<PAGE>
================================================================================
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 JUNE 30, 2000
\ \ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES 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 JULY 31, 2000 WAS
483,449,593
--------------------------------------------------------------------------------
<PAGE>
INTERNATIONAL PAPER COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Earnings - 1
Three Months and Six Months Ended June 30, 2000 and 1999
Consolidated Balance Sheet - 2
June 30, 2000 and December 31, 1999
Consolidated Statement of Cash Flows - 3
Six Months Ended June 30, 2000 and 1999
Consolidated Statement of Common Shareholders' Equity - 4 - 5
Three Months and Six Months Ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 16
Results of Operations
Financial Information by Industry Segment 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
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 30
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
</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 Six Months Ended
June 30, June 30,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
NET SALES $6,780 $5,996 $13,151 $12,028
-------- -------- -------- -------
COSTS AND EXPENSES
Cost of products sold 4,770 4,420 9,334 8,996
Selling and administrative expenses 563 549 1,084 1,053
Depreciation and amortization 404 374 787 757
Distribution expenses 271 277 537 553
Taxes other than payroll and income taxes 61 57 124 114
Restructuring and other charges 71 113 71 113
Merger integration costs 4 157 12 157
Equity earnings from investment in Scitex (2) (3)
-------- -------- -------- -------
TOTAL COSTS AND EXPENSES 6,144 5,945 11,949 11,740
-------- -------- -------- -------
Reversal of reserves no longer required 36 36
-------- -------- -------- -------
EARNINGS BEFORE INTEREST, INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY ITEMS 636 87 1,202 324
Interest expense, net 156 123 287 266
-------- -------- -------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY ITEMS 480 (36) 915 58
Income tax provision (benefit) 142 (18) 278 10
Minority interest expense, net of taxes 68 40 123 74
-------- -------- -------- -------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEMS 270 (58) 514 (26)
Loss on extinguishment of debt, net of taxes (13) (13)
Gains on sales of investments, net of taxes
and minority interest 134
-------- -------- -------- -------
NET EARNINGS (LOSS) $ 270 $ (71) $ 648 $ (39)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE BEFORE
EXTRAORDINARY ITEMS $ 0.64 $(0.14) $ 1.23 $ (0.06)
EARNINGS (LOSS) PER COMMON SHARE - EXTRAORDINARY
ITEMS (0.03) 0.32 (0.03)
-------- -------- -------- -------
EARNINGS (LOSS) PER COMMON SHARE $ 0.64 $(0.17) $ 1.55 $ (0.09)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE - ASSUMING
DILUTION $ 0.64 $(0.17) $ 1.55 $ (0.09)
======== ======== ======== ========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 421.0 413.0 417.3 412.5
======== ======== ======== ========
CASH DIVIDENDS PER COMMON SHARE $ 0.25 $ 0.25 $ 0.50 $ 0.51
======== ======== ======== ========
</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>
June 30, December 31,
2000 1999
----------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and temporary investments $ 1,145 $ 453
Accounts and notes receivable, net 4,070 3,227
Inventories 3,743 3,203
Other current assets 576 358
-------- -------
Total Current Assets 9,534 7,241
-------- -------
Plants, Properties and Equipment, Net 18,731 14,381
Forestlands 6,115 2,921
Investments 503 1,044
Goodwill 6,701 2,596
Deferred Charges and Other Assets 2,872 2,085
-------- -------
TOTAL ASSETS $44,456 $30,268
======== ========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current maturities of long-term debt $ 3,147 $ 920
Accounts payable 1,978 1,870
Accrued payroll and benefits 589 423
Other accrued liabilities 2,098 1,169
-------- -------
Total Current Liabilities 7,812 4,382
-------- -------
Long-Term Debt 12,933 7,520
Deferred Income Taxes 5,023 3,344
Other Liabilities 2,140 1,332
Minority Interest 1,702 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 - 483.5 shares, 1999 - 414.6 shares 484 415
Paid-in capital 6,437 4,078
Retained earnings 7,054 6,613
Accumulated other comprehensive income (loss) (862) (739)
-------- -------
13,113 10,367
Less: Common stock held in treasury, at cost, 2000 - 1.6 shares,
1999 - 1.2 shares 72 63
-------- -------
Total Common Shareholders' Equity 13,041 10,304
-------- -------
TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $44,456 $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>
SIX MONTHS ENDED
JUNE 30,
----------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ 648 $ (39)
