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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECUTITIES EXCHANGE ACT OF 1934
For the Transition Period From _______________ to
---------------
Commission File Number 1-3157
INTERNATIONAL PAPER COMPANY
(Exact name of registrant as specified in its charter)
New York 13-0872805
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Two Manhattanville Road, Purchase, NY 10577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 397-1500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of the registrant's common stock as of October
31, 2000 was 481,370,059
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<PAGE>
INTERNATIONAL PAPER COMPANY
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Earnings -
Three Months and Nine Months Ended September 30, 2000 and 1999 1
Consolidated Balance Sheet -
September 30, 2000 and December 31, 1999 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 3
Consolidated Statement of Common Shareholders' Equity -
Three Months and Nine Months Ended September 30, 2000 and 1999 4 - 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Financial Information by Industry Segment 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II. Other Information
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 33
</TABLE>
* Omitted since no answer is called for, answer is in the negative or
inapplicable.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 7,801 $ 6,251 $ 20,952 $ 18,279
-------- -------- -------- --------
Costs and Expenses
Cost of products sold 5,611 4,593 14,945 13,589
Selling and administrative expenses 553 495 1,637 1,548
Depreciation and amortization 516 383 1,303 1,140
Distribution expenses 335 268 872 821
Taxes other than payroll and income taxes 63 58 187 172
Restructuring and other charges 125 10 196 123
Merger integration costs 15 68 27 225
Equity earnings from investment in Scitex (3)
-------- -------- -------- --------
Total Costs and Expenses 7,218 5,875 19,167 17,615
-------- -------- -------- --------
Reversal of reserves no longer required 6 6 36
-------- -------- -------- --------
Earnings Before Interest, Income Taxes, Minority
Interest and Extraordinary Items 589 376 1,791 700
Interest expense, net 278 134 565 400
-------- -------- -------- --------
Earnings Before Income Taxes, Minority
Interest and Extraordinary Items 311 242 1,226 300
Income tax provision 71 54 349 64
Minority interest expense, net of taxes 65 43 188 117
-------- -------- -------- --------
Earnings Before Extraordinary Items 175 145 689 119
Loss on extinguishment of debt, net of taxes (3) (16)
Impairment losses on businesses to be sold, net of taxes (310) (310)
Gains on sales of investments, net of taxes
and minority interest 134
-------- -------- -------- --------
Net Earnings (Loss) $ (135) $ 142 $ 513 $ 103
======== ======== ======== ========
Earnings Per Common Share Before
Extraordinary Items $ 0.36 $ 0.35 $ 1.57 $ 0.29
Loss Per Common Share - Extraordinary
Items (0.64) (0.01) (0.40) (0.04)
-------- -------- -------- --------
Earnings (Loss) Per Common Share $ (0.28) $ 0.34 $ 1.17 $ 0.25
======== ======== ======== ========
Earnings (Loss) Per Common Share - Assuming
Dilution $ (0.28) $ 0.34 $ 1.17 $ 0.25
======== ======== ======== ========
Average Shares of Common Stock Outstanding 481.6 413.5 438.9 412.9
======== ======== ======== ========
Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.75 $ 0.76
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Balance Sheet
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets
Current Assets
Cash and temporary investments $ 1,171 $ 453
Accounts and notes receivable, net 3,729 3,227
Inventories 3,398 3,203
Other current assets 1,866 358
-------- --------
Total Current Assets 10,164 7,241
-------- --------
Plants, Properties and Equipment, net 17,372 14,381
Forestlands 6,056 2,921
Investments 316 1,044
Goodwill 6,438 2,596
Deferred Charges and Other Assets 2,619 2,085
-------- --------
Total Assets $ 42,965 $ 30,268
======== ========
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 2,912 $ 920
Accounts payable 1,829 1,870
Accrued payroll and benefits 592 423
Other accrued liabilities 2,253 1,169
-------- --------
Total Current Liabilities 7,586 4,382
-------- --------
Long-Term Debt 12,690 7,520
Deferred Income Taxes 4,647 3,344
Other Liabilities 2,239 1,332
Minority Interest 1,426 1,581
International Paper - Obligated Mandatorily Redeemable Preferred
Securities of Subsidiaries Holding International Paper Debentures 1,805 1,805
Common Shareholders' Equity
Common stock, $1 par value, 2000 - 484.1 shares, 1999 - 414.6 shares 484 415
Paid-in capital 6,473 4,078
Retained earnings 6,799 6,613
Accumulated other comprehensive income (loss) (1,064) (739)
-------- --------
12,692 10,367
Less: Common stock held in treasury, at cost, 2000 - 2.7 shares
1999 - 1.2 shares 120 63
-------- --------
Total Common Shareholders' Equity 12,572 10,304
-------- --------
Total Liabilities and Common Shareholders' Equity $ 42,965 $ 30,268
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Cash Flows
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
2000 1999
------- -------
<S> <C> <C>
Operating Activities
Net earnings $ 513 $ 103
Depreciation and amortization 1,303 1,140
Deferred income tax benefit (34) (209)
Payments related to restructuring and legal reserves (161) (117)
Payments related to mergers (31) (124)
Merger integration costs 27 225
Restructuring and other charges 196 123
Reversal of reserves no longer required (6) (36)
Loss on extinguishment of debt 26
Impairment losses on businesses to be sold 460
Gains on sales of investments (385)
Other, net 292 22
Changes in current assets and liabilities
Accounts and notes receivable (313) (331)
Inventories (63) (57)
Accounts payable and accrued liabilities 92 381
Other (10) 11
------- -------
Cash Provided by Operations 1,880 1,157
------- -------
Investment Activities
Invested in capital projects (908) (706)
Mergers and acquisitions, net of cash acquired (5,618) (54)
Proceeds from divestitures 1,393 119
Other 44 (84)
------- -------
Cash Used for Investment Activities (5,089) (725)
------- -------
Financing Activities
Issuance of common stock 43 192
Issuance of debt 6,328 787
Reduction of debt (1,896) (1,159)
Penalties paid on early retirement of debt (23)
Change in bank overdrafts (202) (68)
Dividends paid (327) (314)
Other 105 (12)
------- -------
Cash Provided by (Used for) Financing Activities 4,051 (597)
------- -------
Effect of Exchange Rate Changes on Cash (124) (15)
------- -------
Change in Cash and Temporary Investments 718 (180)
Cash and Temporary Investments
Beginning of the period 453 533
------- -------
End of the period $ 1,171 $ 353
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Three Months Ended September 30, 2000
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 2000 483,450 $ 484 $ 6,437 $ 7,054 $ (862) 1,582 $ 72 $ 13,041
Issuance of stock for
various plans 658 36 700 33 3
Repurchase of stock 460 15 (15)
Cash dividends - Common
stock ($0.25 per share) (120) (120)
Comprehensive income (loss)
Net earnings (loss) (135) (135)
Change in cumulative
foreign currency
translation adjustment (202) (202)
--------
Total comprehensive
income (loss) (337)
------- -------- -------- -------- -------- ----- -------- --------
Balance, September 30, 2000 484,108 $ 484 $ 6,473 $ 6,799 $ (1,064) 2,742 $ 120 $ 12,572
======= ======== ======== ======== ======== ===== ======== ========
</TABLE>
Three Months Ended September 30, 1999
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1999 413,228 $ 413 $ 3,997 $ 6,597 $ (620) 139 $ 9 $ 10,378
Issuance of stock for
various plans 799 1 (10) (207) (12) 3
Repurchase of stock 640 33 (33)
Cash dividends - Common
stock ($0.25 per share) (102) (102)
Comprehensive income (loss)
Net earnings 142 142
Change in cumulative
foreign currency
translation adjustment 6 6
--------
Total comprehensive
income (loss) 148
------- -------- -------- -------- -------- ----- -------- --------
Balance, September 30, 1999 414,027 $ 414 $ 3,987 $ 6,637 $ (614) 572 $ 30 $ 10,394
======= ======== ======== ======== ======== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
INTERNATIONAL PAPER COMPANY
Consolidated Statement of Common Shareholders' Equity
(Unaudited)
(In millions, except share amounts in thousands)
Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 414,584 $ 415 $ 4,078 $ 6,613 $ (739) 1,216 $ 63 $ 10,304
Issuance of stock for merger 68,706 69 2,360 2,429
Issuance of stock for
various plans 818 35 (184) (9) 44
Repurchase of stock 1,710 66 (66)
Cash dividends - Common
stock ($0.75 per share) (327) (327)
Comprehensive income (loss)
Net earnings 513 513
Change in cumulative
foreign currency
translation adjustment (325) (325)
--------
Total comprehensive
income (loss) 188
------- -------- -------- -------- -------- ----- -------- --------
Balance, September 30, 2000 484,108 $ 484 $ 6,473 $ 6,799 $ (1,064) 2,742 $ 120 $ 12,572
======= ======== ======== ======== ======== ===== ======== ========
</TABLE>
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 413,185 $ 413 $ 3,896 $ 6,848 $ (395) 552 $ 24 $ 10,738
Issuance of stock for
various plans 842 1 91 (1,870) (87) 179
Repurchase of stock 1,890 93 (93)
Cash dividends - Common
stock ($0.76 per share) (314) (314)
Comprehensive income (loss)
Net earnings 103 103
Change in cumulative
foreign currency
translation adjustment (219) (219)
--------
Total comprehensive
income (loss) (116)
------- -------- -------- -------- -------- -------- -------- --------
Balance, September 30, 1999 414,027 $ 414 $ 3,987 $ 6,637 $ (614) 572 $ 30 $ 10,394
======= ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
INTERNATIONAL PAPER COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, in the opinion of
Management, include all adjustments (consisting only of normal recurring
accruals) which are necessary for the fair presentation of results for the
interim periods. It is suggested that these consolidated financial statements be
read in conjunction with the audited financial statements and the notes thereto
incorporated by reference in International Paper's Form 10-K for the year ended
December 31, 1999, which has previously been filed with the Commission.
