<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 MARCH 31, 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
APRIL 30, 2000 WAS 414,743,586.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 Ended March 31, 2000 and 1999
Consolidated Balance Sheet - 2
March 31, 2000 and December 31, 1999
Consolidated Statement of Cash Flows - 3
Three Months Ended March 31, 2000 and 1999
Consolidated Statement of Common Shareholders' Equity - 4
Three Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and 13
Results of Operations
Financial Information by Industry Segment 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk *
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
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 24
Signatures 24
</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
MARCH 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
NET SALES $ 6,371 $ 6,032
------- -------
COSTS AND EXPENSES
Cost of products sold 4,564 4,576
Selling and administrative expenses 521 504
Depreciation and amortization 383 383
Distribution expenses 266 276
Taxes other than payroll and income taxes 63 57
Merger integration costs 8
Equity earnings from investment in Scitex (1)
------- -------
TOTAL COSTS AND EXPENSES 5,805 5,795
------- -------
EARNINGS BEFORE INTEREST, INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY
ITEMS 566 237
Interest expense, net 131 143
------- -------
EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS 435 94
Income tax provision 136 28
Minority interest expense, net of taxes 55 34
------- -------
EARNINGS BEFORE EXTRAORDINARY ITEMS 244 32
Gains on sales of investments, net of taxes and minority interest 134
------- -------
NET EARNINGS $ 378 $ 32
======= =======
EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEMS $ 0.59 $ 0.08
EARNINGS PER COMMON SHARE - EXTRAORDINARY ITEMS 0.32
------- -------
EARNINGS PER COMMON SHARE $ 0.91 $ 0.08
======= =======
EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ 0.91 $ 0.08
======= =======
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 413.5 412.1
======= =======
CASH DIVIDENDS PER COMMON SHARE $ 0.25 $ 0.26
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
INTERNATIONAL PAPER COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and temporary investments $ 1,574 $ 453
Accounts and notes receivable, net 3,409 3,227
Inventories 3,306 3,203
Other current assets 384 358
-------- --------
Total Current Assets 8,673 7,241
-------- --------
Plants, Properties and Equipment, Net 14,389 14,381
Forestlands 2,895 2,921
Investments 169 1,044
Goodwill 3,207 2,596
Deferred Charges and Other Assets 2,216 2,085
-------- --------
TOTAL ASSETS $ 31,549 $ 30,268
======== ========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current maturities of long-term debt $ 1,699 $ 920
Accounts payable 1,874 1,870
Accrued payroll and benefits 371 423
Other accrued liabilities 1,531 1,169
-------- --------
Total Current Liabilities 5,475 4,382
-------- --------
Long-Term Debt 7,250 7,520
Deferred Income Taxes 3,442 3,344
Other Liabilities 1,349 1,332
Minority Interest 1,699 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 - 414.7 shares, 1999 - 414.6 shares 415 415
Paid-in capital 4,076 4,078
Retained earnings 6,887 6,613
Accumulated other comprehensive income (loss) (799) (739)
-------- --------
10,579 10,367
Less: Common stock held in treasury, at cost, 2000 - 1.1 shares, 50 63
1999 - 1.2 shares -------- --------
Total Common Shareholders' Equity 10,529 10,304
-------- --------
TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $ 31,549 $ 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>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 378 $ 32
Depreciation and amortization 383 383
Deferred income tax provision (benefit) 71 (13)
Payments related to restructuring and legal reserves (62) (27)
Merger integration costs 8
Gains on sales of investments (385)
Other, net 197 33
Changes in current assets and liabilities
Accounts and notes receivable (163) (184)
Inventories (78) 11
Accounts payable and accrued liabilities 193 46
Other (7) 8
------- -------
CASH PROVIDED BY OPERATIONS 535 289
------- -------
INVESTMENT ACTIVITIES
Invested in capital projects (214) (211)
Mergers and acquisitions, net of cash acquired (590) (23)
Proceeds from divestitures 1,359 16
Other (121) (32)
------- -------
CASH PROVIDED BY (USED FOR) INVESTMENT ACTIVITIES 434 (250)
