EXHIBIT 13
International Paper [Logo]
2000
ANNUAL REPORT
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Financial Highlights International Paper
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Dollar amounts and shares in millions, except per share amounts 2000 1999
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Financial Summary
Net Sales $28,180 $24,573
Operating Profit 2,712 (a) 1,808 (a)
Earnings Before Income Taxes, Minority Interest and Extraordinary Items 723 (b) 448 (d)
Net Earnings 142 (b,c) 183 (d,e)
Total Assets 42,109 30,268
Common Shareholders' Equity 12,034 10,304
Return on Investment Before Extraordinary Items 3.3% (b) 2.6% (d)
Return on Investment Before Special and Extraordinary Items 5.3% 4.0%
Per Share of Common Stock
Earnings Before Extraordinary Items $ 0.82 (b) $ 0.48 (d)
Earnings--Assuming Dilution 0.32 (b,c) 0.44 (d,e)
Cash Dividends 1.00 1.01 (f)
Common Shareholders'Equity 24.85 24.85
Shareholder Profile
Shareholders of Record at December 31 39,486 32,881
Shares Outstanding at December 31 484.2 414.6
Average Shares Outstanding 449.6 413.0
(a) See the operating profit table on page 30 for details of operating profit
by industry segment. Results of equity investees are not included in
operating profit.
(b) Includes a charge before taxes and minority interest of $949 million ($589
million after taxes and minority interest) for asset shutdowns of excess
internal capacity, cost reduction actions, and additions to existing
Masonite legal reserves, a $54 million pre-tax charge ($33 million after
taxes) for merger-related expenses and a $34 million pre-tax credit ($21
million after taxes) for the reversals of reserves no longer required.
(c) Includes an extraordinary gain of $385 million before taxes and minority
interest ($134 million after taxes and minority interest) on the sale of
our investment in Scitex and Carter Holt Harvey's sale of its share of
COPEC, an extraordinary loss of $460 million before taxes ($310 million
after taxes) related to the impairment of our Zanders and Masonite
businesses to be sold, an extraordinary pre-tax gain of $368 million ($183
million after taxes and minority interest) related to the sale of Bush
Boake Allen, an extraordinary loss of $5 million before taxes and minority
interest ($2 million after taxes and minority interest) related to Carter
Holt Harvey's sale of its Plastics division, and an extraordinary pre-tax
charge of $373 million ($231 million after taxes) related to impairments of
our Argentine investments, as well as the Chemical Cellulose pulp business
and Fine Papers businesses to be sold.
(d) Includes a $148 million pre-tax charge ($97 million after taxes) for Union
Camp merger-related termination benefits, a $107 million pre-tax charge
($78 million after taxes) for merger-related expenses, a $298 million
charge before taxes and minority interest ($180 million after taxes and
minority interest) 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 reversals of reserves no longer
required.
(e) Includes an extraordinary loss of $26 million before taxes ($16 million
after taxes) for the extinguishment of high-interest debt that was assumed
in the merger with Union Camp.
(f) The International Paper dividend was $1.00 per share in 1999. However,
dividends on a per share basis were restated to include dividends paid by
Union Camp which merged with International Paper during 1999 in a
transaction accounted for as a pooling-of-interests.
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[PHOTO of John Dillon]
To International Paper Shareowners
I believe this past year at International Paper can best be characterized by our
FOCUS. We focused on our three core businesses--Paper, Packaging and Forest
Products--further defining and strengthening these businesses.
The course for 2000 and beyond was set in mid-1999, when we announced our
long-term strategy to investors following our Union Camp acquisition. We said
then that International Paper is a company on the move, changing and improving
in ways we never have before. We said that we are dedicated to strengthening our
businesses and improving shareowner value. Specifically, we made a commitment in
1999 to make strong businesses stronger, shut down excess capacity and achieve
non-price improvement.
Today, as we look back on the year 2000, it's clear that we did what we
said we would do. First, we narrowed the portfolio of International Paper to
paper, packaging, and forest products, and, in turn, achieved the necessary
focus to win in these core businesses. The Champion International acquisition in
mid-2000 was a key component in providing this focus and strengthening of our
businesses. Second, in October we took aggressive and bold steps to improve our
returns through a rationalization and realignment program, which addresses our
commitment to improve competitiveness. Third, we not only proceeded with a $3
billion divestiture program, we increased the target to $5 billion, including
timberland sales. Through February of this year, we have made major progress
toward our non-price improvement target. In fact, $.66 per share, or 31%, of our
2000 EPS before special and extraordinary items came from results in this area.
Acquisitions
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Successful acquisitions during the past few years have provided the platform for
focusing on our core businesses. As a consequence of acquiring Federal Paper
Board in 1996, we were able to build a world class consumer packaging business.
With the addition of Union Camp in 1999, we gained world class assets and a very
strong position in uncoated papers and industrial packaging. The Champion
International acquisition in mid-2000 significantly strengthened our coated
papers position, while also giving us a strategically important printing papers
business in Brazil, low-cost U.S. uncoated assets, and the Weldwood business in
Canada. Both Union Camp and Champion strengthened
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xpedx--our distribution business. And all three companies brought major
timberlands and important wood products operations.
In terms of results, the Union Camp integration continues to progress very
well, is ahead of our plan, and is considered a real home run. Our merger with
Champion International is also doing very well. This move allowed us to take
major actions to bring our cost structure down and significantly sharpen our
focus on core businesses. There is a lot more to do and we have a plan to get
the results this year. In fact, the Champion merger synergies target has been
increased by nearly 20 percent, from $425 million to $500 million.
Overall, our focus on core businesses is dramatically different from just a
few years ago. In 1997, for example, 78% of our invested capital was directed at
the paper, packaging, and forest products businesses. Today, almost 95% of our
invested capital is directed to these core businesses.
Capacity Rationalization and Realignment
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On another positive front, International Paper's capacity rationalization and
realignment initiatives are right on schedule. As a result of the Union Camp and
Champion acquisitions, we added further uncoated paper capacity to our
manufacturing system in the United States. The contribution of these assets
allowed us to re-evaluate our manufacturing system, which resulted in some
important decisions to rationalize and realign capacity in order to improve
our cost position, enrich the customer/product mix, increase production
efficiencies, and improve our financial performance.
In fourth quarter 2000, we announced that we were taking 1.2 million tons
of capacity out of the International Paper system. Our actions removed 18% of
our U.S. uncoated papers capacity and 7% of our U.S. market pulp capacity. This
was accomplished through an indefinite shutdown of our Mobile, Alabama mill; the
staged closure of our Lock Haven, Pennsylvania facility; and the downsizing of
the Courtland, Alabama mill. In addition, by closing our Camden, Arkansas
facility and realigning our Kraft papers production, we reduced our U.S.
containerboard system capacity by 5%.
To sum up, the 2000 rationalization and realignment activities are a
significant step in improving the competitiveness of the International Paper
system for printing papers and containerboard. It takes excess
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capacity out of our system and allows us to fully concentrate our resources on
very competitive facilities. In short, these actions ensure a more profitable
company.
At International Paper, we believe that we must manage capacity to meet
customer demand without building inventory. And we continued to take downtime to
keep production in line with demand. International Paper effectively balanced
our supply to meet the demands of our customers in 2000, and took about 1.7
million tons of market-related downtime. As we move through 2001, we will
continue to manage our system consistent with the orders that we receive from
our customers.
Divestitures
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As with all other activities in 2000 and this year to date, our divestiture
program allows for increased focus on our core businesses. The businesses that
we sold, and are in the process of selling, are very good businesses--but don't
fit with our focused strategy.
Originally, we set a goal for asset divestitures of $3 billion, excluding
timberlands. In December, after further study, we revised our goal upward to $5
billion in asset divestitures, including timberlands.
Non-price Improvements
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When we established our non-price improvement program in 1999, we set a target
to achieve ROI improvement of 400 basis points, excluding the impact of price,
by year-end 2002. Included in this program are non-price initiatives, such as
our FAST (Focus, Align, Simplify, and Time) change initiative, other
business-specific performance improvement initiatives, and our merger synergies
from Union Camp and Champion.
In 2000, even with increased raw material and energy costs, we were able to
make significant strides toward reaching our target. Indeed, we are about
halfway to our target as we enter the second half of the program, and are in an
excellent position to continue our efforts and achieve our goal.
2000 Financial Performance
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Earnings for the year 2000 were $969 million ($2.16 per share) before special
and extraordinary items, compared with 1999 full year net earnings of $551
million ($1.33 per share) before special and extraordinary items. Sales in 2000
of $28.2 billion were up from $24.6 billion
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in sales for 1999 primarily due to the Champion acquisition. Full year 2000 net
earnings after special and extraordinary items were $142 million ($.32 per
share). Net earnings for 1999 after special and extraordinary items were $183
million ($.44 per share).
Financial Flexibility
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International Paper is committed to regaining financial flexibility, using
proceeds from the divestiture program and free cash flow to pay down debt. In
fact, International Paper has paid down over $1 billion in debt since the
Champion acquisition and will continue to use this discipline in 2001.
Looking Ahead
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As we move forward, I am confident that we are on the right course. The number
one goal at International Paper is to improve our profitability. We remain
dedicated to improving shareowner value at a rate faster than our competition.
I am convinced that the hard decisions we have made, and continue to make,
are resulting in a stronger and more profitable International Paper. They are
the right decisions for our future. The achievements of last year not only
reflect this, but also serve as a catalyst for 2001 as we strive to improve
performance.
I've said this before, but it bears repeating that I believe we have the
most engaged, the most focused--in short, we have the best employees in our
industry. The value of their contributions on a daily basis is terrific. As we
continue our efforts to build a diverse employee community, it is clear we could
not reach our objectives without such a dedicated team of employees.
At International Paper, the key word is focus. As we continue to focus on
our three core businesses and our success drivers--People, Customers and
Operational Excellence--we will continue our march to improve profitability. And
in so doing, we will become the world's best paper and forest products company.
John T. Dillon
John T. Dillon
Chairman and Chief Executive Officer
March 1, 2001
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Table of Contents
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Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
Corporate Overview 6
Description of Industry Segments 7
Industry Segment Results 9
Printing Papers 9
Industrial and Consumer Packaging 10
Distribution 10
Forest Products 11
Chemicals and Petroleum 12
Carter Holt Harvey 12
Liquidity and Capital Resources 13
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Financial Information by Industry Segment 30
and Geographic Area
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Report of Management on Financial Statements 32
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Report of Independent Public Accountants 32
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Consolidated Statement of Earnings 33
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Consolidated Balance Sheet 34
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Consolidated Statement of Cash Flows 35
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Consolidated Statement of Common 36
Shareholders' Equity
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Notes to Consolidated Financial Statements 37
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Six-Year Financial Summary 62
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Interim Financial Results 64
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Management's Discussion and Analysis
Corporate Overview
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Results of Operations
International Paper's 2000 results of operations include Champion
International Corporation (Champion), a company acquired on June 20, 2000 in a
transaction accounted for as a purchase from the acquisition date.
Earnings per share before special and extraordinary items in 2000 were 62%
above 1999 and 157% above 1998. Although markets during the first half of 2000
were stable, the U.S. economy slowed at an accelerating rate during the second
half of the year, which adversely impacted demand for our products. As a
result, through market related down-time, we curtailed production during 2000
by 1.7 million tons throughout our mill system in order to align production
with our customer demand. In addition, we are realigning our production to
increase efficiency and reduce costs. To this end, we have announced the
closures of our Mobile, Alabama, Lock Haven, Pennsylvania, and Camden, Arkansas
paper mills and the downsizing of our Courtland, Alabama mill. These actions
will permanently remove over 1.2 million tons of capacity per year from our
system.
Rapidly rising energy costs increased our manufacturing costs and eroded
profit margins throughout our North American system. Where possible, mills
switched to less costly alternative fuels. However, overall energy costs were
more than $200 million above 1999 levels and continue to be high as we enter
2001.
During 2000, International Paper increasingly focused on its three core
businesses--paper, packaging and forest products. In support of this strategy,
we announced a $5 billion divestiture program to exit those businesses that are
considered to be non-core or do not meet our return on investment criteria. As
of March 1, 2001, we have completed the dispositions of our interests in Bush
Boake Allen, Zanders Feinpapiere AG (Zanders), the Argentine packaging assets,
the oil and gas assets, the Hamilton, Ohio mill, and the former Champion
headquarters building. We have entered into agreements to sell our Masonite
business and certain western forestlands, and we are exploring strategic
alternatives for, including the possible sales of, the Arizona Chemical,
Flexible Packaging, Decorative Products, Fine Papers and Chemical Cellulose
pulp businesses, and our hydroelectric assets. Non-strategic timberlands in
east Texas are also planned for sale and are included in our $5 billion
divestiture target. Approximately $740 million in proceeds were received during
2000 from these divestitures, and we expect to complete most of the remaining
dispositions by the end of 2001.
Our 2000 net sales of $28.2 billion increased 15% and 18% over 1999 and
1998 net sales of $24.6 billion and $24.0 billion, respectively. The increase
was due primarily to the Champion acquisition. Excluding contributions from
Champion, 2000 sales increased about 2% over 1999 sales and about 4% over sales
reported in 1998.
International net sales (including U.S. exports) totaled $7.6 billion, or
27% of total sales in 2000. This was well above sales of $6.9 billion in 1999
and $6.8 billion in 1998. These increases are attributable mainly to
contributions from Brazilian and Canadian operations from the Champion
acquisition. Export sales from the U.S. increased slightly in 2000 to $1.6
billion compared with $1.5 billion in both 1999 and 1998.
Earnings before special and extraordinary items in 2000 improved to $969
million, or $2.16 per share, compared with earnings before special and
extraordinary items of $551 million, or $1.33 per share, in 1999, and $345
million, or $.84 per share, in 1998. Special charges after taxes and minority
interest totaled $601 million, or $1.34 per share, in 2000, $352 million, or
$.85 per share, in 1999, and $98 million, or $.24 per share, in 1998. About 85%
of the 2000 special charges related to facility rationalizations. Extraordinary
items were a loss of $226 million, or $.50 per share, in 2000, and $16 million,
or $.04 per share, in 1999. After special and extraordinary items, net earnings
were $142 million, or $.32 per share, in 2000, $183 million, or $.44 per share,
in 1999, and $247 million, or $.60 per share, in 1998.
Operating profit of $2.7 billion in 2000 was up 50% from the $1.8 billion
in 1999, and almost double the 1998 level of $1.4 billion. Profit contributions
from Champion accounted for approximately $325 million of the increases
compared with both 1999 and 1998. Additionally, $400 million of operating
improvement was driven mainly by enhanced sales mix and lower costs resulting
from our profit improvement initiatives and merger benefit programs. These
improvements were partially offset by sharply rising domestic energy costs,
which reduced profits by about $200 million in 2000 compared with 1999.
Improved prices increased operating profit by almost $500 million in 2000
compared with 1999. This increase was offset, in part, by a $200 million
reduction due to market related downtime. Excluding special and extraordinary
items, return on investment was 5.3% in 2000, 33% above the 4.0% in 1999 and
89% above the 2.8% in 1998.
The integration of International Paper and Champion is proceeding well. We
realized approximately $70 million in merger benefits in the fourth quarter of
2000 and are on schedule to meet our annualized target of $500 million by the
end of 2001. We realized our Union Camp integration goal of $425 million in
annualized merger benefits by year-end 2000.
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Management's Discussion and Analysis
International Paper is committed to improving return on investment by 400
basis points through non-price improvements by the end of 2002 as compared to
the first quarter of 1999. In addition to our announced asset sales, we have
budgeted 2001 capital spending at $1.2 billion, down from $1.4 billion in 2000.
Description of Industry Segments
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Printing Papers
International Paper is the world's leading producer of printing and
writing papers. These products include uncoated and coated papers. Bristols and
market pulp are other major products included in this segment.
Uncoated Papers: This business includes office papers for use in desktop
printing and copiers, offset paper used in commercial printing, and a variety
of papers that are converted by our customers into such products as envelopes,
forms and file folders. Our brands include:
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U.S. Office Papers Hammermill
Great White
Commercial Printing Williamsburg
Bristols Carolina
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Europe Office Papers Reylux
Polspeed
Ballet
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The mills producing uncoated papers are located in the U.S., Scotland,
France, Poland, and Russia. These mills have uncoated paper production capacity
of 5.7 million tons annually.
Coated Papers: Coated papers are used in a variety of printing and
publication end uses. Products include coated free sheet, coated groundwood and
supercalendered ground-wood papers. These products are used in catalogs,
magazines, inserts and commercial printing.
International Paper's position in this business was significantly expanded
with the acquisition of Champion. Production capacity in the U.S. amounts to
2.2 million tons annually.
In January 2001, International Paper sold its interest in Zanders, a
German producer of high-quality coated papers. The results of Zanders are
included in this segment for 2000.
Market Pulp: Market pulp is an intermediate product used by non-integrated
paper mills and synthetic fiber makers, and in the production of sanitary
products such as diapers. International Paper is a major supplier of market
pulp. Products include softwood pulp, both northern and southern, birch,
northern and southern hardwood paper pulp as well as fluff pulp. These products
are produced in the U.S., Canada, France, Poland and Russia, and are sold
around the world. These facilities have annual pulp capacity of about 2.2
million tons.
Brazil: Through the Champion acquisition, we have added operations in
Brazil, which function through International Paper do Brasil, Ltda. These
operations have an annual production capacity of 670,000 tons of coated and
uncoated papers. We own or manage 1.5 million acres of forestlands.
Industrial and Consumer Packaging
Industrial Packaging: With a capacity of about 5 million tons annually,
International Paper is the second largest manufacturer of containerboard in the
U.S. Nearly one-third of our production is specialty grades, such as PineLiner,
SunLiner, Polarboard, Coastliner, BriteTop and Spra White. About 60% of our
production is converted into corrugated boxes and other packaging by our 53
U.S. container plants. In Europe, our operations include one recycled fiber
mill in France and 23 container plants in France, Ireland, Italy, Spain and the
United Kingdom. Our global presence also includes operations in Puerto Rico,
Chile, Turkey, and China. Our container plants are supported by regional design
centers, which offer total packaging solutions and supply chain initiatives. We
also have the capacity to produce over 600,000 tons of kraft paper each year
for use in multiwall and retail bags.
Consumer Packaging: With annual production capacity of 2 million tons,
International Paper is the world's largest producer of bleached packaging
board. Our Everest and Starcote brands are used in packaging applications for
juice, milk, food, cosmetics, pharmaceuticals, computer software and tobacco
products. Approximately 40% of our bleached board production is converted into
packaging products in our own plants. Our Beverage Packaging business has 17
plants worldwide offering complete packaging systems, from paper to filling
machines, using fresh and aseptic technologies including Tru-Taste brand
barrier board technology for premium long-life juices. Shorewood Packaging
Corporation (Shorewood), acquired in March 2000, operates 20 plants worldwide,
producing packaging with high-impact graphics for a variety of consumer
markets, including tobacco, cosmetics and home entertainment. The Foodservice
business offers cups, lids, cartons, bags, containers, beverage carriers, trays
and plates from seven domestic plants and through six international joint
ventures.
Industrial Papers: We produce 370,000 tons of specialty industrial papers
annually used in applications such as pressure-sensitive labels, food and
industrial packaging, industrial sealants and tapes and consumer hygiene
products.
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Management's Discussion and Analysis
Distribution
Through xpedx, our North American merchant distribution business, we
supply industry wholesalers and end users with a vast array of printing,
packaging, graphic arts, maintenance and industrial products. xpedx operates
over 116 warehouses, 138 sales offices and 139 retail stores in the U.S. and
Mexico. Overseas, Papeteries de France, Scaldia in the Netherlands, and Impap
in Poland serve European accounts. About 22% of our worldwide distribution
sales are products manufactured by International Paper's own facilities.
Forest Products
Forest Resources: International Paper owns or manages about 12 million
acres of forestlands in the U.S., mostly in the South. About 26% of our wood
requirements in 2000 were supplied by these forestlands.
Wood Products: International Paper owns and operates 38 U.S. plants
producing southern pine lumber, oriented strand board (OSB), plywood and
engineered wood products. The majority of these plants are located in the
southern U.S. near our forestlands. We can produce up to 2.8 billion board feet
of lumber, 1.8 billion square feet of plywood and 950 million square feet of
OSB annually.
Canadian Wood Products: Weldwood of Canada Limited produces about 1.1
billion board feet of lumber and 410 million square feet of plywood annually.
We have, through licenses and forest management agreements, harvesting rights
on government-owned timberlands in Canada.
Masonite: From eight locations in North America, Europe and Korea,
Masonite manufactures and markets CraftMaster door facings and other molded
products for residential and commercial construction, as well as a broad line
of hardboard exterior siding, industrial hardboard and a wide range of
softboard products for the home and office. Our worldwide capacity for door
facings is approximately 1.2 billion square feet annually.
Decorative Products: We produce high- and low-pressure laminates,
particleboard and graphic arts products from 13 facilities. Our customers
include residential and commercial construction, furniture, store fixtures and
graphic arts businesses as well as customers with specialty niche applications.
Chemicals and Petroleum
Chemicals: Arizona Chemical is a leading processor of crude tall oil and
crude sulfate turpentine, natural by-products of the papermaking process.
Products also include specialty resins used in adhesives and inks made at 15
plants in the U.S. and Europe. In addition, we produce chemical specialty pulp,
primarily utilized in cigarette filters and fabrics.
Bush Boake Allen: International Paper sold its 68.2% interest in Bush
Boake Allen on November 8, 2000. During our ownership, Bush Boake Allen, which
conducted operations on six continents and had locations in 39 countries,
supplied flavors and fragrances for use in foods, beverages, cosmetics and
toiletries.
Petroleum: In January 2001, International Paper conveyed its oil and gas
properties and royalty interests to a third party. We have retained management
of other mineral rights on company-owned and leased lands. During 2000, our
petroleum business managed mineral rights and explored and developed oil and
gas reserves, generally by establishing partnerships with other independent oil
and gas producing companies.
Carter Holt Harvey
Carter Holt Harvey is approximately 50.4% owned by International Paper. It
is one of the largest forest products companies in the Southern Hemisphere,
with operations mainly in New Zealand and Australia. The Australasian region
accounts for approximately 84% of its sales. Asian countries, particularly
Japan, Korea and China, are important markets for its logs, pulp and
linerboard. Carter Holt Harvey's forest operations include ownership of 820,000
productive acres of predominantly sustainably managed radiata pine plantations
located in New Zealand, currently yielding 7.4 million tons of logs annually.
This yield is expected to increase to over 7.9 million tons by 2002. About 50%
of the harvest is processed through Carter Holt Harvey's wood products and pulp
and paper businesses. Their access to one of the largest low-cost softwood
fiber bases in the Southern Hemisphere is a key strength.
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Management's Discussion and Analysis
Carter Holt Harvey is the largest Australasian producer of lumber,
plywood, laminated veneer lumber and panel products. It has over 600 million
board feet of lumber capacity. The panels business is comprised of two medium
density fiberboard mills and six particleboard facilities with approximately
605 million square feet of annual capacity. Carter Holt Harvey is New Zealand's
largest manufacturer and marketer of pulp and paper products, with overall
annual capacity of 825,000 tons at three mills. Its major products are
linerboard and pulp. Carter Holt Harvey produces 140,000 tons of tissue
products from two mills and eight converting facilities and is the largest
manufacturer of tissue in Australia. Sorbent is the most recognized local
tissue brand in this market. Carter Holt Harvey also produces corrugated boxes,
cartons and paper bags with a focus on the horticulture, primary produce and
foodservice markets in New Zealand and Australia. It is a leading producer of
cups in Australia through its Continental Cup joint venture with International
Paper. Its distribution business comprises Carters, a building supplies chain
in New Zealand, and paper merchants B.J. Ball Papers in New Zealand and Raleigh
Paper in Australia. In January 2000, Carter Holt Harvey sold its equity
interest in Compania de Petroleos de Chile (COPEC).
Industry Segment Results
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Printing Papers
Printing Papers posted sales of $8.0 billion compared with $5.8 billion in
1999 and 1998. About $2.0 billion of the increase in sales was a result of the
Champion acquisition. Operating profit rose to $959 million in 2000 from $254
million in 1999 and $178 million in 1998, due mainly to contributions from
Champion in the second half of 2000. Excluding Champion, operating profit
increased 170% over 1999 due to significant price improvements (approximately
60% of the increase), favorable mix (approximately 20% of the increase) and
cost reduction actions (approximately 20% of the increase).
Printing Papers
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In millions 2000 1999 1998
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Sales $7,960 $5,840 $5,815
Operating Profit $ 959 $ 254 $ 178
Uncoated Papers sales were $4.9 billion in 2000, up from $4.1 billion in
1999 and $4.0 billion in 1998. The increase in sales was due both to a 13% rise
in domestic shipments, primarily as a result of the Champion acquisition
mid-year, and an increase in pricing year-over-year. Paper prices averaged 8%
higher than in 1999 and were strongest in the first half of 2000. As demand
softened mid-year, we significantly curtailed production at our mills to
balance production with orders and control our inventories. Operating profit
was up 156% over 1999 and nearly three times the 1998 level. Our profit
improvement and cost reduction initiatives have been effective and have
positively impacted earnings. However, the continued strengthening of the U.S.
dollar in 2000 depressed the translated value of our non-U.S. sales and
increased pulp costs. Additionally, raw material and energy price increases in
2000 continue to negatively impact earnings. Our continued expansion in Central
and Eastern Europe, coupled with low-cost production, resulted in another
strong performance from our Kwidzyn facility in Poland and a successful year
for Svetogorsk, our Russian operation.
Coated Papers sales were $1.9 billion, $575 million of which resulted from
the Champion acquisition in the second half of the year, compared with $1.2
billion in 1999 and $1.3 billion in 1998. Operating profit was up about 80%
compared with 1999 and 1998. Excluding Champion, results of operations rose
about 16% in 2000 from both the 1999 and 1998 level. Average prices in 2000
were up about 13% in the U.S., but down slightly in Europe compared with 1999.
In addition to price improvement, enhanced mix also contributed to the
increase. The increase was offset somewhat by higher pulp and raw material
costs, driven mainly by the cost of energy.
Market Pulp sales from our U.S., European and Canadian facilities were
$925 million in 2000 compared with $535 million and $480 million in 1999 and
1998, respectively. While Champion sales of $270 million were a factor, a 32%
market pulp price improvement over the 1999 level also contributed to the
increase. After incurring operating losses in 1999 and 1998, an operating
profit was realized in 2000.
Brazil is included since the date of the Champion acquisition, June 20,
2000. The Brazilian business reported sales of $270 million.
Looking ahead to 2001, we expect profits in U.S. Printing Papers to
improve as we continue to drive our profit improvement initiatives and balance
our production to our orders. We expect uncoated markets to experience some
pressure on pricing while maintaining stable volumes. European sales volumes
are also expected to remain solid. With the sale of Zanders, our strategy will
be to focus on value-added uncoated grades. With this focus and ongoing cost
improvements, our outlook is good.
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Management's Discussion and Analysis
Industrial and Consumer Packaging
Industrial and Consumer Packaging sales totaled $7.6 billion in 2000, 9%
better than the two previous years'sales of $7.0 billion. Operating profit of
$773 million in 2000 improved 38% from the $562 million of 1999, mainly due to
additional benefits from synergies realized from the Union Camp merger
(approximately 40% of the improvement) and manufacturing and commercial
initiatives implemented across all of the businesses (approximately 60% of the
improvement). Improved pricing during the first half of the year was offset by
softer second half demand that resulted in significant mill production
slowdowns to match our supply with demand. Higher fourth quarter energy costs
also adversely affected results. Sales were $7.0 billion in 1998 and operating
profit was $334 million.
Industrial and Consumer Packaging
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Sales $7,625 $7,050 $7,010
Operating Profit $ 773 $ 562 $ 334
Industrial Packaging revenues were $4.0 billion in 2000, up from $3.8
billion the previous year and $3.7 billion in 1998. Profits in 2000 improved
67% over 1999, after substantial improvement from 1998. While improved pricing
benefited operating results, internal initiatives (approximately 60% of the
improvement) coupled with further savings from the Union Camp merger and the
2000 acquisition of Champion (approximately 40% of the improvement) were the
major reasons for the year-to-year profit gains. Demand remained healthy
through the first half of 2000, but weakened progressively over the balance of
the year. Domestic box shipments were about the same as 1999, but were slightly
better than experienced across the industry despite the closure of four
unprofitable facilities during the year. Second half mill production cutbacks
were necessary to counter the market softness. Published domestic linerboard
prices, after increasing in February, remained steady through the remainder of
the year despite softer demand. Markets for our European converting operations
improved during 2000, with volumes slightly better than 1999. The strong U.S.
dollar, however, adversely impacted results reported by our non-U.S.
operations, and detracted from our competitiveness in containerboard export
markets. The inclusion of Champion's Roanoke Rapids, North Carolina,
manufacturing facility in the second half of 2000 also contributed to the
year-over-year earnings improvement.
During 2000, the Industrial Packaging business took more than one million
tons of market related downtime in container-board, representing more than 20%
of our system capacity. Most of the downtime was taken during the third and
fourth quarters as demand weakened significantly. Going forward, we expect
continued softness in demand for the domestic business beyond the seasonally
weak January/February time frame. Although the strong dollar has now retreated
somewhat, it will take considerable time to regain our former position in
export markets. Mill production will be managed as needed to keep our
inventories in line with customer demand.
Consumer Packaging sales were $3.6 billion, up from $3.2 billion in 1999
and $3.3 billion in 1998. The revenue increase was mainly due to the
acquisition of Shorewood in March 2000. Consumer Packaging's 2000 operating
profit was comparable with both 1999 and 1998. Our internal process improvement
program, which began in the mill system during 1999 and expanded into the
converting businesses during 2000, has proven to be a major success and
continues to add to earnings. However, weaker market conditions for most of the
Consumer Packaging businesses and higher input costs offset most of the
progress in 2000. Overall, bleached board prices were 5% higher than 1999.