On June 20, 2000, International Paper acquired Champion International
Corporation (Champion). The transaction was accounted for as a purchase. The
accompanying statement of earnings includes Champion's earnings from June 20,
2000.
On April 30, 1999, International Paper completed its merger with Union Camp
Corporation (Union Camp) in a transaction accounted for as a
pooling-of-interests. The accompanying 1999 financial statements have been
restated to include the financial position and results of operations for both
International Paper and Union Camp. 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 before extraordinary items were computed by dividing
earnings before extraordinary items by the weighted average number of common
shares outstanding. Earnings per common share before extraordinary items,
assuming dilution, were computed assuming that all potentially dilutive
securities were converted into common shares at the beginning of each period. A
reconciliation of the amounts included in the computation of earnings per common
share before extraordinary items and earnings per common share before
extraordinary items, assuming dilution, is as follows:
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
In millions, except per share amounts 2000 1999 2000 1999
------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings before extraordinary items $ 175 $ 145 $ 689 $ 119
Effect of dilutive securities
Preferred securities of subsidiary trust 12
-------- -------- -------- --------
Earnings before extraordinary
items - assuming dilution $ 175 $ 145 $ 701 $ 119
======== ======== ======== ========
Average common shares outstanding 481.6 413.5 438.9 412.9
Effect of dilutive securities
Preferred securities of subsidiary trust 8.3
Long-term incentive plan
deferred compensation
Stock options 0.1 3.3 0.3 3.3
-------- -------- -------- --------
Average common shares outstanding -
assuming dilution 481.7 416.8 447.5 416.2
======== ======== ======== ========
Earnings per common share
before extraordinary items $ 0.36 $ 0.35 $ 1.57 $ 0.29
======== ======== ======== ========
Earnings per common share
before extraordinary items -
assuming dilution $ 0.36 $ 0.35 $ 1.57 $ 0.29
======== ======== ======== ========
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
NOTE 3 - MERGERS AND ACQUISITIONS
On June 20, 2000, International Paper completed the previously announced merger
with Champion, a leading manufacturer of paper for business communications,
commercial printing and publications with significant market pulp, plywood,
lumber and wood chip manufacturing operations. Under the terms of the merger
agreement, Champion shareholders received $50 in cash per share and $25 worth of
International Paper common stock per share. Champion shares were acquired for
approximately $5 billion in cash and 68.7 million shares of International Paper
common stock totaling $2.4 billion. Approximately $2.3 billion of debt was
assumed. The results of Champion are included in the consolidated statement of
earnings from June 20, 2000.
In connection with the merger announcement, International Paper also announced
its intention to sell more than $3 billion of assets by the end of 2001 as part
of its increased focus on its core businesses. When the decision has been made
to sell a specific business, costs and charges may be incurred in future
periods. See Note 13 - Businesses Held for Sale regarding the announced plans to
sell Masonite, Zanders and Bush Boake Allen and related charges under this
program. Also, as a result of the merger announcement, Moody's lowered our
long-term debt rating to Baa1. At September 30, 2000, outstanding debt included
approximately $3 billion of commercial paper and bank notes with interest rates
that fluctuate based on market conditions and our credit rating.
Carter Holt Harvey purchased CSR Limited's medium density fiberboard and
particleboard businesses and its Oberon sawmill for approximately $200 million
in cash on April 28, 2000.
International Paper acquired Shorewood Packaging Corporation, a leader in the
premium retail packaging market, for approximately $640 million in cash and the
assumption of $280 million of debt on March 31, 2000.
7
<PAGE>
On November 24, 1998, International Paper announced that we had reached an
agreement to merge with Union Camp, a diversified paper and forest products
company. The transaction was approved by Union Camp and International Paper
shareholders, and the merger was completed, on April 30, 1999. Union Camp
shareholders received 1.4852 International Paper common shares for each Union
Camp share held. The total value of the transaction, including the assumption of
debt, was approximately $7.9 billion. International Paper issued 110 million
shares for 74 million Union Camp shares, including options. The merger was
accounted for as a pooling-of-interests.
In April 1999, Carter Holt Harvey acquired the corrugated packaging business of
Stone Australia, a subsidiary of Smurfit-Stone Container Corporation. The
business consists of two sites in Melbourne and Sydney which serve industrial
and primary produce customers.
All of the acquisitions completed in the first nine months of 2000 and for the
year 1999 were accounted for using the purchase method, with the exception of
the Union Camp acquisition, which was accounted for as a pooling-of-interests.
The operating results of those mergers and acquisitions accounted for under the
purchase method have been included in the consolidated statement of earnings
from the dates of acquisition. The accompanying consolidated balance sheet as of
September 30, 2000, reflects preliminary allocations of the purchase prices of
Shorewood Packaging, CSR Limited and Champion to the fair value of the assets
and liabilities acquired.
NOTE 4 - PREFERRED SECURITIES OF SUBSIDIARIES
In September 1998, International Paper Capital Trust III issued $805 million of
International Paper-obligated mandatorily redeemable preferred securities.
International Paper Capital Trust III is a wholly-owned consolidated subsidiary
of International Paper and its sole assets are International Paper 7 7/8%
debentures. The obligations of International Paper Capital Trust III related to
its preferred securities are fully and unconditionally guaranteed by
International Paper. These preferred securities are mandatorily redeemable on
December 1, 2038.
In June 1998, IP Finance (Barbados) Limited, a non-U.S. wholly-owned
consolidated subsidiary of International Paper, issued $550 million of preferred
securities with a dividend payment based on LIBOR. These preferred securities
are mandatorily redeemable on June 30, 2008.
In March 1998, Timberlands Capital Corp. II, Inc., a wholly-owned consolidated
subsidiary of International Paper, issued $170 million of 7.005% preferred
securities as part of the financing to repurchase the outstanding units of IP
Timberlands, Ltd. These securities are not mandatorily redeemable and are
classified in the consolidated balance sheet as a minority interest liability.
In the third quarter of 1995, International Paper Capital Trust (the Trust)
issued $450 million of International Paper-obligated mandatorily redeemable
preferred securities. The Trust is a wholly-owned consolidated subsidiary of
International Paper, and its sole assets are International Paper 5 1/4%
convertible subordinated debentures. The obligations of the Trust related to its
preferred securities are fully and unconditionally guaranteed by International
Paper. These preferred securities are convertible into International Paper
common stock.
Distributions paid under all the International Paper's subsidiary preferred
securities were $32 million and $31 million for the third quarter of 2000 and
1999, respectively, and $108 million and $103 million for the nine months ended
September 30, 2000 and 1999, respectively. These distributions are included in
minority interest expense in the consolidated statement of earnings.
8
<PAGE>
NOTE 5 - SPECIAL AND EXTRAORDINARY ITEMS INCLUDING RESTRUCTURING AND BUSINESS
IMPROVEMENT ACTIONS
During the third quarter of 2000, International Paper recorded special items
amounting to a net charge before taxes of $134 million ($85 million after
taxes). The special items included a $15 million pre-tax charge ($9 million
after taxes) for merger-related expenses, a $6 million pre-tax credit ($4
million after taxes) for the reversal of merger-related termination benefits
reserves no longer required and a $125 million pre-tax charge ($80 million after
taxes) for additional Masonite legal reserves. The merger-related expenses of
$15 million consist primarily of travel expenses, system integration costs and
stay bonuses.
International Paper also recorded an extraordinary loss of $460 million before
taxes ($310 million after taxes) to reflect the estimated losses on the planned
sales of Masonite and Zanders. See Note 13 - Businesses Held for Sale for
additional information.
During the second quarter of 2000, International Paper recorded special items
amounting to a net charge before taxes and minority interest of $75 million ($45
million after taxes and minority interest). The special items included a $4
million pre-tax charge ($3 million after taxes) for merger-related expenses and
a $71 million pre-tax charge ($42 million after taxes and minority interest) for
asset shutdowns of excess internal capacity and cost reduction actions. The
merger-related expenses of $4 million consist primarily of travel expenses and
system integration costs related to the Union Camp and Champion mergers. The $71
million charge for asset shutdowns of excess internal capacity and cost
reduction actions includes $40 million of asset write-downs and $31 million of
severance and other charges. The following table presents additional detail
related to the $71 million charge:
<TABLE>
<CAPTION>
Second Quarter 2000
---------------------------
Asset Severance
Write- and
In millions downs Other Total
----------- ------- --------- -----
<S> <C> <C> <C>
Printing and Communications Papers (a) $ 22 $ 7 $ 29
Consumer Packaging (b) 7 9 16
Industrial Papers (c) 9 4 13
Other (d) 2 11 13
----- ----- -----
$ 40 $ 31 $ 71
===== ===== =====
</TABLE>
(a) The Printing and Communications Papers business shutdown the Millers
Falls, Massachusetts mill due to excess capacity. Charges associated with
the shutdown include $22 million of asset write-downs, $2 million of
severance costs covering the termination of 119 employees and other exit
costs of $3 million. At September 30, 2000, 107 employees had been
terminated.
Also, the Franklin, Virginia mill reduced its salaried workforce in a
continuing effort to improve the cost effectiveness and long-term
competitive position of the pulp and paper operation. A severance charge
of $2 million covers the elimination of 108 salaried positions. At
September 30, 2000, 26 employees had been terminated.