------- -------
FINANCING ACTIVITIES
Issuance of common stock 35 30
Issuance of debt 979 438
Reduction of debt (715) (406)
Change in bank overdrafts (61) (41)
Dividends paid (104) (108)
Other 22 (36)
------- -------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 156 (123)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4) (9)
------- -------
CHANGE IN CASH AND TEMPORARY INVESTMENTS 1,121 (93)
CASH AND TEMPORARY INVESTMENTS
Beginning of the period 453 533
------- -------
End of the period $ 1,574 $ 440
======= =======
</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 MARCH 31, 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 various
plans 151 (2) (791) (41) 39
Repurchase of stock 630 28 (28)
Cash dividends - Common
stock ($0.25 per share) (104) (104)
Comprehensive income (loss)
Net earnings 378 378
Change in cumulative
foreign currency
translation adjustment (60) (60)
-------------
Total comprehensive
income (loss) 318
------- ------ ------- -------- ------------- ------ ------ -------------
BALANCE, MARCH 31, 2000 414,735 $ 415 $ 4,076 $ 6,887 ($799) 1,055 $50 $10,529
======= ====== ======= ======== ============= ====== ====== =============
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Accumulated Total
Other Common
Common Stock Issued Paid-in Retained Comprehensive Treasury Stock Shareholders'
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 413,185 $ 413 $ 3,896 $ 6,848 ($395) 552 $24 $10,738
Issuance of stock for various
plans (461) 27 (245) (11) 38
Repurchase of stock 620 27 (27)
Cash dividends - Common
stock ($0.26 per share) (108) (108)
Comprehensive income (loss)
Net earnings 32 32
Change in cumulative
foreign currency
translation adjustment (186) (186)
-------
Total comprehensive
income (loss) (154)
-------- ----- ------- ------- ----- --- --- -------
BALANCE, MARCH 31, 1999 412,724 $ 413 $ 3,923 $ 6,772 ($581) 927 $40 $10,487
======== ===== ======= ======= ===== === === =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<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 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 were computed by dividing net earnings 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:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2000 1999
------------------------------------- -------- -------
<S> <C> <C>
EARNINGS BEFORE EXTRAORDINARY ITEMS $ 244 $ 32
Effect of dilutive securities
Preferred securities of subsidiary trust 4
------- -------
EARNINGS BEFORE EXTRAORDINARY ITEMS - ASSUMING DILUTION $ 248 $ 32
======= =======
AVERAGE COMMON SHARES OUTSTANDING 413.5 412.1
Effect of dilutive securities
Long-term incentive plan deferred compensation
Stock options 1.2 2.3
Preferred securities of subsidiary trust 8.3
------- -------
AVERAGE COMMON SHARES OUTSTANDING - ASSUMING DILUTION 423.0 414.4
======= =======
EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEMS $ 0.59 $ 0.08
======= =======
EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEMS -
ASSUMING DILUTION $ 0.59 $ 0.08
======= =======
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
5
<PAGE>
NOTE 3 - MERGERS AND ACQUISITIONS
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.
On November 24, 1998, International Paper announced that it had reached an
agreement to merge with Union Camp Corporation (Union Camp), a diversified paper
and forest products company. The transaction was approved by Union Camp and
International Paper shareholders on April 30, 1999. Union Camp shareholders
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.
The accompanying 1999 financial statements have been restated to combine the
historical financial position and results of operations for both International
Paper and Union Camp. The results of operations for the separate companies for
the periods prior to the merger and the combined amounts included in
International Paper's consolidated financial statements are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
IN MILLIONS MARCH 31, 1999
----------- ----------------
<S> <C>
Net sales:
International Paper $ 4,962
Union Camp 1,137
Intercompany eliminations (67)
-------
$ 6,032
=======
Net earnings (loss):
International Paper $ 44
Union Camp (10)
Other (2)
-------
$ 32
=======
</TABLE>
Note: Other includes the elimination of intercompany transactions and
adjustments to conform the accounting practices of the two companies.
