INTERNATIONAL PAPER 1997 ANNUAL REPORT
1997 ANNUAL REPORT
100 YEARS
CELEBRATING
OUR CENTENNIAL
1898-1998
CONTENTS
IFC FINANCIAL HIGHLIGHTS
2 LETTER TO SHAREHOLDERS
4 OUR BUSINESSES
10 OUR TRANSFORMATION
12 CUSTOMER FOCUS
14 TEAMWORK IN ACTION
16 THE PRODUCTS OF SUCCESS
18 TOOLS OF THE TRADE
20 THE BOTTOM LINE
21 FINANCIAL REVIEW
51 DIRECTORS AND SENIOR MANAGEMENT
53 LIST OF EMPLOYEE TEAMS
54 SHAREHOLDER INFORMATION
100 years
Our Centennial is not so much a milestone as it is a checkpoint. It's an
opportunity to see where we've been. And, more important, where we're going.
Together, we're moving confidently toward our next 100 years.
[Logo] INTERNATIONAL PAPER CENTENNIAL 1998
FINANCIAL HIGHLIGHTS
DOLLAR AMOUNTS AND SHARES IN MILLIONS,
EXCEPT PER SHARE AMOUNTS 1997 1996
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FINANCIAL SUMMARY
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Net Sales $ 20,096 $ 20,143
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Operating Profit 741(1,2) 1,589(1,3)
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Earnings Before Income Taxes and
Minority Interest 16(2) 802(3)
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Net Earnings (Loss) (151)(2) 303(3)
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Total Assets 26,754 28,252
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Common Shareholders' Equity 8,710 9,344
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Return on Investment 1.2%(2) 3.3%(3)
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PER SHARE OF COMMON STOCK
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Earnings (Loss) $ (.50)(2) $ 1.04(3)
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Earnings (Loss) - Assuming Dilution (.50)(2) 1.04(3)
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Cash Dividends 1.00 1.00
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Common Shareholders' Equity 28.82 31.13
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SHAREHOLDER PROFILE
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Shareholders of Record at December 31 32,697 33,930
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Shares Outstanding at December 31 302.2 300.2
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Average Shares Outstanding 301.6 292.1
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(1) See the operating profit tables on page 32 for details of operating profit
by industry segment. Results of equity investees are not included in
operating profit.
(2) Includes a pre-tax business improvement charge of $535 million ($385
million after taxes or $1.28 per share), a $150 million pre-tax provision
for legal reserve ($93 million after taxes or $.31 per share), a pre-tax
charge of $125 million ($80 million after taxes or $.26 per share) for
anticipated losses associated with the sale of the imaging businesses, and
a pre-tax gain of $170 million ($97 million after taxes and minority
interest expense or $.32 per share) from the redemption of certain
retained West Coast partnership interests and the release of a related
debt guaranty. Return on investment was 3.0% before these items. The
provision for legal reserve is not included in operating profit.
(3) Includes a pre-tax restructuring and asset impairment charge of $515
million ($362 million after taxes or $1.35 per share), a $592 million
pre-tax gain on the sale of a partnership interest ($336 million after
taxes and minority interest or $1.25 per share), a $155 million pre-tax
charge ($99 million after taxes or $.33 per share) for the write-down of
the investment in Scitex and a $10 million pre-tax charge ($6 million
after taxes or $.02 per share) for our share of a restructuring charge
announced by Scitex in November 1996. The $155 million write-down of
the investment in Scitex and the $10 million Scitex restructuring charge
are not included in operating profit. Return on investment was 3.6% before
these items.
TODAY AND TOMORROW, INTERNATIONAL PAPER WILL BE A GLOBAL INDUSTRY LEADER AND
PROVIDE AN EXCELLENT FINANCIAL RETURN. WE WILL EMPOWER EMPLOYEES AND BE THE
SUPPLIER OF CHOICE FOR CUSTOMERS.
1898
Seventeen pulp and paper mills in the northeastern United States merged to form
International Paper.
1898
Hammermill Paper Company founded in Erie, Pennsylvania.
1916
Federal Paper Board Company launched with paper mill in Bogota, New Jersey.
1927
Formed Southern International Paper, a wholly owned subsidiary of International
Paper.
1930
Formed Arizona Chemical as an International Paper/American Cyanamid joint
venture.
1942
Developed wet-strength linerboard to ship military supplies during WWII.
1946
Southern Kraft Division opened research laboratory in Mobile, Alabama.
1946
Acquired Single Service Containers, Inc. to enter liquid packaging market.
1957
Established Southlands Experiment Forest in Bainbridge, Georgia.
1969
Corporate Research Center opened in Tuxedo Park, New York.
1981
Sold Canadian International Paper to finance modernization of U.S. operations.
1986
Acquired Hammermill Paper Company.
1987
Moved operations headquarters to Memphis, Tennessee.
1988
Acquired Masonite Corporation.
1989
Acquired Aussedat Rey, a major French paper company.
1989
Acquired Zanders Feinpapiere AG, a leading German producer of fine papers.
1992
Acquired the Kwidzyn paper mill in Poland.
1993
Consolidated distribution businesses into ResourceNet International, later named
xpedx.
1995
Acquired majority ownership of Carter Holt Harvey in New Zealand.
1996
Merged with Federal Paper Board.
1996
Opened the Cincinnati Technology Center.
1998
International Paper celebrates its Centennial.
"...WE INTEND TO WIN BY BECOMING MORE FOCUSED ON THOSE BUSINESSES IN WHICH WE
CAN HAVE A LEADERSHIP POSITION AND GENERATE RETURNS THAT WILL BE AMONG THE BEST
IN OUR INDUSTRY."
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John T. Dillon
Chairman and Chief Executive Officer
TO OUR SHAREHOLDERS
Although we made significant progress on many fronts, 1997 proved to be a
very difficult year for International Paper.
Last year at this time, I had anticipated that business would improve
early in the year. But the recovery from the depressed conditions experienced
since late 1995 stretched out until the third quarter, and just as a discernible
improvement started to take hold, the economic problems in Southeast Asia began
to affect some of our major businesses.
As a result, we finished the year with earnings before special items of
$310 million or $1.03 per share, compared with prior-year earnings (also before
special items ) of $434 million or $1.49 per share. Net sales of $20 billion
were about even with last year's level. For 1997, International Paper recorded a
loss of $151 million or $.50 per share after special items.
As I have said, in many respects 1997 was a year of significant progress.
For example:
o Federal Paper Board was successfully integrated into our consumer packaging
business with results that exceeded our expectations. The addition of Imperial
Bondware provided an important new dimension affording customers, particularly
in the fast-food industry, the benefits of the most extensive product line in
our industry.
o At midyear, we announced a plan to narrow our focus and sell over $1 billion
worth of assets or businesses that could not either meet our financial return
requirements or achieve market leadership. We are finalizing the divestiture of
the imaging products business. We have sold small paper mills in France and
Colombia, and expect to complete the sale of our Veratec nonwovens business and
several facilities within our decorative products division by mid-1998.
o We have restructured our huge uncoated papers business to achieve a return on
investment leadership position. Accordingly, we have shut down or reallocated
some 400,000 tons of capacity - the equivalent of more than 15 percent of
International Paper's U.S. uncoated papers capacity and two percent of U.S.
industry capacity.
o A review and analysis of our entire coated papers business was completed and
we are now weighing the alternatives for improving returns. And our new Accolade
lightweight coated freesheet papers are enjoying excellent success.
o Our 1997 $300 million cost improvement objective was exceeded by 10 percent.
Unfortunately, this accomplishment was overshadowed by more than $500 million in
price declines.
o We significantly reduced capital spending to $1.1 billion in 1997 - despite
the fact that, following the Federal Paper Board acquisition, we are now a
substantially larger company.
o We made employees at all levels aware of the critical importance of improving
our return on investment and have put in place a financial discipline that
focuses every facility on these goals.
o We restructured our senior management compensation system so that annual
incentives are now largely dependent on whether we meet our return on investment
targets and how our returns compare with our competitors. In addition, we
[2]
initiated an incentive bonus program for 2,000 middle level managers that is
likewise dependent on the attainment of return on investment targets.
But despite the many accomplishments of 1997, and the hard work by
thousands of proud and dedicated employees that went into making them happen,
our financial performance failed to meet our - and our shareholders' -
expectations. We understand that we must do things very differently if we are to
achieve our goals.
In the future, we intend to win by becoming more focused on those
businesses in which we can have a leadership position and generate returns that
will be among the best in our industry. International Paper today is in three
businesses: (1) paper, including paper distribution; (2) packaging, both
consumer and industrial packaging; and (3) forest products, which encompasses
building materials and related products that derive from our being this
country's largest private owner of forestlands. For each of these businesses, we
have a powerful plan in place to achieve maximum operational effectiveness and
excellence.
International Paper also expects to be a continuing part of the increasing
worldwide industry consolidation process. And we will actively pursue new
vehicles and types of investments, e.g., joint ventures and marketing alliances,
that would enable us to grow and improve returns.
For much of our history, we have been primarily a manufacturing company,
believing that success will come from manufacturing excellence and from being
the low-cost producer. Today, however, it is clear that manufacturing expertise
by itself is not enough. We need to become more attuned to market trends and, as
we did in 1997, continue to reduce working capital by curtailing production
before inventories are built. We also need to become far more proficient in
developing and bringing to market new products and services that meet our
customers' changing needs, while always providing those customers with the
highest level of quality. This year, every one of our businesses will strive to
attain preferred supplier status with customers, and will measure itself against
that objective.
Success also requires sound people development strategies. We want the
people at International Paper to have a winning attitude and to regard this
Company as a great place to work. If we are to outperform our competition, we
must hire, train, motivate, develop, promote and retain outstanding people.
Knowledgeable, skilled and determined people are our competitive advantage.
One month ago, International Paper began its second century of operations.
While it was a source of great pride and satisfaction for all of us to celebrate
the Centennial, I also sensed a spirit of renewed energy and rededication. We
fully realize that if we are to succeed in an increasingly competitive global
marketplace, we must be viewed as the preferred choice of shareholders,
customers and employees. We are committed to executing whatever organizational
and cultural changes are required to achieve this goal.
I am convinced that even in today's highly demanding marketplace, our
businesses can earn an improving rate of return. I am also convinced that no
other company in our industry can match the international scope of our
resources, the diversity of our products, the innovation of our technology or
the talent of our employees. With these very considerable assets, I am confident
that we will succeed in improving the performance of International Paper.
/s/ John T. Dillon
John T. Dillon
Chairman and Chief Executive Officer
March 5, 1998
"...TO SUCCEED IN AN INCREASINGLY COMPETITIVE GLOBAL MARKETPLACE, WE MUST BE
VIEWED AS THE PREFERRED CHOICE OF SHAREHOLDERS, CUSTOMERS AND EMPLOYEES."
[3]
OUR BUSINESSES
WE WILL BE THE PREFERRED SUPPLIER OF QUALITY PRODUCTS TO OUR
VALUED CUSTOMERS AROUND THE WORLD.
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PRINTING PAPERS
The Springhill brand name assures superior print quality for
printers, publishers and everyday consumers of our papers.
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PRINTING PAPERS
Our bristols and coated papers offer excellent printing
characteristics for a wide range of uses.
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PRINTING PAPERS
Our pulp grades are used as the basic ingredient for
many diverse products ranging from paper to yarn.
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PRINTING PAPERS
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International Paper produces a broad range of printing papers in six
countries for consumers around the world. To better serve our customers, we are
organized in customer-focused business units that align us with our major
markets.
Printing and Office Papers
We manufacture the broadest line of office papers for advanced digital
imaging printers, as well as more traditional office equipment. In addition, we
offer printing papers for offset printing and opaques for books, direct mail and
advertising materials. Hammermill and Springhill brands are produced in the U.S.
In Europe, we are the leading supplier of office papers, with our EverRey, Duo,
Presentation and Tecnis brands. In New Zealand, Carter Holt Harvey produces
reprographic and fine papers at the Mataura mill.
Converting and Specialty
Our converting and specialty group provides papers for specialized
applications such as envelopes, tablets, security papers and release backings.
This business group has had extensive success in developing new products with
higher returns using our diverse technical and product development capabilities.
Coated Papers and Bristols
We manufacture coated papers and bristols in the U.S. and Germany. Our
improved Miraweb II and new Accolade coated papers target high-end magazines and
catalogs. Publication Gloss and Hudson Web are also used for catalogs, magazines
and newspaper coupon inserts. Zanders Ikono remains the preferred coated
freesheet paper for premium printing applications.
Our Springhill and Carolina coated bristols are used for book covers and
commercial printing. And our uncoated Springhill bristols are used for
commercial printing and converting applications, such as file folders, tags,
tickets and index cards.
Fine Papers
International Paper has committed itself to the fine papers business and
is investing in its people, brands and facilities. The creation of International
Paper Premium Papers will integrate the Company's fine papers activities in
Europe. The new entity will unite the sales and marketing functions of Zanders
premium uncoated papers, Aussedat Rey, Strathmore and Beckett.
Pulp
International Paper is a major producer of market pulp in the U.S.,
France, Poland and New Zealand. Our grades range from high-purity pulp for
acetate and fabrics to fluff pulp for hygiene products and paper pulp for the
production of paper and paperboard.
Initiatives
In addition to streamlining our organizational structure to provide better
market focus and responsiveness, we are taking aggressive steps to improve the
fundamental profitability of our printing papers businesses. Our objective is to
double the returns of our U.S. printing papers group over the next few years. To
accomplish our objective, we are implementing the following business
initiatives:
o Significantly improving our manufacturing efficiency by removing 400,000 tons
of high-cost uncoated papers and pulp capacity and then simplifying and
optimizing our remaining assets to maximize manufacturing productivi ty;
o Continuing to generate more than 10 percent of our annual sales volume from
new, value-added products. We are focusing especially on emerging, rapidly
growing markets created by new computer-based imaging technologies;
o Restructuring the fine papers organization and facility mix while making
significant investments to improve customer service and profitability. Examples
include the start-up of a new centralized converting and distribution facility
at Saybrook, Ohio, in 1998 and the restructuring of the Erie mill that will make
it a world-class producer of fine papers;
[4]
o Repositioning our coated paper assets into higher value coated specialty
papers;
o Further enhancing the distinctive printing characteristics of our high-quality
Carolina and Springhill coated bristols lines; and
o Investing $40 million in our Natchez, Miss., mill to enhance product quality
and reaffirm our position as a world leader in chemical cellulose pulp.
In Europe, our efforts to increase productivity and to reduce costs lie at
the core of our strategy to improve competitiveness and returns. Our strategy
includes the following:
o Reducing costs in real terms by two percent annually;
o Increasing productivity by three to five percent annually, with even more
significant impact expected in 1998 due to the rebuild of a board machine in
Kwidzyn; and
o Updating our product line so that we offer our customers the solutions they
seek for their office papers, fax, copier and digital imaging needs.
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PACKAGING
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International Paper's packaging products do more than simply keep our
customers' goods fresh, secure and attractive; we also strive to solve the
shipping and merchandising-related challenges that our customers face every day.
Containerboard
We manufacture three million tons of containerboard annually at seven
manufacturing facilities in the U.S., Europe and New Zealand. Our facilities are
among the most efficient in the world and aggressive cost management efforts are
targeted at continuously improving our competitive cost position. We also
manufacture one of the industry's widest product ranges, including visual-appeal
grades such as ColorBrite and WhiteTop linerboard.
U.S. Container
In the U.S., our 22 container plants cover the range from below average
performer to the world's best, and we have specific plans under way to bring all
of our facilities up to first-quartile performance. We have one of the broadest
product offerings in the industry. Extensive product development activities,
spearheaded by our packaging technology and design centers, continue to bring
forth new products to meet increasing market demands.
International Container
In Europe, 18 container plants in the United Kingdom, Italy, Spain and
France make us a leading provider of corrugated packaging for agricultural
products. And with 10 container plants in New Zealand, Carter Holt Harvey is a
major producer of corrugated boxes.
Kraft Papers
We manufacture a broad array of bleached and unbleached kraft papers for
applications ranging from fancy shopping bags to multiwall pet food sacks. A new
dunnage bag plant in Fordyce, Ark., manufactures cushioning products for the
rail and truck freight industry.
Bleached Board
We have a world-class manufacturing system that produces two million tons
annually of high-quality Everest and Starcote bleached board for global markets.
Our vast array of products with excellent performance characteristics provide
superior convertibility and printability for products such as liquid packaging,
paper cups and plates, and folding cartons for food and cosmetics. We continue
to expand our business in response to the growing requirements of the consumer
packaging markets of the world. For example, in 1996, we merged with Federal
Paper Board. Since the merger, we have streamlined and rationalized our
manufacturing system to operate each machine at its optimum capability.
Liquid Packaging
Twenty-one plants produce fresh and aseptic liquid packaging for customers
around the world. We set ourselves apart by offering unique barrier board,
excellent process print characteristics and complete systems including filling
machinery, board and packaging. Our innovative leadership is demonstrated
through products such as Spout-Pak and FreshCap.
Folding Cartons, Cups and Retail Bags
Customers for these products require high-resolution graphics and exacting
specifications and performance standards. Fifteen plants worldwide manufacture
folding cartons, cups and bags. We possess an efficient manufacturing system, a
broad product offering and a commitment to grow with our customers.
Initiatives
Our industrial packaging businesses occupy important positions in the
major market segments around the world and we plan to grow each business in
excess of double the overall
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PRINTING PAPERS
International Paper's European Papers business is the number
one marketer of copy paper in Europe.
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PACKAGING
International Paper's WhiteTop visual-appeal linerboard combined with
sharp graphics transform corrugated packaging into billboards.
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PACKAGING
We produce a wide range of corrugated packaging for customers
worldwide that provides both protection and consumer appeal.
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PACKAGING
To produce superior packaging with bold graphics, folding carton
producers use our Starcote and Everest bleached board products.
[5]
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PACKAGING
Consumers around the world enjoy beverages in
both our aseptic and fresh liquid packaging cartons.
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DISTRIBUTION
RepliCopy reprographic paper is one of the many fine
paper products xpedx offers customers in North America.
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DISTRIBUTION
Regency cleaning products are used by savvy consumers seeking a
high-quality national brand and excellent service from xpedx.
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DISTRIBUTION
xpedx offers a full line of Colorlok precision printing
products to the graphic arts market in North America.
annual market growth rate. International Paper will be the preferred supplier to
industrial packaging customers around the world by implementing the following
initiatives:
o Increasing the capacity of our packaging system to further improve financial
returns by capturing the incremental margins generated from selling corrugated
containers. An important step was the recent announcement of the merger with
Weston Paper and Manufacturing Company. Weston's 11 packaging plants greatly
strengthen our presence in the central and southeastern U.S. and bring us
valuable expertise in high-end printing applications;
o Expanding our industrial packaging presence in rapidly growing overseas
markets. The recent announcement of a joint venture with Olmuksa, the leading
manufacturer of industrial packaging in Turkey, will give us a significant
opportunity at the crossroads of Europe and Asia; and
o Focusing on long-term customer relationships and growing with our partners in
attractive specialized market segments around the world.
In consumer packaging, our goal is to be the preferred worldwide packaging
supplier to consumer products markets by utilizing our diversity and global
presence. With our unparalleled breadth of products and resources for packaging
solutions, we can service the needs of global customers. We will seek long-term
relationships with customers and provide value-added products and service
through the following initiatives:
o Continuing to seek opportunities to expand our businesses in response to the
growing requirements of consumer packaging markets. The merger with Federal
Paper Board and our recent investments in France and El Salvador for liquid
packaging and in Australia for cups and folding cartons are examples of this
commitment;
o Establishing an effective organization for "one-stop shopping," by combining
the efforts of our folding carton, cup and retail bag business and by becoming
partners with the customers who previously had maintained separate relationships
with these divisions. We have the resources to dedicate specific employee teams
and machinery, and capitalize on the unique resources of International Paper to
offer packaging solutions that set us apart from our competition; and
o Aggressively implementing supply chain management initiatives to increase
efficiencies and establish long-term partnerships with customers. The goal is to
provide customers with quality products, shorter order times, quicker
turnarounds and service that is second to none.
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DISTRIBUTION
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International Paper's distribution businesses in North America, Europe and
Australasia ensure that users of paper, office supplies, industrial products and
graphic arts supplies have just-in-time access to the products they rely upon
every day.
[Logo] xpedx
The backbone of our North American distribution business, known as xpedx
since January 1, 1998, is a strong sales and marketing organization that builds
solid relationships with customers ranging from large national accounts to
individual consumers. Our sophisticated distribution system, which uses
geographic regional hubs, allows us to give our customers fast and efficient
service for virtually any printing, packaging, graphic arts or industrial
supplies product. What's more, about 20 percent of the revenue generated by
xpedx involves distribution of products manufactured by International Paper.
Aussedat Rey, Scaldia and Impap
Just as xpedx is creating a world-class organization in the U.S., Aussedat
Rey in France, Scaldia in the Nether-lands and Impap in Poland are leveraging
their strengths in purchasing, marketing and efficient distribution. The
distribution business in Europe has moved aggressively to increase product
offerings, reduce costs and improve logistics. These businesses offer superior
service to their customers and are growing as fast or faster than their
respective markets.
Carter Holt Harvey
Carter Holt Harvey in New Zealand has a distribution system that serves
customers in New Zealand and Australia. The company's merchant distribution
subsidiaries include B.J. Ball Papers and Raleigh Paper. B.J. Ball has a major
position in New Zealand's paper distribution market, while in Australia, Raleigh
focuses on specialty papers.
Initiatives
Worldwide distribution is focusing on growth in specific market segments,
increasing operational efficiency, reducing costs and improv-
[6]
ing returns through the following initiatives:
o Implementing a worldwide management training program for employees in North
America, Europe and Australasia;
o Achieving operational efficiencies and improving customer information by
installing a common operating system for all North American distribution
locations;
o Expanding the growing international and North American national account
program that has been a performance leader in the Company;
o Using geographic regional distribution hubs to provide our North American
customers with a service advantage and a competitive edge in asset turn; and
o Increasing the marketing effort we have made in servicing the retailers of
printing and imaging products across the U.S.
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SPECIALTY PRODUCTS
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The specialty products businesses provide global solutions to customers
with a diverse array of products. These businesses are tied to our forest
products base by way of raw materials, by-products, processes and land
ownership.
Specialty Panels
In specialty panels, we design and produce engineered products based on
wood and paper. Our Masonite subsidiary molds wood fiber into a broad line of
door facings with many different designs and sizes. Our customers fabricate
these facings into doors that bring style, functionality, durability and economy
to both new construction and remodeling. Today, Masonite is the world leader
with its CraftMaster brand. We also manufacture a broad line of hardboard
exterior siding and industrial hardboard and softboard.
In 1997, we merged our Nevamar operations in North America with our
Polyrey operation in Europe. This has positioned us to enter new global markets
for high-pressure paper laminates used as decorative surfaces on kitchen and
bathroom countertops, furniture and cabinets. Nevamar and Polyrey target
high-end architecturally specified projects that require a wide range of unique
patterns and colors.
Other products include Uniwood and Fome-Cor paper and polystyrene-faced
foam panels used for retail signage, point of purchase displays, exhibition
display boards and art-framing materials.
We see continued global growth of our specialty panel products. We are
driving this through the following initiatives:
o Value-added marketing that brings solutions to and builds intimacy with our
customers. Our success depends on customizing marketing programs to meet
specific needs of individual segments;
o Identifying new customer needs ahead of competition and developing products,
processes and applications to expand our family of branded products; and
o Investing in technology to lower operating costs and to improve capital
utilization. For example, recently acquired molding technology, using smaller,
more capital efficient plants, is positioning us to expand our CraftMaster line
of products in new international markets in advance of demand.
Industrial Papers
We produce over 300,000 tons annually of industrial papers. Applications
for these papers include food and industrial packaging, industrial sealant and
tapes, pressure sensitive labels and consumer hygiene products.
