-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NxeLsJOInqLNeLdFNU6Q7//jcZfzGFC6zTspyjRFdv7kAvmUGQDB/Ct3+sT0HMmJ Yqi7cgEgAtqRTScqEqpJXw== 0000950117-03-000884.txt : 20030228 0000950117-03-000884.hdr.sgml : 20030228 20030228163428 ACCESSION NUMBER: 0000950117-03-000884 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL PAPER CO /NEW/ CENTRAL INDEX KEY: 0000051434 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 130872805 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03157 FILM NUMBER: 03587130 BUSINESS ADDRESS: STREET 1: 400 ATLANTIC STREET CITY: STAMFORD STATE: CT ZIP: 06921 BUSINESS PHONE: 203-541-8000 MAIL ADDRESS: STREET 1: 400 ATLANTIC STREET CITY: STAMFORD STATE: CT ZIP: 06921 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL PAPER & POWER CORP DATE OF NAME CHANGE: 19710527 10-K 1 a34643.txt INTERNATIONAL PAPER CO. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2002 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to COMMISSION FILE NO. 1-3157 INTERNATIONAL PAPER COMPANY (Exact name of registrant as specified in its charter) New York 13-0872805 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 Atlantic Street Stamford, Connecticut 06921 (Zip Code) (Address of principal executive offices) Company's telephone number, including area code: 203-541-8000 ---------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $1 per share par value New York Stock Exchange 7 7/8% Debentures due 2038 New York Stock Exchange ---------- Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[_] ---------- Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2) of the Act. Yes[X] or No[_] The aggregate market value of the registrant's outstanding common stock held by non-affiliates of the registrant, computed by reference to the closing price as reported on the New York Stock Exchange, as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2002) was approximately $20,958,331,700. The number of shares outstanding of the Company's common stock, as of February 21, 2003 was 478,808,232 Documents incorporated by reference: Portions of the registrant's proxy statement filed within 120 days of the close of the registrant's fiscal year in connection with registrant's 2003 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K. INTERNATIONAL PAPER COMPANY Index to Annual Report on Form 10-K For the Year Ended December 31, 2002 PART I - -------------------------------------------------------------------------------- ITEM 1. BUSINESS General 1 Financial Information Concerning Industry Segments 1 Financial Information About International and Domestic Operations 1 Competition and Costs 1 Marketing and Distribution 2 Description of Principal Products 2 Sales by Volume 2 Research and Development 2 Environmental Protection 2 Employees 2 Raw Materials 3 Forward-looking Statements 3 ITEM 2. PROPERTIES Forestlands 3 Mills and Plants 3 Capital Investments and Dispositions 3 ITEM 3. LEGAL PROCEEDINGS 3 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 3 PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 3 ITEM 6. SELECTED FINANCIAL DATA 4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Corporate Overview 6 Description of Industry Segments 8 Industry Segment Results 10 Liquidity and Capital Resources 14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Information by Industry Segment and Geographic Area 26 Report of Management on Financial Statements 28 Report of Deloitte & Touche LLP, Independent Auditors 29 Report of Independent Public Accountants 29 Consolidated Statement of Earnings 31 Consolidated Balance Sheet 32 Consolidated Statement of Cash Flows 33 Consolidated Statement of Common Shareholders' Equity 34 Notes to Consolidated Financial Statements 35 Interim Financial Results 65 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 67 PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 67 ITEM 11. EXECUTIVE COMPENSATION 67 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 68 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 68 PART IV - -------------------------------------------------------------------------------- ITEM 14. CONTROLS AND PROCEDURES 68 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 68 Additional Financial Data 68 Reports on Form 8-K 70 Report of Independent Auditors on Financial Statement Schedule 71 Schedule II-Valuation and Qualifying Accounts 72 SIGNATURES 73 CERTIFICATIONS 75 APPENDIX I 2002 LISTING OF FACILITIES A-1 ITEM 1. BUSINESS General International Paper Company (the "Company" or "International Paper," which may be referred to as "we" or "us"), 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, Canada, Europe, the Pacific Rim, and South America. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to available industry capacity and general economic conditions. We are a New York corporation and were incorporated in 1941 as the successor to the New York corporation of the same name organized in 1898. Our home page on the Internet is www.internationalpaper.com. You can learn more about us by visiting that site. In the United States at December 31, 2002, the Company operated 28 pulp, paper and packaging mills, 87 converting and packaging plants, 27 wood products facilities, and seven specialty chemicals plants. Production facilities at December 31, 2002 in Europe, Asia, Latin America, South America and Canada included 13 pulp, paper and packaging mills, 45 converting and packaging plants, 11 wood products facilities, two specialty panels and laminated products plants and seven specialty chemicals plants. We distribute printing, packaging, graphic arts, maintenance and industrial products through over 283 distribution branches located primarily in the United States. At December 31, 2002, we owned or managed approximately 9 million acres of forestlands in the United States, mostly in the South, approximately 1.5 million acres in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned timberlands in Canada and Russia. Carter Holt Harvey, a New Zealand company which is approximately 50.5% owned by International Paper, operates five mills producing pulp, paper, packaging and tissue products, 24 converting and packaging plants and 67 wood products manufacturing and distribution facilities, primarily in New Zealand and Australia. Carter Holt Harvey distributes paper and packaging products through six distribution branches located in New Zealand and Australia. In New Zealand, Carter Holt Harvey owns approximately 810,000 acres of forestlands. For financial reporting purposes, our businesses are separated into six segments: Printing Papers; Industrial and Consumer Packaging; Distribution; Forest Products; Carter Holt Harvey; and Specialty Businesses and Other. A description of these business segments can be found on pages 8 through 10 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. From 1997 through 2002, International Paper's capital expenditures approximated $7.3 billion, excluding mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and environmental performance, lower costs, and improve forestlands. Capital spending in 2002 was $1.0 billion and is expected to be approximately $1.3 billion in 2003. This amount is below our expected annual depreciation and amortization expense of $1.6 billion. You can find more information about capital expenditures on pages 14 and 15 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Discussions of mergers and acquisitions can be found on pages 14 and 15 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. You can find discussions of restructuring charges and other special items on pages 17 and 18 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Throughout this Annual Report on Form 10-K, we "incorporate by reference" certain information in parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC permits us to disclose important information by referring to it in that manner. Please refer to such information. Financial Information Concerning Industry Segments The financial information concerning segments is set forth on pages 26 and 27 of Item 8. Financial Statements and Supplementary Data. Financial Information About International and Domestic Operations The financial information concerning international and domestic operations and export sales is set forth on page 27 of Item 8. Financial Statements and Supplementary Data. Competition and Costs Despite the size of the Company's manufacturing capacities for paper, paperboard, packaging and pulp products, the markets in all of the cited product lines are large and highly fragmented. The markets for wood and specialty products are similarly large and fragmented. There are numerous competitors, and the major markets, both domestic and international, in which the Company sells its principal products are very competitive. These products are in competition with similar products produced by others, and in some instances, with products produced by other industries from other materials. 1 Many factors influence the Company's competitive position, including prices, costs, product quality and services. You can find more information about the impact of prices and costs on operating profits on pages 6 through 14 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Marketing and Distribution The Company sells paper and packaging products through our sales organization directly to users or converters for manufacture. Sales offices are located throughout the United States as well as internationally. We also sell significant volumes of products through paper merchants and distributors, including facilities in our distribution network. We market our U.S. production of lumber and plywood through independent and Company-owned distribution centers. Specialty products are marketed through various channels of distribution. Description of Principal Products The Company's principal products are described on pages 8 through 10 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Sales by Volume Sales volumes of major products for 2002, 2001, and 2000 were as follows:
Sales Volumes by Product (1) (2) (3) (Unaudited) - -------------------------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------------- Printing Papers (In thousands of tons) Uncoated Papers and Bristols...................... 6,469 6,439 5,957 Coated Papers .................................... 2,212 2,132 2,062 Market Pulp (4) .................................. 2,525 2,531 1,996 Packaging (In thousands of tons) Containerboard ................................... 2,262 2,091 2,347 Bleached Packaging Board ......................... 1,336 1,247 1,339 Kraft ............................................ 626 587 489 Industrial and Consumer Packaging ................ 4,526 4,683 5,135 Forest Products (In millions) Panels (sq. ft. 3/8"-basis) ...................... 2,433 2,991 2,380 Lumber (board feet) .............................. 4,227 4,089 3,302 MDF and Particleboard (sq. ft. 3/4"- basis) ...... 623 660 654
(1) Includes third party and inter-segment sales and 100% of volumes sold by Carter Holt Harvey. (2) Includes sales volumes for Champion from July 1, 2000. (3) Sales volumes for divested businesses are included through the date of sale. (4) Includes internal sales to mills. Research and Development The Company operates research and development centers at Sterling Forest, New York; Loveland, Ohio; Kaukauna, Wisconsin; Jacksonville, Florida; Savannah, Georgia; a regional center for applied forest research in Bainbridge, Georgia; a forest biotechnology center in Rotorua, New Zealand; and several product laboratories. We direct research and development activities to short-term, long-term and technical assistance needs of customers and operating divisions; process, equipment and product innovations; and improve profits through tree generation and propagation research. Activities include studies on improved forest species and management; innovation and improvement of pulping, bleaching, chemical recovery, papermaking and coating processes; packaging design and materials development; reduction of environmental discharges; re-use of raw materials in manufacturing processes; recycling of consumer and packaging paper products; energy conservation; applications of computer controls to manufacturing operations; innovations and improvement of products; and development of various new products. Our development efforts specifically address product safety as well as the minimization of solid waste. The cost to the Company of its research and development operations in 2002 was $77 million; $92 million in 2001; and $92 million in 2000, including Champion for the period of July-December. Environmental Protection Information concerning the effects of the Company's compliance with Federal, State and local provisions enacted or adopted relating to environmental protection matters is set forth on pages 22 through 24 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Employees As of December 31, 2002, we had approximately 91,000 employees, 55,000 of whom were located in the United States. Approximately 35,000 of our U.S. employees are hourly employees, approximately 19,000 of whom are represented by the Paper, Allied-Industrial, Chemical and Energy International Union. During 2002, labor agreements were ratified at six mills. During 2003, labor agreements are scheduled to be negotiated at two mills: Vicksburg and Riverdale. During 2002, 16 labor agreements were settled in non-paper mill operations. Settlements included six in paper converting, three in building materials, and seven in distribution. During 2003, 24 non-paper mill operations will negotiate new labor agreements. 2 Raw Materials For information on the sources and availability of raw materials essential to our business, see Item 2. Properties. FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K, and in particular, statements found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, that are not historical in nature may constitute forward-looking statements. These statements are often identified by the words, "believe," "expect," "plan," "appear," "project," "estimate," "intend," and words of similar import. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include, among other things, the strength of demand for the Company's products and changes in overall demand, the effects of competition from foreign and domestic producers, the level of housing starts, changes in the cost or availability of raw materials, the cost of compliance with environmental and other governmental regulations, the ability of the Company to continue to realize anticipated cost savings, performance of the Company's manufacturing operations, results of legal proceedings, changes related to international economic conditions, changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Euro, economic conditions in developing countries, specifically Brazil and Russia, and the effects of continued geopolitical unrest and uncertainty. In view of such uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 2. PROPERTIES Forestlands The principal raw material used by International Paper is wood in various forms. As of December 31, 2002, the Company or its subsidiaries owned or managed approximately 9 million acres of forestlands in the United States, 1.5 million acres in Brazil and had, through licenses and forest management agreements, harvesting rights on government-owned timberlands in Canada and Russia. An additional 810,000 acres of forestlands in New Zealand were held through Carter Holt Harvey, a consolidated subsidiary of International Paper. During 2002, the Company's U.S. forestlands supplied 15.5 million tons of roundwood to its U.S. facilities, representing 30% of its wood fiber requirements. The balance was acquired from other private industrial and non-industrial forestland owners, with only an insignificant amount coming from public lands of the United States government. In addition, in 2002, 6.2 million tons of wood were sold to other users. In November 1994, we adopted the Sustainable Forestry Principles developed by the American Forest and Paper Association in August 1994. Mills and Plants A listing of our production facilities, the vast majority of which we own, can be found in Appendix I hereto, which is incorporated herein by reference. The Company's facilities are in good operating condition and are suited for the purposes for which they are presently being used. We continue to study the economics of modernization or adopting other alternatives for higher cost facilities. Capital Investments and Dispositions Given the size, scope and complexity of our business interests, we continuously examine and evaluate a wide variety of business opportunities and planning alternatives, including possible acquisitions and sales or other dispositions of properties. You can find planned capital investments for 2003, dispositions, and restructuring activities as of December 31, 2002 on pages 14 through 18 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and on pages 38 through 48 of Item 8. Financial Statements and Supplementary Data. ITEM 3. LEGAL PROCEEDINGS Information concerning the Company's legal proceedings is set forth on pages 22 through 24 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and on pages 50 through 54 of Item 8. Financial Statements and Supplementary Data. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2002. PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Dividend per share data on the Company's common stock, the high and low sales prices for the Company's common stock for each of the four quarters in 2002 and 2001, are set forth on page 65 of Item 8. Financial Statements and Supplementary Data. 3 ITEM 6. SELECTED FINANCIAL DATA