(b) The Consumer Packaging business has implemented a plan to reduce excess
capacity and streamline administrative functions at several of its
locations as a result of the Shorewood acquisition. The Richmond, Virginia
facility is scheduled to be shut down. Charges associated with the
shutdown include $6 million of asset write-downs, $2 million of severance
costs covering the termination of 126 employees and other exit costs of $1
million. At September 30, 2000, 123 employees had been terminated.
9
<PAGE>
Management also decided to permanently idle the lithographic department of
the Clinton, Iowa facility. This action will allow the Retail Packaging
business to better focus its resources for further profit improvement. The
charge includes $1 million of asset write-downs, $3 million of severance
covering the termination of 187 employees and $2 million of other exit
costs. At September 30, 2000, 103 employees had been terminated.
A severance reserve of $1 million has also been established related to the
streamlining effort of the Consumer Packaging business. This reserve
covers the termination of 17 employees. At September 30, 2000, 13
employees had been terminated.
(c) Industrial Papers announced the shutdown of the Knoxville, Tennessee
converting facility in an effort to reduce excess capacity. The charge
includes $9 million of asset write-downs, $1 million of severance costs
related to the termination of 120 employees and other exit costs of $3
million. At September 30, 2000, 11 employees had been terminated.
(d) Other includes $8 million related to Industrial Packaging, primarily for
the shutdown of the Tupelo, Mississippi sheet plant. The Industrial
Packaging charge includes $5 million of severance costs covering the
termination of 221 employees, $2 million of asset write-offs and $1
million of other cash costs. At September 30, 2000, 158 employees had been
terminated.
Other also includes $5 million related to the indefinite shutdown of
Carter Holt Harvey's Mataura paper mill. The Carter Holt Harvey charge
includes $3 million of severance costs covering the termination of 158
employees and $2 million of other cash costs. At September 30, 2000, 138
employees had been terminated.
The following table is a roll forward of the severance and other costs included
in the second quarter 2000 reserves for excess internal capacity and cost
reduction:
<TABLE>
<CAPTION>
Severance
and
Dollars in millions Other
------------------- ----------
<S> <C>
Opening balance - second quarter 2000 (1,056 employees) $ 31
Cash charges - third quarter 2000 (679 employees) (10)
----------
Balance, September 30, 2000 (377 employees) $ 21
==========
</TABLE>
During the first quarter of 2000, International Paper recorded an extraordinary
gain of $385 million before taxes and minority interest expense ($134 million
after taxes and minority interest expense) on the sale of our investment in
Scitex and Carter Holt Harvey's sale of its share of Compania de Petroleos de
Chile (COPEC), Chile's largest industrial conglomerate. The sale for just over
$1.2 billion of Carter Holt Harvey's equity interest in COPEC closed on January
3, 2000. The sale for $79 million of our equity interest in Scitex was completed
on January 6, 2000. The gains on these sales are recorded as extraordinary items
pursuant to the pooling-of-interests rules. Also during the first quarter of
2000, International Paper recorded special items amounting to a net pre-tax
charge of $8 million ($5 million after taxes) for additional Union Camp
merger-related expenses.
10
<PAGE>
The following table shows the impact of special items on 2000 pre-tax earnings
by quarter:
<TABLE>
<CAPTION>
Quarter
---------------------------------
In millions First Second Third Year-to-Date
----------- ----- ------ ----- ------------
<S> <C> <C> <C> <C>
Earnings before special items, income taxes,
minority interest and extraordinary items $ 443 $ 555 $ 445 $ 1,443
Merger-related expenses (8) (4) (15) (27)
Restructuring and other charges (71) (71)
Reversal of reserves no longer required 6 6
Provision for legal reserves (125) (125)
------- ------- ------- -------
Earnings before income taxes, minority
interest and extraordinary items $ 435 $ 480 $ 311 $ 1,226
======= ======= ======= =======
</TABLE>
During 1999, special items amounting to a net charge before taxes and minority
interest expense of $557 million ($352 million after taxes and minority interest
expense) were recorded. The special items included a $148 million pre-tax charge
($97 million after taxes) for Union Camp merger-related termination benefits, a
$107 million pre-tax charge ($78 million after taxes) for merger-related
expenses, a $298 million pre-tax charge ($180 million after taxes and minority
interest expense) for asset shutdowns of excess internal capacity and cost
reduction actions, a $10 million pre-tax charge ($6 million after taxes) to
increase existing environmental remediation reserves related to certain former
Union Camp facilities, a $30 million pre-tax charge ($18 million after taxes) to
increase existing legal reserves and a $36 million pre-tax credit ($27 million
after taxes) for the reversal of reserves that were no longer required. The 1999
extraordinary item was a $26 million pre-tax charge ($16 million after taxes)
related to the refinancing of high interest Union Camp debt, which we assumed
under the merger agreement.
The following table shows the impact of special items on 1999 pre-tax earnings
by quarter:
<TABLE>
<CAPTION>
Quarter
--------------------------------------------- Year-to-
In millions First Second Third Fourth Date
----------- ----- ------ ----- ------ --------
<S> <C> <C> <C> <C> <C>
Earnings before special items, income taxes,
minority interest and extraordinary items $ 94 $ 198 $ 320 $ 393 $1,005
Merger-related termination benefits (98) (50) (148)
Merger-related expenses (59) (18) (30) (107)
Restructuring and other charges (113) (185) (298)
Reversal of reserves no longer required 36 36
Environmental reserve (10) (10)
Provision for legal reserves (30) (30)
------ ------ ------ ------ ------
Earnings (loss) before income taxes, minority
interest and extraordinary items $ 94 $ (36) $ 242 $ 148 $ 448
====== ====== ====== ====== ======
</TABLE>
The Union Camp merger-related termination benefits charge relates to employees
terminating after the effective date of the merger under an integration benefits
program completed in the third quarter of 2000. Under this program, 1,218
employees of the combined company were originally identified for termination.
Benefits payable under this program for certain senior executives and managers
have been paid from the general assets of International Paper. Benefits for
remaining employees have been primarily paid from plan assets of our qualified
pension plan. In total, 1,062 employees were terminated. Related cash payments
approximated $71 million (including payments related to our nonqualified pension
plans). The remainder of the incurred costs primarily represents an increase in
the projected benefit obligation of our qualified pension plan. Upon termination
of the program in the third quarter of 2000, $6 million of the original reserve
of $148 million was not used and reversed to income.
11
<PAGE>
The following table is a roll forward of the Union Camp merger-related
termination benefits charge and costs incurred by quarter. The amounts
identified below as incurred include all payments made to employees that have
been terminated. The payments are made from the general assets of International
Paper or from the assets of our qualified pension plan.
<TABLE>
<CAPTION>
Termination
Dollars in millions Benefits
------------------- -----------
<S> <C>
Special charge - second quarter 1999 (572 employees) $ 98
Incurred costs - second quarter 1999 (83 employees) (30)
Special charge - third quarter (646 employees) 50
Incurred costs - third quarter 1999 (484 employees) (53)
Incurred costs - fourth quarter 1999 (220 employees) (33)
---------
Balance, December 31, 1999 (431 employees) 32
Incurred costs - first quarter 2000 (111 employees) (8)
Incurred costs - second quarter 2000 (164 employees) (18)
Reversal of reserves no longer required (156 employees) (6)
---------
Balance, September 30, 2000 $ --
=========
Note: Benefit costs are treated as incurred on the termination date
of the employee.
</TABLE>
The 1999 merger-related expenses of $107 million consisted of $49 million of
merger costs and $58 million of post-merger expenses. The merger costs were
primarily investment banker, consulting, legal and accounting fees. Post merger
integration expenses included costs related to employee retention such as stay
bonuses and other merger-related cash costs related to the integration of Union
Camp.
The $298 million charge in 1999 for the asset shutdowns of excess internal
capacity consisted of a $113 million charge in the second quarter and a $185
million charge in the fourth quarter. The charges included $149 million of asset
write-downs and $149 million of severance and other charges. A full discussion
of these charges is included in International Paper's 1999 Annual Report filed
on Form 10-K. The following table is a roll forward of the severance and other
costs included in the 1999 restructuring plan:
<TABLE>
<CAPTION>
Severance
Dollars in millions and Other
------------------- -----------
<S> <C>
Opening balance - second quarter 1999 (1,118 employees) $ 56
Cash charges - third quarter 1999 (710 employees) (13)
Additions - fourth quarter 1999 (2,045 employees) 93
Cash charges - fourth quarter 1999 (50 employees) (21)
----------
Balance, December 31, 1999 (2,403 employees) 115
Cash charges - first quarter 2000 (1,031 employees) (25)
Other charges - first quarter 2000 (8)
Cash charges - second quarter 2000 (673 employees) (14)
Cash charges - third quarter 2000 (200 employees) (15)
Other charges - third quarter 2000 (5)
----------
Balance, September 30, 2000 (499 employees) $ 48
==========
</TABLE>
The 1999 $36 million pre-tax credit for the reversal of reserves that were no
longer required consists of $30 million related to a retained exposure at the
Lancey mill in France and $6 million of excess reserves previously established
by Union Camp. The Lancey mill was sold to an employee group in October of 1997.
In April, 1999, International Paper's remaining exposure to potential
obligations under this sale were resolved, and the reserve was returned to
income in the second quarter.
12
<PAGE>
The $30 million pre-tax charge to increase existing legal reserves included $25
million which we added to our reserve for hardboard siding claims. The remaining
$5 million is related to other potential exposures.