Through our Thilmany, Pressure Sensitive Papers and Akrosil divisions, we
are committed to continued product innovation in the rapidly growing industrial
papers markets, and will continue to seek opportunities to expand these
businesses worldwide.
Chemicals and Petroleum
During the year, we integrated our recent acquisitions in Europe and built
a team to manage the chemicals business on a global basis. Arizona Chemical is
now the leading producer of products based on pulp chemical by-products with
sales evenly split between North America and Europe.
This business has been built by serving a growing worldwide customer base
with adhesive, ink and chewing gum resins, polymer additives, coating chemicals,
fatty acids and related products. We will continue to grow through the following
initiatives:
o Developing functional solutions to our customer needs rather than selling
specific molecular chemicals;
o Expanding through both internal growth and acquisitions; and
o Targeting improvements in operating efficien-
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DISTRIBUTION
Consumers in Europe and Australasia have come to rely on our
overseas distribution businesses for high-quality products and service.
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SPECIALTY PRODUCTS
Masonite produces a diverse line of CraftMaster door facings
with different designs and styles.
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SPECIALTY PRODUCTS
Peel-and-stick labels are just one of the many products made by our
industrial papers group and use our adhesive resins.
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SPECIALTY PRODUCTS
Arizona Chemical's food-grade resins find their way into
products such as chewing gum.
[7]
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SPECIALTY PRODUCTS
Consumers in New Zealand and Australia are familiar with
Carter Holt Harvey's tissue products.
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FOREST PRODUCTS
International Paper developed fast-growing SuperTree pine
seedlings to renew harvested tracts of forestland.
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FOREST PRODUCTS
International Paper is a leading producer of
southern yellow pine lumber.
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FOREST PRODUCTS
Our oriented strand board and veneer are used to make
I-joists, an engineered wood product.
cies based on incorporation of best practices across all facilities.
Our petroleum and minerals business manages the mineral resources on
Company land and also explores for and develops oil and gas reserves in West
Texas, the Gulf Coast and the Gulf of Mexico.
By promoting our fee ownership, we are successfully getting extensive new
three-dimensional seismic surveys shot across our property. We will continue
this effort and, on key properties, retain the right to participate in drilling
projects in addition to our normal royalty position.
Tissue
Through our majority ownership of Carter Holt Harvey, we are the largest
tissue products manufacturer in New Zealand and Australia. Our brand names, such
as Sorbent and Handee, are among the best known tissue products to consumers
down under.
Divestitures
As previously announced, a number of businesses have been offered for
sale. In regard to our imaging products business, Ilford and Anchor Chemicals
have been sold, and Horsell Anitec is under contract to be sold in 1998.
Veratec, our nonwovens business, and several specialty panels businesses are
also being offered for sale, with closings expected in 1998.
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FOREST PRODUCTS
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International Paper is a strong steward of the environment and the natural
resources entrusted in our care. We are committed to managing our forests in an
environmentally responsible manner and taking a leadership role in the American
Forest & Paper Association's Sustainable Forestry Initiative.
Forestlands
International Paper owns or manages about 6.3 million acres of forestlands
in the U.S., mostly in the South, where loblolly pine trees thrive. Our
forestlands are managed to strike a balance between the public's need for forest
products, the sustainability of the forests and the health and well-being of the
forest environment. In the U.S., we have developed advanced land management
techniques that enable us to harvest trees while providing watershed protection,
wildlife habitat preservation and recreational opportunities.
We also have an interest in 800,000 acres of radiata pine forests in New
Zealand through Carter Holt Harvey, giving us access to export markets
throughout the Pacific Rim. Additionally, Carter Holt Harvey has a stake in
COPEC, one of the largest industrial companies in Chile. COPEC's principal
business, Arauco, owns about one million acres of radiata pine forests in Chile.
Wood Products
Our wood products are used by residential and commercial builders
throughout the world. We produce lumber, plywood, oriented strand board (OSB)
and other wood products at 25 plants in the U.S. Our 1996 merger with Federal
Paper Board more than doubled our U.S. lumber capacity.
With 10 plants in New Zealand and Australia, Carter Holt Harvey is one of
the region's largest lumber producers. Also, Carter Holt Harvey has a leading
position in plywood in New Zealand and in veneer-laminated lumber in Australia.
With 36 branches, Carters, its own building materials outlet, is New Zealand's
second largest building materials merchandiser.
Initiatives
While harvest volumes in the next few years are expected to be below 1997
levels, we expect them to double in the next 10 years through environmentally
responsible forest stewardship and these initiatives:
o Expansion of high-yield reforestation techniques;
o Aggressive mid-rotation thinning;
o Selective mature-stand harvesting; and
o Active and aggressive support of the Sustainable Forestry Initiative.
We will maintain the top quartile returns of our wood products business by
doing the following:
o Increasing development and growth of value-added products that include premium
OSB products used in engineered lumber, southern specialty plywood and
prime-grade lumber products;
o Raising the productivity of our facilities. For example, in 1997, system-wide
productivity improve- ments produced incremental lumber equivalent to the output
of a new large-sized lumber mill; and
o Continuously reducing manufacturing costs system-wide.
[8]
International Paper is changing. We are moving aggressively toward the
goals that we have established for the businesses in our company.
We are changing the way we do business to compete successfully in the 21st
century. We are taking a more proactive approach to changes in our marketplace.
Establishing a customer-driven corporate culture. Strengthening teamwork.
Developing new products. Inventing new technologies. Creating the customer
service processes that will ensure our leadership in the years ahead.
In some cases, change means building on our strengths. In other cases, it
means exiting businesses that no longer make economic sense. In all cases, our
transformation means focusing our resources to earn the highest return on
investment possible.
Shown are mature southern pine trees growing in our Southlands Experiment Forest
in Bainbridge, Ga. >
[GRAPHIC OMITTED]
[10]
OUR TRANSFORMATION
MAKING CHANGES. EMPOWERING OUR
EMPLOYEES. IMPROVING
PRODUCTIVITY.
SHARING BEST
PRACTICES. IT WILL
KEEP US A LEADER
IN OUR INDUSTRY.
[11]
[GRAPHIC OMITTED]
"TEAMWORK" EN FRANCAIS
During 1997, the employees of International Paper's Saillat, France, mill
demonstrated the benefits of sharing best practices and teamwork. Saillat is a
key facility for the production of business papers, a product growing in excess
of five percent annually in Europe. The mill had set an aggressive productivity
improvement goal of 200 French francs per ton of pulp. To capture this growth,
Saillat had to both reduce costs and improve productivity. o By pursuing
operating excellence from the forests on through to the shipping of the finished
product, and through the extraordinary commitment and teamwork of individual
employees, the Saillat team achieved the stated goal in less than two months. By
year-end, actual results were nearly double the goal. As a result, the mill
improved its cost position and product quality, and productivity improved nearly
10 percent. C'est magnifique! o Shown are Saillat mill employees and products at
a local landmark in Etagnac, France. >
[GRAPHIC OMITTED]
FROM INDIANA TO ISTANBUL
International Paper continues to look for opportunities to expand globally
our well positioned businesses targeted for growth. The most recent examples of
this strategy are the proposed merger with Weston Paper and Manufacturing
Company and our joint venture with Olmuksa. o Although Weston is an
Indiana-based company with production facilities located mostly in the
Mississippi River basin and Olmuksa's box plants and paper mill are located in
Turkey, almost six thousand miles away, the two businesses share much in common.
Both companies operate modern facilities and have proven track records of
success. Both manufacture product lines that strengthen our industrial packaging
segment capabilities. And both give International Paper a presence in markets
where we've had a limited presence in the past. o As the world grows ever small,
International Paper is covering more of it. That's why we answer to the world. o
Shown is a representation of our expanding global industrial packaging business.
[GRAPHIC OMITTED]
WHAT'S IN A NAME?
[xpedx Logo] When Shakespeare wrote, "By any other name would smell as
sweet," he probably wasn't thinking about his customers. But when International
Paper's North American distribution business changed its name from ResourceNet
International to xpedx, it did so because it wanted to unify all of its
operations under a single identity that its customers could easily recognize and
remember. o The new name "expresses our broad, collective commitment to customer
service," said Tom Costello, president of xpedx. Extensive market research
confirms that the new name suggests strong performance in excellence, speed,
efficiency and accuracy. The name has generated encouraging comments from
employees and customers. The strong, clean logo is quick to catch the eye and
holds recognition. That's critical when transforming the brand identity for one
of North America's leading distributors of paper and packaging products,
industrial and sanitary maintenance products, and graphic supplies and
equipment. o Shown is an xpedx delivery truck near the company's headquarters in
Covington, Ky.
What separates one company in our industry from another? In our view, the
answer is clear: value. Every day our experience confirms that customers are
looking for more than simply reams of paper, folding cartons, sheets of plywood
or corrugated boxes. They want innovative new products that satisfy unique
needs.
That's why $2 billion of our Company's sales in 1997 were from products
that came to market within the last three years. By listening to our customers
and working with them to create new products and services, we have enabled them
to be first to market. By focusing on our customers, we help them succeed. And
that's important. Because, after all, our customers' success is a prerequisite
to our own.
Shown are two IP account executives, Mark Armato of Hammermill and Erin Hally of
the bleached board division. >
CUSTOMER FOCUS
ASKING QUESTIONS.
LISTENING.
PROVIDING SOLUTIONS.
IT'S HOW WE SET
OURSELVES APART.
[12]
[PHOTO OMITTED]
[13]
MAXIMIZING VALUE
To grow our businesses more profitably, we must first understand our
customers' needs. That was the thinking behind our new alliance with Tyson
Foods. Tyson became a leader in the poultry industry through internal growth and
acquisitions. We recognized that Tyson could save time and money by
standardizing its packaging operations. We also knew that each facility would
require local support and service. o Working together, Tyson and International
Paper's U.S. container division created a centralized procurement and supply
network. For our part, we unified resources at every level of the division,
making our unique combination of national and local resources available to
Tyson. Specifically, we created programs for direct communications and dedicated
technical support, design, sales and customer service resources exclusively to
Tyson. The result: reduced order and delivery times and lower packaging costs
for Tyson Foods and preferred supplier status for International Paper. When
customers become partners, everybody wins. o Shown are Tyson Foods employees and
an International Paper sales executive in Springdale, Ark. >
[GRAPHIC OMITTED]
A BETTER WAY TO MEASURE SUCCESS
Thanks to the new Customer Satisfaction Index (CSI), employees at Arizona
Chemical have a better understanding of how well they're serving their
customers. The new measurement relies on empirical data, such as on-time
delivery, to measure satisfaction monthly. o "With our commitment to be the best
supplier, it was time for us to take responsibility and measure our own
performance," explained Medardo Monzon, global manager, sales/marketing, for
Arizona Chemical. Employees are now able to identify specific ways they can
enhance quality and reliability. Improvements made so far range from
manufacturing adjustments for product improvement to clearer labeling when
shipping. o How successful is CSI with our customerso Sanford A. Siegel of East
China Clay International said, "We're impressed with the pride your employees
take in their products at Arizona Chemical and we're about ready to adopt your
Customer Satisfaction Index for our own folks!" o Shown are Arizona Chemical
employees at the Panama City, Fla., plant. >
[GRAPHIC OMITTED]
TEAMING UP FOR SUCCESS
Sharpening our customer focus requires us to leverage the widespread
capabilities of our Company by removing organizational barriers and gaining a
competitive advantage. That's what happened when the bleached board, folding
carton and industrial papers groups teamed up to create total packaging
solutions for our tobacco products customers. o In the past, these groups
maintained separate relationships with our customers. Now, by combining efforts,
the three groups can take full advantage of International Paper's diversity,
size and global reach. Working together, we have become partners with our
customers and a more significant supplier of bleached board, label paper,
folding cartons and foil liner. o The result: supply chain management
capabilities our competition cannot match and the opportunity for further growth
with these valued customers worldwide. o Shown is an array of packaging produced
at various International Paper manufacturing facilities.
[GRAPHIC OMITTED]
TEAMWORK IN ACTION
COOPERATION. IT GIVES
US THE POWER WE
NEED TO PERFORM AT
THE HIGHEST LEVEL.
[14]
Our employees are our greatest asset. We value their ideas. We respect
their skills. We celebrate their diversity.
But no employee stands alone. In every mill and office, we work as a team.
We encourage our employees - from the most senior manager to our most junior
trainee - to regard themselves as owners with a personal stake in International
Paper's success. We give them the tools they need to get their jobs done right
today. We ask them to think of better ways to do their jobs in the future.
Empowering employees does more than make International Paper a great place
to work. It helps us attract the best talent available. Most important, it
allows us to leverage that talent on our customers' behalf.
----------
< Shown are Jimmy Pierce, David Stephens and Pearl Jones, "Carolina King" pulp
dryer team members at our Riegelwood, N.C., mill.
[GRAPHIC OMITTED]
[15]
[GRAPHIC OMITTED]
EMPOWERING EMPLOYEES THROUGH EDUCATION
How can employees at every level contribute to improving profitability and
meeting the Company's return on investment goalso The first step is education.
As Pete Carr, work systems facilitator in Masonite's Ukiah, Calif., plant
explained, "If you expect employees to help you achieve business goals, they
need to know the score of the game as it's being played." o Ensuring that every
member of the team knows the score is what Masonite Ukiah's business literacy
program is all about. "We teach employees that we have to meet goals to earn
reinvestment," said mill manager Carolyn Stein. "We emphasize that there are
many things we can each do to make a difference." These things include using
materials wisely, reducing unscheduled downtime and reducing inventories. o
Employee response has been enthusiastic. As boiler operator Ed Evans summarized,
"Employees want to help. The more we know about what's important, the more we
can do something about it." o Shown are Masonite employees standing in a wood
chip pile at the Ukiah plant. >
[GRAPHIC OMITTED]
PUTTING A NEW FACE ON RETURNS
The employees at our folding carton plant in Richmond, Va., knew that
improving their return on investment (ROI) required everyone to pull in the same
direction. A strong, consistent communication effort was needed to heighten
everyone's awareness of ROI. That's how the character of Richmond ROI
(pronounced Roy) was born. o From his forum in a monthly newsletter, Richmond
ROI keeps employees focused on the plant's financial goals and the impact each
of them can make. Monthly ROI results inform everyone of the plant's progress,
citing specific causes that affected the plant's performance. Safety results are
also reported by Richmond ROI. o With all employees focused on returns, Richmond
improved its results significantly in 1997, generating an 11 percent ROI.
Progress continues in 1998, with an even higher target. You can be sure that
Richmond ROI will be keeping score. o Shown are employees in front of the
plant's newest rotogravure printing press.
[GRAPHIC OMITTED]
A MERGER OF MINDS
The 1996 merger of International Paper and Federal Paper Board created a
single business entity that was greater than the sum of the two parts. By
combining the two excellent bleached board organizations, we were able to
increase overall productivity through improved paper machine utilization,
transportation and logistics rationalization, and sharing of best practices and
technologies. o Our Riegelwood, N.C., mill is a case in point. The mill gained
75 tons per day of additional capacity following the merger through increased
production efficiencies. In addition, the close working relationships forged by
Riegelwood employees with other International Paper mills and the corporate
technology group helped improve product quality and reduce costs. o Throughout
the system, our employees are making the merger a resounding success through
teamwork. In 1997 alone, the synergies produced efficiencies that created
200,000 tons of additional capacity with no additional capital expenditure and
achieved cost savings of over $100 million. o Shown are Riegelwood mill
personnel in a railcar loaded with rolls of bleached board products.
THE PRODUCTS
OF SUCCESS
ANTICIPATING
CHANGE.
EXCEEDING
EXPECTATIONS.
One of International Paper's greatest strengths is the ability to create
customized solutions to customers' toughest challenges. Every year, our Company
creates many new products or improves existing products, each directed toward
providing added value to its end users. From WhiteTop visual-appeal linerboard
to Accolade lightweight coated freesheet papers, we are an industry leader in
product development. It's a position in which we take great pride and a
responsibility we take very seriously.
Clearly, adding value is critical to our goal of being our customers'
supplier of choice. We must develop new superior products and provide value our
customers can't find elsewhere. In today's competitive environment, we'll be
successful only if our customers succeed as well.
Shown is an image used as part of the very successful Strathmore Writing System
advertising campaign. >
[16]
WHEN OUR
PRODUCTS
CREATE VALUE
FOR CUSTOMERS,
WE'VE
SUCCEEDED.
[17]
FINE PAPERS GET EVEN FINER
The fine papers division was hard at work in 1997. For example, Beckett
Papers introduced Paradox, a versatile new text and cover grade available in two
finishes and a spectrum of colors for use in annual reports, brochures and other
applications. How could Beckett produce a high-quality product selling at a
competitive price? In a word: teamwork. o Working from specifications
established by a resource-planning task force, technicians, engineers, chemists,
production workers and finishing employees in Hamilton, Ohio, worked as one to
produce samples that would exceed prevailing standards. Consulting with
corporate technology and the Hamilton mill's machine operators - not to mention
designers, printers and merchants - the team quickly established new high
performance and quality benchmarks within stringent price parameters. o The
result: yet another innovative International Paper product that fills a distinct
niche in the marketplace. o Shown is an array of Paradox samples and a marketing
brochure. >
[GRAPHIC OMITTED]
FRESH IDEAS FOR SUCCESS
In our liquid packaging division, successful products do more than just
satisfy customers' needs. They also help customers increase sales and margins.
But don't take our word for it. Ask the folks at Schenkel's All Star Dairy in
Huntington, Ind. o Schenkel's Dairy was our first customer to use the FreshCap
package, which was designed to keep milk fresh longer than traditional gable-top
cartons. Another important advantage: the printability of paper cartons over
plastic. With FreshCap, dairies can feature eye-catching graphics that appeal to
consumers at point-of-sale. These advantages are augmented by the award-winning
FreshCap Marketing Program, an array of promotional tools including television
and radio commercials, that we offer to our customers to promote their dairy
products. o Maybe that's why Tom Schenkel said, "FreshCap's the best thing to
come along for us in 20 years." We couldn't agree more. o Shown is an array of
FreshCap dairy cartons. >
[GRAPHIC OMITTED]
ACCOLADES FOR TEAMWORK
By almost any measure, the introduction of Accolade lightweight coated
freesheet papers in 1997 was a success. Upscale catalog retailers such as FAO
Schwartz, Lands' End and the Pleasant Company have lauded Accolade for its
excellent performance characteristics. But success was no accident. It was the
result of several years of research and development and, most of all, teamwork.
o International Paper customers worked closely with our corporate technology
group and the Androscoggin mill to develop Accolade. Customers were involved
from the start, helping to pinpoint and evaluate the characteristics they need
for catalogs, brochures and magazines. Our scientists and engineers created ways
to balance brightness, shade and opacity with print cleanliness and smoothness
for superior image fidelity. And mill operators ensured that the product quality
consistently meets our customers' specifications. o The result of the team
approach: a successful product that continues to receive accolades from our many
coated freesheet papers customers. o Shown is an FAO Schwartz catalog printed on
Accolade lightweight coated freesheet paper.
[GRAPHIC OMITTED]
International Paper recognizes the importance of technology as an
essential tool for success. We are recognized as a technology leader in the
paper and forest products industry. That makes sense because over the years we
have made significant investments in research and development and we will
continue to do so in the future.
But the true strength of our technology is not only our investment - it's
our philosophy of sharing best practices. Many of our most innovative products
and processes were made possible because we shared new technologies across
different lines of business and geographic boundaries. Technological innovations
in one International Paper business have benefited others time and again.
< Shown is Raj Bodalia, senior research associate in the analytical sciences
department at the Technology Center in Cincinnati, Ohio.
[PHOTO OMITTED]
[18]
TOOLS OF THE TRADE
FINDING A BETTER WAY.
THEN IMPROVING IT
FURTHER. SUPERIOR
TECHNOLOGY GIVES US
A COMPETITIVE EDGE.
[PHOTO OMITTED]
[19]
[PHOTO OMITTED]
INNOVATION IN THE HEART OF TEXAS
When International Paper creates new advances in coated paper
manufacturing technology, chances are good that our McKinney Coated Products
(MCP) facility in Texas served as the laboratory. From conceptualization to
commercialization, MCP assists with development and production, and also
supports the Company's leadership position in printing and barrier substrates. o
That was the case in 1997, when MCP helped the coated papers group develop a new
line of ink-jet printing papers for home and office use. These papers lend vivid
color to graphics when documents are produced on ink-jet printers. It was also
the case with the launch of the Invent It! brand, our entry into the
fast-growing category of do-it-yourself creativity projects for home computers
such as greeting cards, banners and business cards. o Whenever International
Paper launches a dynamic new coated product line, it's a good bet that McKinney
Coated Products helped Invent It! o Shown is a consumer shopping for paper
products at an Invent It! display in an office products store. >
[PHOTO OMITTED]
FIELD OF DREAMS
When International Paper scientists at our Southlands Experiment Forest in
Bainbridge, Ga., built their "field of dreams," they attracted top researchers
from throughout the southern U.S. and the U.S. Department of Energy to "play
ball" with them. o Southlands' field of dreams is not a game, however. Instead,
it is a laboratory for fast-growing loblolly pine and sweetgum trees. Southlands
scientists and research partners have the goal of growing trees 50 feet tall and
10 inches in diameter in 10 years. Using treatments like fertilization and
irrigation, plus pest and disease protection, researchers are determining the
upper limits of the trees' growth. Field of dreams results will give Company
foresters a benchmark for operational plantations and potential environmental
and pest impacts, providing valuable information that will continue to advance
the success of the Company's forest productivity initiatives. The dream is
quickly becoming a reality! o Shown are International Paper foresters in their
field of dreams in Bainbridge.
ADVANCED MANUFACTURING TRAINING
The art and science of papermaking is advancing at a rapid rate, and
International Paper is in the forefront of that progress. At the same time, it's
critical to keep all of our manufacturing employees abreast of the latest
technical advances. o Advanced training at our new Manufacturing Technology
Center (MTC) in Cincinnati, Ohio, is ensuring that our pulp and paper mill
process area employees have an in-depth understanding of new problem-solving
techniques. The MTC offers management skills courses for both hourly operators
and supervisors taught by a faculty made up of seasoned technical employees from
across the Company. o To make the course interactive, students are required to
bring a specific problem from their mill to discuss in class and then return
home with solutions. Since 1994, a total of 400 students have completed the
management skills courses. To date, the students have solved an impressive 90
percent of the problems studied. o Shown are students and instructor during a
recent management skills class at the Manufacturing Technology Center in
Cincinnati.
FINANCIAL REVIEW
22 MANAGEMENT'S DISCUSSION AND ANALYSIS
22 CORPORATE OVERVIEW
23 PRINTING PAPERS
24 PACKAGING
24 DISTRIBUTION
25 SPECIALTY PRODUCTS
25 FOREST PRODUCTS
26 LIQUIDITY & CAPITAL RESOURCES
31 FINANCIAL INFORMATION BY
GEOGRAPHIC AREA
32 FINANCIAL INFORMATION BY
INDUSTRY SEGMENT
33 REPORT OF MANAGEMENT
ON FINANCIAL STATEMENTS
33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
34 CONSOLIDATED STATEMENT OF EARNINGS
35 CONSOLIDATED BALANCE SHEET
36 CONSOLIDATED STATEMENT OF CASH FLOWS
37 CONSOLIDATED STATEMENT OF COMMON
SHAREHOLDERS' EQUITY
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
48 ELEVEN-YEAR FINANCIAL SUMMARY
50 INTERIM FINANCIAL RESULTS
[21]
22 Management's Discussion and Analysis
- ------------------
CORPORATE OVERVIEW
- ------------------
Results of Operations
International Paper's 1997 net sales of $20.1 billion were essentially flat with
1996 and slightly above 1995 sales of $19.8 billion. Despite generally stronger
demand than 1996 and a full-year contribution from Federal Paper Board
(Federal), acquired in March 1996, sales were flat overall due to lower pricing
for most products. Before contributions from Federal, 1997 sales declined about
2%.