However, softening demand during the second half of the year resulted in
production curtailments in the fourth quarter to balance internal supply with
customer demand. A restructuring of the converting business in 2000, along with
the addition of Shorewood, allowed us to move more quickly away from commodity
grades. We closed or offered for sale certain facilities producing retail and
beverage packaging, and are exploring strategic alternatives for our Flexible
Packaging business, including its possible sale.
Looking ahead, markets are expected to remain under pressure in the short
term. Success in 2001 will come from a focused execution of marketing and
manufacturing initiatives, as well as from realignment in our converting
businesses.
Distribution
North American and European distribution sales totaled $7.3 billion in
2000 compared with $6.9 billion in 1999 and $6.3 billion in 1998. Operating
profit in 2000 increased 14% from 1999 and 40% from 1998. Sales margins
increased from 1.5% in 1999 to 1.7% in 2000 due largely to operating
efficiencies. Market conditions were highly competitive throughout the year.
Distribution
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Sales $7,255 $6,850 $6,280
Operating Profit $ 120 $ 105 $ 86
10
<Page>
Management's Discussion and Analysis
xpedx, our North American distribution operation, posted sales of $6.9 billion,
up 6% from 1999, and 17% from 1998. The increase over 1999 was driven primarily
by the acquisition of Nationwide, Champion's distribution operation. Excluding
Nationwide, xpedx had sales of $6.5 billion in 2000, up 3% from 1999,
reflecting slightly higher product prices and volumes. In 1999, xpedx and
Alling & Cory, the distribution company acquired with Union Camp, were
combined. Our integration strategy was to retain market segments that met our
strategic and financial objectives. This strategy, coupled with a highly
competitive pricing environment in 2000, and an economic slowdown in the fourth
quarter resulted in a reduction in sales. However, operating profits rose as a
result of cost reductions, which helped offset weaker market conditions in the
second half of 2000.
In 2000, xpedx and Nationwide employed the same successful integration
strategies used in the earlier Alling & Cory and Zellerbach acquisitions. By
the end of 2000, integrations were complete in 21 of 28 metropolitan areas,
eliminating duplicate facilities and causing a reduction of over 350 employees.
Integrations at the remaining seven sites are targeted for completion in early
2001.
Our European distribution operations--Papeteries de France, Scaldia in the
Netherlands and Impap in Poland--posted sales of $370 million, increasing 6%
from 1999 and 9% from 1998. Operating profit increased 44% over 1999 and 81%
over 1998.
Looking ahead, we expect pricing pressure and a continuing economic
slowdown to negatively impact our business.
Forest Products
Forest Products sales were $3.5 billion, up from $3.2 billion in 1999 and
$2.9 billion in 1998. Operating profit in 2000 of $602 million was down from
$724 million in 1999 and $622 million in 1998. This decline was attributable to
lower average building materials prices (approximately 95% of the decline) and
sales volumes (approximately 5% of the decline).
Forest Products
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Sales $3,465 $3,205 $2,930
Operating Profit $ 602 $ 724 $ 622
Forest Resources sales in 2000 were $848 million compared with $653
million in 1999 and $553 million in 1998. Operating profit was 23% higher than
1999 and 14% higher than 1998 primarily due to the inclusion of Champion
results in the second half of 2000. While harvest volumes in 2000 were higher
than 1999 and 1998, average prices declined from 1999, which were below the
record levels seen in 1998. Average pine sawtimber and pulpwood prices in 2000
were lower than 1999 average prices by about 5% and 11%, respectively. Stumpage
prices entering 2001 are well below comparable prices at the beginning of 1999.
Furthermore, customer wood inventory levels at pulp and paper mills and wood
products plants are generally at or near targeted levels. As a result, we do
not expect any significant price improvement in early 2001, and we anticipate
full-year prices will average less than 2000, and well below 1999. Harvest
volumes in 2001 are also projected to be lower than the record volumes in 2000.
Wood Products sales in 2000 of $1.3 billion were off slightly from $1.4
billion in 1999, but higher than 1998 sales of $1.2 billion. This business
reported a loss for the current year following a strong performance in 1999.
The loss was due largely to significant pricing pressure and weak demand
resulting from lower housing starts and increasing interest rates. Prices in
2000, compared with 1999, were off 21% for lumber, and about 26% in panels. We
expect similar market conditions early in 2001 and will continue to manage
capacity to keep supply in line with customer demand.
Canadian Wood Products, a former Champion business operated through
Weldwood of Canada, reported sales of $190 million for the second half of 2000.
By year-end, lumber prices had dropped significantly versus 1999. High
inventories and low prices are expected to continue to negatively impact this
business in 2001.
Masonite sales were $465 million in 2000, 9% below 1999 sales of $512
million and 7% below 1998 sales of $499 million. The sales decline was
principally the result of a lower demand for siding and hardboard products as
well as increased global competition in the molded door facings market. Prices
for molded door facings continued to decline in 2000. Shipments in all business
lines declined in the second half of the year as market conditions slowed.
Operating profits for the year declined due to lower sales volumes, lower
prices and higher input costs. Masonite is included in our program to divest
non-strategic assets. In September 2000, we reached an agreement to sell
Masonite to a third party.
Decorative Products sales were $619 million, down slightly from 1999 sales
of $624 million and 6% from 1998 sales of $658 million. The decline in sales
from 1998 reflects the closure and sale of several facilities in late 1998 and
early 1999. Although sales were relatively flat in 2000, operating profits
declined due to higher raw material, energy and manufacturing costs. Demand in
the second half of the year was weak, particularly in particleboard, resulting
in reduced operating schedules at several locations. We are exploring strategic
alternatives for this business, including its possible sale.
11
<Page>
Management's Discussion and Analysis
Chemicals and Petroleum
Chemicals and Petroleum sales were $1.4 billion in 2000, down slightly
from $1.5 billion in 1999 and 1998. Earnings were $161 million in 2000, up
about 30% from the $124 million in 1999 and 18% from $136 million in 1998.
Petroleum operations drove the improvements, which were offset, in part, by
declines in the other businesses.
Chemicals and Petroleum
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Sales $1,395 $1,455 $1,465
Operating Profit $ 161 $ 124 $ 136
Chemicals sales were $845 million in 2000, compared with $885 million and
$905 million in 1999 and 1998, respectively. Operating profit declined 23% from
1999 and 39% from 1998. The decline was primarily due to increased costs in the
Chemical Cellulose pulp business. Offsetting this decline somewhat was an
improved sales mix of higher valued products and a reduction of manufacturing
costs from facility rationalizations in the commodity chemical and specialty
adhesive resins businesses. These positive business strategies reduced the
unfavorable impact of higher energy costs, higher raw material costs, and
unfavorable foreign exchange rates. We are exploring strategic alternatives for
our commodity chemical and specialty adhesive resins businesses and our
Chemical Cellulose pulp business, including their possible sales.
Bush Boake Allen results are included up to November 8, 2000, the date we
sold our interest in the company. Sales included for 2000 were $425 million
compared with full year 1999 and 1998 sales of $500 million and $485 million,
respectively. The 2000 partial year operating profit was about 12% higher than
the full year 1999 operating profit, but about 15% lower than in 1998.
Petroleum sales of $125 million were well ahead of the $70 million in 1999
and $75 million in 1998. Operating profit was almost 150% higher than 1999 and
nearly four times 1998 profits. Higher oil and gas prices had a positive impact
on this business. Year-over-year average prices for oil and gas rose about 70%.
Our exploration program, generally operated through joint ventures, was focused
on West Texas, the Gulf Coast and the Gulf of Mexico and generated additional
reserves that were slightly higher than production in 2000. On January 31,
2001, the oil and gas assets were conveyed to a third party.
Carter Holt Harvey
International Paper's results for this segment differ from those reported
by Carter Holt Harvey in New Zealand in four major respects:
1. Carter Holt Harvey's reporting period is a fiscal year ending March 31. Our
segment results are for the calendar year.
2. Our segment earnings include only our share of Carter Holt Harvey's
operating earnings. Segment sales, however, represent 100% of Carter Holt
Harvey's sales.
3. Carter Holt Harvey reports in New Zealand dollars but our segment results
are reported in U.S. dollars. The weighted average currency exchange rate
used to translate New Zealand dollars to U.S. dollars was 0.46 in 2000,
0.52 in 1999 and 0.54 in 1998.
4. Carter Holt Harvey reports under New Zealand accounting standards, but our
segment results comply with U.S. generally accepted accounting principles.
The major differences relate to cost of timber harvested (COTH), land
sales, equity investment in COPEC and start-up costs. These differences
reduced segment earnings by about $20 million in 2000, $50 million in 1999
and $40 million in 1998.
Carter Holt Harvey
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Sales $1,675 $1,605 $1,505
Operating Profit $ 71 $ 39 $ 20
Carter Holt Harvey's segment sales were $1.7 billion in 2000 compared with
$1.6 billion in 1999 and $1.5 billion in 1998. Operating profit of $71 million
was up over 80% from the $39 million in 1999 and more than triple the $20
million reported in 1998. The increase was mainly due to improved demand in
Asia and Australia (approximately 10% of the increase), improved operational
performance at the Kinleith pulp and paper mill (approximately 30% of the
increase), increased harvest volumes (approximately 10% of the increase) and
added contribution from an Australian panels business acquired in May 2000
(approximately 50% of the increase).
12
<Page>
Management's Discussion and Analysis
Forests sales were up 27% due to increased harvest volumes and some price
improvement in both domestic and export markets. Wood Products net sales
improved by 37%, due to the acquisition of an Australian panels business during
the year. The slowdown in residential construction led to lower timber sales
volumes while log costs were higher than 1999. Net sales for the pulp, paper
and tissue business were up 20%, and operating profit was significantly higher
than a year ago. The enhanced performance was driven by rising prices for pulp
and linerboard, while the Kinleith mill operations improved due to the
completion of a major mill modernization. A number of production records were
set at the Kinleith mill during the year including total annual output. The
24,000-ton Mataura fine paper mill was shut down during the year for an
indefinite period. The tissue business was adversely impacted by higher pulp
prices, while markets remained very competitive. Although packaging markets in
New Zealand and Australia also remained highly competitive, some price
improvement helped to offset higher linerboard costs. The packaging operations
reported a profit for the year. The plastics packaging business was sold during
the fourth quarter.
The outlook is mixed with pricing for export logs, pulp and linerboard
dependent upon the overall level of economic activity in Asia. Construction
markets in Australia and New Zealand, which slowed during 2000, appear to have
leveled but we are not expecting early improvement.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Cash Provided by Operations
Cash provided by operations totaled $2.4 billion for 2000, compared with
$1.7 billion in 1999 and $2.1 billion in 1998. The largest factor in the
increase in operating cash flow in 2000 was higher earnings before special and
extraordinary items. Excluding special and extraordinary items, after taxes and
minority interest, net earnings for 2000 increased $418 million from 1999. The
largest factors in the decrease in operating cash flow in 1999 were payments
related to the Union Camp merger and restructuring and legal reserves.
Excluding special and extraordinary items, after taxes and minority interest,
net earnings for 1999 increased $206 million compared with 1998. An increase in
working capital reduced 2000 operating cash flow by $146 million. Working
capital changes decreased 1999 operating cash flow by $32 million and increased
1998 operating cash flow by $74 million. Depreciation and amortization expense
was $1.9 billion in 2000 and $1.7 billion in 1999 and 1998.
Investment Activities
Capital spending was $1.4 billion in 2000, or 71%, of depreciation and
amortization as compared to $1.1 billion, or 68%, of depreciation and
amortization in 1999, and $1.3 billion, or 80%, of depreciation and
amortization in 1998. The increase in spending in 2000 was the result of
capital projects for Champion and Shorewood. As part of our program to improve
return on investment, we plan to continue to hold capital spending well below
depreciation and amortization. We plan to spend $1.2 billion in capital in
2001. The following table presents capital spending by each of our business
segments for the years ended December 31, 2000, 1999 and 1998.
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Printing Papers $ 447 $ 382 $ 302
Industrial and Consumer Packaging 333 287 391
Distribution 24 16 19
Forest Products 262 189 222
Chemicals and Petroleum 90 104 170
Carter Holt Harvey 100 99 166
------ ------ ------
Subtotal 1,256 1,077 1,270
Corporate and other 96 62 52
------ ------ ------
Total $1,352 $1,139 $1,322
====== ====== ======
On June 20, 2000, International Paper completed the previously announced
acquisition of Champion, a leading manufacturer of paper for business
communications, commercial printing and publications with significant market
pulp, plywood and lumber manufacturing operations. Champion shareholders
received $50 in cash and $25 worth of International Paper common stock for each
Champion share. The acquisition was completed for approximately $5 billion in
cash and 68.7 million shares of International Paper common stock with a market
value of $2.4 billion. Approximately $2.8 billion of Champion debt was assumed.
On March 31, 2000, we acquired Shorewood, a leader in the manufacture of
premium retail packaging, for approximately $640 million in cash and the
assumption of $280 million of debt.
On April 28, 2000, Carter Holt Harvey purchased CSR Limited's (CSR) medium
density fiberboard and particleboard businesses and its Oberon sawmill for
approximately $200 million in cash.
13
<Page>
Management's Discussion and Analysis
The Champion, Shorewood and CSR acquisitions were accounted for using the
purchase method. Their results of operations are included in International
Paper's consolidated statement of earnings from their respective dates of
acquisition. The accompanying consolidated balance sheet as of December 31,
2000, reflects preliminary purchase price allocations for Champion, Shorewood
and CSR to the fair value of the assets and liabilities acquired.
In connection with the Champion acquisition, we announced a divestment
program that we now estimate will generate gross proceeds of approximately $5
billion by the end of 2001. As of March 1, 2001, about $1.2 billion of proceeds
have been realized under the program, primarily from the dispositions of Bush
Boake Allen, the oil and gas interests, Zanders and the former Champion
headquarters building. It is possible that additional charges will be required
in 2001 as specific businesses are identified for sale. See Note 7--Businesses
Held for Sale for information related to the planned sales under this program.
Also, at the time of the Champion acquisition, Moody's lowered our
long-term debt rating to Baa1. At December 31, 2000, outstanding debt included
approximately $2.1 billion of borrowings with interest rates that fluctuate
based on market conditions and our credit rating.
The merger with Union Camp 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.
Also 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.
During 1998, International Paper acquired the Zellerbach distribution
business from the Mead Corporation for $261 million in cash, Weston Paper and
Manufacturing Company through the exchange of 4.7 million International Paper
common shares valued at $232 million, and Svetogorsk AO, a Russia-based pulp
and paper business. Carter Holt Harvey and International Paper jointly acquired
Marinetti S.A.'s paper cup division based in Chile, and Australia-based
Continental Cup. Carter Holt Harvey separately acquired Riverwood
International, an Australia-based folding carton business. We also entered into
a joint venture with Olmuksa in Turkey to manufacture containerboard and
corrugated boxes. Finally, a wholly owned subsidiary of International Paper
purchased all of the publicly-traded Class A depository units of IP
Timberlands, Ltd. for $100 million in cash.
All of the above acquisitions 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 acquisitions
accounted for under the purchase method have been included in the consolidated
statement of earnings from the dates of acquisition.
In November 2000, International Paper sold its interest in Bush Boake
Allen for $640 million, resulting in an extraordinary gain of $183 million
after taxes and minority interest. This transaction was completed as part of
our asset sale program. Bush Boake Allen, which had been included in the
Chemicals and Petroleum segment, contributed sales of $425 million, $500
million and $485 million and operating earnings of $31 million, $28 million and
$37 million for each of the three years ended December 31, 2000, 1999 and 1998,
respectively.
In January 2000, International Paper sold its equity interest in Scitex
for $79 million, and Carter Holt Harvey sold its equity interest in Compania de
Petroleos de Chile (COPEC) for just over $1.2 billion. These sales resulted in
a combined extraordinary gain of $134 million after taxes and minority
interest. The gains on these sales are recorded as extraordinary items pursuant
to the pooling-of-interests rules.
Financing Activities
Financing activities during 2000 included $6.3 billion of debt issuance.
This increase included $4.3 billion in long-term debt and $2 billion of
short-term debt instruments (largely commercial paper) issued mainly to finance
the Champion and Shorewood acquisitions. In addition, we assumed approximately
$3 billion of debt associated with acquisitions, and subsequently reduced the
acquired debt balances by $450 million. We repaid $600 million of maturing
long-term debt and $1.0 billion in short-term debt from divestiture proceeds
and operating cash flows, as well as $700 million of Carter Holt Harvey debt
from proceeds received on the sale of their interest in COPEC.
Financing activities during 1999 included an early extinguishment of $275
million of high interest debt that was assumed in the acquisition of Union
Camp, at an after tax cost of $16 million, which is reflected as an
extraordinary item in the 1999 statement of earnings. Other debt, primarily
short-term, was reduced by $540 million.
Financing activities during 1998 included $1.9 billion in net reductions,
primarily of short-term debt, and the issuance of $1.5 billion of preferred
securities of subsidiaries.
Dividend payments were $447 million, $418 million and $431 million in
2000, 1999 and 1998, respectively. On a per share basis, dividend payments were
$1.00 in 2000, $1.01 in
14
<Page>
Management's Discussion and Analysis
1999, and $1.05 in 1998. The International Paper dividend remained at $1.00 per
share during the three-year period. However, dividend payments on a per share
basis for 1999 and 1998 have been restated to include dividends paid by Union
Camp.
At December 31, 2000, cash and temporary investments totaled $1.2 billion
compared to $453 million at December 31, 1999. This increase was due primarily
to $500 million remaining from Carter Holt Harvey's sale of COPEC. The balance
of the increase was related to the operations in Brazil and Canada that were
acquired through the Champion acquisition.
Capital Resources Outlook for 2001
Our financial condition continues to be strong. We anticipate that cash flow
from operations, supplemented by proceeds from sales of our divested businesses
and certain other assets and short- or long-term borrowings as necessary, will
be adequate to fund our capital expenditures, to service and reduce existing
debt, and to meet working capital and dividend requirements during 2001.
Other Financial Statement Items
Net interest expense increased to $816 million in 2000 compared with $541
million in 1999 and $614 million in 1998. The increase reflects the net increase
in total debt outstanding, after adjusting for the effects of currency
translation, from December 1999 to December 2000. Proceeds received from the
sale of assets in 1998, 1999 and 2000, as well as proceeds from the issuance of
preferred securities, were used to reduce debt and for other general corporate
purposes.
Minority interest increased to $238 million of expense in 2000, compared with
$163 million in 1999 and $87 million in 1998. The increase in 2000 was mainly
due to the minority shareholders'portion of the gain on the sale of Carter Holt
Harvey's investment in COPEC in January 2000. The increase in minority interest
expense from the year ended December 31, 1998, to the year ended December 31,
1999, was primarily due to an increase in earnings at Carter Holt Harvey in
1999, and the fact that preferred securities of subsidiaries issued during 1998
were outstanding for the full year in 1999.
Net periodic pension results for the U.S. defined benefit plans were income of
$101 million, $49 million and $77 million in 2000, 1999 and 1998, respectively.
The variation between pension income in 2000 and 1999 was primarily due to the
acquisition of Champion. The variation between pension income in 1999 and 1998
was primarily due to the expiration of International Paper's transition asset
amortization that reduced 1999 pension income by $26 million as compared to
1998.
On June 1, 1999, International Paper enhanced pension benefits for its major
union groups. As a result, the pension plan was revalued. The revaluation
assumed a discount rate of 7.25% and a rate of compensation increase of 4.5%.
These actions had the net effect of reducing the pension benefit obligation by
$179 million.
Special Items Including Restructuring and Business Improvement Actions
2000: Special items reduced 2000 net earnings by $601 million, 1999 net earnings
by $352 million and 1998 net earnings by $98 million. The following table and
discussion presents the impact of special items for 2000:
- --------------------------------------------------------------------------------
In millions 2000
- --------------------------------------------------------------------------------
Earnings Earnings
(Loss) (Loss)
Before Income After Income
Taxes and Taxes and
Minority Minority
Interest Interest
- --------------------------------------------------------------------------------
Before special and extraordinary items $1,692 $ 969
Merger-related expenses (54) (33)
Restructuring and other charges (824) (509)
Provision for legal reserves (125) (80)
Reversals of reserves no longer required 34 21
------ -----
After special items $ 723 $ 368
====== =====
During 2000, special charges before taxes and minority interest of $969
million ($601 million after taxes and minority interest) were recorded. These
special items included a $54 million pre-tax charge ($33 million after taxes)
for merger-related expenses, an $824 million charge before taxes and minority
interest ($509 million after taxes and minority interest) for asset shutdowns of
excess internal capacity and cost reduction actions, a $125 million pre-tax
charge ($80 million after taxes) for additional Masonite legal reserves and a
$34 million pre-tax credit ($21 million after taxes) for the reversals of
reserves no longer required. A further discussion of the Masonite legal
reserves, can be found in Note 11--Commitments and Contingent Liabilities.
The merger-related expenses of $54 million consisted primarily of travel,
systems integration, employee retention, and other one-time cash costs related
to the Champion acquisition and Union Camp merger.
The $824 million charge for the asset shutdowns of excess internal capacity
and cost reduction actions consisted of a $71 million charge in the second
quarter of 2000 and a $753 million charge in the fourth quarter of 2000.
15
<Page>
Management's Discussion and Analysis
The second quarter charge of $71 million consisted of $40 million of asset
write-downs and $31 million of severance and other charges. The following table
and discussion presents additional detail related to this charge:
- --------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------
Printing 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
=== === ===
(a) The Printing Papers business shut down the Millers Falls, Massachusetts
mill in August 2000 due to excess internal capacity. Charges associated
with the shutdown included $22 million to write down the assets to their
estimated fair market value of zero, $2 million of severance costs covering
the termination of 119 employees, and other exit costs of $3 million. The
Millers Falls mill had revenues of $33 million, $39 million and $44 million
in 2000, 1999 and 1998, respectively. The mill had no operating income in
2000 and operating income of $3 million in both 1999 and 1998. At December
31, 2000, all 119 employees had been terminated.
Also, a severance charge of $2 million was recorded covering the
elimination of 108 salaried positions at the Franklin, Virginia mill
in a continuing effort to improve its cost effectiveness and long-term
competitive position. At December 31,2000,103 employees had been
terminated.
(b) The Consumer Packaging business implemented a plan to reduce excess
internal capacity and streamline administrative functions at several of its
locations as a result of the Shorewood acquisition. As a result, the
Richmond, Virginia facility was shut down in June 2000. Charges associated
with this shutdown included $6 million to write down assets to their fair
market value of zero, $2 million of severance costs covering the
termination of 126 employees, and other exit costs of $1 million. This
facility had revenues of $8 million, $23 million and $37 million in 2000,
1999 and 1998, respectively. The Richmond facility had operating losses of
$2 million and $1 million in 2000 and 1999, respectively, and operating
income of $3 million in 1998. At December 31, 2000, 125 employees had been
terminated.
Management also permanently idled 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.
Related charges included $1 million of asset write-downs, $3 million of
severance costs covering the termination of 187 employees, and $2 million
of other exit costs. At December 31, 2000, 151 employees had been
terminated.
A severance reserve of $1 million was also established to streamline the
Consumer Packaging business. This reserve covers the termination of 17
employees. At December 31,2000, all 17 employees had been terminated.
(c) Industrial Papers shut down the Knoxville, Tennessee converting facility in
December 2000 to reduce excess internal capacity. Assets were written down
$9 million to their estimated fair market value and a severance charge of
$1 million was recorded to terminate 120 employees. Other exit costs
totaled $3 million. The Knoxville facility had revenues of $46 million, $62
million and $56 million in 2000, 1999 and 1998, respectively. This facility
had operating income of $2 million in 2000 and 1999, and an operating loss
of $2 million in 1998. At December 31, 2000, the head count had been
reduced by 106 employees.
(d) Other includes $8 million related to Industrial Packaging, primarily for
the shutdown of the Tupelo, Mississippi sheet plant. The Industrial
Packaging charge included $2 million of asset write-offs, $5 million of
severance costs covering the termination of 221 employees and $1 million of
other cash costs. At December 31, 2000, 212 employees had been terminated.
Other also includes $5 million related to the indefinite closure of
Carter Holt Harvey's Mataura paper mill. This charge included $3 million of
severance costs covering the termination of 158 employees and $2 million of
other cash costs. At December 31, 2000, all 158 employees had been
terminated.
16
<Page>
Management's Discussion and Analysis
The fourth quarter charge of $753 million consisted of $536 million of asset
write-downs and $217 million of severance and other charges. The following table
and discussion presents additional detail related to this charge:
- -----------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- -----------------------------------------------------------------------------
Printing Papers (a) $293 $103 $396
Consumer Packaging (b) 86 7 93
Industrial Packaging (c) 114 46 160
Chemicals and Petroleum (d) 16 18 34
Forest Products (e) 15 20 35
Distribution (f) 3 19 22
Carter Holt Harvey (g) 1 4 5
Other (h) 8 - 8
---- ---- ----
$536 $217 $753
==== ==== ====
(a) The Printing Papers business announced the indefinite shutdown of the
Mobile, Alabama mill and the Lock Haven, Pennsylvania mill. The announcement
was in conjunction with the business's plan to realign and rationalize
papermaking capacity to benefit future operations. Charges associated with
the Mobile shutdown included $223 million to write assets down to their
salvage value, $31 million of severance costs covering the termination of
760 employees, and other exit costs of $41 million. The Mobile mill had
revenues of $274 million, $287 million and $258 million in 2000, 1999 and
1998, respectively. This mill had operating earnings of $34 million and $8
million in 2000 and 1999, respectively, and an operating loss of $43 million
in 1998. Charges associated with the Lock Haven shutdown included $70
million to write the assets down to their salvage value, $16 million of
severance costs covering the termination of 589 employees, and other exit
costs of $15 million. The Lock Haven mill had revenues of $267 million in
2000 and $225 million in each of 1999 and 1998. This mill had an operating
loss of $21 million in 2000, and operating earnings of $12 million and $27
million in 1999 and 1998, respectively.
(b) The Consumer Packaging business announced shutdowns of the beverage
packaging converting plant in Jamaica and the packaging facility in
Cincinnati, Ohio. Production at the Jamaica plant was moved to Venezuela to
increase plant utilization. The Cincinnati facility was closed in order to
better align our manufacturing system with customer demand. Charges
associated with these shutdowns included $6 million of asset write-downs,
$5 million of severance costs covering the termination of 239 employees,
and other exit costs of $2 million. The Consumer Packaging charge also
included an $80 million asset impairment due to continuing losses in its
aseptic business. The aseptic assets were written down to their estimated
fair market value based on expected future discounted cash flows.
(c) The Industrial Packaging business charge of $160 million is related to the
shutdown of the Camden, Arkansas mill, the shutdown of the Pedemonte, Italy
container plant and the write-down of the Walsum No. 10 paper machine. The
Camden mill, which produced unbleached kraft and multi-wall paper, was
closed due to the declining kraft paper market, excess internal capacity
and shrinking customer demand. The mill's assets were written down $102
million to their salvage value, and severance costs of $24 million were
recorded to cover the termination of 613 employees. Other exit costs
totaled $15 million. The Camden mill had revenues of $151 million, $162
million and $153 million and operating earnings of $14 million, $22 million
and $18 million in 2000, 1999 and 1998, respectively. Charges associated
with the Pedemonte plant shutdown included $2 million of asset write-downs,
$3 million of severance costs covering the termination of 83 employees, and
$4 million of other exit costs. The Pedemonte plant had revenues of $9
million, $11 million and $15 million in 2000, 1999 and 1998, respectively.
This plant had operating losses of $2 million in 2000 and 1999 and $1
million in 1998. The business also wrote down the Walsum No. 10 paper
machine acquired in the Union Camp merger by $10 million to its estimated
fair market value.
(d) The Chemicals and Petroleum business charge of $34 million was related to
the announced shutdown of the Oakdale, Louisiana plant. This is part of the
business's Asset Rationalization Program to increase earnings, improve
plant efficiencies and reduce excess internal capacity. A portion of the
facility was shut down at the end of 2000, with the remainder to be closed
by the end of 2001. The charge included $16 million to write the assets
down to their estimated fair market value of zero, $1 million of severance
costs covering the termination of 61 employees, and $17 million of other
exit costs. The Oakdale plant had revenues of $31 million, $30 million and
$32 million and operating earnings of $3 million, zero and $6 million in
2000, 1999 and 1998, respectively.
17
<Page>
Management's Discussion and Analysis
(e) The Forest Products business charge of $35 million was primarily related to
the announced shutdown of the Washington, Georgia lumber mill and
restructuring costs associated with the Mobile mill closure. The Washington
lumber mill will be closed due to unfavorable market conditions and excess
internal capacity. The mill had revenues of $54 million, $66 million and
$62 million in 2000, 1999 and 1998, respectively. This facility had an
operating loss of $6 million in 2000, operating income of $2 million in
1999, and an operating loss of $3 million in 1998. The total Forest
Products business charge included $15 million of asset write-downs, $7
million of severance costs covering the termination of 264 employees, and
$13 million of other exit costs.
(f) xpedx, our distribution business, implemented a restructuring plan to
consolidate duplicate facilities, eliminate excess internal capacity and
increase productivity. The $22 million charge associated with this plan
included $3 million of asset write-downs, $15 million of severance costs
covering the termination of 433 employees, and $4 million of other cash
costs.
(g) The Carter Holt Harvey charge of $5 million is related to cost reduction
actions primarily associated with the tissue and packaging businesses. This
charge included $1 million of asset write-downs and $4 million of severance
covering the termination of 145 employees.
(h) This $8 million charge relates to the write-down of our investment in
PaperExchange.com, an online provider of e-commerce for the paper industry,
to its estimated fair market value.
Also, a pre-tax credit of $28 million was recorded for excess 1999 second and
fourth quarter restructuring reserves no longer required, and a pre-tax credit
of $6 million was recorded for excess Union Camp merger-related termination
benefits reserves no longer required.