Depreciation and amortization 787 757
Deferred income tax provision (benefit) 107 (128)
Payments related to restructuring and legal reserves (105) (77)
Payments related to mergers (16) (83)
Merger integration costs 12 157
Restructuring and other charges 71 113
Reversal of reserves no longer required (36)
Loss on extinguishment of debt 21
Gains on sales of investments (385)
Other, net 142 63
Changes in current assets and liabilities
Accounts and notes receivable (282) (190)
Inventories (69) 46
Accounts payable and accrued liabilities 49 98
Other 9 1
------ ------
CASH PROVIDED BY OPERATIONS 968 703
------ ------
INVESTMENT ACTIVITIES
Invested in capital projects (488) (459)
Mergers and acquisitions, net of cash acquired (5,355) (46)
Proceeds from divestitures 1,359 119
Other (106) (54)
------ ------
CASH USED FOR INVESTMENT ACTIVITIES (4,590) (440)
------ ------
FINANCING ACTIVITIES
Issuance of common stock 39 166
Issuance of debt 6,173 704
Reduction of debt (1,487) (659)
Change in bank overdrafts (199) (120)
Dividends paid (207) (212)
Other 39 (36)
------ ------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 4,358 (157)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (44) (15)
------ ------
CHANGE IN CASH AND TEMPORARY INVESTMENTS 692 91
CASH AND TEMPORARY INVESTMENTS
Beginning of the period 453 533
------ ------
End of the period $ 1,145 $ 624
======== ======
</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 JUNE 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, MARCH 31, 2000 414,735 $415 $4,076 $6,887 $(799) 1,055 $50 $10,529
Issuance of stock for
merger 68,706 69 2,360 2,429
Issuance of stock for
various plans 9 1 (93) (1) 2
Repurchase of stock 620 23 (23)
Cash dividends - Common
stock ($0.25 per share) (103) (103)
Comprehensive income (loss)
Net earnings 270 270
Change in cumulative
foreign currency
translation adjustment (63) (63)
-------
Total comprehensive
income (loss) 207
------- ------- -------- -------- -------- ------ ------- -------
BALANCE, JUNE 30, 2000 483,450 $484 $6,437 $7,054 $(862) 1,582 $72 $13,041
======= ======= ======== ======== ======== ====== ======= =======
</TABLE>
THREE MONTHS ENDED JUNE 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, MARCH 31, 1999 412,724 $413 $3,923 $6,772 $(581) 927 $ 40 $10,487
Issuance of stock for
various plans 504 74 (1,418) (64) 138
Repurchase of stock 630 33 (33)
Cash dividends - Common
stock ($0.25 per share) (104) (104)
Comprehensive income (loss)
Net earnings (loss) (71) (71)
Change in cumulative
foreign currency
translation adjustment (39) (39)
--------
Total comprehensive
income (loss) (110)
-------- ------- ------- -------- ------- -------- -------- --------
BALANCE, JUNE 30, 1999 413,228 $413 $3,997 $6,597 $(620) 139 $ 9 $10,378
======== ======= ======= ======== ======= ======== ======== ========
</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)
SIX MONTHS ENDED JUNE 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 160 (1) (884) (42) 41
Repurchase of stock 1,250 51 (51)
Cash dividends - Common
stock ($0.50 per share) (207) (207)
Comprehensive income (loss)
Net earnings 648 648
Change in cumulative
foreign currency
translation adjustment (123) (123)
--------
Total comprehensive
income (loss) 525
------- ------- ------- ------ ------- ------ ------- --------
BALANCE, JUNE 30, 2000 483,450 $484 $6,437 $7,054 $(862) 1,582 $ 72 $13,041
======= ======= ======= ======= ======== ====== ======= ========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
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 43 101 (1,663) (75) 176
Repurchase of stock 1,250 60 (60)
Cash dividends - Common
stock ($0.51 per share) (212) (212)
Comprehensive income (loss)
Net earnings (loss) (39) (39)
Change in cumulative
foreign currency
translation adjustment (225) (225)
--------
Total comprehensive
income (loss) (264)
------- ------ -------- -------- ------- ------ ------- --------
BALANCE, JUNE 30, 1999 413,228 $413 $3,997 $6,597 $(620) 139 $ 9 $10,378
======== ====== ======== ======== ======= ====== ======== ========
</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 completed its previously announced merger
with Champion International Corporation (Champion) in a transaction accounted
for as a purchase. Champion was acquired for approximately $5 billion in cash
and International Paper common stock totaling approximately $2.4 billion. Also,
International Paper assumed approximately $2.3 billion of Champion debt. The
results of Champion are included in the consolidated statement of earnings from
June 20, 2000, and the June 30, 2000 consolidated balance sheet includes the
assets and liabilities of Champion as well as preliminary purchase price
allocations.