Sales outside the United States totaled $5.8 billion in 1997, 29% of net
sales, including Carter Holt Harvey, which was consolidated from May 1995 and
contributed $2.0 billion, $2.1 billion and $1.4 billion in 1997, 1996 and 1995,
respectively. Export sales from the U.S. were $1.4 billion in 1997 and 1996 and
$1.5 billion in 1995, bringing total international sales to $7.2 billion
compared with $7.4 billion in 1996 and $7.1 billion in 1995.
For 1997, the Company reported a loss of $151 million or $.50 per share
after special items that reduced net earnings by $461 million or $1.53 per
share. Net earnings before special items were $310 million or $1.03 per share,
compared with 1996 earnings before special items of $434 million or $1.49 per
share and 1995 record earnings of $1.2 billion or $4.50 per share.
Excluding special items, return on investment was 3.0% in 1997 compared
with 3.6% in 1996 and 8.4% in 1995. Management recognizes that current financial
returns are not satisfactory and is focused on company-wide business improvement
initiatives. These are described more fully in the section titled "Restructuring
and Business Improvement Actions" below and in the discussion and analysis of
each business segment.
1997 was characterized by improving market conditions, and we surpassed
our profit improvement goal of $300 million. When the year began, prices for a
number of our products were lower than at any time during 1996. Although prices
improved during the year, on average they were lower than in 1996, and overall
results were considerably weaker. Lower prices in 1997 in our U.S. businesses
alone cost the Company over $500 million. Despite positive contributions from
acquisitions, results for both 1997 and 1996 were significantly lower than the
earnings record set in 1995, when prices for many products were at peak levels.
In 1998, more aggressive profit improvement targets are in place and we
expect to complete our previously announced over $1 billion of asset sales by
midyear. We anticipate continued strong demand for our products, fueled by
moderate economic growth in the U.S. and stronger growth in Europe than in
recent years. However, the recent downturn in Asian economic markets is creating
a great deal of uncertainty and has started to cause prices for pulp and some
paper products worldwide to weaken. We expect any disruption in world markets
will be temporary, and believe Asia will be of continuing long-term strategic
importance. On the positive side, the situation in Asia is significantly slowing
down the rapid expansion of pulp and paper capacity in that region.
Special Items
Special items reduced 1997 net earnings by $461 million or $1.53 per share and
1996 net earnings by $131 million or $.45 per share. The table at the bottom of
this page shows the impact of special items in both 1997 and 1996.
Second-quarter 1997 results included a business improvement charge of $535
million and a $150 million provision to increase legal reserves as a result of a
recent settlement by Masonite Corporation, a wholly owned subsidiary, of a
class-action lawsuit relating to its hardboard siding product. Fourth-quarter
special items included a charge of $125 million for anticipated losses on the
sale of the Company's remaining imaging businesses and a gain of $170 million on
the redemption of certain retained West Coast partnership interests and the
release of a related debt guaranty.
First-quarter 1996 results reflected a gain of $592 million on the sale of
a 98% interest in a partnership that owns 300,000 acres of these same West Coast
forestlands. 1996 results also included a first-quarter charge of $515 million
to cover the costs of management actions to restructure and strengthen certain
businesses, and a fourth-quarter charge of $155 million to write down the
Company's investment in Scitex; these totaled $670 million. Also a $10
million pre-tax charge was recorded for our share of a restructuring charge
announcec by Scitex in November 1996.
A table showing the impact of special items on each of the business
segments in 1997 and 1996 appears on page 32.
Restructuring and Business Improvement Actions
In June 1997, a $535 million business improvement charge ($385 million after
taxes or $1.28 per share) was recorded under a plan to improve the Company's
financial performance by closing or divesting of operations that no longer meet
financial or strategic objectives. The charge included approximately $230
million for asset writedowns, $210 million for estimated losses on sales of
businesses, and $95 million for severance and other expenses. The majority of
the charge relates to the restructuring of the
Impact of Special Items (in millions)
1997
--------------------------------
Earnings (Loss) Earnings (Loss)
Before Taxes After Taxes
and and
Minority Minority
Interest Interest
- ----------------------------------------------------------------------
Before special items $ 656 $ 310
Business improvement charge (535) (385)
Provision for legal reserve (150) (93)
Restructuring and asset impairment charges (125) (80)
Gains on sales of partnership interests 170 97
----- -----
After special items $ 16 $(151)
===== =====
1996
---------------------------------
Earnings (Loss) Earnings (Loss)
Before Taxes After Taxes
and and
Minority Minority
Interest Interest
- ------------------------------------------------------------------------------
Before special items $ 890 $ 434
Business improvement charge
Provision for legal reserve
Restructuring and asset impairment charges (670) (461)
Scitex restructuring charge (10) (6)
Gains on sales of partnership interests 592 336
----- -----
After special items $ 802 $ 303
===== =====
Management's Discussion and Analysis 23
Company's printing papers business and the sale of certain specialty businesses.
Restructuring actions completed in 1997 included the shutdown of the Woronoco,
Mass., mill; two paper machines at the Erie, Pa., mill; one paper machine at the
Mobile, Ala., mill; the Lock Haven, Pa., de-inking operation; a higher cost
paper machine at the Moss Point, Miss., mill; and two container plants in
California. Also completed were the sales of the imaging products division's
photographics and pressroom chemicals businesses. In December 1997, an
additional charge of $125 million ($80 million after taxes or $.26 per share)
was recorded for anticipated losses associated with the sale of the Company's
remaining imaging businesses. Other sales completed in 1997 included the Lancey
coated papers mill in France; three multiwall kraft bag plants in the U.S.; and
our minority share of Productores de Papeles, S.A., a paper manufacturer in
Colombia.
Annual improvement in earnings before interest and taxes related to the
business improvement program of approximately $100 million is expected by the
end of 1998. Divestitures scheduled for completion in 1998 include the
imaging products division's printing and graphic arts businesses, for which
an agreement to sell was reached in 1998. We will also sell the Veratec
nonwovens division, several decorative panels businesses and the label
business.
Under a 1996 program, International Paper recognized a restructuring
and asset impairment charge of $515 million ($362 million after taxes or
$1.35 per share). The charge included $305 million to write off certain
assets, primarily those of the Company's imaging products businesses; $100
million for asset impairments related to the adoption of Statement of
Financial Accounting Standards No. 121; and one-time cash costs of $110
million for severance and other expenses. Annual improvement in earnings
before interest and taxes was on target and just over $100 million in 1997.
Printing Papers
Printing Papers reported 1997 sales of $5.5 billion, down from $5.6 billion in
1996 and $6.1 billion in 1995. The modest decline between 1997 and 1996 occurred
primarily in Europe. Otherwise, generally stronger volumes for most product
lines offset lower prices. Operating profit before special charges was $174
million, down from $220 million in 1996 and well below 1995's record $1.1
billion. After special charges relating to restructuring and business
improvement programs, the segment lost $38 million in 1997 and earned $185
million in 1996. Results reflect weaker pulp and paper markets during the first
half of 1997. Conditions improved somewhat by midyear and prices improved, but
the recovery was not strong.
The Company made good progress during 1997 to restructure its printing
papers businesses. In the U.S., we shut down four inefficient machines and a
de-inking plant, and transferred three machines to more profitable product
lines. In 1998, we plan to shut down another machine, reconfigure one to produce
specialty fine grades and convert two others to packaging grades. When this is
done, we will have permanently reduced our U.S. pulp and business papers
productive capacity by 400,000 tons. Elsewhere, we sold Aussedat Rey's Lancey
coated papers mill in France and our minority interest in a printing papers
business in Colombia.
As 1998 began, overall demand was stable and customer inventories were at
normal levels. However, economic weakness in Asia poses a great deal of
uncertainty about the near-term strength of world pulp and paper markets, as
demand decreases from that region, and exports, particularly from Indonesia,
begin to find their way into world markets.
Business Papers sales were $2.9 billion in 1997, a decline of 4% from 1996
and 12% from 1995. In the U.S., shipments were flat and average prices fell $35
per ton or 4% from 1996 levels. Lower manufacturing costs partially offset the
impact of lower prices. However, U.S. operating profit was one-third that of
1996. In Europe, sales volumes increased due to the full-year impact of the
former Federal mill in Inverurie, Scotland, while prices declined from 1996.
Operating profit improved by more than 50% due to significantly lower costs at
both Aussedat Rey and Kwidzyn. In the coming year, restructuring actions and
other management initiatives alone are expected to increase profitability in our
U.S. operations by as much as $50 million. Our European operations will continue
to focus on productivity and cost reduction as well.
Coated Papers sales were $1.8 billion, increasing 4% over 1996, again due
to higher volumes. Sales were flat with 1995 as the addition of Federal's
bristols business offset price declines. Overall, coated papers operating profit
improved 13% in 1997 to 80% of 1995's record level. In the U.S., pricing for
both groundwood and freesheet products trended upward during the year. Coated
papers volumes increased 26% and sales of Accolade, our new coated freesheet,
exceeded expectations. However, U.S. operating profit declined significantly due
mainly to start-up costs associated with the reconfigured machine at our mill in
Jay, Maine, which produces Accolade. Our European operations were on the
upswing, returning to profitability following losses in 1996 and 1995. Zanders
performance was considerably better as cost-reduction actions taken over the
past several years began to pay off. For 1998, we expect the U.S. coated papers
market to remain strong, but are less optimistic about Europe due to capacity
additions and pricing pressure.
Pulp sales declined modestly to $880 million in 1997 as stronger shipments
offset lower average prices. Operating profit nearly doubled due mainly to
higher volumes and lower manufacturing costs at our European mills. Results were
particularly strong at Aussedat Rey's Saillat mill, which was modernized in
1993. After improving for several months, worldwide pulp prices began to erode
in late 1997 due to the economic downturn in Southeast Asia. As the year ended,
the Company was experiencing lower order rates from Asian customers, and prices
continued to trend downward. We believe pulp prices will remain under pressure
through the first quarter of 1998.
In 1998, we will complete our improvement program for our printing papers
businesses, and identify additional opportunities to reduce costs by optimizing
the use of our production facilities.
24 Management's Discussion and Analysis
Initiatives to increase shipments and improve sales mix will also add favorably
to results in 1998.
Packaging
Packaging sales totaled $4.9 billion in 1997, flat with 1996. Operating profit
of $194 million before special charges in 1997 declined from $463 million in
1996. After special charges relating to restructuring and business improvement
programs, operating profit was $146 million in 1997 and $421 million in 1996.
Shipments were generally stronger across the Company's packaging businesses in
1997, but substantially weaker prices for industrial packaging during the first
half of the year drove the decline in operating profit. In 1995, sales were $4.5
billion and operating profit was $741 million.
During the past year, we took several actions to strengthen our packaging
businesses. We sold our multiwall bag operations, allowing us to focus our
resources on stronger segments of the kraft packaging business, and we shut down
two unprofitable container plants. So far in 1998, we have entered into a joint
venture with a box manufacturer in Turkey, adding to our presence in Eastern
Europe and Asia. We also announced plans to merge with Weston Paper and
Manufacturing Company, which operates a corrugated medium mill and 11 container
plants in the central and southeastern U.S. The merger will add to our
capabilities in markets where International Paper does not currently have
container plants, and increases our level of integration with our containerboard
mills to nearly 60%. Carter Holt Harvey moved ahead with the 1998 completion of
the modernization of its Kinleith mill, to secure an internationally competitive
cost position for both containerboard and pulp. Finally, we plan to exit the
label business during the first half of 1998.
Industrial Packaging sales were $2.6 billion in 1997, down from $2.8
billion in 1996 and $3.1 billion in 1995. These businesses broke even in 1997,
after reporting a 60% decline in operating profit in 1996. In the U.S.,
industrial packaging prices declined during the first half of 1997, but improved
in the second half as strong export demand caused markets to tighten. Overall,
average containerboard sales prices were 8% lower than in 1996. Although pricing
was weak, demand for industrial packaging was relatively strong. Shipments
increased 10% over 1996, largely from corrugated boxes and export
containerboard.
Carter Holt Harvey, accounting for about 16% of our industrial packaging
sales in 1997, also experienced lower prices, mainly in New Zealand, on flat
sales volumes. Earnings were one-fourth as much as in 1996. Construction-related
downtime at Kinleith also contributed to the earnings decline. Faced with
increasing domestic competition, Carter Holt Harvey improved its service and
quality during the past year and will continue to do so in 1998.
Most indicators are positive for the U.S. industrial packaging industry.
No U.S. producers have announced plans to expand containerboard production
capacity, and inventories continue at reasonable levels. As 1998 began,
containerboard prices were 25% lower than the last-cycle peak in mid-1995, but
were $25 per ton or 8% higher than the 1997 average. Despite the economic
situation in Asia, domestic and export demand remains strong, and we believe
that, on average, 1998 industrial packaging prices will be higher than in 1997.
A number of key initiatives will also contribute to higher industrial packaging
sales and earnings in 1998. These include growth in our specialty products such
as WhiteTop, Pineliner and ColorBrite and a plan to offset higher fiber costs
with productivity and volume gains.
Consumer Packaging sales were $2.3 billion in 1997, up from $2.1 billion
in 1996. Sales were $1.4 billion in 1995. Sales growth between 1995 and 1997 was
due mainly to higher volumes resulting from our merger with Federal in March
1996. Operating profit declined 14% from 1996, but remained slightly higher than
in 1995.
Bleached board prices declined in early 1997 and were essentially flat the
rest of the year. On average, prices were about 3% lower than in 1996. Our U.S.
mills significantly reduced costs in 1997 as the integration of Federal
continued and high-performance work systems became more effective. These more
than offset higher fiber and energy costs during the year. Our converting
operations achieved better volumes and sales mix, posting results that were in
line with 1996. Liquid packaging sales grew 6% in 1997, the first full year of
operations for plants in Europe and South America, but the division reported a
small loss due to currency devaluations late in the year, primarily in South
Korea.
Carter Holt Harvey's sales and operating profit declined considerably due
to the same competitive environment faced by its industrial packaging business.
And Kwidzyn, in Poland, reported a loss on its boxboard operations due to weak
margins.
Early in 1998, bleached board order backlogs softened. We expect that the
situation in Asia and a strong U.S. dollar will preclude tighter markets until
late in the year. However, we anticipate that earnings will improve in 1998 as
internal initiatives more than offset flat prices and higher fiber costs. Longer
term, we are positioning our businesses to compete in growing global markets.
For example, we are pursuing additional offshore opportunities in fresh juice
and aseptic packaging. And recently, we announced plans to complement our
Imperial Bondware food-service products by investing with Carter Holt Harvey in
an Australian cup maker.
Distribution
Distribution sales totaled $4.7 billion in both 1997 and 1996 compared with 1995
sales of $5.0 billion. Operating profit was $99 million ($83 million after a
business improvement charge) in 1997, declining from $109 million in 1996 and
$106 million in 1995. Profit on sales declined from 2.3% in 1996 to 1.8% in 1997
due largely to lower prices.
xpedx, the Company's North American distribution operation, posted sales
of $4.2 billion in 1997, flat with 1996. Sales volume increased 7%, fueled by
effective sales and marketing programs and 30 new retail stores. Although unit
sales grew, margins weakened and operating profit declined 16%. About 70% of
xpedx sales are in printing papers markets, with the balance in graphic arts and
industrial products. Paper prices declined 10% in 1997. xpedx costs did not
decline at the same rate, causing gross margins to decline (by nearly one-half
of 1%) in 1997. Also contributing somewhat was a higher proportion of direct
sales, which have lower margins than sales of products flowing through our
warehouses.
During 1997, xpedx moved ahead with the strengthening of its
Management's Discussion and Analysis 25
service base by closing inefficient locations and consolidating operations into
highly automated, efficient regional distribution centers. Actions taken in 1997
are projected to reduce costs by over $10 million annually, beginning in 1998.
In 1998, xpedx expects continued strong unit sales growth. Sales growth
will come from an effective national accounts program, alliances with national
suppliers to sell their branded products exclusively and the growing
small-office, home-office market. Another source of growth will be Taussig
Graphics Supply, Inc., a premier distributor of graphic arts products, acquired
late in 1997.
International Paper's international distribution operations posted sales
of $455 million, declining slightly from 1996 and 1995. Operating profit was in
line with 1996 and 1995, with both European and Pacific Rim operations
contributing positively.
Overall, we expect higher sales and earnings for the distribution
businesses in 1998.
Specialty Products
Specialty Products sales of $3.5 billion were essentially flat with 1996. Sales
were $3.3 billion in 1995. Earnings before special charges were $323 million in
1997 compared with $319 million in 1996 and $207 million in 1995. After special
charges relating mainly to businesses being divested, the segment reported
operating losses of $4 million in 1997 and $51 million in 1996. In 1998, the
Company will divest itself of several businesses with net sales of approximately
$1.1 billion. These are the imaging products and nonwovens businesses and
certain specialty panel operations. In our assessment, these businesses do not
have the growth or return potential necessary to meet the Company's overall
financial goals.
Specialty Panels includes molded interior door facings, hardboard siding
and decorative surfaces such as high-pressure laminates. Sales were $990 million
in 1997, in line with both 1996 and 1995. Demand for door facings and
high-pressure laminates grew in 1997, supported by a strong U.S. housing market
and growth overseas. However, specialty panels operating profit declined 12% due
to start-up costs associated with a new door facings plant in Ireland and weaker
earnings at Carter Holt Harvey. Sales and earnings of our U.S. low-pressure
laminates and industrial panels businesses were weak in 1997, plagued by
overcapacity, and we announced plans to exit these product lines by mid-1998.
In 1998, we expect demand for door facings to continue to grow, but we
expect pricing to be under pressure because of new industry capacity. We are
targeting sales growth in international markets, particularly Europe, and in
Asia, where we are using new technology to build less costly production lines.
New products will also contribute to growth in specialty panels sales.
Imaging sales declined 3% to $690 million. Operating profit improved
considerably due to the success of the cost-reduction program we undertook in
early 1996. These gains were offset somewhat by volume declines across all major
product lines. Over the past several years, advances in digital-based imaging
technology has severely reduced demand for photosensitive papers and films and,
in July 1997, the Company announced its plan to exit the imaging products
businesses. Late in 1997, we sold our photographics and pressroom chemicals
businesses. Early in 1998, we reached an agreement on the sale of the printing
and graphic arts operations. We expect to incur operating losses until the sale
is completed.
Industrial Papers 1997 sales of $550 million were flat with 1996. However,
operating profit declined 23% after growing 16% in 1996. The U.S. market for
release-backing products became more competitive in 1997 as the industry
consolidated and European producers entered the market. Prices were down 5% in
1997. Demand for other grades remained strong throughout the year. Market
conditions in 1998 are expected to mirror 1997. Industrial papers continues to
meet our return goals, and we are selectively investing in products with growth
potential. In 1998, Thilmany will install a new extruder in the U.S. and Akrosil
will install a new coater in the Netherlands. We expect both sales and earnings
to improve in 1998 due to volume growth and lower costs.
Tissue sales of $410 million were slightly higher than in 1996. Operating
profit also improved slightly due mainly to volume growth. Since the acquisition
of the Australian operations of Bowater plc in early 1995, Carter Holt Harvey
has achieved market share gains in Australia, and in New Zealand a new diaper
machine boosted sales ahead of expectations. We expect the tissue business to
continue to perform well.
Nonwovens sales of $250 million declined about 5% from 1996 and 1995
levels. Operating profit nearly doubled as the spunbond capabilities we built
over the past several years began to pay off. Profits were offset somewhat by
declines in traditional nonwovens, markets that have been shrinking due to new
spunbond technology. We expect this business to be sold by mid-1998.
Sales of Chemicals and Petroleum were $560 million in 1997, 3% higher than
last year. Operating profit fell 6% but remained well above 1995. Chemicals
profit increased 25% in 1997, returning to 1995 levels. Results reflect strong
European operations, where we have increased resins sales mainly at Forchem,
acquired in late 1996. U.S. operations were weaker in 1997 due to operating
problems and environmental costs. Petroleum earnings declined 20% due to lower
production and lower gas and oil prices. In 1998, we expect chemicals earnings
to improve as we focus on specialty resins and improvements in manufacturing
operations. Petroleum's results will depend on oil and gas pricing. Our
exploration program will continue to concentrate on West Texas, the Gulf Coast
and the Gulf of Mexico.
Forest Products
Forest Products sales for 1997 were $2.7 billion, even with 1996. Sales were
$2.1 billion in 1995. Operating profit, before special items, increased to $430
million, from $390 million in 1996 and $388 million in 1995. After special
items, operating profit was $554 million in 1997 and $925 million in 1996.
Special items in 1996 included a gain of $592 million from the sale of an
interest in a partnership in Oregon and Washington that included essentially all
of IP Timberlands, Ltd.'s Western forestland holdings. In December 1997, the
Company's remaining interest in this partnership was redeemed and a related debt
guaranty was released, resulting in a gain of $170 million. Additionally,
special items included restructuring and business improvement charges of $46
26 Management's Discussion and Analysis
million in 1997 and $57 million in 1996.
Forestlands revenues decreased 13% to $650 million in 1997 from $750
million in 1996, while operating profit increased nearly 20%. Sales declined
because 1996 included our West Coast operations through March. Operating profit
for the year reflected strong pricing and demand in the U.S., as well as the
sale of controlling interests in nonstrategic forestlands in western
Pennsylvania and New York. U.S. harvest volumes were higher in 1997, with sawlog
volumes increasing approximately 12%. Sawlog prices averaged about 2% above 1996
levels, and pulpwood prices rose approximately 10%. Carter Holt Harvey's
revenues decreased 15% and earnings were down for the year, as lower pricing in
New Zealand and Asia offset higher harvest volumes.
Our outlook for our forestlands business is mixed. Prices for our stumpage
entered 1998 at or near all-time highs. In addition, U.S. construction activity
is projected to remain strong in 1998, which would support continued strong
demand for our stumpage. We also expect to complete partnership interest sales
involving approximately 112,000 acres of forestland in Pennsylvania and New York
in 1998. Harvest volumes, however, are expected to decline somewhat below 1997's
record levels for the next few years due to a younger average age class for our
timber. Furthermore, the recent economic downturn in Asia could adversely affect
demand for stumpage in the U.S. in 1998, and will depress 1998 results for
Carter Holt Harvey.
Wood Products revenues increased 8% in 1997 to $2.1 billion, up from $1.9
billion in 1996 and $1.4 billion in 1995. In the U.S., operating profit
increased slightly. Results reflect strong lumber operations, offset by losses
for panels and other products.
Our lumber operations were particularly strong in 1997 as robust
construction markets pushed sales up over 35% while operating profits nearly
doubled. Results also benefited from a full year's contribution from the five
plants acquired in the Federal merger of March 1996. Lumber prices rose over
10%, driven by strong demand and by an increase in sales of premium grades,
which carry higher margins. About 15% of our lumber sales are premium grades, up
from about 5% in 1996. 1998 projections are to grow to over 20%. The higher
prices and shipments, together with cost reductions, more than offset higher log
costs in 1997.
Our U.S. panel businesses were negatively impacted by higher log costs and
a sharp decline in prices for oriented strand board (OSB), as industry-wide
capacity additions came on line. However, by year-end, OSB prices had recovered
somewhat as demand and capacity moved closer to balance. Average plywood prices
increased slightly in 1997, while sales volumes were slightly lower. Panels
results continue to benefit from production of higher margin specialty products
that represent approximately 25% of our plywood sales.
Carter Holt Harvey's sales, which represent about 30% of our wood products
business, increased 8% in 1997. Operating profit was in line with 1996. With
improving business conditions in Australia, the 1996 acquisition of Forwood
Products is exceeding sales and profit targets, and further gains are expected
in 1998. About 10% of Carter Holt Harvey's products are exported into Asia. The
Asian economic situation will result in weakness during 1998. However, Carter
Holt Harvey is strategically committed to its customer base in the Asian market,
and in the longer term remains positive on the outlook for demand from the
region.