NOTE 6 - INVENTORIES
Inventories by major category include:
<TABLE>
<CAPTION>
September 30, December 31,
In millions 2000 1999
----------- ------------- ------------
<S> <C> <C>
Raw Materials $ 462 $ 484
Finished pulp, paper and packaging products 2,038 1,869
Finished lumber and panel products 245 178
Operating supplies 506 486
Other 147 186
---------- ----------
Total $ 3,398 $ 3,203
========== ==========
</TABLE>
The increase in inventories is primarily due to the Champion merger ($455
million at the date of acquisition) offset by the reclassification of $267
million of inventories to other current assets related to the businesses held
for sale discussed in Note 13.
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments made during the nine month periods ended September 30, 2000
and 1999 were $487 million and $450 million, respectively. Capitalized net
interest costs were $19 million for the nine months ended September 30, 2000 and
$27 million for the nine months ended September 30, 1999. Total interest expense
was $628 million for the nine months ended September 30, 2000 and $457 million
for the nine months ended September 30, 1999. Income tax payments made during
the nine months ended September 30, 2000 and 1999 were $210 million and $31
million, respectively.
NOTE 8 - TEMPORARY INVESTMENTS
Temporary investments with a maturity of three months or less are treated as
cash equivalents and are stated at cost. Temporary investments totaled $630
million and $153 million at September 30, 2000 and December 31, 1999,
respectively. The increase was primarily due to unused proceeds from Carter Holt
Harvey's sale of its share of COPEC.
NOTE 9 - SUPPLEMENTAL BALANCE SHEET INFORMATION
Accumulated depreciation was $15.7 billion at September 30, 2000 and $15.1
billion at December 31, 1999. The allowance for doubtful accounts was $120
million at September 30, 2000 and $106 million at December 31, 1999.
NOTE 10 - FINANCIAL INSTRUMENTS
International Paper uses financial instruments primarily to hedge its exposure
to currency and interest rate risk. To qualify as hedges, financial instruments
must reduce the currency or interest rate risk associated with the related
underlying items and be designated as hedges by management. Gains or losses from
the revaluation of financial instruments which do not qualify for hedge
accounting treatment are recognized in earnings.
International Paper has a policy of financing a portion of its investments in
overseas operations with borrowings denominated in the same currency as the
investment or by entering into foreign exchange contracts in tandem with U.S.
dollar borrowings. These contracts are effective in providing a hedge against
fluctuations in currency
13
<PAGE>
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 are included in earnings. Amounts payable to or due from the
counterparties to the foreign exchange contracts are included in accrued
liabilities or accounts receivable as applicable.
International Paper also utilizes foreign exchange contracts to hedge certain
transactions that are denominated in foreign currencies, primarily export sales
and equipment purchases from nonresident vendors. These contracts serve to
protect us from currency fluctuations between the transaction and settlement
dates. Gains or losses from the revaluation of these contracts, based on
published currency exchange rates, along with offsetting gains or losses
resulting from the revaluation of the underlying transactions, are recognized in
earnings or deferred and recognized in the basis of the underlying transaction
when completed. Any gains or losses arising from the cancellation of the
underlying transactions or early termination of the foreign currency contracts
are included in earnings.
International Paper uses cross-currency and interest rate swap agreements to
manage the composition of its fixed and floating rate debt portfolio. Amounts to
be paid or received as interest under these agreements are recognized over the
life of the swap agreements as adjustments to interest expense. Gains or losses
from the revaluation of cross-currency swap agreements that qualify as hedges of
investments are recorded as translation adjustments in common shareholders'
equity. Gains or losses from the revaluation of cross-currency swap agreements
that do not qualify as hedges of investments are included in earnings. The
related amounts payable to or receivable from the counterparties to the
agreements are included in accrued liabilities or accounts receivable. If swap
agreements are terminated early, the resulting gain or loss is deferred and
amortized over the remaining life of the related debt.
International Paper does not hold or issue financial instruments for trading
purposes. The counterparties to our interest rate swap agreements and foreign
exchange contracts consist of a number of major international financial
institutions. International Paper continually monitors its positions with and
the credit quality of these financial institutions and does not expect
nonperformance by the counterparties.
NOTE 11 - RECENT ACCOUNTING DEVELOPMENTS
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", an amendment to Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", issued in June 1998. Statement No. 133 established
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured by its
fair value. Statement No. 133 requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Statement No. 138 amends the accounting and reporting
standards of Statement No. 133 for certain derivative instruments and certain
hedging activities.
We will adopt SFAS 133 (as amended by SFAS 138) beginning on January 1, 2001. We
are in the process of completing our review to determine the impact of the new
standard on income and equity. Since the impact is dependent on future market
rates and future derivative actions prior to year-end, the impact of adopting
SFAS 133 is not fully determinable at this time.
14
<PAGE>
NOTE 12 - PRO FORMA FINANCIAL INFORMATION
International Paper's consolidated results of operations include Champion's
activity from June 20, 2000, the date of the merger.
The following unaudited pro forma financial information for the nine months
ended September 30, 2000 and 1999 presents the combined results of the
continuing operations of International Paper and Champion as if the merger
occurred as of the beginning of each period. The pro forma adjustments are based
on available information, estimated purchase price allocations and certain
assumptions that we believe are reasonable. There can be no assurance that the
assumptions and estimates will be realized. The pro forma information does not
purport to represent International Paper's actual results of operations if the
transaction described above would have occurred at the beginning of the
respective period. In addition, the information is not indicative of future
results.
<TABLE>
<CAPTION>
In millions, except per share amounts,
for the nine months ended September 30, 2000 1999
--------------------------------------- -------- --------
<S> <C> <C>
Net Sales $ 23,689 $ 22,179
Earnings Before Extraordinary Items 366 9
Net Earnings (Loss) 190 (9)
Earnings Per Common Share Before Extraordinary Items 0.76 0.02
Earnings (Loss) Per Common Share 0.39 (0.02)
</TABLE>
NOTE 13 - BUSINESSES HELD FOR SALE
The sales of Bush Boake Allen (BBA), Masonite and Zanders were approved as
specific elements of our previously announced intention to sell more than $3
billion in assets by the end of 2001. The sale of our interest in BBA closed on
November 8, 2000; definitive agreements to sell Masonite and Zanders were
entered into on September 30, 2000, and November 7, 2000, respectively.
BBA is included in the Chemicals and Petroleum segment, Masonite in the Forest
Products segment and Zanders in the Printing and Communications Papers segment.
Sales and operating earnings for the year ended December 31, 1999 and the
nine-months ended September 30, 2000, were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 2000 December 31, 1999
-------------------------- --------------------------
Operating Operating
In millions Sales Earnings Sales Earnings
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BBA $ 363 $ 26 $ 499 $ 28
Masonite 362 12 512 26
Zanders 484 -- 594 8
</TABLE>
The assets of these businesses amounting to $1.3 billion were reclassified to
"other current assets" and the liabilities amounting to $454 million were
reclassified as "other accrued liabilities" on our balance sheet.
Masonite and Zanders were written down to their estimated net realizable value
based on sales prices, resulting in an extraordinary charge of $310 million
after taxes in the third quarter. The sale of BBA will result in a profit which
will be shown as an extraordinary item in the fourth quarter. This treatment is
in accordance with the pooling-of-interests rules.
15
<PAGE>
NOTE 14 - SUBSEQUENT EVENTS
On October 18, 2000, we announced the planned closings of three mills and the
scaling back of another in the coming months. The shutdowns will result in
reductions of approximately 820,000 tons (18%) of our U.S. uncoated papers
capacity, 120,000 tons (7%) of our North American market pulp capacity, 230,000
tons (5%) of our U.S. Containerboard capacity, and 50,000 tons of our unbleached
Kraft paper capacity. Approximately 2,500 employees at these mills and related
forestry operations will be impacted by the shutdowns. The affected facilities
include mills in Mobile and Courtland, Alabama, Lock Haven, Pennsylvania and
Camden, Arkansas.
We estimate that the asset write-downs and cash costs, including severance,
associated with these actions will be in the $500 million range (pre-tax) and
will be accounted for in the fourth quarter of 2000.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Our consolidated results of operations include Champion International
Corporation (Champion) for the full third quarter. The Champion acquisition was
completed on June 20, 2000 in a purchase accounting transaction. Therefore, our
results include Champion from that date forward. Prior periods have not been
restated.
International Paper's third-quarter 2000 net sales were $7.8 billion, well ahead
of net sales recorded in both the 2000 second-quarter and the 1999 third-quarter
of $6.8 billion and $6.3 billion, respectively. The increase was primarily the
result of the Champion acquisition which accounted for 17% of third quarter
sales.
International Paper posted third-quarter 2000 earnings of $260 million, or $.53
per share, before special and extraordinary items. This represents a 15%
increase over third-quarter 1999 earnings of $193 million, or $.46 per share,
before special and extraordinary items. Earnings held up well despite very
significant downtime in our Packaging and Paper segments and a decline in wood
products prices. Our profit improvement initiatives are having a moderating
effect on sharply rising energy and raw material prices. The U.S. dollar also
strengthened during the quarter negatively impacting earnings from non-U.S.
businesses and reducing demand for products produced in the U.S.
We reported a loss of $135 million, or $.38 per share, after special and
extraordinary items, in the third-quarter of 2000. In order for the 2000
third-quarter earnings per share to add up to the year-to-date earnings per
share, a loss of $.38 per share is required. On the basis of the
weighted-average number of shares outstanding for the third quarter, the loss
per share was $.28. The difference between the two calculations relates to the
68.7 million shares that were issued in June, 2000 in connection with the
Champion acquisition.