Six-Year Financial Summary - ------------------------------------------------------------------------------------------------------------------------ Dollar amounts in millions, except per share amounts and stock prices 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Results of Operations Net sales $24,976 $26,363 $28,180 $24,573 Cost and expenses, excluding interest 23,890 26,716 26,675 23,620 Earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of accounting changes 371 (a) (1,265)(d) 723 (f) 448 (h) Minority interest expense, net of taxes 130 (a) 147 (d) 238 (f) 163 (h) Extraordinary items -- (46)(e) (226)(g) (16)(i) Cumulative effect of accounting changes (1,175)(b) (16)(e) -- -- Net earnings (loss) (880)(a-c) (1,204)(d,e) 142 (f,g) 183 (h,i) Earnings (loss) applicable to common shares (880)(a-c) (1,204)(d,e) 142 (f,g) 183 (h,i) ------- -------- ------- ------- Financial Position Working capital $ 3,159 $ 2,814 $ 2,880 $ 2,859 Plants, properties and equipment, net 14,167 14,616 16,132 14,381 Forestlands 3,846 4,197 5,966 2,921 Total assets 33,792 37,177 42,109 30,268 Long-term debt 13,042 12,457 12,648 7,520 Common shareholders' equity 7,374 10,291 12,034 10,304 ------- -------- ------- ------- Per Share of Common Stock - Assuming No Dilution (m) Earnings (loss) before extraordinary items and cumulative effect of accounting changes $ 0.61 $ (2.37) $ 0.82 $ 0.48 Extraordinary items -- (0.10) (0.50) (0.04) Cumulative effect of accounting changes (2.44) (0.03) -- -- Net earnings (loss) (1.83) (2.50) 0.32 0.44 Cash dividends 1.00 1.00 1.00 1.01 Common shareholders' equity 15.21 21.25 24.85 24.85 ------- -------- ------- ------- Common Stock Prices High $ 46.19 $ 43.25 $ 60.00 $ 59.50 Low 31.35 30.70 26.31 39.50 Year-end 34.97 40.35 40.81 56.44 ------- -------- ------- ------- Financial Ratios Current ratio 1.7 1.5 1.4 1.7 Total debt to capital ratio 55.1 50.1 49.3 38.1 Return on equity (8.8)(a-c,l) (10.6)(d,e,l) 1.2(f,g,l) 1.7(h,i,l) Return on investment before extraordinary items and cumulative effect of accounting changes 2.6 (a,l) (0.7)(d,l) 3.3(f,l) 2.6(h,l) ------- -------- ------- ------- Capital Expenditures $ 1,009 $ 1,049 $ 1,352 $ 1,139 ------- -------- ------- ------- Number of Employees 91,000 100,100 112,900 98,700 ======= ======== ======= =======
Six-Year Financial Summary - -------------------------------------------------------------------------------------- Dollar amounts in millions, except per share amounts and stock prices 1998 1997 - -------------------------------------------------------------------------------------- Results of Operations Net sales $23,979 $24,556 Cost and expenses, excluding interest 23,039 23,976 Earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of accounting changes 429(j) 143 (k) Minority interest expense, net of taxes 87(j) 140 (k) Extraordinary items -- -- Cumulative effect of accounting changes -- -- Net earnings (loss) 247(j) (80)(k) Earnings (loss) applicable to common shares 247(j) (80)(k) ------- ------- Financial Position Working capital $ 2,675 $ 1,476 Plants, properties and equipment, net 15,320 15,707 Forestlands 3,093 3,273 Total assets 31,466 31,971 Long-term debt 7,697 8,521 Common shareholders' equity 10,738 10,647 ------- ------- Per Share of Common Stock - Assuming No Dilution (m) Earnings (loss) before extraordinary items and cumulative effect of accounting changes $ 0.60 $ (0.20) Extraordinary items -- -- Cumulative effect of accounting changes -- -- Net earnings (loss) 0.60 (0.20) Cash dividends 1.05 1.05 Common shareholders' equity 25.99 26.10 ------- ------- Common Stock Prices High $ 55.25 $ 61.00 Low 35.50 38.63 Year-end 44.81 43.13 ------- ------- Financial Ratios Current ratio 1.6 1.3 Total debt to capital ratio 39.0 46.1 Return on equity 2.3(j,l) (0.7)(k,l) Return on investment before extraordinary items and cumulative effect of accounting changes 2.5(j,l) 1.5 (k,l) ------- ------- Capital Expenditures $ 1,322 $ 1,448 ------- ------- Number of Employees 98,300 100,900 ======= =======
4 FINANCIAL GLOSSARY Current ratio - current assets divided by current liabilities. Total debt to capital ratio - long-term debt plus notes payable and current maturities of long-term debt divided by long-term debt, notes payable and current maturities of long-term debt, minority interest, preferred securities and total common shareholders' equity. Return on equity - net earnings divided by average common shareholders' equity (computed monthly). Return on investment - the after-tax amount of earnings before interest, minority interest, extraordinary items and cumulative effect of accounting changes divided by the average of total assets minus accounts payable and accrued liabilities (computed on a monthly basis). FOOTNOTES TO SIX-YEAR FINANCIAL SUMMARY (a) Includes a $199 million charge before taxes and minority interest ($130 million after taxes and minority interest) for facility closures, administrative realignment severance costs, and cost reduction actions, a pre-tax charge of $450 million ($278 million after taxes) for additions to existing exterior siding legal reserves, a charge of $46 million before taxes and minority interest ($27 million after taxes and minority interest) for early debt retirement costs, a credit of $41 million before taxes and minority interest ($101 million after taxes and minority interest) to adjust accrued costs of businesses sold or held for sale, and a pre-tax credit of $68 million ($43 million after taxes) for the reversal of restructuring and realignment reserves no longer required. (b) Includes a $1.2 billion charge for the transitional goodwill impairment charge from the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," recorded as the cumulative effect of an accounting change in the first quarter of 2002. (c) Reflects a decrease of $46 million in the income tax provision for a reduction of deferred state income tax liabilities. (d) Includes a $1.1 billion charge before taxes and minority interest ($752 million after taxes and minority interest) for asset shutdowns of excess internal capacity, cost reduction actions, and additions to existing exterior siding legal reserves, a net pre-tax charge of $629 million ($587 million after taxes) related to dispositions and asset impairments of businesses held for sale, a $42 million pre-tax charge ($28 million after taxes) for Champion merger integration costs, and a $17 million pre-tax credit ($11 million after taxes) for the reversal of reserves no longer required. (e) Includes an extraordinary pre-tax charge of $73 million ($46 million after taxes) related to the impairment of the Masonite business and the divestiture of the Petroleum and Minerals assets and a charge of $25 million before taxes and minority interest ($16 million after taxes and minority interest) for the cumulative effect of a change in accounting for derivatives and hedging activities. (f) Includes an $824 million charge before taxes and minority interest ($509 million after taxes and minority interest) for asset shutdowns, a $125 million pre-tax charge ($80 million after taxes) for additional exterior siding legal reserves, a $54 million pre-tax charge ($33 million after taxes) for merger-related expenses, and a $34 million pre-tax credit ($21 million after taxes) for the reversal of reserves no longer required. (g) Includes an extraordinary gain of $385 million before taxes and minority interest ($134 million after taxes and minority interest) on the sale of International Paper's investment in Scitex and Carter Holt Harvey's sale of its share of Compania de Petroleos de Chile (COPEC), an extraordinary loss of $460 million before taxes ($310 million after taxes) related to the impairment of the Zanders and Masonite businesses, an extraordinary gain before taxes and minority interest of $368 million ($183 million after taxes and minority interest) related to the sale of Bush Boake Allen, an extraordinary loss of $5 million before taxes and minority interest ($2 million after taxes and minority interest) related to Carter Holt Harvey's sale of its Plastics division, and an extraordinary pre-tax charge of $373 million ($231 million after taxes) related to impairments of the Argentine investments and the Chemical Cellulose Pulp and Fine Papers businesses. (h) Includes a $148 million pre-tax charge ($97 million after taxes) for Union Camp merger-related termination benefits, a $107 million pre-tax charge ($78 million after taxes) for merger-related expenses, a $298 million pre-tax charge ($180 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $10 million pre-tax charge ($6 million after taxes) to increase existing environmental remediation reserves related to certain former Union Camp facilities, a $30 million pre-tax charge ($18 million after taxes) to increase existing legal reserves and a $36 million pre-tax credit ($27 million after taxes) for the reversal of reserves no longer required. (i) Includes an extraordinary loss of $26 million before taxes ($16 million after taxes) for the extinguishment of high-interest debt that was assumed in the merger with Union Camp. 5 (j) Includes a $20 million pre-tax gain ($12 million after taxes) on the sale of the Veratec nonwovens business, an $83 million pre-tax credit ($50 million after taxes) from the reversals of previously established reserves that were no longer required, a $111 million pre-tax charge ($68 million after taxes) for the impairment of oil and gas reserves due to low prices, a $145 million restructuring and asset impairment charge before taxes and minority interest ($82 million after taxes and minority interest) and $16 million of pre-tax charges ($10 million after taxes) related to International Paper's share of charges taken by Scitex, a 13% investee company, for the write-off of in-process research and development related to an acquisition and costs to exit the digital video business. (k) Includes a pre-tax business improvement charge of $535 million ($385 million after taxes), a $150 million pre-tax provision for legal reserves ($93 million after taxes), a pre-tax charge of $125 million ($80 million after taxes) for anticipated losses associated with the sale of the Imaging businesses, and a gain of $170 million before taxes and minority interest ($97 million after taxes and minority interest) from the redemption of certain retained West Coast partnership interests and the release of a related debt guaranty. (l) Return on equity was 5.3% and return on investment was 4.0% in 2002 before special items and cumulative effect of an accounting change. Return on equity was 1.8% and return on investment was 2.9% in 2001 before special and extraordinary items and cumulative effect of an accounting change. Return on equity was 8.3% and return on investment was 5.3% in 2000 before special and extraordinary items. Return on equity was 5.2% and return on investment was 4.0% in 1999 before special and extraordinary items. Return on equity was 3.2% and return on investment was 2.8% in 1998 before special items. Return on equity was 3.4% and return on investment was 3.0% in 1997 before special items. (m) All per share amounts are computed before the effects of dilutive securities. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Corporate Overview Results of Operations For the year ended December 31, 2002, International Paper reported a net loss of $880 million ($1.83 per share) compared with a net loss of $1.2 billion ($2.50 per share) in 2001 and net earnings of $142 million ($.32 per share) in 2000. Amounts include the effects of special charges, extraordinary items and the cumulative effect of accounting changes. Special charges in 2002 included a charge of $199 million before taxes and minority interest ($130 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $450 million pre-tax charge ($278 million after taxes) for additional exterior siding legal reserves, a $46 million charge before taxes and minority interest ($27 million after taxes and minority interest) for early debt retirement costs, $41 million before taxes and minority interest ($101 million after taxes and minority interest) of gains on sales of businesses held for sale, and a $68 million pre-tax credit ($43 million after taxes) for the reversal of reserves no longer required. In addition, a $46 million credit was recorded to reduce the 2002 income tax provision in the fourth quarter for a reduction of deferred state income tax liabilities. Results for 2002 also included a charge of $1.2 billion after minority interest ($2.44 per share) for the cumulative effect of an accounting change to record the transitional impairment charge for the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." In addition, a $1.5 billion after-tax direct charge to equity (with no impact on operating results) was recorded in the 2002 fourth quarter related to International Paper's qualified pension plans. These two items were non-cash charges and had no adverse effect on existing debt covenants.
- -------------------------------------------------------------------------------- In millions 2002 - ------------------------------------------------------------------------------- Earnings (Loss) Earnings (Loss) Before Income After Income Taxes and Taxes and Minority Interest Minority Interest - ------------------------------------------------------------------------------- Before special items and cumulative effect of accounting change $ 957 $ 540 Restructuring and other charges (199) (130) Provision for legal reserves (450) (278) Debt retirement costs (46) (27) Reversal of reserves no longer required 68 43 Net gains on sales and impairments of businesses held for sale 41 101 Deferred state income tax adjustment -- 46 ------- ------- After special items 371 295 Accounting change - transitional goodwill impairment charge (1,236) (1,175) ------- ------- Net loss $ (865) $ (880) ======= =======
Special charges in 2001 included a charge of $892 million before taxes and minority interest ($606 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $225 million pre-tax charge ($146 million after taxes) for additions to the existing exterior siding legal reserves, a $17 million pre-tax credit 6 ($11 million after taxes) for the reversal of reserves no longer required, a $629 million pre-tax net loss ($587 million after taxes) related to dispositions and asset impairments of businesses held for sale, and a $42 million pre-tax charge ($28 million after taxes) related to merger integration costs. Additionally, results included an extraordinary pre-tax loss of $73 million ($46 million after taxes, or $.10 per share) for disposition losses and asset impairments of businesses held for sale, and a charge of $25 million before taxes and minority interest ($16 million after taxes and minority interest, or $.03 per share) for the cumulative effect of a change in accounting for derivatives and hedging activities.
- -------------------------------------------------------------------------------- In millions 2001 - -------------------------------------------------------------------------------- Earnings (Loss) Earnings (Loss) Before Income After Income Taxes and Taxes and Minority Interest Minority Interest - -------------------------------------------------------------------------------- Before special and extraordinary items and cumulative effect of accounting change $ 506 $ 214 Restructuring and other charges (892) (606) Provision for legal reserves (225) (146) Reversal of reserves no longer required 17 11 Net losses on sales and impairments of businesses held for sale (629) (587) Merger-related expenses (42) (28) ------- ------- After special items (1,265) (1,142) Extraordinary item - net losses on sales and impairments of businesses held for sale (73) (46) Accounting change - derivatives and hedging activities (25) (16) ------- ------- Net loss $(1,363) $(1,204) ======= =======
In 2000, special charges included a charge of $824 million before taxes and minority interest ($509 million after taxes and minority interest) for restructuring and cost reduction actions, a $125 million pre-tax charge ($80 million after taxes) for additional exterior siding legal reserves, a $34 million pre-tax credit ($21 million after taxes) for the reversal of reserves no longer required, and a $54 million pre-tax charge ($33 million after taxes) for merger integration costs. In addition, an extraordinary charge of $85 million before taxes and minority interest ($226 million after taxes and minority interest, or $.50 per share) was recorded for net disposition losses and asset impairments of businesses held for sale.