In the U.S., we expect construction activity to remain strong in 1998,
with housing starts at or near 1997 levels. As a result, demand and pricing for
wood products should continue to be favorable. We expect some further recovery
in OSB prices as the year progresses. Profitability in 1998 is expected to be
negatively affected early in the year by both higher log costs and wood
availability. However, productivity and cost-savings initiatives currently under
way, together with increased sales of higher margin premium products, should
reduce the impact of higher costs.
- -----------------------------
LIQUIDITY & CAPITAL RESOURCES
- -----------------------------
Cash Provided by Operations
Cash provided by operations declined to $1.2 billion in 1997 from $1.7 billion
in 1996 and $2.2 billion in 1995. As compared with 1996, earnings after
adjusting for noncash special items declined by $100 million. In addition,
working capital reduced operating cash flow by about $390 million. On an overall
basis, noncash working capital was $2.9 billion at December 31, 1997, which was
about a $200 million decrease from 1996. However, after adjusting for foreign
exchange, acquisitions and restructuring activities, working capital increased
by about $390 million. Just under half the increase resulted from reductions in
nontrade accrued liabilities. Inventory accounted for most of the rest,
including increases in xpedx inventory, liquid packaging filling machines and
purchased timber deeds. Depreciation and amortization expense of $1.3 billion in
1997 was about $100 million above 1996, increasing from $1.0 billion in 1995.
Investment Activities
Capital spending was reduced to $1.1 billion in 1997, from $1.4 billion and $1.5
billion in 1996 and 1995, respectively. Capital spending is expected to be $1.1
billion in 1998 and will continue to be focused on the Company's stronger, more
competitive businesses.
Capital Spending by Industry Segment
In millions for the years ended
December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Printing Papers $ 401 $ 454 $ 375
Packaging 275 338 531
Distribution 20 14 18
Specialty Products 191 289 251
Forest Products 172 195 271
------ ------ ------
Subtotal 1,059 1,290 1,446
Corporate 52 104 72
------ ------ ------
Total $1,111 $1,394 $1,518
====== ====== ======
Under the business improvement plan undertaken by the Company in 1997,
sales of nonstrategic businesses and assets are expected to generate cash
proceeds of $1 billion. Proceeds will be used primarily to reduce debt. In 1997,
proceeds from these divestitures totaled $322 million.
Acquisitions in 1997 included Merbok Formtec, an Asian door facings
company that will be an addition to Masonite, and Taussig
Management's Discussion and Analysis 27
Graphics Supply, Inc., a distributor of graphic arts products, to complement our
distribution business.
In March 1996, International Paper merged with Federal Paper Board, a
paper and forest products company with facilities in the U.S. and the U.K.
Federal shareholders received, at their election and subject to certain
limitations, either $55 in cash or a combination of cash and International Paper
common stock for each share of Federal Paper Board common stock. To complete the
merger, Federal shares were acquired for approximately $1.3 billion in cash and
$1.4 billion in International Paper stock, and $800 million of debt was assumed.
Other 1996 acquisitions included Forchem, a tall oil and turpentine processor in
Finland, and Forwood Products, a timber-processing business in Australia,
acquired for about $100 million each.
Acquisitions in 1995 included approximately 26% of the outstanding shares
of Carter Holt Harvey, bringing International Paper's ownership of the New
Zealand-based forest and paper products company to just over 50%. The share
purchases were financed with borrowings totaling $1.1 billion. (The Company's
initial investment of 16% of Carter Holt Harvey was made in 1991 and was
followed by an additional 8% investment in 1994.) We also acquired the assets of
paper distributors Seaman-Patrick Paper Company and Carpenter Paper Company;
Micarta, a high-pressure laminates business; and the inks and adhesives resin
business of DSM in France.
Financing Activities
Financing activities during 1997 included the issuance of environmental and
industrial development bonds for various capital projects, repayment of $164
million of Federal Paper Board 10% debentures, and a net reduction in commercial
paper and short-term bank borrowings. Long-term debt and notes payable to banks
on our balance sheet were $9.4 billion at December 31, 1997 compared with $10
billion in 1996. However, after adjusting for foreign exchange, acquisitions and
restructuring activities, debt was reduced by approximately $220 million on a
cash flow basis.
Financing activities in 1996 included short-term borrowings of $1.3
billion used to acquire Federal. Also, $741 million of notes with maturities
ranging from three to seven years were issued, and IPT borrowed $450 million due
in 1999 from a consortium of banks.
In 1995, IPT issued $750 million of five-year debt, Carter Holt Harvey
issued $300 million of U.S. dollar-denominated notes, and International Paper
Capital Trust, a wholly owned subsidiary, issued $450 million of preferred
securities that are convertible into International Paper common stock. Also
during 1995, 5.75% convertible debentures were called by the Company and
converted into 5.8 million shares of common stock.
Unless otherwise noted, the proceeds of all of the financings described
above were used to reduce short-term debt or for general corporate purposes.
Dividend payments were $302 million in 1997 ($1.00 per common share), $291
million in 1996 and $237 million in 1995. In the third quarter of 1995, the
Company declared a two-for-one stock split and raised the quarterly dividend
from $.21 to $.25 per common share.
Capital Resources Outlook for 1998
The Company's financial condition continues to be strong. The ratio of debt to
total capital was held at 39% in 1997, equal to 1996 and 1995. The Company
anticipates that cash flow from operations, supplemented as necessary by short-
or long-term borrowings, will be adequate to fund its capital expenditures, to
service existing debt, and to meet working capital and dividend requirements
during 1998.
Other Financial Statement Items
Net interest expense was $490 million in 1997, declining from $530 million in
1996. The reduction reflects lower borrowing rates and tax-related interest
income in 1997. Net interest expense was $493 million in 1995.
Minority interest expense declined to $129 million in 1997 from $169
million in 1996, due largely to weaker earnings at Carter Holt Harvey and a
lower level of profits on the sales of West Coast partnership interests by IPT.
(Minority interest expense related to such sales was $6 million and $32 million
in 1997 and 1996, respectively.) These declines were offset in part by stronger
results at Zanders. Minority interest expense was $156 million in 1995.
Before special items, the 1997 effective tax rate was 34%, declining from
36% in 1996 due to a change in the mix of earnings, and 35.5% in 1995. After
special items, the effective tax rate was 238% of pre-tax income in 1997 and 41%
in 1996. Taxes provided on special charges, which included expenses that were
not deductible for tax purposes, as well as taxes at statutory rates on the gain
on sale of a partnership interest, caused the Company's 1997 tax provision to be
more than twice that of earnings before taxes. The table below presents
components of earnings and the related income taxes for 1997 and 1996.
In 1998, we expect the effective tax rate on operating earnings to be
about 34%.
Effective Tax Rate (dollars in millions)
1997 1996
------------------------------------------ -------------------------------------------
Earnings (Loss) Earnings (Loss)
Before Taxes Tax Effective Before Taxes Tax Effective
and Minority Expense Tax and Minority Expense Tax
Interest (Benefit) Rate Interest (Benefit) Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Before special items $ 656 $ 223 34% $ 890 $ 319 36%
Business improvement charge (535) (150) 28%
Provision for legal reserve (150) (57) 38%
Restructuring and asset impairment charges (125) (45) 36% (670) (209) 31%
Scitex restructuring charge (10) (4) 36%
Gains on sales of partnership interests 170 67 39% 592 224 38%
----- ----- ----- -----
After special items $ 16 $ 38 238% $ 802 $ 330 41%
===== ===== ===== =====
28 Management's Discussion and Analysis
The full-year impact of the March 1996 merger with Federal contributed between
2% and 18% to the components of 1997 costs and expenses.
Recent Accounting Pronouncements
In the first quarter of 1997, International Paper adopted the provisions of
American Institute of Certified Public Accountants Statement of Position (SOP)
No. 96-1, "Environmental Remediation Liabilities," which provides guidance
concerning the recognition, measurement and disclosure of environmental
remediation liabilities. The adoption of the SOP did not have a material effect
on the Company's financial position or results of operations. Also in 1997, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," which did not have a material effect on reported earnings
per common share. Disclosures required by this standard appear in Note 2 to the
consolidated financial statements.
In 1998, the Company will adopt SFAS No. 130, "Reporting Comprehensive
Income," which sets standards for the reporting of comprehensive income and its
components, and SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information," which requires the presentation of segment information on
a basis consistent with that used by management for operating decisions and sets
forth quarterly and annual disclosure requirements.
Legal and Environmental Issues
International Paper operates in an industry subject to extensive state and
federal environmental regulation. A total of $90 million was spent in 1997 ($130
million in 1996 and $108 million in 1995) to control environmental releases into
the air and water and to assure environmentally sound disposal of waste. The
Company expects to spend approximately $105 million in 1998 for similar capital
projects, including costs to comply with the Environmental Protection Agency's
(EPA) "Cluster Rule" regulations. Amounts to be spent in future years will
depend on new laws and regulations and changes in environmental issues. Taking
these uncertainties into account, our preliminary estimate for 1999 and 2000 is
approximately $350 million.
In early 1998, the EPA will issue final regulations on the "Cluster Rule"
establishing new requirements regarding air emissions and wastewater discharges
from pulp and paper mills. Implementation will be required over the next three
to eight years. One of the main requirements of the Cluster Rule will be that
pulp and paper mills use only elemental chlorine-free technology (ECF) in the
pulp bleaching process. In 1996, International Paper completed the conversion of
13 of its U.S and European bleached mills to this technology. The cost of
conversion as well as other related projects completed through 1997 was $145
million. Two former Federal Paper Board mills, Augusta and Riegelwood, will be
converted to ECF in 1998. The Company estimates that additional capital
expenditures of approximately $230 million will be made over the next three
years in order to comply with the Cluster Rule's initial provisions. Projected
costs during the years 2001 through 2006 total $180 million. The final cost will
depend on the outcome of regulations for pulp and paper grades other than
bleached kraft. Regulations for these categories are not likely to become final
until late 1999 or 2000. The Company now estimates that annual pre-tax operating
costs, excluding depreciation, will increase approximately $20 million annually
when the regulations are fully implemented.
International Paper has been named as a potentially liable party with
respect to a number of environmental remediation actions under various federal
and state laws, including the Comprehensive Environmental Response, Compensation
and Liability Act. Related costs are recorded in the financial statements when
they are probable and reasonably estimable. Completion of these actions is not
expected to have a material adverse effect on our financial condition or results
of operations. Further details can be found in the Company's quarterly reports
on Form 10-Q and annual report on Form 10-K filed with the Securities and
Exchange Commission.
A nationwide class-action lawsuit filed against International Paper and
Masonite in Alabama in 1994 was settled in July 1997. The lawsuit alleged that
hardboard siding manufactured by Masonite, and used as exterior cladding for
residential dwellings, failed prematurely. The class consists of all homeowners
in the U.S. who used the siding in their residences since 1980. Final approval
of the settlement was granted on January 15, 1998. It provides for payments to
claimants meeting certain requirements of the settlement agreement for a period
of up to 10 years. In the second quarter of 1997, the Company recorded a $150
million provision to increase its legal reserves. While the total cost of the
settlement is not known with certainty, the Company believes its legal reserves
are sufficient and that the settlement will not have a material adverse effect
on its consolidated financial position or results of operations.
While any proceeding or litigation has an element of uncertainty, the
Company believes that the outcome of any lawsuit or claim that is pending or
threatened, or all of them combined, will not have a material adverse effect on
its consolidated financial position or results of operations. For a further
discussion of legal issues, see Note 11 to the consolidated financial statements
and Item 3 (Legal Proceedings) of the annual report on Form 10-K.
Year-2000 Costs
Many of our systems and related computer technology are year-2000 compliant.
However, we have a program in place to bring the remaining software and systems
into year-2000 compliance by mid-1999. We estimate that this will cost $65
million, exclusive of software and systems that are being replaced or upgraded
in the normal course of business. Information system maintenance or modification
costs are expensed as incurred, while the cost of new software and equipment is
capitalized and amortized over the assets' useful lives.
Management's Discussion and Analysis 29
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, 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 investments at
December 31, 1997 were not significant.
The table that follows summarizes our debt obligations outstanding as of
December 31, 1997 expressed in U.S. dollar equivalents. This information should
be read in conjunction with Note 13 to the consolidated financial statements.
Short- and Long-Term Debt (in millions)
Outstanding as of December 31, 1997 1998 1999 2000 2001 2002 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. commercial paper and bank notes-5.7%
average interest rate $ 772 $ 772 $ 772
New Zealand dollar commercial paper and
bank notes-8.4% average interest rate 273 273 273
Australian dollar commercial paper and bank
notes-4.9% average interest rate 116 116 116
Belgian franc bank notes-4.0% average
interest rate 119 119 119
French franc bank notes-3.8% average
interest rate 618 618 618
German mark bank notes-3.9% average
interest rate 271 271 271
Dutch guilder bank notes-3.8% average
interest rate 208 208 208
Finnish markka bank notes-3.9%
average interest rate 98 98 98
New Zealand dollar notes payable-8.9%
average interest rate 418 418 418
Fixed rate debt-7.9% average interest rate 31 $ 28 $ 361 $ 286 $ 287 $2,611 3,604 3,996
5 7/8% Swiss franc debentures 80 80 87
Floating rate notes-6.2% average interest rate 450 450 450
Medium-term notes-7.4% average interest rate 50 282 8 121 76 85 622 640
Environmental and industrial development
bonds-5.8% average interest rate 15 20 76 22 51 852 1,036 1,091
German mark fixed rate borrowings-5.5%
average interest rate 56 20 20 34 49 179 179
Other 261 105 41 26 48 21 502 508
------ ----- ----- ------ ------ ------ ------ ------
Total Debt $3,306 $ 885 $ 506 $ 555 $ 496 $3,618 $9,366 $9,844
====== ===== ===== ====== ====== ====== ====== ======
Interest Rate and Currency Swaps (in millions)
Outstanding as of December 31, 1997 1998 1999 2000 2001 2002 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. dollar variable to fixed rate swaps $ 50 $525 $ 45 $1,000 $1,620 $ (127)
Average pay rate 7.1%
Average receive rate 5.8%
Australian dollar variable to fixed rate swaps 68 44 $ 34 $ 51 17 214 (4)
Average pay rate 7.0%
Average receive rate 4.9%
New Zealand dollar variable to fixed rate swaps 15 15 27 15 15 87
Average pay rate 7.5%
Average receive rate 8.1%
U.S. dollar fixed to variable rate swaps 45 1,250 1,295 146
Average pay rate 7.0%
Average receive rate 7.5%
U.S. dollar to Australian dollar
cross-currency swap 150 150 19
30 Management's Discussion and Analysis
For debt obligations, the table presents principal cash flows and related
weighted average interest rates by year of maturity. Variable interest rates
disclosed represent the weighted average rates at the end of the period. For
financial statement classification, $1.4 billion of short-term debt has been
classified as long-term pursuant to line of credit agreements.
We use cross-currency and interest rate swap agreements to manage the
composition of our fixed and floating rate debt portfolio. Amounts to be paid or
received as interest under these agreements are recognized over the life of the
swap agreements as adjustments to interest expense. The impact on earnings and
the Company's net liability under these agreements were not significant. The
previous table presents notional amounts and principal cash flows for swap
agreements by year of maturity expressed in U.S. dollar equivalents.
COPEC, a Chilean equity investment of Carter Holt Harvey, has
approximately $1.0 billion of U.S. dollar-denominated debt. The remeasurement of
this debt as the Chilean peso and U.S. dollar exchange rate fluctuates is
recorded in earnings. Based on the relative ownership, a 3% movement in that
exchange rate would result in approximately a one cent per share earnings impact
for International Paper.
The Company transacts business in many currencies and is 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 a hedge 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 the Company 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, 1997 expressed in U.S. dollar
equivalents. All contracts have maturities of less than 12 months. This
information should be read in conjunction with Note 14 of the consolidated
financial statements.
Weighted
Average Unrealized
Foreign Currency Contract Exchange Gain
Forward Contracts (dollars in millions) Amount Rate (Loss)
- --------------------------------------------------------------------------------
Receive Belgian francs/Pay Italian lira $ 13 2.09 $
Receive Belgian francs/Pay U.S. dollars 78 36.36 1
Receive French francs/Pay Belgian francs 13 6.16
Receive French francs/Pay British pounds 10 9.66
Receive British pounds/Pay U.S. dollars 38 1.67 (1)
Receive Italian lira/Pay U.S. dollars 51 1,715.87 (1)
Receive Dutch guilders/Pay Belgian francs 42 18.31
Receive Dutch guilders/Pay British pounds 18 3.35
Receive U.S. dollars/Pay British pounds 13 1.65
Receive U.S. dollars/Pay Belgian francs 25 36.42
Receive Irish punts/Pay U.S. dollars 128 0.68 (1)
Receive New Zealand dollars/
Pay U.S. dollars 803 1.46 (55)
Receive New Zealand dollars/
Pay Australian dollars 113 0.93 2
Receive Australian dollars/
Pay New Zealand dollars 68 1.12 (1)
Receive Swiss francs/
Pay New Zealand dollars 79 1.10 5
Receive U.S. dollars/
Pay New Zealand dollars 206 1.56 9
Receive U.S. dollars/
Pay Australian dollars 301 1.37 20
The company has an additional $123 million in a number of smaller contracts to
purchase or sell other currencies with a related net unrealized gain of $2.5
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 market value or earnings the Company could incur from
adverse changes in interest rates or currency exchange rates. The results of our
analysis at a 95% confidence level were not significant to the Company's
consolidated common shareholder's equity, earnings or daily change in market
capitalization.
Effect of Inflation
General inflation has had minimal impact on International Paper's 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.
Financial Information by Geographic Area 31
NET SALES
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
United States (1),(3) $ 14,760 $ 14,512 $ 14,610
Europe (3) 3,402 3,583 3,791
Pacific Rim (4) 2,129 2,263 1,571
Other 226 186 188
Less: Intergeographic Sales (421) (401) (363)
-------- -------- --------
Net Sales $ 20,096 $ 20,143 $ 19,797
======== ======== ========
ASSETS
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
United States (3) $15,650 $15,695 $12,033
Europe (3) 3,635 4,405 4,252
Pacific Rim (4) 3,985 4,779 4,334
Other 189 187 192
Equity Investments 1,046 1,070 1,291
Corporate 2,249 2,116 1,875
------- ------- -------
Assets $26,754 $28,252 $23,977
======= ======= =======
EUROPEAN SALES BY INDUSTRY SEGMENT
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Printing Papers (3) $1,469 $1,506 $1,664
Packaging 646 707 756
Distribution 321 334 378
Specialty Products 961 1,006 960
Forest Products 5 30 33
------ ------ ------
European Sales $3,402 $3,583 $3,791
====== ====== ======
OPERATING PROFIT
1997 1996 1995
------------------------------------ ------------------------------------ -------
Before After Before After
Special Special Special Special Special Special
In millions Items Items Items Items Items Items
- ------------------------------------------------------------------------------------------------------------------------------------
United States(3) $ 977 $ (252) $ 725 $ 1,272 $ 306 $ 1,578 $ 2,062
Europe(3) 102 (227) (125) (218) (218) 251
Pacific Rim(4) 111 111 218 218 216
Other 30 30 11 11 6
------- ------- ------- ------- ------- ------- -------
Operating Profit(2) $ 1,220 $ (479) $ 741 $ 1,501 $ 88 $ 1,589 $ 2,535
======= ======= ======= ======= ======= ======= =======
(1) Export sales to unaffiliated customers (in billions) were $1.4 in 1997,
$1.4 in 1996 and $1.5 in 1995.
(2) Includes amounts for acquisitions, net of goodwill amortization, from the
dates of acquisition.
(3) Includes the results of Federal Paper Board from March 12, 1996.
(4) Includes the results of Carter Holt Harvey from May 1, 1995 except for
earnings from its investment in COPEC, which are included in corporate
items.
Europe
European business sales of $3.4 billion were $200 million or 5% below 1996 sales
of $3.6 billion and $400 million or 10% below 1995 sales of $3.8 billion.
Operating profit, before special items, of $102 million improved over breakeven
results in 1996. Special items in 1997 included charges related to the disposal
of the imaging businesses and the restructure of the printing papers business.
Better economic conditions and cost-reduction efforts resulted in profits
for the printing papers businesses compared with a loss in 1996. Contributions
from chemicals' 1996 acquisitions, partially offset by start-up costs at
Masonite's Ireland plant, also added to European profits. We expect continued
improvement led by stronger economic growth in Europe. However, recent financial
events in Asia may temporarily weaken pulp and paper pricing in early 1998.
Pacific Rim
Carter Holt Harvey, a New Zealand-based forest and paper products company,
represents the majority of our operations in the Pacific Rim. Through its equity
interest in COPEC, it also has substantial assets in Chile. Carter Holt Harvey
is a major producer of tissue in Australasia and supplies wood products to the
Australian markets.
International Paper's 1997 results include Carter Holt Harvey sales of
$2.0 billion and operating profit of $112 million compared with $2.1 billion and
$211 million, respectively, for 1996. Carter Holt Harvey's results are on a
one-month-lag basis and include adjustments to conform with U.S. accounting
principles. Operating profit declined mainly due to lower packaging prices in
New Zealand as the result of increased competition and general price weakness
for pulp and forest products. The Asian economic situation is expected to place
pressure on pricing and earnings in 1998, particularly in pulp, packaging board
and log export markets. A company-wide review of all operations was recently
completed and a program to improve margins through increased productivity,
customer and revenue management, and operational efficiencies is now under way.
A detail of Carter Holt Harvey's sales by industry segment, adjusted to
conform to International Paper's presentation, is included on page 32.
32 Financial Information by Industry Segment
NET SALES
In millions 1997 1996 1995(1)
- --------------------------------------------------------------------------------
Printing Papers $ 5,550 $ 5,640 $ 6,090
Packaging 4,950 4,945 4,475
Distribution 4,690 4,675 5,040
Specialty Products 3,450 3,475 3,260
Forest Products 2,715 2,665 2,140
Less: Intersegment Sales (1,259) (1,257) (1,208)
-------- -------- --------
Net Sales $ 20,096 $ 20,143 $ 19,797
======== ======== ========
ASSETS
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Printing Papers $ 7,810 $ 8,627 $ 7,121
Packaging 6,198 6,088 4,150
Distribution 1,477 1,346 1,454
Specialty Products 3,106 3,636 3,639
Forest Products 4,868 5,369 4,447
Equity Investments 1,046 1,070 1,291
Corporate(2) 2,249 2,116 1,875
------- ------- -------
Assets $26,754 $28,252 $23,977
======= ======= =======
OPERATING PROFIT
1997 1996 1995
--------------------------------- ----------------------------------- --------
Before After Before After
Special Special Special Special Special Special
In millions Items Items Items Items Items Items
- ------------------------------------------------------------------------------------------------------------------------------------
Printing Papers $ 174 $ (212) $ (38) $ 220 $ (35) $ 185 $ 1,093
Packaging 194 (48) 146 463 (42) 421 741
Distribution 99 (16) 83 109 109 106
Specialty Products 323 (327) (4) 319 (370) (51) 207
Forest Products 430 124 554 390 535 925 388
------- ------- ------- ------- ------- ------- -------
Operating Profit 1,220 (479) 741 1,501 88 1,589 2,535
Interest Expense, net (490) (490) (530) (530) (493)
Corporate Items, net(3) (74) (161) (235) (81) (176)(4) (257) (14)
------- ------- ------- ------- ------- ------- -------
Earnings Before Income Taxes
and Minority Interest $ 656 $ (640) $ 16 $ 890 $ (88) $ 802 $ 2,028
======= ======= ======= ======= ======= ======= =======
DEPRECIATION, DEPLETION AND AMORTIZATION
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Printing Papers $ 550 $ 528 $ 475
Packaging 359 329 246
Distribution 34 35 35
Specialty Products 202 194 199
Forest Products 259 220 150
Corporate 12 9 6
------- ------- -------
Depreciation, Depletion and Amortization 1,416 1,315 1,111
Less: Depletion(5) (158) (121) (80)
------- ------- -------
Depreciation and Amortization $ 1,258 $ 1,194 $ 1,031
======= ======= =======
FEDERAL PAPER BOARD AND CARTER HOLT HARVEY SALES(6)
1997 Net Sales 1996 Net Sales
--------------------------------------------------- ---------------------------------------------------
Federal Carter Federal Carter
International Paper Holt International Paper Holt
In millions Paper Board Harvey Consolidated Paper Board Harvey Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Printing Papers $ 4,799 $ 641 $ 110 $ 5,550 $ 4,941 $ 565 $ 134 $ 5,640
Packaging 3,590 829 531 4,950 3,659 650 636 4,945
Distribution 4,557 133 4,690 4,538 137 4,675
Specialty Products 2,919 531 3,450 2,924 551 3,475
Forest Products 1,479 292 944 2,715 1,492 222 951 2,665
Less: Intersegment Sales (815) (148) (296) (1,259) (877) (50) (330) (1,257)
-------- -------- -------- -------- -------- -------- -------- --------
Net Sales $ 16,529 $ 1,614 $ 1,953 $ 20,096 $ 16,677 $ 1,387 $ 2,079 $ 20,143
======== ======== ======== ======== ======== ======== ======== ========
(1) 1995 net sales have been adjusted to conform with the current-year
presentation.