The following table presents a roll forward of the severance and other costs
included in the 2000 restructuring plans:
- --------------------------------------------------------------------------------
Severance
In millions and Other
- --------------------------------------------------------------------------------
Opening Balance (second quarter 2000) $ 31
Additions (fourth quarter 2000) 217
2000 Activity
Cash charges (19)
----
Balance, December 31, 2000 $229
====
The severance charges recorded in the second and fourth quarters of 2000
related to 4,243 employees. As of December 31, 2000, 991 employees had been
terminated.
1999: The following table and discussion presents the impact of special items
for 1999:
- ---------------------------------------------------------------------------------
In millions 1999
- ---------------------------------------------------------------------------------
Earnings Earnings
(Loss) (Loss)
Before Income After Income
Taxes and Taxes and
Minority Minority
Interest Interest
- ---------------------------------------------------------------------------------
Before special and extraordinary items $1,005 $ 551
Union Camp merger-related
termination benefits (148) (97)
Merger-related expenses (107) (78)
Restructuring and other charges (298) (180)
Environmental remediation charge (10) (6)
Provision for legal reserves (30) (18)
Reversals of reserves no longer required 36 27
------ -----
After special items $ 448 $ 199
====== =====
During 1999, special charges before taxes and minority interest of $557
million ($352 million after taxes and minority interest) were recorded. These
special items included a $148 million pre-tax charge ($97 million after taxes)
for Union Camp merger-related termination benefits, a $107 million pre-tax
charge ($78 million after taxes) for merger-related expenses, a $298 million
charge before taxes and minority interest ($180 million after taxes and minority
interest) 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 reversals of reserves that were no longer required.
The merger-related expenses of $107 million consisted of $49 million of merger
costs and $58 million of post-merger expenses. The merger costs were primarily
investment banker, consulting, legal and accounting fees. Post-merger
integration expenses included costs related to employee retention, such as stay
bonuses, and other cash costs related to the integration of Union Camp.
18
<Page>
Management's Discussion and Analysis
The Union Camp merger-related termination benefits charge related 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
originally identified for termination. An additional 346 employees left the
company after the merger was announced, but were not eligible for benefits under
the integration benefits program completed in the third quarter of 2000.
Benefits payable under this program for certain senior executives and managers
were paid from the general assets of International Paper. Benefits for remaining
employees were primarily paid from plan assets of our qualified pension plan. In
total, 1,062 employees were terminated. Related cash payments approximated $71
million (including payments related to our nonqualified pension plans). The
remainder of the costs incurred primarily represented an increase in the
projected benefit obligation of our qualified pension plan. Upon termination of
the program in the third quarter of 2000, $6 million of the original reserve of
$148 million was reversed to income.
The following table is a roll forward of the Union Camp merger-related
termination benefits charge:
- --------------------------------------------------------------------------------
Termination
Dollars in millions Benefits
- --------------------------------------------------------------------------------
Special charge (1,218 employees) $ 148
1999 incurred costs (787 employees) (116)
2000 incurred costs (275 employees) (26)
Reversal of reserve no longer required (6)
-----
Balance, December 31, 2000 $ --
=====
Note: Benefit costs are treated as incurred on the termination date of the
employee.
The $298 million charge for asset shutdowns of excess internal capacity
consisted of a $113 million charge in the second quarter of 1999 and a $185
million charge in the fourth quarter of 1999.
The second quarter $113 million charge for the asset shutdowns of excess
internal capacity and cost reduction actions included $57 million of asset
write-downs and $56 million of severance and other charges. The following table
and discussion presents additional detail related to this charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Printing Papers (a) $ 6 $ 27 $ 33
European Papers (b) 3 7 10
Consumer Packaging (c) 19 12 31
Industrial Packaging (d) 12 - 12
Chemicals and Petroleum (e) 10 3 13
Industrial Papers (f) 7 7 14
---- ---- ----
$ 57 $ 56 $113
==== ==== ====
(a) International Paper recorded a charge of $24 million for severance related
to the second phase of the Printing Papers business plan to improve the
cost position of its mills. The charge, pursuant to an ongoing severance
program, covered a reduction of approximately 289 employees at several
mills in the U.S. At December 31, 2000, 258 employees had been terminated.
Also, management approved a decision to permanently shut down the Hudson
River mill No. 4 paper machine located in Corinth, New York and the No. 2
paper machine at the Franklin, Virginia mill due to excess internal
capacity. Both machines have now been shut down. The machines were written
down by $6 million to their estimated fair market value of zero. Severance
costs of $3 million were recorded to cover the termination of 147
employees. At December 31, 2000, 142 employees had been terminated.
(b) The charge for European Papers, which covered the shutdown of two mills,
consisted of $3 million in asset write-downs, $6 million in severance costs
and $1 million of other exit costs. The Lana mill in Docelles, France was
shut down due to excess internal capacity. The Lana mill produced high-end
uncoated specialty paper that was shifted to the La Robertsau mill in
Strasbourg, France. The mill's fixed assets were written down $3 million to
their estimated fair market value of zero. Costs of $1 million related to
the site closure and severance of $4 million related to the termination of
42 employees were also recorded. The Lana mill had revenues of $12 million
and an operating loss of $2 million for the year ended December 31, 1999.
At December 31, 2000, all 42 employees had been terminated.
The Corimex coating plant in Clermont-Ferrand, France was shut down in
April 1999. The assets at this plant had been considered to be impaired in
1997 and were written down at that time because of a decline in the market
for thermal fax paper. A $2 million severance charge was recorded during
the second quarter of 1999 to cover the costs of terminating 81 employees.
Corimex had revenues of $6 million and an operating loss of $3 million for
the year ended December 31, 1999. At December 31, 2000, all 81 employees
had been terminated.
19
<Page>
Management's Discussion and Analysis
(c) The Consumer Packaging business implemented a plan to improve the overall
performance of the Moss Point, Mississippi mill. Included in this plan was
the shutdown of the No. 3 paper machine, which produced labels. This
production was transferred to the Hudson River mill. The machine was
written down $6 million to its estimated fair market value of zero.
Severance costs including, but not limited to, employees associated with
the No. 3 machine totaled $10 million and covered the elimination of 360
positions. At December 31, 2000, 331 employees had been terminated.
Consumer Packaging also shut down the Beverage Packaging facility in
Itu, Brazil in an effort to reduce excess internal capacity in Latin
America. The related assets were written down $13 million to their
estimated fair market value of zero, and a severance charge of $1 million
covering the elimination of 29 positions was recorded. Other exit costs
totaled $1 million. At December 31, 2000, 27 employees had been terminated.
(d) With the merger of Union Camp, International Paper negotiated the
resolution of contractual commitments related to an Industrial Packaging
investment in Turkey. As a result of these negotiations and evaluation of
this entity, it was determined that the investment was impaired. A $12
million charge was recorded to reflect this impairment and the related
costs of resolving the contractual commitments.
(e) As a result of an overall reduction in demand for dissolving pulp, a
decision was made to downsize the Natchez, Mississippi mill. Charges
associated with capacity reduction totaled $10 million and included the
shutdown of several pieces of equipment. A severance charge of $3 million
was recorded to eliminate 89 positions. At December 31, 2000, all 89
employees had been terminated.
(f) The Industrial Papers business implemented a plan to reduce excess internal
capacity at several of its locations. The Toronto, Canada plant was closed.
Equipment at the Kaukauna, Wisconsin, Knoxville, Tennessee and Menasha,
Wisconsin facilities was taken out of service. The total amount related to
the write-down of these assets was $7 million. Severance costs related to
these shutdowns were $5 million, based on a personnel reduction of 81
employees. Other exit costs totaled $2 million. At December 31, 2000, 73
employees had been terminated.
The $185 million fourth quarter charge for shutdowns of excess internal
capacity and cost reduction actions included $92 million of asset
write-downs and $93 million of severance and other charges. The following
table and discussion presents additional detail related to this charge:
- -----------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- -----------------------------------------------------------------------------------
Printing Papers (a) $ 7 $ 5 $ 12
Consumer Packaging (b) 14 22 36
Industrial Packaging (c) 7 14 21
Chemicals and Petroleum (d) 30 20 50
Building Materials (e) 10 6 16
Distribution (f) 6 17 23
Carter Holt Harvey (g) 18 9 27
---- ---- ----
$ 92 $ 93 $185
==== ==== ====
(a) The Printing Papers charge encompassed a $2 million severance charge
related to a production curtailment at the Erie, Pennsylvania mill due to
lower demand, a $3 million write-off of deferred software costs as the
result of a decision to discontinue the installation of a Union Camp order
entry system, and a $7 million impairment of our investment in the Otis
Hydroelectric plant. In November 1999, the Erie mill changed from a
seven-day, four-crew schedule to a three-crew schedule in order to balance
operating capacity with sales demand. This production curtailment resulted
in the termination of 99 employees. At December 31, 2000, all 99 employees
had been terminated. We wrote down our investment in the Otis Hydroelectric
partnership to the approximate fair market value of the investment based
upon our offer to acquire the other partner's interest.
(b) The Consumer Packaging charge of $36 million was related to the shutdown of
facilities, capacity optimization and a deferred software write-off. The
Philadelphia, Pennsylvania plant was shut down in June 2000 and the
Edmonton, Alberta plant was shut down in April 2000. Charges associated
with these shutdowns included $7 million of asset write-downs, $1 million
of severance costs covering the termination of 194 employees, and other
exit costs of $5 million. At December 31, 2000, all 194 employees had been
terminated. Charges related to eliminating excess internal capacity
included $7 million of asset write-downs and a severance charge of $11
million for the termination of 512 employees. The capacity reductions
related to the aseptic and flexible packaging businesses. At December 31,
2000, 381 employees had been terminated. The business also discontinued the
implementation of a Union Camp order management system. The write-off of
deferred software costs related to this system was $5 million.
20
<Page>
Management's Discussion and Analysis
(c) The Industrial Packaging business shut down the following plants and
shifted production to other facilities: the Terre Haute, Indiana box plant;
the Northlake, Illinois box plant; the Columbia, Tennessee sheet plant; and
the Montgomery, Alabama sheet plant. The design center in Spartanburg,
South Carolina was also closed. The functions performed in Spartanburg will
continue in Memphis, Tennessee. Charges associated with the consolidation
and improvement of the Industrial Packaging business totaled $21 million
and included $7 million of asset write-downs, a $12 million severance
charge covering the termination of 426 employees, and other exit costs of
$2 million. At December 31, 2000, 309 employees had been terminated.
(d) The Chemicals and Petroleum charge of $50 million related to the partial
shutdown of the Chester-le-Street plant located in northeast England and
additional costs related to the 1998 shutdown of the Springhill, Louisiana
plant. The Chester-le-Street plant was a fully integrated site comprised of
a crude tall oil fractionation plant, a rosin resin upgrading plant and a
dimer plant. The crude tall oil and rosin resin upgrading facilities at the
site were closed and production shifted to other Arizona Chemical
facilities. Asset write-downs for this plant totaled $30 million. A
severance charge of $3 million covered the termination of 83 employees.
Other costs of $12 million included demolition and contract cancellations.
At December 31, 2000, all 83 employees had been terminated. We also
recorded an additional charge of $5 million related to the 1998 closure of
the Springhill plant, covering other exit costs including demolition and
cleanup.
(e) The Building Materials charge of $16 million included $3 million for a
program to improve the profitability of the decorative surfaces business
and $13 million for the shutdown of the Pilot Rock, Oregon mill. The
Decorative Products business developed an improvement plan to consolidate
certain manufacturing activities and streamline administrative functions.
As a result, a reserve was established to cover asset write-offs totaling
$2 million, and severance charges of $1 million were recorded related to
the reduction of 65 employees. At December 31, 2000, 38 employees had been
terminated.
International Paper announced in October 1999 that it would shut down
the Pilot Rock, Oregon mill due to excess capacity within the Masonite
manufacturing system. Soft-board production was moved to our Ukiah,
California and Lisbon Falls, Maine facilities. The related charge included
$8 million of asset write-downs, a $2 million severance charge covering the
termination of 155 employees, and $3 million of other exit costs. At
December 31, 2000, 149 employees had been terminated.
(f) xpedx implemented a plan to consolidate duplicate facilities and eliminate
excess internal capacity. The $23 million charge associated with this plan
included $6 million of asset write-downs, a severance charge of $5 million
for the termination of 211 employees, and other costs of $12 million. Other
costs consisted primarily of lease cancellations. At December 31, 2000, 197
employees had been terminated.
(g) This charge related to the shutdown of the No. 5 paper machine at Carter
Holt Harvey's Kinleith mill. The machine had been idled due to a
reconfiguration project at the mill. Plans for alternative uses for the
machine were reexamined and it was determined that based on current
competitive conditions it would not provide adequate returns on the capital
required and that it would be scrapped. Accordingly, the machine was
written down by $18 million to its estimated salvage value. Also, severance
costs of $9 million were recorded to cover the costs of terminating 300
employees. At December 31, 2000, all 300 employees had been terminated.
The $30 million pre-tax charge to increase existing legal reserves included
$25 million added to the reserve for hard-board siding claims. A further
discussion of this charge can be found in Note 11--Commitments and Contingent
Liabilities.
The $36 million pre-tax credit for reserves no longer required consisted of
$30 million related to a retained exposure at the Lancey mill in France and $6
million of excess severance reserves previously established by Union Camp. The
Lancey mill was sold to an employee group in October 1997. In April 1999,
International Paper's remaining exposure to potential obligations under this
sale was resolved, with the reserve returned to income in the second quarter.
The following table presents a roll forward of severance and other costs
included in the 1999 restructuring plans:
- ---------------------------------------------------------------------------------
Severance
In millions and Other
- ---------------------------------------------------------------------------------
Opening Balance (second quarter 1999) $ 56
Additions (fourth quarter 1999) 93
1999 Activity
Cash charges (34)
2000 Activity
Cash charges (75)
Other charges (13)
Reversals of reserves no longer required (14)
----
Balance, December 31, 2000 $ 13
====
21
<Page>
Management's Discussion and Analysis
The severance reserves recorded in the second and fourth quarters of 1999
related to 3,163 employees. At December 31, 2000, 2,793 employees had been
terminated. Reserves of $14 million were determined to no longer be required and
reversed to income in the fourth quarter of 2000. The remaining $13 million of
reserves represents costs to be incurred or severance to be paid in the first
quarter of 2001.
1998: The following table and discussion presents the impact of special items
for 1998:
- --------------------------------------------------------------------------------
In millions 1998
- --------------------------------------------------------------------------------
Earnings Earnings
(Loss) (Loss)
Before Income After Income
Taxes and Taxes and
Minority Minority
Interest Interest
- --------------------------------------------------------------------------------
Before special items $ 598 $ 345
Oil and gas impairment charges (111) (68)
Restructuring and other charges (161) (92)
Gain on sale of business 20 12
Reversals of reserves no longer required 83 50
----- -----
After special items $ 429 $ 247
===== =====
During 1998, International Paper recorded $111 million of oil and gas
impairment charges ($68 million after taxes); $56 million ($35 million after
taxes) in the fourth quarter and $55 million ($33 million after taxes) in the
third quarter. International Paper had oil and gas exploration and production
operations in West Texas, the Gulf Coast and the Gulf of Mexico. The Securities
and Exchange Commission's regulations for companies that use the full-cost
method of accounting for oil and gas activities require companies to perform a
ceiling test on a quarterly basis. As a result of low oil and gas prices, the
value of International Paper's properties was written down through these noncash
charges.
Also in 1998, International Paper recorded a $145 million pre-tax
restructuring charge ($82 million after taxes and minority interest) consisting
of $64 million of asset write-downs and $81 million of severance costs, and
recorded pre-tax charges of $16 million ($10 million after taxes) related to
International Paper's share of write-offs taken by Scitex, a then-owned 13%
investee company, related to an acquisition of in-process research and
development and its exit from the digital video business. The Scitex items were
reflected as equity losses from the investment in Scitex in the consolidated
statement of earnings. International Paper sold its equity interest in Scitex in
January 2000. In addition, International Paper recorded a $20 million pre-tax
gain ($12 million after taxes) on the sale of its Veratec nonwovens division,
and an $83 million pre-tax credit ($50 million after taxes) from the reversals
of previously established reserves that were no longer required. These reserves
had been established in 1996 and 1997 and were primarily associated with the
Veratec and Imaging businesses. The sales of these businesses were completed in
1998, and those reserves not required were returned to earnings.
The following table and discussion presents additional detail related to the
$145 million restructuring charge:
- -------------------------------------------------------------------
Asset
In millions Write-downs Severance Total
- -------------------------------------------------------------------
Distribution (a) $ 20 $ 10 $ 30
Printing Papers (b) 13 14 27
Carter Holt Harvey (c) 15 3 18
Industrial Packaging (d) 8 7 15
Union Camp (e) 8 32 40
Other (f) -- 15 15
---- ---- ----
$ 64 $ 81 $145
==== ==== ====
(a) After the acquisition of Zellerbach, management of xpedx terminated certain
software projects that were in process and began to use Zellerbach's systems
in certain of its regions. Accordingly, $20 million of deferred software
costs were written off. In addition, a $10 million severance charge was
recorded to terminate 274 xpedxemployees at duplicate facilities and
locations. At December 31, 1999, all 274 employees had been terminated.
(b) International Paper's Printing Papers business shut down equipment at the
Mobile, Alabama mill and announced the termination of 750 employees at the
Mobile, Alabama, Lock Haven, Pennsylvania, and Ticonderoga, New York mills.
At the Mobile mill, International Paper permanently shut down a paper
machine and related equipment with a net book value of $13 million. These
assets were written down to their estimated fair market value of zero. The
severance charge associated with the employee reductions at the three mills
was $14 million. At December 31, 1999, all employees under this program had
been terminated.
(c) This charge primarily consisted of a $15 million asset write-down
associated with the shutdown of two Carter Holt Harvey facilities,
Myrtleford and Taupo. Myrtleford, a tissue pulp mill located in Australia,
was closed due to excess capacity in its tissue pulp system. Carter Holt
Harvey will be able to produce the volume at lower costs at its Kawerau
tissue pulp mill located in New Zealand. Carter Holt Harvey also closed
the Taupo, New Zealand
22
<Page>
Management's Discussion and Analysis
sawmill due to excess capacity in its sawmill system as the result of recent
productivity improvements. The $3 million severance charge represented the
cost of terminating 236 employees. At December 31, 1999, all 236 employees
had been terminated. International Paper's consolidated financial statements
included revenues of $21 million and operating income of $1 million from
these facilities in 1998.
(d) Management shut down the Gardiner, Oregon mill because of excess capacity
in International Paper's containerboard system. As a result, the net
plant, property and equipment assets of this mill were reduced from $13
million to the estimated salvage value of $5 million. In connection with
this decision to close, 298 employees at the mill were terminated and a $7
million severance charge was recorded. This mill had revenues of $78
million and operating losses of $16 million in 1998.
(e) During 1998, Union Camp recorded a pre-tax special charge of $40 million.
Included in the charge was $32 million related to the termination of 540
positions and $8 million of asset write-downs. Approximately 190 of these
positions related to a reorganization and restructuring of Union Camp's
research and development activities. Another 190 positions related to a
consolidation of the packaging group's administrative support functions. The
remaining 160 positions related to a series of other organizational changes.
At December 31, 1999, all 540 employees had been terminated.
The asset write-downs were principally attributable to the impairment of
goodwill specific to two packaging businesses, the Chase packaging facility
and Union Camp's 1996 purchase of a 50% interest in a packaging plant in
Turkey. Upon reviewing the historical and projected operating results for
these businesses, management concluded that expected future cash flows did
not fully support the carrying value of these assets.
(f) The $15 million severance charge was recorded as a result of an announcement
by International Paper of a plan to consolidate its land and timber and
logging and fiber supply divisions into a new division called Forest
Resources, and the consolidation of the Consumer Packaging group. Of the $15
million charge, $10 million related to a head count reduction of 200
employees in the Forest Resources group and the remaining $5 million was
based on a personnel reduction of 210 employees in the Consumer Packaging
group. At December 31, 1999, all 410 employees had been terminated.
The following table presents a roll forward of the severance costs included
in the 1998 restructuring plan:
- ----------------------------------------------------------------------------
In millions Severance
- ----------------------------------------------------------------------------
Opening Balance (third quarter 1998) $ 81
1998 Activity
Cash charges (19)
1999 Activity
Cash charges (56)
Reversal of reserve no longer required (6)
----
Balance, December 31, 1999 $ --
====
The severance reserve recorded in the third quarter of 1998 related to 2,508
employees. As of December 31, 1999, all employees had been terminated.
Ongoing Profit Improvement Review and Potential for Future Charges and
Impairments
International Paper continually evaluates its operations for opportunities for
improvement. These evaluations are targeted to (a) focus our portfolio on our
core businesses of paper, packaging and forest products, (b) operate fewer
facilities with the same revenue capability, (c) reduce costs, and (d)
rationalize and realign capacity. Annually, operating plans are developed by
each of our businesses to ensure that facilities will achieve a return at least
equal to their cost of capital over an economic cycle. If it subsequently
becomes apparent that a facility's operating plan will not be achieved, a
decision is then made to either (a) shut down the facility and record the
corresponding charge, or (b) evaluate the expected recovery of the carrying
value of the facility to determine if an impairment of the asset value of the
facility has occurred under Statement of Financial Accounting Standards No.
121.
In recent years, this policy has led to the shut down of a number of
facilities and the recording of significant asset impairment charges and
severance costs. As this profit improvement initiative is ongoing, it is
possible that significant additional charges and costs will be incurred in
future periods in our core businesses should such triggering events occur.
Income Taxes
Before special and extraordinary items, the 2000 and 1999 effective income tax
rate was 28% of pre-tax earnings, increasing from 26% in 1998. The effective
income tax rates are below the U.S. statutory tax rate primarily because of the
geographic mix of overall taxable earnings and the impact of state tax and other
credits. After special items, the effective income tax rate was 16%, 19% and 22%
for 2000, 1999 and 1998, respectively. We estimate that the 2001 effective
income tax rate will be approximately 31% based on expected earnings and
business conditions, which are subject to change.
23
<Page>
Management's Discussion and Analysis
The following tables present the impact of the special items on the
effective income tax rate for the three years. Taxes on special charges were
provided at statutory rates except for those charges that represent tax
deductions that management does not believe will be realized.
- --------------------------------------------------------------------------------
In millions 2000
- --------------------------------------------------------------------------------
Earnings (Loss)
Before Income
Income Taxes Tax Effective
and Minority Provision Tax
Interest (Benefit) Rate
- --------------------------------------------------------------------------------
Before special and extraordinary items $1,692 $ 480 28%
Merger-related expenses (54) (21) 39%
Restructuring and other charges (824) (310) 38%
Provision for legal reserves (125) (45) 36%
Reversals of reserves no longer required 34 13 38%
------ -----
After special items $ 723 $ 117 16%
====== =====
- --------------------------------------------------------------------------------
In millions 1999
- --------------------------------------------------------------------------------
Earnings (Loss)
Before Income
Income Taxes Tax Effective
and Minority Provision Tax
Interest (Benefit) Rate
- --------------------------------------------------------------------------------
Before special and extraordinary items $1,005 $ 281 28%
Union Camp merger-related
termination benefits (148) (51) 34%
Merger-related expenses (107) (29) 27%
Restructuring and other charges (298) (108) 36%
Environmental remediation charge (10) (4) 40%
Provision for legal reserves (30) (12) 40%
Reversals of reserves no longer required 36 9 25%
------ -----
After special items $ 448 $ 86 19%
====== =====
- --------------------------------------------------------------------------------
In millions 1998
- --------------------------------------------------------------------------------
Earnings (Loss)
Before Income
Income Taxes Tax Effective
and Minority Provision Tax
Interest (Benefit) Rate
- --------------------------------------------------------------------------------
Before special items $ 598 $158 26%
Oil and gas impairment charges (111) (43) 39%
Restructuring and other charges (161) (61) 38%
Gain on sale of business 20 8 40%
Reversals of reserves no longer required 83 33 40%
----- -----
After special items $ 429 $ 95 22%
===== =====
Recent Accounting Developments
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," an amendment to SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 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. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.
International Paper will adopt SFAS No. 133 (as amended by SFAS No. 138) as
of January 1, 2001. We estimate that adoption will require a one-time, non-cash
charge before taxes and minority interest of approximately $23 million ($14
million after taxes and minority interest), which will be recorded as a
cumulative change in accounting method.
Legal and Environmental Issues
International Paper is subject to extensive federal and state environmental
regulation as well as similar regulations in all other jurisdictions in which we
operate. Our continuing objectives are to: (1) control pollutants discharged
into the air, water and groundwater to avoid adverse impacts on the environment,
(2) make continual improvements in environmental performance, and (3) maintain
100% compliance with applicable laws and regulations. A total of $190 million
was spent in 2000 for capital projects to control environmental releases into
the air and water, and to assure environmentally sound management and disposal
of waste. We expect to spend approximately $136 million in 2001 for similar
capital projects, including the costs to comply with the Environmental
Protection Agency's (EPA) Cluster Rule regulations. Amounts to be spent for
environmental control projects in future years will depend on new laws and
regulations and changes in legal requirements and environmental concerns. Taking
these uncertainties into account, our preliminary estimate for additional
environmental appropriations during the year 2002 is approximately $164 million
and during the year 2003 is approximately $143 million.
On April 15, 1998, the EPA issued final Cluster Rule regulations that
established new requirements regarding air emissions and wastewater discharges
from pulp and paper mills to be met by 2006. The projected costs included in our
estimate related to the Cluster Rule regulations for the years 2001 through 2002
are $116 million. Projected Cluster Rule costs for 2003 through 2006 are in the
range of $330 million
24
<Page>
Management's Discussion and Analysis
to $370 million. Included in these estimates are costs associated with
combustion source standards for the pulp and paper industry, which were issued
by the EPA on January 12, 2001. The final cost depends on the outcome of the
Cluster Rule water regulations for pulp and paper categories other than bleached
kraft and soda. Regulations for these categories are not likely to become final
until late 2001. We estimate that annual operating costs, excluding
depreciation, will increase approximately $22 million when these regulations are
fully implemented.
Additional regulatory requirements that may affect future spending include
the EPA's requirements for states to assess current surface water loading from
industrial and area sources. This process, called Total Maximum Daily Load
(TMDL) allocation, could result in reduced allowable treated effluent discharges
from our manufacturing sites. To date there have been no significant impacts due
to the TMDL process, as the majority of our manufacturing sites operate at
levels significantly below allowable waste loadings.
In recent years, the EPA has undertaken significant air quality initiatives
associated with nitrogen oxide emissions, regional haze, and national ambient
air quality standards. When regulatory requirements for new and changing
standards are finalized, we will add any resulting future cost projections to
our expenditure forecast.
International Paper has been named as a potentially liable party in a number
of environmental remediation actions under various federal and state laws,
including the Comprehensive Environmental Response, Compensation and Liability
Act. Related costs are recorded in the financial statements when they are
probable and reasonably estimable. As of December 31, 2000, these liabilities
totaled approximately $170 million. Completion of these actions is not expected
to have a material adverse effect on our financial condition or results of
operations.
The significant effort International Paper has made in the analysis of
environmental issues and the development of environmental control technology
responses will enable us to keep costs for compliance with environmental
regulations at, or below, industry averages.
Masonite Litigation: Three nationwide class action lawsuits filed against
International Paper have been settled in recent years.
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 non-refundable
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 consisted 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 consisted of all U.S. property owners who had incorporated
and installed Masonite Woodruf roofing 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 non-refundable advance of
$1.7 million plus $75,000 in costs for each of the two cases.
Reserves for these matters total $92 million at December 31, 2000, net of
expected future insurance recoveries of $43 million. This amount includes $25
million added to the reserve for hardboard siding claims in the fourth quarter
of 1999 (some of which has now been paid to claimants) and an additional $125
million added to that reserve in the third quarter of 2000 to cover an expected
shortfall, resulting primarily from a higher number of hardboard siding claims
than 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. While International Paper believes that the reserve balances
established for these matters are adequate, and that additional amounts will be
recovered from its insurance carriers in the future relating to these claims,
International Paper is unable to estimate at this time the amount of additional
charges, if any, that may be required for these matters in the future.
25
<Page>
Management's Discussion and Analysis
Through December 31, 2000, net settlement payments of $277 million,
including the $51 million of non-refundable advances of attorneys' fees
discussed above, have been made. Included in the non-refundable advances of
attorneys' fees is $5 million, which has been paid to the attorneys for the
plaintiffs in the Omniwood and Woodruf lawsuits. Also, we have received $27
million related to these matters from our insurance carriers through December
31, 2000. The liability for these matters will be retained after the planned
sale of Masonite is completed.
For further information on the Masonite litigaiton,
please see Note 11 to the financial statements.
Other Litigation: In March and April 2000, 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 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. Champion has filed a motion to dismiss, which as of February 26, 2001 has
not been decided.
On May 14, 1999, and May 18, 1999, two lawsuits were filed against
International Paper, the former Union Camp Corporation and other manufacturers
of linerboard. These suits allege that the defendants conspired to fix prices
for linerboard and corrugated sheets during the period October 1, 1993, through
November 30, 1995. Both lawsuits were filed seeking nationwide class
certification. The lawsuits allege that various purchasers of corrugated sheets
and corrugated containers were injured as a result of the alleged conspiracy.
The cases have been consolidated in federal court in the Eastern District of
Pennsylvania. Defendants'motions to dismiss the cases were denied on October 4,
2000. Plaintiffs filed motions for class certification on January 10, 2001,
which were pending as of February 26, 2001.
Purchasers of high-pressure laminates have filed a number of purported class
actions under the federal antitrust laws in various federal district courts in
different states, alleging that International Paper's Nevamar division
participated in a price-fixing conspiracy with competitors. These cases have
been consolidated in federal district court in New York. Indirect and direct
purchasers of high-pressure laminates have also filed similar purported class
action cases under various state antitrust and consumer protection statutes in
California, Florida, Maine, Michigan, Minnesota, New Mexico, New York, North
Dakota, South Dakota, Tennessee and the District of Columbia. International
Paper filed a motion to dismiss one of the cases in federal court, which was
denied by the court without prejudice. The federal plaintiffs filed a
consolidated amended complaint on February 22, 2001. As of February 26, 2001,
International Paper has filed a motion to dismiss the case pending in New York
State court and has filed answers in California, New Mexico, South Dakota and
one of two complaints filed in Michigan. Answers are not yet due in the
remaining state cases.