On April 30, 1999, International Paper completed its previously announced merger
with Union Camp Corporation 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 Six Months Ended
June 30, June 30,
------------------- ----------------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2000 1999 2000 1999
------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
EARNINGS (LOSS) BEFORE EXTRAORDINARY
ITEMS $ 270 $ (58) $ 514 $ (26)
Effect of dilutive securities
Preferred securities of subsidiary trust 5 9
-------- --------- --------- ---------
EARNINGS (LOSS) BEFORE EXTRAORDINARY
ITEMS - ASSUMING DILUTION $ 275 $ (58) $ 523 $ (26)
======== ======== ========= =========
AVERAGE COMMON SHARES OUTSTANDING 421.0 413.0 417.3 412.5
Effect of dilutive securities
Preferred securities of subsidiary trust 8.3 8.3
Long-term incentive plan deferred
compensation (1.1) (1.1)
Stock options 0.3 0.5
-------- --------- --------- ----------
AVERAGE COMMON SHARES OUTSTANDING -
ASSUMING DILUTION 429.6 411.9 426.1 411.4
======== ========= ========= ==========
EARNINGS (LOSS) PER COMMON SHARE
BEFORE EXTRAORDINARY ITEMS $ 0.64 $ (0.14) $ 1.23 $ (0.06)
======== ========= ========= ==========
EARNINGS (LOSS) PER COMMON SHARE
BEFORE EXTRAORDINARY ITEMS - ASSUMING
DILUTION $ 0.64 $ (0.14) $ 1.23 $ (0.06)
======== ========= ========= ==========
</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, and the June 30, 2000 consolidated balance sheet
includes the balances of Champion.
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. Also, as a result of the merger announcement, Moody's lowered our
long-term debt rating to Baa1. At June 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.
On February 21, 2000, Carter Holt Harvey, a subsidiary of International Paper,
announced the purchase of CSR Limited's medium density fiberboard and
particleboard businesses and its Oberon sawmill for approximately $200 million
in cash. This acquisition was completed on April 28, 2000.
On February 17, 2000, International Paper announced that we had reached an
agreement to acquire 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. This merger was completed on
March 31, 2000.
7
<PAGE>
On November 24, 1998, International Paper announced that we had reached an
agreement to merge with Union Camp Corporation (Union Camp), a diversified paper
and forest products company. The transaction was approved by Union Camp and
International Paper shareholders, 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 and second quarters 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 June 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 of International Paper's subsidiary preferred
securities were $32 million and $30 million for the second quarter of 2000 and
1999, respectively, and $76 million and $72 million for the six months ended
June 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 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 one-time merger costs 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 one-time merger 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>
ASSET SEVERANCE
WRITE - AND
IN MILLIONS DOWNS OTHER TOTAL
----------- ------- --------- -----
<S> <C> <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 announced the shutdown of
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.
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.
(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. 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. A severance reserve of $1 million has also
been established related to the streamlining efforts of the Consumer
Packaging business. This reserve covers the termination of 17 employees.
(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.
(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
9
<PAGE>
the termination of 221 employees, $2 million of asset write-offs and $1
million of other cash costs. 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.
The $31 million reserve for severance and other costs recorded in the 2000
second quarter related to 1,056 employees.
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 integration costs.
International Paper also 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.
The following table shows the impact of special items on 2000 pre-tax earnings
by quarter:
<TABLE>
<CAPTION>
QUARTER
------------------
IN MILLIONS FIRST SECOND YEAR-TO-DATE
----------- ----- ------ ------------
<S> <C> <C> <C>
EARNINGS BEFORE SPECIAL ITEMS, INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY ITEMS $443 $555 $998
One-time merger expenses (8) (4) (12)
Restructuring and other charges (71) (71)
---- ---- ----
EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST AND
EXTRAORDINARY ITEMS $435 $480 $915
==== ==== ====
</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 one-time merger
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:
10
<PAGE>
<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)
One-time merger 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. Under this program, 1,218 employees of the combined company were
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. As of June 30, 2000, 1,062
employees had been 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.
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 or to be 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 1999 (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)
-----------
Balance, June 30, 2000 (156 employees) $ 6
===========
</TABLE>
Note: Benefit costs are treated as incurred on the termination date
of the employee.
The program was substantially completed in the second quarter. We are in the
process of reevaluating the program to determine if additional costs will be
incurred in the third quarter. Any accruals that remain after the reevaluation
process will be reversed to income in the third quarter of this year.
The one-time merger 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
11
<PAGE>
fees. Post-merger integration expenses included costs related to employee
retention such as stay bonuses and other one-time cash costs related to the
integration of Union Camp.
The $298 million charge for the asset shutdowns of excess internal capacity
consisted of a $113 million charge in the 1999 second quarter and a $185 million
charge in the 1999 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)
---------
Balance, June 30, 2000 (699 employees) $ 68
=========
</TABLE>
The $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.
NOTE 6 - INVENTORIES
Inventories by major category include:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
IN MILLIONS 2000 1999
----------- -------- ------------
<S> <C> <C>
Raw materials $ 581 $ 484
Finished pulp, paper and packaging
products 2,199 1,869
Finished lumber and panel products 253 178
Operating supplies 515 486
Other 195 186
-------- ------------
TOTAL $3,743 $ 3,203
======== ============
</TABLE>
Approximately $455 million of the increase in inventories is due to the Champion
merger.