(2) Corporate assets are principally cash and temporary investments,
investments, deferred taxes and other assets that are not identifiable
with industry segments.
(3) Corporate Items, net includes our share of earnings from equity
investments, unallocated corporate expenses and special items not
affecting the segments.
(4) Includes the write-down of the Scitex investment and our share of the
restructuring charge announced by Scitex.
(5) Depletion consists of cost of timber harvested and is included in Forest
Products.
(6) The financial statements reflect the merger with Federal Paper Board
(March 12, 1996) and the consolidation of Carter Holt Harvey (May 1,
1995). Their net sales have been adjusted to conform with International
Paper's classifications.
33
Report of Management on Financial Statements
The management of International Paper Company is responsible for the fair
presentation of the information contained in the financial statements in this
annual report. The statements are prepared in accordance with generally accepted
accounting principles and reflect management's best judgment as to the Company's
financial position, results of operations and cash flows.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that transactions are properly recorded and
summarized so that reliable financial records and reports can be prepared and
assets safeguarded.
An important part of the internal controls system is the Company's Policy
on Ethical Business Conduct, which requires employees to maintain the highest
ethical and legal standards in their conduct of Company business. The internal
controls system further includes careful selection and training of supervisory
and management personnel, appropriate delegation of authority and division of
responsibility, dissemination of accounting and business policies throughout the
Company, and an extensive program of internal audits with management follow-up.
The Company maintains a toll-free telephone "compliance line" whereby any
employee may report suspected violations of law or Company policy.
The independent public accountants provide an objective, independent
review of management's discharge of its responsibility for the fairness of the
Company's financial statements. They review the Company's internal accounting
controls and conduct tests of procedures and accounting records to enable them
to form the opinion set forth in their report.
The Board of Directors monitors management's administration of the
Company's financial and accounting policies and practices, and the preparation
of these financial statements. The Audit Committee, which consists of five
nonemployee directors, meets regularly with representatives of management, the
independent public accountants and the internal Auditor to review their
activities. The Audit Committee recommends that the shareholders approve the
appointment of the independent public accountants to conduct the annual audit.
The independent public accountants and the internal Auditor both have free
access to the Audit Committee and meet regularly with the Audit Committee, with
and without management representatives in attendance.
/s/ Marianne M. Parrs
Marianne M. Parrs
Senior 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, 1997
and 1996, and the related consolidated statements of earnings, common
shareholders' equity and cash flows for each of the three years ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of International Paper Company
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, N.Y.
February 6, 1998
34 Consolidated Statement of Earnings
IN MILLIONS, EXCEPT PER SHARE AMOUNTS, FOR THE YEARS ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
NET SALES $ 20,096 $ 20,143 $ 19,797
-------- -------- --------
COSTS AND EXPENSES
Cost of products sold 14,974 14,883 13,886
Selling and administrative expenses 1,581 1,509 1,381
Depreciation and amortization 1,258 1,194 1,031
Distribution expenses 933 925 794
Taxes other than payroll and income taxes 205 194 174
Equity (earnings) losses from investment in Scitex (1) 28 10
Business improvement charge 535
Provision for legal reserve 150
Restructuring and asset impairment charges 125 670
-------- -------- --------
TOTAL COSTS AND EXPENSES 19,760 19,403 17,276
Gains on sales of west coast partnership interests 170 592
-------- -------- --------
EARNINGS BEFORE INTEREST, INCOME TAXES
AND MINORITY INTEREST 506 1,332 2,521
Interest expense, net 490 530 493
-------- -------- --------
EARNINGS BEFORE INCOME TAXES AND
MINORITY INTEREST 16 802 2,028
Income tax provision 38 330 719
Minority interest expense, net of taxes 129 169 156
-------- -------- --------
NET EARNINGS (LOSS) $ (151) $ 303 $ 1,153
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE $ (.50) $ 1.04 $ 4.50
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE - ASSUMING DILUTION $ (.50) $ 1.04 $ 4.41
======== ======== ========
The accompanying notes are an integral part of these financial statements.
Consolidated Balance Sheet 35
IN MILLIONS AT DECEMBER 31 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary investments $ 398 $ 352
Accounts and notes receivable, less allowances of $93 in 1997 and $101 in 1996 2,404 2,553
Inventories 2,760 2,840
Other current assets 383 253
------- -------
Total Current Assets 5,945 5,998
Plants, Properties and Equipment, Net 12,369 13,217
Forestlands 2,969 3,342
Investments 1,166 1,178
Goodwill 2,557 2,748
Deferred Charges and Other Assets 1,748 1,769
------- -------
TOTAL ASSETS $26,754 $28,252
======= =======
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current maturities of long-term debt $ 2,212 $ 3,296
Accounts payable 1,338 1,426
Accrued liabilities 1,330 1,172
------- -------
Total Current Liabilities 4,880 5,894
------- -------
Long-Term Debt 7,154 6,691
Deferred Income Taxes 2,681 2,768
Other Liabilities 1,236 1,240
Minority Interest 1,643 1,865
International Paper-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely International Paper Subordinated
Debentures-Note 8 450 450
Commitments and Contingent Liabilities-Note 11
Common Shareholders' Equity
Common stock, $1 par value, issued at December 31, 1997-302.9 shares,
1996-300.8 shares 303 301
Paid-in capital 3,258 3,426
Retained earnings 5,186 5,639
------- -------
8,747 9,366
Less: Common stock held in treasury, at cost, 1997-0.7 shares,
1996-0.6 shares 37 22
------- -------
Total Common Shareholders' Equity 8,710 9,344
------- -------
TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $26,754 $28,252
======= =======
The accompanying notes are an integral part of these financial statements.
36 Consolidated Statement of Cash Flows
IN MILLIONS FOR THE YEARS ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $ (151) $ 303 $ 1,153
Depreciation and amortization 1,258 1,194 1,031
Deferred income tax provision (benefit) (90) 107 146
Business improvement charge 535
Provision for legal reserve 150
Restructuring and asset impairment charges 125 670
Scitex restructuring charge 10
Payments related to restructuring and legal charges (116) (34)
Gains on sales of west coast partnership interests (170) (592)
Other, net 92 133 (92)
Changes in current assets and liabilities
Accounts and notes receivable (53) 192 45
Inventories (150) 174 (320)
Accounts payable and accrued liabilities (188) (399) 289
Other (19) (4)
------- ------- -------
CASH PROVIDED BY OPERATIONS 1,242 1,739 2,248
------- ------- -------
INVESTMENT ACTIVITIES
Invested in capital projects (1,111) (1,394) (1,518)
Mergers and acquisitions, net of cash acquired (80) (1,527) (1,168)
Consolidation of equity investment 241
Proceeds from divestitures 322
Other 16 (59) (111)
------- ------- -------
CASH USED FOR INVESTMENT ACTIVITIES (853) (2,980) (2,556)
------- ------- -------
FINANCING ACTIVITIES
Issuance of common stock 142 100 66
Issuance of preferred securities by subsidiary trust 450
Issuance of debt 531 1,909 1,055
Reduction of debt (752) (375) (950)
Change in bank overdrafts 29 (23) 57
Dividends paid (302) (291) (237)
Other 6 (40) (100)
------- ------- -------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (346) 1,280 341
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3 1 9
------- ------- -------
CHANGE IN CASH AND TEMPORARY INVESTMENTS 46 40 42
CASH AND TEMPORARY INVESTMENTS
Beginning of the year 352 312 270
------- ------- -------
End of the year $ 398 $ 352 $ 312
======= ======= =======
The accompanying notes are an integral part of these financial statements.
Consolidated Statement of Common Shareholders' Equity 37
IN MILLIONS,
EXCEPT SHARE AMOUNTS IN THOUSANDS Common Stock Issued Treasury Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Total Common
Paid-In Retained Shareholders'
Shares Amount Capital(1) Earnings Shares Amount Equity
-------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1995 256,488 $256 $1,658 $4,711 4,698 $111 $6,514
Issuance of stock for acquisitions 988 1 37 38
Issuance of stock for various plans 27 (2,445) (55) 82
Conversion of subordinated
debentures 5,785 6 199 205
Cash dividends-Common stock
($.92 per share) (237) (237)
Foreign currency translation
(less tax benefit of $66) 42 42
Net earnings 1,153 1,153
------- ---- ------ ------ ------ ---- ------
BALANCE, DECEMBER 31, 1995 263,261 263 1,963 5,627 2,253 56 7,797
Issuance of stock for merger 35,348 35 1,368 1,403
Issuance of stock for various plans 2,215 3 67 (2,567) (70) 140
Repurchase of stock 868 36 (36)
Cash dividends-Common stock
($1.00 per share) (291) (291)
Foreign currency translation
(less tax expense of $36) 28 28
Net earnings 303 303
------- ---- ------ ------ ------ ---- ------
BALANCE, DECEMBER 31, 1996 300,824 301 3,426 5,639 554 22 9,344
Issuance of stock for various plans 2,086 2 55 (2,345) (106) 163
Repurchase of stock 2,517 121 (121)
Cash dividends-Common stock
($1.00 per share) (302) (302)
Realized foreign currency translation
adjustment related to divestitures
(less tax benefit of $6) 23 23
Foreign currency translation
(less tax expense of $200) (246) (246)
Net loss (151) (151)
------- ---- ------ ------ ------ ---- ------
BALANCE, DECEMBER 31, 1997 302,910 $303 $3,258 $5,186 726 $ 37 $8,710
======= ==== ====== ====== ====== ==== ======
(1) The cumulative foreign currency translation adjustment (in millions) was
$(396), $(173) and $(201) million at December 31, 1997, 1996 and 1995,
respectively.
The accompanying notes are an integral part of these financial statements.
38 Notes to Consolidated Financial Statements
- -------------------------------------------------
Note 1 Summary of Significant Accounting Policies
- -------------------------------------------------
Nature of the Company's Business
The Company is a global forest products, paper and packaging company that is
complemented by an extensive distribution system, with primary markets and
manufacturing operations in the United States, Europe and the Pacific Rim.
Substantially all of the Company's businesses have experienced and are likely to
continue to experience cycles relating to available industry capacity and
general economic conditions. For a further discussion of the Company's business,
see pages 22 through 30 of management's discussion and analysis of financial
condition and results of operations.
Financial Statements
The preparation of these financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates. For a
further discussion of significant estimates and assumptions that affect the
reported amounts of assets and liabilities and results of operations, and
disclosure of contingent assets and liabilities, see the legal and environmental
issues section on page 28. Actual results could differ from management's
estimates.
Revenue Recognition
The Company recognizes revenues when goods are shipped.
Consolidation
The consolidated financial statements include the accounts of International
Paper Company and its subsidiaries. Minority interest represents minority
shareholders' proportionate share of the equity in several of the Company's
consolidated subsidiaries, primarily Carter Holt Harvey Limited, IP Timberlands,
Ltd. (IPT), Zanders Feinpapiere AG, Georgetown Equipment Leasing Associates,
L.P. and Trout Creek Equipment Leasing, L.P. All significant intercompany
balances and transactions are eliminated. Investments in affiliated companies
owned 20% to 50%, and the Company's investment in Scitex Corporation Ltd., where
the Company has the ability to exercise significant influence, are accounted for
by the equity method. The Company's share of affiliates' earnings is included in
the consolidated statement of earnings. The results of Carter Holt Harvey are
consolidated on a one-month-lag basis due to the availability of financial
information.
Temporary Investments
Temporary investments with an original maturity of three months or less are
treated as cash equivalents and are stated at cost, which approximates market.
Inventories
Inventory values include all costs directly associated with manufacturing
products: materials, labor and manufacturing overhead. These values are
presented at cost or market, if it is lower. In the United States, costs of raw
materials and finished pulp and paper products are generally determined using
the last-in, first-out method. Other inventories are primarily stated using the
first-in, first-out or average cost method.
Plants, Properties and Equipment
Plants, properties and equipment are stated at cost, less accumulated
depreciation. For financial reporting purposes, the Company uses the
units-of-production method for depreciating its major pulp and paper mills and
certain wood products facilities and the straight-line method for other plants
and equipment. Annual straight-line depreciation rates are buildings, 2 1/2% to
8 1/2%, and machinery and equipment, 5% to 33%. For tax purposes, depreciation
is computed utilizing accelerated methods.
Interest costs related to the development of certain long-term assets are
capitalized and amortized over the related assets' estimated useful lives. The
Company capitalized net interest costs of $62 million in 1997, $67 million in
1996 and $58 million in 1995. Interest payments made during 1997, 1996 and 1995
were $708 million, $658 million and $603 million, respectively. Total interest
expense was $593 million in 1997, $583 million in 1996 and $542 million in 1995.
Forestlands
The Company, which currently owns 84% and 100% of IPT's Class A and Class B
Units, respectively, controlled approximately 6.3 million acres of forestlands
in the United States and, through its ownership of Carter Holt Harvey,
approximately 845,000 acres of forestlands in New Zealand at December 31, 1997.
Forestlands are stated at cost, less accumulated depletion representing the cost
of timber harvested. Forestlands include owned property as well as certain
timber harvesting rights with terms of one or more years. Costs attributable to
timber are charged against income as trees are cut. The depletion rate charged
is determined annually based on the relationship of remaining costs to estimated
recoverable volume.
Amortization of Intangible Assets
Goodwill, the cost in excess of assigned value of businesses acquired, is
amortized for periods of up to 40 years. Accumulated amortization was $344
million and $296 million at December 31, 1997 and 1996, respectively.
Stock-Based Compensation
Stock options and other stock-based compensation awards are accounted for using
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Environmental Remediation Costs
Costs associated with environmental remediation obligations are accrued when
such costs are probable and reasonably estimable. Such accruals are adjusted as
further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are discounted to their
present value when the expected cash flows are reliably determinable.
Notes continued 39
Translation of Financial Statements
Balance sheets of the Company's international operations are translated into
U.S. dollars at year-end exchange rates, while statements of earnings are
translated at average rates. Adjustments resulting from financial statement
translations are included as cumulative translation adjustments in paid-in
capital. 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.
- --------------------------------
Note 2 Earnings Per Common Share
- --------------------------------
Earnings per common share were computed by dividing net earnings by the weighted
average number of common shares outstanding. Earnings per common share-assuming
dilution were computed assuming that all potentially dilutive securities were
converted into common shares at the beginning of each year.
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which did not have a
material effect on reported earnings per common share. A reconciliation of the
amounts included in the computation of earnings per common share and earnings
per common share-assuming dilution is as follows.
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Net earnings (loss) $ (151) $ 303 $ 1,153
Effect of dilutive securities
Convertible subordinated debentures 4
Preferred securities of subsidiary trust 7
-------- -------- ---------
Net earnings (loss)-assuming dilution $ (151) $ 303 $ 1,164
======== ======== =========
Average common shares outstanding 301.6 292.1 256.5
Effect of dilutive securities
Long-term incentive plan
deferred compensation (0.9) (0.9) (0.8)
Stock options 1.4 1.0
Convertible subordinated debentures 3.4
Preferred securities of subsidiary trust 3.8
-------- -------- ---------
Average common shares outstanding-
assuming dilution 300.7 292.6 263.9
======== ======== =========
Earnings (loss) per common share $ (.50) $ 1.04 $ 4.50
======== ======== =========
Earnings (loss) per common share-
assuming dilution $ (.50) $ 1.04 $ 4.41
======== ======== =========
Note: If an amount does not appear in the above table, the security has been
retired or was antidilutive for the period presented.
- -----------------------------------
Note 3 Industry Segment Information
- -----------------------------------
Financial information by industry segment and geographic area for 1997, 1996 and
1995 is presented on pages 26, 31 and 32.
- -------------------------------------
Note 4 Recent Accounting Developments
- -------------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," in June 1997.
This statement establishes standards for the reporting and display of
comprehensive income and its components and is effective for fiscal years
beginning after December 15, 1997. The Company will adopt the provisions of this
statement in the first quarter of 1998.
- -------------------------------
Note 5 Mergers and Acquisitions
- -------------------------------
In September 1997, the Company acquired Merbok Formtec, a company that has
pioneered the development of door facing products through postforming
medium-density fiberboard. In November 1997, the stock of Taussig Graphics
Supply, Inc. was acquired.
On March 12, 1996, the Company completed the merger with Federal Paper
Board (Federal), a diversified paper and forest products company. Under the
terms of the merger agreement, Federal shareholders received, at their election
and subject to certain limitations, either $55 in cash per share or a
combination of cash and International Paper common stock worth $55 for each
share of Federal common stock. Federal shares were acquired for approximately
$1.3 billion in cash and $1.4 billion in International Paper common stock, and
approximately $800 million of debt was assumed.
In August 1996, the Company acquired Forchem, a tall oil and turpentine
processor in Finland. In September 1996, Carter Holt Harvey acquired Forwood
Products, the timber-processing business of the South Australian Government.
In late April 1995, the Company acquired approximately 26% of Carter Holt
Harvey, a New Zealand-based forest and paper products company, for $1.1 billion.
The acquisition increased International Paper's ownership to just over 50%. As a
result, Carter Holt Harvey was consolidated into International Paper's financial
statements beginning on May 1, 1995. Prior to this date, the equity accounting
method was utilized. As a result of this consolidation, the Company's
consolidated cash and temporary investments balance increased by $241 million,
representing approximately 74% of Carter Holt Harvey's cash and temporary
investments balance as of the acquisition date. This is reflected in the
consolidated statement of cash flows as the consolidation of an equity
investment. The acquisition of Carter Holt Harvey is presented net of 26% of its
cash and temporary investments as of the acquisition date.
In January 1995, the assets of both Seaman-Patrick Company and Carpenter
Paper Company, two paper distribution companies, were acquired for approximately
988,000 shares of common stock. In September, Micarta, the high-pressure
laminates business of Westinghouse, was acquired. In October, the inks and
adhesives resin business of DSM, located in Niort, France, was acquired.
All of the 1997, 1996 and 1995 acquisitions were accounted for using the
purchase method. The operating results of these mergers and acquisitions have
been included in the consolidated statement of earnings from the dates of
acquisition.
40 Notes continued
- --------------------------------------
Note 6 Restructuring and Other Charges
- --------------------------------------
In June 1997, a $535 million pre-tax business improvement charge ($385
million after taxes) was recorded under a plan to improve the Company's
financial performance through closing or divesting of operations that no
longer meet financial or strategic objectives. It included approximately $230
million for asset write-downs, $210 million for the estimated losses on sales
of businesses and $95 million for severance and other expenses. Annual
improvement in pre-tax earnings of approximately $100 million is expected by
the end of 1998.
The $230 million write-down of assets that International Paper recorded in the
second quarter of 1997 consisted primarily of write-downs associated with assets
to be sold or shut down as follows (in millions):
Shutdown of European Papers facilities (a) $105
Shutdown of U.S. Papers and Fine Papers facilities (b) 101
Write-off of Haig Point real estate development (c) 13
Other shutdowns 11
--------
$230
--------
--------
(a) In the second quarter of 1997, management committed to sell the
Lancey, France, mill to an employee group. The Company wrote down the net
carrying amount of the mill at June 30, 1997 by $65 million and recorded a
liability of $30 million. The sale closed in October 1997. Lancey had 1997
operating losses of $7 million through the sale date. The Corimex, France,
mill produces coated thermal fax paper, which is a market that weakened in
the mid-1990's. During the second quarter of 1997, management concluded that
it would continue to operate this mill but that the assets were impaired.
Based on an analysis of expected future cash flows completed in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of",
(SFAS No. 121), the Company reduced the carrying value of the Corimex mill
from $12 million to $2 million, resulting in a $10 million charge. Corimex
had operating losses of $2 million during 1997.
(b) The $101 million reserve related to the restructuring of the Fine Papers
manufacturing operations in the Northeast ($51 million) and the shutdown of the
deinking facility at the Lock Haven, Pa., mill ($50 million). The restructuring
of the Fine Papers operations included the shutdown of the Woronoco, Ma.,
paper mill and three small paper machines at the Erie, Pa., mill. In the 1997
second quarter, we decided to close the deinking facility. Given that each of
these actions represented the permanent shutdown of equipment or facilities,
International Paper wrote-down the net carrying amount of the assets to zero.
(c) The Company is the developer of a residential golf community named Haig
Point at Daufuskie Island, S.C. As the developer, International Paper was
responsible for operating this community until a specified number of lots were
sold, at which time it would turn the community over to the homeowners. The net
book value of our investment in Haig Point was $13 million at June 30, 1997.
Given the continuing operating losses, $5 million in 1997, an updated marketing
study, and the inability to find a buyer for this investment, we concluded that
the investment was permanently impaired and wrote it down to zero.
The $210 million loss that the Company recorded in connection with sales or
anticipated sales related to the following businesses (in millions):
Imaging (a) $150
Veratec (b) 25
Decorative Products (c) 20
Label (d) 15
--------
$210
--------
--------
(a) The Company decided to sell its Imaging businesses in the second quarter of
1997. Based on discussions with its investment banker and meetings with
potential buyers, the Company believed that the most likely outcome was to
realize approximately $325 million. The Company established a
reserve of $150 million which represented the estimated loss on the sale of the
Imaging businesses. The Company expected to complete the sale of the Imaging
businesses within one year. The Imaging businesses had operating earnings of
$9 million during 1997.
(b) The Veratec division had developed a business that was based on an interspun
technology for treating fabrics. The net carrying value of this business was $25
million at June 30, 1997. In June 1997, the Company decided to shut down this
business and recorded a reserve of $25 million. Prior to the shutdown, this
business had an operating loss of $7 million in 1997.
(c) In the second quarter of 1997, management decided to sell the medium-density
fiberboard, low-pressure laminates and particleboard businesses. The Company
estimated the expected sales prices for each of these businesses and recorded a
reserve of $20 million to reduce the net carrying amounts to these levels. The
Company expected to complete the sales of these businesses within one year.
These businesses had operating losses of $1 million during 1997.
(d) In the second quarter of 1997, management committed to a plan to sell the
label business. The estimated loss on the label business sale included in the
second-quarter 1997 restructuring charge was $15 million. The Company expected
to complete the sale of the label business within one year. The label business
had an operating loss of $2 million during 1997.