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 quarter 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
March 31, 2000 reflects a preliminary allocation of the purchase price of
Shorewood Packaging to the fair value of the assets and liabilities acquired.
6
<PAGE>
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 $44 million and $42 million for the first quarter of 2000 and
1999, respectively.
NOTE 5 - SPECIAL AND EXTRAORDINARY ITEMS INCLUDING RESTRUCTURING AND BUSINESS
IMPROVEMENT ACTIONS
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.
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
7
<PAGE>
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)
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 $ 94 $ (36) $ 242 $ 148 $ 448
INTEREST AND EXTRAORDINARY ITEMS ============= ============= ============ ============= ==============
</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 are or have been paid from the general assets of
International Paper. Benefits for remaining employees have been or will be
primarily paid from plan assets of our qualified pension plan. Through March 31,
2000, 898 employees had been terminated. Related cash payments approximated $65
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. Substantially all
of the positions are expected to be eliminated by May 31, 2000.
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)
---------------
Balance, March 31, 2000 (320 employees) $ 24
===============
</TABLE>
Note: Benefit costs are treated as incurred on termination date of the
employee.
8
<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)
---------------
Balance, March 31, 2000 (1,372 employees) $ 82
===============
</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>
MARCH 31, DECEMBER 31,
IN MILLIONS 2000 1999
----------- ------------- -------------
<S> <C> <C>
Raw materials $ 489 $ 484
Finished pulp, paper and packaging
products 1,970 1,869
Finished lumber and panel products 182 178
Operating supplies 480 486
Other 185 186
------------- -------------
TOTAL $3,306 $3,203
============= =============
</TABLE>
9
<PAGE>
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments made during the three month period ended March 31, 2000 and
1999 were $137 million and $130 million, respectively. Capitalized net interest
costs were $7 million for the quarter ended March 31, 2000. International Paper
capitalized net interest costs of $2 million for the 1999 first quarter. Total
interest expense was $156 million for the 2000 first quarter and $163 million
for the 1999 first quarter. We made a net income tax payment of $22 million
during the 2000 first quarter and received a net refund of $6 million during the
first quarter of 1999.
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 $1.3
billion and $153 million at March 31, 2000 and December 31, 1999, respectively.
NOTE 9 - SUPPLEMENTAL BALANCE SHEET INFORMATION
Accumulated depreciation was $15.3 billion at March 31, 2000 and $15.1 billion
at December 31, 1999. The allowance for doubtful accounts was $111 million at
March 31, 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.
10
<PAGE>
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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured by its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
The Statement is effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance. The Statement cannot be applied retroactively. The
Statement must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the company's
election, before January 1, 1998).
International Paper has not yet quantified the impact of adopting the Statement
on its consolidated financial statements and has not determined the timing or
method of the adoption. However, adoption of the provisions of the Statement
could increase volatility in earnings and other comprehensive income.
NOTE 12 - SUBSEQUENT EVENTS
On April 25, 2000, International Paper announced that it had offered to purchase
all outstanding shares of Champion International Corporation in a cash and stock
transaction worth $64 per share or an estimated $6.2 billion. In addition,
International Paper would assume approximately $2.3 billion of Champion's debt.
Champion is a leading manufacturer of paper for business communications,
commercial printing and publications with significant market pulp, plywood,
lumber and wood chip manufacturing operations.
In connection with such announcement, International Paper also announced its
intention to sell more than $3 billion of assets by the end of 2001 as part of
our increased focus on our core businesses. When such disposition plans are
finalized, we may incur costs and charges in future periods. Also as a result of
the above announcement, Moody's has lowered our long-term debt rating to Baa1.
At March 31, 2000,
11
<PAGE>
outstanding debt included approximately $2.5 billion of commercial paper and
bank notes with interest rates that fluctuate based on market conditions and our
credit rating.