12
<PAGE>
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments made during the six month period ended June 30, 2000 and 1999
were $309 million and $331 million, respectively. Capitalized net interest costs
were $13 million for the six months ended June 30, 2000 and $16 million for the
six months ended June 30, 1999. Total interest expense was $326 million for the
six months ended June 30, 2000 and $314 million for the six months ended June
30, 1999. Income tax payments made during the six months ended June 30, 2000 and
1999 were $161 million and $20 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 $655
million and $153 million at June 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 $15.5 billion at June 30, 2000 and $15.1 billion at
December 31, 1999. The allowance for doubtful accounts was $116 million at June
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 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
13
<PAGE>
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. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
Statement No. 138 amends the accounting and reporting standards of Statement No.
133 for certain derivative instruments and certain hedging activities.
The Statements are effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statements as of the beginning of any fiscal
quarter after issuance. The Statements cannot be applied retroactively. The
Statements must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the company's
election, before January 1, 1998).
International Paper has not yet quantified the impact of adopting the Statements
on its consolidated financial statements and has not determined the timing or
method of the adoption. However, adoption of the provisions of the Statements
could increase volatility in earnings and other comprehensive income.
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 six months ended
June 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 SIX MONTHS ENDED JUNE 30, 2000 1999
--------------------------------- -------- --------
<S> <C> <C>
Net Sales $ 15,888 $ 14,594
Earnings (Loss) Before Extraordinary Items $ 313 $ (155)
Net Earnings (Loss) $ 447 $ (168)
Earnings (Loss) Per Common Share Before Extraordinary Items $ 0.65 $ (0.35)
Earnings (Loss) Per Common Share $ 0.93 $ (0.35)
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
International Paper's second-quarter 2000 net sales were $6.8 billion, ahead of
the $6.4 billion reported in the 2000 first-quarter and $6.0 billion reported in
the 1999 second-quarter.
International Paper reported second quarter 2000 earnings of $315 million, or
$.75 per share, before special items. This is an increase of $66 million, or
$.15 per share, over first quarter 2000 earnings of $249 million, or $.60 per
share, before special and extraordinary items, and well above second-quarter
1999 earnings before special and extraordinary items of $99 million, or $.24 per
share.
We reported net earnings of $270 million, or $.64 per share, after special items
in the second-quarter of 2000. Special items totaled $75 million before taxes
and minority interest, $45 million after taxes and minority interest or $.11 per
share, and consisted of $71 million associated with asset write-downs, severance
and other charges and $4 million of one-time merger expenses. International
Paper reported a net loss in the 1999 second-quarter of $71 million, or $.17 per
share, after special and extraordinary items. Special items amounted to $234
million, or $157 million after taxes. These items included a $98 million charge
for Union Camp merger-related severance, a $59 million charge for one-time Union
Camp and Champion merger expenses, a $113 million charge for asset shutdowns,
and credits of $36 million from the reversal of reserves that were no longer
required. We also recorded an extraordinary charge of $13 million after taxes,
or $.03 per share, for the refinancing of high interest Union Camp debt which
International Paper assumed under the merger agreement.
The consolidated results of operations include Champion for the eleven days in
June that International Paper owned the company. The Champion merger was
completed on June 20, 2000, in a transaction accounted for as a purchase. The
following segment discussions exclude sales and operating profit generated by
Champion.
PRINTING AND COMMUNICATIONS PAPERS 2000 second-quarter net sales of $1,620
million experienced a 2% decline from the $1,650 million reported in the 2000
first-quarter, but increased 17% over the 1999 second-quarter net sales of
$1,385 million. Operating profit for the 2000 second-quarter of $212 million was
ahead of the $178 million of earnings recorded in the 2000 first-quarter and a
significant improvement over 1999 second-quarter earnings of $22 million.
Earnings in the U.S. papers business remained strong during the second quarter
primarily due to the combination of favorable pricing and the continuation of
internal cost-cutting activities. However, due to softening in demand coupled
with high inventory levels, International Paper took 125,000 tons of downtime in
uncoated freesheet in the second quarter and plans to take out an additional 10%
of capacity in July and August in order to keep inventories in line. European
Papers' results for the second quarter were above earnings reported in the prior
quarter and increased significantly over the 1999 second-quarter due to the
improving external market and excellent performance at the Saillat, Kwidzyn and
Svetogorsk mills.
PRINTING AND COMMUNICATIONS PAPERS (IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
---------------------------------------- ---------------------------------------
1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $1,650 $1,620 $3,270 $1,450 $1,385 $2,835
Operating Profit 178 212 390 8 22 30
</TABLE>
INDUSTRIAL AND CONSUMER PACKAGING 2000 second-quarter net sales of $1,985
million were 10% better than the $1,805 million reported in the 2000
first-quarter and up 13% from the 1999 second-quarter net sales of $1,760
million. Operating profit for the 2000 second-quarter of $234 million was up
from both the 2000 first-quarter and the 1999 second-quarter operating profits
of $196 million and $142 million, respectively. Industrial
16
<PAGE>
Packaging's second quarter results continued to improve as a result of internal
sales initiatives and operations improvements. This led to a more than 25%
increase in earnings over the prior quarter and more than two times the earnings
recorded in the 1999 second quarter. Due to weak U.S. box shipments and reduced
export containerboard shipments, inventory levels were relatively high during
the quarter. International Paper took 165,000 tons of containerboard downtime in
order to balance its production with customer demand. An additional 200,000 tons
of downtime is planned for July and August, which is over 20% of total system
capacity. Consumer Packaging earnings were 7% better than both the prior quarter
and the 1999 second-quarter due to the success of internal cost initiatives
achieved in the mills. Increases in raw materials costs, however, eroded some of
the manufacturing progress.