The $95 million of severance and other expenses consists of the following (in
millions):
Severance (a) $42
Write-off of deferred software costs (b) 18
Lease buyouts at warehouses (c) 9
Write-off of deinking process license (d) 4
Other exit costs (e) 22
-----------
$95
-----------
-----------
(a) The $42 million severance charge relates to programs initiated and
approved in the 1997 second quarter in the U.S. and European Papers,
Industrial and Consumer Packaging segments and corporate staff groups to
reduce headcount by 3,015 employees under the Company's existing ongoing
severance plans. We recorded the charge in the second quarter as (1)
management had committed to the plan of termination, (2) the benefit
arrangement had been communicated to the employees, (3) the number of
employees, their functions and locations had been identified, and (4) all
terminations would be completed within one year. As of December 31, 1997,
1,137 employees had been terminated under these programs.
(b) The $18 million charge for the write-off of deferred software costs relates
to two items as follows: (1) during the 1997 second quarter, the Company decided
to abandon a human resources software project for which $11 million of deferred
software costs had been recorded and (2) as a result of the decision to sell
certain businesses in the second quarter of 1997, the Company decided to
terminate enterprise software projects in these businesses, for which it had
recorded $7 million of deferred software costs.
(c) The $9 million charge represents the cost to buy out obligations under
existing warehouse leases. The Company decided to close these warehouses in the
second quarter of 1997.
(d) The $4 million charge represents the write-off of the net carrying value of
the deinking process license that the Company acquired from a third party.
International Paper permanently shut down this operation in the 1997 second
quarter. Accordingly, it wrote the license down to zero.
(e) The charge of $22 million relates to other exit costs.
In December 1997, an additional pre-tax charge of $125 million ($80 million
after taxes) was recorded for anticipated losses associated with the sale of the
remaining Imaging businesses. Such amount was determined after consideration of
the sales of certain of the Imaging businesses that had been completed and the
estimated proceeds from the businesses remaining to be sold.
The following table is a roll forward of the 1997 restructuring plan (in
millions):
Severance
And Other
---------
Opening Balance
(second quarter 1997) $ 95
1997 Activity
Writedown assets (18)
Cash charges (15)
-----
Balance, December 31, 1997 $ 62
-----
-----
The $62 million balance represents remaining reserves to complete the
1997 restructuring plan including severance, lease payments and other exit
costs.
Also in June 1997, we recorded a $150 million pre-tax charge ($93
million after taxes) to add to our legal reserves. On July 14, 1997, Masonite
Corporation, a wholly owned subsidiary, announced that it had reached a
proposed settlement in a class action pending in Mobile County, Alabama. The
Company believes its legal reserves are adequate to cover any amounts to be
paid pursuant to the proposed settlement, which is now final. See Note 11 for
a further discussion of this legal settlement.
In the first quarter of 1996, management initiated several actions to
restructure and strengthen existing businesses that resulted in a pre-tax charge
to earnings of $515 million ($362 million after taxes). The charge included $305
million for the write-down of certain assets, $100 million for asset impairments
(related to the adoption of the provisions of SFAS No. 121), $80 million in
associated severance costs and $30 million of other expenses, including the
cancellation of leases.
The major components of the $305 million asset write-down were as follows (in
millions):
Consolidation and shutdown of Imaging facilities (a) $192
Shutdown of Cordele OSB composite siding business (b) 43
Write-off of Georgetown recovery unit (c) 25
Shutdown of Veratec facilities (d) 19
Impairment of INTAMASA business (e) 15
Other shutdowns 11
--------
$305
--------
--------
(a) In the first quarter of 1996, management decided to consolidate the Imaging
division's manufacturing and sales operations, which resulted in a write-down of
the assets associated with these facilities. The planned facility shutdowns
included the Swiss manufacturing plants, the Lyon, France, facility and several
European sales companies. As the Company was planning to close these facilities,
it determined the fair value to be zero. In addition, the Company determined
that the long-lived assets associated with its Binghamton, N.Y., Holyoke, Ma.,
and several U.K. facilities were impaired based on an analysis of future cash
flows from these businesses. The cash flow analysis, which was completed in
accordance with SFAS No. 121, indicated that future cash flows from these
operations would be break-even and, accordingly, the Company wrote down the
long-lived assets to their estimated fair value of zero. The Imaging division
had operating earnings of $1 million during 1996.
(b) International Paper's Cordele, Ga., facility produced both oriented strand
board substrate and composite wood siding. The carrying amount of the equipment
related solely to the manufacture of composite wood siding was $43 million. The
Company decided to stop manufacturing composite wood siding and to exit this
business. As we shut down the equipment, the assets' fair values were determined
to be zero.
(c) In the first quarter of 1996, the Company permanently closed an enhanced
kraft recovery unit in its Georgetown, S.C., facility because of its failure to
operate effectively. The carrying amount of this asset was $25 million. As the
equipment was shut down, the Company determined its fair value to be zero.
(d) The Company permanently closed its Veratec Belgium facility and 5 thermal
bond machines in its Lewisburg, Ky., facility during the first quarter of 1996.
The carrying amounts of these assets were $12 million and $7 million,
respectively. As these facilities and machines were being closed, the Company
determined their fair value to be zero.
(e) In the first quarter of 1996, the Company committed to sell the Masonite
INTAMASA business located in Cella, Spain. The Company wrote down its carrying
amount of $41 million to $26 million, which represented the estimated selling
price of this business. This business had operating earnings of $3 million
during 1996.
In the first quarter of 1996, International Paper recorded an impairment
charge of $100 million consisting of the following (in millions):
Gardiner mill (a) $42
Hardboard siding facilities (b) 26
Mineral deposits (c) 14
Haig Point real estate development (d) 8
Other 10
-----------
$100
-----------
-----------
(a) The Gardiner, Ore., mill produces containerboard and is the Company's
only West Coast mill. In early 1996, management announced an extended
shutdown of the mill. As a result of the shutdown, International Paper
determined that a triggering event had occurred, and wrote down the mill's
assets to the estimated fair value.
(b) The Masonite division had hardboard siding operations at its Laurel,
Miss., Towanda, Pa., and Ukiah, Calif., plants. Based on expected declines in
demand, management believed that a triggering event under SFAS No. 121 had
occurred in the first quarter of 1996. The Company would continue to hold and
use these assets, but it projected that the future cash flows of this
business would be negative. Accordingly, it wrote down the $26 million
carrying amount of these assets to zero.
(c) The Petroleum and Minerals division had two mineral investments that it
determined to be impaired in the first quarter of 1996. First, based on a
consultant's analysis, the Company estimated the value of its lignite reserves
to be $3 million, thereby requiring a write-down of $11 million. Second, an
analysis of its zinc reserves indicated a fair value of $500,000, requiring a
write-down of $3 million. The triggering event for these write-downs was the
analysis of these reserves on a stand-alone basis.
(d) International Paper holds an investment in a residential golf community
named Haig Point at Daufuskie Island, S.C. As the developer, the Company is
responsible for operating this community until a specified number of lots have
been sold, at which time it would turn the community over to the homeowners. The
net book value of the Company's investment in Haig Point was $21 million at
December 31, 1995. The Company concluded in the first quarter of 1996 that its
investment was impaired. The triggering event was the analysis of the 1995
results and the 1996 forecast combined with the decision to sell this business.
Haig Point's estimated fair value was $13 million, resulting in an $8 million
charge.
The Company's 1996 charge included $80 million of severance costs. The charge
relates to programs initiated and approved in the first quarter of 1996 to
reduce headcount by 1,955 employees under our existing ongoing severance plan.
The businesses impacted by this charge include Imaging ($45 million), Veratec
($12 million), Zanders ($10 million), and corporate staff groups and other
businesses ($13 million). Under this plan, there have been headcount reductions
of 1,595 employees through December 31, 1997.
The Company's 1996 charge also included $30 million of other expenses. The major
components of this charge were the lease termination costs incurred by the
Imaging businesses as a result of the decision to close several European
locations. The lease termination costs resulted from the termination of leases
in London, the U.K. depot facilities, and the Benelux and Germany sales offices.
The following is a roll forward of the 1996 restructuring and impairment program
(in millions):
Severance
And Other
---------
Opening Balance
(first quarter 1996) $ 110
1996 and 1997 Activity
Cash charges (78)
-----
Balance, December 31, 1997 $ 32
-----
-----
The $32 million balance represents remaining reserves to complete the 1996
restructuring plan including primarily severance and lease buyout reserves.
In the fourth quarter of 1996, a $155 million pre-tax charge ($99 million
after taxes) was recorded for the write-down of the investment in Scitex to
current market value, and a $10 million pre-tax charge ($6 million after
taxes) was recorded for the Company's share of a restructuring charge
announced by Scitex in November 1996. At such time, the Company determined
that its investment in Scitex of 5.7 million shares was permanently impaired
and began efforts to dispose of its investment.
- ---------------------------------------------------------
Note 7 Gains on Sales of West Coast Partnership Interests
- ---------------------------------------------------------
On March 29, 1996, IP Timberlands Ltd. (IPT) completed the sale of a 98% general
partnership interest in a subsidiary partnership that owns approximately 300,000
acres of forestlands located in Oregon and Washington. Included in the net
assets of the partnership interest sold were forestlands, roads and $750 million
of long-term debt. As a result of this transaction, International Paper
recognized in its 1996 first-quarter consolidated results a $592 million pre-tax
gain ($336 million after taxes and minority interest expense or $1.25 per
share). IPT and International Paper retained nonoperating interests in the
partnership. In December 1997, these retained interests were redeemed and a
related debt guaranty was released resulting in a pre-tax gain of $170 million
($97 million after taxes and minority interest expense or $.32 per share).
- -----------------------------------------
Note 8 Preferred Securities of Subsidiary
- -----------------------------------------
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. Preferred securities distributions of $24 million were paid in
each of the years 1997 and 1996, and $10 million was paid in 1995.
- --------------------------------------------
Note 9 Sale of Limited Partnership Interests
- --------------------------------------------
During 1993, the Company contributed assets with a fair market value of
approximately $900 million to two newly formed limited partnerships, Georgetown
Equipment Leasing Associates, L.P. and Trout Creek Equipment Leasing, L.P. These
partnerships are separate and distinct legal entities from the Company and have
separate assets, liabilities, business functions and operations. However, for
accounting purposes, the Company continues to consolidate these assets, and the
minority shareholders' interests are reflected as minority interest in the
accompanying financial statements. The purpose of the partnerships is to invest
in and manage a portfolio of assets including pulp and paper equipment used at
the Georgetown, S.C., and Ticonderoga, N.Y., mills. This equipment is leased to
the Company under long-term leases. Partnership assets also include floating
rate notes, debentures and cash. During 1993, outside investors purchased a
portion of the Company's limited
Notes continued 41
partner interests for $132 million and also contributed an additional $33
million to one of these partnerships.
At December 31, 1997, the Company held aggregate general and limited
partner interests totaling 83.5% in Georgetown Equipment Leasing Associates,
L.P. and 81.4% in Trout Creek Equipment Leasing, L.P. The Company also held $439
million and $378 million of borrowings at December 31, 1997 and 1996,
respectively, from these partnerships. These funds are being used for general
corporate purposes.
- --------------------
Note 10 Income Taxes
- --------------------
The Company uses the asset and liability method of accounting for income taxes
whereby deferred income taxes are recorded for the future tax consequences
attributable to differences between the financial statement and tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured using
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Deferred tax
assets and liabilities are revalued to reflect new tax rates in the periods rate
changes are enacted.
The components of earnings before income taxes and minority interest, and
the provision for income taxes by taxing jurisdiction were:
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Earnings (loss)
U.S $ (40) $ 815 $ 1,565
Non-U.S 56 (13) 463
======= ======= =======
Earnings before income
taxes and minority interest $ 16 $ 802 $ 2,028
======= ======= =======
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Current tax provision
U.S. federal $ 84 $ 158 $ 380
U.S. state and local 8 1 88
Non-U.S 36 64 105
------- ------- -------
128 223 573
======= ======= =======
Deferred tax provision (benefit)
U.S. federal (49) 146 141
U.S. state and local (42) (3) (6)
Non-U.S 1 (36) 11
------- ------- -------
(90) 107 146
------- ------- -------
Income tax provision $ 38 $ 330 $ 719
======= ======= =======
The Company made income tax payments of $179 million, $286 million and $413
million in 1997, 1996 and 1995, respectively.
A reconciliation of income tax expense using the statutory U.S. income
tax rate compared with the Company's actual income tax expense follows:
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Earnings before income taxes
and minority interest $ 16 $ 802 $ 2,028
Statutory U.S. income tax rate 35% 35% 35%
------- ------- -------
Tax expense using
statutory U.S. income tax rate 6 281 710
State and local income taxes (22) (1) 53
Non-U.S. tax rate differences 34 37 (45)
Nondeductible business expenses 52 7 20
Foreign sales corporation benefit (21) (6) (19)
Minority interest (23) (37) (32)
Goodwill 19 21 8
Net U.S. tax on non-U.S. dividends 11 54 3
Tax credits (7) (23) (5)
Other, net (11) (3) 26
------- ------- -------
Income tax provision $ 38 $ 330 $ 719
------- ------- -------
Effective income tax rate 238% 41% 35.5%
======= ======= =======
The net deferred income tax liability as of December 31, 1997 and 1996 includes
the following components:
In millions 1997 1996
- --------------------------------------------------------------------------------
Current deferred tax asset $ 238 $ 107
Noncurrent deferred tax liability(1) (2,522) (2,576)
------- -------
Total $(2,284) $(2,469)
======= =======
(1) Net of $159 million and $192 million at December 31, 1997 and 1996,
respectively, of noncur rent deferred tax assets.
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1997 and 1996 were as follows:
In millions 1997 1996
- --------------------------------------------------------------------------------
Plants, properties and equipment $(2,325) $(2,332)
Prepaid pension costs (326) (299)
Forestlands (650) (622)
Postretirement benefit accruals 169 174
Alternative minimum and other tax credits 217 173
Non-U.S. net operating losses 132 148
Other 499 289
------- -------
Total $(2,284) $(2,469)
======= =======
The Company had net operating loss carryforwards applicable to non-U.S.
subsidiaries of which $182 million expire in years 1998 through 2006 and $243
million can be carried forward indefinitely.
Deferred taxes are not provided for temporary differences of approximately
$353 million, $361 million and $501 million as of December 31, 1997, 1996 and
1995, respectively, representing earnings of non-U.S. subsidiaries that are
intended to be permanently reinvested. If these earnings were remitted, the
Company believes that U.S. foreign tax credits would eliminate any significant
impact on future income tax provisions.
- ----------------------------------------------
Note 11 Commitments and Contingent Liabilities
- ----------------------------------------------
The Company leases certain property, machinery and equipment under cancelable
and noncancelable lease agreements. At December 31, 1997, total future minimum
rental commitments under noncancelable leases were $480 million, due as follows:
42 Notes continued
1998-$131 million, 1999-$106 million, 2000-$83 million, 2001-$57 million,
2002-$43 million and thereafter-$60 million. Rent expense was $210 million, $198
million and $159 million for 1997, 1996 and 1995, respectively.
A nationwide class-action lawsuit filed against the Company and Masonite
Corporation, a wholly owned subsidiary, has been settled. This lawsuit alleged
that hardboard siding manufactured by Masonite fails prematurely, allowing
moisture intrusion that in turn causes the failure of the structure underneath
the siding. The class consists of all U.S. homeowners having Masonite hardboard
siding installed on and incorporated into buildings between 1980 and January 15,
1998.
Final approval of the settlement was granted by the Court on January 15,
1998. The settlement provides for monetary compensation to class members meeting
the settlement requirements on a claims-made basis. It also provides for the
payment of attorneys' fees equaling 15% of the settlement amounts paid to class
members, with a nonrefundable advance of $47.5 million plus $2.5 million in
costs. While the total cost of the settlement is not presently known with
certainty, the Company believes that it will not have a material adverse effect
on its consolidated financial position or results of operations. The Company and
Masonite have the right to terminate this settlement after seven years from the
date of final approval.
The Company is also involved in various other inquiries, administrative
proceedings and litigation relating to contracts, sales of property,
environmental protection, tax, antitrust and other matters, some of which allege
substantial monetary damages. While any proceeding or litigation has the element
of uncertainty, the Company believes that the outcome of any lawsuit or claim
that is pending or threatened, or all of them combined, will not have a material
adverse effect on its consolidated financial position or results of operations.
- -----------------------------------------------
Note 12 Supplementary Balance Sheet Information
- -----------------------------------------------
Inventories by major category were:
In millions at December 31 1997 1996
- --------------------------------------------------------------------------------
Raw materials $ 478 $ 552
Finished pulp, paper and packaging
products 1,466 1,400
Finished lumber and panel products 160 215
Operating supplies 387 397
Other 269 276
------ ------
Inventories $2,760 $2,840
====== ======
The Company uses the last-in, first-out inventory method to value substantially
all of its domestic inventories. Approximately 74% of the Company's total raw
materials and finished products inventories were valued using this method. If
the first-in, first-out method had been used, it would have increased total
inventory balances by approximately $253 million, $228 million and $227 million
at December 31, 1997, 1996 and 1995, respectively.
Plants, properties and equipment by major classification were:
In millions at December 31 1997 1996
- --------------------------------------------------------------------------------
Pulp, paper and packaging facilities
Mills $16,361 $16,386
Packaging plants 1,452 1,620
Wood products facilities 1,869 1,914
Other plants, properties and equipment 2,645 2,811
------- -------
Gross cost 22,327 22,731
Less: Accumulated depreciation 9,958 9,514
------- -------
Plants, properties and equipment, net $12,369 $13,217
======= =======
- --------------------------------
Note 13 Debt and Lines of Credit
- --------------------------------
A summary of long-term debt follows:
In millions at December 31 1997 1996
- --------------------------------------------------------------------------------
8 7/8% to 10.5% notes-due 1998-2012 $ 653 $ 325
8 7/8% to 9.7% notes-due 2000-2004 600 600
8 3/8% to 9 1/2% debentures-due 2015-2024 300 300
6 7/8% to 7 7/8% notes-due 2000-2007 1,223 1,223
6 7/8% to 8 1/8% notes-due 2023-2024 545 545
6 1/8% notes-due 2003 199 199
5 7/8% Swiss franc debentures-due 2001 80 88
5 1/8% debentures-due 2012 84 82
Floating rate notes-due 1999(1) 450 450
Medium-term notes-due 1998-2009(2) 622 664
Environmental and industrial development
bonds-due 1998-2021(3),(4) 1,036 981
Commercial paper and bank notes(5) 1,094 727
Other(6) 479 814
------ ------
Total(7) 7,365 6,998
Less: Current maturities 211 307
------ ------
Long-term debt $7,154 $6,691
====== ======
(1) The weighted average interest rate on these notes was 6.2% in 1997 and
1996 and is based on LIBOR.
(2) The weighted average interest rate on these notes was 7.4% in 1997 and
7.5% in 1996.
(3) The weighted average interest rate on these bonds was 5.8% in 1997 and
1996.
(4) Includes $315 million of bonds at December 31, 1997 and $323 million at
December 31, 1996, which may be tendered at various dates and/or under
certain circumstances.
(5) Includes $321 million in 1997 of non-U.S. dollar-denominated borrowings
with a weighted average interest rate of 5.9% in 1997.
(6) Includes $41 million in 1997 and $60 million in 1996 of French franc
borrrowings with a weighted average interest rate of 3.0% in 1997 and 3.2%
in 1996, and $179 million in 1997 and $218 million in 1996 of German mark
borrowings with a weighted average interest rate of 5.5% in 1997 and 6.7%
in 1996.
(7) The fair market value was approximately $7.8 billion and $7.3 billion at
December 31, 1997 and 1996, respectively.
Total maturities of long-term debt over the next five years are 1998-$211
million, 1999-$885 million, 2000-$1.2 billion, 2001-$555 million and 2002-$1.2
billion.
At December 31, 1997 and 1996, the Company, including a non-U.S.
subsidiary, classified $1.4 billion and $1.1 billion, respectively, of
tenderable bonds, commercial paper and bank notes as long-term debt. The Company
and this subsidiary have the intent and ability to renew or convert these
obligations through 1998 and into future periods.
At December 31, 1997, the Company had unused bank lines of credit of
approximately $1.7 billion. The lines generally provide for interest at market
rates plus a margin based on the Company's current bond rating. The principal
line, which is cancelable only if the Company's bond rating drops below
investment grade, provides for $750 million of credit through January 2000, and
has a facility fee of .10% that is payable quarterly. A non-U.S. subsidiary of
the
Notes continued 43
Company also has two principal lines of credit that support its commercial paper
programs. A $600 million line of credit matures in April 2002 and has a .15%
facility fee that is payable quarterly, and a 250 million New Zealand dollar
line of credit matures in February 2002 and has a .13% facility fee that is
payable quarterly.
At December 31, 1997, notes payable classified as current liabilities
included $2.0 billion of non-U.S. dollar-denominated debt with a weighted
average interest rate of 5.6%.
At December 31, 1997, the Company's total outstanding debt included
approximately $3.1 billion of borrowings with interest rates that fluctuate
based on market conditions and the Company's credit rating.
Through a public tender offer in the 1997 third quarter, the Company's
wholly owned subsidiary, Federal Paper Board, repurchased $164 million of its
10% debentures due April 15, 2011. The earnings impact of the debt retirement
was not significant.
In July 1995, 5 3/4% convertible debentures were called by the Company and
converted into 5.8 million shares of common stock.
- -----------------------------
Note 14 Financial Instruments
- -----------------------------
The Company uses financial instruments primarily to hedge its exposure to
currency and interest rate risk. To qualify as hedges, financial instruments
must reduce the currency or interest rate risk associated with the related
underlying items and be designated as hedges by management. Gains or losses from
the revaluation of financial instruments that do not qualify for hedge
accounting treatment are recognized in earnings.
The Company has a policy of financing a portion of its investments in
overseas operations with borrowings denominated in the same currency as the
investment or by entering into foreign exchange contracts in tandem with U.S.
dollar borrowings. These contracts are effective in providing a hedge against
fluctuations in currency exchange rates. Gains or losses from the revaluation of
these contracts, which are fully offset by gains or losses from the revaluation
of the net assets being hedged, are determined monthly based on published
currency exchange rates and are recorded as translation adjustments in common
shareholders' equity. Upon liquidation of the net assets being hedged or early
termination of the foreign exchange contracts, the gains or losses from the
revaluation of foreign exchange contracts 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.
Non-U.S. dollar-denominated debt totaling $2.7 billion was outstanding at
December 31, 1997. Also outstanding were foreign exchange contracts totaling
$1.2 billion, all having maturities of less than 360 days, as follows: New
Zealand dollars, $687 million; Australian dollars, $203 million; Irish punts,
$128 million; Italian lira, $48 million; Swiss francs, $76 million; and British
pounds, $36 million. In addition, a non-U.S. subsidiary of the Company had
outstanding foreign exchange contracts totaling $378 million that were
denominated in U.S. dollars. The average amount of outstanding contracts during
1997 and 1996 was $1.7 billion and $1.9 billion, respectively.
The Company also utilizes foreign 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 the Company from currency fluctuations between the transaction and
settlement dates. Gains and losses from the revaluation of these contracts,
based on published currency exchange rates, along with offsetting gains and
losses resulting from the revaluation of the underlying transactions, are
recognized in earnings or deferred and recognized in the basis of the underlying
transaction when completed. Any gains or losses arising from the cancellation of
the underlying transactions or early termination of the foreign currency
contracts would be included in earnings.
At December 31, 1997, foreign exchange contracts totaling $407 million,
all having maturities of less than 12 months, were outstanding as follows:
Belgian francs, $112 million; Australian dollars, $107 million; Dutch guilders
$68 million; french francs, $42 million; British pounds, $22 million; and
contracts totaling $56 million in 12 different currencies. Non-U.S. subsidiaries
of the Company also had contracts outstanding of $287 million that were
denominated in U.S. dollars. The average amount of outstanding contracts during
1997 and 1996 was $726 million and $583 million, respectively.