On May 10, 2000, International Paper announced that it had submitted a
revised bid of $75 per share in cash and stock for Champion or an estimated
$7.3 billion. In addition, International Paper would assume approximately
$2.3 billion of Champion's debt.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
International Paper's first-quarter 2000 net sales were $6.4 billion, up from
$6.3 billion in the 1999 fourth-quarter and $6.0 billion in the 1999
first-quarter. 1999 amounts have been restated to reflect International Paper's
merger with Union Camp Corporation which was accounted for as a
pooling-of-interests.
First-quarter 2000 net earnings were $249 million, or $.60 per share, before
special and extraordinary items, an increase of $22 million, or $.05 per share,
over fourth-quarter 1999 net earnings of $227 million, or $.55 per share, before
special and extraordinary items. First-quarter 1999 net earnings were $32
million, or $.08 per share.
First-quarter 2000 net earnings were $378 million, or $.91 per share, after
special and extraordinary items, compared with net earnings after special items
of $80 million, or $.19 per share, in the 1999 fourth-quarter and net earnings
of $32 million, or $.08 per share, in the 1999 first-quarter.
Extraordinary items in the 2000 first-quarter represented a gain of $134
million, or $.32 per share, after taxes and minority interest resulting from the
sale of International Paper's investment in Scitex and Carter Holt Harvey's sale
of its share of COPEC. 2000 first-quarter special items consisted of additional
Union Camp integration costs which negatively impacted earnings by $5 million,
or $.01 per share, after taxes. Special items in the fourth quarter of 1999
amounted to $147 million or $.36 per share after taxes and minority interest,
representing restructuring costs primarily in packaging, chemicals, and xpedx,
and integration costs associated with the Union Camp merger. No special or
extraordinary items were recorded in the first quarter of 1999.
First-quarter 2000 operating profit of $603 million more than doubled the $281
million in the 1999 first-quarter. Operating profit was positively impacted by
higher prices for most of our paper and board products, as well as favorable
volume and mix. Increased operating profit also reflects the effects of internal
profit improvement programs and benefits achieved from last year's merger with
Union Camp.
PRINTING AND COMMUNICATIONS PAPERS 2000 first-quarter net sales increased 14% to
$1,650 million from $1,450 million recorded in the 1999 first-quarter and 8%
from $1,525 million in the 1999 fourth quarter. First-quarter 2000 operating
profit increased significantly to $178 million from $8 million in the 1999
first-quarter and $141 million in the 1999 fourth quarter. Earnings in the U.S.
Papers business were considerably better than those achieved in the first
quarter of 1999 and 35% better than those achieved in the 1999 fourth-quarter.
Earnings improvement reflects strong volume, price improvement, and the effects
of internal profit improvement programs and merger benefits. European Papers'
results were also significantly better than in the first quarter of 1999 and
slightly better than in the 1999 fourth-quarter. European Papers' earnings
improvement from the 1999 first-quarter reflects increased shipments for both
coated and uncoated products. Eastern European operations remain strong.
PRINTING AND COMMUNICATIONS PAPERS
- ----------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------- -----------------------------
IN MILLIONS 1ST QUARTER 1ST QUARTER 4TH QUARTER
- -------------- -------------- -------------- -------------
<S> <C> <C> <C>
Sales $1,650 $1,450 $1,525
Operating Profit 178 8 141
</TABLE>
13
<PAGE>
INDUSTRIAL AND CONSUMER PACKAGING 2000 first-quarter net sales of $1,805 million
were 8% better than 1999 first-quarter net sales of $1,675 million and slightly
lower than the $1,835 million reported in the 1999 fourth-quarter. First-quarter
2000 operating profit of $196 million was significantly higher than the $56
million recorded in the 1999 first-quarter, and slightly ahead of 1999
fourth-quarter earnings of $193 million. Industrial Packaging's first-quarter
performance continued the positive trend established during the last half of
1999, up significantly from the 1999 first-quarter. The favorable results
reflect continued realization of synergies from the Union Camp merger, as well
as ongoing profit improvement programs and increased prices. Earnings for
Consumer Packaging were up almost one-third from the same period last year. The
improvement resulted primarily from better bleached board pricing. Consumer
Packaging earnings were 5% below those achieved in the 1999 fourth quarter.