INDUSTRIAL AND CONSUMER PACKAGING (IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
--------------------------------------- --------------------------------------
1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $1,805 $1,985 $3,790 $1,675 $1,760 $3,435
Operating Profit 196 234 430 56 142 198
</TABLE>
DISTRIBUTION 2000 second-quarter net sales of $1,700 million were down slightly
from the $1,750 million recorded in the first quarter and slightly higher than
the $1,675 million recorded in the 1999 second-quarter. The 2000 second-quarter
operating profit of $35 million improved over both the 2000 first-quarter and
the 1999 second-quarter operating profits of $30 million and $27 million,
respectively. Contributing to the improved performance were cost reduction
efforts in under-performing facilities and the Alling and Cory integration
sites, along with stronger realization in margin per unit sold.
DISTRIBUTION (IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
---------------------------------------- --------------------------------------
1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $1,750 $1,700 $3,450 $1,700 $1,675 $3,375
Operating Profit 30 35 65 24 27 51
</TABLE>
CHEMICALS AND PETROLEUM, which includes results from our approximately 68% owned
subsidiary, Bush Boake Allen, reported second-quarter 2000 net sales of $365
million, ahead of $345 million reported in the 2000 first-quarter and $360
million in the 1999 second-quarter. Operating profit of $36 million for the 2000
second-quarter increased 9% over 2000 first-quarter earnings of $33 million and
was up 29% over 1999 second-quarter earnings of $28 million. The earnings
results of our chemicals businesses reflect an improvement in demand for
chemical products and higher oil and gas prices.
CHEMICALS AND PETROLEUM (IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
----------------------------------------- ----------------------------------------
1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $345 $365 $710 $350 $360 $710
Operating Profit 33 36 69 19 28 47
</TABLE>
FOREST PRODUCTS 2000 second-quarter net sales were $750 million compared with
$780 million in the 2000 first-quarter and $815 million in the 1999
second-quarter. Operating profit of $174 million for the 2000 second-quarter
improved 17% over 2000 first-quarter earnings of $149 million, but were down
slightly from 1999 second-quarter earnings of $175 million. The improvement over
the first quarter was primarily the result of increases in harvest volumes,
sales of standing timber and a seasonal increase in recreational income.
Stumpage prices for both pulpwood and sawtimber for the 2000 second-quarter were
slightly below the first quarter and continued to average well below 1999
levels. Second-quarter 2000 earnings for the Building Materials group were down
slightly from the prior quarter, and well below the second quarter of 1999. The
year over year decline is primarily the result of weaker pricing for wood
products and molded door facings. The cumulative effect of interest rate
increases, lower consumer confidence and future uncertainty became increasingly
evident this
17
<PAGE>
quarter as prices eroded and demand remained sluggish during what is typically
the start of the peak construction season.
FOREST PRODUCTS (IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------- ---------------------------------------------
1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $780 $750 $1,530 $785 $815 $1,600
Operating Profit 149 174 323 174 175 349
</TABLE>
CARTER HOLT HARVEY reported 2000 second-quarter net sales of $460 million
compared with $410 million recorded in the prior quarter and $400 million
recorded in the 1999 second-quarter. Operating profit of $23 million reported in
the 2000 second-quarter was ahead of the 2000 first-quarter earnings of $17
million and reflects a significant improvement over the $8 million reported in
the same period a year ago. Carter Holt Harvey's Forest Products, Wood Products,
Packaging and Pulp and Paper businesses contributed to the favorable second
quarter results primarily due to increased volumes and higher prices in each of
the markets and improved performance at the Kinleith mill. However, Tissue
results weakened as the result of higher pulp prices and increased competition.
In addition, sales and earnings for the Wood Products business were boosted by
the reporting of two months of trading results from an Australian panels
business and sawmill acquired in April of 2000.
CARTER HOLT HARVEY (IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
------------------------------------------ ---------------------------------------
1st Quarter 2nd Quarter Six Months 1st Quarter 2nd Quarter Six Months
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $410 $460 $870 $365 $400 $765
Operating Profit 17 23 40 - 8 8
</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 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 $968 million for the 2000 first half
compared with $703 million for the 1999 six month period. Higher earnings for
the 2000 first half were partially offset by increased working capital
requirements. Working capital changes decreased operating cash flow by $293
million and $45 million for the 2000 and 1999 six month periods, respectively.