The Company uses cross-currency and interest rate swap agreements to
manage the composition of its fixed and floating rate debt portfolio. Amounts to
be paid or received as interest under these agreements are recognized over the
life of the swap agreements as adjustments to interest expense. Gains or losses
from the revaluation of cross-currency swap agreements that qualify as hedges of
investments are recorded as translation adjustments in common shareholders'
equity. Gains or losses from the revaluation of cross-currency swap agreements
that do not qualify as hedges of investments are included in earnings. The
related amounts payable to or due from the counterparties to the agreements are
included in accrued liabilities or accounts receivable as applicable. If swap
agreements are terminated early, the resulting gain or loss would be deferred
and amortized over the remaining life of the related debt.
During 1996, the Company entered into interest rate swap agreements
maturing in 1998 and 1999 under which it will receive interest at floating rates
and pay interest at fixed rates based on a principal amount of $575 million.
Also, in 1994, the Company entered into interest rate swap agreements involving
the exchange of fixed or floating rate interest payments, without changing the
underlying principal amounts, related to $600 million and $400 million of
long-term debt having maturities ranging from 10 to 30 years.
44 Notes Continued
A non-U.S. subsidiary of the Company also uses cross-currency and interest
rate swap agreements to manage the composition of its fixed and floating rate
debt. Under a cross-currency agreement entered into in 1996 and maturing in
2002, the subsidiary will receive $150 million and will pay 203 million
Australian dollars. Interest is receivable at 7 5/8% and payable at floating
rates. During 1997, the non-U.S. subsidiary entered into 12 interest rate swap
agreements totaling 145 million New Zealand dollars and 150 million Australian
dollars under which it will receive interest at floating rates and pay interest
at fixed rates. These swap agreements mature from 1998 through 2002. During
1996, the subsidiary entered into an interest rate swap agreement maturing in
1999 under which it will receive interest at floating rates and pay interest at
fixed rates based on a principal amount of 65 million Australian dollars. Also
outstanding at December 31, 1997 was an interest rate swap agreement maturing in
1998 under which the subsidiary will receive interest at floating rates and pay
interest at fixed rates based on a principal amount of 100 million Australian
dollars, and two agreements maturing in 2004 under which the subsidiary will
receive interest at fixed rates and pay interest at floating rates based on a
combined principal amount of $250 million.
The impact on earnings and the Company's net liability under these
agreements were not significant.
The Company does not hold or issue financial instruments for trading
purposes.
The counterparties to the Company's interest rate swap agreements and
foreign exchange contracts consist of a number of major international financial
institutions. The Company continually monitors its positions with and the credit
quality of these financial institutions and does not expect nonperformance by
the counterparties.
- ---------------------
Note 15 Capital Stock
- ---------------------
The authorized capital stock of the Company at December 31, 1997 and 1996
consisted of 400,000,000 shares of common stock, $1 par value; 400,000 shares of
cumulative $4 nonredeemable preferred stock, without par value (stated value of
$100 per share); and 8,750,000 shares of serial preferred stock, $1 par value.
The serial preferred stock is issuable in one or more series by the Board of
Directors without further shareholder action.
In the third quarter of 1995, the Company declared a two-for-one common
stock split that was distributed to shareholders of record as of August 18,
1995. All share amounts have been retroactively adjusted for the effect of the
common stock split. In addition, the quarterly dividend was raised $.04 to $.25
per common share on a split-adjusted basis.
The Company has stock rights under a Shareholder Rights Plan whereby each
share of common stock has one right. Each right entitles shareholders to
purchase one common stock share at an exercise price of $77.50. The rights will
become exercisable 10 days after anyone acquires or tenders for 20% or more of
the Company's common stock. If, thereafter, anyone acquires 30% or more of the
common stock, or a 20% or more owner combines with the Company in a reverse
merger in which the Company survives and its common stock is not changed, each
right will entitle its holder to purchase Company common stock with a value of
twice the $77.50 exercise price. If, following an acquisition of 20% or more of
the common stock, the Company is acquired in a merger or sells 50% of its assets
or earnings power, each right will entitle its holder to purchase stock of the
acquiring company with a value of twice the $77.50 exercise price.
- ------------------------
Note 16 Retirement Plans
- ------------------------
The Company maintains pension plans that provide retirement benefits to
substantially all employees. Employees generally are eligible to participate in
the plans upon completion of one year of service and attainment of age 21.
The plans provide defined benefits based on years of credited service and
either final average earnings (salaried employees), hourly job rates or
specified benefit rates (hourly and union employees).
U.S. Defined Benefit Plans
The Company makes contributions that are sufficient to fully fund its
actuarially determined costs, generally equal to the minimum amounts required by
ERISA.
Net periodic pension income for the Company's qualified and nonqualified
defined benefit plans comprised the following:
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost-benefits earned
during the period $ (62) $ (61) $ (39)
Interest cost on projected benefit
obligation (205) (192) (170)
Actual return on plan assets 542 372 477
Net amortization and deferrals (200) (47) (193)
----- ----- -----
Net periodic pension income $ 75 $ 72 $ 75
===== ===== =====
The actuarial assumptions used in determining net periodic pension income
for the years presented were:
1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate 7.5% 7.25% 8.75%
Expected long-term return on
plan assets 10.0% 10.0% 10.0%
Weighted average rate of increase
in compensation levels 4.5% 4.25% 4.75%
The discount rates and the rates of increase in future compen sation levels used
to determine the projected benefit obligations at December 31, 1997 were 7.25%
and 4.5%, respectively, and at December 31, 1996 were 7.5% and 4.5%,
respectively.
The following table presents the funded status of the Company's U.S.
pension plans and the amounts reflected in the accompanying consolidated balance
sheet:
Notes continued 45
In millions at December 31 1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Vested benefits $ 2,594 $ 2,420
------- -------
Accumulated benefit obligation $ 2,716 $ 2,558
------- -------
Projected benefit obligation(1) $ 2,945 $ 2,745
Plan assets at fair value 3,729 3,355
------- -------
Plan assets in excess of projected
benefit obligation 784 610
Unrecognized net (gain) loss (42) 92
Balance of unrecorded transition asset(2) (28) (55)
Other 60 42
------- -------
Prepaid pension cost $ 774 $ 689
======= =======
(1) Includes nonqualified unfunded plans with projected benefit obligations of
approximately $77 million and $76 million at December 31, 1997 and 1996,
respectively.
(2) Amortization of the transition asset, which increases annual net periodic
pension income, will be completed in 1999.
Plan assets are held primarily in master trust accounts and comprise the
following:
In millions at December 31 1997 1996
- --------------------------------------------------------------------------------
Cash reserves $ 266 $ 44
Fixed income securities 1,002 1,159
Diversified equities 1,675 1,449
International Paper common stock 449 422
Real estate 156 117
Other 181 164
------ ------
Total plan assets $3,729 $3,355
====== ======
Non-U.S. Defined Benefit Plans
Generally, the Company's non-U.S. pension plans are funded using the projected
benefit as a target, except in certain countries where funding of benefit plans
is not required. Net periodic pension expense for the Company's non-U.S. pension
plans was immaterial for 1997, 1996 and 1995.
The following table presents the funded status of the Company's non-U.S.
pension plans and the amounts reflected in the accompanying consolidated balance
sheet. Plan assets are composed principally of common stocks and fixed income
securities.
In millions at December 31 1997(2) 1996
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Vested benefits $ 138 $ 367
----- -----
Accumulated benefit obligation $ 149 $ 382
----- -----
Projected benefit obligation(1) $ 168 $ 473
Plan assets at fair value 124 511
----- -----
Plan assets in excess of projected
benefit obligation (44) 38
Unrecognized net (gain) loss 6 (12)
Balance of unrecorded transition asset (1) (34)
Other 2 4
----- -----
Pension liability $ (37) $ (4)
===== =====
(1) The weighted average discount rate and the weighted average rate of
compensation increase used to measure the projected benefit obligation
were 6.67% (7.08% in 1996) and 4.45% (4.99% in 1996), respectively.
(2) Benefit obligations and plan assets declined in 1997 and the resulting
pension liability increased primarily due to the sale of the imaging
businesses whose U.K. plans were fully funded.
Other Plans
The Company sponsors several defined contribution plans to provide substantially
all U.S. salaried and certain hourly employees of the Company an opportunity to
accumulate personal funds for their retirement. Contributions may be made on a
before-tax basis to substantially all of these plans.
As determined by the provisions of each plan, the Company matches the
employees' basic voluntary contributions. Company matching contributions to the
plans were approximately $46 million, $42 million and $38 million for the plan
years ending in 1997, 1996 and 1995, respectively. The net assets of these plans
approximated $2.0 billion as of the 1997 plan year-end.
- -------------------------------
Note 17 Postretirement Benefits
- -------------------------------
The Company provides certain retiree health care and life insurance benefits
covering a majority of U.S. salaried and certain hourly employees. Employees are
generally eligible for benefits upon retirement and completion of a specified
number of years of creditable service. A plan amendment in 1992 limits the
maximum annual Company contribution for health care benefits for retirees after
January 1, 1992 based on age at retirement and years of service after age 50.
Amortization of this plan amendment, which reduces annual net postretirement
benefit cost, will be completed in 1999. The Company does not prefund these
benefits and has the right to modify or terminate certain of these plans in the
future.
The components of postretirement benefit expense in 1997, 1996 and 1995
were as follows:
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost-benefits earned
during the period $ 6 $ 7 $ 6
Interest cost on accumulated
postretirement benefit obligation 24 25 26
Net amortization of plan
amendments (20) (17) (18)
---- ---- ----
Net postretirement benefit cost $ 10 $ 15 $ 14
==== ==== ====
The accumulated postretirement benefit obligation, included in other
liabilities in the accompanying consolidated balance sheet, comprises the
following components:
In millions at December 31 1997 1996
- --------------------------------------------------------------------------------
Retirees $ 264 $ 251
Fully eligible active plan participants 20 22
Other active plan participants 60 85
----- -----
Total accumulated postretirement benefit
obligation 344 358
Unrecognized net loss (38) (30)
Unrecognized effect of plan amendments 61 58
----- -----
Accrued postretirement benefit obligation $ 367 $ 386
===== =====
Future benefit costs were estimated assuming medical costs would increase at a
8.75% annual rate, decreasing to a 5% annual growth rate ratably over the next
six 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, 1997 by $19 million, with an
immaterial effect on 1997 postretire-
46 Notes continued
ment benefit cost. The weighted average discount rate used to estimate the
accumulated postretirement benefit obligation at December 31, 1997 was 7.25%
compared with 7.5% at December 31, 1996.
- -----------------------
Note 18 Incentive Plans
- -----------------------
The Company has a Long-Term Incentive Compensation Plan that includes a Stock
Option Plan, a Restricted Performance Share Plan and an Executive Continuity
Award Plan, administered by a committee of nonemployee members of the Board of
Directors who are not eligible for awards. The plan allows stock appreciation
rights to be awarded, although none were awarded in 1997, 1996 or 1995.
The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its plans and the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), which was adopted in 1996. Accordingly, no
compensation cost has been recognized for the stock option plan. Had
compensation cost for the Company's stock-based compensation plans been
determined consistent with the provisions of SFAS No. 123, the Company's net
earnings, earnings per common share and earnings per common share-assuming
dilution would have been reduced to the pro forma amounts indicated below:
In millions, except per share amounts 1997 1996 1995
- --------------------------------------------------------------------------------
Net Earnings (Loss)
As reported $ (151) $ 303 $ 1,153
Pro forma (175) 291 1,143
Earnings (Loss) Per Common
Share
As reported $ (.50) $ 1.04 $ 4.50
Pro forma (.58) 1.00 4.46
Earnings (Loss) Per Common
Share-Assuming Dilution
As reported $ (.50) $ 1.04 $ 4.41
Pro forma (.58) 1.00 4.37
The effect on 1997, 1996 and 1995 pro forma net earnings, earnings per common
share and earnings per common share-assuming dilution of expensing the estimated
fair value of stock options is not necessarily representative of the effect on
reported earnings for future years due to the vesting period of stock options
and the potential for issuance of additional stock options in future years.
Stock Option Plan
Initial stock options are normally granted in January of each year. The option
price is the market price of the stock at the date of grant. Options are
immediately exercisable under the plan; however, the underlying shares cannot be
sold and carry profit forfeiture provisions during the initial four years
following grant. Upon exercise of an option, a replacement option may be granted
with the exercise price equal to the current market price and with a term
extending to the expiration date of the original option.
For purposes of the pro forma disclosure above, the fair value of each
option grant has been estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 1997, 1996 and 1995, respectively:
1997 1996 1995
- --------------------------------------------------------------------------------
Initial Options(1)
Risk-Free Interest Rate 6.32% 5.45% 7.80%
Price Volatility 29.50% 22.18% 22.15%
Dividend Yield 2.50% 2.72% 2.44%
Expected Term in Years 4.37 4.74 4.74
Replacement Options(2)
Risk-Free Interest Rate 6.31% 6.38% 5.91%
Price Volatility 29.50% 22.18% 22.15%
Dividend Yield 2.31% 2.68% 2.34%
Expected Term in Years 2.22 2.97 2.97
(1) The average fair values of initial option grants during 1997, 1996 and
1995 were $11.59, $8.37 and $10.33, respectively.
(2) The average fair values of replacement option grants during 1997, 1996 and
1995 were $9.04, $6.82 and $7.23, respectively.
A summary of the status of the Stock Option Plan as of December 31, 1997,
1996 and 1995 and changes during the years ended on those dates is presented
below:
Weighted
Average
Options(1) Exercise Price
- --------------------------------------------------------------------------------
Outstanding at 1/1/95 8,396,868 $ 32.41
Granted 3,196,311 40.03
Exercised (2,069,022) 30.09
Forfeited (262,044) 35.64
---------- -------
Outstanding at 12/31/95 9,262,113 35.44
Granted(2) 4,234,695 35.42
Exercised (2,091,942) 30.39
Forfeited (460,321) 36.89
---------- -------
Outstanding at 12/31/96 10,944,545 36.53
Granted 5,478,674 45.82
Exercised (4,196,183) 35.42
Forfeited (683,248) 40.66
---------- -------
Outstanding at 12/31/97 11,543,788 41.09
==========
(1) This table does not include Executive Continuity Award tandem options
described below. No fair value is assigned to these options under SFAS No.
123. The tandem restricted shares accompanying these options are expensed
over their vesting periods.
(2) At acquisition, outstanding Federal Paper Board options that were not paid
in cash were converted to 797,776 options of International Paper with a
fair value of $20.58 per option. The fair value for all acquired options
was included in the purchase price that has been allocated to acquired
assets and liabilities.
The following table summarizes information about stock options outstanding
at December 31, 1997:
Options Outstanding and Exercisable
---------------------------------------------
Weighted Weighted
Number Average Average
Range of Exercise Outstanding at Remaining Exercise
Prices 12/31/97 Life Price
- ------------------------------------------------------------------------------
$14.36-$36.50 1,266,827 2.90 $ 30.17
$36.62-$38.88 2,839,300 5.80 $ 37.87
$38.93-$41.75 2,671,400 7.00 $ 39.91
$41.87-$43.13 2,610,737 7.20 $ 42.79
$43.18-$59.94 2,155,524 3.10 $ 51.15
Restricted Performance Share Plan
Under the Restricted Performance Share Plan, contingent awards of Company common
stock are granted by the committee. Awards are earned if the Company's financial
performance over a five-year
Notes continued 47
period meets or exceeds that of other forest products companies using standards
determined by the committee.
The following summarizes the activity of the Restricted Performance Share
Plan for the three years ending December 31, 1997:
Shares
- --------------------------------------------------------------------------------
Outstanding at 1/1/95 690,012
Granted 360,701
Issued (211,648)
Forfeited (28,101)
---------
Outstanding at 12/31/95 810,964
Granted 424,264
Issued (190,660)
Forfeited (85,178)
---------
Outstanding at 12/31/96 959,390
Granted 277,815
Issued (87,451)
Forfeited (40,352)
---------
Outstanding at 12/31/97 1,109,402
=========
Executive Continuity Award Plan
The Executive Continuity Award Plan provides for the granting of tandem awards
of restricted stock and/or nonqualified stock options to key executives. Grants
are restricted and awards conditioned on attainment of specified age and years
of service requirements. Exercise of a tandem stock option results in the
cancellation of the related restricted shares.
The following summarizes the activity of the Executive Continuity Award
Plan for the three years ending December 31, 1997:
Shares
- --------------------------------------------------------------------------------
Outstanding at 1/1/95 477,000
Granted 28,000
Forfeited(1) (26,000)
-------
Outstanding at 12/31/95 479,000
Granted 136,650
Forfeited(1) (132,000)
-------
Outstanding at 12/31/96 483,650
Granted 106,108
Forfeited (9,500)
-------
Outstanding at 12/31/97 580,258
=======
(1) Includes restricted shares canceled when tandem stock options were
exercised. In 1996 and 1995, 400,000 and 120,000 tandem stock options were
exercised, respectively.
At December 31, 1997 and 1996, a total of 4.8 million and 7.9 million
shares, respectively, were available for grant under the Long-Term Incentive
Compensation Plan.
The compensation cost that has been charged to earnings for the
performance-based plans was $11 million, $13 million and $14 million for 1997,
1996 and 1995, respectively.
- ---------------------------------------
Note 19 Pro Forma Financial Information
- ---------------------------------------
The following unaudited pro forma financial information for the year ended
December 31, 1996 reflects the combined results of the continuing operations of
the Company and the 1996 acquisitions listed in Note 5. The 1997 amounts
presented below are actual results for the year ended December 31, 1997. These
amounts include all of the 1996 acquisitions for the entire year and are
presented for comparative purposes only. The 1996 pro forma information is
presented as if the transactions occurred as of the beginning of the year. The
pro forma adjustments are based on available information, preliminary purchase
price allocations and certain assumptions that the Company believes are
reasonable. The 1996 pro forma information does not purport to represent the
Company's actual results of operations if the transactions described above would
have occurred at the beginning of the year nor is it indicative of the actual
results since acquisition. In addition, the information may not be indicative of
future results.
In millions, except per share amounts, (Unaudited)
for the years ended December 31 1997 1996
- --------------------------------------------------------------------------------
Net Sales $ 20,096 $ 20,500
Net Earnings (Loss) (151) 289
Earnings (Loss) Per Common Share $ (.50) $ .96
Earnings (Loss) Per Common Share-
Assuming Dilution $ (.50) $ .96
- -------------------------
Note 20 Subsequent Events
- -------------------------
In February 1998, International Paper announced that it would merge with Weston
Paper and Manufacturing Company through an exchange of shares valued at $232
million. The transaction, which is expected to be finalized during the second
quarter, is subject to the completion of due diligence, regulatory approvals and
approval by Weston shareholders. Weston, based in Terre Haute, Ind., operates
one paper mill that produces corrugating medium and 11 corrugated container
plants.
Also in February 1998, the Company announced that it had reached an
agreement to sell the printing and graphic arts businesses of its imaging
products division.
48 Eleven-Year Financial Summary Eleven-Year Financial Summary 49
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICE 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net sales $ 20,096 $ 20,143 $ 19,797 $ 14,966
Costs and expenses, excluding interest 19,760 19,403 17,276 13,902
Earnings before income taxes, minority interest,
extraordinary item and cumulative effect of
accounting changes 16(1) 802(2) 2,028 7153
Minority interest expense, net of taxes 129(1) 169(2) 156 47
Extraordinary item (6)
Cumulative effect of accounting changes (75) (50) (215)
Net earnings (loss) (151)(1) 303(2) 1,153 357(3)
Earnings (loss) applicable to common shares (151)(1) 303(2) 1,153 357(3)
-------- -------- -------- --------
FINANCIAL POSITION
Working capital $ 1,065 $ 104 $ 1,010 $ 796
Plants, properties and equipment, net 12,369 13,217 10,997 9,139
Forestlands 2,969 3,342 2,803 802
Total assets 26,754 28,252 23,977 17,836
Long-term debt 7,154 6,691 5,946 4,464
Common shareholders' equity 8,710 9,344 7,797 6,514
-------- -------- -------- --------
PER SHARE OF COMMON STOCK - ASSUMING NO DILUTION(8)
Earnings (loss) before extraordinary item and
cumulative effect of accounting changes $ (.50)(1) $ 1.04(2) $ 4.50 $ 1.73(3)
Extraordinary item
Cumulative effect of accounting changes
Earnings (loss) (.50)(1) 1.04(2) 4.50 1.43(3)
Cash dividends 1.00 1.00 .92 .84
Common shareholders' equity 28.82 31.13 29.87 25.87
-------- -------- -------- --------
COMMON STOCK PRICES(8)
High 61 44 5/8 45 3/4 40 1/4
Low 38 5/8 35 5/8 34 1/8 30 3/8
Year-end 43 1/8 40 1/2 37 7/8 37 3/4
-------- -------- -------- --------
FINANCIAL RATIOS
Current ratio 1.2 1.0 1.2 1.2
Total debt to capital ratio 38.9 38.9 38.5 41.2
Return on equity (1.7)(1),(9) 3.4(2),(9) 16.1 5.6(3)
Return on investment 1.2(1),(9) 3.3(2),(9) 8.4 4.2(3)
-------- -------- -------- --------
CAPITAL EXPENDITURES $ 1,111 $ 1,394 $ 1,518 $ 1,114
-------- -------- -------- --------
NUMBER OF EMPLOYEES 82,000 87,000 81,500 70,000
======== ======== ======== ========
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net sales $ 13,685 $ 13,598 $ 12,703 $ 12,960
Costs and expenses, excluding interest 12,837 13,125(5) 11,695(6) 11,695(7)
Earnings before income taxes, minority interest,
extraordinary item and cumulative effect of
accounting changes 538 226(5) 693(6) 988(7)
Minority interest expense, net of taxes 36 15 42 33
Extraordinary item
Cumulative effect of accounting changes
Net earnings (loss) 289(4) 86(5) 184(6) 569(7)
Earnings (loss) applicable to common shares 289(4) 86(5) 184(6) 569(7)
-------- -------- -------- --------
FINANCIAL POSITION
Working capital $ 472 $ (165) $ 404 $ 784
Plants, properties and equipment, net 8,872 8,884 7,848 7,287
Forestlands 786 759 743 751
Total assets 16,631 16,516 14,941 13,669
Long-term debt 3,601 3,096 3,351 3,096
Common shareholders' equity 6,225 6,189 5,739 5,632
-------- -------- -------- --------
PER SHARE OF COMMON STOCK - ASSUMING NO DILUTION(8)
Earnings (loss) before extraordinary item and
cumulative effect of accounting changes $ 1.17(4) $ .58(5) $ 1.80(6) $ 2.61(7)
Extraordinary item
Cumulative effect of accounting changes
Earnings (loss) 1.17(4) .35(5) .83(6) 2.61(7)
Cash dividends .84 .84 .84 .84
Common shareholders' equity 25.12 25.23 25.52 25.67
-------- -------- -------- --------
COMMON STOCK PRICES(8)
High 35 39 1/4 39 1/8 29 7/8
Low 28 3/8 29 1/4 25 1/4 21 3/8
Year-end 33 7/8 33 3/8 35 3/8 26 3/4
-------- -------- -------- --------
FINANCIAL RATIOS
Current ratio 1.1 .96 1.1 1.2
Total debt to capital ratio 38.5 38.0 39.1 36.1
Return on equity 4.7(4) 1.4(5) 3.2(6) 10.5(7)
Return on investment 3.6(4) 2.0(5) 3.5(6) 7.2(7)
-------- -------- -------- --------
CAPITAL EXPENDITURES $ 954 $ 1,368 $ 1,197 $ 1,267
-------- -------- -------- --------
NUMBER OF EMPLOYEES 72,500 73,000 70,500 69,000
======== ======== ======== ========
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES 1989 1988 1987
- -------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net sales $ 11,378 $ 9,587 $ 7,800
Costs and expenses, excluding interest 9,739 8,199 6,930
Earnings before income taxes, minority interest,
extraordinary item and cumulative effect of
accounting changes 1,434 1,223 703
Minority interest expense, net of taxes 26 22 21
Extraordinary item
Cumulative effect of accounting changes
Net earnings (loss) 86(4) 75(4) 40(7)
Earnings (loss) applicable to common shares 84(5) 73(3) 38(7)
-------- -------- --------
FINANCIAL POSITION
Working capital $ 366 $ 781 $ 657
Plants, properties and equipment, net 6,238 5,456 5,125
Forestlands 764 772 780
Total assets 11,582 9,462 8,710
Long-term debt 2,324 1,853 1,937
Common shareholders' equity 5,147 4,557 4,052
-------- -------- --------
PER SHARE OF COMMON STOCK - ASSUMING NO DILUTION(8)
Earnings (loss) before extraordinary item and
cumulative effect of accounting changes $ 3.86 $ 3.28 $ 1.84
Extraordinary item (.02)
Cumulative effect of accounting changes (.30) (.21) (.97)
Earnings (loss) 3.86 3.28 1.84
Cash dividends .77 .64 .60
Common shareholders' equity 23.67 20.57 18.18
-------- -------- --------
COMMON STOCK PRICES(8)
High 29 3/8 24 3/4 28 7/8
Low 22 5/8 18 1/4 13 1/2
Year-end 28 1/4 23 1/4 21 1/8
-------- -------- --------
FINANCIAL RATIOS
Current ratio 1.1 1.5 1.4
Total debt to capital ratio 33.9 25.8 31.6
Return on equity 17.8 17.0 10.0
Return on investment 11.3 11.0 7.2
-------- -------- --------
CAPITAL EXPENDITURES $ 887 $ 645 $ 603
-------- -------- --------
NUMBER OF EMPLOYEES 63,500 55,500 45,500
======== ======== ========
FINANCIAL GLOSSARY
Current ratio-
current assets divided by current liabilities.