INDUSTRIAL AND CONSUMER PACKAGING
- ---------------------------------
<TABLE>
<CAPTION>
2000 1999
-------------- ---------------------------------
IN MILLIONS 1ST QUARTER 1ST QUARTER 4TH QUARTER
- -------------- -------------- -------------- -----------
<S> <C> <C> <C>
Sales $1,805 $1,675 $1,835
Operating Profit 196 56 193
</TABLE>
DISTRIBUTION 2000 first-quarter net sales of $1,750 million were up slightly
from $1,700 million in the 1999 first-quarter and about even with $1,735
million in the previous quarter. First-quarter 2000 operating profit of $30
million was up 25% from 1999 first-quarter earnings of $24 million and slightly
ahead of 1999 fourth-quarter earnings of $29 million. The favorable results
reflect the elimination of Zellerbach integration costs and Union Camp merger
benefits.
DISTRIBUTION
- ------------
<TABLE>
<CAPTION>
2000 1999
-------------- ----------------------------------
IN MILLIONS 1ST QUARTER 1ST QUARTER 4TH QUARTER
- -------------- -------------- -------------- --------------
<S> <C> <C> <C>
Sales $1,750 $1,700 $1,735
Operating Profit 30 24 29
</TABLE>
CHEMICALS AND PETROLEUM, which includes results from our approximately 68% owned
subsidiary, Bush Boake Allen, reported first-quarter 2000 net sales of $345
million as compared with $350 million in the 1999 first-quarter and $375
million in the 1999 fourth-quarter. First-quarter 2000 operating profit of $33
million was substantially higher than the $19 million recorded in the 1999
first-quarter. The improvement was due largely to increased Arizona Chemical
earnings which were 75% better than the same period last year, as well as
Petroleum and Minerals' earnings which were also up compared with the same
period last year, due in part to higher prices for oil and gas. First-quarter
2000 operating profit for the segment was 13% lower than the $38 million
recorded in the 1999 fourth quarter due to lower earnings for Bush Boake Allen
and chemical cellulose pulp.
CHEMICALS AND PETROLEUM
- -----------------------
<TABLE>
<CAPTION>
2000 1999
-------------- -------------------------------
IN MILLIONS 1ST QUARTER 1ST QUARTER 4TH QUARTER
- -------------- -------------- -------------- --------------
<S> <C> <C> <C>
Sales $345 $350 $375
Operating Profit 33 19 38
</TABLE>
14
<PAGE>
FOREST PRODUCTS 2000 first-quarter net sales of $780 million were about flat
compared with sales during the same period last year and in the fourth quarter
of 1999. First-quarter 2000 operating profit of $149 million was down about 15%
compared with 1999 first quarter operating profit of $174 million and fourth
quarter 1999 earnings of $176 million, due largely to lower bulk timber sales in
the current quarter. Excluding the effects of these sales, operating earnings
were about the same as the comparable period last year, despite stumpage prices
for both pine pulpwood and sawtimber which averaged well below 1999
first-quarter prices. First-quarter 2000 operating profit, excluding bulk timber
sales, was better than the fourth quarter of 1999, even though first-quarter
2000 pulpwood prices were slightly lower than in the 1999 fourth-quarter.
Building Materials first quarter earnings were down compared to first-quarter
1999. The decline was driven by weaker pricing for wood products and molded door
facings as well as lower volumes. Operating results were 30% better than the
fourth quarter of 1999, due mainly to higher Decorative Products sales volumes,
improved Wood Products prices and better Masonite operations.
FOREST PRODUCTS
- ---------------
<TABLE>
<CAPTION>
2000 1999
-------------- ---------------------------------------
IN MILLIONS 1st Quarter 1st Quarter 4th Quarter
- ----------- -------------- -------------- ---------------
<S> <C> <C> <C>
Sales $780 $785 $780
Operating Profit 149 174 176
</TABLE>
CARTER HOLT HARVEY reported first-quarter net sales of $410 million compared
with $365 million recorded during the same period last year and $430 million in
the fourth quarter of 1999. First-quarter 2000 operating profit of $17 million
was significantly higher than breakeven in the same period a year ago and 11%
lower than $19 million recorded in the fourth quarter of 1999. Compared to the
1999 first-quarter, current quarter results reflect improvements in volumes
across all business groups and higher prices for pulp, linerboard and Wood
Products. When compared with the preceding quarter of 1999, the first quarter of
2000 displayed the usual seasonal reduction in sales volumes from the Tissue
group, while pricing and volumes improved for logs, pulp and linerboard.