Investments in capital projects totaled $488 million and $459 million for the
2000 and 1999 six 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 six month periods include a $4.7
billion and $45 million net increase in debt. The 2000 increase includes both
the $5.0 billion debt issuance to finance the Champion merger and the $650
million debt issuance to finance the Shorewood merger. Debt reductions include
the repayment of $279 million of assumed Shorewood debt, $147 million of assumed
Champion debt, and approximately $700 million of debt repayments by Carter Holt
Harvey. Common stock dividend payments were $207 million, or $.50 per common
share for the 2000 first half compared with $212 million or $.51 per common
share for the 1999 first
18
<PAGE>
half. Dividend payments for the second quarters ended June 30, 2000 and 1999
were $103 million and $104 million or $.25 per common share for both periods.
Actual cash dividends paid for the 1999 first-quarter were $.25 per common
share. However, cash dividends declared per common share have been restated to
include dividends declared by Union Camp.
At June 30, 2000, cash and temporary investments totaled $1.1 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, and the June 30, 2000 consolidated balance sheet
includes the balances of Champion.
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. Also, as a result of the merger announcement,
Moody's lowered our long-term debt rating to Baa1. At June 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.
On February 21, 2000, Carter Holt Harvey announced the purchase of CSR Limited's
medium density fiberboard and particleboard businesses and its Oberon sawmill
for approximately $200 million in cash. This acquisition was completed on April
28, 2000.
On February 17, 2000, International Paper announced that we had reached an
agreement to acquire 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. This merger was completed on
March 31, 2000.
On November 24, 1998, International Paper announced that we had reached an
agreement to merge with Union Camp Corporation (Union Camp), a diversified paper
and forest products company. The transaction was approved by Union Camp and
International Paper shareholders, 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, a subsidiary of International Paper, 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 and second quarters 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
19
<PAGE>
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 June 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 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 one-time merger costs 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 one-time merger 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>
ASSET SEVERANCE
WRITE - AND
IN MILLIONS DOWNS OTHER TOTAL
----------- ----- ----- -----
<S> <C> <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 announced the shutdown of
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.
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.
(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. 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. A severance reserve of $1 million has also
been established related to the streamlining efforts of the Consumer
Packaging business. This reserve covers the termination of 17 employees.
20
<PAGE>
(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.
(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. 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.
The $31 million reserve for severance and other costs recorded in the 2000
second quarter related to 1,056 employees.
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 integration costs.
International Paper also 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.
The following table shows the impact of special items on 2000 pre-tax earnings
by quarter:
<TABLE>
<CAPTION>
QUARTER
----------------
IN MILLIONS FIRST SECOND YEAR-TO-DATE
----------- ----- ------ ------------
<S> <C> <C> <C>
EARNINGS BEFORE SPECIAL ITEMS, INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY ITEMS $ 443 $ 555 $ 998
One-time merger expenses (8) (4) (12)
Restructuring and other charges (71) (71)
------ ----- ------------
EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST AND
EXTRAORDINARY ITEMS $ 435 $ 480 $ 915
====== ===== ============
</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 one-time merger
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.
21
<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)
One-time merger 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. Under this program, 1,218 employees of the combined company were
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. As of June 30, 2000, 1,062
employees had been 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.
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 or to be 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 1999 (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)
-----------
Balance, June 30, 2000 (156 employees) $ 6
===========
</TABLE>
Note: Benefit costs are treated as incurred on the termination date of
the employee.
The program was substantially completed in the second quarter. We are in the
process of reevaluating the program to determine if additional costs will be
incurred in the third quarter. Any accruals that remain after the reevaluation
process will be reversed to income in the third quarter of this year.
22
<PAGE>
The one-time merger 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 one-time cash costs related to the integration of Union Camp.
The $298 million charge for the asset shutdowns of excess internal capacity
consisted of a $113 million charge in the 1999 second quarter and a $185 million
charge in the 1999 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)
---------
Balance, June 30, 2000 (699 employees) $ 68
=========
</TABLE>
The $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.
OTHER
The effective income tax rate before special and extraordinary items increased
to 31% for the 2000 first-half from 29% in the 1999 first-half. 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
30% and 17% for the 2000 and 1999 six 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 six month periods ended June 30,
2000 and 1999.
23
<PAGE>
<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 $ 998 $ 309 31% $ 292 $ 86 29%
Merger-related termination
benefits (98) (31) 32%
One-time merger expenses (12) (4) 33% (59) (10) 17%
Restructuring and other
charges (71) (27) 38% (113) (44) 39%
Reversals of reserves no
longer required 36 9 25%
------------ ---------- ------------- ----------
After special items $ 915 $ 278 30% $ 58 $ 10 17%
============ ========== ============= ==========
</TABLE>
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 and other restructuring activities 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.