Other Environmental: In April 1999, the Franklin, Virginia mill received a
Notice of Violation (NOV) from the EPA, Region 3 in Philadelphia, and an NOV
from the Commonwealth of Virginia alleging that the mill violated the Prevention
of Significant Deterioration (PSD) regulations. The Franklin mill was owned by
Union Camp Corporation at that time and was one of seven paper mills in Region 3
owned by different companies that received similar notices of violation. Union
Camp merged with International Paper on April 30, 1999, and International Paper
has entered into negotiations with the EPA and the Commonwealth of Virginia.
The Franklin mill NOVs were issued in connection with the EPA's well
publicized PSD air permit enforcement initiative against the paper industry. In
1999, our paper mills in Kaukauna, Wisconsin and Augusta, Georgia received
requests for information from the EPA regarding compliance with the PSD
regulations. Three additional facilities received information requests in 2000,
and the EPA's initiative may result in similar actions at other facilities.
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 that resolved the matter for a civil penalty of
$134,000.
In November 1999, the Wisconsin Department of Natural Resources filed a
civil complaint alleging past exceedences of air permit limits at the former
Union Camp flexible packaging facility located in Tomah, Wisconsin. The matter
was settled on November 2, 2000 for a civil penalty of $60,000.
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.
26
<Page>
Management's Discussion and Analysis
As of February 26, 2001, there were no other pending judicial proceedings,
brought by governmental authorities against International Paper, for alleged
violations of applicable environmental laws or regulations. International Paper
is engaged in various other proceedings that arise under applicable
environmental and safety laws or regulations, including approximately 97 active
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) and comparable state laws. Most of these proceedings
involve the cleanup of hazardous substances at large commercial landfills that
received waste from many different sources. While joint and several liability is
authorized under the CERCLA, as a practical matter, liability for CERCLA
cleanups is allocated among the many potential responsible parties. Based upon
previous experience with respect to the cleanup of hazardous substances and upon
presently available information, International Paper believes that it has no or
de minimis liability with respect to 18 of these sites; that liability is not
likely to be significant at 51 sites; and that estimates of liability at 28 of
these sites is likely to be significant but not material to International
Paper's consolidated finan-cial position or results of operations.
On June 19, 2000, before International Paper completed the acquisition of
Champion, Champion entered into a Consent Order with the Maine Department of
Environmental Protection that resolved allegations of past wastewater and
reporting deficiencies at Champion's lumber mills in Milford and Passadumkeag,
Maine. The U.S. EPA and the U.S. Attorney's Office in Maine have since that time
commenced a grand jury investigation of the same allegations.
We are also involved in other contractual disputes, administrative and legal
proceedings and investigations of various types. While any litigation,
proceeding or investigation has an element of uncertainty, we believe that the
outcome of any proceeding, lawsuit or claim that is pending or threatened, or
all of them combined, will not have a material adverse effect on our
consolidated financial position or results of operations.
Impact of the Euro
The introduction of the euro for noncash transactions took place on January 1,
1999, with 11 countries participating in the first wave: Austria, Belgium,
Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and
Spain. The euro has been trading on world currency exchanges since 1999 and is
used by our businesses in transactions. On January 2, 2002, new euro-denominated
bills and coins will be issued and legacy currencies will be completely
withdrawn from circulation that year. In general, the euro has increased price
transparency for our products in Europe. The major impact on International Paper
has been on its businesses within the euro zone, which make up approximately 9%
of sales. Each of our European businesses has a plan in place to deal with the
introduction of the euro.
Over the three-year transition period, our computer systems will be updated
to ensure euro compliance. Also, we are reviewing our marketing and operational
policies and procedures to ensure our ability to continue to successfully
conduct all aspects of our business in this new market. In general, our product
lines are likely to become somewhat more international, with some leveling of
prices that is not expected to significantly impact our operations. We
anticipate that the total costs in connection with the euro conversion will not
be material. Further, we do not anticipate that the conversion from the legacy
currencies to the euro will have a material adverse effect on our consolidated
financial position or results of operations.
Effect of Inflation
General inflation has had minimal impact on our operating results in the last
three years. Sales prices and volumes are more strongly influenced by supply and
demand factors in specific markets and by exchange rate fluctuations than by
inflationary factors.
Market Risk
We use financial instruments, including fixed and variable rate debt, to finance
operations, for capital spending programs and for general corporate purposes.
Additionally, financial instruments, including swap and forward contracts, are
used to hedge exposures to interest rate and foreign currency risks. We do not
use financial instruments for trading purposes.
Our exposure to market risk for changes in interest rates relates primarily
to investments in marketable securities, and short- and long-term debt
obligations. We invest in high-credit-quality securities with major
international financial institutions while limiting exposure to any one issuer.
Our debt obligations outstanding as of December 31, 2000, expressed in U.S.
dollar equivalents, are summarized as to their principal cash flows and related
weighted average interest rates by year of maturity in the following table. Our
investments in marketable securities at December 31, 2000 were not significant.
27
<Page>
Management's Discussion and Analysis
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in millions 2001 2002 2003 2004 2005 Thereafter Total Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. commercial paper and bank notes
7.3% average interest rate $ 879 $ - $ - $637 $ - $ - $ 1,516 $ 1,516
Euro commercial paper and bank notes
5.1% average interest rate 178 - - - - - 178 178
Chinese renminbi bank notes
6.0% average interest rate 18 - - - - - 18 18
Euro fixed rate notes
5 3/8% average interest rate - - - - - 223 223 214
New Zealand dollar bank notes
7.1% average interest rate 285 - - - - - 285 285
Fixed rate debt--7.8% average interest rate 397 484 1,432 683 1,177 3,218 7,391 7,518
5 7/8% Swiss franc debentures 67 - - - - - 67 71
Medium term notes--8.2% average interest rate 146 79 30 9 - 43 307 312
Environmental and industrial development bonds
6.3% average interest rate 44 75 6 32 77 2,100 2,334 2,431
Brazilian real notes
13.4% average interest rate 24 24 22 18 100 6 194 194
Floating rate notes--7.9% average interest rate - 2,100 - - - - 2,100 2,100
Other 77 15 10 8 6 34 150 147
------ ------ ------ ------ ------ ------ ------- -------
Total Debt $2,115 $2,777 $1,500 $1,387 $1,360 $5,624 $14,763 $14,984
====== ====== ====== ====== ====== ====== ======= =======
For debt obligations, the table above presents principal cash flows and
related weighted average interest rates by year of maturity. Variable interest
rates disclosed represent the weighted average rates at the end of the period.
For financial statement classification, $750 million of short-term debt has been
classified as long-term pursuant to line of credit agreements.
We use cross-currency and interest rate swap agreements to manage the
composition of our fixed and floating rate debt portfolio. Amounts to be paid or
received as interest under these agreements are recognized over the life of the
swap agreements as adjustments to interest expense. The impact on earnings and
our net liability under these agreements was not significant. Our cross-currency
and interest rate swap agreements outstanding at December 31, 2000, expressed in
U.S. dollar equivalents, by year of maturity, are presented in the following
table.
- -------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in millions 2001 2002 2003 2004 2005 Thereafter Total Fair Value
- -------------------------------------------------------------------------------------------------------------------------------
U.S. dollar variable to fixed rate swaps $ - $ 45 $200 $300 $- $500 $1,045 $ 97
Average pay rate 6.3% / Average receive rate 6.9%
U.S. dollar fixed to variable rate swaps - 45 200 550 - 500 1,295 (98)
Average pay rate 7.6% / Average receive rate 6.8%
U.S. dollar to New Zealand dollar cross-currency swap - 150 - - - - 150 (5)
Australian dollar to New Zealand dollar cross-currency swap - 130 - - - - 130 25
Swiss franc to New Zealand dollar cross-currency swaps 68 - - - - - 68 1
28
<Page>
Management's Discussion and Analysis
We also transact business in many currencies and are subject to currency
exchange rate risk. We address this risk through a risk management program that
involves financing a portion of our investments in overseas operations with
borrowings denominated in the same currency as the investment or by entering
into currency exchange contracts in tandem with U.S. dollar borrowings. These
contracts are effective in providing hedges against fluctuations in currency
exchange rates. Additionally, we utilize currency exchange contracts to hedge
certain transactions that are denominated in foreign currencies, primarily
export sales and equipment purchased from nonresident vendors. These contracts
serve to protect us from currency fluctuations between the transaction and
settlement dates.
The following table presents information about our foreign currency forward
contracts outstanding as of December 31, 2000, expressed in U.S. dollar
equivalents. The majority of the contracts have maturities of less than 12
months. This information should be read in conjunction with Note 14--Financial
Instruments to the consolidated financial statements which can be found on pages
54 through 56.
- --------------------------------------------------------------------------------------
Weighted Net
Average Unrealized
Contract Exchange Gain
U.S. dollars in millions Amount Rate (Loss)
- --------------------------------------------------------------------------------------
Pay U.S. dollars /
Receive European euros $1,072 0.89 $(10)
Pay British pounds /
Receive European euros 70 0.59 1
Pay U.S. dollars /
Receive British pounds 129 1.46 (2)
Pay European euros /
Receive British pounds 39 1.63 -
Receive New Zealand dollars /
Pay Australian dollars 475 1.31 15
Pay U.S. dollars /
Receive New Zealand dollars 350 0.46 (5)
Receive Swedish kronas /
Pay U.S. dollars 30 9.64 -
Receive U.S. dollars /
Pay European euros 29 0.88 (1)
Receive U.S. dollars /
Pay British pounds 18 1.44 -
Receive U.S. dollars /
Pay New Zealand dollars 440 0.41 (25)
We have an additional $31 million in a number of smaller forward contracts to
purchase or sell other currencies with a related net unrealized immaterial gain.
We also purchase foreign exchange option contracts, with terms that generally
do not exceed one year, to hedge export sales. Premiums paid under these
contracts are expensed over the life of the option contract. Gains arising on
these options are recognized at the time the options are exercised. Option
contracts outstanding at December 31, 2000 amounted to $121 million.
Value at Risk
Value at risk is used to describe an approach for measuring market risk exposure
that utilizes statistical models that are based on historical price and
volatility patterns to estimate the probability of the value of a financial
instrument falling above or below a specified amount at a specified confidence
level and over a given time period. Our analysis uses variance-covariance
statistical modeling techniques and includes substantially all interest
rate-sensitive debt and swaps, and currency exchange contracts. The model
estimates the potential loss in fair value or earnings we could incur from
adverse changes in interest rates or currency exchange rates. We believe the
effects of interest rate or currency exchange movements on the respective
underlying hedged transactions would substantially offset any loss incurred. The
results of our analysis at a 95% confidence level were not significant to our
consolidated common shareholders' equity, earnings or daily change in market
capitalization.
Forward-Looking Statements
Certain statements in this 2000 Annual Report to Shareholders, and in
particular, statements found in Management's Discussion and Analysis, that are
not historical in nature may constitute forward-looking statements. These
statements are often identified by the words, "believe," "expect," "plan,"
"appear," "project," "estimate," "intend," and words of similar import. Such
statements reflect the current views of International Paper with respect to
future events and are subject to risks and uncertainties. Actual results may
differ materially from those expressed or implied in these statements. Factors
that could cause actual results to differ include, among other things, whether
conditions influencing the recent economic slowdown will continue or worsen,
changes in overall demand, whether our initiatives relating to balancing our
supply with demand will be successful, changes in domestic or foreign
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 and facility
rationalizations can be achieved. In view of such uncertainties, investors are
cautioned not to place undue reliance on these forward-looking statements.
International Paper does not assume any obligation to update these
forward-looking statements.
29
<Page>
Financial Information by Industry Segment and Geographic Area
For information about our industry segments, see the "Description of Industry
Segments" included in management's discussion and analysis of financial
condition and results of operations.
For management purposes, we report the operating performance of each business
based on earnings before interest and income taxes ("EBIT") excluding special
and extraordinary items and gains or losses on sales of businesses. Our Carter
Holt Harvey segment includes our share, about half, of their operating earnings
adjusted for U.S. generally accepted accounting principles. The remaining half
is included in the minority interest adjustment. Intersegment sales and
transfers are recorded at current market prices. Corporate sales include the
Imaging and Veratec businesses that were sold in 1998. Sales for these
businesses were $220 million in 1998. Corporate operating profit includes an
operating loss of $2 million for these businesses in 1998 as well as corporate
expenses. Corporate assets include these businesses for the applicable years in
addition to other assets not allocated to our segments.
External Sales by Major Product is determined by aggregating sales from each
segment based on similar products or services. External sales are defined as
those that are made to parties outside International Paper's consolidated group
whereas sales by segment in the Net Sales table are determined by the management
approach and include intersegment sales.
Capital Spending by Industry Segment is reported on page 13 of management's
discussion and analysis of financial condition and results of operations.
Information by Industry Segment
Net Sales
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Printing Papers(a) $ 7,960 $ 5,840 $ 5,815
Industrial and Consumer Packaging 7,625 7,050 7,010
Distribution 7,255 6,850 6,280
Forest Products 3,465 3,205 2,930
Chemicals and Petroleum 1,395 1,455 1,465
Carter Holt Harvey 1,675 1,605 1,505
Corporate and Intersegment Sales(a,b,c) (1,195) (1,432) (1,026)
------- ------- -------
Net Sales $28,180 $24,573 $23,979
======= ======= =======
Assets
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Printing Papers $11,692 $ 7,929 $ 8,213
Industrial and Consumer Packaging 8,187 7,316 7,389
Distribution 1,989 1,893 1,903
Forest Products 7,454 3,819 3,644
Chemicals and Petroleum 1,056 1,531 1,614
Carter Holt Harvey(d) 3,141 4,183 4,475
Corporate(c) 8,590 3,597 4,228
------- ------- -------
Assets $42,109 $30,268 $31,466
======= ======= =======
Operating Profit(a)
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Printing Papers $ 959 $ 254 $ 178
Industrial and Consumer Packaging 773 562 334
Distribution 120 105 86
Forest Products 602 724 622
Chemicals and Petroleum 161 124 136
Carter Holt Harvey(e) 71 39 20
Corporate(b) 26 -- --
------- ------- -------
Operating Profit 2,712 1,808 1,376
Interest expense, net (816) (541) (614)
Minority interest adjustment(e) 108 74 57
Corporate items, net (312) (336) (237)(c)
Merger integration costs (54) (255) --
Restructuring and other charges (949) (338) (256)
Reversals of reserves no longer required 34 36 83
Gain on sale of business -- -- 20
------- ------- -------
Earnings Before Income Taxes, Minority
Interest and Extraordinary Items $ 723 $ 448 $ 429
======= ======= =======
30
<Page>
Financial Information by Industry Segment and Geographic Area
Restructuring and Other Charges
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Printing Papers $425 $ 55 $ 32
Industrial and Consumer Packaging 290 114 46
Distribution 22 23 31
Forest Products 35 16 14
Chemicals and Petroleum 34 63 4
Carter Holt Harvey 10 27 18
Corporate(a) 133 40 111
---- ---- -----
Restructuring and Other Charges $949 $338 $256
==== ==== =====
Depreciation and Amortization
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Printing Papers(f) $ 635 $ 556 $ 535
Industrial and Consumer Packaging 487 466 447
Distribution 35 32 25
Forest Products(f) 273 196 218
Chemicals and Petroleum 91 99 106
Carter Holt Harvey(f) 177 201 193
Corporate 218 115 136
------- ------- -------
Depreciation and Amortization $ 1,916 $ 1,665 $ 1,660
======= ======= =======
External Sales by Major Product
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Printing Papers $ 7,210 $ 5,069 $ 5,475
Packaging 8,051 7,361 7,360
Distribution 7,275 6,926 6,235
Forest Products 4,226 3,759 3,430
Chemicals and Petroleum 1,418 1,458 1,230
Corporate Sales(c) -- -- 249
------- ------- -------
Net Sales $28,180 $24,573 $23,979
======= ======= =======
(a) Certain reclassifications and adjustments have been made to prior year
amounts.
(b) Includes results of operations from Champion, which was acquired on June
20, 2000. Beginning on July 1, 2000, the results of the former Champion
business have been included in the appropriate business segment.
(c) Includes results or assets, as applicable, from operations disposed of in
1998.
(d) Includes equity investments (in millions) of $16 in 2000, $876 in 1999 and
$956 in 1998.
(e) Includes equity earnings (in millions) of $11 in 2000, $54 in 1999 and $20
in 1998. Half of these equity earnings amounts are in the Carter Holt
Harvey segment and half are in the minority interest adjustment.
(f) Includes cost of timber harvested.
Information by Geographic Area
Net Sales(g)
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
United States(h) $22,131 $19,152 $18,682
Europe 3,353 3,257 3,251
Pacific Rim(i) 1,923 1,865 1,731
Americas, other than U.S.(k) 773 299 315
------- ------- -------
Net Sales $28,180 $24,573 $23,979
======= ======= =======
European Sales by Industry Segment
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Printing Papers $ 1,637 $ 1,514 $ 1,423
Industrial and Consumer Packaging 736 750 772
Distribution 370 347 323
Forest Products 196 200 208
Chemicals and Petroleum 414 446 465
Other Businesses(c) -- -- 60
------- ------- -------
European Sales $ 3,353 $ 3,257 $ 3,251
======= ======= =======
Long-Lived Assets(j)
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
United States $17,026 $12,325 $13,149
Europe 1,213 1,888 2,101
Pacific Rim(i) 2,291 2,625 2,793
Americas, other than U.S.(k) 1,313 77 74
Corporate 134 387 296
------- ------- -------
Long-Lived Assets $21,977 $17,302 $18,413
======= ======= =======
(g) Net sales are attributed to countries based on location of seller.
(h) Export sales to unaffiliated customers (in billions) were $1.6 in 2000, and
$1.5 in 1999 and 1998.
(i) Operations in New Zealand and Australia account for most of the Pacific Rim
amounts.
(j) Long-Lived Assets includes Forestlands and Plants, Properties and
Equipment, net.
(k) Increases in 2000 reflect operations in Brazil and Canada acquired with
Champion.
31
<Page>
Report of Management on Financial Statements
The management of International Paper Company is responsible for the fair
presentation of the information contained in the financial statements in this
annual report. The statements are prepared in accordance with U.S. generally
accepted accounting principles and reflect management's best judgment as to our
financial position, results of operations and cash flows.
International Paper maintains a system of internal accounting controls
designed to provide reasonable assurance that transactions are properly recorded
and summarized so that reliable financial records and reports can be prepared
and assets safeguarded. The internal controls system includes our long-standing
policy on ethical business conduct and careful selection and training of
supervisory and management personnel, appropriate delegation of authority and
division of responsibility, dissemination of accounting and business policies
throughout International Paper, and an extensive program of internal audits with
management follow-up.
The independent public accountants provide an objective, independent review
of management's discharge of its responsibility for the fairness of our
financial statements. They review our internal accounting controls and conduct
tests of procedures and accounting records to enable them to form the opinion
set forth in their report.
The Board of Directors monitors management's administration of International
Paper's financial and accounting policies and practices, and the preparation of
these financial statements. The Audit and Finance Committee (Committee), which
consists of five non-employee directors, meets regularly with representatives of
management, the independent public accountants and the Internal Auditor to
review their activities. The Committee has reviewed and discussed the
consolidated financial statements for the year ended December 31, 2000 with
management and the independent public accountants. The Committee's report
recommending the inclusion of such financial statements in this Annual Report is
set forth in our Proxy Statement.
The independent public accountants and the Internal Auditor both have free
access to the Committee and meet regularly with the Committee, with and without
management representatives in attendance.
JOHN V. FARACI
John V. Faraci
Executive Vice President and Chief Financial Officer
Report of Independent Public Accountants
To the Shareholders of International Paper Company:
We have audited the accompanying consolidated balance sheets of International
Paper Company (a New York corporation) and subsidiaries as of December 31, 2000
and 1999, and the related statements of earnings, common shareholders' equity
and cash flows for each of the three years ended December 31, 2000. These
financial statements are the responsibility of International Paper's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the consolidated financial statements of Union
Camp Corporation (a company acquired during 1999 in a transaction accounted for
as a pooling-of-interests) prior to 1999. The Union Camp financial statements
reflect total assets and total revenues of 16% and 19% in 1998 of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for that entity, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of International Paper Company and subsidiaries
as of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years ended December 31, 2000 in conformity
with generally accepted accounting principles in the United States.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
New York, N.Y.
February 13, 2001
32
<Page>
Consolidated Statement of Earnings International Paper
- --------------------------------------------------------------------------------------------------------------
In millions, except per share amounts, for the years ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Net Sales $28,180 $24,573 $23,979
------- ------- -------
Costs and Expenses
Cost of products sold 20,082 17,960 17,758
Selling and administrative expenses 2,283 2,083 2,032
Depreciation and amortization 1,916 1,665 1,660
Distribution expenses 1,104 1,098 1,087
Taxes other than payroll and income taxes 287 226 231
Equity (earnings) losses from investment in Scitex -- (5) 15
Merger integration costs 54 255 --
Restructuring and other charges 949 338 256
------- ------- -------
Total Costs and Expenses 26,675 23,620 23,039
Reversals of reserves no longer required 34 36 83
Gain on sale of business -- -- 20
------- ------- -------
Earnings Before Interest, Income Taxes, Minority Interest
and Extraordinary Items 1,539 989 1,043
Interest expense, net 816 541 614
------- ------- -------
Earnings Before Income Taxes, Minority Interest
and Extraordinary Items 723 448 429
Income tax provision 117 86 95
Minority interest expense, net of taxes 238 163 87
------- ------- -------
Earnings Before Extraordinary Items 368 199 247
Impairment losses on businesses to be sold, net of taxes (541) -- --
Net gain on sales of investments and businesses, net of taxes
and minority interest 315 -- --
Loss on extinguishment of debt, net of taxes -- (16) --
------- ------- -------
Net Earnings $ 142 $ 183 $ 247
======= ======= =======
Earnings Per Common Share--Before Extraordinary Items $ 0.82 $ 0.48 $ 0.60
Earnings (Loss) Per Common Share--Extraordinary Items (0.50) (0.04) --
------- ------- -------
Earnings Per Common Share $ 0.32 $ 0.44 $ 0.60
======= ======= =======
Earnings Per Common Share--Assuming Dilution $ 0.32 $ 0.44 $ 0.60
======= ======= =======
The accompanying notes are an integral part of these financial statements.
33
<Page>
Consolidated Balance Sheet International Paper
- ---------------------------------------------------------------------------------------------------------
In millions at December 31 2000 1999
- ---------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and temporary investments $ 1,198 $ 453
Accounts and notes receivable, less allowances of $128 in 2000 and $106 in 1999 3,433 3,227
Inventories 3,182 3,203
Assets of businesses held for sale 1,890 --
Other current assets 752 358
------- -------
Total Current Assets 10,455 7,241
------- -------
Plants, Properties and Equipment, net 16,011 14,381
Forestlands 5,966 2,921
Investments 269 1,044
Goodwill 6,310 2,596
Deferred Charges and Other Assets 3,098 2,085
------- -------
Total Assets $42,109 $30,268
======= =======
Liabilities and Common Shareholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 2,115 $ 920
Accounts payable 2,113 1,870
Accrued payroll and benefits 511 423
Liabilities of businesses held for sale 541 --
Other accrued liabilities 2,133 1,169
------- -------
Total Current Liabilities 7,413 4,382
------- -------
Long-Term Debt 12,648 7,520
Deferred Income Taxes 4,699 3,344
Other Liabilities 2,155 1,332
Minority Interest 1,355 1,581
International Paper-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiaries Holding International Paper Debentures--Note 8 1,805 1,805
Commitments and Contingent Liabilities--Note 11
Common Shareholders' Equity
Common stock, $1 par value, 2000--484.2 shares, 1999--414.6 shares 484 415
Paid-in capital 6,501 4,078
Retained earnings 6,308 6,613
Accumulated other comprehensive income (loss) (1,142) (739)
------- -------
12,151 10,367
Less: Common stock held in treasury, at cost, 2000--2.7 shares, 1999--1.2 shares 117 63
------- -------
Total Common Shareholders' Equity 12,034 10,304
------- -------
Total Liabilities and Common Shareholders' Equity $42,109 $30,268
======= =======
The accompanying notes are an integral part of these financial statements.
34
<Page>
Consolidated Statement of Cash Flows International Paper
- ----------------------------------------------------------------------------------------
In millions for the years ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------------------
Operating Activities
Net earnings $ 142 $ 183 $ 247
Depreciation and amortization 1,916 1,665 1,660
Deferred income tax provision (benefit) (323) (208) 132
Payments related to restructuring and legal reserves (233) (191) (82)
Payments related to mergers (58) (172) -
Merger integration costs 54 255 -
Restructuring and other charges 949 338 256
Reversals of reserves no longer required (34) (36) (83)
Gains on sales of investments and businesses (748) - (20)
Loss on extinguishment of debt - 26 -
Impairment losses on businesses to be sold 833 - -
Other, net 78 (100) (86)
Changes in current assets and liabilities
Accounts and notes receivable (59) (361) 152
Inventories (143) (121) 51
Accounts payable and accrued liabilities 19 449 (113)
Other 37 1 (16)
------- ------- -------
Cash Provided by Operations 2,430 1,728 2,098
------- ------- -------
Investment Activities
Invested in capital projects (1,352) (1,139) (1,322)
Mergers and acquisitions, net of cash acquired (5,677) (54) (498)
Proceeds from divestitures 2,116 119 523
Other (1) (11) (51)
------- ------- -------
Cash Used for Investment Activities (4,914) (1,085) (1,348)
------- ------- -------
Financing Activities
Issuance of common stock 25 246 115
Issuance of preferred securities by subsidiary - - 1,525
Issuance of debt 6,328 1,023 348
Reduction of debt (2,770) (1,563) (2,213)
Change in bank overdrafts 118 102 68
Dividends paid (447) (418) (431)
Other 140 (96) (63)
------- ------- -------
Cash Provided by (Used for) Financing Activities 3,394 (706) (651)
------- ------- -------
Effect of Exchange Rate Changes on Cash (165) (17) 1
------- ------- -------
Change in Cash and Temporary Investments 745 (80) 100
Cash and Temporary Investments
Beginning of the year 453 533 433
------- ------- -------
End of the year $ 1,198 $ 453 $ 533
======= ======= =======
The accompanying notes are an integral part of these financial statements.
35
<Page>
Consolidated Statement of Common International Paper
Shareholders'Equity
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common Stock Issued Other Com- Treasury Stock Common
In millions, except share amounts -------------------- Paid-in Retained prehensive ---------------- Shareholders'
in thousands Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1998 408,174 $ 408 $ 3,659 $ 7,032 $ (415) 726 $ 37 $ 10,647
Issuance of stock for acquisition 4,683 5 227 -- -- -- -- 232
Issuance of stock for various plans 605 1 23 -- -- (2,694) (128) 152
Repurchase of stock (277) (1) (13) -- -- 2,520 115 (129)
Cash dividends--Common stock
($1.05 per share) -- -- -- (431) -- -- -- (431)
Comprehensive income (loss)
Net earnings -- -- -- 247 -- -- -- 247
Minimum pension liability adjustment
(less tax benefit of $5) -- -- -- -- (8) -- -- (8)
Change in cumulative foreign currency
translation adjustment
(less tax benefit of $2) -- -- -- -- 21 -- -- 21
Realized foreign currency translation
adjustment related to divestitures
(less tax benefit of $4) -- -- -- -- 7 -- -- 7
--------
Total comprehensive income 267
------- ----- ------- ------- ------- ------ ------ --------
Balance, December 31, 1998 413,185 413 3,896 6,848 (395) 552 24 10,738
Issuance of stock for various plans 1,399 2 182 -- -- (1,866) (87) 271
Repurchase of stock -- -- -- -- -- 2,530 126 (126)
Cash dividends--Common stock
($1.01 per share) -- -- -- (418) -- -- -- (418)
Comprehensive income (loss)
Net earnings -- -- -- 183 -- -- -- 183
Minimum pension liability adjustment
(less tax expense of $1) -- -- -- -- 2 -- -- 2
Change in cumulative foreign currency
translation adjustment
(less tax expense of $31) -- -- -- -- (346) -- -- (346)
--------
Total comprehensive (loss) (161)
------- ----- ------- ------- ------- ------ ------ --------
Balance, December 31, 1999 414,584 415 4,078 6,613 (739) 1,216 63 10,304
Issuance of stock for acquisition 68,706 69 2,360 -- -- -- -- 2,429
Issuance of stock for various plans 870 -- 63 -- -- (236) (12) 75
Repurchase of stock -- -- -- -- -- 1,710 66 (66)
Cash dividends--Common stock
($1.00 per share) -- -- -- (447) -- -- -- (447)
Comprehensive income (loss)
Net earnings -- -- -- 142 -- -- -- 142
Minimum pension liability adjustment
(less tax benefit of $13) -- -- -- -- (23) -- -- (23)
Change in cumulative foreign currency
translation adjustment
(less tax expense of $123) -- -- -- -- (380) -- -- (380)
--------
Total comprehensive (loss) (261)
------- ----- ------- ------- ------- ------ ------ --------
Balance, December 31, 2000 484,160 $ 484 $ 6,501 $ 6,308 $(1,142) 2,690 $ 117 $ 12,034
======= ===== ======= ======= ======= ====== ======= ========
The cumulative foreign currency translation adjustment (in millions) was
$(1,113), $(733) and $(387) at December 31, 2000, 1999 and 1998, respectively,
and is included as a component of accumulated other comprehensive income (loss).
The accompanying notes are an integral part of these financial statements.