Special items in the third quarter totaled $85 million after taxes, or $.18 per
share, and consisted of Masonite legal reserves and merger-related expenses.
Extraordinary items in the 2000 third-quarter included a charge of $310 million
after taxes, or $.64 per share, resulting from the announced plans to sell
Masonite and Zanders. Second-quarter 2000 earnings were $270 million, or $.64
per share, after special items totaling $75 million before taxes and minority
interests which consisted of $71 million associated with facility closures and
the simplification of manufacturing operations and $4 million of merger-related
expenses.
The results for Champion are included in each applicable segment although their
segment results have been adjusted to conform to International Paper's
classifications. The following segment discussions are based on results before
third-quarter special and extraordinary items.
PRINTING AND COMMUNICATIONS PAPERS net sales of $2.4 billion for the third
quarter of 2000 showed significant improvement over prior quarter net sales of
$1.6 billion and 1999 third-quarter net sales of $1.5 billion. Champion
contributed over one-third of total segment sales for the 2000 third-quarter.
The segment posted operating profit of $303 million in the 2000 third-quarter,
$135 million of which resulted from the Champion acquisition. Third quarter
operating profit was up 43% from $212 million in the previous quarter and well
ahead of the third-quarter 1999 operating profit of $84 million. Strong pulp
pricing and internal cost-cutting activities managed to offset the sluggish
demand for uncoated papers and higher energy costs experienced during the
quarter. In addition, the segment was able to recognize some of the price
increase announced in mid-September for uncoated papers. Market-related uncoated
papers and pulp downtime of 180,000 tons has helped balance inventories with
demand. Continued downtime is expected to be taken as needed in the fourth
quarter to keep supply aligned with demand.
17
<PAGE>
Printing and Communications Papers
----------------------------------
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------ -----------------------------------------------
In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 1,620 $ 2,440 $ 5,710 $ 1,385 $ 1,480 $ 4,315
Operating Profit 212 303 693 22 84 114
</TABLE>
INDUSTRIAL AND CONSUMER PACKAGING 2000 third-quarter net sales of $1.9 billion
were down from the $2.0 billion of net sales recorded in the second quarter of
2000, but 8% ahead of $1.8 billion in net sales recorded in the third quarter of
the previous year. Before Champion's contribution, third quarter net sales would
have shown an increase of 5% over the prior year's third-quarter. The business
reported operating profit of $194 million for the 2000 third-quarter, a decline
from the $234 million of operating profit recorded in the prior quarter, but a
13% increase over 1999 third-quarter operating profit of $171 million.
Industrial Packaging's mill operations performed exceptionally well during the
third quarter, continuing the trend of improvement seen in the first half of the
year. However, operating results declined in the third quarter versus the second
quarter due to extensive downtime taken to match supply with our customers
demand. The Containerboard system took over 400,000 tons of downtime during the
quarter in order to balance production with customer demand. Earnings for the
domestic box converting operations also fell below prior quarter earnings due
primarily to the softening in demand. Kraft Paper earnings for the quarter were
ahead of prior quarter despite market-related downtime. Consumer Packaging and
Industrial Papers third quarter earnings were in line with prior year and prior
quarter; however, softer demand for most of the Consumer Packaging converting
businesses was experienced, as well as weaker pressure sensitive product volume
from Industrial Papers. The Bleached Board business also encountered some market
softness during the third quarter which carried over to the converting
operations.
Industrial and Consumer Packaging
---------------------------------
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------ -----------------------------------------------
In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 1,985 $ 1,930 $ 5,720 $ 1,760 $ 1,780 $ 5,215
Operating Profit 234 194 624 142 171 369
</TABLE>
DISTRIBUTION net sales of $1.9 billion for the 2000 third-quarter were ahead of
2000 second-quarter net sales of $1.7 billion, as well as the 1999 third-quarter
net sales of $1.7 billion. However, before Champion's contribution, 2000
third-quarter net sales would have been about even with both prior quarter and
the 1999 third-quarter. Operating profit of $32 million in the 2000
third-quarter was down slightly from prior quarter operating profit of $35
million but showed a 28% improvement over 1999 third-quarter results of $25
million. Weak July and early August sales were primarily responsible for the
decrease in operating profit from the 2000 second-quarter, despite expense
reduction efforts offsetting part of the sales shortfall. Sales of the European
distribution division dropped as a result of seasonal summer weakness and supply
disruptions due to the widespread European fuel tax protests. Continuing
benefits from the Zellerbach acquisition, combined with profit improvement
efforts and merger synergies from the integration of Alling and Cory, are
primarily driving the improvement over prior year.
Distribution
------------
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------ -----------------------------------------------
In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 1,700 $ 1,930 $ 5,380 $ 1,675 $ 1,740 $ 5,115
Operating Profit 35 32 97 27 25 76
</TABLE>
CHEMICALS AND PETROLEUM, which includes results from our approximately 68% owned
subsidiary, Bush Boake Allen, reported 2000 third-quarter net sales of $375
million which were slightly above both the $365 million in the previous quarter
and the $370 million in the 1999 third-quarter. Third-quarter 2000 operating
profit of $49 million increased 36% over 2000 second-quarter earnings of $36
million and was up 29% over 1999 third-quarter
18
<PAGE>
earnings of $38 million. The improvement in the chemicals businesses over prior
year can be attributed to increased demand for chemical products and higher oil
and gas prices. An improved mix of higher valued products and reduced
manufacturing costs resulting from the shutdowns of facilities also positively
impacted results.
Chemicals and Petroleum
-----------------------
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------ -----------------------------------------------
In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 365 $ 375 $ 1,085 $ 360 $ 370 $ 1,080
Operating Profit 36 49 118 28 38 85
</TABLE>
FOREST PRODUCTS 2000 third-quarter net sales of $1.0 billion were up 36% from
the $750 million reported in the 2000 second-quarter and 24% from the $825
million recorded in the 1999 third-quarter. Champion contributed 20% of total
segment sales and approximately 6% of operating profit for the 2000
third-quarter. Current quarter operating profit of $169 million showed declines
from prior quarter operating profit of $174 million and 1999 third-quarter
operating profit of $199 million. Included in the third quarter operating profit
was $93 million from land and bulk timber sales. Demand for both pulpwood and
sawtimber softened during the quarter as paper mills and wood products plants
curtailed operations to balance supply with demand. The Forest Resources group
also reported a decline in harvest volumes for the quarter from volumes reported
in the prior quarter and the 1999 third-quarter. Third quarter results for the
Building Materials group were down from prior year primarily due to significant
price erosion, sales volume declines and higher input costs.
Forest Products
---------------
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------ -----------------------------------------------
In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 750 $ 1,020 $ 2,550 $ 815 $ 825 $ 2,425
Operating Profit 174 169 492 175 199 548
</TABLE>
CARTER HOLT HARVEY reported 2000 third-quarter net sales of $435 million
compared with $460 million recorded in the prior quarter and $410 million
recorded in the 1999 third-quarter. Operating profit in the 2000 third-quarter
of $21 million was down slightly from $23 million recorded in the previous
quarter, but reflected a significant improvement over the $12 million reported
in the same period a year ago. Third quarter results were down slightly from
prior quarter due to general price weakening in both the domestic and export
markets for Forest Products, as well as the negative impacts of weaker New
Zealand and Australian markets on the Wood Products business, particularly
related to residential construction. Earnings for Carter Holt Harvey's Packaging
business were comparable to the previous quarter; however, price improvement and
enhanced operating efficiencies in the New Zealand operations were offset by the
inability to get price improvements in Australia. Both the Pulp and Paper and
Tissues businesses showed earnings improvement due to higher export prices,
margin improvement and increased sales volumes. For the three and nine months
ended September 30, 2000, the New Zealand dollar weakened against the U.S.
dollar by 13% and 19%, respectively. The results for Carter Holt Harvey were
adversely impacted by the weakened New Zealand dollar.
Carter Holt Harvey
------------------
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------ -----------------------------------------------
In millions 2nd Quarter 3rd Quarter Nine Months 2nd Quarter 3rd Quarter Nine Months
------------------------------------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 460 $ 435 $ 1,305 $ 400 $ 410 $ 1,175
Operating Profit 23 21 61 8 12 20
</TABLE>
International Paper's results for this segment differ from those reported by
Carter Holt Harvey in New Zealand due to (1) Carter Holt Harvey's fiscal year
ending March 31 versus our calendar year, (2) our segment earnings include only
our share of Carter Holt Harvey's operating earnings while 100% of sales are
included, (3) our
19
<PAGE>
results are in U.S. dollars while Carter Holt Harvey reports in New Zealand
dollars, and (4) Carter Holt Harvey reports under New Zealand accounting
standards while our segment results comply with U.S. generally accepted
accounting principles. The major accounting differences relate to cost of timber
harvested and start-up costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $1.9 billion for the first nine months of
2000 compared with $1.2 billion for the 1999 nine month period. Higher earnings
for the first nine months of 2000 were partially offset by increased working
capital requirements. Working capital changes decreased operating cash flow by
$294 million for the first nine months of 2000 and increased operating cash flow
by $4 million for the same period in 1999.
Investments in capital projects totaled $908 million and $706 million for the
2000 and 1999 nine month periods. Cash flow generated by operations,
supplemented as necessary by short- or long-term borrowings, is anticipated to
be adequate to fund capital expenditures. As part of our program to improve
return on investment, we plan to continue to hold annual capital spending below
annual depreciation and amortization expense. Discretionary capital spending
will be primarily for reducing costs, stabilizing processes and improving
services.