24
<PAGE>
FINANCIAL INFORMATION BY INDUSTRY SEGMENT
(UNAUDITED)
(IN MILLIONS)
NET SALES BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Printing and Communications Papers (1) $ 1,620 $ 1,385 $ 3,270 $ 2,835
Industrial and Consumer Packaging 1,985 1,760 3,790 3,435
Distribution 1,700 1,675 3,450 3,375
Chemicals and Petroleum 365 360 710 710
Forest Products 750 815 1,530 1,600
Carter Holt Harvey 460 400 870 765
Corporate and Intersegment Sales (1)(2) (100) (399) (469) (692)
-------- -------- -------- --------
NET SALES $ 6,780 $ 5,996 $ 13,151 $ 12,028
======== ======== ======== ========
</TABLE>
OPERATING PROFIT BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Printing and Communications Papers $ 212 $ 22 $ 390 $ 30
Industrial and Consumer Packaging 234 142 430 198
Distribution 35 27 65 51
Chemicals and Petroleum 36 28 69 47
Forest Products 174 175 323 349
Carter Holt Harvey (3) 23 8 40 8
Corporate (2) 26 26
------- ------- ------- -------
OPERATING PROFIT 740 402 1,343 683
Interest expense, net (156) (123) (287) (266)
Minority interest adjustment 38 15 62 21
Corporate items, net (67) (98) (120) (149)
Restructuring and other charges (71) (113) (71) (113)
Merger integration costs (4) (157) (12) (157)
Reversal of reserves no longer required 36 36
Scitex restructuring and other charges 2 3
------- ------- ------- -------
EARNINGS BEFORE INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY ITEMS $ 480 $ (36) $ 915 $ 58
======= ======= ======= =======
</TABLE>
--------------
(1) Certain reclassifications and adjustments have been made to prior year
amounts.
(2) Includes results from operations of Champion International Corporation
acquired on June 20, 2000. Beginning on July 1, 2000, the results of the
former Champion business will be included in the appropriate business
segment.
(3) Includes equity earnings (in millions) of $5 and $21 for the three months
ended June 30, 2000 and 1999, respectively, and $9 and $22 for the six
months ended June 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.
25
<PAGE>
PRODUCTION BY PRODUCT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Printing Papers (In thousands of tons)
White Papers and Bristols (a) 1,355 1,364 2,735 2,715
Coated Papers 317 339 642 655
Market Pulp (b) 516 461 1,037 993
Newsprint 28 25 55 48
Packaging (In thousands of tons)
Containerboard (a) 1,190 1,236 2,394 2,371
Bleached Packaging Board 542 535 1,074 1,050
Industrial Papers 230 223 471 450
Industrial and Consumer Packaging (c) 1,332 1,272 2,653 2,510
Specialty Products (In thousands of tons)
Tissue 42 39 83 81
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) (d) 510 492 1,003 979
Lumber (board feet) 713 715 1,428 1,498
MDF (sq. ft. 3/4" - basis) 84 58 143 114
Particleboard (sq. ft. 3/4" - basis) 95 51 143 97
</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 this tonnage was fabricated from paperboard and
paper produced at International Paper's own mills and is included in the
containerboard, bleached packaging board and industrial papers amounts in
this table.
(d) Panels include plywood and oriented strand board.
26
<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.
27
<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 having Masonite Woodruf
roofing incorporated into and installed on buildings 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 $66 million at June 30, 2000. This amount
includes $25 million, which we added to our reserve for hardboard siding claims
in the fourth quarter of 1999, to cover an expected shortfall in that reserve
resulting primarily from a higher number of hardboard siding claims in the
fourth quarter of 1999 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 June 30,
2000, settlement payments of $248 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 June 30, 2000.
International Paper and Masonite have the right to terminate each of the
settlements after seven years from the dates of final approval.
OTHER LITIGATION
In March and April 2000, Champion International Corporation (Champion)and 10
members of its board of directors were served with six lawsuits that have been
filed in the Supreme Court for the State of New York, New York County. Each of
the suits purports
28
<PAGE>
to be a class action filed on behalf of Champion shareholders and alleges that
the defendants breached their fiduciary duties in connection with the proposed
merger with UPM-Kymmene Corporation and the merger proposal from International
Paper.
A number of class actions have been filed in federal and state courts in New
York, Texas, California and Tennessee alleging that International Paper's
Nevamar division participated in a price fixing conspiracy with three of its
competitors. The cases in federal court assert a violation of the federal
antitrust laws, while the state court cases allege violations of state antitrust
and consumer protection statutes. We have filed a motion to dismiss one of these
cases. As of July 31, 2000, we have not filed a pleading responsive to the
complaints in any of the other cases. We intend to defend these cases
vigorously.
In August 1998, the former Union Camp Corporation informed the Virginia
Department of Environmental Quality (DEQ) of certain New Source Performance
Standards (NSPS) permitting discrepancies related to a power boiler at the
paper mill in Franklin, Virginia. On April 11, 2000, International Paper and
the DEQ entered into a consent order which resolved the matter for a civil
penalty of $134,000.