36
<Page>
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Nature of Our Business
International Paper is a global forest products, paper and packaging company
that is complemented by an extensive distribution system, with primary markets
and manufacturing operations in the U.S., Canada, Europe, the Pacific Rim and
South America. Substantially all of our businesses have experienced, and are
likely to continue to experience, cycles relating to available industry capacity
and general economic conditions. For a further discussion of our business, see
pages 6 through 29 of management's discussion and analysis of financial
condition and results of operations.
Financial Statements
The preparation of these financial statements in conformity with U.S. generally
accepted accounting principles requires the use of management's estimates. For a
further discussion of significant estimates and assumptions that affect the
reported amounts of assets and liabilities, results of operations, and
disclosure of contingent assets and liabilities, see the legal and environmental
issues section beginning on page 24. Actual future results could differ from
management's estimates. See page 29 for a description of factors which could
cause future results to differ from management's estimates.
On June 20, 2000, International Paper acquired Champion International
Corporation (Champion) in a transaction accounted for as a purchase. The
accompanying financial statements include Champion's results of operations from
the date of acquisition.
On April 30, 1999, International Paper completed the merger with Union Camp
Corporation (Union Camp) in a transaction accounted for as a
pooling-of-interests. The accompanying financial statements include the
financial position and results of operations for both Union Camp and
International Paper for all periods presented.
Revenue Recognition
Revenues are recognized when goods are shipped except for export and timberland
sales. Export sales revenue is recognized at the point title passes, generally
at the destination port. Timberland sales revenue is recognized when title and
risk of loss pass to the buyer.
Shipping and Handling Costs
Shipping and handling costs, such as freight to our customers' destinations, are
included in distribution expenses in the consolidated statement of earnings.
These costs when included in the sales price charged for our products are
recognized in net sales.
Consolidation
The consolidated financial statements include the accounts of International
Paper and its subsidiaries. Minority interest represents minority
shareholders' proportionate share of the equity in several of our consolidated
subsidiaries, primarily Carter Holt Harvey Limited, Zanders Feinpapiere AG
(Zanders), Georgetown Equipment Leasing Associates, L.P., Trout Creek Equipment
Leasing, L.P. and, prior to its sale in 2000, Bush Boake Allen. International
Paper sold its interest in Zanders in January 2001. All significant intercompany
balances and transactions are eliminated.
Investments in affiliated companies are accounted for by the equity method,
including companies owned 20% to 50% and our 13% investment in Scitex
Corporation, Ltd. prior to its sale in 2000. International Paper's share of
affiliates' earnings is included in the consolidated statement of earnings.
Temporary Investments
Temporary investments with an original maturity of three months or less are
treated as cash equivalents and are stated at cost, which approximates market.
Inventories
Inventory values include all costs directly associated with manufacturing
products: materials, labor and manufacturing overhead. These values are
presented at cost or market, if it is lower. In the U.S., costs of raw materials
and finished pulp and paper products are generally determined using the last-in,
first-out method. Other inventories are primarily stated using the first-in,
first-out or average cost method.
Plants, Properties and Equipment
Plants, properties and equipment are stated at cost, less accumulated
depreciation. Expenditures for betterments are capitalized whereas normal
repairs and maintenance are expensed as incurred. For financial reporting
purposes, the units-of-production method of depreciation is used for major pulp
and
37
<Page>
Notes to Consolidated Financial Statements
paper mills and certain wood products facilities and the straight-line method
for other plants and equipment. Annual straight-line depreciation rates are
buildings, 2 1/2% to 8 1/2%, and machinery and equipment, 5% to 33%. For tax
purposes, depreciation is computed using accelerated methods.
Interest costs related to the development of certain long-term assets are
capitalized and amortized over the related assets' estimated useful lives.
Capitalized net interest costs were $25 million in 2000, $29 million in 1999 and
$53 million in 1998. Interest payments made during 2000, 1999 and 1998 were $816
million, $594 million and $766 million, respectively. Total interest expense was
$938 million in 2000, $611 million in 1999 and $706 million in 1998.
Forestlands
At December 31, 2000, International Paper and its subsidiaries controlled about
12 million acres of forestlands in the U.S., 1.5 million acres in Brazil,
820,000 acres in New Zealand, and had, through licenses and forest management
agreements, harvesting rights on government-owned timberlands in Canada.
Forestlands include owned property as well as certain timber harvesting rights
with terms of one or more years, and are stated at cost, less cost of timber
harvested (COTH). Costs attributable to timber are charged against income as
trees are cut. The rate charged is determined annually based on the relationship
of incurred costs to estimated current volume. Cost of timber harvested is
included in depreciation and amortization in the consolidated statement of
earnings.
Effective January 1, 1998, International Paper consolidated its accounting
for forestlands in the southern United States into one COTH pool to parallel
the manner in which the southern forestlands asset is managed internally, and
to better reflect the homogeneous nature of the forest species across the
South. Prior to this date, two COTH pools had been used. This change in
accounting resulted in an increase in 1998 pretax income of approximately $11.7
million, or slightly less than $.02 per share. Due to the cumulative nature of
the COTH computation, calculation of the cumulative effect of the accounting
change as of the beginning of 1998, and disclosure of pro forma amounts for
prior years, are not determinable.
Goodwill
Goodwill, the cost in excess of assigned value of businesses acquired, is
amortized over its estimated period of benefit on a straight-line basis, not to
exceed 40 years. Accumulated amortization was $574 million and $487 million at
December 31, 2000 and 1999, respectively. Goodwill amortization expense is
included in depreciation and amortization in the consolidated statement of
earnings.
Impairment of Long-Lived Assets
Long-lived assets, including allocated goodwill, are reviewed for impairment
upon the occurrence of events or changes in circumstances that indicate the
carrying value of the assets may not be recoverable, as measured by comparing
their net book value to the estimated future cash flows generated by their use.
Impaired assets are recorded at the lesser of their carrying value or fair
market value as determined by their expected future discounted cash flows.
Enterprise-level goodwill is periodically reviewed for impairment by
comparing expected undiscounted cash flows to the carrying value of goodwill.
Enterprise-level goodwill would be written down to fair market value if it were
impaired.
Stock-Based Compensation
Stock options and other stock-based compensation awards are accounted for using
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Environmental Remediation Costs
Costs associated with environmental remediation obligations are accrued when
such costs are probable and reasonably estimable. Such accruals are adjusted as
further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are discounted to their
present value when the expected cash flows are reliably determinable.
Translation of Financial Statements
Balance sheets of international operations are translated into U.S. dollars at
year-end exchange rates, while statements of earnings are translated at average
rates. Adjustments resulting from financial statement translations are included
as cumulative translation adjustments in accumulated other comprehensive income
(loss). Gains and losses resulting from foreign currency transactions are
included in earnings.
Reclassifications
Certain reclassifications have been made to prior-year amounts to conform with
the current-year presentation.
38
<Page>
Notes to Consolidated Financial Statements
2 Earnings Per Common Share
- --------------------------------------------------------------------------------
Earnings per common share before extraordinary items is 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, is computed assuming that all potentially dilutive securities
were converted into common shares at the beginning of each year. A
reconciliation of the amounts included in the computation of earnings per common
share before extraordinary items and earnings per common share before
extraordinary items, assuming dilution, is as follows:
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Earnings before extraordinary items $ 368 $ 199 $ 247
Effect of dilutive securities
Preferred securities of subsidiary trust - - -
----- ----- -----
Earnings before extraordinary items--
assuming dilution $ 368 $ 199 $ 247
===== ===== =====
Average common shares outstanding 449.6 413.0 411.0
Effect of dilutive securities
Long-term incentive plan
deferred compensation - - -
Stock options 0.4 3.1 3.2
Preferred securities of subsidiary trust - - -
----- ----- -----
Average common shares outstanding--
assuming dilution 450.0 416.1 414.2
===== ===== =====
Earnings per common share before
extraordinary items $0.82 $0.48 $0.60
===== ===== =====
Earnings per common share before
extraordinary items--assuming dilution $0.82 $0.48 $0.60
===== ===== =====
Note: If an amount does not appear in the above table, the security was
antidilutive for the period presented.
3 Industry Segment Information
- --------------------------------------------------------------------------------
Financial information by industry segment and geographic area for 2000, 1999 and
1998 is presented on pages 30 and 31.
4 Recent Accounting Developments
- --------------------------------------------------------------------------------
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," an amendment to SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 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. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.
International Paper will adopt SFAS No. 133 (as amended by SFAS No. 138) as
of January 1, 2001. We estimate that adoption will require a one-time, non-cash
charge before taxes and minority interest of approximately $23 million ($14
million after taxes and minority interest), which will be recorded as a
cumulative change in accounting method.
5 Mergers, Acquisitions and Divestitures
- --------------------------------------------------------------------------------
On June 20, 2000, International Paper completed the previously announced
acquisition of Champion, a leading manufacturer of paper for business
communications, commercial printing and publications with significant market
pulp, plywood and lumber manufacturing operations. Champion shareholders
received $50 in cash and $25 worth of International Paper common stock for each
Champion share. The acquisition was completed for approximately $5 billion in
cash and 68.7 million shares of International Paper common stock with a market
value of $2.4 billion. Approximately $2.8 billion of Champion debt was assumed.
On March 31, 2000, we acquired Shorewood Packaging Corporation (Shorewood),
a leader in the manufacture of premium retail packaging, for approximately $640
million in cash and the assumption of $280 million of debt.
On April 28, 2000, Carter Holt Harvey purchased CSR Limited's (CSR) medium
density fiberboard and particleboard businesses and its Oberon sawmill for
approximately $200 million in cash.
39
<Page>
Notes to Consolidated Financial Statements
The Champion, Shorewood and CSR acquisitions were accounted for using the
purchase method. Their results of operations are included in International
Paper's consolidated statement of earnings from their respective dates of
acquisition. The accompanying consolidated balance sheet as of December 31, 2000
reflects preliminary purchase price allocations for Champion, Shorewood and CSR
to the fair value of the assets and liabilities acquired.
The following table presents unaudited pro forma financial information
that reflects the combined results of operations of International Paper,
Champion and Shorewood as if the acquisitions had occurred as of the beginning
of each of the respective periods. This pro forma information does not
necessarily reflect the actual results that would have occurred, nor is it
necessarily indicative of future results of operations of the combined
companies.
- --------------------------------------------------------------------------------
In millions, except per share amounts,
for the twelve months ended December 31, 2000 1999
- --------------------------------------------------------------------------------
Net sales $31,050 $30,549
Earnings before extraordinary items 304 169
Net earnings 78 149
Earnings per common share before
extraordinary items 0.63 0.35
Earnings per common share 0.16 0.31
International Paper announced a divestment program in connection with the
Champion acquisition that it now estimates will generate gross proceeds of
approximately $5 billion by the end of 2001. As of March 1, 2001, about $1.2
billion of proceeds have been realized under the program, primarily from the
dispositions of Bush Boake Allen, the oil and gas interests, Zanders and the
former Champion headquarters building. It is possible that additional charges
will be required in 2001 as specific businesses are identified for sale. See
Note 7-Businesses Held for Sale for information related to the planned sales
under this program.
The merger with Union Camp 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.
Also 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 that
serve industrial and primary produce customers.
During 1998, International Paper acquired the Zellerbach distribution
business from the Mead Corporation for $261 million in cash, Weston Paper and
Manufacturing Company through the exchange of 4.7 million International Paper
common shares valued at $232 million, and Svetogorsk AO, a Russia-based pulp and
paper business. Carter Holt Harvey and International Paper jointly acquired
Marinetti S.A.'s paper cup division based in Chile, and Australia-based
Continental Cup. Carter Holt Harvey separately acquired Riverwood International,
an Australia-based folding carton business. International Paper also entered
into a joint venture with Olmuksa in Turkey to manufacture containerboard and
corrugated boxes. Finally, a wholly owned subsidiary of International Paper
purchased all of the publicly traded Class A depository units of IP Timberlands,
Ltd. for $100 million in cash.
All of the above acquisitions 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 acquisitions accounted for
under the purchase method have been included in the consolidated statement of
earnings from the dates of acquisition.
In November 2000, International Paper sold its interest in Bush Boake
Allen, for $640 million, resulting in an extraordinary gain of $183 million
after taxes and minority interest. This transaction was completed as part of the
asset sale program. Bush Boake Allen, which had been included in the Chemicals
and Petroleum segment, contributed sales of $425 million, $500 million and $485
million and operating earnings of $31 million, $28 million and $37 million for
each of the three years ended December 31, 2000, 1999 and 1998, respectively.
In January 2000, International Paper sold its equity interest in Scitex for
$79 million, and Carter Holt Harvey sold its equity interest in Compania de
Petroleos de Chile (COPEC) for just over $1.2 billion. These sales resulted in a
combined extraordinary gain of $134 million after taxes and minority interest.
The gains on these sales are recorded as extraordinary items pursuant to the
pooling-of-interests rules.
40
<Page>
Notes to Consolidated Financial Statements
6 Special Items Including Restructuring and
Business Improvement Actions
- --------------------------------------------------------------------------------
2000: Special items reduced 2000 net earnings by $601 million, 1999 net earnings
by $352 million and 1998 net earnings by $98 million. The following table and
discussion presents the impact of special items for 2000:
- -------------------------------------------------------------------------------
In millions 2000
- -------------------------------------------------------------------------------
Earnings Earnings
(Loss) (Loss)
Before Income After Income
Taxes and Taxes and
Minority Minority
Interest Interest
- -------------------------------------------------------------------------------
Before special and extraordinary items $1,692 $ 969
Merger-related expenses (54) (33)
Restructuring and other charges (824) (509)
Provision for legal reserves (125) (80)
Reversals of reserves no longer required 34 21
------ ------
After special items $ 723 $ 368
====== ======
During 2000, special charges before taxes and minority interest of $969
million ($601 million after taxes and minority interest) were recorded. These
special items included a $54 million pre-tax charge ($33 million after taxes)
for merger-related expenses, an $824 million charge before taxes and minority
interest ($509 million after taxes and minority interest) for asset shutdowns of
excess internal capacity and cost reduction actions, a $125 million pre-tax
charge ($80 million after taxes) for additional Masonite legal reserves and a
$34 million pre-tax credit ($21 million after taxes) for the reversals of
reserves no longer required. A further discussion of the Masonite legal
reserves, can be found in Note 11-Commitments and Contingent Liabilities.
The merger-related expenses of $54 million consisted primarily of travel,
systems integration, employee retention, and other one-time cash costs related
to the Champion acquisition and Union Camp merger.
The $824 million charge for the asset shutdowns of excess internal capacity
and cost reduction actions consisted of a $71 million charge in the second
quarter of 2000 and a $753 million charge in the fourth quarter of 2000.
The second quarter charge of $71 million consisted of $40 million of asset
write-downs and $31 million of severance and other charges. The following table
and discussion presents additional detail related to this charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Printing 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
=== === ===
(a) The Printing Papers business shut down the Millers Falls, Massachusetts
mill in August 2000 due to excess internal capacity. Charges associated
with the shutdown included $22 million to write down the assets to their
estimated fair market value of zero, $2 million of severance costs covering
the termination of 119 employees, and other exit costs of $3 million. The
Millers Falls mill had revenues of $33 million, $39 million and $44 million
in 2000, 1999 and 1998, respectively. The mill had no operating income in
2000 and operating income of $3 million in both 1999 and 1998. At December
31, 2000, all 119 employees had been terminated.
Also, a severance charge of $2 million was recorded covering the
elimination of 108 salaried positions at the Franklin, Virginia mill in a
continuing effort to improve its cost effectiveness and long-term
competitive position. At December 31, 2000, 103 employees had been
terminated.
(b) The Consumer Packaging business implemented a plan to reduce excess
internal capacity and streamline administrative functions at several of its
locations as a result of the Shorewood acquisition. As a result, the
Richmond, Virginia facility was shut down in June 2000. Charges associated
with this shutdown included $6 million to write down assets to their fair
market value of zero, $2 million of severance costs covering the
termination of 126 employees, and other exit costs of $1 million. This
facility had revenues of $8 million, $23 million and $37 million in 2000,
1999 and 1998, respectively. The Richmond facility had operating losses of
$2 million and $1 million in 2000 and 1999, respectively, and operating
income of $3 million in 1998. At December 31, 2000, 125 employees had been
terminated.
41
<Page>
Notes to Consolidated Financial Statements
Management also permanently idled 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.
Related charges included $1 million of asset write-downs, $3 million of
severance costs covering the termination of 187 employees, and $2 million
of other exit costs. At December 31, 2000, 151 employees had been
terminated.
A severance reserve of $1 million was also established to streamline
the Consumer Packaging business. This reserve covers the termination of 17
employees. At December 31, 2000, all 17 employees had been terminated.
(c) Industrial Papers shut down the Knoxville, Tennessee converting facility in
December 2000 to reduce excess internal capacity. Assets were written down
$9 million to their estimated fair market value and a severance charge of
$1 million was recorded to terminate 120 employees. Other exit costs
totaled $3 million. The Knoxville facility had revenues of $46 million, $62
million and $56 million in 2000, 1999 and 1998, respectively. This facility
had operating income of $2 million in 2000 and 1999, and an operating loss
of $2 million in 1998. At December 31, 2000, the head count had been
reduced by 106 employees.
(d) Other includes $8 million related to Industrial Packaging, primarily for
the shutdown of the Tupelo, Mississippi sheet plant. The Industrial
Packaging charge included $2 million of asset write-offs, $5 million of
severance costs covering the termination of 221 employees and $1 million of
other cash costs. At December 31, 2000, 212 employees had been terminated.
Other also includes $5 million related to the indefinite closure of
Carter Holt Harvey's Mataura paper mill. This charge included $3 million of
severance costs covering the termination of 158 employees and $2 million of
other cash costs. At December 31, 2000, all 158 employees had been
terminated.
The fourth quarter charge of $753 million consisted of $536 million of
asset write-downs and $217 million of severance and other charges. The following
table and discussion presents additional detail related to this charge:
- --------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- --------------------------------------------------------------------------------
Printing Papers (a) $293 $103 $396
Consumer Packaging (b) 86 7 93
Industrial Packaging (c) 114 46 160
Chemicals and Petroleum (d) 16 18 34
Forest Products (e) 15 20 35
Distribution (f) 3 19 22
Carter Holt Harvey (g) 1 4 5
Other (h) 8 - 8
---- ---- ----
$536 $217 $753
==== ==== ====
(a) The Printing Papers business announced the shutdown of the Mobile, Alabama
mill and the Lock Haven, Pennsylvania mill. The announcement was in
conjunction with the business's plan to realign and rationalize
papermaking capacity to benefit future operations. Charges associated with
the Mobile shutdown included $223 million to write assets down to their
salvage value, $31 million of severance costs covering the termination of
760 employees, and other exit costs of $41 million. The Mobile mill had
revenues of $274 million, $287 million and $258 million in 2000, 1999 and
1998, respectively. This mill had operating earnings of $34 million and $8
million in 2000 and 1999, respectively, and an operating loss of $43
million in 1998. Charges associated with the Lock Haven shutdown included
$70 million to write the assets down to their salvage value, $16 million
of severance costs covering the termination of 589 employees, and other
exit costs of $15 million. The Lock Haven mill had revenues of $267
million in 2000 and $225 million in each of 1999 and 1998. This mill had
an operating loss of $21 million in 2000, and operating earnings of $12
million and $27 million in 1999 and 1998, respectively.
(b) The Consumer Packaging business announced shutdowns of the beverage
packaging converting plant in Jamaica and the packaging facility in
Cincinnati, Ohio. Production at the Jamaica plant was moved to Venezuela to
increase plant utilization. The Cincinnati facility was closed in order to
better align our manufacturing system with customer demand. Charges
associated with these shutdowns included $6 million of asset write-downs,
$5 million of
42
<Page>
Notes to Consolidated Financial Statements
severance costs covering the termination of 239 employees, and other exit
costs of $2 million. The Consumer Packaging charge also included an $80
million asset impairment due to continuing losses in its aseptic business.
The aseptic assets were written down to their estimated fair market value
based on expected future discounted cash flows.
(c) The Industrial Packaging business charge of $160 million is related to the
shutdown of the Camden, Arkansas mill, the shutdown of the Pedemonte, Italy
container plant and the write-down of the Walsum No. 10 paper machine. The
Camden mill, which produced unbleached kraft and multi-wall paper, was
closed due to the declining kraft paper market, excess internal capacity
and shrinking customer demand. The mill's assets were written down $102
million to their salvage value, and severance costs of $24 million were
recorded to cover the termination of 613 employees. Other exit costs
totaled $15 million. The Camden mill had revenues of $151 million, $162
million and $153 million and operating earnings of $14 million, $22 million
and $18 million in 2000, 1999 and 1998, respectively. Charges associated
with the Pedemonte plant shutdown included $2 million of asset write-downs,
$3 million of severance costs covering the termination of 83 employees, and
$4 million of other exit costs. The Pedemonte plant had revenues of $9
million, $11 million and $15 million in 2000, 1999 and 1998, respectively.
This plant had operating losses of $2 million in 2000 and 1999 and $1
million in 1998. The business also wrote down the Walsum No. 10 paper
machine acquired in the Union Camp merger by $10 million to its estimated
fair market value.
(d) The Chemicals and Petroleum business charge of $34 million was related to
the announced shutdown of the Oakdale, Louisiana plant. This is part of the
business's Asset Rationalization Program to increase earnings, improve
plant efficiencies and reduce excess internal capacity. A portion of the
facility was shut down at the end of 2000, with the remainder to be closed
by the end of 2001. The charge included $16 million to write the assets
down to their estimated fair market value of zero, $1 million of severance
costs covering the termination of 61 employees, and $17 million of other
exit costs. The Oakdale plant had revenues of $31 million, $30 million and
$32 million and operating earnings of $3 million, zero and $6 million in
2000, 1999 and 1998, respectively.
(e) The Forest Products business charge of $35 million was primarily related to
the announced shutdown of the Washington, Georgia lumber mill and
restructuring costs associated with the Mobile mill closure. The Washington
lumber mill will be closed due to unfavorable market conditions and excess
internal capacity. The mill had revenues of $54 million, $66 million and
$62 million in 2000, 1999 and 1998, respectively. This facility had an
operating loss of $6 million in 2000, operating income of $2 million in
1999, and an operating loss of $3 million in 1998. The total Forest
Products business charge included $15 million of asset write-downs, $7
million of severance costs covering the termination of 264 employees, and
$13 million of other exit costs.
(f) xpedx, our distribution business, implemented a restructuring plan to
consolidate duplicate facilities, eliminate excess internal capacity and
increase productivity. The $22 million charge associated with this plan
included $3 million of asset write-downs, $15 million of severance costs
covering the termination of 433 employees, and $4 million of other cash
costs.
(g) The Carter Holt Harvey charge of $5 million is related to cost reduction
actions primarily associated with the tissue and packaging businesses. This
charge included $1 million of asset write-downs and $4 million of severance
covering the termination of 145 employees.
(h) This $8 million charge relates to the write-down of our investment in
PaperExchange.com, an online provider of e-commerce for the paper industry,
to its estimated fair market value.
Also, a pre-tax credit of $28 million was recorded for excess 1999 second and
fourth quarter restructuring reserves no longer required, and a pre-tax credit
of $6 million was recorded for excess Union Camp merger-related termination
benefits reserves no longer required.
43
<Page>
Notes to Consolidated Financial Statements
The following table presents a roll forward of the severance and other costs
included in the 2000 restructuring plans:
- --------------------------------------------------------------------------------
Severance
In millions and Other
- --------------------------------------------------------------------------------
Opening Balance (second quarter 2000) $ 31
Additions (fourth quarter 2000) 217
2000 Activity
Cash charges (19)
----
Balance, December 31, 2000 $229
====
The severance charges recorded in the second and fourth quarters of 2000
related to 4,243 employees. As of December 31, 2000, 991 employees had been
terminated.
1999: The following table and discussion presents the impact of special items
for 1999:
- --------------------------------------------------------------------------------
In millions 1999
- --------------------------------------------------------------------------------
Earnings Earnings
(Loss) (Loss)
Before Income After Income
Taxes and Taxes and
Minority Minority
Interest Interest
- --------------------------------------------------------------------------------
Before special and extraordinary items $1,005 $ 551
Union Camp merger-related termination benefits (148) (97)
Merger-related expenses (107) (78)
Restructuring and other charges (298) (180)
Environmental remediation charge (10) (6)
Provision for legal reserves (30) (18)
Reversals of reserves no longer required 36 27
----- -----
After special items $ 448 $ 199
===== =====
During 1999, special charges before taxes and minority interest of $557
million ($352 million after taxes and minority interest) were recorded. These
special items included a $148 million pre-tax charge ($97 million after taxes)
for Union Camp merger-related termination benefits, a $107 million pre-tax
charge ($78 million after taxes) for merger-related expenses, a $298 million
charge before taxes and minority interest ($180 million after taxes and minority
interest) 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 reversals of reserves that were no longer required.
The merger-related expenses of $107 million consisted of $49 million of
merger costs and $58 million of post-merger expenses. The merger costs were
primarily investment banker, consulting, legal and accounting fees. Post-merger
integration expenses included costs related to employee retention, such as stay
bonuses, and other cash costs related to the integration of Union Camp.
The Union Camp merger-related termination benefits charge related 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 originally identified for termination. An additional 346
employees left the company after the merger was announced, but were not eligible
for benefits under the integration benefits program completed in the third
quarter of 2000. Benefits payable under this program for certain senior
executives and managers were paid from the general assets of International
Paper. Benefits for remaining employees were primarily paid from plan assets of
our qualified pension plan. In total, 1,062 employees were terminated. Related
cash payments approximated $71 million (including payments related to our
nonqualified pension plans). The remainder of the costs incurred primarily
represented an increase in the projected benefit obligation of our qualified
pension plan. Upon termination of the program in the third quarter of 2000, $6
million of the original reserve of $148 million was reversed to income.
The following table is a roll forward of the Union Camp merger-related
termination benefits charge:
- --------------------------------------------------------------------------------
Termination
Dollars in millions Benefits
- --------------------------------------------------------------------------------
Special charge (1,218 employees) $ 148
1999 incurred costs (787 employees) (116)
2000 incurred costs (275 employees) (26)
Reversal of reserve no longer required (6)
-----
Balance, December 31, 2000 $ --
=====
Note: Benefit costs are treated as incurred on the termination date of the
employee.
The $298 million charge for asset shutdowns of excess internal capacity
consisted of a $113 million charge in the second quarter of 1999 and a $185
million charge in the fourth quarter of 1999.
44
<Page>
Notes to Consolidated Financial Statements
The second quarter $113 million charge for the asset shutdowns of excess
internal capacity and cost reduction actions included $57 million of asset
write-downs and $56 million of severance and other charges. The following table
and discussion presents additional detail related to this charge:
- ------------------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- ------------------------------------------------------------------------------
Printing Papers (a) $ 6 $27 $ 33
European Papers (b) 3 7 10
Consumer Packaging (c) 19 12 31
Industrial Packaging (d) 12 -- 12
Chemicals and Petroleum (e) 10 3 13
Industrial Papers (f) 7 7 14
--- --- ----
$57 $56 $113
=== === ====
(a) International Paper recorded a charge of $24 million for severance related
to the second phase of the Printing Papers business plan to improve the cost
position of its mills. The charge, pursuant to an ongoing severance program,
covered a reduction of approximately 289 employees at several mills in the
U.S. At December 31, 2000, 258 employees had been terminated.
Also, management approved a decision to permanently shut down the Hudson
River mill No. 4 paper machine located in Corinth, New York and the No. 2
paper machine at the Franklin, Virginia mill due to excess internal
capacity. Both machines have now been shut down. The machines were written
down by $6 million to their estimated fair market value of zero. Severance
costs of $3 million were recorded to cover the termination of 147 employees.
At December 31, 2000, 142 employees had been terminated.
(b) The charge for European Papers, which covered the shutdown of two mills,
consisted of $3 million in asset write-downs, $6 million in severance costs
and $1 million of other exit costs. The Lana mill in Docelles, France was
shut down due to excess internal capacity. The Lana mill produced high-end
uncoated specialty paper that was shifted to the La Robertsau mill in
Strasbourg, France. The mill's fixed assets were written down $3 million to
their estimated fair market value of zero. Costs of $1 million related to
the site closure and severance of $4 million related to the termination of
42 employees were also recorded. The Lana mill had revenues of $12 million
and an operating loss of $2 million for the year ended December 31, 1999. At
December 31, 2000, all 42 employees had been terminated.
The Corimex coating plant in Clermont-Ferrand, France was shut down in
April 1999. The assets at this plant had been considered to be impaired in
1997 and were written down at that time because of a decline in the market
for thermal fax paper. A $2 million severance charge was recorded during the
second quarter of 1999 to cover the costs of terminating 81 employees.
Corimex had revenues of $6 million and an operating loss of $3 million for
the year ended December 31, 1999. At December 31, 2000, all 81 employees had
been terminated.
(c) The Consumer Packaging business implemented a plan to improve the overall
performance of the Moss Point, Mississippi mill. Included in this plan was
the shutdown of the No. 3 paper machine, which produced labels. This
production was transferred to the Hudson River mill. The machine was written
down $6 million to its estimated fair market value of zero. Severance costs
including, but not limited to, employees associated with the No. 3 machine
totaled $10 million and covered the elimination of 360 positions. At
December 31, 2000, 331 employees had been terminated.
Consumer Packaging also shut down the Beverage Packaging facility in
Itu, Brazil in an effort to reduce excess internal capacity in Latin
America. The related assets were written down $13 million to their estimated
fair market value of zero, and a severance charge of $1 million covering the
elimination of 29 positions was recorded. Other exit costs totaled $1
million. At December 31, 2000, 27 employees had been terminated.
(d) With the merger of Union Camp, International Paper negotiated the resolution
of contractual commitments related to an Industrial Packaging investment in
Turkey. As a result of these negotiations and evaluation of this entity, it
was determined that the investment was impaired. A $12 million charge was
recorded to reflect this impairment and the related costs of resolving the
contractual commitments.