Financing activities for the 2000 and 1999 nine month periods include a $4.4
billion net increase and a $372 million net decrease in debt. The 2000 increase
includes both the $5.0 billion debt issuance to finance the Champion merger and
the $640 million debt issuance to finance the Shorewood merger. Debt reductions
include the repayment of $279 million of assumed Shorewood debt, $172 million of
assumed Champion debt, and approximately $700 million of debt repayments by
Carter Holt Harvey. Common stock dividend payments were $327 million, or $.75
per common share for the first nine months of 2000 compared with $314 million or
$.76 per common share for the same period in 1999. Dividend payments for the
third quarters ended September 30, 2000 and 1999 were $120 million and $102
million or $.25 per common share for both periods. Actual cash dividends paid
for the first nine months of 1999 were $.75 per common share, however, dividend
payments on a per common share basis have been restated to include dividends
paid by Union Camp.
At September 30, 2000, cash and temporary investments totaled $1.2 billion
compared to $453 million at December 31, 1999. The increase in cash and
temporary investments is due primarily to proceeds of $1.2 billion from Carter
Holt Harvey's sale of COPEC and cash acquired through the Champion merger of
approximately $325 million, less Carter Holt Harvey debt reductions of $700
million and Carter Holt Harvey's acquisition of CSR for approximately $200
million.
MERGERS AND ACQUISITIONS
On June 20, 2000, International Paper completed the previously announced merger
with Champion, a leading manufacturer of paper for business communications,
commercial printing and publications with significant market pulp, plywood,
lumber and wood chip manufacturing operations. Under the terms of the merger
agreement, Champion shareholders received $50 in cash per share and $25 worth of
International Paper common stock per share. Champion shares were acquired for
approximately $5 billion in cash and 68.7 million shares of International Paper
common stock totaling $2.4 billion. Approximately $2.3 billion of debt was
assumed. The results of Champion are included in the consolidated statement of
earnings from June 20, 2000.
In connection with the merger announcement, International Paper also announced
its intention to sell more than $3 billion of assets by the end of 2001 as part
of its increased focus on its core businesses. When the decision has been made
to sell a specific business, costs and charges may be incurred in future
periods. See the discussion titled "Businesses Held for Sale" on page 25
regarding the announced plans to sell Masonite, Zanders and Bush Boake Allen and
related charges under this program. Also as a result of the merger announcement,
Moody's lowered our long-term debt rating to Baa1. At September 30, 2000,
outstanding debt included approximately $3 billion of commercial paper and bank
notes with interest rates that fluctuate based on market conditions and our
credit rating.
20
<PAGE>
Carter Holt Harvey purchased CSR Limited's medium density fiberboard and
particleboard businesses and its Oberon sawmill for approximately $200 million
in cash on April 28, 2000.
International Paper acquired Shorewood Packaging Corporation, a leader in the
premium retail packaging market, for approximately $640 million in cash and the
assumption of approximately $280 million of debt on March 31, 2000.
On November 24, 1998, International Paper announced that it had reached an
agreement to merge with Union Camp, a diversified paper and forest products
company. The transaction was approved by Union Camp and International Paper
shareholders, and the merger was completed, on April 30, 1999. Union Camp
shareholders received 1.4852 International Paper common shares for each Union
Camp share held. The total value of the transaction, including the assumption of
debt, was approximately $7.9 billion. International Paper issued 110 million
shares for 74 million Union Camp shares, including options. The merger was
accounted for as a pooling-of-interests.
In April 1999, Carter Holt Harvey acquired the corrugated packaging business of
Stone Australia, a subsidiary of Smurfit-Stone Container Corporation. The
business consists of two sites in Melbourne and Sydney which serve industrial
and primary produce customers.
All of the acquisitions completed in the first nine months of 2000 and for the
year 1999 were accounted for using the purchase method, with the exception of
the Union Camp acquisition, which was accounted for as a pooling-of-interests.
The operating results of those mergers and acquisitions accounted for under the
purchase method have been included in the consolidated statement of earnings
from the dates of acquisition. The accompanying consolidated balance sheet as of
September 30, 2000, reflects preliminary allocations of the purchase prices of
Shorewood Packaging, CSR Limited and Champion to the fair value of the assets
and liabilities acquired.
RESTRUCTURING, SPECIAL AND EXTRAORDINARY ITEMS
During the third quarter of 2000, International Paper recorded special items
amounting to a net charge before taxes of $134 million ($85 million after
taxes). The special items included a $15 million pre-tax charge ($9 million
after taxes) for merger-related expenses, a $6 million pre-tax credit ($4
million after taxes) for the reversal of merger-related termination benefits
reserves no longer required and a $125 million pre-tax charge ($80 million after
taxes) for additional Masonite legal reserves. The merger-related expenses of
$15 million consist primarily of travel expenses, system integration costs and
stay bonuses.
International Paper also recorded an extraordinary loss of $460 million before
taxes ($310 million after taxes) to reflect the estimated losses on the planned
sales of Masonite and Zanders. See the discussion titled "Businesses Held for
Sale" on page 25 for additional information.
During the second quarter of 2000, International Paper recorded special items
amounting to a net charge before taxes and minority interest of $75 million ($45
million after taxes and minority interest). The special items included a $4
million pre-tax charge ($3 million after taxes) for merger-related expenses and
a $71 million pre-tax charge ($42 million after taxes and minority interest) for
asset shutdowns of excess internal capacity and cost reduction actions. The
merger-related expenses of $4 million consist primarily of travel expenses and
system integration costs related to the Union Camp and Champion mergers. The $71
million charge for asset shutdowns of excess internal capacity and costs
reduction actions includes $40 million of asset write-downs and $31 million of
severance and other charges. The following table presents additional detail
related to the $71 million charge:
21
<PAGE>
<TABLE>
<CAPTION>
Second Quarter 2000
---------------------------------
Asset Severance
Write- and
In millions downs Other Total
----------- ------- --------- -------
<S> <C> <C> <C>
Printing and Communications Papers (a) $ 22 $ 7 $ 29
Consumer Packaging (b) 7 9 16
Industrial Papers (c) 9 4 13
Other (d) 2 11 13
------- ------- -------
$ 40 $ 31 $ 71
======= ======= =======
</TABLE>
(a) The Printing and Communications Papers business shutdown the Millers
Falls, Massachusetts mill due to excess capacity. Charges associated with
the shutdown include $22 million of asset write-downs, $2 million of
severance costs covering the termination of 119 employees and other exit
costs of $3 million. At September 30, 2000, 107 employees had been
terminated.
Also, the Franklin, Virginia mill reduced its salaried workforce in a
continuing effort to improve the cost effectiveness and long-term
competitive position of the pulp and paper operation. A severance charge
of $2 million covers the elimination of 108 salaried positions. At
September 30, 2000, 26 employees had been terminated.
(b) The Consumer Packaging business has implemented a plan to reduce excess
capacity and streamline administrative functions at several of its
locations as a result of the Shorewood acquisition. The Richmond, Virginia
facility is scheduled to be shut down. Charges associated with the
shutdown include $6 million of asset write-downs, $2 million of severance
costs covering the termination of 126 employees and other exit costs of $1
million. At September 30, 2000, 123 employees had been terminated.
Management also decided to permanently idle the lithographic department of
the Clinton, Iowa facility. This action will allow the Retail Packaging
business to better focus its resources for further profit improvement. The
charge includes $1 million of asset write-downs, $3 million of severance
covering the termination of 187 employees and $2 million of other exit
costs. At September 30, 2000, 103 employees had been terminated.
A severance reserve of $1 million has also been established related to the
streamlining effort of the Consumer Packaging business. This reserve
covers the termination of 17 employees. At September 30, 2000, 13
employees had been terminated.
(c) Industrial Papers announced the shutdown of the Knoxville, Tennessee
converting facility in an effort to reduce excess capacity. The charge
includes $9 million of asset write-downs, $1 million of severance costs
related to the termination of 120 employees and other exit costs of $3
million. At September 30, 2000, 11 employees had been terminated.
(d) Other includes $8 million related to Industrial Packaging, primarily for
the shutdown of the Tupelo, Mississippi sheet plant. The Industrial
Packaging charge includes $5 million of severance costs covering the
termination of 221 employees, $2 million of asset write-offs and $1
million of other cash costs. At September 30, 2000, 158 employees had been
terminated.
Other also includes $5 million related to the indefinite shutdown of
Carter Holt Harvey's Mataura paper mill. The Carter Holt Harvey charge
includes $3 million of severance costs covering the termination of 158
employees and $2 million of other cash costs. At September 30, 2000, 138
employees had been terminated.
22
<PAGE>
The following table is a roll forward of the severance and other costs included
in the second quarter 2000 reserves for excess internal capacity and cost
reductions.
<TABLE>
<CAPTION>
Severance
and
Dollars in millions Other
------------------- ----------
<S> <C>
Opening balance - second quarter 2000 (1,056 employees) $ 31
Cash charges - third quarter 2000 (679 employees) (10)
----------
Balance, September 30, 2000 (377 employees) $ 21
==========
</TABLE>
During the first quarter of 2000, International Paper recorded an extraordinary
gain of $385 million before taxes and minority interest expense ($134 million
after taxes and minority interest expense) on the sale of our investment in
Scitex and Carter Holt Harvey's sale of its share of Compania de Petroleos de
Chile (COPEC), Chile's largest industrial conglomerate. The sale for just over
$1.2 billion of Carter Holt Harvey's equity interest in COPEC closed on January
3, 2000. The sale for $79 million of our equity interest in Scitex was completed
on January 6, 2000. The gains on these sales are recorded as extraordinary items
pursuant to the pooling-of-interests rules. Also during the first quarter of
2000, International Paper recorded special items amounting to a net pre-tax
charge of $8 million ($5 million after taxes) for additional Union Camp
merger-related expenses.
