAO Svetogorsk, a pulp and paper business based in
Russia, which should enhance our ability to serve growing market demand in
Russia and Eastern Europe. We acquired the Zellerbach distribution business in
August 1998 for $261 million in cash and integrated it into XPEDX, our
distribution operation. In April 1998, Weston Paper and Manufacturing Company,
which operates a corrugated medium mill and 11 container plants in the central
and southeastern U.S., was acquired by exchanging about 4.7 million
International Paper common shares valued at approximately $232 million, in a
noncash transaction. Carter Holt Harvey also acquired Riverwood International,
an Australia-based folding carton business for approximately $46 million in cash
early in the 1998 second quarter. In February 1998, we entered into a joint
venture with Olmuksa in Turkey for $37 million for the manufacture of
containerboard and corrugated boxes for markets in Turkey and surrounding
countries. Also, Carter Holt Harvey and International Paper jointly acquired
Australia-based Continental Cup in February 1998 for $18 million and the paper
cup division of Marinetti S.A. based in Chile for $12 million in December 1998.
These acquisitions will allow Carter Holt Harvey and International Paper's
Foodservice division to offer a full line of foodservice products in the
Australian and South American markets.
Acquisitions in 1997 included Merbok Formtec, an Asian door facings company, and
Taussig Graphics Supply, Inc., a distributor of graphic arts products, which
complemented our distribution business.
In March 1996, International Paper merged with Federal Paper Board, a paper and
forest products company with facilities in the U.S. and the U.K. Federal
shareholders received, at their election and subject to certain limitations,
either $55 in cash or a combination of cash and International Paper common stock
worth $55 for each Federal common share. In total, Federal shares were acquired
for approximately $1.3 billion in cash and $1.4 billion in International Paper
common stock, and $800 million of debt was assumed. Other 1996 acquisitions
included Forchem, a tall oil and turpentine processor in Finland, and Forwood
Products, a timber-processing business in Australia, each acquired for about
$100 million.
23
<PAGE>
FINANCING ACTIVITIES
Financing activities during 1998 included a $1.8 billion net reduction primarily
of short-term debt, and the issuance of $1.5 billion of preferred securities of
subsidiaries. In March 1998, Timberlands Capital Corp. II, a wholly owned
consolidated subsidiary, issued $170 million of 7.005% preferred securities as
part of the financing to repurchase the outstanding units of IP Timberlands,
Ltd. In June 1998, IP Finance (Barbados) Limited, a wholly owned consolidated
non-U.S. subsidiary, issued $550 million of preferred securities with a dividend
payment that is based on LIBOR. In September 1998, International Paper Capital
Trust III, a wholly owned consolidated subsidiary, issued $805 million of 7 7/8%
mandatorily redeemable preferred securities. Proceeds from the latter two
preferred securities issuances were used primarily to reduce short-term
borrowings.
Long-term debt and notes payable on our consolidated balance sheet were $7.5
billion compared with $9.4 billion in 1997 and $10 billion in 1996. However,
after adjusting for foreign exchange, acquisitions and restructuring activities,
total debt was reduced by approximately $1.9 billion and $220 million in 1998
and 1997, respectively, on a cash flow basis. During 1998, one of the corporate
debt rating agencies, Standard & Poor, downgraded our long-term debt rating from
A- to BBB+.
Financing activities during 1997 included the issuance of environmental and
industrial development bonds for various capital projects, repayment of $164
million of Federal 10% debentures, and a net reduction in commercial paper and
short-term bank borrowings.
Financing activities in 1996 included short-term borrowings of $1.3 billion to
acquire Federal, the issuance of $741 million of notes with maturities ranging
from 3 to 7 years, and borrowings by IP Timberlands, Ltd. of $450 million due in
1999.
Unless otherwise noted, the proceeds of all of the financings described above
were used to reduce short-term debt or for general corporate purposes.
Dividend payments were $306 million in 1998, $302 million in 1997 and $291
million in 1996. In each year, the dividend was $1.00 per common share.
CAPITAL RESOURCES OUTLOOK FOR 1999
The Company's financial condition continues to be strong. We anticipate that
cash flow from operations, supplemented as necessary by short- or long-term
borrowings, will be adequate to fund our capital expenditures, to service
existing debt, and to meet working capital and dividend requirements during
1999.
OTHER FINANCIAL STATEMENT ITEMS
Net interest expense in 1998 was $496 million, about even with 1997 but below
the $530 million reported in 1996, reflecting lower borrowing costs and higher
tax-related interest income.
Minority interest expense declined to $76 million in 1998 from $129 million in
1997 and $169 million in 1996. The main reason for the decrease over the period
was the sharp decline in Carter Holt Harvey's results. Also, the acquisition of
the publicly traded Class-A depository units of IP Timberlands, Ltd. in March
1998 reduced minority interest by $37 million compared with 1997. The sale of
West Coast partnership interests added $32 million to the 1996 amount. Also
included in the minority interest expense are distributions related to preferred
securities of subsidiaries. Increases in these distributions partially offset
the other declines.
Our 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
24
<PAGE>
December 31, 1998, the carrying amounts of these investments and their market
values based on the closing per share amounts were as follows (in millions):
<TABLE>
<CAPTION>
SCITEX COPEC
----------- -----------
<S> <C> <C>
Carrying Amount $ 30 $ 880
Market Value $ 67 $ 840
</TABLE>
For various reasons, the market values based on the closing per share amounts
may be either higher or lower than the amount that could be realized if these
investments were sold.
SPECIAL ITEMS INCLUDING RESTRUCTURING AND BUSINESS IMPROVEMENT ACTIONS
Special items reduced 1998 net earnings by $72 million, 1997 net earnings by
$461 million and 1996 net earnings by $131 million. The following tables and
discussion present the impact of special items for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
<S> <C> <C>
EARNINGS (LOSS) BEFORE EARNINGS (LOSS) AFTER
IN MILLIONS TAXES AND MINORITY INTEREST TAXES AND MINORITY INTEREST
- --------------------------------------- --------------------------- ---------------------------
Before special items $ 521 $ 308
Oil and gas impairment charges (111) (68)
Restructuring and other charges (121) (66)
Gain on sale of business 20 12
Reversals of reserves no longer
required 83 50
----- -----
After special items $ 392 $ 236
----- -----
----- -----
</TABLE>
During 1998, we recorded $111 million of oil and gas impairment charges ($68
million after taxes). Of this amount, $56 million ($35 million after taxes) was
recorded in the fourth quarter and $55 million ($33 million after taxes) was
recorded in the third quarter. The Company has oil and gas exploration and
production operations in West Texas, the Gulf Coast and the Gulf of Mexico. The
Securities and Exchange Commission's regulations for companies that use the
full-cost method of accounting for oil and gas activities require companies to
perform a ceiling test on a quarterly basis. As a result of low oil and gas
prices, the value of our properties were written down through these noncash
charges.
Also in 1998, we recorded a $105 million pre-tax restructuring charge ($56
million after taxes and minority interest) consisting of $56 million of asset
write-downs and $49 million of severance costs and we recorded pre-tax charges
of $16 million ($10 million after taxes) related to our share of write-offs
taken by Scitex, a 13% investee company, related to in-process research and
development of an acquisition and its exit from the digital video business. The
Scitex items are reflected as equity losses from the investment in Scitex in the
consolidated statements of earnings. In addition, we recorded a $20 million
pre-tax gain ($12 million after taxes) on the sale of our Veratec nonwovens
division, and an $83 million pre-tax gain ($50 million after taxes) from the
reversal of previously established reserves that were no longer required. These
reserves were established in 1996 and 1997 and were primarily associated with
the Veratec and Imaging businesses. The sales of these businesses were completed
in 1998 and those reserves not required were returned to earnings.
25
<PAGE>
The following table and discussion presents additional detail related to the
$105 million restructuring charge (in millions):
<TABLE>
<CAPTION>
ASSET
WRITE-DOWNS SEVERANCE TOTAL
----------- --------- -----
<S> <C> <C> <C> <C>
Distribution (a) $ 20 $ 10 $ 30
U.S. Papers (b) 13 14 27
Carter Holt Harvey (c) 15 3 18
Industrial Packaging (d) 8 7 15
Other (e) 15 15
----- --------- -----
Total $ 56 $ 49 $ 105
----- --------- -----
----- --------- -----
</TABLE>
(a) After the acquisition of Zellerbach, management of XPEDX decided to
terminate certain software projects that were in process and to use
Zellerbach's systems in certain of its regions. Accordingly, we wrote off
related deferred software costs on these projects, resulting in a $20
million charge. As part of the Zellerbach integration plan, management
determined that a significant part of the personnel reduction related to the
termination of employees at the Company's duplicate facilities and
locations. The $10 million severance charge represents the costs for
terminating 274 XPEDX employees.
(b) The Company's U.S. Papers business shut down equipment at the Mobile, Ala.,
mill and announced the termination of 750 employees at the Mobile, Ala.,
Lock Haven, Pa., and Ticonderoga, N.Y., mills. At the Mobile mill,
International Paper permanently closed a paper machine and related equipment
with a net book value of $13 million. These assets were written down to
their estimated fair market value of zero. The severance charge associated
with the employee reductions at the 3 mills was $14 million.
(c) This charge primarily consists of a $15 million asset write-down associated
with the closure of two Carter Holt Harvey facilities, Myrtleford and Taupo.
Myrtleford, a tissue pulp mill located in Australia, was closed due to
excess capacity in its tissue pulp system. Carter Holt Harvey will be able
to produce the volume at lower costs at its Kawerau tissue pulp mill located
in New Zealand. Carter Holt Harvey also decided to close the Taupo, New
Zealand, sawmill due to excess capacity in its sawmill system as the result
of recent productivity improvements. The $3 million severance charge
represents the cost for terminating 236 employees. Our consolidated
financial statements included revenues of $21 million, $36 million and $34
million and operating income of $1 million, $3 million and $3 million from
these facilities in 1998, 1997 and 1996, respectively.
(d) Management decided to close the Gardiner, Ore., mill because of excess
capacity in International Paper's containerboard system. As a result, the
net plant, property and equipment assets of this mill were reduced from $13
million to the estimated salvage value of $5 million. In connection with the
third-quarter decision to close this mill, the Company terminated 298
employees at the mill and recorded a severance charge of $7 million. This
mill had revenues of $78 million, $105 million and $55 million and operating
losses of $16 million, $1 million and $9 million in 1998, 1997 and 1996,
respectively.
(e) The $15 million severance charge was recorded as a result of an announcement
by International Paper of a plan to consolidate its land and timber and
logging and fiber supply divisions into a new division called Forest
Resources and the consolidation of the Consumer Packaging group. Of the $15
million charge, $10 million related to a headcount reduction of 200
employees in the Forest Resources group and the remaining $5 million was
based on a personnel reduction of 210 employees in the Consumer Packaging
group.
26
<PAGE>
The following table is a roll forward of the severance costs included in the
1998 restructuring plan (in millions):
<TABLE>
<CAPTION>
SEVERANCE
-------------
<S> <C>
Opening Balance (third quarter 1998) $ 49
1998 Activity
Cash charges (11)
---
Balance, December 31, 1998 $ 38
---
---
</TABLE>
The severance reserve recorded in the 1998 third quarter related to 1,968
employees. As of December 31, 1998, 945 employees had been terminated.
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
<S> <C> <C>
EARNINGS (LOSS) BEFORE EARNINGS (LOSS) AFTER
IN MILLIONS TAXES AND MINORITY INTEREST TAXES AND MINORITY INTEREST
- --------------------------------------- --------------------------- ---------------------------
Before special items $ 656 $ 310
Provision for legal reserve (150) (93)
Restructuring and other charges (660) (465)
Gain on sale of business 170 97
----- -----
After special items $ 16 $ (151)
----- -----
----- -----
</TABLE>
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. It 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. At this point, the anticipated
pre-tax earnings improvement of $100 million from the 1997 restructuring actions
has been largely realized. The earnings improvement consists of $25 million of
lower depreciation expense and $75 million of lower cash costs.
The $230 million write-down of assets that International Paper recorded in the
second quarter of 1997 consisted primarily of write-downs associated with assets
to be sold or shut down as follows (in millions):
<TABLE>
<S> <C> <C>
Shutdown of European Papers facilities (a) $ 105
Shutdown of U.S. Papers and Fine Papers facilities (b) 101
Write-off of Haig Point real estate development (c) 13
Other shutdowns 11
---------
$ 230
---------
---------
</TABLE>
(a) In the second quarter of 1997, management committed to sell the Lancey,
France, mill to an employee group. The Company wrote down the net carrying
amount of the mill at June 30, 1997 by $65 million and established a reserve
of $30 million to cover a retained exposure. This remaining exposure should
be resolved in 1999 at which time we will complete our accounting for this
sale. The sale closed in October 1997. Lancey had revenues of $52 million
and $81 million and operating losses of $7 million and $9 million in 1997
and 1996, respectively. The Corimex, France, mill produces coated thermal
fax paper, which is a market that weakened in the mid-1990s. During the
second quarter of 1997, management concluded that it would continue to
operate this mill but that the assets were impaired. Based on an analysis of
expected future cash flows completed in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (SFAS No.
121), the Company reduced the carrying value of the Corimex mill from $12
million to $2 million, resulting in a $10 million charge. Corimex had
operating losses of $2 million during 1997.
27
<PAGE>
(b) The $101 million reserve related to the restructuring of the Fine Papers
manufacturing operations in the Northeast ($51 million) and the shutdown of
the deinking facility at the Lock Haven, Pa., mill ($50 million). The
restructuring of the Fine Papers operations included the shutdown of the
Woronoco, Mass., paper mill and three small paper machines at the Erie, Pa.,
mill. In the 1997 second quarter, we decided to close the deinking facility.
Given that each of these actions represented the permanent shutdown of
equipment or facilities, International Paper wrote-down the net carrying
amount of the assets to zero. The Woronoco, Mass., mill had revenues of $46
million and $50 million and operating earnings of $5 million and $1 million
in 1997 and 1996, respectively.
(c) The Company is the developer of a residential golf community named Haig
Point at Daufuskie Island, S.C. As the developer, International Paper was
responsible for operating this community until a specified number of lots
were sold, at which time it would turn the community over to the homeowners.
The net book value of our investment in Haig Point was $13 million at June
30, 1997. Given the continuing operating losses, $5 million in 1997, an
updated marketing study, and the inability to find a buyer for this
investment, we concluded that the investment was permanently impaired and
wrote it down to zero. The operating loss in 1998 was $500,000.
The $210 million loss that the Company recorded in connection with sales or
anticipated sales related to the following businesses (in millions):
<TABLE>
<S> <C> <C>
Imaging (a) $ 150
Veratec (b) 25
Decorative Products (c) 20
Label (d) 15
---------
$ 210
---------
---------
</TABLE>
(a) The Company decided to sell its Imaging businesses in the second quarter of
1997. Based on discussions with its investment banker and meetings with
potential buyers, the Company believed that the most likely outcome was to
realize approximately $325 million. The Company established a reserve of
$150 million which represented the estimated loss on the sale of the Imaging
businesses. The Company expected to complete the sale of the Imaging
businesses within one year. The Imaging businesses had revenues of $690
million and $713 million and operating earnings of $9 million and $1 million
in 1997 and 1996, respectively.
(b) The Veratec division had developed a business that was based on an interspun
technology for treating fabrics. The net carrying value of this business was
$25 million at June 30, 1997. In June 1997, the Company decided to shut down
this business and recorded a reserve of $25 million. Prior to the shutdown,
this business had revenues of $2 million and $1 million and operating losses
of $7 million and $8 million in 1997 and 1996, respectively.
(c) In the second quarter of 1997, management decided to sell the medium-density
fiberboard, low-pressure laminates and particleboard businesses. The Company
estimated the expected sales prices for each of these businesses and
recorded a reserve of $20 million to reduce the net carrying amounts to
these levels. The Company expected to complete the sales of these businesses
within one year. These businesses had revenues of $196 million and $215
million in 1997 and 1996, respectively, and operating losses of $1 million
in 1997 and operating earnings of $5 million in 1996.
(d) In the second quarter of 1997, management committed to a plan to sell the
label business. The estimated loss on the label business sale included in
the second-quarter 1997 restructuring charge was $15 million. The Company
expected to complete the sale of the label business within one year. The
label business had revenues of $24 million and $39 million in 1997 and 1996,
respectively and an operating loss of $2 million in 1997 and operating
earnings $1 million in 1996.
28
<PAGE>
The $95 million of severance and other expenses consists of the following (in
millions):
<TABLE>
<S> <C> <C>
Severance (a) $ 42
Write-off of deferred software costs (b) 18
Lease buyouts at warehouses (c) 9
Write-off of deinking process license (d) 4
Other exit costs (e) 22
---
$ 95
---
---
</TABLE>
(a) The $42 million severance charge relates to programs initiated and approved
in the 1997 second quarter in the U.S. and European Papers, Industrial and
Consumer Packaging segments and corporate staff groups to reduce headcount
by 3,015 employees under the Company's existing ongoing severance plans. We
recorded the charge in the second quarter as (1) management had committed to
the plan of termination, (2) the benefit arrangement had been communicated
to the employees, (3) the number of employees, their functions and locations
had been identified, and (4) all terminations were to be completed within
approximately one year. As of December 31, 1998, 2,446 employees had been
terminated under these programs.
(b) The $18 million charge for the write-off of deferred software costs relates
to two items as follows: (1) during the 1997 second quarter, the Company
decided to abandon a human resources software project for which $11 million
of deferred software costs had been recorded and (2) as a result of the
decision to sell certain businesses in the second quarter of 1997, the
Company decided to terminate enterprise software projects in these
businesses, for which it had recorded $7 million of deferred software costs.
(c) The $9 million charge represents the cost to buy out obligations under
existing warehouse leases. The Company decided to close these warehouses in
the second quarter of 1997.
(d) The $4 million charge represents the write-off of the net carrying value of
the deinking process license that the Company acquired from a third party.
International Paper permanently shut down this operation in the 1997 second
quarter. Accordingly, it wrote the license down to zero.
(e) The charge of $22 million relates to other exit costs.
In December 1997, an additional pre-tax charge of $125 million ($80 million
after taxes) was recorded for anticipated losses associated with the sale of the
remaining Imaging businesses. Such amount was determined after consideration of
the sales of certain of the Imaging businesses that had been completed and the
estimated proceeds from the businesses remaining to be sold. The remaining
Imaging businesses were sold in 1998.
Also included in the 1997 special items was a $150 million provision to increase
our legal reserves as a result of a settlement by Masonite Corporation, a wholly
owned subsidiary, of a class-action lawsuit relating to its hardboard siding
product. A more detailed discussion of this legal settlement is included in Note
11 to the consolidated financial statements. The Company also recorded a gain of
$170 million on the redemption of certain retained West Coast partnership
interests and the release of a related debt guaranty.
29
<PAGE>
The following table is a roll forward of the severance and other costs included
in the 1997 restructuring plan (in millions):
<TABLE>
<CAPTION>
SEVERANCE
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
---
---
</TABLE>
The $9 million of reserves remaining are to complete the 1997 restructuring
plan.
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
<S> <C> <C>
EARNINGS (LOSS) BEFORE EARNINGS (LOSS) AFTER
IN MILLIONS TAXES AND MINORITY INTEREST TAXES AND MINORITY INTEREST
- ------------------------------------------------- --------------------------- ---------------------------
Before special items $ 890 $ 434
Restructuring and other charges (670) (461)
Scitex restructuring charge (10) (6)
Gain on sale of business 592 336
----- -----
After special items $ 802 $ 303
----- -----
----- -----
</TABLE>
In the first quarter of 1996, management initiated several actions to
restructure and strengthen existing businesses that resulted in a pre-tax charge
to earnings of $515 million ($362 million after taxes). The charge included $305
million for the write-down of certain assets, $100 million for asset impairments
(related to the adoption of the provisions of SFAS No. 121), $80 million in
associated severance costs and $30 million of other expenses, including the
cancellation of leases.