- -------------------------------------------------------------------------------- In millions 2000 - -------------------------------------------------------------------------------- Earnings (Loss) Earnings (Loss) Before Income After Income Taxes and Taxes and Minority Interest Minority Interest - -------------------------------------------------------------------------------- Before special and extraordinary items $ 1,692 $ 969 Restructuring and other charges (824) (509) Provision for legal reserves (125) (80) Reversal of reserves no longer required 34 21 Merger-related expenses (54) (33) ------- ----- After special items 723 368 Extraordinary item - net losses on sales and impairments of businesses held for sale (85) (226) ------- ----- Net earnings $ 638 $ 142 ======= =====
Earnings Before Special and Extraordinary Items and Cumulative Effect of Accounting Changes Earnings before special and extraordinary items and the cumulative effect of an accounting change in 2002 were $540 million, or $1.12 per share, compared with earnings before special and extraordinary items and the cumulative effect of an accounting change of $214 million, or $.44 per share in 2001, and $969 million, or $2.16 per share, in 2000. Earnings in 2002 benefited by approximately $185 million, or $.38 per share, from the exclusion of goodwill amortization as compared with 2001 amounts. After adjusting for this goodwill amortization difference, operating earnings improved nearly 40% in 2002 versus 2001. This improvement was principally due to the implementation of cost reduction initiatives and operational efficiencies despite lower average prices across all of our business segments. Results in 2002 also benefited from lower energy costs than in 2001. The earnings decline in 2002 versus 2000 was due mainly to lower prices and volumes. Earnings in 2000 included six months of Champion's results of operations from the date of acquisition. Segment operating profit of $1.9 billion in 2002, was up from $1.8 billion in 2001, but down from $2.7 billion reported in 2000. Non-price improvements, including lower overhead and raw material costs, combined with a favorable product mix accounted for about a $690 million operating profit improvement in 2002 compared with 2001. In addition, higher volume contributed another $60 million. Price declines experienced in 2002 resulted in lower operating profits of about $600 million. The improved return on investment (ROI) in 2002 was primarily due to better operating performance. ROI also benefited from working capital reductions and facility rationalizations. ROI before 7 special charges was 4.0% in 2002, 2.9% in 2001, and 5.3% in 2000. Cost reduction initiatives have been broad-based. In 2002, the Printing Papers business restructured certain European operations and implemented a reduction-in-force plan in its coated papers mills. The Consumer Packaging business implemented a business reorganization plan and eliminated duplicative facilities. xpedx, our distribution business, consolidated facilities and began to streamline its transaction processing. Carter Holt Harvey made additional progress in improving the cost structure of its Kinleith mill. Also in 2002, International Paper continued to realign administrative functions across all businesses and staff support groups to reduce overhead costs. International Paper continued to balance our production with customer orders in 2002, taking about 600,000 tons of market-related downtime across its mill system. This was down from 1.7 million tons in 2001, due mainly to capacity reductions. Approximately one million tons of capacity reduction actions were taken in 2001, with another 100,000 tons removed through the closure of our Hudson River mill in Corinth, New York in November 2002. Also, subsequent to year end, we announced plans to close our Natchez, Mississippi dissolving pulp mill in mid-2003. International Paper's major focus is on three core businesses - paper, packaging and forest products. In 2000, we announced a program to exit certain businesses that we considered to be non-core or that did not meet our ROI criteria, and to sell certain other non-strategic assets. During 2002, we completed the sales of our oriented strand board facilities and Decorative Products operations. Since the inception of this program, International Paper's divestitures have generated proceeds in excess of $3 billion. In June 2002, International Paper discontinued plans to divest both the Arizona Chemical and Industrial Papers businesses while other small businesses and non-strategic assets continue to be marketed. Net sales in 2002 totaled $25.0 billion, below both 2001 and 2000 net sales of $26.4 billion and $28.2 billion, respectively. The decrease from 2001 was primarily due to the impact of our divested businesses and lower average prices across most of our business segments. International net sales (including U.S. exports) totaled $7.5 billion, or 30% of total sales in 2002. This compares to sales of $7.1 billion in 2001 and $7.6 billion in 2000. The increase in 2002 versus 2001 is mainly due to increased revenues from Carter Holt Harvey. Export sales of $1.3 billion in 2002 were flat with 2001, but down from $1.6 billion in 2000, primarily due to the strong U.S. dollar that made U.S. products less competitive. Over the last few years, the softness in the U.S. economy, a weakening global economy and the strong dollar have had a significant negative impact on profits for International Paper and the Forest Products industry. One measure that we believe provides a reflection of International Paper's improvement in operating performance is the company's return on investment before special charges compared with a peer group of competitors in the Forest Products industry. This comparison indicates that International Paper has moved from the bottom quartile in operating ROI in 1999 to a position of third in the peer group* of eight companies in 2002. We are pleased with these results, and we will continue to focus our efforts on further improvement in this comparative ROI measure in future years. Looking forward, we expect a slow but steady improvement in the business environment in 2003 following a weak first quarter that reflects a current general economic softness and seasonal factors. Continued geopolitical unrest and uncertainty could likely impede any improvement in the economy. Energy costs are also expected to be higher in 2003 than in 2002. We will continue to focus on cost reduction, manufacturing reliability and delivering greater value to our customers. *The 2002 peer group includes Boise, Georgia-Pacific, MeadWestvaco, Smurfit-Stone, Stora-Enso, UPM-Kymmene, Weyerhaeuser and International Paper. Description of Industry Segments International Paper's industry segments discussed below are consistent with the internal structure used to manage these businesses. All segments, except for Carter Holt Harvey, are differentiated on a common product, common customer basis consistent with the business segmentation generally used in the Forest Products industry. The Carter Holt Harvey segment includes the results of multiple Forest Products businesses. Printing Papers International Paper is one of the world's leading producers of printing and writing papers. Products in this segment include uncoated and coated papers, market pulp and bristols. Uncoated Papers: This business produces papers for use in copiers, desktop, laser and digital imaging printing as well as in advertising and promotional materials such as brochures, pamphlets, greeting cards, books, annual reports and direct mail publications. Uncoated Papers also produces a variety of grades that are converted by our customers into envelopes, tablets, business forms, and file folders. Fine papers are used in high-quality text, cover, business correspondence and artist papers. Uncoated Papers are sold under private label and International Paper brand names which include Hammermill, Springhill, Great White, Strathmore, Ballet, Beckett and Rey. 8 The mills producing uncoated papers are located in the United States, Scotland, France, Poland and Russia. These mills have uncoated paper production capacity of 5.1 million tons annually. Coated Papers: This business produces coated papers used in a variety of printing and publication end uses such as catalogs, direct mail, magazines, inserts and commercial printing. Products include coated free sheet, coated groundwood and supercalendered groundwood papers. Production capacity in the United States amounts to approximately 2.0 million tons annually. Market Pulp: Market pulp is used in the manufacture of printing, writing and specialty papers. Pulp is also converted into products such as diapers and sanitary napkins. Products include fluff, northern and southern softwood pulp, as well as northern, southern, and birch hardwood paper pulps. These products are produced in the United States, Canada, France, Poland and Russia, and are sold around the world. International Paper facilities have annual dried pulp capacity of about 2.3 million tons. Brazilian Paper: Brazilian operations function through International Paper do Brasil, Ltda, which owns or manages 1.5 million acres of forestlands in Brazil. Our annual production capacity in Brazil is about 660,000 tons of coated and uncoated papers. Industrial and Consumer Packaging Industrial Packaging: With production capacity of about 4.5 million tons annually, International Paper is the third largest manufacturer of containerboard in the United States. Over one-third of our production is specialty grades, such as PineLiner, Sunliner, Polarboard, Coastliner, BriteTop and Spra White. About 64% of our production is converted domestically into corrugated boxes and other packaging by our 51 U.S. container plants. In Europe, our operations include one recycled fiber mill in France and 21 container plants in France, Ireland, Italy, Spain and the United Kingdom. Our global presence also includes operations in Chile, Turkey and China. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives. We have the capacity to produce around 430,000 tons of kraft paper each year for use in multi-wall and retail bags. Consumer Packaging: International Paper is the world's largest producer of bleached packaging board with annual production capacity of about 1.8 million tons. Our Everest, Fortress and Starcote brands are used in packaging applications for juice, milk, food, cosmetics, pharmaceuticals, computer software and tobacco products. Approximately 40% of our bleached board production is converted into packaging products in our own plants. Our Beverage Packaging business has 15 plants worldwide offering complete packaging systems, from paper to filling machines, using proprietary technologies including Tru-Taste brand barrier board technology for premium long-life juices. Shorewood Packaging Corporation (Shorewood) operates 19 plants worldwide, producing packaging with high-impact graphics for a variety of consumer markets, including tobacco, cosmetics and home entertainment. The Foodservice business offers cups, lids, cartons, bags, containers, beverage carriers, trays and plates from five domestic plants and through four international joint ventures. Group-wide product development efforts provide customers with innovative packaging solutions, including the "smart package" that tracks, traces and authenticates packages throughout the global supply chain. Distribution Through xpedx, our North American merchant distribution business, we supply industry wholesalers and end users with a vast array of printing, packaging, graphic arts, facility supplies and industrial products. xpedx operates 129 warehouses and 147 retail stores in the United States and Mexico. Overseas, Papeteries de France, Scaldia in the Netherlands and Impap in Poland serve European markets. Products manufactured at International Paper facilities account for about 22% of our worldwide distribution sales. Forest Products Forest Resources: International Paper owns or manages approximately 9 million acres of third-party certified forestlands in the United States, mostly in the South. In 2002, these forestlands supplied about 30% of our wood fiber requirements. Wood Products: International Paper owns and operates 27 U.S. plants producing southern pine lumber, plywood, engineered wood products and utility poles. The majority of these plants are located in the South near our forestlands. We can produce about 2.5 billion board feet of lumber and 1.6 billion square feet of plywood annually. Also, Weldwood of Canada Limited, a wholly-owned subsidiary of International Paper, produces about 1.1 billion board feet of lumber and 430 million square feet of plywood annually. Through licenses and forest management agreements, we have harvesting rights on government-owned forestlands in Canada and Russia. Carter Holt Harvey Carter Holt Harvey is approximately 50.5% owned by International Paper. It is one of the largest forest products companies in the Southern Hemisphere, with operations mainly in New Zealand and Australia. The Australasian region accounts for about 80% of its sales. Asia is an important 9 market for its logs, pulp and linerboard products. Carter Holt Harvey's major businesses include: Forest Operations, including ownership of 810,000 acres of predominantly radiata pine plantations that yield over 6.5 million tons of logs annually. Wood Products, including over 600 million board feet of lumber capacity and about 900 million square feet of plywood and panel production. Carter Holt Harvey is the largest Australasian producer of lumber, plywood, laminated veneer lumber and panel products. Pulp and Paper Products, with overall capacity of more than 1.0 million tons of annual linerboard and pulp capacity at four mills. Carter Holt Harvey is New Zealand's largest manufacturer and marketer of pulp and paper products. Tissue Products, with nearly 190 thousand tons of annual production capacity from two mills and seven converting plants. Carter Holt Harvey is the largest tissue manufacturer in Australia. Carter Holt Harvey also produces corrugated boxes, cartons and paper bags, with a focus on the horticulture, primary produce and foodservice markets. Specialty Businesses and Other Chemicals: Arizona Chemical is a leading processor of crude tall oil and crude sulfate turpentine, natural byproducts of the papermaking process. Products include specialty resins used in adhesives and inks made at 14 plants in the United States and Europe. Industrial Papers: We can produce 350,000 tons of specialty industrial papers annually that are used in applications such as pressure-sensitive labels, food and industrial packaging, industrial sealants and tapes, and consumer hygiene products. Decorative Products: In the third quarter of 2002, International Paper completed the sale of its Decorative Products Division to an affiliate of Kohlberg & Co. Prior to the sale, they produced high- and low-pressure laminates, particleboard and graphic arts products. Products and brand designations appearing in italics are trademarks of International Paper or a related company. Industry Segment Results Printing Papers Printing Papers net sales for 2002 were down 4% from 2001 and increased 4% from 2000. Operating profits in 2002 were 4% lower than 2001 and were 44% lower than 2000. Lower earnings in our Coated Papers and Market Pulp businesses in 2002 more than offset increased profits from the Uncoated Papers business. Lower costs in 2002, including the benefits of broad-based cost reduction efforts, lower energy and raw material costs, and rationalization benefits offset about 70% of the approximately $400 million negative effect of lower average prices versus 2001. Higher sales volumes and a more favorable product mix also helped to mitigate the negative price effect. The Printing Papers segment took 655,000 tons of downtime during 2002, including 325,000 tons of lack-of-order downtime to align production with customer demand. This compared with 1,015,000 tons of downtime in 2001, of which 700,000 related to lack-oforders. In 2002, Printing Papers permanently shut down the Hudson River mill located in Corinth, New York, reducing coated paper capacity by approximately 100,000 tons. Capacity reductions announced during 2001 totaled about 350,000 tons.