(e) As a result of an overall reduction in demand for dissolving pulp, a
decision was made to downsize the Natchez, Mississippi mill. Charges
associated with capacity reduction totaled $10 million and included the
shutdown of several pieces of equipment. A severance charge of $3 million
was recorded to eliminate 89 positions. At December 31, 2000, all 89
employees had been terminated.
45
<Page>
Notes to Consolidated Financial Statements
(f) The Industrial Papers business implemented a plan to reduce excess internal
capacity at several of its locations. The Toronto, Canada plant was closed.
Equipment at the Kaukauna, Wisconsin, Knoxville, Tennessee and Menasha,
Wisconsin facilities was taken out of service. The total amount related to
the write-down of these assets was $7 million. Severance costs related to
these shutdowns were $5 million, based on a personnel reduction of 81
employees. Other exit costs totaled $2 million. At December 31, 2000, 73
employees had been terminated.
The $185 million fourth quarter charge for shutdowns of excess internal
capacity and cost reduction actions included $92 million of asset write-downs
and $93 million of severance and other charges. The following table and
discussion presents additional detail related to this charge:
- ----------------------------------------------------------------------
Asset Severance
In millions Write-downs and Other Total
- ----------------------------------------------------------------------
Printing Papers (a) $ 7 $ 5 $ 12
Consumer Packaging (b) 14 22 36
Industrial Packaging (c) 7 14 21
Chemicals and Petroleum (d) 30 20 50
Building Materials (e) 10 6 16
Distribution (f) 6 17 23
Carter Holt Harvey (g) 18 9 27
--- --- ----
$92 $93 $185
=== === ====
(a) The Printing Papers charge encompassed a $2 million severance charge related
to a production curtailment at the Erie, Pennsylvania mill due to lower
demand, a $3 million write-off of deferred software costs as the result of a
decision to discontinue the installation of a Union Camp order entry system,
and a $7 million impairment of our investment in the Otis Hydroelectric
plant. In November 1999, the Erie mill changed from a seven-day, four-crew
schedule to a three-crew schedule in order to balance operating capacity
with sales demand. This production curtailment resulted in the termination
of 99 employees. At December 31, 2000, all 99 employees had been terminated.
We wrote down our investment in the Otis Hydroelectric partnership to the
approximate fair market value of the investment based upon our offer to
acquire the other partner's interest.
(b) The Consumer Packaging charge of $36 million was related to the shutdown of
facilities, capacity optimization and a deferred software write-off. The
Philadelphia, Pennsylvania plant was shut down in June 2000 and the
Edmonton, Alberta plant was shut down in April 2000. Charges associated with
these shutdowns included $7 million of asset write-downs, $1 million of
severance costs covering the termination of 194 employees, and other exit
costs of $5 million. At December 31, 2000, all 194 employees had been
terminated. Charges related to eliminating excess internal capacity included
$7 million of asset write-downs and a severance charge of $11 million for
the termination of 512 employees. The capacity reductions related to the
aseptic and flexible packaging businesses. At December 31, 2000, 381
employees had been terminated. The business also discontinued the
implementation of a Union Camp order management system. The write-off of
deferred software costs related to this system was $5 million.
(c) The Industrial Packaging business shut down the following plants and shifted
production to other facilities: the Terre Haute, Indiana box plant; the
Northlake, Illinois box plant; the Columbia, Tennessee sheet plant; and the
Montgomery, Alabama sheet plant. The design center in Spartanburg, South
Carolina was also closed. The functions performed in Spartanburg will
continue in Memphis, Tennessee. Charges associated with the consolidation
and improvement of the Industrial Packaging business totaled $21 million and
included $7 million of asset write-downs, a $12 million severance charge
covering the termination of 426 employees, and other exit costs of $2
million. At December 31, 2000, 309 employees had been terminated.
(d) The Chemicals and Petroleum charge of $50 million related to the partial
shutdown of the Chester-le-Street plant located in northeast England and
additional costs related to the 1998 shutdown of the Springhill, Louisiana
plant. The Chester-le-Street plant was a fully integrated site comprised of
a crude tall oil fractionation plant, a rosin resin upgrading plant and a
dimer plant. The crude tall oil and rosin resin upgrading facilities at the
site were closed and production shifted to other Arizona Chemical
facilities. Asset write-downs for this plant totaled $30 million. A
severance charge of $3 million covered the termination of
83 employees. Other costs of $12 million included demolition and contract
cancellations. At December 31, 2000, all
46
<Page>
Notes to Consolidated Financial Statements
83 employees had been terminated. We also recorded an additional charge of
$5 million related to the 1998 closure of the Springhill plant, covering
other exit costs including demolition and cleanup.
(e) The Building Materials charge of $16 million included $3 million for a
program to improve the profitability of the decorative surfaces business and
$13 million for the shutdown of the Pilot Rock, Oregon mill. The Decorative
Products business developed an improvement plan to consolidate certain
manufacturing activities and streamline administrative functions. As a
result, a reserve was established to cover asset write-offs totaling $2
million, and severance charges of $1 million were recorded related to the
reduction of 65 employees. At December 31, 2000, 38 employees had been
terminated.
International Paper announced in October 1999 that it would shut down
the Pilot Rock, Oregon mill due to excess capacity within the Masonite
manufacturing system. Softboard production was moved to our Ukiah,
California and Lisbon Falls, Maine facilities. The related charge included
$8 million of asset write-downs, a $2 million severance charge covering the
termination of 155 employees, and $3 million of other exit costs. At
December 31, 2000, 149 employees had been terminated.
(f) xpedx implemented a plan to consolidate duplicate facilities and eliminate
excess internal capacity. The $23 million charge associated with this plan
included $6 million of asset write-downs, a severance charge of $5 million
for the termination of 211 employees, and other costs of $12 million. Other
costs consisted primarily of lease cancellations. At December 31, 2000, 197
employees had been terminated.
(g) This charge related to the shutdown of the No. 5 paper machine at Carter
Holt Harvey's Kinleith mill. The machine had been idled due to a
reconfiguration project at the mill. Plans for alternative uses for the
machine were reexamined and it was determined that based on current
competitive conditions it would not provide adequate returns on the capital
required and that it would be scrapped. Accordingly, the machine was written
down by $18 million to its estimated salvage value. Also, severance costs of
$9 million were recorded to cover the costs of terminating 300 employees. At
December 31, 2000, all 300 employees had been terminated.
The $30 million pre-tax charge to increase existing legal reserves included
$25 million added to the reserve for hardboard siding claims. A further
discussion of this charge can be found in Note 11-Commitments and Contingent
Liabilities.
The $36 million pre-tax credit for reserves no longer required consisted of
$30 million related to a retained exposure at the Lancey mill in France and $6
million of excess severance reserves previously established by Union Camp. The
Lancey mill was sold to an employee group in October 1997. In April 1999,
International Paper's remaining exposure to potential obligations under this
sale was resolved, with the reserve returned to income in the second quarter.
The following table presents a roll forward of severance and other costs
included in the 1999 restructuring plans:
- --------------------------------------------------------------------------------
Severance
In millions and Other
- --------------------------------------------------------------------------------
Opening Balance (second quarter 1999) $ 56
Additions (fourth quarter 1999) 93
1999 Activity
Cash charges (34)
2000 Activity
Cash charges (75)
Other charges (13)
Reversals of reserves no longer required (14)
----
Balance, December 31, 2000 $ 13
====
The severance reserves recorded in the second and fourth quarters of 1999
related to 3,163 employees. At December 31, 2000, 2,793 employees had been
terminated. Reserves of $14 million were determined to no longer be required and
reversed to income in the fourth quarter of 2000. The remaining $13 million of
reserves represents costs to be incurred or severance to be paid in the first
quarter of 2001.
1998: The following table and discussion presents the impact of special items
for 1998:
- --------------------------------------------------------------------------------
In millions 1998
- --------------------------------------------------------------------------------
Earnings Earnings
(Loss) (Loss)
Before Income After Income
Taxes and Taxes and
Minority Minority
Interest Interest
- --------------------------------------------------------------------------------
Before special items $ 598 $345
Oil and gas impairment charges (111) (68)
Restructuring and other charges (161) (92)
Gain on sale of business 20 12
Reversals of reserves no longer required 83 50
----- ----
After special items $ 429 $247
===== ====
47
<Page>
Notes to Consolidated Financial Statements
During 1998, International Paper recorded $111 million of oil and gas
impairment charges ($68 million after taxes); $56 million ($35 million after
taxes) in the fourth quarter and $55 million ($33 million after taxes) in the
third quarter. International Paper had oil and gas exploration and production
operations in West Texas, the Gulf Coast and the Gulf of Mexico. The Securities
and Exchange Commission's regulations for companies that use the full-cost
method of accounting for oil and gas activities require companies to perform a
ceiling test on a quarterly basis. As a result of low oil and gas prices, the
value of International Paper's properties was written down through these noncash
charges.
Also in 1998, International Paper recorded a $145 million pre-tax
restructuring charge ($82 million after taxes and minority interest) consisting
of $64 million of asset write-downs and $81 million of severance costs, and
recorded pre-tax charges of $16 million ($10 million after taxes) related to
International Paper's share of write-offs taken by Scitex, a then-owned 13%
investee company, related to an acquisition of in-process research and
development and its exit from the digital video business. The Scitex items were
reflected as equity losses from the investment in Scitex in the consolidated
statement of earnings. International Paper sold its equity interest in Scitex in
January 2000. In addition, International Paper recorded a $20 million pre-tax
gain ($12 million after taxes) on the sale of its Veratec nonwovens division,
and an $83 million pre-tax credit ($50 million after taxes) from the reversals
of previously established reserves that were no longer required. These reserves
had been established in 1996 and 1997 and were primarily associated with the
Veratec and Imaging businesses. The sales of these businesses were completed in
1998, and those reserves not required were returned to earnings.
The following table and discussion presents additional detail related to the
$145 million restructuring charge:
- ------------------------------------------------------------------
Asset
In millions Write-downs Severance Total
- ------------------------------------------------------------------
Distribution (a) $20 $10 $ 30
Printing Papers (b) 13 14 27
Carter Holt Harvey (c) 15 3 18
Industrial Packaging (d) 8 7 15
Union Camp (e) 8 32 40
Other (f) -- 15 15
--- --- ----
$64 $81 $145
=== === ====
(a) After the acquisition of Zellerbach, management of xpedx terminated certain
software projects that were in process and began to use Zellerbach's systems
in certain of its regions. Accordingly, $20 million of deferred software
costs were written off. In addition, a $10 million severance charge was
recorded to terminate 274 xpedx employees at duplicate facilities and
locations. At December 31, 1999, all 274 employees had been terminated.
(b) International Paper's Printing Papers business shut down equipment at the
Mobile, Alabama mill and announced the termination of 750 employees at the
Mobile, Alabama, Lock Haven, Pennsylvania, and Ticonderoga, New York mills.
At the Mobile mill, International Paper permanently shut down a paper
machine and related equipment with a net book value of $13 million. These
assets were written down to their estimated fair market value of zero. The
severance charge associated with the employee reductions at the three mills
was $14 million. At December 31, 1999, all employees under this program had
been terminated.
(c) This charge primarily consisted of a $15 million asset write-down
associated with the shutdown of two Carter Holt Harvey facilities,
Myrtleford and Taupo. Myrtleford, a tissue pulp mill located in Australia,
was closed due to excess capacity in its tissue pulp system. Carter Holt
Harvey will be able to produce the volume at lower costs at its Kawerau
tissue pulp mill located in New Zealand. Carter Holt Harvey also closed
the Taupo, New Zealand sawmill due to excess capacity in its sawmill
system as the result of recent productivity improvements. The $3 million
severance charge represented the cost of terminating 236 employees. At
December 31, 1999, all 236 employees had been terminated. International
Paper's consolidated financial statements included revenues of $21 million
and operating income of $1 million from these facilities in 1998.
(d) Management shut down the Gardiner, Oregon mill because of excess capacity
in International Paper's containerboard system. As a result, the net
plant, property and equipment assets of this mill were reduced from $13
million to the estimated salvage value of $5 million. In connection with
this decision to close, 298 employees at the mill were terminated and a $7
million severance charge was recorded. This mill had revenues of $78
million and operating losses of $16 million in 1998.
48
<Page>
Notes to Consolidated Financial Statements
(e) During 1998, Union Camp recorded a pre-tax special charge of $40 million.
Included in the charge was $32 million related to the termination of 540
positions and $8 million of asset write-downs. Approximately 190 of these
positions related to a reorganization and restructuring of Union Camp's
research and development activities. Another 190 positions related to a
consolidation of the packaging group's administrative support functions. The
remaining 160 positions related to a series of other organizational changes.
At December 31, 1999, all 540 employees had been terminated.
The asset write-downs were principally attributable to the impairment of
goodwill specific to two packaging businesses, the Chase packaging facility
and Union Camp's 1996 purchase of a 50% interest in a packaging plant in
Turkey. Upon reviewing the historical and projected operating results for
these businesses, management concluded that expected future cash flows did
not fully support the carrying value of these assets.
(f) The $15 million severance charge was recorded as a result of an announcement
by International Paper of a plan to consolidate its land and timber and
logging and fiber supply divisions into a new division called Forest
Resources, and the consolidation of the Consumer Packaging group. Of the $15
million charge, $10 million related to a head count reduction of 200
employees in the Forest Resources group and the remaining $5 million was
based on a personnel reduction of 210 employees in the Consumer Packaging
group. At December 31, 1999, all 410 employees had been terminated.
The following table presents a roll forward of the severance costs included
in the 1998 restructuring plan:
- ---------------------------------------------------------------------------
In millions Severance
- ---------------------------------------------------------------------------
Opening Balance (third quarter 1998) $ 81
1998 Activity
Cash charges (19)
1999 Activity
Cash charges (56)
Reversal of reserve no longer required (6)
----
Balance, December 31, 1999 $ --
====
The severance reserve recorded in the third quarter of 1998 related to 2,508
employees. As of December 31, 1999, all employees had been terminated.
7 Businesses Held for Sale
- --------------------------------------------------------------------------------
During 2000, International Paper announced plans to sell by the end of 2001,
approximately $5 billion of assets that are not strategic to its core
businesses. The decision to sell these businesses and certain other assets
resulted from International Paper's acquisition of Champion and the completion
of its strategic analysis to focus on its core businesses of paper, packaging
and forest products.
The following table presents the businesses held for sale at December 31,
2000 along with their sales and operating earnings for each of the three years
ended December 31, 2000, 1999 and 1998:
- ----------------------------------------------------------------------------
In millions for the years ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------
Arizona Chemical
(Chemicals and Petroleum)
Sales $ 630 $ 677 $ 673
Operating earnings 63 54 64
Chemical Cellulose
(Chemicals and Petroleum)
Sales 215 208 232
Operating earnings (loss) (14) 9 16
Fine Papers (Printing Papers)
Sales 262 265 294
Operating earnings 21 10 22
Masonite (Forest Products)
Sales 465 512 499
Operating earnings 5 26 36
Petroleum & Minerals
(Chemicals and Petroleum)
Sales 125 70 75
Operating earnings 81 33 21
Zanders (Printing Papers)
Sales 626 594 626
Operating earnings (loss) (4) 8 9
Other (Various)
Sales 102 18 12
Operating earnings (loss) (22) -- (1)
Total
Sales $2,425 $2,344 $2,411
Operating earnings $ 130 $ 140 $ 167
Note: Other, for the year ended December 31, 2000, includes the Hamilton mill,
which was acquired in the June 20, 2000 Champion acquisition.
49
<Page>
Notes to Consolidated Financial Statements
In the third quarter of 2000, the assets of Masonite and Zanders were
written down to their fair market values of approximately $520 million based on
estimated sales proceeds. This resulted in an extraordinary pre-tax charge of
$460 million ($310 million after taxes). In the fourth quarter of 2000, Fine
Papers, the Chemical Cellulose pulp business and International Paper's Flexible
Packaging businesses in Argentina (included in Other) were written down to
their fair market values of approximately $230 million based on estimated sales
proceeds, resulting in an extraordinary pre-tax charge of $373 million ($231
million after taxes). These charges are presented as extraordinary items, net
of taxes, in the consolidated statement of earnings in accordance with the
pooling-of-interests rules.
The assets of the businesses held for sale, totaling $1.9 billion, are
included in "assets of businesses held for sale" in current assets in the
accompanying consolidated balance sheet. The liabilities of these businesses,
totaling $541 million, are included in "liabilities of businesses held for sale"
in current liabilities in the accompanying consolidated balance sheet.
An agreement to sell Masonite to Premdor Inc. of Toronto, Canada was
entered into September 30, 2000, and is subject to closing conditions and
regulatory approval.
See Note 19-Subsequent Events for a discussion of the completion of the
dispositions of Zanders, the Argentine businesses, the oil and gas interests and
the Hamilton mill. International Paper is currently soliciting or evaluating
bids on the remaining businesses, which it expects to sell by the end of 2001.
8 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 the preferred securities noted above
were $141 million, $134 million and $54 million in 2000, 1999 and 1998,
respectively. The expense related to these preferred securities is shown in
minority interest expense in the consolidated statement of earnings.
9 Sale of Limited Partnership Interests
- --------------------------------------------------------------------------------
During 1993, International Paper contributed assets with a fair market value of
approximately $900 million to two newly formed limited partnerships, Georgetown
Equipment Leasing Associates, L.P. and Trout Creek Equipment Leasing, L.P. These
partnerships are separate and distinct legal entities from International Paper
and have separate assets, liabilities, business functions and operations.
However, for accounting purposes, these assets continue to be consolidated, with
the minority shareholders' interests reflected as minority interest in the
accompanying financial statements. The purpose of the partnerships is to invest
in and manage a portfolio of assets including pulp and paper equipment used at
the Georgetown, South Carolina and Ticonderoga, New York mills. This equipment
is leased to International Paper under long-term leases. Partnership assets also
include floating rate notes and cash. During 1993, outside investors purchased
a portion of our limited partner interests for $132 million and also contributed
an additional $33 million to one of these partnerships.
At December 31, 2000, International Paper held aggregate general and
limited partner interests totaling 63% in Georgetown Equipment Leasing
Associates, L.P. and 57% in Trout Creek Equipment Leasing, L.P.
50
<Page>
Notes to Consolidated Financial Statements
10 Income Taxes
- --------------------------------------------------------------------------------
International Paper uses the asset and liability method of accounting for income
taxes whereby deferred income taxes are recorded for the future tax consequences
attributable to differences between the financial statement and tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured using
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Deferred tax
assets and liabilities are revalued to reflect new tax rates in the periods rate
changes are enacted.
The components of earnings before income taxes, minority interest and
extraordinary items by taxing jurisdiction were:
- ----------------------------------------------------------------------
In millions 2000 1999 1998
- ----------------------------------------------------------------------
Earnings
U.S. $202 $237 $297
Non-U.S. 521 211 132
---- ---- ----
Earnings before income taxes, minority
interest and extraordinary items $723 $448 $429
==== ==== ====
The provision for income taxes by taxing jurisdiction was:
- ----------------------------------------------------------------------
In millions 2000 1999 1998
- ----------------------------------------------------------------------
Current tax provision (benefit)
U.S. federal $130 $259 $(64)
U.S. state and local 41 27 (6)
Non-U.S. 102 8 33
---- ---- ----
273 294 (37)
==== ==== ====
Deferred tax provision (benefit)
U.S. federal (31) (108) 117
U.S. state and local (65) (103) (12)
Non-U.S. (60) 3 27
---- ---- ----
(156) (208) 132
==== ==== ====
Income tax provision $117 $ 86 $ 95
==== ==== ====
International Paper made income tax payments, net of refunds, of $298
million, $68 million and $144 million in 2000, 1999 and 1998, respectively.
A reconciliation of income tax expense using the statutory U.S. income
tax rate compared with actual income tax expense follows:
- ----------------------------------------------------------------------
In millions 2000 1999 1998
- ----------------------------------------------------------------------
Earnings before income taxes, minority
interest and extraordinary items $723 $448 $429
Statutory U.S. income tax rate 35% 35% 35%
---- ---- ----
Tax expense using statutory
U.S. income tax rate 253 157 150
State and local income taxes (15) (20) (11)
Non-U.S. tax rate differences (80) (52) 20
Permanent benefits on sales of
non-U.S. businesses - (2) (33)
Permanent benefits on sales of
non-strategic timberland assets - - (29)
Nondeductible business expenses 10 30 9
Foreign sales corporation benefit (18) (9) (9)
Minority interest (82) (56) (31)
Goodwill amortization 39 21 21
Net U.S. tax on non-U.S. dividends 28 15 10
Tax credits - (12) (1)
Other, net (18) 14 (1)
---- ---- ----
Income tax provision $117 $ 86 $ 95
==== ==== ====
Effective income tax rate 16% 19% 22%
==== ==== ====
The net deferred income tax liability as of December 31, 2000 and 1999
includes the following components:
- ----------------------------------------------------------------------
In millions 2000 1999
- ----------------------------------------------------------------------
Current deferred tax asset $ 562 $ 196
Noncurrent deferred tax asset 311 240
Noncurrent deferred tax liability (4,699) (3,344)
------- -------
Total $(3,826) $(2,908)
======= =======
The tax effects of significant temporary differences representing
deferred tax assets and liabilities at December 31, 2000 and 1999 were as
follows:
- ----------------------------------------------------------------------
In millions 2000 1999
- ----------------------------------------------------------------------
Plants, properties and equipment $(3,344) $(2,995)
Prepaid pension costs (326) (339)
Forestlands (1,686) (534)
Postretirement benefit accruals 199 225
Alternative minimum and other tax credits 432 390
Net operating loss carryforwards 264 235
Other 635 110
------- -------
Total $(3,826) $(2,908)
======= =======
51
<Page>
Notes to Consolidated Financial Statements
Net operating loss carryforwards, most of which are applicable to
non-U.S. subsidiaries, expire as follows: years 2001 through 2007--$130 million,
years 2019 through 2020--$273 million and indefinite carryforward--$363 million.
Deferred taxes are not provided for temporary differences of
approximately $1.7 billion, $1.2 billion and $1.1 billion as of December 31,
2000, 1999 and 1998, respectively, representing earnings of non-U.S.
subsidiaries that are intended to be permanently reinvested. Computation of the
potential deferred tax liability associated with these undistributed earnings is
not practicable.
Note 11. Commitments and Contingent Liabilities
Certain property, machinery and equipment are leased under cancelable
and non-cancelable agreements. At December 31, 2000, total future minimum
rental commitments under non-cancelable leases were $977 million, due as
follows: 2001-$170 million, 2002-$143 million, 2003 - $121 million, 2004 - $111
million, 2005 - $100 million and thereafter - $332 million. Rent expense was
$218 million, $229 million and $237 million for 2000, 1999 and 1998,
respectively.
International Paper has entered into an agreement to guarantee, for a
fee, a contractual credit agreement of an unrelated third party. The maximum
amount of the guarantee is $110 million and expires in 2008. The guaranty fees
are payable to International Paper at the time the borrowings under the
agreement are repaid to the third party lenders.
Three nationwide class action lawsuits relating to products
manufactured by Masonite Corporation that were filed against International
Paper have been settled in recent years.
The first suit, entitled Judy Naef v. Masonite and International
Paper, was filed in December 1994 (Hardboard Lawsuit). The plaintiffs 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 January
1, 1980 and January 15, 1998. The Court granted final approval of the
settlement on January 15, 1998. The settlement provides for monetary
compensation to class members meeting the settlement requirements on a
claims-made basis, which requires a class member to individually submit proof
of damage to, or caused by, Masonite product, proof of square footage involved,
and proofs of various other matters in order to qualify for payment with
respect to a claim. It also provides for the payment of attorneys' fees
equaling 15% of the settlement amounts paid to class members, with a
non-refundable advance of $47.5 million plus $2.5 million in costs. For siding
that was installed between January 1, 1980 and December 31, 1989, claims must
be made by January 15, 2005, and for siding installed between January 1, 1990
through January 15, 1998, claims must be made by January 15, 2008.
52
The second suit, entitled Cosby, et. al. v. Masonite Corporation, et.
al., was filed in 1997 (Omniwood Lawsuit). The plaintiffs made allegations with
regard to Omniwood siding manufactured by Masonite which were similar to
those alleged in the Hardboard Lawsuit. The class consisted of all U.S.
property owners having Omniwood siding installed on and incorporated into
buildings from January 1, 1992 to January 6, 1999. The settlement relating to
the Omniwood Lawsuit provides that qualified claims must be made by January 6,
2009 for Omniwood siding that was installed between January 1, 1992 and January
6, 1999.
The third suit, entitled Smith, et. al. v. Masonite Corporation, et.
al was filed in 1995 (Woodruf Lawsuit). The plaintiffs alleged that Woodruf
roofing manufactured by Masonite is defective and causes damage to the
structure underneath the roofing. The class consisted of all U.S. property
owners who had incorporated and installed Masonite Woodruf roofing from January
1, 1980 to January 6, 1999. The settlement relating to the Woodruf Lawsuit
provides that for product installed between January 1, 1980 and December 31,
1989, claims must be made by January 6, 2006, and for product installed between
January 1, 1990 and January 6, 1999, claims must be made by January 6, 2009.
The Court granted final approval of the settlements of the Omniwood
and Woodruf Lawsuits on January 6, 1999. The settlements provide for monetary
compensation to class members meeting the settlement requirements on a
claims-made basis, which requires a class member to individually submit proof
of damage to, or caused by, Masonite product, proof of square footage involved,
and proofs of various other matters. The settlements also provide for payment
of attorneys' fees equaling 13% of the settlement amounts paid to class members
with a non-refundable advance of $1.7 million plus $75,000 in costs for each of
the two cases.
Once a claim is determined to be valid under the respective settlement
agreement covering the claim, the amount of the claim is determined by
reference to a negotiated compensation formula established under the settlement
agreement designed to compensate the homeowner for all damage to the structure.
The compensation formula is based on (1) the average cost per square foot for
product replacement, including material and labor as calculated by industry
standards, in the area in which the structure is located, adjusted for
inflation, or (2) the cost of appropriate refinishing as determined by industry
standards in such area, adjusted for inflation. Persons receiving compensation
pursuant to this formula also agree to release International Paper and Masonite
from all other property damage claims relating to the product in question.
53
In connection with the products involved in the lawsuits described
above, where there is damage, the process of degradation begins almost
immediately after installation and continues until repairs are made.
International Paper estimates that approximately 4 million structures have
installed products that are the subject of the Hardboard Lawsuit, 300,000
structures have installed products that are subject to the Omniwood Lawsuit and
86,000 structures have installed products that are the subject of the Woodruf
Lawsuit. Masonite stopped selling the hardboard siding in May 2001, the
products involved in the Woodruf Lawsuit in May 1996, and the products involved
in the Omniwood Lawsuit in September 1996.
Persons who are class members under the Hardboard, Omniwood and
Woodruf Lawsuits who do not pursue remedies under the respective settlement
agreement pertaining to such suits, may have recourse to warranties, if any, in
existence at the expiration of the respective terms established under the
settlement agreements for making claims. The warranty period generally extends
for 25 years following the installation of the product in question and,
although the warranties vary from product to product, they generally provide
for a payment of up to two times the purchase price.
The following table presents an analysis of the net reserve activity
related to the Hardboard, Omniwood and Woodruf Lawsuits for the years ended
December 31, 1998, 1999 and 2000.
RESERVE ANALYSIS
(in millions)
Hardboard Omniwood Woodruf Total
--------- -------- ------- -----
December 31, 1997 $154 $ 33 $ 14 $201
Payments (87) (2) (2) (91)
Insurance collections 19 - - 19
Balance, December 31, 1998 86 31 12 129
Additional provision 20 3 2 25
Payments (76) (9) (7) (92)
Insurance collections 8 - - 8
Other (6) 10 2 6
Balance, December 31, 1999 32 35 9 76
Additional provision 110 10 5 125
Payments (117) (13) (12) (142)
Financial collar reimbursement 48 - - 48
Other (7) (10) 2 (15)
Balance, December 31, 2000 $ 66 $ 22 $ 4 $ 92
54
In the fourth quarter of 1999, $25 million was added to the existing
reserve balance. During the third quarter of 2000, a determination was made
that an additional $125 million provision was required to cover an expected
shortfall, resulting primarily from a higher than anticipated number of claims
relating to the Hardboard Lawsuit. This trend started in the second half of
1999 and continued into 2000. The $125 million increase was based on an
independent third party statistical study of future costs, which analyzed
trends in the claims experience through May 30, 2000.
Four statistical outcomes described below, developed by the
independent third party, were reviewed as the basis for the determination of
the amount of the reserve, resulting in incremental future claims projections
for the Hardboard Lawsuit ranging from $95 million to $175 million.
Statistical Outcome 1--This outcome was based on the assumption that
there is a return to the originally estimated claim decline curves, which
equated to a 45% annual decline in all areas of the settlement. This analysis
resulted in projected future costs for claims relating to the Hardboard Lawsuit
of $95 million.
Statistical Outcome 2--This outcome was based on the assumption that
the claims rate continues at the same level for one more year in areas that had
experienced a growth in the claims rate in the second year of the settlement,
and then declines at the rate of 45% per year. In other areas, it was assumed
that claims would decline at a 45% rate. This analysis resulted in projected
future costs for claims relating to the Hardboard Lawsuit of $ 115 million.
Statistical Outcome 3--This outcome was based on the assumption that
the claims rate (a) grows moderately for one year in areas where growth was
observed in the second quarter of 2000, (b) then levels off for one year, and
(c) then declines at the rate of 45% per year. Additionally, it was assumed
that the claims rate remains level for one year in areas where growth in the
claims rate was observed in the second year and then declines by 45% per year.
Finally, it was assumed that the claims rate declines by 45% per year in areas
where the claims rate declined in the second year of settlement. This analysis
resulted in projected future costs for claims relating to the Hardboard Lawsuit
of $ 145 million.
Statistical Outcome 4--This outcome was based on the assumption that
the claims rate (a) doubles in one state for one additional year, levels off
for two years and then declines by 45% per year, (b) remains level in another
state for two years and then declines by 45% per year, and (c) in all other
areas, declines by 45% per year. This analysis resulted in projected future
costs for claims relating to the Hardboard Lawsuit of $175 million.