30
<PAGE>
The major components of the $305 million asset write-down were as follows (in
millions):
<TABLE>
<S> <C> <C>
Consolidation and shutdown of Imaging facilities (a) $ 192
Shutdown of Cordele OSB composite siding business (b) 43
Write-off of Georgetown recovery unit (c) 25
Shutdown of Veratec facilities (d) 19
Impairment of INTAMASA business (e) 15
Other shutdowns 11
---------
$ 305
---------
---------
</TABLE>
(a) In the first quarter of 1996, management decided to consolidate the Imaging
division's manufacturing and sales operations, which resulted in a
write-down of the assets associated with these facilities. The planned
facility shutdowns included the Swiss manufacturing plants, the Lyon,
France, facility and several European sales companies. As the Company was
planning to close these facilities, it determined the fair value to be zero.
In addition, the Company determined that the long-lived assets associated
with its Binghamton, N.Y., Holyoke, Mass., and several U.K. facilities were
impaired based on an analysis of future cash flows from these businesses.
The cash flow analysis, which was completed in accordance with SFAS No. 121,
indicated that future cash flows from these operations would be break-even
and, accordingly, the Company wrote down the long-lived assets to their
estimated fair value of zero. The Imaging division had revenues of $713
million and operating earnings of $1 million during 1996.
(b) International Paper's Cordele, Ga., facility produced both oriented strand
board substrate and composite wood siding. The carrying amount of the
equipment related solely to the manufacture of composite wood siding was $43
million. The Company decided to stop manufacturing composite wood siding and
to exit this business. As we shut down the equipment, the assets' fair
values were determined to be zero.
(c) In the first quarter of 1996, the Company permanently closed an enhanced
kraft recovery unit in its Georgetown, S.C., facility because of its failure
to operate effectively. The carrying amount of this asset was $25 million.
As the equipment was shut down, the Company determined its fair value to be
zero.
(d) The Company decided to permanently close its Veratec Belgium facility and 5
thermal bond machines in its Lewisburg, Ky., facility during the first
quarter of 1996. The carrying amounts of these assets were $12 million and
$7 million, respectively. As these facilities and machines were being
closed, the Company determined their fair values to be zero.
(e) In the first quarter of 1996, the Company committed to sell the Masonite
INTAMASA business located in Cella, Spain. The Company wrote down its
carrying amount of $41 million to $26 million, which represented the
estimated selling price of this business. This business had revenues of $25
million and operating earnings of $3 million during 1996.
In the first quarter of 1996, International Paper recorded an impairment charge
of $100 million consisting of the following (in millions):
<TABLE>
<S> <C> <C>
Gardiner mill (a) $ 42
Hardboard siding facilities (b) 26
Mineral deposits (c) 14
Haig Point real estate development (d) 8
Other 10
---------
$ 100
---------
---------
</TABLE>
31
<PAGE>
(a) The Gardiner, Ore., mill produces containerboard and is the Company's only
West Coast mill. In early 1996, management announced an extended shutdown of
the mill. As a result of the shutdown, International Paper determined that a
triggering event had occurred, and it wrote down the mill's assets to the
estimated fair value.
(b) The Masonite division had hardboard siding operations at its Laurel, Miss.,
Towanda, Pa., and Ukiah, Calif., plants. Based on expected declines in
demand, management believed that a triggering event under SFAS No. 121 had
occurred in the first quarter of 1996. The Company would continue to hold
and use these assets, but it projected that the future cash flows of this
business would be negative. Accordingly, it wrote down the $26 million
carrying amount of these assets to zero.
(c) The Petroleum and Minerals division had two mineral investments that it
determined to be impaired in the first quarter of 1996. First, based on a
consultant's analysis, the Company estimated the fair value of its lignite
reserves to be $3 million, thereby requiring a write-down of $11 million.
Second, an analysis of its zinc reserves indicated a fair value of $500,000,
requiring a write-down of $3 million. The triggering event for these
write-downs was the analysis of these reserves on a stand-alone basis.
(d) International Paper holds an investment in a residential golf community
named Haig Point at Daufuskie Island, S. C. As the developer, the Company is
responsible for operating this community until a specified number of lots
have been sold, at which time it would turn the community over to the
homeowners. The net book value of the Company's investment in Haig Point was
$21 million at December 31, 1995. The Company concluded in the first quarter
of 1996 that its investment was impaired. The triggering event was the
analysis of the 1995 results and the 1996 forecast, combined with the
decision to sell this business. Haig Point's estimated fair value was $13
million, resulting in an $8 million charge.
The Company's 1996 charge included $80 million of severance costs. The charge
relates to programs initiated and approved in the first quarter of 1996 to
reduce headcount by 1,955 employees under our existing ongoing severance plan.
The businesses impacted by this charge include Imaging ($45 million), Veratec
($12 million), Zanders ($10 million), and corporate staff groups and other
businesses ($13 million). Under this plan, there have been headcount reductions
of 1,597 employees.
The Company's 1996 charge also included $30 million of other expenses. The major
components of this charge were the lease termination costs incurred by the
Imaging businesses as a result of the decision to close several European
locations. The lease termination costs resulted from the termination of leases
in London, the U.K. depot facilities, and the Benelux and Germany sales offices.
The following is a roll forward of the 1996 severance and other costs included
in the restructuring and impairment program (in millions):
<TABLE>
<CAPTION>
SEVERANCE
AND OTHER
-------------
<S> <C>
Opening Balance (first quarter 1996) $ 110
1996, 1997 and 1998 Activity
Reserve reversals (1998) (29)
Cash charges (81)
-----
Balance, December 31, 1998 $ -
-----
</TABLE>
In the fourth quarter of 1996, a $155 million pre-tax charge ($99 million after
taxes) was recorded for the write-down of the investment in Scitex to current
market value. At such time, the Company determined that its investment in Scitex
of 5.7 million shares was permanently impaired and began efforts, thus far
unsuccessful, to dispose of its investment. We wrote our investment in Scitex
down to $10 per share based on the closing prices of Scitex shares during the
period from November 14, 1996 to December 31, 1996.
32
<PAGE>
The Company also recorded a $10 million pre-tax charge ($6 million after taxes)
related to our share of a restructuring charge taken by Scitex. This item is
reflected as an equity loss from the investment in Scitex in the consolidated
statement of earnings.
The Company also completed the sale of a 98% general partnership interest in a
subsidiary partnership that owned approximately 300,000 acres of forestlands in
Oregon and Washington. Included in the net assets of the partnership interest
sold were forestlands, roads and $750 million of long-term debt. As a result of
this transaction, International Paper recognized a $592 million pre-tax gain.
ONGOING PROFIT IMPROVEMENT REVIEW
International Paper continually evaluates its operations for improvement. When
any such plans are finalized, the Company may incur costs or charges in future
periods related to improvement plans when and if such plans are implemented.
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.
INCOME TAXES
Before special items, the 1998 effective tax rate was 25% of pre-tax earnings,
declining from 34% in 1997 and 36% in 1996. The decline in the 1998 tax rate was
due primarily to the impact of state tax credits, changes in the geographic mix
of our overall taxable earnings, and permanent tax benefits on sales of non-U.S.
businesses and non-strategic timberland assets. After special items, the
effective tax rate was 20%, 238% and 41% for 1998, 1997 and 1996, respectively.
We estimate that the 1999 effective tax rate will be approximately 30% based on
expected earnings and business conditions, which are subject to change.
The following tables present the impact of the special items on the effective
tax rate for the three years. Taxes on special charges were provided at
statutory rates except for those charges that represent tax deductions that
management does not believe will be realized.
<TABLE>
<CAPTION>
1998
----------------------------------------
EARNINGS (LOSS)
BEFORE TAXES TAX
AND MINORITY EXPENSE EFFECTIVE
EFFECTIVE TAX RATE (IN MILLIONS) INTEREST (BENEFIT) TAX RATE
- --------------------------------------------- --------------- ----------- ----------
<S> <C> <C> <C>
Before special items $ 521 $ 130 25%
Oil and gas impairment charges (111) (43) 39%
Restructuring and other charges (121) (48) 40%
Gain on sale of business 20 8 40%
Reversals of reserves no longer required 83 33 40%
----- -----
After special items $ 392 $ 80 20%
----- -----
----- -----
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------
EARNINGS (LOSS)
BEFORE TAXES TAX
AND MINORITY EXPENSE EFFECTIVE
EFFECTIVE TAX RATE (IN MILLIONS) INTEREST (BENEFIT) TAX RATE
- --------------------------------------------- --------------- ----------- ----------
<S> <C> <C> <C>
Before special items $ 656 $ 223 34%
Provision for legal reserve (150) (57) 38%
Restructuring and other charges (660) (195) 30%
Gain on sale of business 170 67 39%
----- -----
After special items $ 16 $ 38 238%
----- -----
----- -----
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
1996
----------------------------------------
EARNINGS (LOSS)
BEFORE TAXES TAX
AND MINORITY EXPENSE EFFECTIVE
EFFECTIVE TAX RATE (IN MILLIONS) INTEREST (BENEFIT) TAX RATE
- --------------------------------------------- --------------- ----------- ----------
<S> <C> <C> <C>
Before special items $ 890 $ 319 36%
Restructuring and other charges (670) (209) 31%
Scitex restructuring charge (10) (4) 36%
Gain on sale of business 592 224 38%
----- -----
After special items $ 802 $ 330 41%
----- -----
----- -----
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In the fourth quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information," which requires the presentation of segment information on
a basis consistent with that used by management for operating decisions and sets
forth quarterly and annual disclosure requirements. The Company's industry
segment and geographic area financial information for 1998, 1997 and 1996
appearing on pages 42 through 45 has been restated accordingly. The major change
to previously reported segment data is to present Carter Holt Harvey as a
distinct business segment, rather than to report it on a product-line basis.
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 and 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 a company's
election, before January 1, 1998).
We have not yet quantified the impact of adopting this Statement on our
consolidated financial statements and have not determined the timing or method
of our adoption. However, adoption of the provisions of the Statement could
increase volatility in earnings and other comprehensive income.
LEGAL AND ENVIRONMENTAL ISSUES
International Paper operates in an industry subject to extensive federal and
state environmental regulation. Controlling pollutants discharged into the air,
water and groundwater to avoid adverse impacts on the environment, making
continual improvements in environmental performance, and achieving 100%
compliance with applicable laws and regulations are continuing goals of
International Paper. A total of $100 million was spent in 1998 for capital
projects to control environmental releases into the air and water and to assure
environmentally sound management and disposal of waste. We expect to spend
approximately $80 million in 1999 for similar capital projects, including the
costs to comply with the Environmental Protection Agency's (EPA) Cluster Rule
regulations. Amounts to be spent for environmental control projects in future
years will depend on new laws and regulations and changes in legal requirements
and environmental concerns. Taking these uncertainties into account, our
preliminary estimate for 2000 and
34
<PAGE>
2001 is approximately $230 million in total. On April 15, 1998, the EPA issued
final Cluster Rule regulations that established new requirements regarding air
emissions and wastewater discharges from pulp and paper mills to be met over the
next 3 to 8 years. One of the requirements of the Cluster Rule is that pulp and
paper mills use only elemental chlorine-free technology (ECF) in the pulp
bleaching process. We have spent $206 million through 1998 to convert 15 of our
U.S. and European bleached mills to this technology and for certain other
projects related to the Cluster Rule regulations. The additional cost related to
the Cluster Rule regulations for the years 1999 through 2001 is estimated to be
$194 million. Projected costs for the following 5 years are in the range of $120
million to $180 million. The final cost depends on the outcome of Cluster Rule
water regulations for pulp and paper categories other than bleached kraft.
Regulations for these categories are not likely to become final until late 2000
or 2001. We now estimate that annual operating costs, excluding depreciation,
will increase approximately $20 million when these regulations are fully
implemented.
International Paper has been named as a potentially liable party in a number of
environmental remediation actions under various federal and state laws,
including the Comprehensive Environmental Response, Compensation and Liability
Act. Related costs are recorded in the financial statements when they are
probable and reasonably estimable. Completion of these actions is not expected
to have a material adverse effect on the Company's financial condition or
results of operations.
Three nationwide class-action lawsuits filed against International Paper 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 or 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
for a period of up to 10 years. It also provides for the payment of attorneys'
fees equaling 15% 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 or 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 13% 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.
In the second quarter of 1997, we recorded a $150 million provision to increase
our legal reserves. While the total cost of these three settlements is not
presently known with certainty, we believe that our legal reserves, totaling
$129 million at December 31, 1998, are adequate to cover any amounts to be paid.
The reserve balance is net of $58 million of expected insurance recoveries.
Through December 31, 1998, settlement payments of $91 million, including the $49
million of non-returnable advances of attorneys' fees discussed above have been
made. Also, we have received $19 million from our insurance carriers. The
settlements are not expected to have a material adverse effect on our
consolidated financial position or results of operations. International Paper
and Masonite have the right to terminate each of the settlements after 7 years
from the dates of final approval.
While any proceeding or litigation has an element of uncertainty, the Company
believes that the outcome of any lawsuit or claim that is pending or threatened,
or all of them combined, will not have a material
35
<PAGE>
adverse effect on its consolidated financial position or results of operations.
For a further discussion of legal issues, see pages 67 and 68 of Item 8.
Financial Statements and Supplementary Data, Note 11. Commitments and Contingent
Liabilities.
IMPACT OF EURO
The introduction of the euro for noncash transactions took place on January 1,
1999, with 11 countries participating in the first wave: Austria, Belgium,
Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and
Spain. There has been an irrevocable locking of exchange rates between each of
the participating countries' national currencies and the new euro currency,
which became a currency in its own right. The euro has begun trading on world
currency exchanges and may be used in business transactions. On January 2, 2002,
new euro-denominated bills and coins will be issued and legacy currencies will
be completely withdrawn from circulation that year. In general, the euro is
expected to increase price transparency for our products in Europe. The major
impact to International Paper will be to its businesses within the euro zone,
which make up approximately 17% of sales. Each of our European businesses has a
plan in place to deal with the introduction of the euro.
Over the three-year transition period, our computer systems will be updated to
ensure euro compliance. Also, we are reviewing our marketing and operational
policies and procedures to ensure our ability to continue to successfully
conduct all aspects of our business in this new market. In general, our product
lines are likely to become somewhat more international, with some leveling of
prices that is not expected to significantly impact our operations. We
anticipate that the total costs in connection with the euro conversion will not
be material. Further, we do not anticipate that the conversion from the legacy
currencies to the euro will have a material adverse effect on our consolidated
financial position or results of operations.
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 designed to bring our 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. It
also includes readiness assessment of significant vendors and customers, and
contingency planning.
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 50% at the end of
February 1999 and expect to complete these efforts by the end of June 1999.
Based on the results of the detailed assessment step completed during the fourth
quarter of 1998, we have lowered our estimate of the incremental Year
2000-related costs from $135 million plus or minus 30% to $100 million plus or
minus 10%, 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. The availability of lower cost approaches and
alternatives to address facility system issues, and efficiencies achieved in our
central business system testing process, were the principal contributors to the
reduced estimate. Spending through the end of 1998 totaled $32 million. The
remaining costs are expected to be incurred during the first half of 1999. Our
policy is to expense as incurred information system maintenance
36
<PAGE>
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, noncompliant 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 major 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 46
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 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
37
<PAGE>
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 60%
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.
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
EFFECT OF INFLATION
General inflation has had minimal impact on our operating results in the last
three years. Sales prices and volumes are more strongly influenced by supply and
demand factors in specific markets and by exchange rate fluctuations than by
inflationary factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
We use financial instruments, including fixed and variable rate debt, to finance
operations, for capital spending programs and for general corporate purposes.
Additionally, financial instruments, including swap and forward contracts, are
used to hedge exposures to interest rate and foreign currency risks. We do not
use financial instruments for trading purposes.
Our exposure to market risk for changes in interest rates relates primarily to
investments in marketable securities, and short- and long-term debt obligations.
We invest in high-credit-quality securities with major international financial
institutions while limiting exposure to any one issuer. Our debt obligations
outstanding as of December 31, 1998, expressed in U.S. dollar equivalents, are
summarized as to their principal cash flows and related weighted average
interest rates by year of maturity in the following table. Our investments at
December 31, 1998 were not significant.
38
<PAGE>
SHORT- AND LONG-TERM DEBT (IN MILLIONS)
<TABLE>
<CAPTION>
OUTSTANDING AS OF DECEMBER 31, 1998 1999 2000 2001 2002 2003 THEREAFTER TOTAL
- ----------------------------------------------------- --------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. commercial paper and bank notes--5.6% average
interest rate $ 527 $ 527
New Zealand dollar commercial paper and bank
notes--4.7% average interest rate 385 385
Australian dollar commercial paper and bank
notes--5.1% average interest rate 165 165
French franc bank notes--3.8% average interest rate 46 46
German mark bank notes--4.4% average interest rate 17 17
Japanese yen bank notes--4.0% average interest rate 20 20
New Zealand dollar notes payable--5.0% average
interest rate 178 178
Fixed rate debt--7.9% average interest rate 16 $ 331 $ 256 $ 256 $ 205 $ 2,487 3,551
5 7/8% Swiss franc debentures 82 82
Floating rate notes--6.2% average interest rate 450 450
Medium-term notes--7.4% average interest rate 282 8 121 79 30 52 572
Environmental and industrial development bonds--5.6%
average interest rate 16 13 81 48 4 868 1,030
German mark fixed rate borrowings--4.6% average
interest rate 24 24 44 44 19 4 159
Other 98 43 31 79 12 36 299
--------- --------- --------- --------- --------- ----------- ---------
Total Debt $ 2,224 $ 419 $ 615 $ 506 $ 270 $ 3,447 $ 7,481
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
<CAPTION>
FAIR
OUTSTANDING AS OF DECEMBER 31, 1998 VALUE
- ----------------------------------------------------- ---------
<S> <C>
U.S. commercial paper and bank notes--5.6% average
interest rate $ 527
New Zealand dollar commercial paper and bank
notes--4.7% average interest rate 385
Australian dollar commercial paper and bank
notes--5.1% average interest rate 165
French franc bank notes--3.8% average interest rate 46
German mark bank notes--4.4% average interest rate 17
Japanese yen bank notes--4.0% average interest rate 20
New Zealand dollar notes payable--5.0% average
interest rate 178
Fixed rate debt--7.9% average interest rate 3,816
5 7/8% Swiss franc debentures 88
Floating rate notes--6.2% average interest rate 450
Medium-term notes--7.4% average interest rate 596
Environmental and industrial development bonds--5.6%
average interest rate 1,077
German mark fixed rate borrowings--4.6% average
interest rate 159
Other 302
---------
Total Debt $ 7,826
---------
---------
</TABLE>
For debt obligations, the table presents principal cash flows and related
weighted average interest rates by year of maturity. Variable interest rates
disclosed represent the weighted average rates at the end of the period. For
financial statement classification, $1.4 billion of short-term debt has been
classified as long-term pursuant to line of credit agreements.
We use cross-currency and interest rate swap agreements to manage the
composition of our fixed and floating rate debt portfolio. Amounts to be paid or
received as interest under these agreements are recognized over the life of the
swap agreements as adjustments to interest expense. The impact on earnings and
our net liability under these agreements were not significant. Our
cross-currency and interest rate swap agreements outstanding as of December 31,
1998, expressed in U.S. dollar equivalents, by year of maturity are presented in
the following table.
39
<PAGE>
INTEREST RATE AND CURRENCY SWAPS (in millions)
<TABLE>
<CAPTION>
FAIR
OUTSTANDING AS OF DECEMBER 31, 1998 1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
- ---------------------------------------------------------------------- ---- ---- ---- ---- ---- ---------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. dollar variable to fixed rate swaps $525 $ 45 $1,000 $1,570 ($187)
Average pay rate 7.1%
Average receive rate 5.2%
Australian dollar variable to fixed rate swaps 40 $45 $45 15 $30 175 (3)
Average pay rate 6.3%
Average receive rate 4.9%
New Zealand dollar variable to fixed rate swaps 13 24 26 26 26 115 (2)
Average pay rate 7.1%
Average receive rate 4.6%
U.S. dollar fixed to variable rate swaps 45 1,250 1,295 190
Average pay rate 5.1%
Average receive rate 7.5%
U.S. dollar to Australian dollar cross-currency swap 150 150 14
</TABLE>
COPEC, a Chilean equity investment of Carter Holt Harvey, has approximately $1.5
billion of U.S. dollar-denominated debt. The remeasurement of this debt as the
Chilean peso and U.S. dollar exchange rate fluctuates is recorded in earnings.
Based on the relative ownership, a 3% movement in that exchange rate would
result in approximately a $.02 per share earnings impact for International
Paper.