Printing Papers - -------------------------------------------------------------------------------- In millions 2002 2001 2000 - -------------------------------------------------------------------------------- Sales $7,510 $7,815 $7,210 Operating Profit $ 519 $ 538 $ 930
Uncoated Papers sales were $4.8 billion in 2002, down slightly from $4.9 billion in 2001 and flat compared with 2000. Overall average prices in 2002 declined from both 2001 and 2000. Annual 2002 shipments were relatively flat compared with 2001, with some volume growth in Europe and domestic operations maintaining volumes. Also, total capacity in the industry declined leading to higher operating rates. Operating profits increased 36% from 2001 and 15% from 2000 benefiting from manufacturing cost reductions, favorable operating efficiencies and lower administrative costs in our U.S. and European operations. In addition to the cost and efficiency initiatives, the business's increased marketing focus on key customers in targeted business segments had a positive impact on earnings. U.S. operating results benefited from improved operating efficiencies and capacity reductions that led to higher machine operating rates. Price increases implemented in the fall of 2002 remained in effect through the end of the year. Uncoated paper prices in Europe recovered somewhat from the 2001 fourth quarter, although the momentum slowed during the fourth quarter of 2002. Continued growth in eastern Europe more than offset weaker western European markets. Coated Papers sales were $1.5 billion in 2002, compared with $1.6 billion in 2001 and $1.2 billion in 2000. The business operated at a loss in 2002, primarily as a result of lower average sales prices, but was profitable in both 2001 and 2000. Shipments in 2002 increased 5%, while average prices were down about 15% following a 7% decline in 2001. Profits benefited from record-level machine efficiency as well as cost reduction efforts, which partially offset the impact of lower prices during 2002. 10 Market Pulp sales from our U.S., European and Canadian facilities were $765 million in 2002 compared with $815 million and $925 million in 2001 and 2000, respectively. Operating losses increased in 2002 compared with both 2001 and 2000 as average pulp prices eroded. Pulp prices showed some improvement beginning in the second quarter of 2002, but declined again during the fourth quarter. U.S. pulp volumes in 2002 were 6% higher than 2001, and were slightly higher in Canada, while volumes in Europe declined slightly. Successful cost reduction initiatives and strong manufacturing performance in 2002 helped to reduce the operating losses. Brazilian Paper sales were $440 million in 2002 compared with $460 million in 2001 and $270 million in 2000. Operating profits in 2002 were slightly lower than 2001, but were 69% greater than 2000, which included six months of operations after the acquisition of Champion. Volumes improved in 2002 versus 2001, although the effects of this increase could not fully offset the unfavorable impact of weaker export prices. The increases in sales and earnings in 2002 and 2001 over 2000 reflect a full year of reported operations versus six months in 2000 following the Champion acquisition in June 2000. Looking forward to 2003, we anticipate a slow but steady improvement in market conditions following a slow first quarter. Operationally, we continue to focus on key performance indicators including operating machine efficiency, on-time shipping performance and cost to serve. The Printing Papers segment is well positioned to benefit when economic expansion begins. Industrial and Consumer Packaging Industrial and Consumer Packaging net sales for 2002 were down 3% and 8% from 2001 and 2000, respectively. Operating profits in 2002 were up 2% from 2001 and were down 30% from 2000. Lower average 2002 prices resulted in a $190 million decline in revenues and operating profits, which was offset by lower overhead, energy and material costs and a more favorable product/customer mix ($150 million) and increased sales volumes ($50 million). Downtime in this segment in 2002 declined more than 50% compared with 2001, largely reflecting facility rationalizations in 2002 and 2001.
Industrial and Consumer Packaging - ------------------------------------------- In millions 2002 2001 2000 - ------------------------------------------- Sales $6,095 $6,280 $6,625 Operating Profit $ 517 $ 508 $ 741
Industrial Packaging net sales for 2002 were $3.6 billion compared with $3.7 billion in 2001 and $4.0 billion in 2000. The effect of a 6% reduction in average prices in 2002 versus 2001 was partially offset by a 4% improvement in volume. Operating profits in 2002 declined 21% and 48% from 2001 and 2000, respectively. Weak U.S. demand, coupled with pricing pressure, continued to adversely affect results for this business. Domestic box and board average prices declined by 6% in 2002. Domestic box shipments ended the year 2% higher than in 2001 despite generally soft market conditions and the loss of a large poultry customer early in the year. Containerboard price increases announced in mid-2002 took effect more slowly than anticipated and prices averaged 9% lower than in 2001. The markets in 2002 for the Kraft Paper business were weaker than in 2001. Further rationalization and production realignments between the mills had a positive impact on results. Overall business conditions for the European Container business were relatively stable during 2002. Internal process improvement programs were the major factor in increased earnings during 2002. In addition, the Etienne paper machine rebuild completed during the fourth quarter of 2001 led to improved results for 2002. During 2002, the Industrial Packaging business took 260,000 tons of lack-of-order downtime, continuing its policy of adjusting our production to be in line with customer demand. Consumer Packaging sales were $2.5 billion in 2002 compared with $2.6 billion in both 2001 and 2000. Overall, 2002 average prices were down about 6%, while shipments were slightly higher than 2001. Operating profits in 2002 increased 48% over 2001 and 13% over 2000 as a result of aggressive cost curtailment initiatives and favorable raw material prices that more than offset the effects of weaker average product pricing and mix. Our mills ran virtually at capacity for the year as our internal capacity was well balanced with favorable customer demand. Average bleached board prices declined in 2002 despite some improvement in the middle of the year. Earnings in the bleached board business were adversely affected by a paper machine upgrade completed in the third quarter that will have a positive impact going forward. Efforts to reduce controllable costs were a major contributor to Consumer Packaging's improved operating profits in 2002. These efforts included the rationalization of Shorewood's capacity, the exiting of the Aseptic business, and the further realignment of the domestic Beverage Packaging and Foodservice systems. Looking forward to 2003, we are not expecting improvement in demand. Markets will remain tight with price pressure continuing. Our customer-focused market initiatives combined with our cost control programs are expected to have a favorable impact on future operating results. 11 Distribution Distribution's 2002 net sales declined 7% and 13% from 2001 and 2000, respectively. Operating profits in 2002 were significantly higher than 2001, but were 23% lower than 2000. Lower operating costs, reflecting the impact of restructuring and cost control efforts in 2001 and 2002, added approximately $50 million to operating profits in 2002. Additionally, an improved mix of products and increased focus on key customer relationships added another $40 million. Lower bad debt expense was also a positive factor. However, lower sales volumes offset approximately $45 million of these improvements. Market conditions were difficult in 2002, but were improved compared with a very depressed period in 2001.
Distribution - ------------------------------------------- In millions 2002 2001 2000 - ------------------------------------------- Sales $6,345 $6,790 $7,255 Operating Profit $ 92 $ 21 $ 120
xpedx, our North American distribution operation, posted sales of $6 billion, down 6% and 13% from 2001 and 2000 levels, respectively. The weaker market conditions experienced in 2001 continued during the first quarter of 2002. Sales leveled off in the first half of 2002, then gradually improved over the balance of the year. Sales in our two primary U.S. customer segments, paper and supplies for the commercial printing industry and packaging supplies for the industrial sector, declined 10% and 7%, respectively, in 2002 from 2001. Earnings in 2002, however, were more than four times higher than 2001, although about 20% lower than 2000. The cost reduction plans, initiated in 2001 and continuing into 2002, were the primary drivers in our profit improvement in 2002. We continued our facility consolidation and cost reduction plans in 2002, reducing headcount by an additional 700 people, bringing the total since January 2001 to 1,800, or an 18% work force reduction. Additionally in 2002, progress was made on internal business initiatives to leverage our size and efficiency in transaction processing. Bad debt expense in 2002 decreased 45% from 2001 when the business experienced a number of customer bankruptcies. A higher ROI was achieved in 2002 due to improved earnings and aggressive working capital management, mainly reflected in lower inventories and accounts receivable. European distribution operations posted sales of $375 million, up 7% from 2001 and about the same as in 2000. The European businesses recorded a slight gain in 2002 following a small loss in 2001 and profits in 2000. For 2003, we expect a continued slow recovery as economic growth resumes. As of the end of 2002, we have completed most of our restructuring activity. Future operating results will continue to benefit from the cost reduction actions implemented in 2002 and 2001, and from further simplification of business processes and focused marketing initiatives. Forest Products Forest Products net sales for 2002 were 8% higher than in 2001, and were 30% above 2000 totals. Operating profits in 2002 were 7% and 24% higher than 2001 and 2000, respectively. Earnings in 2002 reflected stronger contributions from Forest Resources operations. The negative effects of lower average building materials prices, slightly lower stumpage prices, and lower sales volumes were partly offset by lower raw material costs. Also, overhead and operating costs declined, reflecting reorganization actions taken in recent years. The increase in sales and earnings in 2002 and 2001 over 2000 also reflects the operations of Champion that were acquired in June 2000.
Forest Products - ------------------------------------------- In millions 2002 2001 2000 - ------------------------------------------- Sales $3,090 $2,855 $2,380 Operating Profit $ 700 $ 655 $ 564
Forest Resources sales in 2002 were $1.2 billion compared with $960 million in 2001 and $848 million in 2000. Operating profit was 6% higher than 2001 and 17% higher than 2000, primarily due to higher timberland sales, lower operating costs and lower cost of timber harvested. Harvest volumes declined about 20% in 2002 compared with 2001 and 2000 levels, reflecting a lower inventory in 2002 of mature timber. Average stumpage prices in 2002 were below 2001 and 2000 levels, with southern pine sawtimber and pulpwood prices declining slightly versus 2001 prices. Earnings from sales of timberlands were approximately $25 million higher in the 2002 fourth quarter than in the third quarter, resulting in a 14% increase in timberland sales earnings in 2002 versus 2001. Earnings from timberland sales in 2001 were 58% higher than in 2000 reflecting the larger overall land base following the Champion acquisition in June 2000. International Paper monetizes its forest assets in various ways, including sales of short- and long-term harvest rights, on a pay-as-cut or lump-sum bulk sale basis, as well as sales of timberlands. We expect harvest volumes and sales of timberlands in 2003 to be lower than in 2002, and stumpage prices for southern yellow pine to decrease slightly, as lumber markets continue to be adversely impacted by imports, partially offset by reduced U.S. lumber capacity. 12 Wood Products sales in the United States in 2002 of $1.3 billion were lower than the $1.4 billion in 2001 and even with 2000, principally due to lower average lumber and panel prices, partially offset by improved manufacturing operations and costs. Average prices were down 4% for lumber in 2002 versus 2001 while volumes declined 2%. Average 2002 plywood prices were down about 5%, although volume was up 5%, compared with 2001. Although housing starts were up slightly, lumber imports increased in 2002, contributing to weaker average prices during the year. The April 2002 sale of the oriented strand board facilities will have a positive impact on future U.S. wood products results. Canadian wood products, operated through Weldwood of Canada, reported net sales of $565 million in 2002 compared with $480 million in 2001 and $190 million from the second half of 2000, after the June 2000 acquisition of Champion. Operating profits in 2002 were 36% higher than 2001. Average prices for lumber in 2002 were about the same as in 2001 while plywood prices showed improvement year over year. The favorable impact of higher productivity and marketing initiatives the business implemented in 2002 was a major factor in the earnings improvement. Looking forward, we expect pricing in 2003 will be mixed with earnings improvement to be driven primarily by lower operating costs and reduced downtime. Carter Holt Harvey International Paper's results shown below for this segment differ from those reported by Carter Holt Harvey in New Zealand in three major respects: 1. Carter Holt Harvey's earnings include only our share of Carter Holt Harvey's operating earnings. Segment sales, however, represent 100% of Carter Holt Harvey's sales. 2. Carter Holt Harvey reports in New Zealand dollars but our segment results are reported in U.S. dollars. The weighted average currency exchange rate used to translate New Zealand dollars to U.S. dollars was 0.47 in 2002, 0.41 in 2001 and 0.46 in 2000. 3. Carter Holt Harvey reports under New Zealand accounting standards, but our segment results comply with generally accepted accounting principles in the United States. The major differences relate to cost of timber harvested (COTH), goodwill amortization, pensions, deferred taxes and financial instruments. These differences reduced segment earnings by approximately $24 million in 2002, $30 million in 2001 and $20 million in 2000.
Carter Holt Harvey - ------------------------------------------- In millions 2002 2001 2000 - ------------------------------------------- Sales $1,910 $1,710 $1,675 Operating Profit $ 56 $ 13 $ 71
Carter Holt Harvey's 2002 net sales were 12% higher than 2001 and were 14% higher than 2000. Operating profits in 2002 were significantly improved over 2001's results but were 21% less than in 2000, when pulp prices were at a five year high. Essentially all of the increase in operating profits from 2001 was due to the effects of cost and margin control initiatives. Forest and Wood Products results improved significantly in 2002 as the residential housing markets in Australia and New Zealand strengthened, resulting in increased volumes. 2002 log exports were at similar levels to 2001 while log prices were slightly higher. The Pulp and Paper business recorded a loss for the year primarily due to weakening pulp sales prices. Tissue results improved in 2002 compared with 2001, benefiting from lower pulp prices and successful marketing initiatives. Higher earnings in the Packaging business reflect the margin improvement and cost control programs that were implemented during 2002. Operating results for 2003 will be dependent on changes in global economic conditions. Economic growth in 2003 for Australia and New Zealand is expected to drop from the strong 2002 levels. The housing market in Australia is expected to decrease in 2003 from the record high levels experienced in 2002. However, prices for key commodities such as pulp and logs are expected to improve on 2002 prices. Specialty Businesses and Other The Specialty Businesses and Other segment includes Arizona Chemical, Chemical Cellulose Pulp and Industrial Papers. Also included are businesses identified in our divestiture program whose results are included in this segment for periods prior to their sale.