In February 2000, the Town of Lyman, South Carolina, issued an administrative
order alleging past violations of a wastewater pretreatment permit at the former
Union Camp folding carton facility in Spartanburg, South Carolina. While
International Paper has satisfied the terms of the order, the Town of Lyman
recently indicated it may seek penalties and other surcharges that together may
exceed $100,000. We are engaged in settlement discussions with the Town of
Lyman.
On June 19, 2000, prior to the completion of the merger 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.
Champion paid a civil penalty of $800,000 in connection with the Consent Order.
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.
29
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of International Paper was held on May
9, 2000.
(b) N/A
(c) (i) The Annual Meeting involved the election of seven directors as
follows:
The election of five directors to Class III. No votes were cast
against a nominee. The votes for or withheld for each nominee were:
For Withheld
------------ ---------
Mr. Robert J. Eaton 340,445,510 3,333,678
Mr. John R. Kennedy 340,332,526 3,446,662
Mr. Donald F. McHenry 340,293,547 3,485,641
Mr. Patrick F. Noonan 338,844,779 4,934,409
Mr. Charles R. Shoemate 340,430,943 3,348,245
The election of one director to Class I. No votes were cast against
the nominee. The votes for or withheld for the nominee were:
For Withheld
----------- ---------
Mr. James A. Henderson 340,413,655 3,365,533
The election of one director to Class II. No votes were cast against
the nominee. The votes for or withheld for the nominee were:
For Withheld
----------- ---------
Mr. Robert D. Kennedy 340,335,889 3,443,299
(c) (ii) The shareholders approved the appointment of Arthur Andersen LLP as
the Company's independent auditor for 2000. There were 341,044,753
votes cast in favor of the ratification, 511,263 votes cast against
the ratification and 2,223,172 votes in abstention.
(c) (iii)The shareholders approved an amendment to the Company's Long-Term
Incentive Compensation Plan. There were 319,200,668 votes cast in
favor of the proposal, 21,495,376 votes cast against the proposal, and
3,083,127 votes in abstention.
(d) N/A
30
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(2) Agreement and Plan of Merger, dated as of May 12, 2000, among
Champion, International Paper and the Purchaser (incorporated by
reference to exhibit 2 to International Paper's Registration
Statement on Form S-4, as amended on June 2, 2000 and June 9,
2000).
(4.1) Indenture, dated as of April 12, 1999, between International
Paper and The Bank of New York, as Trustee (incorporated by
reference to exhibit 4.1 to International Paper's Report on Form
8-K filed on June 29, 2000).
(4.2) Floating Rate Notes Supplemental Indenture, dated as of June 14,
2000, between International Paper and The Bank of New York, as
Trustee (incorporated by reference to exhibit 4.2 to
International Paper's Report on Form 8-K filed on June 29,
2000).
(4.3) 8% Notes Due July 8, 2003 Supplemental Indenture, dated as of
June 14, 2000, between International Paper and The Bank of New
York, as Trustee (incorporated by reference to exhibit 4.3 to
International Paper's Report on Form 8-K filed on June 29,
2000).
(4.4) 8 1/8% Notes Due July 8, 2005 Supplemental Indenture, dated as
of June 14, 2000, between International Paper and The Bank of
New York, as Trustee (incorporated by reference to exhibit 4.4
to International Paper's Report on Form 8-K filed on June 29,
2000).
(4.5) Credit Agreement, dated as of June 14, 2000, among International
Paper, International Paper Financial Services, Inc., various
lenders and Credit Suisse First Boston, New York Branch, as
Administrative Agent, Lead Arranger and Book Manager
(incorporated by reference to exhibit 4.5 to International
Paper's Report on Form 8-K filed on June 29, 2000).
(10.1) Long-Term Incentive Compensation Plan
(11) Statement of Computation of Per Share Earnings
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(99.1) Registration Rights Agreement, dated as of June 14, 2000, by
and among International Paper and Credit Suisse First Boston
Corporation, Banc of America Securities LLC, Chase Securities
31
<PAGE>
Inc., Deutsche Bank Securities Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Salomon Smith Barney Inc., Blaylock
& Partners, L.P. and Utendahl Capital Partners L.P.
(incorporated by reference to exhibit 99.1 to International
Paper's Report on Form 8-K filed on June 29, 2000).
(b) Reports on Form 8-K
International Paper filed reports on Form 8-K on April 11, 2000, April
25, 2000, May 19, 2000, May 22, 2000, and July 12, 2000 reporting
information under Item 5, Other Events, and on June 29, 2000 reporting
information under Item 2, Acquisition or Disposition of Assets, Item
5, Other Events, and Item 7, Financial Statements of Business Acquired
and Pro Forma Financial Information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(REGISTRANT)
Date: August 11, 2000 By /s/ JOHN V. FARACI
------------------
John V. Faraci
Executive Vice President and
Chief Financial Officer
Date: August 11, 2000 By /s/ ANDREW R. LESSIN
--------------------
Andrew R. Lessin
Vice President, Finance and
Chief Accounting Officer
32