Total debt to capital ratio-
long-term debt plus notes payable and current maturities of long-term debt
divided by long-term debt, notes payable and current maturities of long-term
debt, deferred income taxes, minority interest, other liabilities, preferred
securities and total common shareholders' equity.
Return on equity-
net earnings divided by average common shareholders' equity (computed monthly).
Return on investment-
net earnings plus after-tax interest expense and minority interest expense
divided by an average of total assets minus accounts payable and accrued
eliabilities.
(1) Includes a pre-tax business improvement charge of $535 million ($385
million after taxes or $1.28 per share), a $150 million pre-tax provision
for legal reserve ($93 million after taxes or $.31 per share), a pre-tax
charge of $125 million ($80 million after taxes or $.26 per share) for
anticipated losses associated with the sale of the imaging businesses, and
a pre-tax gain of $170 million ($97 million after taxes and minority
interest expense or $.32 per share) from the redemption of certain
retained west coast partnership interests and the release of a related
debt guaranty.
(2) Includes a pre-tax restructuring and asset impairment charge of $515
million ($362 million after taxes or $1.35 per share), a $592 million
pre-tax gain on the sale of a west coast partnership interest ($336
million after taxes and minority interest expense or $1.25 per share), a
$155 million pre-tax charge ($99 million after taxes or $.33 per share)
for the write-down of the investment in Scitex, and a $10 million pre-tax
charge ($6 million after taxes or $.02 per share) for our share of a
restructuring charge announced by Scitex in November 1996.
(3) Includes $17 million ($10 million after taxes or $.04 per share) of
additional earnings related to the change in accounting for start-up
costs.
(4) Includes $25 million ($.10 per share) of additional income tax expense to
revalue deferred tax balances to reflect the increase in the U.S.
statutory federal income tax rate.
(5) Includes restructuring and other charges totaling $398 million ($263
million after taxes or $1.08 per share).
(6) Includes a $60 million pre-tax restructuring charge ($37 million after
taxes or $.17 per share) and additional expenses related to the adoption
of SFAS No. 106 of $25 million ($16 million after taxes or $.07 per
share).
(7) Includes a $212 million pre-tax restructuring charge ($137 million after
taxes or $.63 per share).
(8) Per share data and common stock prices have been adjusted to reflect
two-for-one stock splits in September 1995 and May 1987. All per share
amounts are computed before the effects of dilutive securities.
(9) Return on equity was 3.3% and return on investment was 3.0% in 1997 before
special items. Return on equity was 4.8% and return on investment was 3.6%
in 1996 before special items.
50 Interim Financial Results (unaudited)
Quarter
--------------------------------------------------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND STOCK PRICES First Second Third Fourth Year
- -------------------------------------------------------------------------------------------------------------------------
1997
Net Sales $ 4,862 $ 5,034 $ 5,119 $ 5,081 $ 20,096
Gross Margin(1) 1,226 1,248 1,328 1,320 5,122
Earnings (Loss) Before Income Taxes and
Minority Interest 108 (557)(2) 208 257(3) 16(2),(3)
Net Earnings (Loss) 34 (419)(2) 102 132(3) (151)(2),(3)
Per Share of Common Stock
Earnings (Loss) $ .11 $ (1.39)(2) $ .34 $ .44(3) $ (.50)(2),(3)
Earnings (Loss)-Assuming Dilution .11 (1.39)(2) .34 .44(3) (.50)(2),(3)
Dividends .25 .25 .25 .25 1.00
Common Stock Prices
High 43 5/8 51 7/8 61 58 1/2 61
Low 38 3/4 38 5/8 48 1/4 39 7/8 38 5/8
1996
Net Sales $ 4,798 $ 5,093 $ 5,108 $ 5,144 $ 20,143
Gross Margin(1) 1,244 1,323 1,353 1,340 5,260
Earnings Before Income Taxes and
Minority Interest 336(4) 217 227 225 802(4),(5)
Net Earnings (Loss) 98(4) 99 111 (5)(5) 303(4),(5)
Per Share of Common Stock
Earnings (Loss) $ .36(4) $ .33 $ .37 $ (.02)(5) $ 1.04(4),(5)
Earnings (Loss)-Assuming Dilution .36(4) .33 .37 (.02)(5) 1.04(4),(5)
Dividends .25 .25 .25 .25 1.00
Common Stock Prices
High 41 1/2 43 3/8 44 5/8 44 44 5/8
Low 35 5/8 36 7/8 36 3/4 38 3/4 35 5/8
(1) Gross margin represents net sales less cost of products sold.
(2) Includes a pre-tax business improvement charge of $535 million ($385
million after taxes or $1.28 per share) and a $150 million pre-tax
provision for legal reserve ($93 million after taxes or $0.31 per share).
(3) Includes a pre-tax charge of $125 million ($80 million after taxes or $.26
per share) for anticipated losses on the sale of the imaging businesses
and a pre-tax gain of $170 million ($97 million after taxes and minority
interest expense or $.32 per share) from the redemption of certain
retained West Coast partnership interests and the release of a related
debt guaranty.
(4) Includes a pre-tax restructuring and asset impairment charge of $515
million ($362 million after taxes or $1.35 per share) and a $592 million
pre-tax gain on the sale of a West Coast partnership interest ($336
million after taxes and minority interest expense or $1.25 per share).
(5) Includes a $155 million pre-tax charge ($99 million after taxes or $0.33
per share) for the write-down of the investment in Scitex, and a $10
million pre-tax charge ($6 million after taxes or $.02 per share) for our
share of a restructuring charge announced by Scitex in Novemeber 1996.
Directors and Senior Management 51
- ---------
Directors
- ---------
PETER I. BIJUR 14
Chairman and
Chief Executive Officer
Texaco
WILLARD C. BUTCHER 1345*
Retired Chairman and
Chief Executive Officer
The Chase Manhattan Bank, N.A.
JOHN T. DILLON 2*36
Chairman and
Chief Executive Officer
International Paper
ROBERT J. EATON 4*7
Chairman and
Chief Executive Officer
Chrysler Corporation
JOHN A. GEORGES 236
Retired Chairman and
Chief Executive Officer
International Paper
THOMAS C. GRAHAM 247*
Retired Chairman of the Board
AKSteel Corporation
JOHN R. KENNEDY 17
Retired Chairman and
Chief Executive Officer
Federal Paper Board
DONALD F. MCHENRY 356*
University Research
Professor of Diplomacy
and International Affairs
Georgetown University
PATRICK F. NOONAN 167
Chairman and
Chief Executive Officer
The Conservation Fund
JANE C. PFEIFFER 1*56
Management Consultant
EDMUND T. PRATT, JR. 23*45
Retired Chairman and
Chief Executive Officer
Pfizer Inc.
CHARLES R. SHOEMATE 45
Chairman, President and
Chief Executive Officer
Best Foods, Inc.
C. WESLEY SMITH 67
Executive Vice President
Printing Papers
International Paper
(1) Audit Committee
(2) Executive Committee
(3) Finance Committee
(4) Management Development and
Compensation Committee
(5) Nominating Committee
(6) Public and Legal Affairs Committee
(7) Environment, Health and Technology
Committee
* Committee Chairperson
- -----------------
Senior Management
- -----------------
JOHN T. DILLON
Chairman and
Chief Executive Officer
W. MICHAEL AMICK
Executive Vice President
Forest Products and
Industrial Packaging
JAMES P. MELICAN
Executive Vice President
Legal and External Affairs
DAVID W. OSKIN
Executive Vice President
Consumer Packaging and
Industrial Papers
C. WESLEY SMITH
Executive Vice President
Printing Papers
MILAN J. TURK
Executive Vice President
Specialty Businesses
ROBERT M. AMEN
President
International Paper
Europe
ROBERT M. BYRNES
Senior Vice President
Human Resources
THOMAS E. COSTELLO
Senior Vice President
Distribution Business
DOUGLAS B. FOX
Senior Vice President
Marketing
MARIANNE M. PARRS
Senior Vice President and
Chief Financial Officer
RICHARD B. PHILLIPS
Senior Vice President
Technology
52 Directors and Senior Management
- -----------------------------
Senior Management (continued)
- -----------------------------
DAVID A. BAILEY
President
International Paper
Poland
E. WILLIAM BOEHMLER
Vice President and
Treasurer
H. WAYNE BRAFFORD
Vice President
Converting and Specialty Papers
JAMES A. CEDERNA
Vice President
Arizona Chemical
WILLIAM P. CRAWFORD
Vice President
Logistics
HANS PETER DAROCZI
Vice President
International Container
C. CATO EALY
Vice President
Business Development and
Planning
JOHN V. FLYNN
Vice President
Human Resources
HARTWIG GEGINAT
Chairman and
Chief Executive Officer
Zanders
THOMAS E. GESTRICH
Vice President
Bleached Board
PHILLIP S. GIARAMITA
Vice President
Corporate Communications
MARK O. GODBOLD
Auditor
JAMES W. GUEDRY
Vice President and
Corporate Secretary
EVANS A. HEATH
Vice President
Liquid Packaging
PAUL HERBERT
Chief Operating Officer
Zanders
ROBERT M. HUNKELER
Vice President
Investments
ROBERT L. JANDA
Vice President
Manufacturing
Printing Papers
THOMAS C. JORLING
Vice President
Environmental Affairs
JEFFREY F. KASS
Vice President
Strategic Planning
HARRY G. LAMBROUSSIS
President
International Paper
Latin/South America
PETER F. LEE
Vice President
Research and Development
NEWLAND A. LESKO
Vice President
Coated and Bristol Papers
ANDREW R. LESSIN
Vice President and Controller
WILLIAM B. LYTTON
Vice President and
General Counsel
GERALD C. MARTERER
President
International Paper
Asia
ARTHUR W. MCGOWEN
Vice President
Wood Products
JEAN-PHILIPPE MONTEL
Chairman and
Chief Executive Officer
Aussedat Rey
KARL W. MOORE
Vice President and
Chief Information Officer
GEORGE A. O'BRIEN
President, IPForest
Resources Company
JOSEPH R. RIMSTIDT
Vice President
Quality Management
CAROL L. ROBERTS
Vice President
People Development
R. MICHAEL ROSS
Vice President
Container
WILLIAM H. SLOWIKOWSKI
Vice President
Imaging Products
BENNIE R. SMITH
Vice President
Strategic Planning
Industrial Packaging
RICHARD M. SMITH
Vice President
Printing and Office Papers
MANCO L. SNAPP
President
Masonite
W. DENNIS THOMAS
Vice President
Public Affairs
TOBIN J. TREICHEL
Vice President
Tax
CAROL S. TUTUNDGY
Vice President
Investor Relations
List of Employee Teams 53
LIST OF EMPLOYEE TEAMS
PAGE 11: PRODUCTIVITY TEAM
AUSSEDAT REY
SAILLAT, FRANCE
Robert Ringuet
Jerome Mandaglio
Patrick Genin
Michele Demoulinger
Philippe Demon
PAGE 13: POULTRY TEAM
TYSON FOODS
SPRINGDALE, ARKANSAS
Mike Roetzel*
Steve Morris*
Don Washington
Robert Cole*
John Rodgers*
* Employee of Tyson Foods
PAGE 13: SERVICE TEAM
ARIZONA CHEMICAL
PANAMA CITY, FLORIDA
Richard Craft
Betty Johnson
Francis Bolin
Harold Brookins
PAGE 15: ROI TEAM
FOLDING CARTON
RICHMOND, VIRGINIA
Antoine Harris
Chris Mulligan
Billy Cheatham
Kim Inscoe
Joe Brown
PAGE 15: ROI TEAM
MASONITE
UKIAH, CALIFORNIA
James Pollitz
Ed Evans
Pete Carr
Hillary Hufford
Jaime Garcia
PAGE 15: SHIPPING TEAM
RIEGELWOOD MILL
RIEGELWOOD, NORTH CAROLINA
Jeff Stocks
James Dixon
Mary Smith
PAGE 19: FORESTRY TEAM
SOUTHLANDS EXPERIMENT FOREST
BAINBRIDGE, GEORGIA
Julie Durfield
Tom Cooksey
Larry Stubbs
PAGE 19: SKILLS TRAINING
TECHNOLOGY CENTER
CINCINNATI, OHIO
Le Tran
Ann-Charlotte Norrdahl
Todd Biggs
PAGE 19: TOOLS OF THE TRADE
TECHNOLOGY CENTER
CINCINNATI, OHIO
Ven Ochaya
Cheryl Caldwell
Paul Canino
Inna Golinkin-Elsner
Raj Bodalia
Tricia Reighard
James Burks
John Soehnlen
Nommiy Brown
Tina Collett
John Tonelli
Stephanie Plear
Tom Corkhill
Mimi Muterspaw
David Pedley
Jeff Wheeler
54 Shareholder Information
CORPORATE HEADQUARTERS
International Paper
Two Manhattanville Road
Purchase, N.Y. 10577
914-397-1500
ANNUAL MEETING
The next meeting of shareholders will be held at 9:30 a.m., Tuesday, May 12,
1998, at The Queensbury Hotel, 88 Ridge Street, Glens Falls, N.Y.
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, contact:
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Centre
Ridgefield Park, N.J. 07660
800-678-8715
www.chasemellon.com
STOCK EXCHANGE LISTINGS
Common Shares (symbol: IP) are traded on the following exchanges: New York,
Basel, Geneva, Lausanne, Zurich and Amsterdam. International Paper options are
traded on the Chicago Board of Options Exchange.
DIVIDEND REINVESTMENT AND STOCK 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. The Company pays all
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, N.Y. 10105
REPORTS AND PUBLICATIONS
Additional copies of this report, environmental reports, SEC filings and other
publications are available by calling 914-397-1522 or writing to the Investor
Relations department at corporate headquarters. Most of this information is also
available on our website - http:www.ipaper.com
INVESTOR RELATIONS
Investors desiring further information about International Paper should contact
the Investor Relations department at corporate headquarters, 914-397-1625.
CREDITS
Papers used in this report: Cover: Zanders IkonoGloss, 111 lb. cover; pages 1-8:
Strathmore Elements, 80 lb. text, bright white solids; pages 9-20: Zanders
IkonoDull Satin, 100 lb. text; pages 9-20, short sheets: Zanders IkonoDull
Satin, 115 lb. text; pages 21-54: Hammermill Regalia, 80 lb. text, old
porcelain, smooth. All are recycled papers.
Designed by Pentagram. Printed by The Hennegan Company.
Major photography by John Blaustein, John Madere and William Whitehurst.
Product and brand designations appearing in italics are trademarks of
International Paper or a related company.
THIS 1997 ANNUAL REPORT TO SHAREHOLDERS, AND MANAGEMENT'S DISCUSSION AND
ANALYSIS (MD&A) IN PARTICULAR, CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
CONCERNING PROJECTED IMPROVEMENT IN EARNINGS AT INTERNATIONAL PAPER. ACTUAL
RESULTS MAY DIFFER BASED PRIMARILY ON OVERALL DEMAND AND WHETHER PRICE INCREASES
FOR VARIOUS PAPER AND PACKAGING PRODUCTS CAN BE REALIZED IN 1998, AND WHETHER
ANTICIPATED SAVINGS FROM RESTRUCTURING, THE BUSINESS IMPROVEMENT PROGRAM AND
OTHER INITIATIVES ARE ACHIEVED. The MD&A also includes conclusions as to value
at risk associated with financial instruments. results may differ based on
actual movements in interest and currency exchange rates.
(C) 1998 International Paper Company.
All rights reserved.
INTERNATIONAL PAPER
TWO MANHATTANVILLE ROAD
PURCHASE, NY 10577
WE ANSWER
TO THE WORLD
EXHIBIT 13
APPENDIX B
PHOTOGRAPHS AND ILLUSTRATIONS FOR 1997 ANNUAL REPORT
1. Inside front cover - illustration of International Paper's centennial logo.
Circular in shape, with wording "International Paper Centennial 1998 around the
outer edge, and an illustration of a tree and waterfall in the middle.
2. page 1 (fold out) - photo of International Paper's first annual report in
1899.
3. page 1 (fold out) - photo of Hammermill paper mill under construction in
Erie, Pa.
4. page 1 (fold out) - aerial photo of Federal Paper Board mill in Bogota, NJ.
5. page 1 (fold out) - aerial photo of Southern International Paper mill.
6. page 1 (fold out) - photo of an Arizona Chemical plant.
7. page 1 (fold out) - photo of soldiers carrying supplies packaged in
corrugated boxes made with our wetstrength linerboard.
8. page 1 (fold out) - photo of a scientist in our research lab in Mobile, Ala.
9. page 1 (fold out) - photo of a young girl drinking from a milk carton.
10. page 1 (fold out) - photo of two foresters at our Southlands Experiment
Forest in Bainbridge, Ga.
11. page 1 (fold out) - illustration of International Paper's research center in
Tuxedo, NY.
12. page 1 (fold out) - photo of the Canadian flag.
13. page 1 (fold out) - illustration of the Hammermill Paper Company logo.
14. page 1 (fold out) - photo of International Paper's operations headquarters
in Memphis, TN.
15. page 1 (fold out) - photo of the Masonite logo.
16. page 1 (fold out) - aerial photo of the Aussedat Rey mill in Saillat,
France.
17. page 1 (fold out) - photo of a paper machine at Zanders in Germany.
18. page 1 (fold out) - photo of a paper machine at our Kwidzyn mill in Poland.
19. page 1 (fold out) - photo of the ResourceNet International logo, and map of
U.S. locations.
20. page 1 (fold out) - aerial photo of a radiata pine plantation in New
Zealand.
21. page 1 (fold out) - photo of a Federal Paper Board mill.
22. page 1 (fold out) - photo of the Cincinnati technology center.
23. page 1 (fold out) - illustration of International Paper's centennial logo.
Circular in shape, with wording "International Paper Centennial 1998 around the
outer edge, and an illustration of a tree and waterfall in the middle.
24. page 2 - photo of John T. Dillon, Chairman and Chief Executive Officer,
International Paper.
25. page 4 - photo of three reams of SPRINGHILL reprographic paper.
26. page 4 - photo of an NHL advertising brochure and a doll catalog, printed on
our bristol and coated paper, respectively.
27. page 4 - photo of a large spool of yellow thread, to represent our pulp
business.
28. page 5 - photo of three reams of paper, POLSPEED (from Kwidzyn in Poland),
and REYPRINT (from Aussedat Rey in France) and DUO (from Tait in Scotland).
29. page 5 - photo of a corrugated box made with our WHITETOP linerboard for
Sunkist lemons.
30. page 5 - photo of two corrugated boxes, one from our US division, made for
Chiquita; and the other from our European division, for Champey.
31. page 5 - photo of a TDK VCR tape and packaging made from our STARCOTE
bleached board.
32. page 6 - photo of two aseptic packages containing Elle & Vire sauces.
33. page 6 - photo of two reams of REPLICOPY reprographic paper.
34. page 6 - photo of a container of REGENCY cleaning product.
35. page 6 - photo of a can of COLORLOK precision printing ink.
36. page 7 - photo of three reams of reprographic paper, POLCOPY (from Poland),
MATAURA (from New Zealand), and TECNIS (from Europe).
37. page 7 - photo of a red CRAFTMASTER door, made by Masonite.
38. page 7 - photo of peel and stick labels.
39. page 7 - photo of a gumball machine filled with gum.
40. page 8 - photo of SORBENT toilet tissue package.
42. page 8 - photo of a seedling.
43. page 8 - photo of yellow pine lumber.
44. page 8 - photo of an I-joist.
45. pages 10-11(short sheet - side one) - photo of a stand of loblolly trees,
looking up from the ground, with blue sky and clouds in the background.
46. page 11 (short sheet - side two) - photo of a globe in a brown corrugated
box.
47. page 11 (short sheet - side two) - photo of a parked xpedx truck with
Cincinnati, Ohio in the background.
48. page 11 - photo of five employees of Aussedat Rey's Saillat mill, taken in
front of a local landmark, with Aussedat Rey products.
49. page 13 (short sheet - side one) - photo of half of a globe, showing the US
and Europe (this photo directly faces photo 53 - profile of two employees).
50. page 13 (short sheet - side two) - a photo of an array of tobacco products.
51. page 13 - photo of four employees of Tyson Foods, and one International
Paper employee, shown with corrugated boxes made by International Paper for
Tyson.
52. page 13 - photo of four Arizona Chemical employees at our Panama City,
Florida location.
53. page 13 - photo of the profile of two International Paper account executives
(this photo directly faces photo 49 - globe).
54. page 15 (short sheet - side one, and full page 15) - photo of three
employees and rows of pulp produced at our Reigelwood, N.C. mill.
55. page 15 (short sheet - side two) - photo of 5 employees on a printing press
at our Richmond, Va., folding carton plant.
56. page 15 (short sheet - side two) - photo of 3 employees and rolls of
bleached board inside a rail car at our Reigelwood, N.C. mill.
57. page 15 - photo of 5 employees on a chip pile outside our Masonite plant in
Ukiah, Calif.
58. page 16 - page 17 (short sheet- side one) - photo of several sheets of
Strathmore paper, brightly lit with yellow, green and blue lighting.
59. page 17 (short sheet - side two) - photo of page from a FAO Schwarz catalog
printed on our ACCOLADE coated paper.
60. page 17 - photo of a Beckett PARADOX product brochure, and an array of the
seven colors that the paper comes in.
61.page 17 - photo of an array of various milk cartons made by International
Paper.
62. page 18 - photo of a research associate looking through a microscope at our
Cincinnati, Ohio research center.
63. page 19 (short sheet - side two) - photo of three foresters in a stand of
"field of dreams" pine trees at our Southlands Experiment Forest in Bainbridge,
Ga.
64. page 19 (short sheet - side two) - photo of two students and an instructor
at a management skills training class in Cincinnati, Ohio.
65. page 19 - photo of a consumer in front of our INVENT IT display.
66. page 19 - photo of 16 employees at our research center in Cincinnati, Ohio.