Specialty Businesses and Other - ------------------------------------------- In millions 2002 2001 2000 - ------------------------------------------- Sales $1,535 $2,325 $4,230 Operating Profit $ 51 $ 52 $ 233
Chemicals sales were $595 million in 2002, compared with $566 million in 2001 and $632 million in 2000. Operating profits in 2002 were about 7% lower than in 2001, and about half of the 2000 level, as cost reduction efforts partially offset the negative impact of higher material costs and lower average prices. Industrial Papers sales were $436 million in 2002 compared with sales of $451 million in 2001 and $498 million in 2000. Operating profit in 2002 was up 62% and 11% from 2001 and 2000, respectively. Lower input costs, mix improvements, and less downtime, partially offset by weaker prices, contributed to the improvement in operating profits in 2002. 13 Other businesses in the above totals include operations that have been sold, including Masonite, the oil and gas and mineral royalty business, Decorative Products, Zanders, Flexible Packaging, Retail Packaging, Bush Boake Allen, the former Champion Hamilton Mill, and the Curtis/Palmer hydroelectric facility. Sales for these businesses were approximately $500 million in 2002 compared with $1.3 billion in 2001 and $3.1 billion in 2000. Also included is the Chemical Cellulose Pulp business. In January 2003, we announced that the Natchez, Mississippi, dissolving pulp mill comprising this business would be closed in mid-2003. Corporate Items and Interest Expense For the twelve months ended December 31, 2002, corporate net expense was $253 million compared with $369 million in 2001 and $285 million in 2000. The decrease in 2002 was primarily due to the elimination of goodwill amortization, higher net foreign exchange gains, lower natural gas hedging costs and income from the sale of shares received from an insurance company demutualization, offset in part by lower pension income and higher benefit and inventory related costs. Net interest expense decreased to $783 million in 2002 compared with $929 million in 2001 and $816 million in 2000. The decrease in 2002 reflects lower interest rates and the reductions in long-term debt in 2001. The increase in 2001 included a full year of interest on debt incurred in connection with the Champion acquisition compared with a half year in 2000. Proceeds received from the sale of assets in 2002, 2001 and 2000, were used to reduce debt and for other general corporate purposes. Minority interest expense, net of taxes, decreased to $130 million in 2002, compared with $147 million in 2001 and $238 million in 2000. The decreases reflect lower earnings in 2002 compared with both 2001 and 2000, as well as divestitures in 2001. Liquidity and Capital Resources Cash Provided by Operations Cash provided by operations totaled $2.1 billion for 2002, compared with $1.7 billion in 2001 and $2.4 billion in 2000. The increase in operating cash flow in 2002 reflects lower working capital requirements and higher earnings before special items and the cumulative effect of an accounting change. Excluding special and extraordinary items and the cumulative effect of accounting changes, net earnings after taxes and minority interest for 2002 increased $326 million from 2001, due principally to higher operating earnings reflecting lower depreciation and amortization expense. A decrease in working capital increased 2002 operating cash flow by $368 million. The decrease in operating cash flow in 2001 reflects lower earnings before special and extraordinary items and accounting changes. Excluding special and extraordinary items and accounting changes, after taxes and minority interest, net earnings for 2001 decreased $755 million from 2000. Working capital changes increased 2001 operating cash flow by $279 million and decreased 2000 operating cash flow by $146 million. Depreciation and amortization expense was $1.6 billion in 2002 and $1.9 billion in both 2001 and 2000. Investment Activities Capital spending was $1.0 billion in 2002, or 64% of depreciation and amortization as compared to $1.0 billion, or 56% of depreciation and amortization in 2001, and $1.4 billion, or 71% of depreciation and amortization in 2000. Higher spending in 2000 was the result of capital projects for Champion. As part of our emphasis on improving return on investment, we have continued to hold annual capital spending well below annual depreciation and amortization expense. Discretionary capital spending has been focused on cost reduction, process stabilization and customer service improvement. The following table presents capital spending by each of our business segments for the years ended December 31, 2002, 2001 and 2000.
- ------------------------------------------------------------ In millions 2002 2001 2000 - ------------------------------------------------------------ Printing Papers $ 399 $ 374 $ 447 Industrial and Consumer Packaging 249 246 296 Distribution 5 16 24 Forest Products 127 175 217 Carter Holt Harvey 69 85 100 Specialty Businesses and Other 71 82 172 ------ ------ ------ Subtotal 920 978 1,256 Corporate and other 89 71 96 ------ ------ ------ Total $1,009 $1,049 $1,352 ====== ====== ======
We expect capital expenditures in 2003 to be about $1.3 billion, or about 81% of depreciation and amortization. Mergers and Acquisitions In December 2002, Carter Holt Harvey acquired Starwood Australia's Bell Bay medium density fiberboard plant in Tasmania for $28 million in cash. In April 2001, Carter Holt Harvey acquired Norske Skog's Tasman Kraft pulp manufacturing business for $130 million in cash. In June 2000, International Paper completed the acquisition of Champion, a leading manufacturer of paper for business 14 communications, commercial printing and publications, with significant market pulp, plywood and lumber manufacturing operations. Champion shareholders received $50 in cash per share and $25 worth of International Paper common stock for each Champion share. Champion shares were acquired for approximately $5 billion in cash and 68.7 million shares of International Paper common stock with a fair market value of $2.4 billion. Approximately $2.8 billion of Champion debt was assumed. In April 2000, Carter Holt Harvey purchased CSR Limited's medium density fiberboard and particleboard businesses and its Oberon sawmill for approximately $200 million in cash. In March 2000, International Paper acquired Shorewood, a leader in the manufacture of premium retail packaging, for approximately $640 million in cash and the assumption of $280 million of debt. All of the above 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. In March 2001, International Paper and Carter Holt Harvey each acquired a 25% interest in International Paper Pacific Millennium Limited. The resulting investment is accounted for under the equity method and is included in Investments in the accompanying consolidated balance sheet. Financing Activities Financing activities during 2002 included debt issuances of $2.0 billion and retirements of $3.0 billion, for a net debt reduction of $1.0 billion. Debt issuances in 2002 included $1.2 billion of 5.85% Senior Unsecured Notes due October 30, 2012, the proceeds of which were used to retire most of International Paper's $1.2 billion of 8.0% notes due July 2003 that were issued in connection with the Champion acquisition. Financing activities during 2001 included a net debt reduction of $1.4 billion, primarily from proceeds from divestitures. Debt issuances in 2001 included $1.0 billion of 6.75% Senior Unsecured Notes due September 1, 2011, which yielded proceeds of $993 million, and $2.1 billion of zero-coupon Convertible Senior Debentures due June 20, 2021, which yielded proceeds of approximately $1.0 billion. Financing activities during 2000 included $6.3 billion of debt issuances, including $4.3 billion in long-term debt and $2 billion of short-term debt instruments (largely commercial paper) issued mainly to finance the Champion and Shorewood acquisitions. In addition, we assumed approximately $3.0 billion of debt associated with acquisitions, and subsequently reduced the acquired debt balances by $450 million. We repaid $600 million of maturing long-term debt and $1.0 billion in short-term debt from divestiture proceeds and operating cash flows, as well as $700 million of Carter Holt Harvey debt from proceeds received on the sale of its interest in COPEC. Dividend payments totaled $482 million in both 2002 and 2001, and $447 million in 2000. The International Paper common stock dividend remained at $1.00 per share during the three-year period. At December 31, 2002 and 2001, cash and temporary investments totaled $1.1 billion and $1.2 billion, respectively. Capital Resources Outlook for 2003 International Paper has the ability to fund capital expenditures, service existing debt, and meet working capital and dividend requirements during 2003 through various sources of short- and long-term capital. In addition to existing cash balances and cash provided from operations, short-term liquidity requirements can be met using commercial paper funding. International Paper currently holds short-term credit ratings by Standard & Poor's and Moody's Investors Services of A-2 and P-2, respectively. At December 31, 2002, International Paper had no commercial paper borrowings outstanding. Should a ratings change or market event affect International Paper's ability to access the commercial paper market, short-term liquidity needs could be met through committed revolving credit facilities in excess of $2.0 billion. At December 31, 2002, these facilities were unused. In addition, International Paper has the ability to raise up to $600 million through an asset-backed accounts receivable securitization program established in 2001. At December 31, 2002, this facility was also unused. International Paper believes that these sources will be adequate to fund capital requirements in 2003. International Paper has approximately $485 million of debt scheduled for repayment in 2003. We anticipate using new debt issuances to refinance maturing debt balances. Contractual obligations for future payments under existing debt and lease commitments at December 31, 2002 were as follows:
- --------------------------------------------------------------------- In millions 2003 2004 2005 2006 2007 Thereafter - --------------------------------------------------------------------- Long-term debt $ -- $1,800 $1,700 $709 $488 $8,345 Lease obligations 229 167 180 99 84 263 ---- ------ ------ ---- ---- ------ Total $229 $1,967 $1,880 $808 $572 $8,608 ==== ====== ====== ==== ==== ======
The majority of International Paper's debt is accessed through global public capital markets where we have a wide base of investors. 15 Special Items Including Restructuring and Business Improvement Actions: Divestitures In 2000, International Paper announced a divestment program following the Champion acquisition and the completion of a strategic analysis to focus on International Paper's core businesses. Through December 31, 2002, more than $3 billion had been realized under the program, including cash and notes received plus debt assumed by the buyers. Net (Gains) Losses on Sales and Impairments of Businesses Held for Sale 2002: In the fourth quarter of 2002, International Paper recorded a $10 million pre-tax credit ($4 million after taxes) to adjust estimated accrued costs of businesses previously sold. In the third quarter of 2002, International Paper completed the sale of its Decorative Products operations to an affiliate of Kohlberg & Co. for approximately $100 million in cash and a note receivable with a fair market value of $13 million. This transaction resulted in no gain or loss as these assets had previously been written down to fair market value. Also during the third quarter of 2002, a net gain of $3 million before taxes ($1 million after taxes) was recorded related to adjustments of previously recorded costs of businesses held for sale. During the second quarter of 2002, a net gain on sales of businesses held for sale of $28 million before taxes and minority interest ($96 million after taxes and minority interest) was recorded, including a pre-tax gain of $63 million ($40 million after taxes) from the sale in April 2002 of International Paper's oriented strand board facilities to Nexfor Inc. for $250 million, and a net charge of $35 million before taxes and minority interest (a gain of $56 million after taxes and minority interest) relating to other sales and adjustments of previously recorded estimated costs of businesses held for sale. This net pre-tax charge included: (1) a $2 million net loss associated with the sales of the Wilmington carton plant and Carter Holt Harvey's distribution business; (2) an additional loss of $12 million to write down the net assets of Decorative Products to the amount realized on the subsequent sale; (3) $11 million of additional expenses relating to the decision to continue to operate Arizona Chemical, including a $3 million adjustment of previously estimated costs incurred in connection with the prior sale effort and an $8 million charge to permanently close a production facility; and (4) a $10 million charge for additional expenses relating to prior divestitures. The impairment charge recorded for Arizona Chemical in the fourth quarter of 2001 (see below) included a tax expense based on the form of sale being negotiated at that time. As a result of the decision in the second quarter of 2002 to discontinue sale efforts and to hold and operate Arizona Chemical in the future, this provision was no longer required. Consequently, special items for the second quarter included a gain of $28 million before taxes and minority interest, with an associated $96 million benefit after taxes and minority interest. The 2002 net gains, totaling $41 million (discussed above) are included in Net (gains) losses on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. 2001: In the fourth quarter of 2001, a pre-tax impairment loss of $582 million ($524 million after taxes) was recorded, including $576 million to write down the net assets of Arizona Chemical, Decorative Products and Industrial Papers to an estimated realizable value of approximately $550 million, and $6 million of severance for the reduction of 189 employees in the Chemical Cellulose Pulp business. Also in the fourth quarter, International Paper sold its Mobile, Alabama Retail Packaging facility to Ampac, resulting in a pre-tax loss of $9 million. In the third quarter of 2001, International Paper sold Masonite Corporation (Masonite) to Premdor Inc. of Toronto, Canada, resulting in a pre-tax loss of $87 million, its Flexible Packaging business to Exo-Tech Packaging, LLC, resulting in a pre-tax loss of $31 million, and its Curtis/Palmer hydroelectric generating project in Corinth, New York to TransCanada Pipelines Limited, resulting in a pre-tax gain of $215 million. Additionally, a pre-tax impairment loss of $50 million ($32 million after taxes) was recorded in the third quarter to write down the Chemical Cellulose assets to their expected realizable value of approximately $25 million. In the second quarter of 2001, a pre-tax impairment loss of $85 million ($55 million after taxes) was recorded to reduce the carrying value of the Flexible Packaging assets to their expected realizable value of approximately $85 million based on preliminary offers received. The 2001 losses discussed above, totaling $629 million, are included in Net (gains) losses on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. Structured Transactions In connection with a sale of forestlands in the state of Washington in 2001, International Paper received notes having a value of approximately $480 million on the date of 16 sale. During 2001, International Paper transferred the Notes to an unconsolidated entity in exchange for a preferred interest in that entity valued at approximately $480 million, and accounted for this transfer as a sale of the Notes for financial reporting purposes with no associated gain or loss. Also during 2001, the entity acquired approximately $561 million of other International Paper debt obligations for cash. At December 31, 2001, International Paper offset, for financial reporting purposes, the $480 million of International Paper debt obligations held by the entity since International Paper had, and intended to effect, a legal right to net settle these two amounts. In December 2002, International Paper acquired an option to purchase the third party's interest in the unconsolidated entity and modified the terms of the entity's special loss allocation between the third party and International Paper. These actions required International Paper to consolidate this entity at December 31, 2002, resulting in increases in installment notes receivable (included in Deferred charges and other assets) of $480 million, Long-term debt of $460 million and Minority interest of $20 million. Also, in connection with the sale of the oil and gas properties and fee mineral and royalty interests in 2001, International Paper received a non-controlling preferred limited partnership interest valued at approximately $234 million. The unconsolidated partnership also loaned $244 million to International Paper in 2001. Since International Paper has, and intends to effect, a legal right to net settle these two amounts, we have offset for financial reporting purposes the preferred interest against the note payable. Restructuring and Other Charges International Paper continually evaluates its operations for opportunities for improvement. These evaluations are targeted to (a) focus our portfolio on our core businesses of paper, packaging and forest products, (b) operate fewer facilities with the same revenue capability, (c) reduce costs, and (d) rationalize and realign capacity. Annually, strategic operating plans are developed by each of our businesses to demonstrate that they will achieve a return at least equal to their cost of capital over an economic cycle. If it subsequently becomes apparent that a facility's plan will not be achieved, a decision is then made to either (a) shut down the facility and record the corresponding charge, or (b) evaluate the expected recovery of the carrying value of the facility to determine if an impairment of the asset value of the facility has occurred under SFAS No. 144. In recent years, this policy has led to the shutdown of a number of facilities and the recording of significant asset impairment charges and severance costs. As this profit improvement initiative is ongoing, it is possible that significant additional charges and costs will be incurred in future periods in our core businesses should such triggering events occur. 