55
The assumptions made in the statistical outcomes presented above were
based on projected claims rates frequency, including geographic patterns of
claims rates, and historical information related to the growth (or decline) of
claims rates. In addition, assumptions related to the cost of claims, including
forecasts relating to the rate of inflation, were taken into consideration.
Average claim costs were calculated from historical claims records, taking into
consideration structure type, location and source of the claim. Factors which
could reasonably be expected to cause actual results to vary from these
assumptions include that area specific assumptions as to growth in claims rates
could be incorrect, locations where previously there had been little or no
claims could emerge as significant geographic locations, and the cost per claim
could vary materially from that projected.
After reviewing the statistical outcomes, management concluded that,
based on the recent claims history, Statistical Outcome 4, which projected
incremental future claims of $175 million and approximately 55,000 future
claims (35,000 single family and 20,000 multifamily), represented the most
probable outcome. After deducting existing reserves and considering the impact
of the financial collar discussed below, a provision of $125 million was
recorded in the third quarter of 2000.
Following the $125 million additional provision, net reserves for
these matters totaled $92 million at December 31, 2000. The reserve balance for
claims relating to the Hardboard Lawsuit is net of $43 million of expected
insurance recoveries remaining from an initial estimate of insurance recoveries
of $70 million, which amount was estimated for purposes of establishing a
reserve for the claims related to the Hardboard Lawsuit. International Paper
initiated a lawsuit against certain of its insurance carriers because of their
refusal to indemnify International Paper for the settlement relating to the
Hardboard Lawsuit. Because of the uncertainties inherent in the litigation,
International Paper is unable to estimate the amount which it will recover
against those insurance carriers, but it does not expect the recovery to be
less than the amount initially projected.
Under a financial collar arrangement, International Paper contracted
with a third party for payment in an amount up to $100 million for certain
costs relating to the Hardboard Lawsuit if payments by International Paper with
respect thereto exceeded $165 million. The arrangement with the third party is
in excess of insurance otherwise available to International Paper, which is the
subject of the separate litigation referred to above. Accordingly,
International Paper believes that the obligation of the third party with
respect to this financial collar does not constitute "other valid and
collectible insurance" that would either eliminate or otherwise affect its
right to collect insurance coverage available to it and Masonite
56
under the insurance policies, which are the subject of this separate
litigation. As of December 31, 2000, $52 million of the collar remained
uncollected.
At December 31, 2000, there were $46 million of costs associated with
claims inspected and not paid ($38 million for Hardboard siding, $4 million for
Omniwood and $4 million for Woodruf) and $40 million of costs associated with
claims in process and not yet inspected ($36 million for claims relating to the
Hardboard Lawsuit, $2 million for claims related to the Omniwood Lawsuit and $2
million for claims related to the Woodruf Lawsuit). The aggregate of the
reserve, insurance receivable and uncollected collar, at December 31, 2000
amounted to $187 million as reflected in the table in the following paragraph.
The estimated claims reserve includes $101 million for unasserted claims that
are probable of assertion.
At December 31, 2000, the components of the required reserve and the
classification of such amounts in the consolidated balance sheet are summarized
as follows:
BALANCE SHEET SUMMARY
---------------------
(in millions)
Aggregate reserve (in other accrued liabilities) $ 187
Insurance receivable (in deferred charges and other assets) (43)
Uncollected collar (in accounts and notes receivable) (52)
-----
Reserve required $ 92
=====
The average settlement cost per claim for the years ended December 31,
2000, 1999 and 1998 for the Hardboard, Omniwood and Woodruf Lawsuits is set
forth in the table below:
AVERAGE SETTLEMENT COST PER CLAIM
---------------------------------
(in thousands)
Hardboard Omniwood Woodruf
----------------- ----------------- ----------------
Single Multi- Single Multi- Single Multi-
Family Family Family Family Family Family
------ ------ ------ ------ ------ ------
December 31, 2000 $3.9 $9.5 $6.2 $4.2 $5.2 $2.8
December 31, 1999 $4.1 $8.9 $5.6 $2.2 $5.7 $3.6
December 31, 1998 $4.4 $2.5 - - - -
The above information is calculated by dividing the amount of claims
paid by the number of claims paid.
57
Through December 31, 2000, net settlement payments totaled $277
million ($232 million for claims relating to the Hardboard Lawsuit, $24 million
for claims relating to the Omniwood Lawsuit and $21 million for claims related
to the Woodruf Lawsuit), including $51 million of non-refundable attorneys'
advances discussed above ($47.5 million for the Hardboard Lawsuit and $1.7
million for each of the Omniwood Lawsuit and Woodruf Lawsuit). In addition,
International Paper has received $27 million related to these matters (all
related to the Hardboard Lawsuit) from our insurance carriers through December
31, 2000. The liability for these matters will be retained after the planned
sale of Masonite is completed.
The following table shows an analysis of claims statistics related to
the Hardboard, Omniwood and Woodruf Lawsuits for the years ended December 31,
1998, 1999 and 2000:
CLAIMS STATISTICS
-----------------
(in thousands)
HARDBOARD OMNIWOOD WOODRUF TOTAL
----------------- ---------------- ---------------- -------------------------
Single Multi- Single Multi- Single Multi- Single Multi-
Family Family Family Family Family Family Family Family Total
------- ------ ------ ------ ------ ------ ------ ------ -----
No. of Claims Pending
December 31, 1997 - - - - - - - - -
No. of Claims Filed 18.2 1.9 - - - - 18.2 1.9 20.1
No. of Claims Paid (1.5) (0.5) - - - - (1.5) (0.5) (2.0)
No. of Claims Dismissed (3.6) (0.4) - - - - (3.6) (0.4) (4.0)
December 31, 1998 13.1 1.0 - - - - 13.1 1.0 14.1
No. of Claims Filed 16.6 4.3 2.5 0.1 2.9 0.2 22.0 4.6 26.6
No. of Claims Paid (14.4) (1.6) (1.0) - (1.0) (0.1) (16.4) (1.7) (18.1)
No. of Claims Dismissed (4.0) (1.0) (0.3) - (0.1) - (4.4) (1.0) (5.4)
December 31, 1999 11.3 2.7 1.2 0.1 1.8 0.1 14.3 2.9 17.2
No. of Claims Filed 25.5 9.4 2.2 0.2 2.5 0.1 30.2 9.7 39.9
No. of Claims Paid (15.6) (5.6) (1.9) (0.1) (2.4) - (19.9) (5.7) (25.6)
No. of Claims Dismissed (5.3) (2.0) (0.5) - (0.7) - (6.5) (2.0) (8.5)
December 31, 2000 15.9 4.5 1.0 0.2 1.2 0.2 18.1 4.9 23.0
While International Paper believes that the reserve balances
established for these matters are adequate, and that additional amounts will be
recovered from its insurance carriers in the future relating to these claims,
International Paper is unable to estimate at this time the amount of additional
charges, if any, that may be required for these matters in the future.
58
International Paper is also involved in various other inquiries,
administrative proceedings and litigation relating to contracts, sales of
property, environmental protection, tax, antitrust and other matters, some of
which allege substantial monetary damages. While any proceeding or litigation
has the element of uncertainty, International Paper believes that the outcome
of any of the other lawsuits or claims that are pending or threatened, or all
of them combined, will not have a material adverse effect on its consolidated
financial position or results of operations.
59
12 Supplementary Balance Sheet Information
- --------------------------------------------------------------------------------
Inventories by major category were:
- ----------------------------------------------------------------------
In millions at December 31 2000 1999
- ----------------------------------------------------------------------
Raw materials $ 431 $ 484
Finished pulp, paper and packaging products 1,912 1,869
Finished lumber and panel products 261 178
Operating supplies 473 486
Other 105 186
------ ------
Inventories $3,182 $3,203
====== ======
The last-in, first-out inventory method is used to value most of
International Paper's U.S. inventories. Approximately 68% of total raw materials
and finished products inventories were valued using this method. If the
first-in, first-out method had been used, it would have increased total
inventory balances by approximately $264 million and $250 million at December
31, 2000 and 1999, respectively.
Plants, properties and equipment by major classification were:
- ----------------------------------------------------------------------
In millions at December 31 2000 1999
- ----------------------------------------------------------------------
Pulp, paper and packaging facilities
Mills $22,710 $21,288
Packaging plants 3,464 3,233
Wood products facilities 2,358 2,117
Other plants, properties and equipment 1,522 2,889
------- -------
Gross cost 30,054 29,527
Less: Accumulated depreciation 14,043 15,146
------- -------
Plants, properties and equipment, net $16,011 $14,381
======= =======
13 Debt and Lines of Credit
- --------------------------------------------------------------------------------
A summary of long-term debt follows:
- ----------------------------------------------------------------------
In millions at December 31 2000 1999
- ----------------------------------------------------------------------
8 7/8% to 10.5% notes, due 2001-2012 $ 522 $ 563
8 7/8% to 9.7% notes, due 2001-2004 564 600
9 1/4% sinking fund debentures, due 2001-2021 8 34
8.5% to 9.5% debentures, due 2002-2022 246 246
8 3/8% to 9 1/2% debentures, due 2015-2024 300 300
8% to 8 1/8% notes, due 2003-2005 2,197 -
7% to 7 7/8% notes, due 2001-2007 1,343 1,373
6 7/8% to 8 1/8% notes, due 2023-2029 742 741
6.65% notes, due 2037 92 -
6.5% notes, due 2007 148 148
6.4% to 7.75% debentures, due 2023-2027 865 -
6 1/8% notes, due 2003 200 200
5 7/8% Swiss franc debentures, due 2001 67 68
5 3/8% euro notes, due 2006 223 249
12% to 16% Brazilian real notes, due 2001-2006 194 -
5 1/8% debentures, due 2012 90 88
Medium-term notes, due 2001-2009(a) 307 331
Floating rate notes, due 2002(b) 2,100 -
Environmental and industrial development
bonds, due 2001-2033(c,d) 2,334 1,352
Commercial paper and bank notes(e) 637 1,325
Other(f) 157 416
------- ------
Total(g) 13,336 8,034
Less: Current maturities 688 514
------- ------
Long-term debt $12,648 $7,520
======= =======
(a) The weighted average interest rate on these notes was 8.2% in 2000 and 8.3%
in 1999.
(b) The weighted average interest rate on these notes was 7.9% in 2000.
(c) The weighted average interest rate on these bonds was 6.3% in 2000 and 6.1%
in 1999.
(d) Includes $130 million of bonds at December 31, 2000 and $149 million at
December 31, 1999, which may be tendered at various dates and/or under
certain circumstances.
(e) The weighted average interest rate was 7.2% in 2000. Includes $708 million
in 1999 of non-U.S. dollar denominated borrowings with a weighted average
interest rate of 5.6%.
(f) Includes $19 million in 2000 and $14 million in 1999 of French franc
borrowings with a weighted average interest rate of 2.2% in 2000 and 2.8%
in 1999, $5 million in 2000 of Canadian dollar borrowings with an interest
rate of 9.0%, and $132 million in 1999 of German mark borrowings with a
weighted average interest rate of 4.7%.
(g) The fair market value was approximately $13.5 billion and $8.1 billion at
December 31, 2000 and 1999, respectively.
60
<Page>
Notes to Consolidated Financial Statements
Total maturities of long-term debt over the next five years are 2001--$688
million, 2002--$2.8 billion, 2003--$1.5 billion, 2004--$1.4 billion and
2005--$1.4 billion.
At December 31, 2000 and 1999, International Paper, including Carter Holt
Harvey, classified $750 million and $1.5 billion, respectively, of tenderable
bonds, commercial paper and bank notes as long-term debt. International Paper
and this subsidiary have the intent and ability to renew or convert these
obligations through 2001 and into future periods.
At December 31, 2000, unused bank lines of credit amounted to $2.3 billion.
The agreements generally provide for interest rates at a floating rate index
plus a margin predetermined by International Paper's credit rating. The
principal line, which is cancelable only if International Paper's bond rating
drops below investment grade, provides for $750 million of credit through March
2004, and has a facility fee of 0.13% that is payable quarterly. International
Paper also has a 364-day facility that provides for $1.0 billion of credit
through March 2001 and has a facility fee of 0.09% that is payable quarterly.
Additionally, International Paper has a $1.8 billion 364-day facility that
provides credit through June 2001, and has a facility fee of 0.10% paid
quarterly. Carter Holt Harvey also has two principal lines of credit that
support its commercial paper programs. A $360 million line of credit matures in
April 2002 and has a 0.15% facility fee that is payable quarterly and a 250
million New Zealand dollar line of credit matures in February 2002 with a 0.13%
facility fee that is payable quarterly.
At December 31, 2000, notes payable included $517 million of non-U.S.
dollar denominated debt with maturities of less than twelve months and a
weighted average interest rate of 6.3%.
At December 31, 2000, outstanding debt included approximately $2.1 billion
of commercial paper and bank notes with interest rates that fluctuate based on
market conditions and our credit rating.
On June 20, 2000, International Paper issued $5 billion of debt to finance
the acquisition of Champion and assumed $2.8 billion of Champion debt. At the
time of the acquisition announcement, Moody's lowered International Paper's
long-term debt rating to Baa1 from A3. At December 31, 2000, $6.7 billion of
debt related to the Champion acquisition remained outstanding.
In 1999, International Paper recorded an extraordinary loss of $16 million
after taxes for the extinguishment of high interest debt that was assumed in
connection with the merger with Union Camp. International Paper extinguished
approximately $275 million of long-term debt with interest rates ranging from
8.5% to 10%.
14 Financial Instruments
- ------------------------------------------------------------------------------
Financial instruments are used primarily to hedge exposure to currency and
interest rate risk. To qualify as hedges, financial instruments must reduce the
currency or interest rate risk associated with the related underlying items and
be designated as hedges by management. Gains or losses from the revaluation of
financial instruments that do not qualify for hedge accounting treatment are
recognized in earnings.
International Paper's policy has been to finance a portion of our
investments in non-U.S. operations with borrowings denominated in the same
currency as the investment or by entering into foreign exchange contracts in
tandem with U.S. dollar borrowings. These contracts are effective in providing a
hedge against fluctuations in currency exchange rates. Gains or losses from the
revaluation of these contracts, which are fully offset by gains or losses from
the revaluation of the net assets being hedged, are determined monthly based on
published currency exchange rates and are recorded as translation adjustments in
common shareholders' equity. Upon liquidation of the net assets being hedged or
early termination of the foreign exchange contracts, the gains or losses from
the revaluation of foreign exchange contracts would be included in earnings.
Amounts payable to or due from the counterparties to the foreign exchange
contracts are included in accrued liabilities or accounts receivable as
applicable.
Financial instruments outstanding at December 31, 2000 used to hedge net
investments in non-U.S. operations consisted of non-U.S. dollar denominated debt
totaling $600 million. Also outstanding were foreign currency forward contracts
totaling $1.7 billion, substantially all having maturities of less than twelve
months, as noted in the following table expressed in U.S. dollar equivalents.
The average amount of outstanding contracts was $1.5 billion and $1.0 billion
during 2000 and 1999, respectively.
61
<Page>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Weighted Net
Average Unrealized
Contract Exchange Gain
U.S. dollars in millions Amount Rate (Loss)
- -------------------------------------------------------------------------------
Pay U.S. dollars /
Receive European euros $955 0.88 $(11)
Pay U.S. dollars /
Receive British pounds 128 1.46 (2)
Receive New Zealand dollars /
Pay Australian dollars 413 1.31 15
Pay U.S. dollars /
Receive New Zealand dollars 202 0.44 9
Receive Swedish kronas /
Pay U.S. dollars 30 9.64 -
Foreign exchange contracts are also used to hedge certain transactions that
are denominated in non-U.S. currencies, primarily export sales and equipment
purchased from nonresident vendors. These contracts serve to protect
International Paper from currency fluctuations between the transaction and
settlement dates. Gains and losses from the revaluation of these contracts,
based on published currency exchange rates, along with offsetting gains and
losses resulting from the revaluation of the underlying transactions, are
recognized in earnings or deferred and recognized in the basis of the underlying
transaction when completed. Any gains or losses arising from the cancellation of
the underlying transactions or early termination of the foreign currency
exchange contracts would be included in earnings.
Financial instruments outstanding at December 31, 2000 used to hedge
transactions denominated in non-U.S. currencies consisted of foreign currency
forward contracts totaling $955 million, a majority having maturities of less
than twelve months, as noted in the following table expressed in U.S. dollar
equivalents. The average amount of outstanding contracts during 2000 and 1999
was $825 million and $454 million, respectively.
- -------------------------------------------------------------------------------
Weighted Net
Average Unrealized
Contract Exchange Gain
U.S. dollars in millions Amount Rate (Loss)
- -------------------------------------------------------------------------------
Pay U.S. dollars /
Receive European euros $117 0.90 $ 1
Pay British pounds /
Receive European euros 70 0.59 1
Pay European euros /
Receive British pounds 39 1.63 -
Receive New Zealand dollars /
Pay Australian dollars 62 1.27 -
Pay U.S. dollars /
Receive New Zealand dollars 148 0.48 (14)
Receive U.S. dollars /
Pay European euros 29 0.88 (1)
Receive U.S. dollars /
Pay British pounds 18 1.44 -
Receive U.S. dollars /
Pay New Zealand dollars 440 0.41 (25)
Note: International Paper has an additional $32 million in a number of smaller
forward contracts to purchase or sell other currencies with a related net
immaterial unrealized loss.
International Paper also purchases foreign exchange option contracts, with
terms that generally do not exceed one year, to hedge export sales. Premiums
paid under these contracts are expensed over the life of the option contract.
Gains arising on these options are recognized at the time the options are
exercised. Option contracts outstanding at December 31, 2000 amounted to $121
million.
Cross-currency and interest rate swap agreements are used to manage the
composition of our fixed and floating rate debt portfolio. Amounts to be paid or
received as interest under these agreements are recognized over the life of the
swap agreements as adjustments to interest expense. Gains or losses from the
revaluation of cross-currency swap agreements are included in earnings. The
related amounts payable to or due from the counterparties to the agreements are
included in accrued liabilities or accounts receivable as applicable. If swap
agreements are terminated early, the resulting gain or loss would be deferred
and amortized over the remaining life of the related debt. The following table
presents notional amounts and principal cash flows for currency and interest
rate swap agreements by year of maturity expressed in U.S. dollar equivalents.
The impact on our earnings and net liability under these agreements was not
significant.
62
<Page>
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in millions 2001 2002 2003 2004 2005 Thereafter Total Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. dollar variable to fixed rate swaps $ - $ 45 $200 $300 $ - $ 500 $1,045 $ 97
Average pay rate 6.3% / Average receive rate 6.9%
U.S. dollar fixed to variable rate swaps - 45 200 550 - 500 1,295 (98)
Average pay rate 7.6% / Average receive rate 6.8%
U.S. dollar to New Zealand dollar cross-currency swap - 150 - - - - 150 (5)
Australian dollar to New Zealand dollar cross-currency
swap - 130 - - - - 130 25
Swiss franc to New Zealand dollar cross-currency swaps 68 - - - - - 68 1
International Paper does not hold or issue financial instruments for
trading purposes. The counterparties to 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.
15 Capital Stock
- -------------------------------------------------------------------------------
The authorized capital stock at both December 31, 2000 and 1999 consisted of
990,850,000 shares of common stock, $1 par value; 400,000 shares of cumulative
$4 nonredeemable preferred stock, without par value (stated value $100 per
share); and 8,750,000 shares of serial preferred stock, $1 par value. The serial
preferred stock is issuable in one or more series by the Board of Directors
without further shareholder action.
16 Retirement Plans
- --------------------------------------------------------------------------------
International Paper maintains pension plans that provide retirement benefits to
substantially all employees. Employees generally are eligible to participate in
the plans upon completion of one year of service and attainment of age 21.
The plans provide defined benefits based on years of credited service and
either final average earnings (salaried employees), hourly job rates or
specified benefit rates (hourly and union employees).
U.S. Defined Benefit Plans
International Paper makes contributions that are sufficient to fully fund its
actuarially determined costs, generally equal to the minimum amounts required by
the Employee Retirement Income Security Act (ERISA).
Net periodic pension income for qualified and nonqualified defined benefit
plans comprised the following:
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Service cost $ (98) $(101) $ (97)
Interest cost (397) (303) (297)
Expected return on plan assets 615 469 455
Amortization of net transition asset (obligation) (2) - 26
Actuarial loss (5) (6) (3)
Amortization of prior service cost (19) (16) (12)
Curtailment gain (loss) (2) 6 5
Settlement gain 9 - -
----- ----- -----
Net periodic pension income $ 101 $ 49 $ 77
===== ===== =====
63
<Page>
Notes to Consolidated Financial Statements
The following table presents the changes in benefit obligation and plan
assets for 2000 and 1999 and the plans' funded status and amounts recognized in
the consolidated balance sheet as of December 31, 2000 and 1999.
- ------------------------------------------------------------------------------------
In millions 2000 1999
- ------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation, January 1 $4,323 $4,492
Service cost 98 101
Interest cost 397 303
Actuarial (gain) loss 171 (439)
Benefits paid (451) (322)
Acquisitions(a) 1,796 -
Divestitures (42) -
Curtailment gain (2) (10)
Special termination benefits(b) 10 92
Plan amendments 19 106
------ ------
Benefit obligation, December 31(c) $6,319 $4,323
====== ======
Change in plan assets:
Fair value of plan assets, January 1 $5,612 $4,942
Actual return on plan assets (106) 950
Company and participants' contributions 83 42
Benefits paid (451) (322)
Acquisitions 2,144 -
Divestitures (29) -
------ ------
Fair value of plan assets, December 31 $7,253 $5,612
====== ======
Funded status(d) $934 $1,289
Unrecognized actuarial (gain) loss 292 (615)
Unamortized prior service cost 170 183
Unrecognized net transition obligation - 2
------ ------
Prepaid benefit cost $1,396 $ 859
====== ======
Amounts recognized in the consolidated
balance sheet consist of:
Prepaid benefit cost $1,515 $ 928
Accrued benefit liability (168) (85)
Intangible asset 3 6
Minimum pension liability adjustment
included in accumulated other comprehensive income 46 10
------ ------
Net amount recognized $1,396 $ 859
====== ======
(a) Includes $76.5 million in special termination benefits attributable to the
elimination of 500 positions in connection with a severance program
provided to employees whose jobs were eliminated as a result of the
acquisition of Champion. Also included was a curtailment gain of $17.9
million.
(b) Included in restructuring and other charges for 2000 was $10 million for
special termination benefits attributable to the elimination of
approximately 268 positions in connection with a facility rationalization
program. Included in merger integration costs for 1999 was $92 million for
special termination benefits attributable to the elimination of
approximately 1,171 positions in connection with an employee integration
benefits program provided to employees whose jobs were eliminated as a
result of the merger of International Paper and Union Camp. In 2000, $6
million of this reserve relating to 171 positions, was included in
reversals of reserves no longer required.
(c) Includes nonqualified unfunded plans with projected benefit obligations of
$212 million and $110 million at December 31, 2000 and 1999, respectively.
(d) The Union Camp and Alling & Cory domestic qualified pension plans were
merged with the International Paper domestic qualified pension plan
effective September 30, 1999. The funded status information for 1999
reflects this merger. Prior to the plan merger, the Union Camp domestic
qualified hourly plan had an accumulated benefit obligation in excess of
the fair value of plan assets. As of December 31, 1998, the projected
benefit obligation, accumulated benefit obligation and fair market value of
plan assets for the Union Camp hourly plan were $290 million, $290 million
and $269 million, respectively.
Plan assets are held in master trust accounts and include investments in
International Paper common stock in the amounts of $467 million and $401 million
at December 31, 2000 and 1999, respectively.
Weighted average assumptions as of December 31, 2000, 1999 and 1998 were as
follows:
- -------------------------------------------------------------------------------
2000 1999 1998(a,b)
- -------------------------------------------------------------------------------
Discount rate 7.50% 7.75% 6.60%
Expected long-term return on plan assets 10.00% 10.00% 9.90%
Rate of compensation increase 4.75% 5.00% 4.20%
(a) On June 1, 1999 International Paper enhanced pension benefits for its major
union groups. As a result, the pension plan was revalued. The revaluation
assumed a discount rate of 7.25% and a rate of compensation increase of
4.5%. These actions had the net effect of reducing the pension benefit
obligation by $179 million.
(b) The 1998 rate is a blended average of the Union Camp and International
Paper plan assumptions. The International Paper discount rate, expected
long-term return on plan assets and rate of compensation increase for 1998
was 6.5%, 10.0% and 4.0%, respectively.
64
<Page>
Notes to Consolidated Financial Statements
Non-U.S. Defined Benefit Plans
Generally, our non-U.S. pension plans are funded using the projected benefit as
a target, except in certain countries where funding of benefit plans is not
required. Net periodic pension expense for our non-U.S. plans was not
significant for 2000, 1999 or 1998.
The non-U.S. plans' projected benefit obligation in excess of plan assets at
fair market value at December 31, 2000 and 1999 was $87 million and $43 million,
respectively. Plan assets are composed principally of common stocks and other
fixed income securities.
Other Plans
We sponsor several defined contribution plans to provide substantially all U.S.
salaried and certain hourly employees of International Paper an opportunity to
accumulate personal funds for their retirement. Contributions may be made on a
before-tax basis to substantially all of these plans.
As determined by the provisions of each plan, International Paper matches the
employees' basic voluntary contributions. Such matching contributions to the
plans were approximately $65 million, $67 million and $58 million for the plan
years ending in 2000, 1999 and 1998, respectively. The net assets of these plans
approximated $4.7 billion as of the 2000 plan year-end.
17 Postretirement Benefits
- --------------------------------------------------------------------------------
International Paper provides certain retiree health care and life insurance
benefits covering a majority of U.S. salaried and certain hourly employees.
Employees are generally eligible for benefits upon retirement and completion of
a specified number of years of creditable service. An amendment in 1992 to one
of the plans limits the maximum annual company contribution for health care
benefits for retirees after January 1, 1992, based on age at retirement and
years of service after age 50. Amortization of this plan amendment, which
reduced annual net postretirement benefit cost, was completed in 1999.
International Paper does not prefund these benefits and has the right to modify
or terminate certain of these plans in the future.
The components of postretirement benefit expense in 2000, 1999 and 1998 were
as follows:
- --------------------------------------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Service cost $ 10 $ 11 $ 11
Interest cost 45 30 33
Actuarial loss - 2 1
Amortization of prior service cost (6) (12) (21)
Curtailment gain (2) - -
Settlement gain (2) - -
---- ---- ----
Net postretirement benefit cost $ 45 $ 31 $ 24
==== ==== ====
The following table presents the plans' funded status as of December 31, 2000
and 1999 and changes in benefit obligation and plan assets for 2000 and 1999.
- --------------------------------------------------------------------------------
In millions 2000 1999
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation, January 1 $ 446 $ 503
Service cost 10 11
Interest cost 45 30
Participants' contributions 21 16
Actuarial gain (5) (66)
Benefits paid (73) (44)
Plan amendments (8) (15)
Acquisitions(a) 385 -
Divestitures (1) -
Curtailment loss - 4
Special termination benefits(b) 2 7
----- -----
Benefit obligation, December 31 $ 822 $ 446
===== =====
Change in plan assets:
Fair value of plan assets, January 1 $ - $ -
Company contributions 52 28
Participants' contributions 21 16
Benefits paid (73) (44)
----- -----
Fair value of plan assets, December 31 $ - $ -
===== =====
Funded status $(822) $(446)
Unamortized prior service cost (45) (47)
Unrecognized actuarial (gain) loss (2) 4
----- -----
Accrued benefit cost $(869) $(489)
===== =====
(a) Includes $9.5 million in special termination benefits attributable to the
elimination of 500 positions in connection with a severance program
provided to employees whose jobs were eliminated as a result of the
Champion acquisition. Also included was a curtailment gain of $2.1 million.
65
<Page>
Notes to Consolidated Financial Statements
(b) Included in restructuring and other charges in 2000 were charges of $2
million for special termination benefits attributable to the elimination of
approximately 100 positions in connection with a facility rationalization
program. Included in merger integration costs for 1999 were charges of $7
million for special termination benefits attributable to the elimination of
approximately 313 positions in connection with an integration benefits
program provided to employees whose jobs were eliminated as a result of the
Union Camp merger.
Future benefit costs were estimated assuming medical costs would increase at a
6.50% annual rate, decreasing to a 5% annual growth rate ratably over the next
three years and then remaining at a 5% annual growth rate thereafter. A 1%
increase in this annual trend rate would have increased the accumulated
postretirement benefit obligation at December 31, 2000 by $63 million. A 1%
decrease in the annual trend rate would have decreased the accumulated
postretirement benefit obligation at December 31, 2000 by $57 million. The
effect on net postretirement benefit cost from a 1% increase or decrease would
not be material. The weighted average discount rate used to estimate the
accumulated postretirement benefit obligation at December 31, 2000 was 7.50%
compared with 7.75% at December 31, 1999.
In addition to the U.S. plan, certain Canadian employees are eligible for
retiree health care and life insurance. Costs and obligations for this plan were
not significant.
18 Incentive Plans
- --------------------------------------------------------------------------------
International Paper currently has a Long-Term Incentive Compensation Plan that
includes a Stock Option Plan, a Restricted Performance Share Plan and an
Executive Continuity Award Plan, administered by a committee of nonemployee
members of the Board of Directors (Committee) who are not eligible for awards.
The Plan allows stock appreciation rights to be awarded, although none were
outstanding at December 31, 2000 or 1999. We also have other performance-based
restricted share/unit plans available to senior executives and directors.
We apply the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for our plans and the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). Accordingly, no compensation cost has been recognized for the stock
option plan.
Stock Option Plan
Under the current plan, officers and certain other employees may be granted
options to purchase International Paper common stock. The option price is the
market price of the stock at the date of grant. Options are immediately
exercisable under the plan; however, the underlying shares cannot be sold and
carry profit forfeiture provisions during the initial two years following grant.