We also transact business in many currencies and are subject to currency
exchange rate risk. We address this risk through a risk management program that
involves financing a portion of our investments in overseas operations with
borrowings denominated in the same currency as the investment or by entering
into currency exchange contracts in tandem with U.S. dollar borrowings. These
contracts are effective in providing hedges against fluctuations in currency
exchange rates. Additionally, we utilize currency exchange contracts to hedge
certain transactions that are denominated in foreign currencies, primarily
export sales and equipment purchased from nonresident vendors. These contracts
serve to protect us from currency fluctuations between the transaction and
settlement dates.
The following table presents information about our foreign currency forward
contracts outstanding as of December 31, 1998, expressed in U.S. dollar
equivalents. All contracts have maturities of less than 12 months. This
information should be read in conjunction with Note 14 of Item 8. Financial
Statements and Supplementary Data, which can be found on pages 70 through 72.
FOREIGN CURRENCY FORWARD CONTRACTS (Dollars in millions)
<TABLE>
<CAPTION>
CONTRACT WEIGHTED AVERAGE UNREALIZED
OUTSTANDING AS OF DECEMBER 31, 1998 AMOUNT EXCHANGE RATE GAIN (LOSS)
- ------------------------------------------------------------------------ ----------- ----------------- -------------
<S> <C> <C> <C>
Receive Belgian francs / Pay British pounds $ 28 57.25
Receive Swedish kronas / Pay U.S. dollars 50 8.07
Receive German marks / Pay U.S. dollars 305 1.68 $ 3
Receive British pounds / Pay Belgian francs 32 57.36
Receive New Zealand dollars / Pay U.S. dollars 431 1.02 (8)
Receive New Zealand dollars / Pay Australian dollars 176 1.40 4
Receive Australian dollars / Pay New Zealand dollars 30 0.84 (1)
Receive Swiss francs / Pay New Zealand dollars 85 0.67 (12)
Receive U.S. dollars / Pay New Zealand dollars 105 0.50 (10)
Receive U.S. dollars / Pay Australian dollars 65 0.63 3
</TABLE>
40
<PAGE>
The Company has an additional $44 million in a number of smaller contracts to
purchase or sell other currencies with a related net unrealized immaterial gain.
VALUE AT RISK
Value at risk is used to describe an approach for measuring market risk exposure
that utilizes statistical models that are based on historical price and
volatility patterns to estimate the probability of the value of a financial
instrument falling above or below a specified amount at a specified confidence
level and over a given time period. Our analysis uses variance-covariance
statistical modeling techniques and includes substantially all interest
rate-sensitive debt and swaps, and currency exchange contracts. The model
estimates the potential loss in fair market value or earnings the Company could
incur from adverse changes in interest rates or currency exchange rates. The
results of our analysis at a 95% confidence level were not significant to our
consolidated common shareholders' equity, earnings or daily change in market
capitalization.
41
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
The industry segment and geographic area financial information has been restated
in accordance with the provisions of Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which the Company adopted in the 1998 fourth quarter. This statement requires
that industry segments be reported using the management approach rather than
grouped along industry product lines, as had been reported in prior years. The
Statement allows for combination of segments that have similar economic
characteristics or where segments fall below a 10% materiality threshold.
The most significant segment reporting change is that Carter Holt Harvey, our
50.3% owned consolidated New Zealand-based forest products company, is now
disclosed as a separate segment. In the past, Carter Holt Harvey results were
allocated to the product line segments. For an explanation of major differences
between results reported by the Company for this segment and those reported by
Carter Holt Harvey in New Zealand, see pages 21 and 22 of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For information about our industry segments, see the "Description of Industry
Segments" included in Management's Discussion and Analysis.
For management purposes, we report the operating performance of each business
based on earnings before interest and income taxes ("EBIT") excluding special
items and gains or losses on sales of businesses. Our Carter Holt Harvey segment
includes our share, about half, of Carter Holt Harvey's operating earnings
adjusted for U.S. generally accepted accounting principles. The remaining half
is included in minority interest adjustment. Intersegment sales and transfers
are recorded at current market prices. Corporate sales includes the Imaging and
Veratec businesses that were sold in 1998 and 1997. Corporate operating profit
also includes these businesses as well as corporate expenses. Corporate assets
includes these businesses for the applicable years in addition to other assets
not allocated to our segments. Sales for these businesses were $220 million in
1998 and $938 million and $980 million in 1997 and 1996, respectively. These
businesses recorded an operating loss of $2 million in 1998 and operating
profits of $27 million and $12 million in 1997 and 1996, respectively.
External Sales By Major Product is determined by aggregating sales from each
segment based on similar products or services. External sales are defined as
those that are made to parties outside the Company's consolidated group whereas
sales by segment in the Net Sales table are determined by the management
approach and include intersegment sales.
Capital Spending by Industry Segment is reported on page 23 of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
42
<PAGE>
FINANCIAL INFORMATION BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
NET SALES
IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
U.S. and European Papers $ 4,865 $ 5,200 $ 5,155
Industrial and Consumer Packaging 4,600 4,415 4,275
Distribution 5,545 4,555 4,545
Specialty Products 1,320 1,425 1,425
Forest Products 2,520 2,655 2,550
Carter Holt Harvey 1,505 1,955 2,080
Corporate and Intersegment Sales (1) (814) (109) 113
--------- --------- ---------
Net Sales $ 19,541 $ 20,096 $ 20,143
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
ASSETS
IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
U.S. and European Papers $ 6,779 $ 6,740 $ 7,548
Industrial and Consumer Packaging 5,308 4,880 4,772
Distribution 1,712 1,174 1,101
Specialty Products 1,299 1,414 1,433
Forest Products 3,030 3,237 2,968
Carter Holt Harvey (2) 4,475 4,953 5,733
Corporate (1) 3,753 4,356 4,697
--------- --------- ---------
Assets $ 26,356 $ 26,754 $ 28,252
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
OPERATING PROFIT
IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
U.S. and European Papers $ 135 $ 170 $ 180
Industrial and Consumer Packaging 265 170 375
Distribution 80 85 100
Specialty Products 125 155 175
Forest Products 505 475 390
Carter Holt Harvey (3) 20 90 130
--------- --------- ---------
Operating Profit 1,130 1,145 1,350
Interest expense, net (496) (490) (530)
Minority interest adjustment (3) 45 149 172
Corporate items, net (1)(5) (158) (148) (102)
Provision for legal reserve (150)
Restructuring and other charges (216) (660) (670)
Scitex restructuring and other charges (16) (10)
Reversals of reserves no longer required 83
Gains on sales of businesses 20 170 592
--------- --------- ---------
Earnings Before Income Taxes and Minority Interest $ 392 $ 16 $ 802
--------- --------- ---------
--------- --------- ---------
</TABLE>
43
<PAGE>
FINANCIAL INFORMATION BY INDUSTRY SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
RESTRUCTURING AND OTHER CHARGES
IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
U.S. and European Papers $ 27 $ 186 $ 50
Industrial and Consumer Packaging 20 48 55
Distribution 30 16
Specialty Products 111 29 18
Forest Products 10 66 95
Carter Holt Harvey 18
Corporate 315 452
--------- --------- ---------
Restructuring and Other Charges $ 216 $ 660 $ 670
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION, DEPLETION AND AMORTIZATION
IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
U.S. and European Papers $ 429 $ 470 $ 467
Industrial and Consumer Packaging 288 298 260
Distribution 22 19 19
Specialty Products 92 94 90
Forest Products 181 185 137
Carter Holt Harvey 201 202 192
Corporate 133 148 150
--------- --------- ---------
Depreciation, Depletion and Amortization 1,346 1,416 1,315
Less: Depletion (4) (160) (158) (121)
--------- --------- ---------
Depreciation and Amortization $ 1,186 $ 1,258 $ 1,194
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
EXTERNAL SALES BY MAJOR PRODUCT
IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Printing Papers $ 4,120 $ 4,520 $ 4,525
Packaging 4,970 4,765 4,785
Distribution 5,510 4,470 4,690
Specialty Products 1,665 1,810 1,815
Forest Products 3,020 3,440 3,195
Corporate Sales (1) 256 1,091 1,133
--------- --------- ---------
Net Sales $ 19,541 $ 20,096 $ 20,143
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) Includes results or assets as applicable from operations that were disposed
of in 1998 and 1997.
(2) Includes an equity investment (in millions) of $956 in 1998, $974 in 1997,
and $988 in 1996.
(3) Includes equity earnings (in millions) of $20 in 1998, $65 in 1997, and $65
in 1996. Half of these equity earnings amounts are in the Carter Holt Harvey
segment and half are in minority interest adjustment.
(4) Depletion consists of Cost of Timber Harvested and is included in the Forest
Products and Carter Holt Harvey segments.
(5) Includes goodwill amortization related to Federal Paper Board of $39 million
in 1998 and 1997 and $31 million in 1996.
44
<PAGE>
FINANCIAL INFORMATION BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
NET SALES (1)
IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
United States (2) $ 14,810 $ 14,422 $ 14,215
Europe 2,894 3,326 3,484
Pacific Rim (3) 1,647 2,129 2,263
Other 190 219 180
--------- --------- ---------
Net Sales $ 19,541 $ 20,096 $ 20,142
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
EUROPEAN SALES BY INDUSTRY SEGMENT
IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
U.S. and European Papers $ 1,423 $ 1,512 $ 1,542
Industrial and Consumer Packaging 628 627 686
Distribution 323 322 334
Specialty Products 252 279 244
Forest Products 208 192 241
Other Businesses 60 394 437
--------- --------- ---------
European Sales $ 2,894 $ 3,326 $ 3,484
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
LONG LIVED ASSETS (4)
IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
United States $ 9,918 $ 9,940 $ 10,172
Europe 1,892 1,893 2,323
Pacific Rim (3) 2,751 3,010 3,486
Other 79 98 100
Corporate 234 397 478
--------- --------- ---------
Long Lived Assets $ 14,874 $ 15,338 $ 16,559
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) Revenues are attributed to countries based on location of seller.
(2) Export sales to unaffiliated customers (in billions) were $1.2 in 1998, $1.4
in 1997 and $1.4 in 1996.
(3) Operations in New Zealand and Australia account for most of the Pacific Rim
amounts.
(4) Long Lived Assets includes Forestlands and Plants, Properties and Equipment,
Net.
45
<PAGE>
REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS
The management of International Paper Company is responsible for the fair
presentation of the information contained in the financial statements in this
annual report. The statements are prepared in accordance with generally accepted
accounting principles and reflect management's best judgment as to the Company's
financial position, results of operations and cash flows.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that transactions are properly recorded and
summarized so that reliable financial records and reports can be prepared and
assets safeguarded.
An important part of the internal controls system is the Company's ethics
program: including its long-standing policy on Ethical Business Conduct, which
requires employees to maintain the highest ethical and legal standards in their
conduct of Company business; a toll-free telephone compliance line whereby any
employee may report suspected violations of law or Company policy; and a newly
established office of ethics and business practices. The internal controls
system further includes careful selection and training of supervisory and
management personnel, appropriate delegation of authority and division of
responsibility, dissemination of accounting and business policies throughout the
Company, and an extensive program of internal audits with management follow-up.
The independent public accountants provide an objective, independent review of
management's discharge of its responsibility for the fairness of the Company's
financial statements. They review the Company's internal accounting controls and
conduct tests of procedures and accounting records to enable them to form the
opinion set forth in their report.
The Board of Directors monitors management's administration of the Company's
financial and accounting policies and practices, and the preparation of these
financial statements. The Audit Committee, which consists of four nonemployee
directors, meets regularly with representatives of management, the independent
public accountants and the internal Auditor to review their activities. The
Audit Committee recommends that the shareholders approve the appointment of the
independent public accountants to conduct the annual audit.
The independent public accountants and the internal Auditor both have free
access to the Audit Committee and meet regularly with the Audit Committee, with
and without management representatives in attendance.
Marianne M. Parrs
Executive Vice President-Adminstration and Chief Financial Officer
46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of International Paper Company:
We have audited the accompanying consolidated balance sheets of International
Paper Company (a New York corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of earnings, common
shareholders' equity and cash flows for each of the three years ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Paper Company and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years ended December 31,
1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, N.Y.
February 9, 1999
47
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS
IN MILLIONS, EXCEPT PER SHARE AMOUNTS, FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET SALES $ 19,541 $ 20,096 $ 20,143
--------- --------- ---------
COSTS AND EXPENSES
Cost of products sold 14,761 14,974 14,883
Selling and administrative expenses 1,532 1,581 1,509
Depreciation and amortization 1,186 1,258 1,194
Distribution expenses 865 933 925
Taxes other than payroll and income taxes 181 205 194
Oil and gas impairment charges 111
Provision for legal reserve 150
Equity (earnings) losses from investment in Scitex 15 (1) 28
Restructuring and other charges 105 660 670
--------- --------- ---------
TOTAL COSTS AND EXPENSES 18,756 19,760 19,403
Reversals of reserves no longer required 83
Gains on sales of businesses 20 170 592
--------- --------- ---------
EARNINGS BEFORE INTEREST, INCOME TAXES AND MINORITY INTEREST 888 506 1,332
Interest expense, net 496 490 530
--------- --------- ---------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 392 16 802
Income tax provision 80 38 330
Minority interest expense, net of taxes 76 129 169
--------- --------- ---------
NET EARNINGS (LOSS) $ 236 $ (151) $ 303
--------- --------- ---------
--------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE $ .77 $ (.50) $ 1.04
--------- --------- ---------
--------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE--ASSUMING DILUTION $ .77 $ (.50) $ 1.04
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
CONSOLIDATED BALANCE SHEET
IN MILLIONS, AT DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and temporary investments $ 477 $ 398
Accounts and notes receivable, less allowances of $97 in 1998 and $93 in 1997 2,469 2,404
Inventories 2,719 2,760
Other current assets 345 383
--------- ---------
Total Current Assets 6,010 5,945
Plants, Properties and Equipment, Net 12,079 12,369
Forestlands 2,795 2,969
Investments 1,075 1,166
Goodwill 2,625 2,557
Deferred Charges and Other Assets 1,772 1,748
--------- ---------
TOTAL ASSETS $ 26,356 $ 26,754
--------- ---------
--------- ---------
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current maturities of long-term debt $ 1,074 $ 2,212
Accounts payable 1,525 1,338
Accrued payroll and benefits 304 283
Other accrued liabilities 733 1,047
--------- ---------
Total Current Liabilities 3,636 4,880
--------- ---------
Long-Term Debt 6,407 7,154
Deferred Income Taxes 2,860 2,681
Other Liabilities 1,138 1,236
Minority Interest 1,608 1,643
International Paper--Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries
Holding International Paper Debentures--Note 8 1,805 450
Commitments and Contingent Liabilities--Note 11
Common Shareholders' Equity
Common stock, $1 par value, 1998--307.7 shares, 1997--302.9 shares 308 303
Paid-in capital 3,877 3,654
Retained earnings 5,116 5,186
Accumulated other comprehensive income (loss) (375) (396)
--------- ---------
8,926 8,747
Less: Common stock held in treasury, at cost, 1998--0.6 shares, 1997--0.7 shares 24 37
--------- ---------
Total Common Shareholders' Equity 8,902 8,710
--------- ---------
TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $ 26,356 $ 26,754
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
IN MILLIONS, FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ 236 $ (151) $ 303
Depreciation and amortization 1,186 1,258 1,194
Deferred income tax provision (benefit) 139 (90) 107
Restructuring and other charges 105 660 670
Restructuring charges and write-off of acquired in-process research and
development costs by Scitex 16 10
Provision for legal reserve 150
Payments related to restructuring and legal reserves (82) (103) (34)
Oil and gas impairment charges 111
Reversals of reserves no longer required (83)
Gains on sales of businesses (20) (170) (592)
Other, net 18 92 133
Changes in current assets and liabilities
Accounts and notes receivable 81 (53) 192
Inventories 48 (150) 174
Accounts payable and accrued liabilities (70) (201) (399)
Other (14) (19)
--------- --------- ---------
CASH PROVIDED BY OPERATIONS 1,671 1,242 1,739
--------- --------- ---------
INVESTMENT ACTIVITIES
Invested in capital projects (1,049) (1,111) (1,394)
Mergers and acquisitions, net of cash acquired (498) (80) (1,527)
Proceeds from divestitures 523 322
Other (22) 16 (59)
--------- --------- ---------
CASH USED FOR INVESTMENT ACTIVITIES (1,046) (853) (2,980)
--------- --------- ---------
FINANCING ACTIVITIES
Issuance of common stock 94 142 100
Issuance of preferred securities by subsidiaries 1,525
Issuance of debt 267 531 1,909
Reduction of debt (2,144) (752) (375)
Change in bank overdrafts 68 29 (23)
Dividends paid (306) (302) (291)
Other (50) 6 (40)
--------- --------- ---------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (546) (346) 1,280
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3 1
--------- --------- ---------
CHANGE IN CASH AND TEMPORARY INVESTMENTS 79 46 40
CASH AND TEMPORARY INVESTMENTS
Beginning of the year 398 352 312
--------- --------- ---------
End of the year $ 477 $ 398 $ 352
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
IN MILLIONS, EXCEPT SHARE AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Common Stock Issued Accumulated
Other Treasury Stock
---------------------- Paid-In Retained Comprehensive ------------------------
Shares Amount Capital Earnings Income (Loss) Shares Amount
--------- ----------- ----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 263,261 $ 263 $ 2,164 $ 5,627 $ (201) 2,253 $ 56
Issuance of stock for merger 35,348 35 1,368
Issuance of stock for various plans 2,215 3 67 (2,567) (70)
Repurchase of stock 868 36
Cash dividends--Common stock
($1.00 per share) (291)
Comprehensive income
Net earnings 303
Change in cumulative foreign
currency translation adjustment
(less tax expense of $36) 28
Total comprehensive income
--------- ----- ----------- ----------- ----- ----------- ---
BALANCE, DECEMBER 31, 1996 300,824 301 3,599 5,639 (173) 554 22
Issuance of stock for various plans 2,086 2 55 (2,345) (106)
Repurchase of stock 2,517 121
Cash dividends--Common stock
($1.00 per share) (302)
Comprehensive income (loss)
Net loss (151)
Change in cumulative foreign
currency translation adjustment
(less tax expense of $200) (246)
Realized foreign currency
translation adjustment related
to divestitures
(less tax benefit of $6) 23
Total comprehensive income
(loss)
--------- ----- ----------- ----------- ----- ----------- ---
BALANCE, DECEMBER 31, 1997 302,910 303 3,654 5,186 (396) 726 37
Issuance of stock for merger 4,683 5 227
Issuance of stock for various plans 108 (4) (2,694) (128)
Repurchase of stock 2,520 115
Cash dividends--Common stock
($1.00 per share) (306)
Comprehensive income (loss)
Net earnings 236
Minimum pension liability
adjustment
(less tax benefit of $5) (8)
Change in cumulative foreign
currency translation adjustment
(less tax benefit of $2) 22
Realized foreign currency
translation adjustment related
to divestitures
(less tax benefit of $4) 7
Total comprehensive income
--------- ----- ----------- ----------- ----- ----------- ---
BALANCE, DECEMBER 31, 1998 307,701 $ 308 $ 3,877 $ 5,116 $ (375) 552 $ 24
--------- ----- ----------- ----------- ----- ----------- ---
--------- ----- ----------- ----------- ----- ----------- ---
<CAPTION>
Total
Common
Shareholders'
Equity
---------------
<S> <C>
BALANCE, JANUARY 1, 1996 $ 7,797
Issuance of stock for merger 1,403
Issuance of stock for various plans 140
Repurchase of stock (36)
Cash dividends--Common stock
($1.00 per share) (291)
Comprehensive income
Net earnings 303
Change in cumulative foreign
currency translation adjustment
(less tax expense of $36) 28
------
Total comprehensive income 331
------
BALANCE, DECEMBER 31, 1996 9,344
Issuance of stock for various plans 163
Repurchase of stock (121)
Cash dividends--Common stock
($1.00 per share) (302)
Comprehensive income (loss)
Net loss (151)
Change in cumulative foreign
currency translation adjustment
(less tax expense of $200) (246)
Realized foreign currency
translation adjustment related
to divestitures
(less tax benefit of $6) 23
------
Total comprehensive income
(loss) (374)
------
BALANCE, DECEMBER 31, 1997 8,710
Issuance of stock for merger 232
Issuance of stock for various plans 124
Repurchase of stock (115)
Cash dividends--Common stock
($1.00 per share) (306)
Comprehensive income (loss)
Net earnings 236
Minimum pension liability
adjustment
(less tax benefit of $5) (8)
Change in cumulative foreign
currency translation adjustment
(less tax benefit of $2) 22
Realized foreign currency
translation adjustment related
to divestitures
(less tax benefit of $4) 7
------
Total comprehensive income 257
------
BALANCE, DECEMBER 31, 1998 $ 8,902
------
------
</TABLE>
The cumulative foreign currency translation adjustment (in millions) was $(367),
$(396) and $(173) at December 31, 1998, 1997 and 1996, respectively, and is
included as a component of accumulated other comprehensive income (loss).