2002: During 2002, restructuring and other charges of $695 million before taxes and minority interest ($435 million after taxes and minority interest) were recorded. These charges included a $199 million charge before taxes and minority interest ($130 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $450 million pre-tax charge ($278 million after taxes) for additional exterior siding legal reserves, and a charge of $46 million before taxes and minority interest ($27 million after taxes and minority interest) for early debt retirement costs. In addition, a $68 million pre-tax credit ($43 million after taxes) was recorded in 2002 for the reversal of 2001 and 2000 reserves no longer required. The $199 million charge for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $101 million charge in the fourth quarter of 2002, a $19 million charge in the third quarter of 2002 and a $79 million charge in the second quarter of 2002. The fourth-quarter charge included $29 million of asset write-downs and $72 million of severance and other charges. The third-quarter charge included $9 million of asset write-downs and $10 million of severance and other charges. The second-quarter charge consisted of $42 million of asset write-downs and $37 million of severance and other charges. 2001: During 2001, restructuring and other charges before taxes and minority interest of $1.1 billion ($752 million after taxes and minority interest) were recorded. These charges included an $892 million charge before taxes and minority interest ($606 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, and a $225 million pre-tax charge ($146 million after taxes) for additional exterior siding legal reserves. In addition, a $17 million pre-tax credit ($11 million after taxes) was recorded in 2001 for the reversal of excess 2000 and 1999 restructuring reserves. The $892 million charge for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $171 million charge in the fourth quarter of 2001, a $256 million charge in the third quarter of 2001 and a $465 million charge in the second quarter of 2001. The fourth-quarter charge consisted of $84 million of asset write-downs and $87 million of severance and other charges. The third-quarter charge consisted of $183 million of asset write-downs and $73 million of severance and other charges. The second-quarter charge consisted of $240 million of asset write-downs and $225 million of severance and other charges. 17 2000: During 2000, restructuring and other charges before taxes and minority interest of $949 million ($589 million after taxes and minority interest) were recorded. These charges included an $824 million charge before taxes and minority interest ($509 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, and a $125 million pre-tax charge ($80 million after taxes) for additional exterior siding legal reserves. In addition, a $34 million pre-tax credit ($21 million after taxes) was recorded in 2000 for the reversal of excess 1999 restructuring reserves and Union Camp mergerrelated termination benefit reserves. The $824 million charge for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $753 million charge in the fourth quarter of 2000 and a $71 million charge in the second quarter of 2000. The fourthquarter charge consisted of $536 million of asset write-downs and $217 million of severance and other charges. The second-quarter charge consisted of $40 million of asset write-downs and $31 million of severance and other charges. A further discussion of restructuring and business improvement charges and exterior siding legal reserves can be found in Notes 6 and 11, respectively, of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. Merger Integration Costs During 2001 and 2000, International Paper recorded pre-tax charges of $42 million ($28 million after taxes) and $54 million ($33 million after taxes), respectively, for Champion and Union Camp merger integration costs. These costs consisted primarily of systems integration, employee retention, travel and other one-time cash costs related to the integrations of Champion and Union Camp. Extraordinary Items During the first quarter of 2001, extraordinary pre-tax losses totaling $73 million ($46 million after taxes) were recorded, including $60 million ($38 million after taxes) for impairment losses to reduce the assets of Masonite to their estimated realizable value based on offers received, and $13 million ($8 million after taxes) from a loss on the sale of oil and gas properties and fee mineral and royalty interests. Pursuant to the pooling-of-interest rules, these losses were recorded as extraordinary items in Net losses on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. In the first quarter of 2001, International Paper completed the sale of its interest in Zanders, a European coated papers business, to M-Real (formerly Metsa Serla) for approximately $120 million and the assumption of $80 million of debt. This transaction resulted in an extraordinary loss of $245 million after taxes and minority interest, which was recorded in the third quarter of 2000 (see below) when the decision was made to sell this business. In the fourth quarter of 2000, Fine Papers, the Chemical Cellulose Pulp business and the Flexible Packaging business in Argentina were written down to their estimated fair market values of approximately $235 million based on projected sales proceeds, resulting in a pre-tax charge of $373 million ($231 million after taxes). Also in the fourth quarter, International Paper sold its interest in Bush Boake Allen, a majority-owned subsidiary, for $640 million, resulting in an extraordinary gain of $183 million after taxes and minority interest. Carter Holt Harvey also sold its Plastics division in November, which resulted in an extraordinary loss of $2 million after taxes and minority interest. During the third quarter of 2000, International Paper recorded an extraordinary loss of $460 million before taxes ($310 million after taxes) to write down the net assets of Masonite and Zanders to their estimated realizable value of $520 million. In the first quarter of 2000, International Paper sold its equity interest in Scitex for $79 million, and Carter Holt Harvey sold its equity interest in Compania de Petroleos de Chile (COPEC) for just over $1.2 billion. These sales resulted in a combined extraordinary gain of $134 million after taxes and minority interest. Pursuant to the pooling-of-interest rules, the 2000 gains and losses discussed above, totaling a $226 million net loss after taxes and minority interest, were recorded as extraordinary items in Net losses on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. Critical Accounting Policies The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain. Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include SFAS No. 5, "Accounting for Contingencies," SFAS No. 144, "Accounting for the Impairment or Disposal of Long- 18 Lived Assets," SFAS No. 142, "Goodwill and Other Intangible Assets," SFAS No. 87, "Employers' Accounting for Pensions," as amended by SFAS No. 132, "Employers' Disclosures About Pension and Other Postretirement Benefits," and SFAS No. 109, "Accounting for Income Taxes." The following is a discussion of the impact of these accounting policies on International Paper: Contingent Liabilities. Accruals for matters including legal and environmental matters are recorded when it is probable that a liability has been incurred or an asset impaired and the amount of the loss can be reasonably estimated. Liabilities accrued for legal matters require judgments regarding projected outcomes and range of loss based on historical experience and recommendations of legal counsel. Additionally, as discussed in Note 11 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, reserves for projected future claims settlements relating to exterior siding products previously manufactured by Masonite require judgments regarding projections of future claims rates and amounts. International Paper utilizes independent third parties to assist in developing these estimates. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs. International Paper determines these estimates after a detailed evaluation of each site. Impairment of Long-Lived Assets and Goodwill. An impairment of a long-lived asset exists when the asset carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and intangible asset balances is required annually. The amount and timing of impairment charges for these assets require the estimation of future cash flows and the fair market value of the related assets. Pension and Postretirement Benefit Obligations. The charges recorded for pension and other postretirement benefit obligations are determined annually in conjunction with International Paper's consulting actuary, and are dependent upon various assumptions including the expected long-term rate of return on plan assets, discount rates, projected future compensation increases, health care cost trend rates and mortality rates. Income Taxes. International Paper records provisions for U.S. federal, state and foreign income taxes based on the respective tax rules and regulations for the jurisdictions in which it operates, and judgments as to the allocation of income and the amount of deductions relating to those jurisdictions. Domestic and foreign tax authorities frequently challenge the timing and amounts of these income allocations and deductions. International Paper records reserves for estimated taxes payable and for projected settlements of these disputes. However, the final resolution of these challenges can differ from estimated amounts. While the judgments and estimates made by International Paper are based on historical experience and other assumptions that management believes are appropriate and reasonable under current circumstances, actual resolution of these matters may differ from recorded estimated amounts, resulting in charges or credits that could materially affect future financial statements. Significant Accounting Estimates Pension Accounting. At December 31, 2001, a prepaid pension cost asset of approximately $1.6 billion related to International Paper's qualified pension plans was included in Deferred charges and other assets in the consolidated balance sheet. At December 31, 2002, the market value of plan assets was less than the accumulated benefit obligation for these plans. As a result, as required under U.S. generally accepted accounting principles, the prepaid asset value of approximately $1.7 billion at December 31, 2002 was written off, and a minimum liability of approximately $1.0 billion was established, by an after-tax charge of approximately $1.5 billion to Shareholders' equity with no impact on earnings or cash flow. This reduction of equity had no adverse effect on International Paper's debt covenants. Net periodic pension and postretirement plan income included in operating results was as follows:
- ------------------------------------------------------------------------- In millions 2002 2001 2000 - ------------------------------------------------------------------------- Pension income - U.S. plans (non-cash) $(75) $(141) $(101) Pension expense - non-U.S. plans 26 19 24 Postretirement benefit cost - U.S. plans 59 56 45 ---- ----- ----- Net expense (income) $ 10 $ (66) $ (32) ==== ===== =====
The decrease in pension income for U.S. plans in 2002 was principally due to a reduction in the expected long-term rate of return on plan assets to 9.25% for 2002 from 10% for 2001, with smaller impacts from a reduction in the assumed discount rate to 7.25% for 2002 from 7.5% for 2001 and a reduction in the assumed rate of future compensation increases to 4.5% in 2002 from 4.75% in 2001. The increase in pension income in 2001 was primarily due to the Champion acquisition. 19 After consultation with our actuaries, International Paper determines these actuarial assumptions on December 31 of each year to calculate liability information as of that date and pension expense for the following year. The discount rate assumption is determined based on the internal rate of return for a portfolio of high quality bonds (Moody's Aa Corporate bonds) with maturities that are consistent with projected future plan cash flows. The expected long-term rate of return on plan assets is based on historical and projected average rates of return for current and planned asset classes in the plan investment portfolio. The market value of plan assets for International Paper's U.S. plans at December 31, 2002, totaled approximately $5.6 billion, consisting of approximately 60% equity securities, 30% fixed income securities, and 10% real estate and other assets. Plan assets included approximately $25 million of International Paper common stock. Actual rates of return earned on plan assets for each of the last 10 years were:
- ----------------------------------- Year Return Year Return - ----------------------------------- 2002 (6.7)% 1997 17.2% 2001 (2.4)% 1996 13.3% 2000 (1.4)% 1995 19.9% 1999 21.4% 1994 0.7% 1998 10.0% 1993 11.8%
SFAS No. 87, "Employers' Accounting for Pensions," provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets, and other assumption changes. These net gains and losses are recognized in pension expense prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans (approximately 15 years) to the extent that they are not offset by gains and losses in subsequent years. At December 31, 2002, unrecognized net actuarial losses for International Paper's U.S. plans totaled approximately $2.9 billion, reflecting declines in the fair value of plan assets and discount rates during 2002. Unless offset by the future unrecognized gains from higher discount rates or higher than projected returns on plan assets in future years, the amortization of these unrecognized losses will increase pension expense by approximately $30 million per year for each of the next three years. For 2003, net pension income is expected to decrease by approximately $100 million, principally reflecting a decrease in the expected long-term rate of return on plan assets to 8.75% in 2003 from 9.25% in 2002, and a decrease in the assumed discount rate to 6.5% in 2003 from 7.25% in 2002. The expected long-term rate of return reflects projected returns for an investment mix, determined upon completion of a detailed asset/liability study, that meets the plans' investment objectives. Increasing (decreasing) the expected long-term rate of return on plan assets by an additional 0.25% would increase (decrease) 2003 pension income by approximately $17 million, while an increase (decrease) of 0.25% in the discount rate would increase (decrease) pension income by approximately $14 million. While International Paper may elect to make voluntary contributions to its plans in the coming years, it is unlikely that any minimum contributions to the plans will be required before 2005 unless interest rates decline below current levels or investment performance is significantly below projections. Accounting for Stock Options. International Paper accounts for stock options using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, compensation expense is recorded over the related service period when the market price exceeds the option price at the measurement date, which is the grant date for International Paper's options. No compensation expense is recorded as options are issued with an exercise price equal to the market price of International Paper stock on the grant date. During each reporting period, fully diluted earnings per share is calculated by assuming that "in-the-money" options are exercised and the exercise proceeds are used to repurchase shares in the marketplace. When options are actually exercised, option proceeds are credited to equity and issued shares are included in the computation of earnings per common share, with no effect on reported earnings. Equity is also increased by the tax benefit that International Paper will receive in its tax return for income reported by the optionees in their individual tax returns. Under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," expense for stock options is measured at the grant date based on a computed fair value of options granted, and then charged to expense over the related service period. Had this method of accounting been applied, additional expense of $41 million in 2002, $53 million in 2001 and $38 million in 2000 would have been recorded, increasing the reported loss per share by 5% to ($1.92) in 2002, and 4% to ($2.60) in 2001, and reducing reported earnings per share by 28% to $0.23 in 2000. At December 31, 2002, 37.2 million options were outstanding with exercise prices ranging from $29.31 to $69.63 per share. At December 31, 2001, 29.1 million options were outstanding with exercise prices ranging from $29.31 to $69.63 per share. 20 Income Taxes Before special and extraordinary items and cumulative effect of accounting changes, the 2002 effective income tax rate was 29% of pre-tax earnings compared with 28% in both 2001 and 2000. The effective income tax rates were less than the U.S. Federal statutory tax rate primarily because of the geographic mix of taxable earnings and the impact of state tax credits. After special items, the effective income tax rate was (15%), 21% and 16% for 2002, 2001 and 2000, respectively. The benefit in 2002 reflects the reversal of the assumed stock-sale tax treatment of the 2001 fourth-quarter writedown to net realizable value of the assets of Arizona Chemical upon the decision to discontinue sale efforts and to hold and operate this business in the future, and a $46 million fourth-quarter adjustment of deferred income tax liabilities for the effect of state tax credits and the projected taxability of the company's operations in various state tax jurisdictions. We estimate that the 2003 effective income tax rate will be approximately 31% based on expected earnings and business conditions, which are subject to change. The following tables present the impact of the special items on the effective income tax rate for 2002, 2001 and 2000. Tax provisions (benefits) on special items were generally provided at statutory rates, but were dependent upon the tax attributes of the items and the tax rates in effect in the geographic locations where the items originated.