CARTER HOLT HARVEY
- ------------------
<TABLE>
<CAPTION>
2000 1999
-------------- ---------------------------------------
IN MILLIONS 1st Quarter 1st Quarter 4th Quarter
- ----------- -------------- -------------- ---------------
<S> <C> <C> <C>
Sales $410 $365 $430
Operating Profit 17 -- 19
</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
ends March 31 versus our calendar year, (2) our segment earnings include only
our share of Carter Holt Harvey's operating earnings while 100% of sales are
included, (3) our results are in U.S. dollars while Carter Holt Harvey reports
in New Zealand dollars, and (4) Carter Holt Harvey reports under New Zealand
accounting standards while our segment results comply with U.S. generally
accepted accounting principles. The major accounting differences relate to cost
of timber harvested and start-up costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $535 million for the 2000 first-quarter
compared with $289 million for the 1999 first-quarter. Higher earnings and
decreased working capital requirements contributed to the first-quarter 2000
increase. Working capital changes decreased first-quarter 2000 operating cash
flow by $55 million as compared to a decrease of $119 million in operating cash
flow for first-quarter 1999.
15
<PAGE>
Investments in capital projects totaled $214 million and $211 million for the
2000 and 1999 first-quarters, respectively. 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 first-quarters include a $264 million
and $32 million net increase in debt. The 2000 net increase reflects increased
short-term borrowings used to finance the Shorewood acquisition partially offset
by other decreases to long-term debt. Common stock dividend payments were $104
million or $.25 per common share for the 2000 first-quarter and $108 million or
$.26 per share for the 1999 first-quarter. 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 March 31, 2000, cash and temporary investments totaled $1.6 billion compared
to $453 million at December 31, 1999. This increase is due to the approximately
$1.2 billion received by Carter Holt Harvey for the sale of its interest in
COPEC. These proceeds were used for the CSR acquisition which closed April 28,
2000 and to pay down approximately $650 million of short-term debt.
MERGERS AND ACQUISITIONS
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 it had reached an
agreement to merge with Union Camp Corporation (Union Camp), a diversified paper
and forest products company. The transaction was approved by Union Camp and
International Paper shareholders on April 30, 1999. Union Camp shareholders
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 quarter 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
March 31, 2000 reflects a preliminary allocation of the purchase price of
Shorewood Packaging to the fair value of the assets and liabilities acquired.
16
<PAGE>
RESTRUCTURING, SPECIAL AND EXTRAORDINARY ITEMS
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 COPEC. 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.
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:
<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 are or have been paid from the general assets of
International Paper. Benefits for remaining employees have been or will be
primarily paid from plan assets of our qualified pension plan. Through March 31,
2000, 898 employees had been terminated. Related cash payments approximated $65
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. Substantially all
of the positions are expected to be eliminated by May 31, 2000.
17
<PAGE>
The following table is a roll forward of the Union Camp merger-related
termination benefit charges 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)
---------------
Balance, March 31, 2000 (320 employees) $ 24
===============
</TABLE>
Note: Benefit costs are treated as incurred on termination date of the
employee.
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)
---------------
Balance, March 31, 2000 (1,372 employees) $ 82
===============
</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.
18
<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.
International Paper continually evaluates its operations for improvement. When
any such plans are finalized, we may incur costs or charges in future periods
related to the implementation of such plans.