The following table shows the impact of special items on 2000 pre-tax earnings
by quarter:
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------
In millions First Second Third Year-to-Date
----------- ------- ------- ------- ------------
<S> <C> <C> <C> <C>
Earnings before special items, income taxes,
minority interest and extraordinary items $ 443 $ 555 $ 445 $ 1,443
Merger-related expenses (8) (4) (15) (27)
Restructuring and other charges (71) (71)
Reversal of reserves no longer required 6 6
Provision for legal reserves (125) (125)
------- ------- ------- -------
Earnings before income taxes, minority
interest and extraordinary items $ 435 $ 480 $ 311 $ 1,226
======= ======= ======= =======
</TABLE>
During 1999 special items amounting to a net charge before taxes and minority
interest expense of $557 million ($352 million after taxes and minority interest
expense) were recorded. The special items included a $148 million pre-tax charge
($97 million after taxes) for Union Camp merger-related termination benefits, a
$107 million pre-tax charge ($78 million after taxes) for merger-related
expenses, a $298 million pre-tax charge ($180 million after taxes and minority
interest expense) for asset shutdowns of excess internal capacity and cost
reduction actions, a $10 million pre-tax charge ($6 million after taxes) to
increase existing environmental remediation reserves related to certain former
Union Camp facilities, a $30 million pre-tax charge ($18 million after taxes) to
increase existing legal reserves and a $36 million pre-tax credit ($27 million
after taxes) for the reversal of reserves that were no longer required. The 1999
extraordinary item was a $26 million pre-tax charge ($16 million after taxes)
related to the refinancing of high interest Union Camp debt, which we assumed
under the merger agreement.
23
<PAGE>
The following table shows the impact of special items on 1999 pre-tax earnings
by quarter:
<TABLE>
<CAPTION>
Quarter
--------------------------------------------- Year-to-
In millions First Second Third Fourth Date
----------- ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Earnings before special items, income taxes,
minority interest and extraordinary items $ 94 $ 198 $ 320 $ 393 $1,005
Merger-related termination benefits (98) (50) (148)
Merger-related expenses (59) (18) (30) (107)
Restructuring and other charges (113) (185) (298)
Reversal of reserves no longer required 36 36
Environmental reserve (10) (10)
Provision for legal reserves (30) (30)
------ ------ ------ ------ ------
Earnings (loss) before income taxes, minority
interest and extraordinary items $ 94 $ (36) $ 242 $ 148 $ 448
====== ====== ====== ====== ======
</TABLE>
The Union Camp merger-related termination benefits charge relates to employees
terminating after the effective date of the merger under an integration benefits
program completed in the third quarter of 2000. Under this program, 1,218
employees of the combined company were originally identified for termination.
Benefits payable under this program for certain senior executives and managers
have been paid from the general assets of International Paper. Benefits for
remaining employees have been primarily paid from plan assets of our qualified
pension plan. In total, 1,062 employees were terminated. Related cash payments
approximated $71 million (including payments related to our nonqualified pension
plans). The remainder of the incurred costs primarily represents an increase in
the projected benefit obligation of our qualified pension plan. Upon termination
of the program in the third quarter of 2000, $6 million of the original reserve
of $148 million was not used and reversed to income.
The following table is a roll forward of the Union Camp merger-related
termination benefits charge and costs incurred by quarter. The amounts
identified below as incurred include all payments made to employees that have
been terminated. The payments are made from the general assets of International
Paper or from the assets of our qualified pension plan.
<TABLE>
<CAPTION>
Termination
Dollars in millions Benefits
------------------- ------------
<S> <C>
Special charge - second quarter 1999 (572 employees) $ 98
Incurred costs - second quarter 1999 (83 employees) (30)
Special charge - third quarter (646 employees) 50
Incurred costs - third quarter 1999 (484 employees) (53)
Incurred costs - fourth quarter 1999 (220 employees) (33)
------------
Balance, December 31, 1999 (431 employees) 32
Incurred costs - first quarter 2000 (111 employees) (8)
Incurred costs - second quarter 2000 (164 employees) (18)
Reversal of reserves no longer required (156 employees) (6)
------------
Balance, September 30, 2000 $ --
============
</TABLE>
Note: Benefit costs are treated as incurred on the termination date of the
employee.
The 1999 merger-related expenses of $107 million consisted of $49 million of
merger costs and $58 million of post-merger expenses. The merger costs were
primarily investment banker, consulting, legal and accounting fees. Post merger
integration expenses included costs related to employee retention such as stay
bonuses and other merger-related cash costs related to the integration of Union
Camp.
24
<PAGE>
The $298 million charge in 1999 for the asset shutdowns of excess internal
capacity consisted of a $113 million charge in the second quarter and a $185
million charge in the fourth quarter. The charges included $149 million of asset
write-downs and $149 million of severance and other charges. A full discussion
of these charges is included in International Paper's 1999 Annual Report filed
on Form 10-K. The following table is a roll forward of the severance and other
costs included in the 1999 restructuring plan:
<TABLE>
<CAPTION>
Severance
Dollars in millions and Other
------------------- ------------
<S> <C>
Opening balance - second quarter 1999 (1,118 employees) $ 56
Cash charges - third quarter 1999 (710 employees) (13)
Additions - fourth quarter 1999 (2,045 employees) 93
Cash charges - fourth quarter 1999 (50 employees) (21)
------------
Balance, December 31, 1999 (2,403 employees) 115
Cash charges - first quarter 2000 (1,031 employees) (25)
Other charges - first quarter 2000 (8)
Cash charges - second quarter 2000 (673 employees) (14)
Cash charges - third quarter 2000 (200 employees) (15)
Other charges - third quarter 2000 (5)
------------
Balance, September 30, 2000 (499 employees) $ 48
============
</TABLE>
The 1999 $36 million pre-tax credit for the reversal of reserves that were no
longer required consists of $30 million related to a retained exposure at the
Lancey mill in France and $6 million of excess reserves previously established
by Union Camp. The Lancey mill was sold to an employee group in October of 1997.
In April, 1999, International Paper's remaining exposure to potential
obligations under this sale were resolved, and the reserve was returned to
income in the second quarter.
The $30 million pre-tax charge to increase existing legal reserves included $25
million which we added to our reserve for hardboard siding claims. The remaining
$5 million is related to other potential exposures.
BUSINESSES HELD FOR SALE
The sales of Bush Boake Allen (BBA), Masonite and Zanders were approved as
specific elements of our previously announced intention to sell more than $3
billion in assets by the end of 2001. The sale of our interest in BBA closed on
November 8, 2000; definitive agreements to sell Masonite and Zanders were
entered into on September 30, 2000, and November 7, 2000, respectively.
BBA is included in the Chemicals and Petroleum segment, Masonite in the Forest
Products segment and Zanders in the Printing and Communications Papers segment.
Sales and operating earnings for the year ended December 31, 1999 and the
nine months ended September 30, 2000 were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 2000 December 31, 1999
-------------------------- --------------------------
Operating Operating
In millions Sales Earnings Sales Earnings
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BBA $ 363 $ 26 $ 499 $ 28
Masonite 362 12 512 26
Zanders 484 -- 594 8
</TABLE>
25
<PAGE>
The assets of these businesses amounting to $1.3 billion were reclassified to
"other current assets" and the liabilities amounting to $454 million were
reclassified as "other accrued liabilities" on our balance sheet.
Masonite and Zanders were written down to their estimated net realizable value
based on sales prices, resulting in an extraordinary charge of $310 million
after taxes in the third quarter. The sale of BBA will result in a profit which
will be shown as an extraordinary item in the fourth quarter. This treatment is
in accordance with the pooling-of-interests rules.
Other
The effective income tax rate before special and extraordinary items increased
to 30% for the 2000 first nine months from 28% in the 1999 first nine months.
The increase was primarily due to changes in the mix of estimated annual
earnings. The effective income tax rate after special items but before
extraordinary items was 28% and 21% for the 2000 and 1999 nine month periods,
respectively. The following table presents the components of pre-tax earnings
and losses and the related income tax expense or benefit for each of the nine
month periods ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
---------------------------------------- ----------------------------------------
Earnings Earnings
(Loss) Before (Loss) Before
Income Taxes Income Tax Income Taxes Income Tax
and Minority Provision Effective and Minority Provision Effective
In millions Interest (Benefit) Tax Rate Interest (Benefit) Tax Rate
----------- ------------- ---------- --------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Before special and
extraordinary items $ 1,443 $ 429 30% $ 638 $ 181 28%
Merger-related termination
benefits -- -- -- (148) (51) 34%
Merger-related expenses (27) (10) 37% (77) (17) 22%
Restructuring and other
charges (196) (72) 37% (149) (58) 39%
Reversals of reserves no
longer required 6 2 33% 36 9 25%
------- ------- ------- -------
After special items $ 1,226 $ 349 28% $ 300 $ 64 21%
======= ======= ======= =======
</TABLE>
Increases in the individual line items on the balance sheet are primarily
related to the acquisition of Champion on June 20, 2000 and the reclassification
of the assets and liabilities of the businesses held for sale to "other current
assets" and "other accrued liabilities" at September 30, 2000. The Champion
acquisition was accounted for as a purchase and, accordingly, Champion's
balances are only included in the September 30, 2000 totals on the consolidated
balance sheet. See the discussions titled "Mergers and Acquisitions" and
"Businesses Held for Sale" above for more details.