- ------------------------------------------------------------------------- In millions 2002 - ------------------------------------------------------------------------- Earnings (Loss) Before Income Income Taxes Tax Effective and Minority Provision Tax Interest (Benefit) Rate - ------------------------------------------------------------------------- Before special items and cumulative effect of accounting change $ 957 $ 278 29% Restructuring and other charges (199) (61) 31% Provision for legal reserves (450) (172) 38% Debt retirement costs (46) (17) 37% Reversal of reserves no longer required 68 25 37% Net gains on sales and impairments of businesses held for sale 41 (61) (149%) Deferred state income tax adjustment -- (46) -- ----- ----- After special items $ 371 $ (54) (15%) ===== =====
- ------------------------------------------------------------------------- In millions 2001 - ------------------------------------------------------------------------- Earnings (Loss) Before Income Income Taxes Tax Effective and Minority Provision Tax Interest (Benefit) Rate - ------------------------------------------------------------------------- Before special and extraordinary items and cumulative effect of accounting change $ 506 $ 142 28% Restructuring and other charges (892) (283) 32% Provision for legal reserves (225) (79) 35% Reversal of reserves no longer required 17 6 35% Net losses on sales and impairments of businesses held for sale (629) (42) 7% Merger-related expenses (42) (14) 33% ------- ----- After special items $(1,265) $(270) 21% ======= =====
- ------------------------------------------------------------------------- In millions 2000 - ------------------------------------------------------------------------- Earnings (Loss) Before Income Income Taxes Tax Effective and Minority Provision Tax Interest (Benefit) Rate - ------------------------------------------------------------------------- Before special and extraordinary items $1,692 $ 480 28% Restructuring and other charges (824) (310) 38% Provision for legal reserves (125) (45) 36% Reversal of reserves no longer required 34 13 38% Merger-related expenses (54) (21) 39% ------ ----- After special items $ 723 $ 117 16% ====== =====
Recent Accounting Developments Costs Associated with Exit or Disposal Activities: In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The statement changes the measurement and timing of recognition for exit costs, including restructuring charges, and is effective for any such activities initiated after December 31, 2002. It requires that a liability for costs associated with an exit or disposal activity, such as one-time termination benefits, be recognized when the liability is incurred, rather than at the date of a company's commitment to an exit plan. It has no effect on charges recorded for exit activities begun prior to December 31, 2002. This standard, which International Paper will adopt in 2003, will not have a material effect on the company's results of operations or financial position. 21 Impairment and Disposal of Long-Lived Assets: In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." It establishes a single accounting model for the impairment of long-lived assets to be held and used or to be disposed of by sale or abandonment, and broadens the definition of discontinued operations. International Paper adopted SFAS No. 144 in 2002, with no significant change in the accounting for the impairment and disposal of long-lived assets. Asset Retirement Obligations: In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective in 2003. It requires the recording of an asset and a liability equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists. The asset is required to be depreciated over the life of the related equipment or facility, and the liability accreted each year based on a present value interest rate. This standard, which International Paper will adopt in 2003, will not have a material effect on the company's results of operations or financial position. Goodwill: In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." It changed the accounting for goodwill by eliminating goodwill amortization beginning in 2002. It also requires at least an annual assessment of recorded goodwill for impairment. The initial test for impairment had to be completed by December 31, 2002, with any impairment charge recorded as a cumulative effect of accounting change to be retroactively reflected in the first quarter of 2002. Any impairment charges in subsequent years would be recorded in operating results. The initial test compared the fair value of each of International Paper's business reporting units having recorded goodwill balances, with the business unit's carrying amount. Fair value was determined using discounted projected future operating cash flows, using discount rates that reflected the specific risks inherent in each business ranging from 6.5% to 16%, with an average of 8.5%, (which were in line with rates used by financial institutions in comparable valuations), for all business reporting units except Carter Holt Harvey, where the average quoted market price for Carter Holt Harvey shares was used. Where the carrying amount exceeded fair value, additional testing was performed for possible goodwill impairment. The fair value for these business reporting units was then allocated to individual assets and liabilities, using a depreciated replacement cost approach for fixed assets, and outside appraised value for intangible assets. Any excess of fair value over the allocated amounts was equal to the implied fair value of goodwill. Where this implied goodwill value was less than the goodwill book value, an impairment charge was calculated. Based on testing completed in the fourth quarter of 2002, an initial goodwill impairment loss was recorded for the Industrial and Consumer Packaging, Carter Holt Harvey and Printing Papers business segments totaling $1.2 billion before minority interest. This charge had no impact on cash flows. International Paper ceased recording goodwill amortization effective January 1, 2002. This had no effect on cash flow. The following table shows net earnings for the year ended December 31, 2002, and pro forma net earnings for the years ended December 31, 2001 and 2000, exclusive of goodwill amortization.
- ------------------------------------------------------------------ In millions for years ended December 31 2002 2001 2000 - ------------------------------------------------------------------ Net earnings (loss) $ (880) $(1,204) $ 142 Add back: Goodwill amortization -- 201 141 ------ ------- ----- Adjusted net earnings (loss) $ (880) $(1,003) $ 283 ====== ======= ===== Basic and Diluted Earnings Per Common Share: Net earnings (loss) $(1.83) $ (2.50) $0.32 Goodwill amortization -- 0.42 0.31 ------ ------- ----- Adjusted net earnings (loss) $(1.83) $ (2.08) $0.63 ====== ======= =====
Derivatives and Hedging: On January 1, 2001, International Paper adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138. The cumulative effect of adopting SFAS No. 133 was a $25 million charge to net earnings before taxes and minority interest ($16 million after taxes and minority interest), and a net decrease of $9 million after taxes in Accumulated other comprehensive income (loss) (OCI). The charge to net earnings primarily resulted from recording the fair value of certain interest rate swaps, which do not qualify under the new rules for hedge accounting treatment. The decrease in OCI primarily resulted from adjusting the foreign currency contracts used as hedges of net investments in foreign operations to fair value. LEGAL AND ENVIRONMENTAL ISSUES International Paper is subject to extensive federal and state environmental regulation as well as similar regulations in all other jurisdictions in which we operate. Our continuing objectives are to: (1) control emissions and discharges from our facilities into the air, water and groundwater to avoid adverse impacts on the environment, (2) make continual improvements in environmental performance, and (3) 22 maintain 100% compliance with applicable laws and regulations. A total of $53 million was spent in 2002 for capital projects to control environmental releases into the air and water, and to assure environmentally sound management and disposal of waste. We expect to spend approximately $134 million in 2003 for similar capital projects, including the costs to comply with the Environmental Protection Agency's (EPA) Cluster Rule regulations. Amounts to be spent for environmental control projects in future years will depend on new laws and regulations and changes in legal requirements and environmental concerns. Taking these uncertainties into account, our preliminary estimate for additional environmental appropriations during the year 2004 is approximately $114 million, and during the year 2005 is approximately $131 million. On April 15, 1998, the EPA issued final Cluster Rule regulations that established new requirements regarding air emissions and wastewater discharges from pulp and paper mills to be met by 2006. The projected costs included in our estimate related to the Cluster Rule regulations for the years 2003 through 2004 are $109 million. Included in this estimate are costs associated with combustion source standards for the pulp and paper industry, which were issued by the EPA on January 12, 2001. Total projected Cluster Rule costs for 2005 through 2006 are $83 million. Additional regulatory requirements that may affect future spending include the EPA's requirements for states to assess current surface water loading from industrial and area sources. This process, called Total Maximum Daily Load (TMDL) allocation, could result in reduced allowable treated effluent discharges from our manufacturing sites. To date there have been no significant impacts due to the TMDL process as the majority of our manufacturing sites operate at levels significantly below allowable waste loadings. In recent years, the EPA has undertaken significant air quality initiatives associated with nitrogen oxide emissions, regional haze, and national ambient air quality standards. When regulatory requirements for new and changing standards are finalized, we will add any resulting future cost projections to our expenditure forecast. International Paper has been named as a potentially liable party in a number of environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Related costs are recorded in the financial statements when they are probable and reasonably estimable. As of December 31, 2002, these liabilities totaled approximately $57 million. In addition to CERCLA, other remediation costs recorded as liabilities in the balance sheet totaled approximately $64 million. Completion of these actions is not expected to have a material adverse effect on our financial condition or results of operations. A discussion of CERCLA proceedings can be found below under "Other Environmental." Exterior Siding and Roofing Litigation: Three nationwide class action lawsuits filed against International Paper have been settled in recent years. In connection with one of these lawsuits, International Paper commenced a lawsuit against certain insurance carriers relating to their refusal to indemnify International Paper and, in the case of one insurance carrier, also for its refusal to provide a defense. During 2002, an additional $450 million was provided for claims associated with these class action lawsuits. See Note 11 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for a detailed discussion of these matters. Other Litigation: In March and April 2000, Champion and 10 members of its board of directors were served with six lawsuits that were filed in the Supreme Court for the State of New York, New York County. Each of the suits purported to be a class action filed on behalf of Champion shareholders and alleged that the defendants breached their fiduciary duties in connection with the proposed merger with UPM-Kymmene Corporation and the merger proposal from International Paper. On September 26, 2002, the parties signed a stipulation of settlement providing for the settlement and final disposition of this lawsuit. Pursuant to the stipulation, International Paper will donate $100,000 to a law school designated by the Court to fund educational programs in support of corporate governance and shareholder rights. International Paper will also pay such attorneys' fees and expenses of plaintiffs' counsel as may be awarded by the Court, up to $300,000. The Court held a hearing on the fairness of the proposed settlement on February 10, 2003. On May 14, 1999, and May 18, 1999, two lawsuits were filed in federal court in the Eastern District of Pennsylvania against International Paper, the former Union Camp Corporation and other manufacturers of linerboard. These suits allege that the defendants conspired to fix prices for linerboard and corrugated sheets during the period October 1, 1993, through November 30, 1995. These lawsuits seek injunctive relief as well as treble damages and other costs associated with the litigation. The cases have been consolidated. The plaintiffs in these consolidated cases sought certification on behalf of both corrugated sheet purchasers and corrugated container purchasers. On September 4, 2001, the district court certified both classes. Defendants filed a petition appealing the certification order, which the Court of Appeals for the Third Circuit, in its discretion, granted. On September 5, 2002, the Court of Appeals for the Third Circuit affirmed the district court's certification decision. On January 14, 2003, the defendants filed a petition for certiorari with the U.S. Supreme Court 23 seeking a review of the Court of Appeals decision. Discovery in the case is ongoing. In 2000, purchasers of high-pressure laminates filed a number of purported class actions under the federal antitrust laws alleging that International Paper's Nevamar division (which was part of the Decorative Products division) participated in a price-fixing conspiracy with competitors. These lawsuits seek injunctive relief as well as treble damages and other costs associated with the litigation. These cases have been consolidated in federal district court in New York. In 2000 and 2001, indirect purchasers of high-pressure laminates also filed similar purported class actions cases under various state antitrust and consumer protection statutes in Arizona, California, Florida, Maine, Michigan, Minnesota, New Mexico, New York, North Carolina, North Dakota, South Dakota, Tennessee, West Virginia, Wisconsin and the District of Columbia. The case in New York state court, and one of the two Michigan cases, have been dismissed, while all of the other state cases, except for California, have been stayed pending resolution of the federal cases. Discovery in the federal cases is ongoing. In the third quarter of 2002, International Paper completed the sale of the Decorative Products operations, but retained any liability for these cases. Other Environmental: In May 2002, an internal environmental audit revealed that two lithographic presses at a Shorewood facility in Edison, New Jersey were being operated without required state air certificates. Shorewood is a wholly owned subsidiary of International Paper. The presses were shut down, and the discovery was voluntarily disclosed to the New Jersey Department of Environmental Protection (Department). Following the disclosure, the Department issued appropriate state air certificates. In January 2003, the related enforcement action was closed with no penalties. In February 2000, the Town of Lyman, South Carolina issued an administrative order alleging past violations of a wastewater pretreatment permit at the former Union Camp folding carton facility in Spartanburg, South Carolina. While International Paper has satisfied the terms of the order, the Town of Lyman has indicated that it is seeking penalties and other surcharges that together may exceed $100,000. We are engaged in settlement discussions with the Town of Lyman. In connection with the EPA's well-publicized PSD air permit enforcement initiative against the paper industry, the EPA has issued requests for information related to air permit compliance to five International Paper mills. As of February 2003, none of these requests for information has resulted in enforcement actions. As of February 2003, there were no other pending judicial proceedings, brought by government authorities against International Paper, for alleged violations of applicable environmental laws or regulations. International Paper is engaged in various other proceedings that arise under applicable environmental and safety laws or regulations, including approximately 117 active proceedings under CERCLA and comparable state laws. Most of these proceedings involve the cleanup of hazardous substances at large commercial landfills that received waste from many different sources. While joint and several liability is authorized under CERCLA, as a practical matter, liability for CERCLA cleanups is allocated among the many potential responsible parties. Based upon previous experience with respect to the cleanup of hazardous substances and upon presently available information, International Paper believes that it has no, or de minimis, liability with respect to 20 of these sites; that liability is not likely to be significant at 55 sites; and that estimates of liability at the other 42 sites is likely to be significant, but not material to International Paper's consolidated financial position or results of operations. International Paper believes that the probable liability associated with all of the CERCLA proceedings is approximately $57 million. International Paper is involved in other contractual disputes, administrative and legal proceedings and investigations of various types. While any litigation, proceeding or investigation has an element of uncertainty, we believe that the outcome of any proceeding, lawsuit or claim that is pending or threatened, or all of them combined, will not have a material adverse effect on our consolidated financial position or results of operations. IMPACT OF EURO The introduction of the euro for noncash transactions took place on January 1, 1999, with 11 countries participating in the first wave: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. The euro has traded on world currency exchanges since 1999 and is used by our businesses in transactions. On January 2, 2002, new euro-denominated bills and coins were issued and legacy currencies were withdrawn from circulation. The introduction of the euro has reduced the complexity and cost of managing our business. Over the three-year transition period, our computer systems were updated to ensure euro compliance. Also, we reviewed our marketing and operational policies and procedures to ensure our ability to continue to successfully conduct all aspects of our business in this new market. In general, our product lines have become somewhat more international, with some leveling of prices. Total costs in connection with the euro conversion were not material, and the conversion from the legacy currencies to the euro did not have a material adverse effect on our consolidated financial position or results of operations. 