OTHER
The effective income tax rate before extraordinary items for the 2000
first-quarter increased to 31% from 30% in the first quarter of 1999. The
increase was primarily due to changes in the mix of estimated annual
earnings. The effective tax rate before special items was also 31% and 30%
for the first-quarter ended March 31, 2000 and 1999, 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 three month periods
ended March 31, 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 $ 443 $ 139 31% $ 94 $ 28 30%
One-time merger expenses (8) (3) 38%
---------- --------- ------ ----------
After special items $ 435 $ 136 31% $ 94 $ 28 30%
========== ========= ====== ==========
</TABLE>
19
<PAGE>
FINANCIAL INFORMATION BY INDUSTRY SEGMENT
(UNAUDITED)
(IN MILLIONS)
NET SALES BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Printing and Communications Papers $ 1,650 $ 1,450
Industrial and Consumer Packaging 1,805 1,675
Distribution 1,750 1,700
Chemicals and Petroleum 345 350
Forest Products 780 785
Carter Holt Harvey 410 365
Corporate and Intersegment Sales (369) (293)
------------- -------------
NET SALES $ 6,371 $ 6,032
============ =============
OPERATING PROFIT BY INDUSTRY SEGMENT
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2000 1999
------------- -------------
Printing and Communications Papers $ 178 $ 8
Industrial and Consumer Packaging 196 56
Distribution 30 24
Chemicals and Petroleum 33 19
Forest Products 149 174
Carter Holt Harvey (1) 17
------------- -------------
OPERATING PROFIT 603 281
Interest expense, net (131) (143)
Minority interest adjustment 24 6
Corporate items, net (53) (50)
Merger integration costs (8)
------------- -------------
EARNINGS BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY ITEMS $ 435 $ 94
============= =============
</TABLE>
(1) Includes equity earnings (in millions) of $6 in 2000 and $1 in 1999.
Half of these equity earnings amounts are in the Carter Holt Harvey
segment and half are in the minority interest adjustment.
20
<PAGE>
PRODUCTION BY PRODUCT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999(a)
----------- ------------
<S> <C> <C>
Printing Papers (In thousands of tons)
White Papers and Bristols 1,380 1,351
Coated Papers 325 316
Market Pulp (b) 522 532
Newsprint 27 23
Packaging (In thousands of tons)
Containerboard 1,203 1,135
Bleached Packaging Board 532 567
Industrial Papers 241 227
Industrial and Consumer Packaging (c) 1,283 1,311
Specialty Products (In thousands of tons)
Tissue 41 42
Forest Products (In millions)
Panels (sq. ft. 3/8" - basis) (d) 493 487
Lumber (board feet) 715 783
MDF (sq. ft. 3/4" - basis) 60 56
Particleboard (sq. ft. 3/4" - basis) 49 46
</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.
21
<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 $44 million at March 31, 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. The reserve balance is net of $51
million of expected insurance recoveries (apart from the insurance recoveries to
date). Through March 31, 2000, settlement payments of $219 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 March 31, 2000. International Paper and Masonite have the right to
terminate each of the settlements after seven years from the dates of final
approval.
22
<PAGE>
OTHER LITIGATION
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.
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.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(2) Agreement and Plan of Merger by and among
International Paper Company, International
Paper - 37, Inc. and Shorewood Packaging
Corporation dated as of February 16, 2000,
incorporated by reference to the Schedule
TO of International Paper and
International Paper - 37, Inc. dated
February 29, 2000.