The accompanying notes are an integral part of these financial statements.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE COMPANY'S BUSINESS
The Company is a global forest products, paper and packaging company that is
complemented by an extensive distribution system, with primary markets and
manufacturing operations in the United States, Europe and the Pacific Rim.
Substantially all of the Company's businesses have experienced and are likely to
continue to experience cycles relating to available industry capacity and
general economic conditions. For a further discussion of the Company's business,
see pages 15 through 17 of Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
FINANCIAL STATEMENTS
The preparation of these financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates. For a
further discussion of significant estimates and assumptions that affect the
reported amounts of assets and liabilities and results of operations, and
disclosure of contingent assets and liabilities, see the legal and environmental
issues section on pages 34 through 36 of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations. Actual results could
differ from management's estimates.
REVENUE RECOGNITION
The Company recognizes revenues when goods are shipped.
CONSOLIDATION
The consolidated financial statements include the accounts of International
Paper Company and its subsidiaries. Minority interest represents minority
shareholders' proportionate share of the equity in several of the Company's
consolidated subsidiaries, primarily Carter Holt Harvey Limited, Zanders
Feinpapiere AG, Georgetown Equipment Leasing Associates, L.P. and Trout Creek
Equipment Leasing, L.P. All significant intercompany balances and transactions
are eliminated. Investments in affiliated companies owned 20% to 50%, and the
Company's 13% investment in Scitex Corporation Ltd., where the Company has the
ability to exercise significant influence, because the Company is party to a
shareowners' agreement with two other entities which together with the Company
own just over 39% of Scitex, are accounted for by the equity method. The
Company's share of affiliates' earnings is included in the consolidated
statement of earnings.
TEMPORARY INVESTMENTS
Temporary investments with an original maturity of three months or less are
treated as cash equivalents and are stated at cost, which approximates market.
INVENTORIES
Inventory values include all costs directly associated with manufacturing
products: materials, labor and manufacturing overhead. These values are
presented at cost or market, if it is lower. In the United States, costs of raw
materials and finished pulp and paper products are generally determined using
the last-in, first-out method. Other inventories are primarily stated using the
first-in, first-out or average cost method.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PLANTS, PROPERTIES AND EQUIPMENT
Plants, properties and equipment are stated at cost, less accumulated
depreciation. For financial reporting purposes, the Company uses the
units-of-production method for depreciating its major pulp and paper mills and
certain wood products facilities and the straight-line method for other plants
and equipment. Annual straight-line depreciation rates are buildings, 2 1/2% to
8 1/2%, and machinery and equipment, 5% to 33%. For tax purposes, depreciation
is computed using accelerated methods.
Interest costs related to the development of certain long-term assets are
capitalized and amortized over the related assets' estimated useful lives. The
Company capitalized net interest costs of $42 million in 1998, $62 million in
1997 and $67 million in 1996. Interest payments made during 1998, 1997 and 1996
were $636 million, $708 million and $658 million, respectively. Total interest
expense was $588 million in 1998, $593 million in 1997 and $583 million in 1996.
FORESTLANDS
The Company controlled, through domestic subsidiaries, approximately 5.9 million
acres of forestlands in the United States and, through its ownership of Carter
Holt Harvey, approximately 820,000 acres of forestlands in New Zealand at
December 31, 1998. Forestlands are stated at cost, less accumulated depletion
representing the cost of timber harvested. Forestlands include owned property as
well as certain timber harvesting rights with terms of one or more years. Costs
attributable to timber are charged against income as trees are cut. The
depletion rate charged is determined annually based on the relationship of
remaining costs to estimated recoverable volume.
AMORTIZATION OF INTANGIBLE ASSETS
Goodwill, the cost in excess of assigned value of businesses acquired, is
amortized for periods of up to 40 years. Accumulated amortization was $431
million and $344 million at December 31, 1998 and 1997, respectively.
STOCK-BASED COMPENSATION
Stock options and other stock-based compensation awards are accounted for using
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
ENVIRONMENTAL REMEDIATION COSTS
Costs associated with environmental remediation obligations are accrued when
such costs are probable and reasonably estimable. Such accruals are adjusted as
further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are discounted to their
present value when the expected cash flows are reliably determinable.
TRANSLATION OF FINANCIAL STATEMENTS
Balance sheets of the Company's international operations are translated into
U.S. dollars at year-end exchange rates, while statements of earnings are
translated at average rates. Adjustments resulting from financial statement
translations are included as cumulative translation adjustments in accumulated
other comprehensive income (loss). Gains and losses resulting from foreign
currency transactions are included in earnings.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain reclassifications have been made to prior-year amounts to conform with
the current-year presentation.
NOTE 2. EARNINGS PER COMMON SHARE
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 year. 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>
IN MILLIONS 1998 1997 1996
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Net earnings (loss) $ 236 $ (151) $ 303
Effect of dilutive securities
Preferred securities of subsidiary trust
--------- --------- ---------
Net earnings (loss)--assuming dilution $ 236 $ (151) $ 303
--------- --------- ---------
--------- --------- ---------
Average common shares outstanding 305.9 301.6 292.1
Effect of dilutive securities
Long-term incentive plan deferred compensation (.9) (.9) (.9)
Stock options 1.3 1.4
Preferred securities of subsidiary trust
--------- --------- ---------
Average common shares outstanding--assuming dilution 306.3 300.7 292.6
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per common share $ .77 $ (.50) $ 1.04
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per common share--assuming dilution $ .77 $ (.50) $ 1.04
--------- --------- ---------
--------- --------- ---------
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
NOTE 3. INDUSTRY SEGMENT INFORMATION
The industry segment and geographic area financial information has been restated
in accordance with the provisions of Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which was adopted in the 1998 fourth quarter.
Financial information by industry segment and geographic area for 1998, 1997 and
1996 is presented at the beginning of this Item on pages 42 through 45.
NOTE 4. RECENT ACCOUNTING DEVELOPMENTS
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 of the
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and
may be implemented as of the beginning of any fiscal quarter. The Statement
cannot be applied retroactively. The Statement must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired or substantively modified after December 31, 1997
(and at the Company's election, before January 1, 1998).
We have not yet quantified the impact of adopting the Statement on our
consolidated financial statements and have not determined the timing or method
of our adoption. However, adoption of the provisions of the Statement could
increase volatility in earnings and other comprehensive income.
NOTE 5. 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 forest products
company. Under the terms of the merger agreement, the Union Camp shareholders
will receive International Paper common shares worth $71 per share for each
Union Camp share. The transaction, which is valued at approximately $6.6
billion, including assumption of debt, is subject to approval by Union Camp and
International Paper shareholders. The merger is expected to close early in the
second quarter of 1999 and will be accounted for as a pooling of interests.
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, the Company acquired the Zellerbach distribution business from The
Mead Corporation for approximately $261 million in cash. Zellerbach is being
integrated into XPEDX, the Company's distribution business.
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 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.
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 will allow Carter Holt Harvey and International Paper's Foodservice
Division to offer a full line of food service products in the Australian and New
Zealand markets.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet at December 31, 1998 includes preliminary
purchase price allocations for OAO Svetogorsk, Zellerbach and Weston. Final
allocations for these acquisitions will be completed in 1999.
In September 1997, the Company acquired Merbok Formtec, a company that has
pioneered the development of door facing products through postforming
medium-density fiberboard. In November 1997, the stock of Taussig Graphics
Supply, Inc. was acquired.
In August 1996, the Company acquired Forchem, a tall oil and turpentine
processor in Finland. In September 1996, Carter Holt Harvey acquired Forwood
Products, the timber-processing business of the South Australian Government.
On March 12, 1996 the Company completed the merger with Federal Paper Board
(Federal), a diversified paper and forest products company. Under the terms of
the merger agreement, Federal shareholders received, at their election and
subject to certain limitations, either $55 in cash per share or a combination of
cash and International Paper common stock worth $55 for each share of Federal
common stock. Federal shares were acquired for approximately $1.3 billion in
cash and $1.4 billion in International Paper common stock, and approximately
$800 million of debt was assumed.
All of the acquisitions completed in 1998, 1997 and 1996 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.
NOTE 6. RESTRUCTURING AND OTHER CHARGES
SPECIAL ITEMS INCLUDING RESTRUCTURING AND BUSINESS IMPROVEMENT ACTIONS
Special items reduced 1998 net earnings by $72 million, 1997 net earnings by
$461 million and 1996 net earnings by $131 million. The following tables and
discussion present the impact of special items for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
EARNINGS (LOSS) BEFORE EARNINGS (LOSS) AFTER
IN MILLIONS TAXES AND MINORITY INTEREST TAXES AND MINORITY INTEREST
- ------------------------------------------------- --------------------------- ---------------------------
<S> <C> <C>
Before special items $ 521 $ 308
Oil and gas impairment charges (111) (68)
Restructuring and other charges (121) (66)
Gain on sale of business 20 12
Reversals of reserves no longer required 83 50
----- -----
After special items $ 392 $ 236
----- -----
----- -----
</TABLE>
During 1998, we recorded $111 million of oil and gas impairment charges ($68
million after taxes). Of this amount, $56 million ($35 million after taxes) was
recorded in the fourth quarter and $55 million ($33 million after taxes) was
recorded in the third quarter. The Company has oil and gas exploration and
production operations in West Texas, the Gulf Coast and the Gulf of Mexico. The
Securities and Exchange Commission's regulations for companies that use the
full-cost method of accounting for oil and gas activities require companies to
perform a ceiling test on a quarterly basis. As a result of low oil and gas
prices, the value of our properties were written down through these noncash
charges.
Also in 1998, we recorded a $105 million pre-tax restructuring charge ($56
million after taxes and minority interest) consisting of $56 million of asset
write-downs and $49 million of severance costs and we recorded
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pre-tax charges of $16 million ($10 million after taxes) related to our share of
write-offs taken by Scitex, a 13% investee company, related to in-process
research and development of an acquisition and its exit from the digital video
business. The Scitex items are reflected as equity losses from the investment in
Scitex in the consolidated statements of earnings. In addition, we recorded a
$20 million pre-tax gain ($12 million after taxes) on the sale of our Veratec
nonwovens division, and an $83 million pre-tax gain ($50 million after taxes)
from the reversal of previously established reserves that were no longer
required. These reserves were established in 1996 and 1997 and were primarily
associated with the Veratec and Imaging businesses. The sales of these
businesses were completed in 1998 and those reserves not required were returned
to earnings.
The following table and discussion presents additional detail related to the
$105 million restructuring charge (in millions):
<TABLE>
<CAPTION>
ASSET
WRITE-DOWNS SEVERANCE TOTAL
--------------- ------------- ---------
<S> <C> <C> <C> <C>
Distribution (a) $ 20 $ 10 $ 30
U.S. Papers (b) 13 14 27
Carter Holt Harvey (c) 15 3 18
Industrial Packaging (d) 8 7 15
Other (e) 15 15
--- --- ---------
Total $ 56 $ 49 $ 105
--- --- ---------
--- --- ---------
</TABLE>
(a) After the acquisition of Zellerbach, management of XPEDX decided to
terminate certain software projects that were in process and to use
Zellerbach's systems in certain of its regions. Accordingly, we wrote off
related deferred software costs on these projects, resulting in a $20
million charge. As part of the Zellerbach integration plan, management
determined that a significant part of the personnel reduction related to the
termination of employees at the Company's duplicate facilities and
locations. The $10 million severance charge represents the costs for
terminating 274 XPEDX employees.
(b) The Company's U.S. Papers business shut down equipment at the Mobile, Ala.,
mill and announced the termination of 750 employees at the Mobile, Ala.,
Lock Haven, Pa., and Ticonderoga, N.Y., mills. At the Mobile mill,
International Paper permanently closed a paper machine and related equipment
with a net book value of $13 million. These assets were written down to
their estimated fair market value of zero. The severance charge associated
with the employee reductions at the 3 mills was $14 million.
(c) This charge primarily consists of a $15 million asset write-down associated
with the closure of two Carter Holt Harvey facilities, Myrtleford and Taupo.
Myrtleford, a tissue pulp mill located in Australia, was closed due to
excess capacity in its tissue pulp system. Carter Holt Harvey will be able
to produce the volume at lower costs at its Kawerau tissue pulp mill located
in New Zealand. Carter Holt Harvey also decided to close the Taupo, New
Zealand, sawmill due to excess capacity in its sawmill system as the result
of recent productivity improvements. The $3 million severance charge
represents the cost for terminating 236 employees. Our consolidated
financial statements included revenues of $21 million, $36 million and $34
million and operating income of $1 million, $3 million and $3 million from
these facilities in 1998, 1997 and 1996, respectively.
(d) Management decided to close the Gardiner, Ore., mill because of excess
capacity in International Paper's containerboard system. As a result, the
net plant, property and equipment assets of this mill were reduced from $13
million to the estimated salvage value of $5 million. In connection with the
third-quarter decision to close this mill, the Company terminated 298
employees at the mill and
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded a severance charge of $7 million. This mill had revenues of $78
million, $105 million and $55 million and operating losses of $16 million,
$1 million and $9 million in 1998, 1997 and 1996, respectively.
(e) The $15 million severance charge was recorded as a result of an announcement
by International Paper of a plan to consolidate its land and timber and
logging and fiber supply divisions into a new division called Forest
Resources and the consolidation of the Consumer Packaging group. Of the $15
million charge, $10 million related to a headcount reduction of 200
employees in the Forest Resources group and the remaining $5 million was
based on a personnel reduction of 210 employees in the Consumer Packaging
group.
The following table is a roll forward of the severance costs included in the
1998 restructuring plan (in millions):
<TABLE>
<CAPTION>
SEVERANCE
-------------
<S> <C>
Opening Balance (third quarter 1998) $ 49
1998 Activity
Cash charges (11)
---
Balance, December 31, 1998 $ 38
---
---
</TABLE>
The severance reserve recorded in the 1998 third quarter related to 1,968
employees. As of December 31, 1998, 945 employees had been terminated.
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
EARNINGS (LOSS) BEFORE EARNINGS (LOSS) AFTER
IN MILLIONS TAXES AND MINORITY INTEREST TAXES AND MINORITY INTEREST
- --------------------------------------- --------------------------- ---------------------------
<S> <C> <C>
Before special items $ 656 $ 310
Provision for legal reserve (150) (93)
Restructuring and other charges (660) (465)
Gain on sale of business (see
Note 7.) 170 97
----- -----
After special items $ 16 $ (151)
----- -----
----- -----
</TABLE>
In June 1997, a $535 million pre-tax business improvement charge ($385 million
after taxes) was recorded under a plan to improve the Company's financial
performance through closing or divesting of operations that no longer met
financial or strategic objectives. It 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. At this point, the anticipated
pre-tax earnings improvement of $100 million from the 1997 restructuring actions
has been largely realized. The earnings improvement consists of $25 million of
lower depreciation expense and $75 million of lower cash costs.
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The $230 million write-down of assets that International Paper recorded in the
second quarter of 1997 consisted primarily of write-downs associated with assets
to be sold or shut down as follows (in millions):
<TABLE>
<S> <C> <C>
Shutdown of European Papers facilities (a) $ 105
Shutdown of U.S. Papers and Fine Papers facilities (b) 101
Write-off of Haig Point real estate development (c) 13
Other shutdowns 11
---------
$ 230
---------
---------
</TABLE>
(a) In the second quarter of 1997, management committed to sell the Lancey,
France, mill to an employee group. The Company wrote down the net carrying
amount of the mill at June 30, 1997 by $65 million and established a reserve
of $30 million to cover a retained exposure. This remaining exposure should
be resolved in 1999 at which time we will complete our accounting for this
sale. The sale closed in October 1997. Lancey had revenues of $52 million
and $81 million and operating losses of $7 million and $9 million in 1997
and 1996, respectively. The Corimex, France, mill produces coated thermal
fax paper, which is a market that weakened in the mid-1990s. During the
second quarter of 1997, management concluded that it would continue to
operate this mill but that the assets were impaired. Based on an analysis of
expected future cash flows completed in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (SFAS No.
121), the Company reduced the carrying value of the Corimex mill from $12
million to $2 million, resulting in a $10 million charge. Corimex had
operating losses of $2 million during 1997.
(b) The $101 million reserve related to the restructuring of the Fine Papers
manufacturing operations in the Northeast ($51 million) and the shutdown of
the deinking facility at the Lock Haven, Pa., mill ($50 million). The
restructuring of the Fine Papers operations included the shutdown of the
Woronoco, Mass., paper mill and three small paper machines at the Erie, Pa.,
mill. In the 1997 second quarter, we decided to close the deinking facility.
Given that each of these actions represented the permanent shutdown of
equipment or facilities, International Paper wrote-down the net carrying
amount of the assets to zero. The Woronoco, Mass., mill had revenues of $46
million and $50 million and operating earnings of $5 million and $1 million
in 1997 and 1996, respectively.
(c) The Company is the developer of a residential golf community named Haig
Point at Daufuskie Island, S.C. As the developer, International Paper was
responsible for operating this community until a specified number of lots
were sold, at which time it would turn the community over to the homeowners.
The net book value of our investment in Haig Point was $13 million at June
30, 1997. Given the continuing operating losses, $5 million in 1997, an
updated marketing study, and the inability to find a buyer for this
investment, we concluded that the investment was permanently impaired and
wrote it down to zero. The operating loss in 1998 was $500,000.
The $210 million loss that the Company recorded in connection with sales or
anticipated sales related to the following businesses (in millions):
<TABLE>
<S> <C> <C>
Imaging (a) $ 150
Veratec (b) 25
Decorative Products (c) 20
Label (d) 15
---------
$ 210
---------
---------
</TABLE>
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) The Company decided to sell its Imaging businesses in the second quarter of
1997. Based on discussions with its investment banker and meetings with
potential buyers, the Company believed that the most likely outcome was to
realize approximately $325 million. The Company established a reserve of
$150 million which represented the estimated loss on the sale of the Imaging
businesses. The Company expected to complete the sale of the Imaging
businesses within one year. The Imaging businesses had revenues of $690
million and $713 million and operating earnings of $9 million and $1 million
in 1997 and 1996, respectively.
(b) The Veratec division had developed a business that was based on an interspun
technology for treating fabrics. The net carrying value of this business was
$25 million at June 30, 1997. In June 1997, the Company decided to shut down
this business and recorded a reserve of $25 million. Prior to the shutdown,
this business had revenues of $2 million and $1 million and operating losses
of $7 million and $8 million in 1997 and 1996, respectively.
(c) In the second quarter of 1997, management decided to sell the medium-density
fiberboard, low-pressure laminates and particleboard businesses. The Company
estimated the expected sales prices for each of these businesses and
recorded a reserve of $20 million to reduce the net carrying amounts to
these levels. The Company expected to complete the sales of these businesses
within one year. These businesses had revenues of $196 million and $215
million in 1997 and 1996, respectively; and an operating loss of $1 million
in 1997 and operating earnings of $5 million in 1996.
(d) In the second quarter of 1997, management committed to a plan to sell the
label business. The estimated loss on the label business sale included in
the second-quarter 1997 restructuring charge was $15 million. The Company
expected to complete the sale of the label business within one year. The
label business had revenues of $24 million and $39 million in 1997 and 1996,
respectively and an operating loss of $2 million in 1997 and operating
earnings of $1 million in 1996.