26
<PAGE>
Forward-Looking Statements
The statements under "Management's Discussion and Analysis" and other statements
contained herein that are not historical facts are forward-looking statements
(as such term is defined under the Private Securities Litigation Reform Act of
1995). Forward-looking statements reflect our expectations or forecasts of
future events. These include statements relating to future actions, future
performance or the outcome of contingencies, such as legal proceedings and
financial results. Any or all of the forward-looking statements that we make in
this report may turn out to be wrong. They can be influenced by inaccurate
assumptions we might make or by known or unknown risks and uncertainties. No
forward-looking statements can be guaranteed and actual results may vary
materially. Factors which could cause actual results to differ include, among
other things, changes in overall demand, changes in domestic competition,
changes in the cost or availability of raw materials, the cost of compliance
with environmental laws and regulations and whether anticipated savings from
merger, other restructuring activities, and asset shutdowns relating to excess
capacity can be achieved. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
27
<PAGE>
Financial Information by Industry Segment
(Unaudited)
(In millions)
Net Sales by Industry Segment
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Printing and Communications Papers (1) $ 2,440 $ 1,480 $ 5,710 $ 4,315
Industrial and Consumer Packaging 1,930 1,780 5,720 5,215
Distribution 1,930 1,740 5,380 5,115
Chemicals and Petroleum 375 370 1,085 1,080
Forest Products 1,020 825 2,550 2,425
Carter Holt Harvey 435 410 1,305 1,175
Corporate and Intersegment Sales (1) (2) (329) (354) (798) (1,046)
------- ------- ------- -------
Net Sales $ 7,801 $ 6,251 $20,952 $18,279
======= ======= ======= =======
</TABLE>
Operating Profit by Industry Segment
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Printing and Communications Papers $ 303 $ 84 $ 693 $ 114
Industrial and Consumer Packaging 194 171 624 369
Distribution 32 25 97 76
Chemicals and Petroleum 49 38 118 85
Forest Products 169 199 492 548
Carter Holt Harvey (3) 21 12 61 20
Corporate (2) 26
------- ------- ------- -------
Operating Profit 768 529 2,111 1,212
Interest expense, net (278) (134) (565) (400)
Minority interest adjustment 32 21 94 42
Corporate items, net (77) (96) (197) (245)
Restructuring and other charges (125) (10) (196) (123)
Merger integration costs (15) (68) (27) (225)
Reversal of reserves no longer required 6 6 36
Scitex restructuring and other charges 3
------- ------- ------- -------
Earnings before income taxes,
minority interest and extraordinary items $ 311 $ 242 $ 1,226 $ 300
======= ======= ======= =======
</TABLE>
(1) Certain reclassifications and adjustments have been made to prior year
amounts.
(2) Includes results from operations of Champion acquired on June 20, 2000.
Beginning on July 1, 2000, the results of the former Champion business
have been included in the appropriate business segment.
(3) Includes equity earnings (in millions) of $1 and $14 for the three months
ended September 30, 2000 and 1999, respectively, and $10 and $36 for the
nine months ended September 30, 2000 and 1999, respectively. Half of these
equity earnings amounts are in the Carter Holt Harvey segment and half are
in the minority interest adjustment.
28
<PAGE>
Production by Product
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sepember 30, September 30,
------------------- -------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Printing Papers (in thousands of tons)
White Papers and Bristols (a) (e) 1,684 1,295 4,419 4,010
Coated Papers (e) 720 308 1,362 963
Market Pulp (b) (e) 837 545 1,874 1,538
Newsprint 26 26 81 74
Packaging (in thousands of tons)
Containerboard (a) 1,039 1,230 3,433 3,601
Bleached Packaging Board 532 542 1,607 1,592
Industrial Papers 265 221 736 671
Industrial and Consumer Packaging (a) (c) 1,227 1,264 3,953 3,776
Specialty Products (in thousands of tons)
Tissue 41 37 124 118
Forest Products (in millions)
Panels (sq. ft. 3/8" - basis) (d) (e) 753 510 1,790 1,473
Lumber (board feet) (e) 999 693 2,491 2,164
MDF (sq. ft. 3/4" - basis) 100 53 244 167
Particleboard (sq. ft. 3/4" - basis) 122 51 265 148
</TABLE>
(a) Certain reclassifications and adjustments have been made to current and
prior year amounts.
(b) This excludes market pulp purchases.
(c) A significant portion of the tonnage was fabricated from paperboard and
paper produced at International Paper's own mills and included in the
containerboard, bleached packaging board and industrial papers amounts in
this table.
(d) Panels include plywood and oriented strand board.
(e) Includes Champion for third quarter 2000.
29
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On June 20, 2000, International Paper completed the previously announced merger
with Champion. To complete the merger, Champion shares were acquired for
approximately $5 billion in cash and 68.7 million shares of International Paper
common stock totaling $2.4 billion. Approximately $2.3 billion of Champion's
debt, mostly long-term fixed rate debt, was assumed. International Paper
financed the cash portion of the merger with a combination of short- and
long-term, fixed and floating rate notes.
The results of our analysis of value at risk, considering the Champion
borrowings noted above, were not significant to our consolidated common
shareholders' equity, earnings or daily change in market capitalization.
30
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following matters discussed in previous filings under the Securities
Exchange Act, are updated as follows:
MASONITE LITIGATION
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 and incorporated into buildings
between 1980 and January 15, 1998. Final approval of the settlement was granted
by the Court on January 15, 1998. The settlement provides for monetary
compensation to class members meeting the settlement requirements on a
claims-made basis. It also provides for the payment of attorneys' fees equaling
15% of the settlement amounts paid to class members, with a 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 (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 (Woodruf
Lawsuit). The class consists of all U.S. property owners on which Masonite
Woodruf roofing had 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 provide 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.
Our reserves for these matters total $148 million at September 30, 2000. This
amount includes $25 million added to the reserve for hardboard siding claims in
the fourth quarter of 1999 (some of which has been paid to claimants), and an
additional $125 million added to that reserve in the third quarter of 2000 to
cover an expected shortfall, resulting primarily from a higher number of
hardboard siding claims than we had anticipated. It is reasonably possible that
the higher number of hardboard siding claims might be indicative of the need for
one or more future additions to this reserve. However, whether or not any future
additions to this reserve become necessary, International Paper believes that
these settlements will not have a material adverse effect on our consolidated
financial position or results of operations. Expected insurance recoveries,
apart from the insurance recoveries to date, are $51 million. Through September
30, 2000, settlement payments of $292 million, including the $51 million of
nonrefundable advances of attorneys' fees discussed above, have been made. Also,
we have received $27 million from our insurance carriers through September 30,
2000. International Paper and Masonite have the right to terminate each of the
settlements after seven years from the dates of final approval.
31
<PAGE>
OTHER LITIGATION
On May 14, 1999, and May 18, 1999, two lawsuits were filed against International
Paper, the former Union Camp Corporation and other manufacturers of linerboard.
These suits allege that the defendants conspired to fix prices for linerboard
and corrugated sheets during the period October 1, 1993, through November 30,
1995. Both lawsuits were filed seeking nationwide class certification. The
lawsuits allege that various purchasers of corrugated sheets and corrugated
containers were injured as a result of the alleged conspiracy. The cases have
been consolidated in federal court in the Eastern District of Pennsylvania.
Defendants' motions to dismiss the cases were denied on October 4, 2000.
Purchasers of high-pressure laminates have filed a number of purported class
actions under the federal antitrust laws in various federal district courts in
different states, alleging that International Paper's Nevamar division
participated in a price-fixing conspiracy with competitors; these cases have
been consolidated in federal district court in New York. Indirect and direct
purchasers of high-pressure laminates have also filed similar purported class
action cases under various state antitrust and consumer protection statutes in
California, Florida, Michigan, New Mexico, New York, North Dakota, South Dakota,
Tennessee and the District of Columbia. International Paper has filed a motion
to dismiss one of the cases in federal court. As of October 16, 2000, the
Company has not filed a pleading responsive to any other complaint.
On June 19, 2000, before International Paper completed its acquisition of the
stock of Champion, Champion entered into a Consent Order with the Maine
Department of Environmental Protection which resolved allegations of past
wastewater and reporting deficiencies at Champion's lumber mills in Milford and
Passadumkeag, Maine. The U.S. EPA and the U.S. Attorney's Office in Maine have
since that time commenced a grand jury investigation of the same allegations.
We are also involved in other contractual disputes, administrative and legal
proceedings and investigations of various types. While any litigation,
proceeding or investigation has an element of uncertainty, we believe that the
outcome of any proceeding, lawsuit or claim that is pending or threatened, or
all of them combined, will not have a material adverse effect on our
consolidated financial position or results of operations.
32
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Champion Merger Integration Chief Executive Officer
Performance Plan
(10.2) Champion Merger Integration Savings and Synergy Plan
(11) Statement of Computation of Per Share Earnings
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
International Paper filed reports on Form 8-K on July 12,
2000, October 4, 2000, and October 18, 2000 reporting
information under Item 5, Other Events.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(Registrant)
Date: November 13, 2000 By /s/ JOHN V. FARACI
------------------------------
John V. Faraci
Executive Vice President
and Chief Financial Officer
Date: November 13, 2000 By /s/ ANDREW R. LESSIN
------------------------------
Andrew R. Lessin
Vice President, Finance and
Chief Accounting Officer
33