(11) Statement of Computation of Per Share
Earnings
(12) Computation of Ratio of Earnings to Fixed
Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
Reports on Form 8-K were filed on
January 11, February 17, March 24,
April 11, and April 26, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL PAPER COMPANY
(REGISTRANT)
Date: May 12, 2000 By /S/ JOHN V. FARACI
------------------
John V. Faraci
Senior Vice President and Chief
Financial Officer
Date: May 12, 2000 By /S/ ANDREW R. LESSIN
--------------------
Andrew R. Lessin
Vice President, Finance and
Chief Accounting Officer
24
<PAGE>
(EXHIBIT 11)
INTERNATIONAL PAPER COMPANY
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
EARNINGS BEFORE EXTRAORDINARY ITEMS $ 244 $ 32
Effect of dilutive securities
Preferred securities of subsidiary trust 4
------- -------
EARNINGS BEFORE EXTRAORDINARY ITEMS - ASSUMING $ 248 $ 32
DILUTION ======= =======
AVERAGE COMMON SHARES OUTSTANDING 413.5 412.1
Effect of dilutive securities
Long-term incentive plan deferred compensation
Stock options 1.2 2.3
Preferred securities of subsidiary trust 8.3
------- -------
AVERAGE COMMON SHARES OUTSTANDING - ASSUMING 423.0 414.4
DILUTION ======= =======
EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY $ 0.59 $ 0.08
ITEMS ======= =======
EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY $ 0.59 $ 0.08
ITEMS - ASSUMING DILUTION ======= =======
</TABLE>
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
<PAGE>
(EXHIBIT 12)
INTERNATIONAL PAPER COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- --------------------
TITLE 1995 1996 1997 1998 1999 1999 2000
- ------------------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
A) Earnings before income taxes,
minority interest, extraordinary
items and accounting changes $ 2,742.0 $ 939.0 $ 143.0 $ 429.0 $ 448.0 $ 94.0 $ 435.0
B) Minority interest expense,
net of taxes (166.0) (180.0) (140.0) (87.0) (163.0) (34.0) (55.0)
C) Fixed charges excluding
capitalized interest 740.3 802.1 826.6 866.7 820.9 212.0 207.1
D) Amortization of previously
capitalized interest 29.6 34.2 37.0 38.8 17.0 5.4 5.5
E) Equity in undistributed
earnings of affiliates (94.5) 6.2 (40.4) 23.7 (41.6) 11.0 0.4
----------- ----------- --------- ----------- ----------- --------- --------
F) EARNINGS BEFORE INCOME
TAXES, MINORITY INTEREST,
EXTRAORDINARY ITEMS, ACCOUNTING
CHANGES AND FIXED CHARGES $ 3,251.4 $ 1,601.5 $ 826.2 $ 1,271.2 $ 1,081.3 $ 288.4 $ 593.0
=========== =========== ========= =========== =========== ========= ========
FIXED CHARGES
G) Interest and amortization of
debt expense $ 664.9 $ 699.5 $ 720.0 $ 716.9 $ 611.5 $ 162.6 $ 155.5
H) Interest factor attributable to
rentals 64.8 79.0 83.0 80.7 76.3 17.5 16.8
I) Preferred dividends of
subsidiary 10.6 23.6 23.6 69.1 133.1 31.9 34.8
J) Capitalized interest 66.9 71.2 71.6 53.4 29.3 2.1 6.6
----------- ----------- --------- ----------- ----------- --------- --------
K) TOTAL FIXED CHARGES $ 807.2 $ 873.3 $ 898.2 $ 920.1 $ 850.2 $ 214.1 $ 213.7
=========== =========== ========= =========== =========== ========= ========
L) RATIO OF EARNINGS TO FIXED
CHARGES 4.03 1.83 1.38 1.27 1.35 2.77
=========== =========== ========= =========== =========== ========= ========
M) DEFICIENCY IN EARNINGS
NECESSARY TO COVER FIXED CHARGES $ (72.0)
=========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,574
<SECURITIES> 0
<RECEIVABLES> 3,520
<ALLOWANCES> 111
<INVENTORY> 3,306
<CURRENT-ASSETS> 8,673
<PP&E> 29,683
<DEPRECIATION> 15,294
<TOTAL-ASSETS> 31,549
<CURRENT-LIABILITIES> 5,475
<BONDS> 7,250
1,805
0
<COMMON> 415
<OTHER-SE> 10,114
<TOTAL-LIABILITY-AND-EQUITY> 31,549
<SALES> 6,371
<TOTAL-REVENUES> 6,371
<CGS> 4,564
<TOTAL-COSTS> 5,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> 566
<INCOME-TAX> 136
<INCOME-CONTINUING> 244
<DISCONTINUED> 0
<EXTRAORDINARY> 134
<CHANGES> 0
<NET-INCOME> 378
<EPS-BASIC> 0.91
<EPS-DILUTED> 0.91
</TABLE>