The $95 million of severance and other expenses consists of the following (in
millions):
<TABLE>
<S> <C> <C>
Severance (a) $ 42
Write-off of deferred software costs (b) 18
Lease buyouts at warehouses (c) 9
Write-off of deinking process license (d) 4
Other exit costs (e) 22
---
$ 95
---
---
</TABLE>
(a) The $42 million severance charge relates to programs initiated and approved
in the 1997 second quarter in the U.S. and European Papers, Industrial and
Consumer Packaging segments and corporate staff groups to reduce headcount
by 3,015 employees under the Company's existing ongoing severance plans. We
recorded the charge in the second quarter as (1) management had committed to
the plan of termination, (2) the benefit arrangement had been communicated
to the employees, (3) the number of employees, their functions and locations
had been identified, and (4) all terminations were to be completed within
approximately one year. As of December 31, 1998, 2,446 employees had been
terminated under these programs.
(b) The $18 million charge for the write-off of deferred software costs relates
to two items as follows: (1) during the 1997 second quarter, the Company
decided to abandon a human resources software project for which $11 million
of deferred software costs had been recorded and (2) as a result of the
decision to sell certain businesses in the second quarter of 1997, the
Company decided to terminate enterprise software projects in these
businesses, for which it had recorded $7 million of deferred software costs.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) The $9 million charge represents the cost to buy out obligations under
existing warehouse leases. The Company decided to close these warehouses in
the second quarter of 1997.
(d) The $4 million charge represents the write-off of the net carrying value of
the deinking process license that the Company acquired from a third party.
International Paper permanently shut down this operation in the 1997 second
quarter. Accordingly, it wrote the license down to zero.
(e) The charge of $22 million relates to other exit costs.
In December 1997, an additional pre-tax charge of $125 million ($80 million
after taxes) was recorded for anticipated losses associated with the sale of the
remaining Imaging businesses. Such amount was determined after consideration of
the sales of certain of the Imaging businesses that had been completed and the
estimated proceeds from the businesses remaining to be sold. The remaining
Imaging businesses were sold in 1998.
Also included in the 1997 special items was a $150 million provision to increase
our legal reserves as a result of a settlement by Masonite Corporation, a wholly
owned subsidiary, of a class-action lawsuit relating to its hardboard siding
product. A more detailed discussion of this legal settlement is included in Note
11 to the consolidated financial statements.
The following table is a roll forward of the severance and other costs included
in the 1997 restructuring plan (in millions):
<TABLE>
<CAPTION>
SEVERANCE
AND OTHER
-----------
<S> <C> <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
---
---
</TABLE>
The $9 million of reserves remaining are to complete the 1997 restructuring
plan.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
EARNINGS (LOSS) BEFORE EARNINGS (LOSS) AFTER
IN MILLIONS TAXES AND MINORITY INTEREST TAXES AND MINORITY INTEREST
- ------------------------------------------------- --------------------------- ---------------------------
<S> <C> <C>
Before special items $ 890 $ 434
Restructuring and other charges (670) (461)
Scitex restructuring charge (10) (6)
Gain on sale of business (see Note 7.) 592 336
----- -----
After special items $ 802 $ 303
----- -----
----- -----
</TABLE>
In the first quarter of 1996, management initiated several actions to
restructure and strengthen existing businesses that resulted in a pre-tax charge
to earnings of $515 million ($362 million after taxes). The charge included $305
million for the write-down of certain assets, $100 million for asset impairments
(related to the adoption of the provisions of SFAS No. 121), $80 million in
associated severance costs and $30 million of other expenses, including the
cancellation of leases.
The major components of the $305 million asset write-down were as follows (in
millions):
<TABLE>
<S> <C> <C>
Consolidation and shutdown of Imaging facilities (a) $ 192
Shutdown of Cordele OSB composite siding business (b) 43
Write-off of Georgetown recovery unit (c) 25
Shutdown of Veratec facilities (d) 19
Impairment of INTAMASA business (e) 15
Other shutdowns 11
---------
$ 305
---------
---------
</TABLE>
(a) In the first quarter of 1996, management decided to consolidate the Imaging
division's manufacturing and sales operations, which resulted in a
write-down of the assets associated with these facilities. The planned
facility shutdowns included the Swiss manufacturing plants, the Lyon,
France, facility and several European sales companies. As the Company was
planning to close these facilities, it determined the fair value to be zero.
In addition, the Company determined that the long-lived assets associated
with its Binghamton, N.Y., Holyoke, Mass., and several U.K. facilities were
impaired based on an analysis of future cash flows from these businesses.
The cash flow analysis, which was completed in accordance with SFAS No. 121,
indicated that future cash flows from these operations would be break-even
and, accordingly, the Company wrote down the long-lived assets to their
estimated fair value of zero. The Imaging division had revenues of $713
million and operating earnings of $1 million during 1996.
(b) International Paper's Cordele, Ga., facility produced both oriented strand
board substrate and composite wood siding. The carrying amount of the
equipment related solely to the manufacture of composite wood siding was $43
million. The Company decided to stop manufacturing composite wood siding and
to exit this business. As we shut down the equipment, the assets' fair
values were determined to be zero.
(c) In the first quarter of 1996, the Company permanently closed an enhanced
kraft recovery unit in its Georgetown, S.C., facility because of its failure
to operate effectively. The carrying amount of this asset was $25 million.
As the equipment was shut down, the Company determined its fair value to be
zero.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) The Company decided to permanently close its Veratec Belgium facility and 5
thermal bond machines in its Lewisburg, Ky., facility during the first
quarter of 1996. The carrying amounts of these assets were $12 million and
$7 million, respectively. As these facilities and machines were being
closed, the Company determined their fair values to be zero.
(e) In the first quarter of 1996, the Company committed to sell the Masonite
INTAMASA business located in Cella, Spain. The Company wrote down its
carrying amount of $41 million to $26 million, which represented the
estimated selling price of this business. This business had revenues of $25
million and operating earnings of $3 million during 1996.
In the first quarter of 1996, International Paper recorded an impairment charge
of $100 million consisting of the following (in millions):
<TABLE>
<S> <C> <C>
Gardiner mill (a) $ 42
Hardboard siding facilities (b) 26
Mineral deposits (c) 14
Haig Point real estate development (d) 8
Other 10
---------
$ 100
---------
---------
</TABLE>
(a) The Gardiner, Ore., mill produces containerboard and is the Company's only
West Coast mill. In early 1996, management announced an extended shutdown of
the mill. As a result of the shutdown, International Paper determined that a
triggering event had occurred, and it wrote down the mill's assets to the
estimated fair value.
(b) The Masonite division had hardboard siding operations at its Laurel, Miss.,
Towanda, Pa., and Ukiah, Calif., plants. Based on expected declines in
demand, management believed that a triggering event under SFAS No. 121 had
occurred in the first quarter of 1996. The Company would continue to hold
and use these assets, but it projected that the future cash flows of this
business would be negative. Accordingly, it wrote down the $26 million
carrying amount of these assets to zero.
(c) The Petroleum and Minerals division had two mineral investments that it
determined to be impaired in the first quarter of 1996. First, based on a
consultant's analysis, the Company estimated the value of its lignite
reserves to be $3 million, thereby requiring a write-down of $11 million.
Second, an analysis of its zinc reserves indicated a fair value of $500,000,
requiring a write-down of $3 million. The triggering event for these
write-downs was the analysis of these reserves on a stand-alone basis.
(d) International Paper holds an investment in a residential golf community
named Haig Point at Daufuskie Island, S. C. As the developer, the Company is
responsible for operating this community until a specified number of lots
have been sold, at which time it would turn the community over to the
homeowners. The net book value of the Company's investment in Haig Point was
$21 million at December 31, 1995. The Company concluded in the first quarter
of 1996 that its investment was impaired. The triggering event was the
analysis of the 1995 results and the 1996 forecast, combined with the
decision to sell this business. Haig Point's estimated fair value was $13
million, resulting in an $8 million charge.
The Company's 1996 charge included $80 million of severance costs. The charge
relates to programs initiated and approved in the first quarter of 1996 to
reduce headcount by 1,955 employees under our existing ongoing severance plan.
The businesses impacted by this charge include Imaging ($45 million), Veratec
($12 million), Zanders ($10 million), and corporate staff groups and other
businesses ($13 million). Under this plan, there have been headcount reductions
of 1,597 employees.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's 1996 charge also included $30 million of other expenses. The major
components of this charge were the lease termination costs incurred by the
Imaging businesses as a result of the decision to close several European
locations. The lease termination costs resulted from the termination of leases
in London, the U.K. depot facilities, and the Benelux and Germany sales offices.
The following is a roll forward of the severance and other costs included in the
1996 restructuring and impairment program (in millions):
<TABLE>
<CAPTION>
SEVERANCE
AND OTHER
-----------
<S> <C> <C>
Opening Balance (first quarter 1996) $ 110
1996, 1997 and 1998 Activity
Reserve reversals (1998) (29)
Cash charges (81)
-----
Balance, December 31, 1998 $ -
-----
-----
</TABLE>
In the fourth quarter of 1996, a $155 million pre-tax charge ($99 million after
taxes) was recorded for the write-down of the investment in Scitex to current
market value. At such time, the Company determined that its investment in Scitex
of 5.7 million shares was permanently impaired and began efforts, thus far
unsuccessful, to dispose of its investment. We wrote our investment in Scitex
down to $10 per share based on the closing prices of Scitex shares during the
period from November 14, 1996 to December 31, 1996. The Company also recorded a
$10 million pre-tax charge ($6 million after taxes) related to our share of a
restructuring charge taken by Scitex. This item is reflected as an equity loss
from the investment in Scitex in the consolidated statement of earnings.
NOTE 7. GAINS ON SALES OF WEST COAST PARTNERSHIP INTERESTS
On March 29, 1996, IP Timberlands Ltd. (IPT) completed the sale of a 98% general
partnership interest in a subsidiary partnership that owned approximately
300,000 acres of forestlands located in Oregon and Washington. Included in the
net assets of the partnership interest sold were forestlands, roads and $750
million of long-term debt. As a result of this transaction, International Paper
recognized in its 1996 first-quarter consolidated results a $592 million pre-tax
gain ($336 million after taxes and minority interest expense). IPT and
International Paper retained nonoperating interests in the partnership. In
December 1997, these retained interests were redeemed and a related debt
guaranty was released resulting in a pre-tax gain of $170 million ($97 million
after taxes and minority interest expense). These gains are presented in the
consolidated statement of earnings as gains on sales of businesses.
NOTE 8. PREFERRED SECURITIES OF SUBSIDIARIES
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 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 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%
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the third quarter of 1995, International Paper Capital Trust (the Trust)
issued $450 million of International Paper--obligated mandatorily redeemable
preferred securities. The Trust is a wholly-owned consolidated subsidiary of
International Paper and its sole assets are International Paper 5 1/4%
convertible subordinated debentures. The obligations of the Trust related to its
preferred securities are fully and unconditionally guaranteed by International
Paper. These preferred securities are convertible into International Paper
common stock.
Distributions paid under all of the preferred securities noted above were $54
million, $24 million and $24 million in 1998, 1997 and 1996, respectively.
NOTE 9. SALE OF LIMITED PARTNERSHIP INTERESTS
During 1993, the Company contributed assets with a fair market value of
approximately $900 million to two newly formed limited partnerships, Georgetown
Equipment Leasing Associates, L.P. and Trout Creek Equipment Leasing, L.P. These
partnerships are separate and distinct legal entities from the Company and have
separate assets, liabilities, business functions and operations. However, for
accounting purposes, the Company continues to consolidate these assets, and the
minority shareholders' interests are reflected as minority interest in the
accompanying financial statements. The purpose of the partnerships is to invest
in and manage a portfolio of assets including pulp and paper equipment used at
the Georgetown, S.C., and Ticonderoga, N.Y. mills. This equipment is leased to
the Company under long-term leases. Partnership assets also include floating
rate notes, debentures and cash. During 1993, outside investors purchased a
portion of the Company's limited partner interests for $132 million and also
contributed an additional $33 million to one of these partnerships.
At December 31, 1998, the Company held aggregate general and limited partner
interests totaling 83.5% in Georgetown Equipment Leasing Associates, L.P. and
81.2% in Trout Creek Equipment Leasing, L.P. The Company also held $621 million
and $439 million of borrowings at December 31, 1998 and 1997, respectively, from
these partnerships. These funds are being used for general corporate purposes.
NOTE 10. INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes
whereby deferred income taxes are recorded for the future tax consequences
attributable to differences between the financial statement and tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured using
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Deferred tax
assets and liabilities are revalued to reflect new tax rates in the periods rate
changes are enacted.
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of earnings before income taxes and minority interest by taxing
jurisdiction were:
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997 1996
- ------------------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Earnings (loss)
U.S. $ 290 $ (40) $ 815
Non-U.S. 102 56 (13)
--------- --------- ---------
Earnings before income taxes and minority interest $ 392 $ 16 $ 802
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes by taxing jurisdiction was:
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997 1996
- ------------------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Current tax provision (benefit)
U.S. federal $ (76) $ 84 $ 158
U.S. state and local (7) 8 1
Non-U.S. 24 36 64
--------- --------- ---------
(59) 128 223
--------- --------- ---------
Deferred tax provision (benefit)
U.S. federal 121 (49) 146
U.S. state and local (9) (42) (3)
Non-U.S. 27 1 (36)
--------- --------- ---------
139 (90) 107
--------- --------- ---------
Income tax provision $ 80 $ 38 $ 330
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company made income tax payments, net of refunds, of $110 million, $179
million and $286 million in 1998, 1997 and 1996, respectively.
A reconciliation of income tax expense using the statutory U.S. income tax rate
compared with the Company's actual income tax expense follows:
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997 1996
- --------------------------------------------------------------------------------------- --------- ----- ---------
<S> <C> <C> <C>
Earnings before income taxes and minority interest $ 392 $ 16 $ 802
Statutory U.S. income tax rate 35% 35% 35%
--------- --- ---------
Tax expense using statutory U.S. income tax rate 137 6 281
State and local income taxes (10) (22) (1)
Non-U.S. tax rate differences 22 34 37
Permanent benefits on sales of non-U.S. businesses (33)
Permanent benefits on sales of non-strategic timberland assets (29)
Nondeductible business expenses 7 52 7
Foreign sales corporation benefit (8) (21) (6)
Minority interest (31) (23) (37)
Goodwill 18 19 21
Net U.S. tax on non-U.S. dividends 10 11 54
Tax credits (1) (7) (23)
Other, net (2) (11) (3)
--------- --- ---------
Income tax provision $ 80 $ 38 $ 330
--------- --- ---------
Effective income tax rate 20% 238% 41%
--------- --- ---------
--------- --- ---------
</TABLE>
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred income tax liability as of December 31, 1998 and 1997 includes
the following components:
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997
- ------------------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Current deferred tax asset $ 187 $ 238
Noncurrent deferred tax asset 169 159
Noncurrent deferred tax liability (2,860) (2,681)
--------- ---------
Total $ (2,504) $ (2,284)
--------- ---------
--------- ---------
</TABLE>
The tax effects of significant temporary differences representing deferred tax
assets and liabilities at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997
- ------------------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Plants, properties and equipment $ (2,348) $ (2,325)
Prepaid pension costs (359) (314)
Forestlands (699) (650)
Postretirement benefit accruals 164 169
Alternative minimum and other tax credits 346 217
Non-U.S. net operating losses 135 132
Other 257 487
--------- ---------
Total $ (2,504) $ (2,284)
--------- ---------
--------- ---------
</TABLE>
The Company had net operating loss carryforwards applicable to non-U.S.
subsidiaries of which $203 million expire in years 1999 through 2005 and $267
million can be carried forward indefinitely.
Deferred taxes are not provided for temporary differences of approximately $253
million, $353 million and $361 million as of December 31, 1998, 1997 and 1996,
respectively, representing earnings of non-U.S. subsidiaries that are intended
to be permanently reinvested. If these earnings were remitted, the Company
believes that U.S. foreign tax credits would eliminate any significant impact on
future income tax provisions.
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases certain property, machinery and equipment under cancelable
and noncancelable lease agreements. At December 31, 1998, total future minimum
rental commitments under noncancelable leases were $479 million, due as follows:
1999--$132 million, 2000--$102 million, 2001--$75 million, 2002--$57 million,
2003--$47 million and thereafter--$66 million. Rent expense was $203 million,
$210 million and $198 million for 1998, 1997 and 1996, respectively.
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
non-refundable advance of $47.5 million plus $2.5 million in costs.
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 non-refundable
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 $129 million at December
31, 1998, are adequate to cover any amounts to be paid and that the 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. Through December 31, 1998, settlement payments of $91
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. The Company and Masonite have the right to terminate each of
the settlements after seven years from the dates of final approval.
The Company is also involved in various other inquiries, administrative
proceedings and litigation relating to contracts, sales of property,
environmental protection, tax, antitrust and other matters, some of which allege
substantial monetary damages. While any proceeding or litigation has the element
of uncertainty, the Company believes that the outcome of any lawsuit or claim
that is pending or threatened, or all of them combined, will not have a material
adverse effect on its consolidated financial position or results of operations.
NOTE 12. SUPPLEMENTARY BALANCE SHEET INFORMATION
Inventories by major category were:
<TABLE>
<CAPTION>
IN MILLIONS AT
DECEMBER 31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Raw materials $ 466 $ 478
Finished pulp, paper and packaging products 1,536 1,466
Finished lumber and panel products 169 160
Operating supplies 402 387
Other 146 269
--------- ---------
Inventories $ 2,719 $ 2,760
--------- ---------
--------- ---------
</TABLE>
The Company uses the last-in, first-out inventory method to value substantially
all of its domestic inventories. Approximately 69% of the Company's total raw
materials and finished products inventories were valued using this method. If
the first-in, first-out method had been used, it would have increased total
inventory balances by approximately $234 million, $253 million and $228 million
at December 31, 1998, 1997 and 1996, respectively.
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plants, properties and equipment by major classification were:
<TABLE>
<CAPTION>
IN MILLIONS AT
DECEMBER 31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Pulp, paper and packaging facilities
Mills $ 16,351 $ 16,030
Packaging plants 2,266 1,817
Wood products facilities 1,835 1,844
Other plants, properties and equipment 2,194 2,636
--------- ---------
Gross cost 22,646 22,327
Less: Accumulated depreciation 10,567 9,958
--------- ---------
Plants, properties and equipment, net $ 12,079 $ 12,369
--------- ---------
--------- ---------
</TABLE>
NOTE 13. DEBT AND LINES OF CREDIT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
IN MILLIONS AT
DECEMBER 31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
8 7/8% to 10.5% notes--due 1999-2012 $ 596 $ 653
8 7/8% to 9.7% notes--due 2000-2004 600 600
8 3/8% to 9 1/2% debentures--due 2015-2024 300 300
6 7/8% to 7 7/8% notes--due 2000-2007 1,223 1,223
6 7/8% to 8 1/8% notes--due 2023-2024 546 545
6 1/8% notes--due 2003 200 199
5 7/8% Swiss franc debentures--due 2001 82 80
5 1/8% debentures--due 2012 86 84
Floating rate notes--due 1999 (1) 450 450
Medium-term notes--due 1999-2009 (2) 572 622
Environmental and industrial development
bonds--due 1999-2021 (3,4) 1,030 1,036
Commercial paper and bank notes (5) 1,150 1,094
Other (6) 447 479
--------- ---------
Total (7) 7,282 7,365
Less: Current maturities 875 211
--------- ---------
Long-term debt $ 6,407 $ 7,154
--------- ---------
--------- ---------
</TABLE>
(1) The weighted average interest rate on these notes was 6.2% in 1998 and 1997
and is based on LIBOR.
(2) The weighted average interest rate on these notes was 7.4% in 1998 and 1997.
(3) The weighted average interest rate on these bonds was 5.6% in 1998 and 5.8%
in 1997.
(4) Includes $274 million of bonds at December 31, 1998 and $315 million at
December 31, 1997, which may be tendered at various dates and/or under
certain circumstances.
(5) Includes $550 million in 1998 of non-U.S. dollar denominated borrowings with
a weighted average interest rate of 5.2% in 1998.
(6) Includes $36 million in 1998 and $41 million in 1997 of French franc
borrowings with a weighted average interest rate of 2.7% in 1998 and 3.0% in
1997, and $159 million in 1998 and $179 million in 1997 of German mark
borrowings with a weighted average interest rate of 4.6% in 1998 and 5.5% in
1997.
(7) The fair market value was approximately $7.6 billion and $7.8 billion at
December 31, 1998 and 1997, respectively.