Upon exercise of an option, a replacement option may be granted with the
exercise price equal to the current market price and with a term extending to
the expiration date of the original option.
For purposes of the pro forma disclosure on page 61, the fair market value of
each option grant has been estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2000, 1999 and 1998, respectively:
- -------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------
Initial Options(a)
Risk-Free Interest Rate 6.17% 4.78% 5.05%
Price Volatility 45.00% 33.00% 29.28%
Dividend Yield 2.50% 2.08% 2.38%
Expected Term in Years 2.50(c) 4.39 5.31
Replacement Options(b)
Risk-Free Interest Rate 6.45% 5.47% 5.51%
Price Volatility 45.00% 33.00% 31.09%
Dividend Yield 2.50% 2.05% 2.17%
Expected Term in Years 2.10 2.09 2.12
(a) The average fair market values of initial option grants during 2000, 1999
and 1998 were $11.86, $13.14 and $10.83, respectively.
(b) The average fair values of replacement option grants during 2000, 1999 and
1998 were $13.44, $10.14 and $9.40, respectively.
(c) In 2000, the vesting period for current and prospective option grants under
the stock option plan was reduced from four to two years.
66
<Page>
Notes to Consolidated Financial Statements
A summary of the status of the Stock Option Plan as of December 31, 2000, 1999
and 1998 and changes during the years ended on those dates is presented below:
- ------------------------------------------------------------------------------
Weighted
Average
Exercise
Options(a,b) Price
- ------------------------------------------------------------------------------
Outstanding at January 1, 1998 18,124,084 $38.03
Granted 4,820,970 42.96
Exercised (3,314,612) 35.85
Forfeited (789,621) 42.82
Expired (154,915) 49.97
----------- ---------
Outstanding at December 31, 1998 18,685,906 39.39
Granted 4,521,627 49.76
Exercised (6,531,818) 36.56
Forfeited (522,214) 42.91
Expired (354,566) 51.41
----------- ---------
Outstanding at December 31, 1999 15,798,935 43.14
Granted 9,527,442 43.29
Exercised (1,052,107) 41.84
Forfeited (233,724) 51.96
Expired (177,568) 49.97
----------- ---------
Outstanding at December 31, 2000 23,862,978 $43.12
=========== =========
(a) The table does not include Executive Continuity Award tandem options
described below. No fair value is assigned to these options under SFAS No.
123. The tandem restricted shares accompanying these options are expensed
over their vesting period.
(b) The table does include options outstanding under two acquired company plans
under which options may no longer be granted.
The following table summarizes information about stock options outstanding at
December 31, 2000:
- --------------------------------------------------------------------------------
Outstanding and Exercisable
--------------------------------------
Weighted Weighted
Average Average
Options Remaining Exercise
Range of Exercise Prices Outstanding Life Price
- --------------------------------------------------------------------------------
$25.79-$29.87 5,211,154 9.7 $29.30
$30.00-$41.00 5,484,960 5.1 $35.90
$41.12-$46.00 4,750,379 6.6 $43.82
$46.06-$57.38 4,042,725 3.3 $52.43
$57.43-$69.63 4,373,760 8.5 $59.27
Performance-Based Restricted Shares
Under the Restricted Performance Share Plan, contingent awards of International
Paper's common stock are granted by the Committee. Awards are earned on the
basis of International Paper's financial performance over a period of
consecutive calendar years as determined by the Committee. The Restricted
Performance Share Plan in effect at the beginning of 1999 was cancelled during
1999. Prior to the amended plan, which commences in January 2001, a one-time
Transitional Performance Unit Plan has been in effect since July 1, 1999, which
provides a cash award upon successful achievement of pre-established performance
criteria.
The following summarizes the activity of all performance-based plans for the
three years ending December 31, 2000:
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------------
Outstanding at January 1, 1998 1,161,069
Granted 330,656
Issued (156,935)
Forfeited (50,100)
----------
Outstanding at December 31, 1998 1,284,690
Granted 95,035
Issued (227,553)
Forfeited(a) (1,067,153)
----------
Outstanding at December 31, 1999 85,019
Granted -
Issued (26,537)
Forfeited (58,482)
----------
Outstanding at December 31, 2000 -
==========
(a) Includes 974,734 shares forfeited under the Restricted Performance Share
Plan in 1999.
67
<Page>
Notes to Consolidated Financial Statements
Executive Continuity Award Plan
The Executive Continuity Award Plan provides for the granting of tandem awards
of restricted stock and/or nonqualified stock options to key executives. Grants
are restricted and awards conditioned on attainment of specified age and years
of service requirements. Awarding of a tandem stock option results in the
cancellation of the related restricted shares.
The following summarizes the activity of the Executive Continuity Award Plan
for the three years ending December 31, 2000:
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------------
Outstanding at January 1, 1998 580,258
Granted 24,000
Issued (5,500)
Forfeited (5,000)
--------
Outstanding at December 31, 1998 593,758
Granted 71,900
Issued (65,412)
Forfeited(a) (89,390)
--------
Outstanding at December 31, 1999 510,856
Granted 76,165
Issued (18,303)
Forfeited(a) (112,000)
--------
Outstanding at December 31, 2000 456,718
========
(a) Includes restricted shares cancelled when tandem stock options were
awarded. 560,000 and 440,000 tandem options were awarded in 2000 and 1999,
respectively.
At December 31, 2000 and 1999, a total of 22.5 million and 30.1 million
shares, respectively, were available for grant under the Long-Term Incentive
Compensation Plan. In 1999, shareholders approved an additional 25.5 million
shares to be made available for grant, with 3 million of these shares reserved
specifically for the granting of restricted stock. No additional shares were
made available during 2000. A total of 4.2 million shares were available for the
granting of restricted stock as of December 31, 2000 and 1999.
The compensation cost charged to earnings for all the incentive plans was $28
million, $3 million and $15 million for 2000, 1999 and 1998, respectively.
Earnings in 1999 included income of $20 million recognized upon cancellation of
a majority of the awards under the Restricted Performance Share Plan.
Had compensation cost for International Paper's stock-based compensation plans
been determined consistent with the provisions of SFAS No. 123, its net
earnings, earnings per common share and earnings per common share--assuming
dilution would have been reduced to the pro forma amounts indicated below:
- --------------------------------------------------------------------------------
In millions, except per share amounts 2000 1999 1998
- --------------------------------------------------------------------------------
Net Earnings
As reported $ 142 $ 183 $ 247
Pro forma 104 152 223
Earnings Per Common Share
As reported $0.32 $0.44 $0.60
Pro forma 0.23 0.37 0.54
Earnings Per Common Share--
assuming dilution
As reported $0.32 $0.44 $0.60
Pro forma 0.23 0.37 0.54
The effect on 2000, 1999 and 1998 pro forma net earnings, earnings per common
share and earnings per common share--assuming dilution of expensing the
estimated fair market value of stock options is not necessarily representative
of the effect on reported earnings for future years due to the vesting period of
stock options and the potential for issuance of additional stock options in
future years.
19 Subsequent Events
- --------------------------------------------------------------------------------
As of March 1, 2001 the dispositions of certain businesses discussed in Note
7-Businesses Held for Sale were completed. Zanders, the Argentine businesses and
the Hamilton mill were sold for approximately $130 million. In addition, the oil
and gas interests were conveyed to a third party for approximately $260 million.
On February 15, 2001, International Paper announced that an agreement was
reached to sell approximately 265,000 acres of forestlands in the state of
Washington for approximately $500 million.
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Six-Year Financial Summary International Paper
- -----------------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions, except per share amounts and
stock prices 2000 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Results of Operations
Net sales $ 28,180 $24,573 $23,979 $ 24,556 $ 24,182 $24,140
Costs and expenses, excluding interest 26,675 23,620 23,039 23,976 23,193 20,791
Earnings before income taxes, minority
interest and extraordinary items 723(a) 448(c) 429(e) 143(f) 939(g) 2,742
Minority interest expense, net of taxes 238(a) 163(c) 87(e) 140(f) 180(g) 166
Extraordinary items (226)(b) (16)(d) - - - -
Net earnings (loss) 142(a,b) 183(c,d) 247(e) (80)(f) 379(g) 1,595
Earnings (loss) applicable to common shares 142(a,b) 183(c,d) 247(e) (80)(f) 379(g) 1,595
-------- ------- ------- -------- -------- -------
Financial Position
Working capital $ 3,042 $ 2,859 $ 2,675 $ 1,476 $ 454 $ 1,471
Plants, properties and equipment, net 16,011 14,381 15,320 15,707 16,570 14,347
Forestlands 5,966 2,921 3,093 3,273 3,637 3,030
Total assets 42,109 30,268 31,466 31,971 33,357 28,838
Long-term debt 12,648 7,520 7,697 8,521 7,943 7,144
Common shareholders' equity 12,034 10,304 10,738 10,647 11,349 9,837
-------- ------- ------- -------- -------- -------
Per Share of Common Stock--
Assuming No Dilution(i)
Earnings (loss) before extraordinary items $ 0.82 $ 0.48 $ 0.60 $ (0.20) $ 0.95 $ 4.41
Extraordinary items (0.50) (0.04) - - - -
Earnings (loss) 0.32 0.44 0.60 (0.20) 0.95 4.41
Cash dividends 1.00 1.01 1.05 1.05 1.05 0.98
Common shareholders' equity 24.85 24.85 25.99 26.10 27.95 26.73
-------- ------- ------- -------- -------- -------
Common Stock Prices(i)
High 60 59 1/2 55 1/4 61 44 5/8 45 3/4
Low 26 5/16 39 1/2 35 1/2 38 5/8 35 5/8 34 1/8
Year-end 40 13/16 56 7/16 44 13/16 43 1/8 40 1/2 37 7/8
-------- ------- ------- -------- -------- -------
Financial Ratios
Current ratio 1.4 1.7 1.6 1.3 1.1 1.3
Total debt to capital ratio 49.3 38.1 39.0 46.1 45.6 43.7
Return on equity 1.2(a,b,h) 1.7(c,d,h) 2.3(e,h) (0.7)(f,h) 3.4(g) 17.6
Return on investment before extraordinary items 3.3(a,h) 2.6(c,d,h) 2.5(e,h) 1.5(f,h) 3.3(g) 9.0
-------- ------- ------- -------- -------- -------
Capital Expenditures $ 1,352 $ 1,139 $ 1,322 $ 1,448 $ 1,780 $ 1,785
-------- ------- ------- -------- -------- -------
Number of Employees 112,900 98,700 98,300 100,900 106,300 99,800
======== ======= ======= ======== ======== =======
Financial Glossary
Current ratio--current assets divided by current liabilities.
Total debt to capital ratio--long-term debt plus notes payable and current
maturities of long-term debt divided by long-term debt, notes payable and
current maturities of long-term debt, minority interest, preferred securities
and total common shareholders' equity.
Return on equity--net earnings divided by average common shareholders' equity
(computed monthly).
Return on investment--earnings before income taxes, minority interest and
extraordinary items, less after-tax interest expense, divided by an average of
total assets minus accounts payable and accrued liabilities (computed monthly).
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<Page>
Six-Year Financial Summary
Footnotes to Six-Year Financial Summary
(a) Includes a $54 million pre-tax charge ($33 million after taxes) for merger
related expenses, a $125 million pre-tax charge ($80 million after taxes)
for additional Masonite legal reserves, an $824 million charge before taxes
and minority interest ($509 million after taxes and minority interest) for
asset shutdowns and a $34 million pre-tax credit ($21 million after taxes)
for the reversals of reserves no longer required.
(b) Includes an extraordinary gain of $385 million before taxes and minority
interest ($134 million after taxes and minority interest) on the sale of
International Paper's investment in Scitex and Carter Holt Harvey's sale of
its share of COPEC, an extraordinary loss of $460 million before taxes
($310 million after taxes) related to the impairment of the Zanders and
Masonite businesses to be sold, an extraordinary gain before taxes and
minority interest of $368 million ($183 million after taxes and minority
interest) related to the sale of Bush Boake Allen, an extraordinary loss of
$5 million before taxes and minority interest ($2 million after taxes and
minority interest) related to Carter Holt Harvey's sale of its Plastics
division, and an extraordinary pre-tax charge of $373 million ($231 million
after taxes) related to impairments of the Argentine investments, as well
as the Chemical Cellulose pulp business and Fine Papers businesses to be
sold.
(c) Includes a $148 million pre-tax charge ($97 million after taxes) for Union
Camp merger-related termination benefits, a $107 million pre-tax charge
($78 million after taxes) for merger-related expenses, a $298 million
pre-tax charge ($180 million after taxes and minority interest) 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 reversals of reserves that were no longer
required.
(d) Includes an extraordinary loss of $26 million before taxes ($16 million
after taxes) for the extinguishment of high-interest debt that was assumed
in the merger with Union Camp.
(e) Includes a $20 million pre-tax gain ($12 million after taxes) on the sale
of the Veratec nonwovens business, an $83 million pre-tax credit ($50
million after taxes) from the reversals of previously established reserves
that were no longer required, a $111 million pre-tax charge ($68 million
after taxes) for the impairment of oil and gas reserves due to low prices,
a $145 million pre-tax restructuring and asset impairment charge ($82
million after taxes and minority interest expense) and $16 million of
pre-tax charges ($10 million after taxes) related to International Paper's
share of charges taken by Scitex, a 13% investee company, for the write-off
of in-process research and development related to an acquisition and costs
to exit the digital video business.
(f) Includes a pre-tax business improvement charge of $535 million ($385
million after taxes), a $150 million pre-tax provision for legal reserve
($93 million after taxes), a pre-tax charge of $125 million ($80 million
after taxes) for anticipated losses associated with the sale of the Imaging
businesses, and a pre-tax gain of $170 million ($97 million after taxes and
minority interest) from the redemption of certain retained West Coast
partnership interests and the release of a related debt guaranty.
(g) Includes a pre-tax restructuring and asset impairment charge of $554
million ($386 million after taxes), a $592 million pre-tax gain on the sale
of a West Coast partnership interest ($336 million after taxes and minority
interest), a $155 million pre-tax charge ($99 million after taxes) for the
write-down of the investment in Scitex and a $10 million pre-tax charge ($6
million after taxes) for International Paper's share of a restructuring
charge announced by Scitex in November 1996.
(h) Return on equity was 8.3% and return on investment was 5.3% in 2000 before
special and extraordinary items. Return on equity was 5.2% and return on
investment was 4.0% in 1999 before special and extraordinary items. Return
on equity was 3.2% and return on investment was 2.8% in 1998 before special
items. Return on equity was 3.4% and return on investment was 3.0% in 1997
before special items. Return on equity was 4.7% and return on investment
was 3.8% in 1996 before special items.
(i) Per share data and common stock prices have been adjusted to reflect a
two-for-one stock split in September 1995. All per share amounts are
computed before the effects of dilutive securities.
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<Page>
Interim Financial Results (unaudited) International Paper
- ----------------------------------------------------------------------------------------------------------------
In millions, except per share amounts and stock prices 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ----------------------------------------------------------------------------------------------------------------
2000
Net Sales $6,371 $6,780 $7,801 $7,228
Gross Margin(a) 1,850 2,044 2,253 1,951
Earnings (Loss) Before Income Taxes,
Minority Interest and Extraordinary Items 435(b) 480(d) 311(e) (503)(h)
Net Earnings (Loss) 378(b,c) 270(d) (135)(e,f) (371)(h,i)
Per Share of Common Stock
Earnings (Loss) $0.91 $0.64 $(0.38)(g) $(0.85)(j)
Earnings (Loss)--Assuming Dilution 0.91 0.64 (0.38)(g) (0.85)(j)
Dividends 0.25 0.25 0.25 0.25
Common Stock Prices
High 60 45 15/16 36 13/16 43
Low 32 7/8 29 9/16 27 26 5/16
1999
Net Sales $6,032 $5,996 $6,251 $6,294
Gross Margin(a) 1,497 1,619 1,690 1,807
Earnings (Loss) Before Income Taxes,
Minority Interest and Extraordinary Items 94 (36)(k) 242(l) 148(m)
Net Earnings (Loss) 32 (71)(k) 142(l) 80(m)
Per Share of Common Stock
Earnings (Loss) $0.08 $(0.17) $0.34 $0.19
Earnings (Loss)--Assuming Dilution 0.08 (0.17) 0.34 0.19
Dividends 0.26 0.25 0.25 0.25
Common Stock Prices
High 47 1/4 59 1/2 56 1/16 57 11/16
Low 39 1/2 42 11/16 46 15/16 43 9/16
- ------------------------------------------------------------------------
In millions, except per share amounts and stock prices Year
- ------------------------------------------------------------------------
2000
Net Sales $28,180
Gross Margin(a) 8,098
Earnings (Loss) Before Income Taxes,
Minority Interest and Extraordinary Items 723(b,d,e,h)
Net Earnings (Loss) 142(b-f,h,i)
Per Share of Common Stock
Earnings (Loss) $0.32
Earnings (Loss)--Assuming Dilution 0.32
Dividends 1.00
Common Stock Prices
High 60
Low 26 5/16
1999
Net Sales $24,573
Gross Margin(a) 6,613
Earnings (Loss) Before Income Taxes,
Minority Interest and Extraordinary Items 448(k,l,m)
Net Earnings (Loss) 183(k,l,m)
Per Share of Common Stock
Earnings (Loss) $0.44
Earnings (Loss)--Assuming Dilution 0.44
Dividends 1.01
Common Stock Prices
High 59 1/2
Low 39 1/2
71
<Page>
Interim Financial Results
Footnotes to Interim Financial Results
(a) Gross margin represents net sales less cost of products sold.
(b) Includes an $8 million pre-tax charge ($5 million after taxes) for Union
Camp merger integration costs.
(c) Includes an extraordinary gain of $385 million before taxes and minority
interest ($134 million after taxes and minority interest) on the sale of
International Paper's investment in Scitex and Carter Holt Harvey's sale of
its share of COPEC.
(d) Includes a $4 million pre-tax charge ($3 million after taxes) for
merger-related 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.
(e) Includes a $15 million pre-tax charge ($9 million after taxes) for
merger-related expenses, a $6 million pre-tax credit ($4 million after
taxes) for the reversal of merger-related termination benefits reserves no
longer required, and a $125 million pre-tax charge ($80 million after
taxes) for additional Masonite legal reserves.
(f) Includes an extraordinary loss of $460 million before taxes ($310 million
after taxes) related to the impairment of the Zanders and Masonite
businesses to be sold.
(g) In order for the 2000 third quarter earnings per share to add up to the
year-to-date earnings per share, a loss of $.38 per share is required. On
the basis of the weighted-average number of shares outstanding for the
third quarter, the loss per share was $.28. The difference between the two
calculations relates to the 68.7 million shares that were issued in
connection with the Champion acquisition.
(h) Includes a $27 million pre-tax charge ($16 million after taxes) for Union
Camp and Champion merger-related items, a charge of $753 million before
taxes and minority interest ($467 million after taxes and minority
interest) for shutdown and restructuring reserves, and a $28 million
pre-tax credit ($17 million after taxes) for the reversals of reserves no
longer required.
(i) Includes an extraordinary pre-tax gain of $368 million ($183 million after
taxes) related to the sale of Bush Boake Allen. Also included is an
extraordinary loss of $5 million before taxes and minority interest ($2
million after taxes and minority interest) related to Carter Holt Harvey's
sale of its Plastics division, and an extraordinary pre-tax charge of $373
million ($231 million after taxes) related to impairments of the Argentine
investments, as well as the Chemical Cellulose pulp business and Fine
Papers businesses to be sold.
(j) In order for the year-to-date earnings per share to equal the sum of the
quarters, a loss of $.85 is required in the fourth quarter. On the basis of
the weighted-average shares outstanding for the fourth quarter, the loss
per share was $.77. The difference between the two calculations relates to
the 68.7 million shares that were issued in connection with the Champion
acquisition.
(k) Includes a $98 million pre-tax charge ($67 million after taxes) for Union
Camp merger-related termination benefits, a $59 million pre-tax charge ($49
million after taxes) for other Union Camp merger-related expenses, a $113
million pre-tax charge ($69 million after taxes) for asset shutdowns of
excess internal capacity and cost reduction actions, and a $36 million
pre-tax credit ($27 million after taxes) for the reversals of reserves that
were no longer required.
(l) Includes a $50 million pre-tax charge ($30 million after taxes) for Union
Camp merger-related termination benefits, an $18 million pre-tax charge
($11 million after taxes) for other Union Camp merger-related expenses, and
a $10 million pre-tax charge ($6 million after taxes) to increase existing
environmental remediation reserves related to certain former Union Camp
facilities.
(m) Includes a $185 million pre-tax charge ($111 million after taxes and
minority interest) for asset shutdowns of excess internal capacity and cost
reduction actions, a $30 million pre-tax charge ($18 million after taxes)
for merger-related expenses, and a $30 million pre-tax charge ($18 million
after taxes) to increase existing legal reserves.
72
<Page>
Shareholder Information
Corporate Headquarters
International Paper Company
400 Atlantic Street
Stamford, CT 06921
203-541-8000
Annual Meeting
The next annual meeting of shareholders will be held at 8:30 a.m., Tuesday, May
8, 2001 at the Manhattanville College, Purchase, New York.
Transfer Agent
For services regarding your account such as change of address, lost certificates
or dividend checks, change in registered ownership, or the dividend reinvestment
program, write or call:
Mellon Investor Services, LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
1-800-678-8715
Stock Exchange Listings
Common shares (symbol: IP) are traded on the following exchanges: New York,
Montreal, Swiss and Amsterdam. International Paper options are traded on the
Chicago Board of Options Exchange.
Direct Purchase Plan
Under our plan you may invest all or a portion of your dividends, and you may
purchase up to $20,000 of additional shares each year. International Paper pays
most of the brokerage commissions and fees. You may also deposit your
certificates with the transfer agent for safekeeping. For a copy of the plan
prospectus, call or write to the Corporate Secretary at corporate headquarters.
Independent Public Accountants
Arthur Andersen LLP
1345 Avenue of the Americas
New York, NY 10105
Reports and Publications
Additional copies of this annual report, SEC filings and other publications are
available by calling 1-800-332-8146 or writing to the Investor Relations
department at corporate headquarters. Copies of our most recent environment,
health and safety report are available by calling 1-800-654-3889 or
901-387-5555. Additional information is also available on our Web site,
http://www.internationalpaper.com.
Investor Relations
Investors desiring further information about International Paper should contact
the Investor Relations department at corporate headquarters, 203-541-8625.
Credits
Papers used in this report--Cover: Carolina, 8 pt. C2S, made by our employees at
the Riegelwood, N.C., Mill. Text: pages 1-4, Preference Dull, 80 lb. text, made
by our employees at the Quinnesec, Mich., Mill; pages 5-68, Beckett Expression,
70 lb. text, Snow, made by our employees at the Erie, Pa., Mill.
Designed by Inside Out Design, New York, in collaboration with Stephen Loges
Graphic Design, New York. Photo of Mr. Dillon by Keith Renard, Memphis. Printed
by Sandy Alexander, Clifton, N.J.
Products and brand designations appearing in italics are trademarks of
International Paper or a related company.
'c'2001 International Paper Company. All rights reserved.
73
<Page>
Directors
Peter I. Bijur W. Craig McClelland Board Committees
Former Chairman and Former Chairman and
Chief Executive Officer Chief Executive Officer Audit and Finance Committee
Texaco Inc. Union Camp Corporation Charles R. Shoemate, Chair
Peter I. Bijur
John T. Dillon Donald F. McHenry Samir G. Gibara
Chairman and Distinguished James A. Henderson
Chief Executive Officer Professor of Diplomacy Robert D. Kennedy
International Paper Georgetown University
Management Development and
Robert J. Eaton Patrick F. Noonan Compensation Committee
Former Chairman of the Chairman and Robert J. Eaton, Chair
Board of Management Chief Executive Officer Peter I. Bijur
DaimlerChrysler AG The Conservation Fund James A. Henderson
Robert D. Kennedy
Samir G. Gibara Jane C. Pfeiffer Donald F. McHenry
Chairman and Management Consultant Charles R. Shoemate
Chief Executive Officer
The Goodyear Tire & Jeremiah J. Sheehan Governance Committee
Rubber Company Former Chairman and Donald F. McHenry, Chair
Chief Executive Officer Robert J. Eaton
James A. Henderson Reynolds Metals Company Samir G. Gibara
Former Chairman and John R. Kennedy
Chief Executive Officer Charles R. Shoemate Patrick F. Noonan
Cummins Engine Company Former Chairman, President and Jane C. Pfeiffer
Chief Executive Officer Jeremiah J. Sheehan
John R. Kennedy Bestfoods
Former President and Public Policy and Environment
Chief Executive Officer C. Wesley Smith Committee
Federal Paper Board Company, Inc. Executive Vice President Patrick F. Noonan, Chair
International Paper John R. Kennedy
Robert D. Kennedy W. Craig McClelland
Former Chairman and Jane C. Pfeiffer
Chief Executive Officer Jeremiah J. Sheehan
Union Carbide Corporation C. Wesley Smith
Executive Committee
John T. Dillon, Chair
Donald F. McHenry
Charles R. Shoemate
74
<Page>
Senior Leadership
John T. Dillon William H. Slowikowski William Hoel Matthew Mitchell
Chairman and Senior Vice President Vice President Corporate Auditor
Chief Executive Officer Consumer Packaging Panels & Engineered
Wood Products Jean-Philippe Montel
Robert M. Amen Manco Snapp Chairman
Executive Vice President Senior Vice President Newell E. Holt IP S.A., France
Building Materials Vice President
John V. Faraci Bleached Board Karl W. Moore
Executive Vice President & Dennis Thomas Director, Finance
Chief Financial Officer Senior Vice President Robert M. Hunkeler IP Europe
Public Affairs Vice President
James P. Melican and Communications Investments Maximo Pacheco
Executive Vice President President
David A. Bailey Ernest James International Paper
David W. Oskin Managing Director Vice President Latin America
Executive Vice President European Papers East Corporate Sales
Deborah Parr
Marianne M. Parrs John N. Balboni Thomas C. Jorling Vice President
Executive Vice President Vice President Vice President People Development
e-Business Environmental Affairs, Health
C. Wesley Smith & Safety Carol L. Roberts
Executive Vice President H. Wayne Brafford Vice President
Vice President Thomas Kadien Industrial Packaging
Michael J. Balduino Converting, Specialty Vice President
Senior Vice President & Pulp Commercial Printing & David L. Robinson
Sales and Marketing Fine Papers Vice President
Dennis J. Colley Industrial Packaging
Jerome N. Carter Vice President Paul Karre
Senior Vice President Industrial Packaging Vice President Ethel Scully
Human Resources Human Resources Vice President
William P. Crawford Corporate Marketing
Thomas E. Costello Vice President Jeffrey F. Kass
Senior Vice President Logistics Vice President Marc Shore
Distribution Strategic Planning President
Hans-Peter Daroczi Shorewood Packaging
Charles H. Greiner Vice President Timothy P. Keneally
Senior Vice President International Container Vice President Bennie R. Smith
Printing & Communications Industrial Packaging Performance Vice President
Papers Art Douville & Packaging Systems Industrial Packaging
Executive Vice President
Paul Herbert xpedx Walter Klein Barbara L. Smithers
President Vice President Vice President and
IP Europe C. Cato Ealy Strategic Planning Corporate Secretary
Vice President
Newland Lesko Business Development and Ken Krieg Peter M. Springford
Senior Vice President Planning Vice President President
Industrial Packaging Office and Consumer Papers International Paper Asia
Odair Garcia
William B. Lytton President & Executive Director Austin Lance Larry J. Stowell
Senior Vice President & IP Brazil Vice President Vice President
General Counsel Coated & SC Papers Operations Arizona Chemical
Thomas E. Gestrich
George A. O'Brien Vice President Peter F. Lee Tobin J. Treichel
Senior Vice President Beverage Packaging Vice President Vice President
Forest Resources Research & Development Finance
Jeff Hearn
Richard B. Phillips President & CEO Andrew R. Lessin Carol S. Tutundgy
Senior Vice President Weldwood of Canada Limited Vice President Vice President
Technology Finance Investor Relations
Barry Hentz
LH Puckett Vice President Art McGowen Lyn M. Withey
Senior Vice President Foodservice Business Vice President Vice President
Coated & SC Papers Lumber Products Public Affairs
J. Chris Scalet Gerald C. Marterer
Senior Vice President and Vice President
Chief Information Officer Industrial Papers
75
<Page>
Offices
Corporate Headquarters
400 Atlantic Street
Stamford, CT 06921
1-203-541-8000
Operational Headquarters
6400 Poplar Avenue
Memphis, TN 38197
1-901-763-6000
European Coordination Center
International Paper
Chaussee de la Hulpe, 166
1170 Brussels, Belgium
32-2-774-1211
International Paper Asia
1201-1203 Central Plaza
18 Harbour Road
Wanchai, Hong Kong
852-2824-3000
International Paper Latin America
Miraflores 222, Piso 13
Santiago, Chile
56-2638-3585
Forest Products
Forest Resources, Lumber Products
and Panels & Engineered Wood
Products
1201 West Lathrop Avenue
Savannah, GA 31415
1-912-238-6000
xpedx-Distribution
50 East River Center Boulevard
Suite 700
Covington, KY 41011
1-859-655-2000
Ace Packaging
7986 N. Telegraph Road
Newport, MI 48166
1-734-586-9800
Shorewood Packaging
277 Park Avenue, 30th Fl
New York, NY 10172
1-212-508-5693
Weldwood of Canada Limited
1055 West Hastings Street
Vancouver, British Columbia
1-604-687-7366
Carter Holt Harvey
640 Great South Road
Manukau City
Auckland, New Zealand
64-9-262-6000
76
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[INTERNATIONAL PAPER LOGO]
400 Atlantic Street
Stamford, CT 06921
203-541-8000
www.internationalpaper.com
Equal Opportunity Employer (M/F/D/V)
77