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total maturities of long-term debt over the next five years are 1999--$875
million, 2000--$1.2 billion, 2001--$551 million, 2002--$1.1 billion and
2003--$260 million.
At December 31, 1998 and 1997, the Company, including a non-U.S. subsidiary,
classified $1.4 billion of tenderable bonds, commercial paper and bank notes as
long-term debt. The Company and this subsidiary have the intent and ability to
renew or convert these obligations through 1999 and into future periods.
At December 31, 1998, the Company had unused bank lines of credit of
approximately $4.1 billion. The lines generally provide for interest at market
rates plus a margin based on the Company's current bond rating. The principal
line, which is cancelable only if the Company's bond rating drops below
investment grade, provides for $750 million of credit through January 2000, and
has a facility fee of .10% that is payable quarterly. A non-U.S. subsidiary of
the Company also has two principal lines of credit that support its commercial
paper programs. A $600 million line of credit matures in April 2002 and has a
.15% facility fee that is payable quarterly, and a 250 million New Zealand
dollar line of credit matures in February 2002 and has a .13% facility fee that
is payable quarterly.
At December 31, 1998, notes payable classified as current liabilities included
$272 million of non-U.S. dollar-denominated debt with a weighted average
interest rate of 6.4%.
At December 31, 1998, the Company's total outstanding debt included
approximately $1.3 billion of borrowings with interest rates that fluctuate
based on market conditions and the Company's credit rating.
Through a public tender offer in the 1997 third quarter, the Company's
wholly-owned subsidiary, Federal Paper Board, repurchased $164 million of its
10% debentures due April 15, 2011. The earnings impact of the debt retirement
was not significant.
NOTE 14. FINANCIAL INSTRUMENTS
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 that do not qualify for hedge
accounting treatment are recognized in earnings.
The Company has a policy of financing a portion of its investments in non-U.S.
operations with borrowings denominated in the same currency as the investment or
by entering into foreign exchange contracts in tandem with U.S. dollar
borrowings. These contracts are effective in providing a hedge against
fluctuations in currency exchange rates. Gains or losses from the revaluation of
these contracts, which are fully offset by gains or losses from the revaluation
of the net assets being hedged, are determined monthly based on published
currency exchange rates and are recorded as translation adjustments in common
shareholders' equity. Upon liquidation of the net assets being hedged or early
termination of the foreign exchange contracts, the gains or losses from the
revaluation of foreign exchange contracts would be included in earnings. Amounts
payable to or due from the counterparties to the foreign exchange contracts are
included in accrued liabilities or accounts receivable as applicable.
Financial instruments outstanding at December 31, 1998 used to hedge net
investments in non-U.S. operations consisted of non-U.S. dollar-denominated debt
totaling $1.2 billion. Also outstanding were foreign currency forward contracts
totaling $1.0 billion, all having maturities of less than twelve months, as
70
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
noted in the following table expressed in U.S. dollar equivalents. The average
amount of outstanding contracts during 1998 and 1997 was $1.4 billion and $1.7
billion, respectively.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE UNREALIZED
FOREIGN CURRENCY CONTRACT EXCHANGE GAIN
FORWARD CONTRACTS (DOLLARS IN MILLIONS) AMOUNT RATE (LOSS)
- -------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Receive Australian dollars/Pay New Zealand dollars $ 27 .84 $ (1)
Receive Swiss francs/Pay New Zealand dollars 85 .67 (12)
Receive German marks/Pay U.S. dollars 303 1.68 3
Receive New Zealand dollars/Pay Australian dollars 33 1.18 1
Receive New Zealand dollars/Pay U.S. dollars 327 .77 3
Receive Swedish kronas/Pay U.S. dollars 50 8.07
Receive U.S. dollars/Pay Australian dollars 64 .63 3
Receive U.S. dollars/Pay New Zealand dollars 102 .50 (10)
</TABLE>
The Company also utilizes foreign exchange contracts to hedge certain
transactions that are denominated in non-U.S. currencies, primarily export sales
and equipment purchased from nonresident vendors. These contracts serve to
protect the Company from currency fluctuations between the transaction and
settlement dates. Gains and losses from the revaluation of these contracts,
based on published currency exchange rates, along with offsetting gains and
losses resulting from the revaluation of the underlying transactions, are
recognized in earnings or deferred and recognized in the basis of the underlying
transaction when completed. Any gains or losses arising from the cancellation of
the underlying transactions or early termination of the foreign currency
exchange contracts would be included in earnings.
Financial instruments outstanding at December 31, 1998 used to hedge
transactions denominated in non-U.S. currencies consisted of foreign currency
forward contracts totaling $360 million, all having maturities of less than
twelve months, as noted in the following table expressed in U.S. dollar
equivalents. The average amount of outstanding contracts during 1998 and 1997
was $534 million and $726 million, respectively.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE UNREALIZED
FOREIGN CURRENCY CONTRACT EXCHANGE GAIN
FORWARD CONTRACTS (DOLLARS IN MILLIONS) AMOUNT RATE (LOSS)
- -------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Receive Belgian francs/Pay British pounds $ 28 57.25
Receive British pounds/Pay Belgian francs 32 57.36
Receive New Zealand dollars/Pay Australian dollars 143 1.45 $ 3
Receive New Zealand dollars/Pay U.S. dollars 104 1.77 (11)
</TABLE>
Note: The Company has an additional $53 million in a number of smaller contracts
to purchase or sell other currencies with a related net immaterial unrealized
loss.
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 due from the counterparties to the agreements are
included in accrued liabilities or accounts receivable as applicable. If swap
agreements are terminated early, the resulting gain or loss would be deferred
and amortized over the remaining life of the related debt. The following table
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
presents notional amounts and principal cash flows for currency and interest
rate swap agreements by year of maturity expressed in U.S. dollar equivalents.
The impact on earnings and the Company's net liability under these agreements
were not significant.
INTEREST RATE AND CURRENCY SWAPS (IN MILLIONS)
<TABLE>
<CAPTION>
OUTSTANDING AS OF DECEMBER 31, 1998 1999 2000 2001 2002 2003 THEREAFTER
- -------------------------------------------------------- --------- ----- ----- ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. dollar variable to fixed rate swaps $ 525 $ 45 $ 1,000
Average pay rate 7.1%
Average receive rate 5.2%
Australian dollar variable to fixed rate swaps 40 $ 45 $ 45 15 $ 30
Average pay rate 6.3%
Average receive rate 4.9%
New Zealand dollar variable to fixed rate swaps 13 24 26 26 26
Average pay rate 7.1%
Average receive rate 4.6%
U.S. dollar fixed to variable rate swaps 45 1,250
Average pay rate 5.1%
Average receive rate 7.5%
U.S. dollar to Australian dollar cross-currency swap 150
<CAPTION>
FAIR
OUTSTANDING AS OF DECEMBER 31, 1998 TOTAL VALUE
- -------------------------------------------------------- --------- ---------
<S> <C> <C>
U.S. dollar variable to fixed rate swaps $ 1,570 $ (187)
Average pay rate 7.1%
Average receive rate 5.2%
Australian dollar variable to fixed rate swaps 175 (3)
Average pay rate 6.3%
Average receive rate 4.9%
New Zealand dollar variable to fixed rate swaps 115 (2)
Average pay rate 7.1%
Average receive rate 4.6%
U.S. dollar fixed to variable rate swaps 1,295 190
Average pay rate 5.1%
Average receive rate 7.5%
U.S. dollar to Australian dollar cross-currency swap 150 14
</TABLE>
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.
NOTE 15. CAPITAL STOCK
The authorized capital stock of the Company at December 31, 1998 and 1997
consisted of 400,000,000 shares of common stock, $1 par value; 400,000 shares of
cumulative $4 nonredeemable preferred stock, without par value (stated value of
$100 per share); and 8,750,000 shares of serial preferred stock, $1 par value.
The serial preferred stock is issuable in one or more series by the Board of
Directors without further shareholder action.
The Company has stock rights under a Shareholder Rights Plan whereby each share
of common stock has one right. Each right entitles shareholders to purchase one
common stock share at an exercise price of $77.50. The rights will become
exercisable 10 days after anyone acquires or tenders for 20% or more of the
Company's common stock. If, thereafter, anyone acquires 30% or more of the
common stock, or a 20% or more owner combines with the Company in a reverse
merger in which the Company survives and its common stock is not changed, each
right will entitle its holder to purchase Company common stock with a value of
twice the $77.50 exercise price. If, following an acquisition of 20% or more of
the common stock, the Company is acquired in a merger or sells 50% of its assets
or earnings power, each right will entitle its holder to purchase stock of the
acquiring company with a value of twice the $77.50 exercise price.
NOTE 16. RETIREMENT PLANS
The Company maintains pension plans that provide retirement benefits to
substantially all employees. Employees generally are eligible to participate in
the plans upon completion of one year of service and attainment of age 21.
The plans provide defined benefits based on years of credited service and either
final average earnings (salaried employees), hourly job rates or specified
benefit rates (hourly and union employees).
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. DEFINED BENEFIT PLANS
The Company makes contributions that are sufficient to fully fund its
actuarially determined costs, generally equal to the minimum amounts required by
ERISA.
Net periodic pension income for the Company's qualified and nonqualified defined
benefit plans comprised the following:
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997 1996
- ----------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost $ (66) $ (62) $ (61)
Interest cost (218) (205) (192)
Expected return on plan assets 347 322 303
Amortization of transition asset 27 27 27
Actuarial gains and losses (2) (1) (1)
Amortization of prior service cost (8) (6) (4)
Curtailment gain 5
--------- --------- ---------
Net periodic pension income $ 85 $ 75 $ 72
--------- --------- ---------
--------- --------- ---------
</TABLE>
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in benefit obligation and plan assets
for 1998 and 1997 and the plans' funded status and amounts recognized in the
consolidated balance sheet as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1 $ 2,945 $ 2,745
Service cost 66 62
Interest cost 218 205
Participants' contributions 1 1
Actuarial loss 347 116
Benefits paid (197) (184)
Acquisitions 53
Divestitures (23)
--------- ---------
Benefit obligation, December 31 (1) $ 3,410 $ 2,945
--------- ---------
--------- ---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets, January 1 $ 3,729 $ 3,355
Actual return on plan assets 328 542
Company and participants' contributions 16 16
Benefits paid (197) (184)
Acquisitions 85
Divestitures (25)
--------- ---------
Fair value of plan assets, December 31 $ 3,936 $ 3,729
--------- ---------
--------- ---------
Funded status $ 526 $ 784
Unrecognized actuarial loss (gain) 325 (42)
Unamortized prior service cost 58 66
Unrecognized net transition asset (2) (1) (28)
Other (6)
--------- ---------
Prepaid benefit cost $ 908 $ 774
--------- ---------
--------- ---------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF:
Prepaid benefit cost $ 959 $ 834
Accrued benefit liability (68) (60)
Intangible asset 4
Minimum pension liability adjustment included in accumulated other
comprehensive income 13
--------- ---------
Net amount recognized $ 908 $ 774
--------- ---------
--------- ---------
</TABLE>
(1) Includes nonqualified unfunded plans with projected benefit obligations of
approximately $92 million and $77 million at December 31, 1998 and 1997,
respectively.
(2) Amortization of the transition asset, which increases annual periodic
pension income, will be completed in 1999.
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan assets are held in master trust accounts and include investments in
International Paper common stock in the amounts of $432 million and $449 million
at December 31, 1998 and 1997, respectively.
Weighted average assumptions as of December 31, 1998, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Discount rate 6.50% 7.25% 7.50%
Expected long-term return on plan assets 10.00% 10.00% 10.00%
Rate of compensation increase 4.00% 4.50% 4.50%
</TABLE>
NON-U.S. DEFINED BENEFIT PLANS
Generally, the Company's non-U.S. pension plans are funded using the projected
benefit as a target, except in certain countries where funding of benefit plans
is not required. Net periodic pension expense for the Company's non-U.S. pension
plans was not significant for 1998, 1997 and 1996.
The plans' projected benefit obligation in excess of plan assets at fair value
at December 31, 1998 and 1997 was $50 million and $44 million, respectively.
Plan assets are composed principally of common stocks and fixed income
securities.
OTHER PLANS
The Company sponsors several defined contribution plans to provide substantially
all U.S. salaried and certain hourly employees of the Company an opportunity to
accumulate personal funds for their retirement. Contributions may be made on a
before-tax basis to substantially all of these plans.
As determined by the provisions of each plan, the Company matches the employees'
basic voluntary contributions. Company matching contributions to the plans were
approximately $47 million, $46 million and $42 million for the plan years ending
in 1998, 1997 and 1996, respectively. The net assets of these plans approximated
$2.2 billion as of the 1998 plan year-end.
NOTE 17. POSTRETIREMENT BENEFITS
The Company provides certain retiree health care and life insurance benefits
covering a majority of U.S. salaried and certain hourly employees. Employees are
generally eligible for benefits upon retirement and completion of a specified
number of years of creditable service. A plan amendment in 1992 limits the
maximum annual Company contribution for health care benefits for retirees after
January 1, 1992 based on age at retirement and years of service after age 50.
Amortization of this plan amendment, which reduces annual net postretirement
benefit cost, will be completed in 1999. The Company does not prefund these
benefits and has the right to modify or terminate certain of these plans in the
future.
The components of postretirement benefit expense in 1998, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
In millions 1998 1997 1996
- ---------------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Service cost $ 6 $ 6 $ 7
Interest cost 24 24 25
Actuarial gains and losses 1 1 2
Amortization of prior service cost (21) (21) (19)
--------- --------- ---------
Net postretirement benefit cost $ 10 $ 10 $ 15
--------- --------- ---------
--------- --------- ---------
</TABLE>
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the plans' funded status as of December 31, 1998
and 1997 and changes in benefit obligation and plan assets for 1998 and 1997.
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1 $ 344 $ 358
Service cost 6 6
Interest cost 24 24
Participants' contributions 14 13
Actuarial loss (gain) 13 (28)
Benefits paid (35) (32)
Plan amendments 3
Acquisitions 3
--------- ---------
Benefit obligation, December 31 $ 369 $ 344
--------- ---------
--------- ---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets, January 1 $ - $ -
Company contributions 21 19
Participants' contributions 14 13
Benefits paid (35) (32)
--------- ---------
Fair value of plan assets, December 31 $ - $ -
--------- ---------
--------- ---------
Funded status $ (369) $ (344)
Unamortized prior service cost (41) (61)
Unrecognized actuarial loss 58 38
--------- ---------
Prepaid (accrued) benefit cost $ (352) $ (367)
--------- ---------
--------- ---------
</TABLE>
Future benefit costs were estimated assuming medical costs would increase at an
8% annual rate, decreasing to a 5% annual growth rate ratably over the next five
years and then remaining at a 5% annual growth rate thereafter. A 1% increase in
this annual trend rate would have increased the accumulated postretirement
benefit obligation at December 31, 1998 by $21 million. A 1% decrease in the
annual trend rate would have decreased the accumulated postretirement benefit
obligation at December 31, 1998 by $19 million. The effect on net postretirement
benefit cost from a 1% increase or decrease would not be material. The weighted
average discount rate used to estimate the accumulated postretirement benefit
obligation at December 31, 1998 was 6.50% compared with 7.25% at December 31,
1997.
76
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. INCENTIVE PLANS
The Company has a Long-Term Incentive Compensation Plan that includes a Stock
Option Plan, a Restricted Performance Share Plan and an Executive Continuity
Award Plan, administered by a committee of nonemployee members of the Board of
Directors who are not eligible for awards. The plan allows stock appreciation
rights to be awarded, although none were awarded in 1998, 1997 or 1996.
The Company applies the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). Accordingly, no compensation cost has been recognized for the stock
option plan. Had compensation cost for the Company's stock-based compensation
plans been determined consistent with the provisions of SFAS No. 123, the
Company's net earnings, earnings per common share and earnings per common
share--assuming dilution would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 1998 1997 1996
- -------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Net Earnings (Loss)
As reported $ 236 $ (151) $ 303
Pro forma 217 (175) 291
Earnings (Loss) Per Common Share
As reported $ 0.77 $ (0.50) $ 1.04
Pro forma 0.71 (0.58) 1.00
Earnings (Loss) Per Common Share--Assuming Dilution
As reported $ 0.77 $ (0.50) $ 1.04
Pro forma 0.71 (0.58) 1.00
</TABLE>
The effect on 1998, 1997 and 1996 pro forma net earnings, earnings per common
share and earnings per common share--assuming dilution of expensing the
estimated fair value of stock options is not necessarily representative of the
effect on reported earnings for future years due to the vesting period of stock
options and the potential for issuance of additional stock options in future
years.
STOCK OPTION PLAN
Initial stock options are normally granted in January of each year. The option
price is the market price of the stock at the date of grant. Options are
immediately exercisable under the plan; however, the underlying shares cannot be
sold and carry profit forfeiture provisions during the initial four years
following grant. Upon exercise of an option, a replacement option may be granted
with the exercise price equal to the current market price and with a term
extending to the expiration date of the original option.
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of the pro forma disclosure above, the fair value of each option
grant has been estimated on the date of the grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Initial Options (1)
Risk-Free Interest Rate 5.25% 6.32% 5.45%
Price Volatility 31.09% 29.50% 22.18%
Dividend Yield 2.19% 2.50% 2.72%
Expected Term in Years 4.37 4.37 4.74
Replacement Options (2)
Risk-Free Interest Rate 5.51% 6.31% 6.38%
Price Volatility 31.09% 29.50% 22.18%
Dividend Yield 2.17% 2.31% 2.68%
Expected Term in Years 2.12 2.22 2.97
</TABLE>
(1) The average fair values of initial option grants during 1998, 1997 and 1996
were $11.98, $11.59 and $8.37, respectively.
(2) The average fair values of replacement option grants during 1998, 1997 and
1996 were $9.40, $9.04 and $6.82, respectively.
A summary of the status of the Stock Option Plan as of December 31, 1998, 1997
and 1996 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS (1) PRICE
------------ -----------
<S> <C> <C>
Outstanding at January 1, 1996 9,262,113 $ 35.44
Granted (2) 4,234,695 35.42
Exercised (2,091,942) 30.39
Forfeited (460,321) 36.89
------------ -----------
Outstanding at December 31, 1996 10,944,545 36.53
Granted 5,478,674 45.82
Exercised (4,196,183) 35.42
Forfeited (683,248) 40.66
------------ -----------
Outstanding at December 31, 1997 11,543,788 41.09
Granted 3,440,200 46.98
Exercised (2,566,956) 37.78
Forfeited (904,010) 44.32
------------ -----------
Outstanding at December 31, 1998 11,513,022 43.33
------------
------------
</TABLE>
(1) This table does not include Executive Continuity Award tandem options
described below. No fair value is assigned to these options under SFAS No.
123. The tandem restricted shares accompanying these options are expensed
over their vesting period.
(2) At acquisition, outstanding Federal Paper Board options that were not paid
in cash were converted to 797,776 options of International Paper with a fair
value of $20.58 per option. The fair value for all acquired options was
included in the purchase price that has been allocated to acquired assets
and liabilities.
78
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
---------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF EXERCISE OPTIONS REMAINING EXERCISE
PRICES OUTSTANDING LIFE PRICE
- ------------------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
$19.43--$38.88 2,387,071 4.50 $ 35.88
$38.93--$41.00 2,079,050 6.70 $ 39.78
$41.12--$42.88 3,243,637 7.70 $ 42.41
$42.93--$51.00 2,263,898 4.10 $ 47.96
$51.06--$59.94 1,539,366 3.00 $ 54.84
</TABLE>
RESTRICTED PERFORMANCE SHARE PLAN
Under the Restricted Performance Share Plan, contingent awards of Company common
stock are granted by the committee. Awards are earned if the Company's financial
performance over a five-year period meets or exceeds that of other forest
products companies using standards determined by the committee.
The following summarizes the activity of the Restricted Performance Share Plan
for the three years ending December 31, 1998:
<TABLE>
<CAPTION>
SHARES
----------
<S> <C>
Outstanding at January 1, 1996 810,964
Granted 424,264
Issued (190,660)
Forfeited (85,178)
----------
Outstanding at December 31, 1996 959,390
Granted 277,815
Issued (87,451)
Forfeited (40,352)
----------
Outstanding at December 31, 1997 1,109,402
Granted 320,808
Issued (135,615)
Forfeited (50,100)
----------
Outstanding at December 31, 1998 1,244,495
----------
----------
</TABLE>
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXECUTIVE CONTINUITY AWARD PLAN
The Executive Continuity Award Plan provides for the granting of tandem awards
of restricted stock and/or nonqualified stock options to key executives. Grants
are restricted and awards conditioned on attainment of specified age and years
of service requirements. Exercise of a tandem stock option results in the
cancellation of the related restricted shares.
The following summarizes the activity of the Executive Continuity Award Plan for
the three years ending December 31, 1998:
<TABLE>
<CAPTION>
SHARES
----------
<S> <C>
Outstanding at January 1, 1996 479,000
Granted 136,650
Forfeited (1) (132,000)
----------
Outstanding at December 31, 1996 483,650
Granted 106,108
Issued (9,500)
----------
Outstanding at December 31, 1997 580,258
Granted 24,000
Issued (5,500)
Forfeited (5,000)
----------
Outstanding at December 31, 1998 593,758
----------
----------
</TABLE>
(1) Includes restricted shares canceled when tandem stock options were
exercised. In 1996, 400,000 tandem stock options were exercised.
At December 31, 1998 and 1997, a total of 4.6 million and 4.8 million shares,
respectively, were available for grant under the Long-Term Incentive
Compensation Plan.
The compensation cost that has been charged to earnings for the
performance-based plans was $14 million, $11 million and $13 million for 1998,
1997 and 1996, respectively.
80
<PAGE>
INTERIM FINANCIAL RESULTS (UNAUDITED)
IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------ ------ --------- ------- ----------
<S> <C> <C> <C> <C> <C>
1998
Net Sales $4,868 $4,707 $ 4,939 $ 5,027 $ 19,541
Gross Margin (1) 1,214 1,183 1,159 1,224 4,780
Earnings Before Income Taxes
and Minority Interest 141 140(2) (113) 100(4) 392(2,3,4)
Net Earnings 75 86(2) (213) 54(4) 236(2,3,4)
Per Share of Common Stock
Earnings $ .25 $ .28 $ .07 $ .17 $ .77
Earnings-Assuming Dilution .25 .28 .07 .17 .77
Dividends .25 .25 .25 .25 1.00
Common Stock Prices
High 52 5/8 55 1/4 49 3/8 49 3/16 55 1/4
Low 40 7/8 42 1/2 35 1/2 40 3/16 35 1/2
1997
Net Sales $4,862 $5,034 $ 5,119 $ 5,081 $ 20,096
Gross Margin (1) 1,226 1,248 1,328 1,320 5,122
Earnings (Loss) Before Income
Taxes and Minority Interest 108 (557)(5) 208 257(6) (165,6)
Net Earnings (Loss) 34 (419)(5) 102 132(6) (151)(5,6)
Per Share of Common Stock
Earnings (Loss) $ .11 $(1.39) $ .34 $ .44 $ (.50)
Earnings (Loss)-Assuming
Dilution .11 (1.39) .34 .44 (.50)
Dividends .25 .25 .25 .25 1.00
Common Stock Prices
High 43 5/8 51 7/8 61 58 1/2 61
Low 38 3/4 38 5/8 48 1/4 39 7/8 38 5/8
</TABLE>
(1) Gross margin represents net sales less cost of products sold.
(2) Includes a $6 million pre-tax charge ($4 million after taxes) recorded to
write off in-process research and development costs related to an
acquisition by Scitex, a 13% owned investee company.
(3) Includes special items totaling a pre-tax loss of $105 million ($56 million
after taxes and minority interest). These special items include a $10
million pre-tax charge ($6 million after taxes) related to our share of a
restructuring charge taken by Scitex. The Scitex charge is reflected as an
equity loss from the investment in Scitex in the consolidated statement of
earnings.
(4) Includes a $56 million pre-tax oil and gas impairment charge ($35 million
after taxes) and a $38 million pre-tax gain ($23 million after taxes) from
the reversals of reserves that were no longer required.
(5) Includes a pre-tax business improvement charge of $535 million ($385 million
after taxes) and a $150 million pre-tax provision for legal reserve ($93
million after taxes).
(6) Includes a pre-tax charge of $125 million ($80 million after taxes) for
anticipated losses on the sale of the imaging businesses and a pre-tax gain
of $170 million ($97 million after taxes and minority interest expense) from
the redemption of certain retained west coast partnership interests and the
release of a related debt guaranty.
81
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of the Company and their business experience are set forth on
pages 11 through 14 of the Company's Notice of 1999 Annual Meeting and Proxy
Statement, dated April 27, 1999 (the "Proxy Statement") to be filed on or about
April 27, 1999, and are incorporated herein by reference. The discussion of
executive officers of the Company is included in Part I under "Executive
Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
A description of the compensation of the Company's executive officers is set
forth on pages 19 and 20 and 23 through 28 of the Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company knows of no one owning beneficially more than five percent (5%) of
the Company's common stock other than the following:
<TABLE>
<S> <C> <C>
STATE STREET BANK & TRUST CO............................................. 34,704,369 11.3%
</TABLE>
As of December 31, 1998, State Street Bank & Trust Co. held such shares as the
independent trustee in trust funds for employee savings, thrift, and similar
employee benefit plans of the Company and its subsidiaries ("Company Trust
Funds"). In addition, State Street Bank & Trust Co. is trustee for various third
party trusts and employee benefit plans and is an Investment Adviser. As a
result of its holdings in all capacities, State Street Bank & Trust Co. is the
record holder of 34,704,369 shares of common stock of the Company. The trustee
disclaims beneficial ownership of all such shares except 4,543,901 shares of
which it has sole power to dispose or to direct the disposition. The common
stock held by the Company Trust Funds is allocated to participants' accounts and
such stock or the cash equivalent will be distributed to participants upon
termination of employment or pursuant to withdrawal rights. The trustee votes
the shares of common stock held in the Company Trust Funds in accordance with
the instructions of the participants; shares for which no instructions are
received are voted proportionately to those shares voted by participants.
<TABLE>
<S> <C> <C>
MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED...................... 31,801,523 10.3%
</TABLE>
As of February 12, 1999, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S") was a broker-dealer registered under Section 15 of the Act. MLPF&S is
a sponsor of various unit investment trusts ("UITs") which invest in equity
securities of the Company. The UITs have the right to receive, or the power to
direct the receipt of dividends from or the proceeds from the sale of, the
securities reported herein.
<TABLE>
<S> <C> <C>
CAPITAL RESEARCH AND MANAGEMENT COMPANY.................................. 20,680,000 6.7%
</TABLE>
As of December 31, 1998, Capital Research and Management Company, an investment
adviser registered under Section 203 of the Investment Advisers Act of 1940 held
such shares as a result of acting as investment adviser to various investment
companies registered under Section 8 of the Investment Company Act of 1940.
82
<PAGE>
<TABLE>
<S> <C> <C>
SANFORD C. BERNSTEIN & CO., INC.......................................... 20,365,740 6.6%
</TABLE>
As of February 5, 1999, Sanford C. Bernstein & Co., Inc. had sole or shared
voting power over 14,178,687 of these shares and sole dispositive power over all
of them.
<TABLE>
<S> <C> <C>
MORGAN STANLEY DEAN WITTER & COMPANY..................................... 15,491,079 5.1%
</TABLE>
As of February 2, 1999, Morgan Stanley Dean Witter & Company was an Investment
Adviser registered under Section 203 of the Investment Advisers Act of 1940.
<TABLE>
<S> <C> <C>
COMMON STOCK HELD BY DIRECTORS AND DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP.................................................................. 1,790,726 .58%
</TABLE>
The table showing ownership of the Company's common stock held by individual
directors and by directors and executive officers as a group is set forth on
page 7 of the Proxy Statement, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None, other than those described under Item 11.
FORWARD-LOOKING INFORMATION
THIS 1998 ANNUAL REPORT ON FORM 10-K, AND ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, IN PARTICULAR,
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS CONCERNING PROJECTED IMPROVEMENT IN
EARNINGS AT INTERNATIONAL PAPER. ACTUAL RESULTS MAY DIFFER BASED PRIMARILY ON
OVERALL DEMAND AND WHETHER PRICE INCREASES FOR VARIOUS PAPER AND PACKAGING
PRODUCTS CAN BE REALIZED IN 1999, AND WHETHER ANTICIPATED SAVINGS FROM
RESTRUCTURING, THE BUSINESS IMPROVEMENT PROGRAM, THE MERGER WITH UNION CAMP AND
OTHER INITIATIVES ARE ACHIEVED. ITEM 7A. ALSO INCLUDES CONCLUSIONS AS TO VALUE
AT RISK ASSOCIATED WITH FINANCIAL INSTRUMENTS. RESULTS MAY DIFFER BASED ON
ACTUAL MOVEMENTS IN INTEREST AND CURRENCY EXCHANGE RATES.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBITS
<C> <S>
(11) Statement of Computation of Per Share Earnings
(12) Computation of Ratio of Earnings to Fixed Charges
(21) List of Significant Subsidiaries
(22) Proxy Statement, dated April 27, 1999 (to be filed on or about April 27, 1999)
(23) Consent of Independent Public Accountants
(24) Power of Attorney
(27) Financial Data Schedule
(99) Management Incentive Plan
</TABLE>
83
<PAGE>
REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed by the Company on January 5, 1999 and
March 11, 1999.
FINANCIAL STATEMENT SCHEDULES
The following additional financial data should be read in conjunction with the
financial statements in Item 8. Schedules not included with this additional
financial data have been omitted because they are not applicable, or the
required information is shown in the financial statements on notes thereto.
ADDITIONAL FINANCIAL DATA
1998, 1997 AND 1996
<TABLE>
<S> <C>
Report of Independent Public Accountants on Financial Statement Schedule............... 85
Consolidated Schedule:
II-Valuation and Qualifying Accounts............................................... 86
</TABLE>
84
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To International Paper Company:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in the Company's 1998 Annual Report
on Form 10-K, and have issued our report thereon dated February 9, 1999. Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed in the accompanying index is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, N.Y.
February 9, 1999
85
<PAGE>
SCHEDULE II
INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In millions)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
--------------------------------------------------------------
Additions
Balance at Additions Charged to Deductions Balance at
Beginning Charged to Other from End
Description of Period Earnings Accounts Reserves of Period
- ------------------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserves Applied Against
Specific Assets Shown on
Balance Sheet:
Doubtful accounts--current $ 93 $ 31 $ (27)(a) $ 97
Restructuring reserves 91 49 (93)(b) 47
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
--------------------------------------------------------------
Additions
Balance at Additions Charged to Deductions Balance at
Beginning Charged to Other from End
Description of Period Earnings Accounts Reserves of Period
- ------------------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserves Applied Against
Specific Assets Shown on
Balance Sheet:
Doubtful accounts--current $101 $ 22 $ (30)(a) $ 93
Restructuring reserves 76 95 (80) 91
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
--------------------------------------------------------------
Additions
Balance at Additions Charged to Deductions Balance at
Beginning Charged to Other from End
Description of Period Earnings Accounts Reserves of Period
- ------------------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserves Applied Against
Specific Assets Shown on
Balance Sheet:
Doubtful accounts--current $101 $ 22 $ (22)(a) $101
Restructuring reserves 110 (34) 76
</TABLE>
- ------------------------
(a) Includes write-off, less recoveries, of accounts determined to be
uncollectible and other adjustments.
(b) Includes an $83 million deduction for the reversal of previously established
reserves that were no longer required. The reversal was recognized in 1998
net earnings and is a separate line item in the consolidated statement of
earnings.
86
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
INTERNATIONAL PAPER COMPANY
By: /s/ JAMES W. GUEDRY,
-----------------------------------------
VICE PRESIDENT AND SECRETARY
</TABLE>
March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ (JOHN T. DILLON) Chairman of the Board,
- ------------------------------ Chief Executive Officer March 31, 1999
John T. Dillon and Director
/s/ (C. WESLEY SMITH)* Executive Vice President
- ------------------------------ and Director March 31, 1999
C. Wesley Smith
/s/ (PETER I. BIJUR)* Director
- ------------------------------ March 31, 1999
Peter I. Bijur
/s/ (ROBERT J. EATON)* Director
- ------------------------------ March 31, 1999
Robert J. Eaton
/s/ (JOHN A. GEORGES)* Director
- ------------------------------ March 31, 1999
John A. Georges
/s/ (JAMES A. HENDERSON)* Director
- ------------------------------ March 31, 1999
James A. Henderson
/s/ (JOHN R. KENNEDY)* Director
- ------------------------------ March 31, 1999
John R. Kennedy
/s/ (DONALD F. MCHENRY)* Director
- ------------------------------ March 31, 1999
Donald F. McHenry
/s/ (PATRICK F. NOONAN)* Director
- ------------------------------ March 31, 1999
Patrick F. Noonan
/s/ (JANE C. PFEIFFER)* Director
- ------------------------------ March 31, 1999
Jane C. Pfeiffer
/s/ (CHARLES R. SHOEMATE)* Director
- ------------------------------ March 31, 1999
Charles R. Shoemate
/s/ (MARIANNE M. PARRS) Executive Vice President-
- ------------------------------ Administration and Chief March 31, 1999
Marianne M. Parrs Financial Officer
/s/ (ANDREW R. LESSIN) Vice President and
- ------------------------------ Controller and Chief March 31, 1999
Andrew R. Lessin Accounting Officer
<TABLE>
<S> <C>
/s/ JAMES W. GUEDRY
------------------------------------------
By: * (James W. Guedry, Attorney-in-Fact)
</TABLE>
87
<PAGE>
APPENDIX I
1998 LISTINGS OF FACILITIES
U.S. AND EUROPEAN PAPERS
BUSINESS PAPERS, COATED
PAPERS AND PULP
DOMESTIC:
Mobile, Alabama
Selma, Alabama
(Riverdale Mill)
Camden, Arkansas
Pine Bluff, Arkansas
Mira Loma, California
(C & D Center)
Augusta, Georgia
Bastrop, Louisiana
(Louisiana Mill)
Springhill, Louisiana
(C & D Center)
Jay, Maine
(Androscoggin Mill)
Sturgis, Michigan
(C & D Center)
Moss Point, Mississippi
Natchez, Mississippi
Corinth, New York
(Hudson River Mill)
Ticonderoga, New York
Riegelwood, North Carolina
Wilmington, North Carolina
(Reclaim Center)
Hazelton, Pennsylvania
(C & D Center)
Lock Haven, Pennsylvania
Georgetown, South Carolina
Texarkana, Texas
INTERNATIONAL:
Docelles, France
(Lana Mill)
Grenoble, France
(Pont De Claix Mill)
Maresquel, France
Saillat, France
Saint Die, France
(Anould Mill)
Strasbourg, France
(La Robertsau Mill)
Bergisch Gladbach, Germany
(Gorhrsmuhle Mill)
Duren, Germany
(Reflex Mill)
Klucze, Poland
Kwidzyn, Poland
Svetogorsk, Russia
Inverurie, Scotland
INDUSTRIAL PACKAGING
CONTAINERBOARD
DOMESTIC:
Terre Haute, Indiana
Mansfield, Louisiana
Pineville, Louisiana
Vicksburg, Mississippi
Oswego, New York
Gardiner, Oregon
INTERNATIONAL:
Arles, France
CORRUGATED CONTAINER
DOMESTIC:
Mobile, Alabama
Montgomery, Alabama
Fordyce, Arkansas
Jonesboro, Arkansas
Russellville, Arkansas
Carson, California
Modesto, California
Putnam, Connecticut
Auburndale, Florida
Chicago, Illinois
North Lake, Illinois
Fort Wayne, Indiana
Terre Haute, Indiana
Lexington, Kentucky
Shreveport, Louisiana
Springhill, Louisiana
Detroit, Michigan
Minneapolis, Minnesota
Jackson, Mississippi
Tupelo, Mississippi
Kansas City, Missouri
Geneva, New York
Statesville, North Carolina
Cincinnati, Ohio
Wooster, Ohio
Mount Carmel, Pennsylvania
Georgetown, South Carolina
Columbia, Tennessee
Nashville, Tennessee
Dallas, Texas
Edinburg, Texas
El Paso, Texas
Cedarburg, Wisconsin
Fond du Lac, Wisconsin
INTERNATIONAL:
Las Palmas, Canary Islands
Chalon-sur-Saone, France
Chantilly, France
Creil, France
LePuy, France
Mortagne, France
Guadeloupe, French West
Indies
Bellusco, Italy
Catania, Italy
Pedemonte, Italy
Pomezia, Italy
San Felice, Italy
Barcelona, Spain
Bilbao, Spain
Valladolid, Spain
Thrapston, United Kingdom
Winsford, United Kingdom
CONSUMER PACKAGING
BLEACHED BOARD
Pine Bluff, Arkansas
Sprague, Connecticut
Augusta, Georgia
Moss Point, Mississippi
Georgetown, South Carolina
Riegelwood, North Carolina
Texarkana, Texas
A-1
<PAGE>
BEVERAGE PACKAGING
Turlock, California
Plant City, Florida
Cedar Rapids, Iowa
Kansas City, Kansas
Framingham, Massachusetts
Kalamazoo, Michigan
Raleigh, North Carolina
Philadelphia, Pennsylvania
INTERNATIONAL
Itu, Brazil
Edmonton, Alberta, Canada
London, Ontario, Canada
Longueuil, Quebec, Canada
Shanghai, China
San Salvador, El Salvador
Santiago,
Dominican Republic
St. Priest, France
St. Catherine, Jamaica
Hyogo, Japan
RETAIL PACKAGING
La Grange, Georgia
Thomaston, Georgia
Clinton, Iowa
Hendersonville, North
Carolina
Wilmington, North Carolina
Cincinnati, Ohio
Richmond, Virginia
KRAFT PAPER
Mobile, Alabama
Camden, Arkansas
Moss Point, Mississippi
PLASTIC PACKAGING
Janesville, Wisconsin
FOODSERVICE
DOMESTIC:
Mobile, Alabama
Visalia, California
Shelbyville, Illinois
Hopkinsville, Kentucky
Kenton, Ohio
Jackson, Tennessee
Menomonee Falls, Wisconsin
INTERNATIONAL:
Brisbane, Australia
Santiago, Chile
DISTRIBUTION
WHOLESALE AND RETAIL DISTRIBUTION
(295 distribution branches)
XPEDX
DOMESTIC:
Stores Group
Chicago, Illinois
180 locations nationwide
Southeast Region
Greensboro, NC
23 branches in the Middle Atlantic States and Southeast
West Region
Denver, Colorado
22 branches in the West and Midwest
Specialty Business Group
Erlanger, Kentucky
3 branches nationwide
Northeast Region
Erlanger, Kentucky
20 branches in New England, Middle Atlantic States and Midwest
Midwest Region
Olathe, Kansas
26 branches in the West, Midwest and South
INTERNATIONAL:
Aussedat Rey France
Distribution S.A., Pantin,
France
3 locations
Chihuahua, Mexico
6 locations
Recom Papers
Nijmegen, Netherlands
Scaldia Papier BV,
Nijmegen, Netherlands
Aalbers Paper Products
Veenendaal, Netherlands
Impap
Warsaw, Poland
9 locations
SPECIALTY BUSINESSES
CHEMICALS
DOMESTIC:
Panama City, Florida
Pensacola, Florida
Port St. Joe, Florida
Oakdale, Louisiana
Springhill, Louisiana
Picayune, Mississippi
INTERNATIONAL:
Oulu, Finland
Valkeakoski, Finland
Niort, France
Sandarne, Sweden
Greaker, Norway
PETROLEUM
Alvin, Texas
Midland, Texas
Orange, Texas
FINE AND INDUSTRIAL PAPERS
Thilmany
Knoxville, Tennessee
Kaukauna, Wisconsin
Nicolet
De Pere, Wisconsin
Akrosil
DOMESTIC:
Lancaster, Ohio
Menasha, Wisconsin
INTERNATIONAL:
Toronto, Canada
Limburg, Netherlands
Jay, Maine
(Androscoggin Mill)
Millers Falls, Massachusetts
West Springfield,
Massachusetts
Westfield, Massachusetts
(C & D Center)
Hamilton, Ohio
Saybrook, Ohio
(C & D Center)
Erie, Pennsylvania
A-2
<PAGE>
FOREST PRODUCTS
FORESTLANDS
Approximately 5.9 million acres in the South and Northeast
REALTY PROJECTS
Haig Point Plantation
Daufuskie Island, South
Carolina
BUILDING MATERIALS
WOOD PRODUCTS
Maplesville, Alabama
Tuscaloosa, Alabama
Gurdon, Arkansas
Leola, Arkansas
Whelen Springs, Arkansas
Augusta, Georgia
Cordele, Georgia
Washington, Georgia
Springhill, Louisiana
Morton, Mississippi
Wiggins, Mississippi
Joplin, Missouri
Madison, New Hampshire
Armour, North Carolina
Johnston, South Carolina
Newberry, South Carolina
Sampit, South Carolina
Henderson, Texas
Jefferson, Texas
Nacogdoches, Texas
New Boston, Texas
Slaughter
Dallas, Texas
2 branches in the
Southwest and
Northwest
DECORATIVE PRODUCTS
Particleboard
Stuart, Virginia
Waverly, Virginia
Specialty Panels
DOMESTIC:
Chino, California
Glasgow, Kentucky
Odenton, Maryland
Statesville, North Carolina
Tarboro, North Carolina
Klamath Falls, Oregon
Hampton, South Carolina
Memphis, Tennessee
Oshkosh, Wisconsin
INTERNATIONAL:
Bergerac, France
(Couze Mill)
Ussel, France
Barcelona, Spain
(Durion Mill)
MASONITE
DOMESTIC:
Ukiah, California
Lisbon Falls, Maine
Laurel, Mississippi
Pilot Rock, Oregon
Towanda, Pennsylvania
Danville, Virginia
INTERNATIONAL:
Carrick-on-Shannon, Ireland
Masonite Africa Limited
Estcourt Plant
CARTER HOLT HARVEY
FORESTLANDS
Approximately 820,000
acres in New Zealand
WOOD PRODUCTS
Sawmills and Processing Plants
Box Hill, Victoria, Australia
Mt. Burr, South Australia
Mt. Gambier, South Australia
Myrtleford, New South
Wales, Australia
Kopu, New Zealand
Nelson, New Zealand
Putaruru, New Zealand
Rotorua, New Zealand
Taupo, New Zealand
Tokoroa, New Zealand
Timber Merchants
Box Hill, Victoria, Australia
Hamilton Central,
Queensland, Australia
Sydney, New South Wales,
Australia
Plywood Mills
Myrtleford, New South
Wales, Australia
Nangwarry, South Australia
Tokoroa, New Zealand
Panel Production Plants
Auckland, New Zealand
Christchurch, New Zealand
Rangiora, New Zealand
Thames, New Zealand
Building Supplies Retail Outlets
Retail Outlets, 36 branches
in New Zealand
A-3
<PAGE>
PULP AND PAPER
Kraft Paper, Pulp, Coated and
Uncoated Papers and Bristols
Kinleith, New Zealand
Mataura, New Zealand
Cartonboard
Whakatane, New Zealand
Containerboard
Kinleith, New Zealand
Penrose, New Zealand
Fiber Recycling Operations
Auckland, New Zealand
TISSUE
Pulp and Tissue
Box Hill, Victoria, Australia
Myrtleford, New South
Wales, Australia
Kawerau, New Zealand
Conversion Sites
Box Hill, Victoria, Australia
Keon Park, Victoria, Australia
Clayton, Victoria, Australia
Suva, Fiji
Auckland, New Zealand
(2 plants)
Te Rapa, New Zealand
PACKAGING
Case Manufacturing
Northern (Auckland, New
Zealand)
Central (Levin, New
Zealand)
Southern (Christchurch, New
Zealand)
Solid Fibre (Hamilton, New
Zealand)
Suva, Fiji
Carton Manufacturing
Crestmead, Queensland,
Australia
Dandenong, Victoria,
Australia
Reservoir, Victoria, Australia
Smithfield, New South
Wales, Australia
Woodville, Australia
Auckland, New Zealand
Christchurch, New Zealand
Paper Bag Manufacturing
Auckland, New Zealand
Paper Cups
Brisbane, Australia
Plastic Packaging
Sydney, Australia
Santiago, Chile
Albany, New Zealand
Hamilton, New Zealand
Hastings, New Zealand
Wellington, New Zealand
DISTRIBUTION
Paper Merchant,
Warehousing and
Distribution Centers,
Australia, 3 locations
New Zealand, 16 locations
A-4
<PAGE>
12345
TWO MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
Printed on Hammermill Papers, Accent Opaque 50 lbs.
Hammermill Papers is a division of International Paper.
<PAGE>
(EXHIBIT 11)
INTERNATIONAL PAPER COMPANY
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR TO DATE
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET EARNINGS (LOSS) $ 236 $ (151) $ 303
Effect of dilutive securities
Preferred securities of subsidiary trust
--------- --------- ---------
NET EARNINGS (LOSS)--ASSUMING DILUTION $ 236 $ (151) $ 303
--------- --------- ---------
--------- --------- ---------
AVERAGE COMMON SHARES OUTSTANDING 305.9 301.6 292.1
Effect of dilutive securities
Long-term incentive plan deferred compensation (0.9) (0.9) (0.9)
Stock options 1.3 1.4
Preferred securities of subsidiary trust
--------- --------- ---------
AVERAGE COMMON SHARES OUTSTANDING--ASSUMING DILUTION 306.3 300.7 292.6
--------- --------- ---------
--------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE $ 0.77 $ (0.50) $ 1.04
--------- --------- ---------
--------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE--ASSUMING DILUTION $ 0.77 $ (0.50) $ 1.04
--------- --------- ---------
--------- --------- ---------
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
<PAGE>
(EXHIBIT 12)
INTERNATIONAL PAPER COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
TITLE 1993 1994 1995 1996 1997 1998
- ---------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
A) Earnings before income taxes, minority
interest, extraordinary item and
accounting changes $ 538.0 $ 715.0 $ 2,028.0 $ 802.0 $ 16.0 $ 392.0
B) Less: Minority interest expense, net of
taxes (36.0) (47.0) (156.0) (169.0) (129.0) (76.0)
C) Add: Fixed charges excluding capitalized
interest 365.3 412.3 605.9 672.4 686.6 724.8
D) Add: Amortization of previously
capitalized interest 12.2 12.8 13.0 17.8 20.0 20.8
E) Less: Equity in undistributed earnings of
affiliates (25.9) (49.1) (94.5) 6.2 (40.4) 23.7
--------- --------- --------- --------- --------- ---------
F) EARNINGS BEFORE INCOME TAXES, MINORITY
INTEREST, EXTRAORDINARY ITEM, ACCOUNTING
CHANGES AND FIXED CHARGES $ 853.6 $ 1,044.0 $ 2,396.4 $ 1,329.4 $ 553.2 $ 1,085.3
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
FIXED CHARGES
G) Interest and amortization of debt expense $ 334.5 $ 371.0 $ 542.3 $ 582.8 $ 593.0 $ 588.0
H) Interest factor attributable to rentals 30.8 41.3 53.0 66.0 70.0 67.7
I) Preferred dividends of subsidiary 10.6 23.6 23.6 69.1
J) Capitalized interest 12.2 18.0 58.0 66.7 61.9 42.5
--------- --------- --------- --------- --------- ---------
K) TOTAL FIXED CHARGES $ 377.5 $ 430.3 $ 663.9 $ 739.1 $ 748.5 $ 767.3
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
L) RATIO OF EARNINGS TO FIXED CHARGES 2.26 2.43 3.61 1.80 1.41
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
M) DEFICIENCY IN EARNINGS NECESSARY TO COVER
FIXED CHARGES $ 195.3
---------
---------
</TABLE>
<PAGE>
(EXHIBIT 21)
COMPANY AND SUBSIDIARIES:
<TABLE>
<CAPTION>
SOVEREIGN POWER PERCENTAGE OF VOTING
UNDER WHICH SECURITIES OWNED BY
ORGANIZED IMMEDIATE PARENT
----------------- ---------------------
<S> <C> <C>
International Paper Company the ("Company")............................ New York Parent
Carter Holt Harvey..................................................... New Zealand 50.3%
</TABLE>
Names of subsidiaries which, if considered in the aggregate as a single
subsidiary would not constitute a significant subsidiary, have been ommitted.
<PAGE>
(EXHIBIT 23)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated February 9, 1999, included in this Form 10-K, into the Company's
previously filed Registration Statement File Nos. 2-57646, 33-11117, 33-32527,
33-38133, 33-41374, 33-50438, 33-51447, 33-61335, 33-62283, 333-01667,
333-02137, 333-24869, 333-47583, 333-62661, and 333-75235
ARTHUR ANDERSEN LLP
New York, N.Y.
March 29, 1999
<PAGE>
(Exhibit 24)
POWER OF ATTORNEY
Know all Men By These Presents, that the undersigned hereby constitutes
and appoints JAMES W. GUEDRY, WILLIAM B. LYTTON AND JAMES P. MELICAN and each
of them (with full power to each of them to act alone) their true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for them on their behalf and in their name, place and stead, in
any and all capacities, to sign, executive and affix their seal thereto and file
the Annual Report of International Paper Company on Form 10-K (or any other
appropriate form), under the Securities Exchange Act of 1934, as amended,
together with any and all amendments to such Annual Report and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities Exchange Commission, granting unto said attorneys-in-fact, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, for all intents and purposes, and that the undersigned
hereby ratify and confirm all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
Executed on this 9th day of March, 1999, at Purchase, New York.
SIGNATURE TITLE
/s/ John T. Dillon Director and Chairman of the Board
-------------------------------- (Chief Executive Officer)
(JOHN T. DILLON)
/s/ C. Wesley Smith Executive Vice President and Director
--------------------------------
(C. WESLEY SMITH)
/s/ Peter I. Bijur Director
--------------------------------
(PETER I. BIJUR)
/s/ Robert J. Eaton Director
--------------------------------
(ROBERT J. EATON)
/s/ John A. Georges Director
--------------------------------
(JOHN A. GEORGES)
<PAGE>
/s/ James A. Henderson Director
--------------------------------
(JAMES A. HENDERSON)
/s/ John R. Kennedy Director
--------------------------------
(JOHN R. KENNEDY)
/s/ Donald F. McHenry Director
--------------------------------
(DONALD F. MCHENRY)
/s/ Patrick F. Noonan Director
--------------------------------
(PATRICK F. NOONAN)
/s/ Jane C. Pfeiffer Director
--------------------------------
(JANE C. PFEIFFER)
/s/ Charles R. Schoemate Director
--------------------------------
(CHARLES R. SCHOEMATE)
/s/ Marianne M. Parrs Executive Vice President--Administration
-------------------------------- and Chief Financial Officer
(MARIANNE M. PARRS)
/s/ Andrew R.Lessin Vice President and Controller
-------------------------------- and Chief Accounting Officer
(ANDREW R. LESSIN)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 477
<SECURITIES> 0
<RECEIVABLES> 2,566
<ALLOWANCES> 97
<INVENTORY> 2,719
<CURRENT-ASSETS> 6,010
<PP&E> 22,646
<DEPRECIATION> 10,567
<TOTAL-ASSETS> 26,356
<CURRENT-LIABILITIES> 3,636
<BONDS> 6,407
1,805
0
<COMMON> 308
<OTHER-SE> 8,594
<TOTAL-LIABILITY-AND-EQUITY> 26,356
<SALES> 19,541
<TOTAL-REVENUES> 19,541
<CGS> 14,761
<TOTAL-COSTS> 18,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 31
<INTEREST-EXPENSE> 496
<INCOME-PRETAX> 392
<INCOME-TAX> 80
<INCOME-CONTINUING> 236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 236
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
<PAGE>
(Exhibit 99)
INTERNATIONAL PAPER COMPANY - MANAGEMENT INCENTIVE PLAN (MIP)
AMENDED AND RESTATED AS OF JANUARY 1, 1999
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 the best talent available, and (c) to further align
the interests of the participants and 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.
II. DEFINITIONS
Business: "Business" means one of the Business Groups reporting
directly to the Chairman.
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 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 Industry Financial Performance Peer
Group, calculated on a weighted basis.
Division: "Division" means any subordinate organizational unit, other
than those designated as a Mill, Facility, or Plant aligned with one
of the businesses.
Employees: "Employees" means those persons who are full-time employees
of the Company.
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Executive Lead Team: "Executive Lead Team" means those individuals who
by virtue of their positions and reporting levels with the Company,
along with the Chairman and Chief Executive Officer, make up the
policy making body responsible for guiding and directing the
operations of the Company.
Goal Scale: "Goal Scale" means the conversion of the performance
initiative rating to a percent of target award earned.
Industry Financial Performance Peer Group: "Industry Financial
Performance Peer Group" means that representative group of companies
in the paper and forest products industry with which the Company
competes, as determined from time to time by the Company, listed in
Appendix A.
Mill/Facility/Plant: "Mill/Facility/Plant" means a mill, facility,
forest region, plant, or similar subdivision of a Business or Division.
Participant: "Participant" means a person who has been designated as a
participant in the Plan, according to Section V.
Performance Initiative Rating: "Performance Initiative Rating" means
the percentage amount assigned to a Performance Initiative for a level
of achievement which translates to a percentage of the Target Award.
Performance Initiatives: "Performance Initiatives" means the measures
developed around ROI, customer focus, operational excellence, and
people development or other initiatives as identified by the Company
upon which awards may be earned.
Plan: "Plan" means this Amended and Restated Management Incentive
Plan, as may be amended from time to time.
Plan Year: "Plan Year" means the twelve month period corresponding to
the Company's fiscal year.
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, shown in Appendix B.
III. PLAN DESCRIPTION
The Plan is an annual cash incentive plan developed around the
achievement of pre-established Return on Investment (ROI) measures and
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appropriate key performance initiatives promoting customer focus,
operational excellence, and people development or other initiatives as
identified by the Company. Participants earn awards from corporate,
business/division, or mill/plant/facility performance in proportion to
the organizational level in which they are assigned. Total awards
cannot exceed 175% of the aggregate MIP targets for all Plan
participants.
IV. ADMINISTRATION OF THE PLAN
The Plan operates at the discretion of the Management Development and
Compensation Committee (Committee) of the Board of Directors. The
Committee may exercise considerable discretion and judgment in
interpreting the Plan, and adopting, from time to time, rules and
regulations that govern the administration of the Plan.
The Committee delegates authority to the Chairman and Chief Executive
Officer or his designee, for the day-to-day administration of the
Plan, except for any participant considered an Officer/Insider of
the Company or whose position level is 25 or higher.
Decisions of the Committee are final, conclusive and binding on all
parties, including the Company, its shareholders, and employees.
V. PARTICIPATION IN THE PLAN
Participants in the Plan are limited to employees of the Company,
whose positions are considered to have a meaningful impact on the
Company's performance as determined by the Chairman and Chief
Executive Officer or his designee. Employees who are eligible for
participation in any other annual, recurring variable cash
compensation plan of the Company are not eligible for participation
in this Plan. Participation in this Plan, or receipt of an award under
this Plan, does not give Participant or Employee any right to a
subsequent award, or any right to continued employment by the Company
for any period.
VI. AMOUNT AVAILABLE FOR INCENTIVE AWARDS
A. PERFORMANCE INITIATIVES. Corporate performance initiatives will
be:
o Return on Investment (ROI) as compared to the annual budget,
and
o Return on Investment as compared to Industry Financial
Performance Peer Group, 70% of total corporate performance
will be driven by corporate ROI performance to the industry
peer group. 30% will be driven by ROI performance to the
budget.
Up to six additional initiatives may be identified for plan
purposes. These additional initiatives are based on
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appropriate business level ROI and appropriate corporate or
business customer focus, operational excellence, and people
development goals. Weighting of the initiatives will be
dependent upon the specific needs of the business and
opportunity for the participant to contribute and affect
performance against the initiatives.
B. PERFORMANCE INITIATIVE RATING. Each performance initiative will
be evaluated at the end of the plan year and assigned a rating
between 0 and 125% representing the level at which the
initiative was achieved. Ratings will be assigned by
appropriate management levels for final review and approval by
the Chairman and Chief Executive Officer before submitting to
the Committee for final approval. In connection with Company ROI
and Competitive ROI, the Committee may take into account,
without limitation, such items as unforeseen changes in
economic conditions.
C. GOAL SCALE. The Performance Initiative Rating will translate
to a percentage of the target award according to the following
scale:
PERFORMANCE INITIATIVE RATING PERCENT OF TARGET AWARD
----------------------------- -----------------------
125% 175%
100% 100%
70% 50%
Less than 70% 0%
VII. ALLOCATION OF INCENTIVE COMPENSATION AWARDS AMONG PARTICIPANTS
A. GENERAL. Amounts available under the MIP for payment of
individual awards will be earned and allocated among Corporate,
Business/Division and Mill/Facility/Plant Participants based on
organizational level performance.
B. CORPORATE LEVEL PARTICIPANTS. The Chairman and Chief Executive
Officer, Executive Lead Team Members, and all subordinate staff
members not specifically assigned to a business, division,
mill, facility, or plant are considered corporate participants.
As such, 60% of these participants' target award is based upon
corporate performance initiatives and 40% upon initiatives
developed and weighted as appropriate for their positions.
C. BUSINESS/DIVISION PARTICIPANTS. For participants, other than
Corporate Level Participants, whose primary responsibilities
rest at a business or division level, the target award under
the Plan is based 50% upon corporate performance initiatives
and 50% upon specific business or division level initiatives
developed and weighted as appropriate for their positions.
D. MILL/FACILITY/PLANT PARTICIPANTS. For participants, whose
primary responsibilities rest at a mill, facility, or plant
level, the target award under the Plan is based 25% upon
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corporate performance initiatives, 25% upon appropriate
business/division level initiatives, and 50% upon specific
mill, facility, or plant initiatives developed and weighted as
appropriate for their positions.
VIII. CEO DISCRETIONARY FUND
A discretionary fund of up to 33% of the total MIP payout may be used
by the Chairman and Chief Executive Office to reward an employee
whose contributions during the Plan Year merit special recognition.
The fund may or may not be utilized as determined by the Chairman and
Chief Executive Officer however, any unused funds may not be carried
over to succeeding years.
IX. AWARD RECOMMENDATIONS.
A. RECOMMENDATIONS. The Chairman and Chief Executive Officer
will submit to the Committee at the end of each Plan Year
individual award recommendations for participants
considered Officers/Insiders or whose position level is 25
or higher and an aggregate award amount for all other
participants.
B. GRANTING OF AWARDS. The Committee, in its sole discretion,
may approve, revise or disapprove any recommended award to
an Officer/Insider as it deems appropriate. Any award to an
Officer/Insider will 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, disability or retirement (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, such award will be
canceled and the Participant will have no right to receive
payment.
X. METHOD AND TIME OF PAYMENT OF AWARDS
A. TYPE OF PAYMENT. As soon as practical 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/Insider), the award will
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 will
be paid to such beneficiary or beneficiaries as the
Participant has designated in writing. The beneficiary
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designation will state whether payment will 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 a filed a beneficiary
designation, the award will be paid in a lump-sum to the
Participant's estate.
C. DEFERRAL OF PAYMENT. Any Participant may elect to defer
payment, not to exceed 85%, of any award under this Plan by
filing an irrevocable Election to Defer Payment with the
Company by a date determined by the Company. Awards or
portions elected to be deferred will be invested in accounts
under the Company's savings plans as directed by the
participants.
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 is governed by the laws of the State of New York.
XIII. TAX WITHHOLDING.
The Company will 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 AWARD.
No award, under this Plan, and no rights or interests therein,
will be assignable or transferable by a Participant (or legal
representative).
XV. EFFECTIVE DATE.
This Plan is effective as of January 1, 1999.
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Appendix A
Industry Financial Performance
Peer Group
Boise Cascade Smurfit-Stone
Champion International Westvaco
Georgia-Pacific Weyerhaeuser
Mead Williamette
<PAGE>
Appendix B
Management Incentive Plan (MIP)
Target Awards
<TABLE>
<CAPTION>
Position Target as a Percent
LEVEL OF MIDPOINT
<S> <C>
43 85%
36 60%
35 60%
34 60%
33 55%
32 55%
31 55%
30 45%
29 45%
28 45%
27 40%
26 40%
25 40%
24 35%
23 30%
22 30%
21 25%
20 20%
19 20%
18 15%
</TABLE>