24 EFFECT OF INFLATION General inflation has had minimal impact on our operating results in the last three years. Sales prices and volumes are more strongly influenced by supply and demand factors in specific markets and by exchange rate fluctuations than by inflationary factors. MARKET RISK We use financial instruments, including fixed and variable rate debt, to finance operations, for capital spending programs and for general corporate purposes. Additionally, financial instruments, including various derivative contracts, are used to hedge exposures to interest rate, commodity and foreign currency risks. We do not use financial instruments for trading purposes. Information related to International Paper's debt obligations is included in Note 13 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. A discussion of derivatives and hedging activities is included in Note 14 of the Notes to Consolidated Financial Statements. We assess our market risk based on changes in interest and foreign currency rates and commodity prices utilizing a sensitivity analysis. The sensitivity analysis measures the potential loss in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in interest and currency rates and commodity prices. Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to short- and long-term debt obligations and investments in marketable securities. We invest in investment grade securities of financial institutions and industrial companies and limit exposure to any one issuer. Our investments in marketable securities at December 31, 2002 were not significant. We issue fixed and floating-rate debt in a proportion consistent with International Paper's optimal capital structure, while at the same time taking advantage of market opportunities to reduce interest expense as appropriate. Derivative instruments, such as interest rate swaps, may be used to implement the optimal capital structure. At December 31, 2002 and 2001, the net fair value liability of financial instruments with exposure to interest rate risk was approximately $10.2 billion and $10.5 billion, respectively. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would be approximately $325 million and $350 million for 2002 and 2001, respectively. Commodity Risk The objective of our commodity exposure management is to minimize volatility in earnings due to large fluctuations in the price of commodities. Commodity swap and option contracts are currently used to manage risks associated with market fluctuations in energy prices. At December 31, 2002 and 2001, the net fair value of such contracts was an $18 million asset and a $29 million liability, respectively. The potential loss in fair value resulting from a 10% adverse change in the underlying commodity prices would be immaterial for 2002 and 2001. Foreign Currency Risk International Paper transacts business in many currencies and is also subject to currency exchange rate risk through investments and businesses owned and operated in foreign countries. Our objective in managing the associated foreign currency risks is to minimize the effect of adverse exchange rate fluctuations on our after-tax cash flows, and to prudently manage transactions in foreign currency. We address these risks on a limited basis through financing a portion of our investments in overseas operations with borrowings denominated in the same currency as the operation's functional currency, or by entering into long-term cross-currency and interest rate swaps, or short-term foreign exchange contracts. At December 31, 2002 and 2001, the net fair value liability of financial instruments with exposure to foreign currency risk was approximately $570 million and $765 million, respectively. The potential loss in fair value for such financial instruments from a 10% adverse change in quoted foreign currency exchange rates would be immaterial for both 2002 and 2001. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the discussion under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations on page 25 and under Item 8. Financial Statements and Supplementary Data in Note 14 on pages 56 - 58. 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Information by Industry Segment and Geographic Area For information about our industry segments, see the "Description of Industry Segments" included on pages 8 through 10 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. For management purposes, we report the operating performance of each business based on earnings before interest and income taxes ("EBIT") excluding special and extraordinary items, gains or losses on sales of businesses and cumulative effects of accounting changes. Our Carter Holt Harvey segment includes our share, about half, of their operating earnings adjusted for U.S. generally accepted accounting principles. The remaining half is included in minority interest. Intersegment sales and transfers are recorded at current market prices. External Sales by Major Product is determined by aggregating sales from each segment based on similar products or services. External sales are defined as those that are made to parties outside International Paper's consolidated group, whereas sales by segment in the Net Sales table are determined by the management approach and include intersegment sales. Capital Spending by Industry Segment is reported on page 14 of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. INFORMATION BY INDUSTRY SEGMENT
Net Sales - ------------------------------------------------------------------------------- In millions 2002 2001 2000 - ------------------------------------------------------------------------------- Printing Papers $ 7,510 $ 7,815 $ 7,210 Industrial and Consumer Packaging 6,095 6,280 6,625 Distribution 6,345 6,790 7,255 Forest Products 3,090 2,855 2,380 Carter Holt Harvey 1,910 1,710 1,675 Specialty Businesses and Other (b) 1,535 2,325 4,230 Corporate and Intersegment Sales (c) (1,509) (1,412) (1,195) ------- ------- ------- Net Sales $24,976 $26,363 $28,180 ======= ======= ======= Assets (a) - ------------------------------------------------------------------------------- In millions 2002 2001 2000 - ------------------------------------------------------------------------------- Printing Papers $ 9,260 $ 9,742 $10,580 Industrial and Consumer Packaging 6,244 7,338 7,437 Distribution 1,691 1,662 1,986 Forest Products 4,307 5,106 6,610 Carter Holt Harvey 3,442 3,295 3,141 Specialty Businesses and Other (b) 760 676 2,579 Corporate 8,088 9,358 9,776 ------- ------- ------- Assets $33,792 $37,177 $42,109 ======= ======= ======= Operating Profit - ------------------------------------------------------------------------------ In millions 2002 2001 2000 - ------------------------------------------------------------------------------ Printing Papers $ 519 $ 538 $ 930 Industrial and Consumer Packaging 517 508 741 Distribution 92 21 120 Forest Products 700 655 564 Carter Holt Harvey 56 13 71 Specialty Businesses and Other (b) 51 52 233 Corporate (c) -- -- 26 ------ ------- ------ Operating Profit 1,935 1,787 2,685 Interest expense, net (783) (929) (816) Minority interest (d) 58 17 108 Corporate items, net (253) (369) (285) Merger integration costs -- (42) (54) Restructuring and other charges (695) (1,117) (949) Reversals of reserves no longer required 68 17 34 Net gains (losses) on sales and impairments of businesses held for sale 41 (629) -- ------ ------- ------ Earnings (Loss) Before Income Taxes, Minority Interest, Extraordinary Items and Cumulative Effect of Accounting Changes $ 371 $(1,265) $ 723 ====== ======= ======
26
Restructuring and Other Charges - -------------------------------------------------------------------------------- In millions 2002 2001 2000 - -------------------------------------------------------------------------------- Printing Papers $ 85 $ 185 $425 Industrial and Consumer Packaging 31 534 255 Distribution 13 46 22 Forest Products 12 34 35 Carter Holt Harvey 28 10 10 Specialty Businesses and Other (b) 19 8 69 Corporate 507 300 133 ---- ------ ---- Restructuring and Other Charges $695 $1,117 $949 ==== ====== ==== Depreciation and Amortization (e) - -------------------------------------------------------------------------------- In millions 2002 2001 2000 - -------------------------------------------------------------------------------- Printing Papers $ 684 $ 716 $ 623 Industrial and Consumer Packaging 385 424 447 Distribution 18 31 35 Forest Products 170 214 216 Carter Holt Harvey 197 194 177 Specialty Businesses and Other (b) 22 39 224 Corporate 111 252 194 ------ ------ ------ Depreciation and Amortization $1,587 $1,870 $1,916 ====== ====== ====== External Sales by Major Product - -------------------------------------------------------------------------------- In millions 2002 2001 2000 - -------------------------------------------------------------------------------- Printing Papers $ 6,668 $ 7,042 $ 7,169 Industrial and Consumer Packaging 6,852 7,263 8,052 Distribution 6,519 6,961 7,275 Forest Products 4,160 4,297 4,243 Other (f) 777 800 1,441 ------- ------- ------- Net Sales $24,976 $26,363 $28,180 ======= ======= =======
INFORMATION BY GEOGRAPHIC AREA
Net Sales (g) - -------------------------------------------------------------------------------- In millions 2002 2001 2000 - -------------------------------------------------------------------------------- United States (h) $18,795 $20,555 $22,131 Europe 2,636 2,630 3,353 Pacific Rim (k) 2,104 1,888 1,923 Americas, other than U.S. 1,441 1,290 773 ------- ------- ------- Net Sales $24,976 $26,363 $28,180 ======= ======= ======= European Sales by Industry Segment - -------------------------------------------------------------------------------- In millions 2002 2001 2000 - -------------------------------------------------------------------------------- Printing Papers $1,152 $1,110 $1,047 Industrial and Consumer Packaging 677 694 709 Distribution 374 353 370 Specialty Businesses and Other (b) 433 473 1,227 ------ ------ ------ European Sales $2,636 $2,630 $3,353 ====== ====== ====== Long-Lived Assets (a, i) - -------------------------------------------------------------------------------- In millions 2002 2001 2000 - -------------------------------------------------------------------------------- United States (j) $12,630 $13,627 $16,493 Europe 1,206 1,179 1,217 Pacific Rim (k) 2,654 2,325 2,324 Americas, other than U.S. 1,215 1,447 1,612 Corporate 308 235 452 ------- ------- ------- Long-Lived Assets $18,013 $18,813 $22,098 ======= ======= =======
(a) Certain reclassifications and adjustments have been made to conform to current presentation. (b) Includes Arizona Chemical, Chemical Cellulose Pulp and Industrial Papers. Also included are certain other smaller businesses identified in the company's divestiture program. (c) Includes results of operations of Champion from date of acquisition, June 20, 2000, through June 30, 2000. (d) Operating profits for industry segments include each segment's percentage share of the profits of subsidiaries included in that segment that are less than wholly owned. The pre-tax minority interest for these subsidiaries is added here to present consolidated earnings before income taxes, minority interest, extraordinary items, and cumulative effect of accounting changes. (e) Includes cost of timber harvested. (f) Includes sales of products not included in our major product lines. (g) Net sales are attributed to countries based on location of seller. (h) Export sales to unaffiliated customers (in billions) were $1.3 in 2002, $1.3 in 2001 and $1.6 in 2000. (i) Long-Lived Assets includes Forestlands and Plants, Properties and Equipment, net. (j) Decrease in 2001 primarily due to divestitures. (k) Operations in New Zealand and Australia account for most of the Pacific Rim amounts. 27 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 accounting principles generally accepted in the United States of America and reflect management's best judgment as to our financial position, results of operations, cash flows and related disclosures. International Paper maintains a system of internal accounting and disclosure controls designed to provide reasonable assurance: (a) that transactions are properly recorded and summarized so that reliable financial records and reports can be prepared and assets safeguarded; and (b) that information required to be disclosed by us in reports filed with the Securities and Exchange Commission (SEC) is recorded, processed, summarized and reported on a timely basis. We have formed a Disclosure Committee to oversee this process. We believe that these controls are effective and have completed all the certifications required by the Sarbanes- Oxley Act of 2002 and SEC regulations. Our ethics program is an important part of the internal controls system. It includes long-standing principles and policies on ethical business conduct that require employees to maintain the highest ethical and legal standards in the conduct of International Paper business, that have been distributed to all employees, a toll-free telephone helpline whereby any employee may report suspected violations of law or International Paper's policy, and an office of ethics and business practice. 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 International Paper, and an extensive program of internal audits with management follow-up. The independent auditors provide an objective, independent review of management's discharge of its responsibility for the fair presentation of our financial statements. They review our internal 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, assisted by the Audit and Finance Committee (Committee), monitors management's administration of International Paper's financial and accounting policies and practices, and the preparation of these financial statements. The Committee, which currently consists of five independent directors, meets regularly with representatives of management, the independent auditors and the Internal Auditor to review their activities. The Committee's Charter has been modified to take into account the proposed New York Stock Exchange rules relating to Audit Committees and to conform to the new SEC rules and regulations promulgated as a result of the Sarbanes-Oxley Act of 2002. A copy of the charter is included in the Company's Proxy Statement relating to the 2003 annual meeting of shareholders. The Committee has reviewed and discussed the consolidated financial statements for the year ended December 31, 2002, including critical accounting policies and significant management judgments, with management and the independent auditors. The Committee's report recommending the inclusion of such financial statements in this Annual Report on Form 10-K is set forth in our Proxy Statement. The independent auditors and the Internal Auditor both have free access to the Committee and meet regularly with the Committee, with and without management representatives in attendance. /s/ JOHN T. DILLON JOHN T. DILLON Chairman and Chief Executive Officer /s/ JOHN V. FARACI JOHN V. FARACI President and Chief Financial Officer 28 Report of Deloitte & Touche LLP, Independent Auditors To the Shareholders of International Paper Company: We have audited the accompanying consolidated balance sheet of International Paper Company and subsidiaries as of December 31, 2002, and the related consolidated statements of earnings, common shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of International Paper's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of International Paper Company as of December 31, 2001 and for the years ended December 31, 2001 and 2000, before the revisions described in Note 4 to the consolidated financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated February 12, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, such 2002 consolidated financial statements present fairly, in all material respects, the financial position of International Paper Company and subsidiaries, as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As described in Note 4 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," effective January 1, 2002. As discussed above, the financial statements of International Paper Company as of December 31, 2001, and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations. As described in Note 4, these financial statements have been revised to include the transitional disclosures required by SFAS No. 142, that was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 4 with respect to 2001 and 2000 included (a) agreeing the previously reported earnings (loss) to the previously issued financial statements and the adjustments to reported earnings (loss) representing amortization expense (including any related tax effects) recognized in those periods related to goodwill to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted earnings (loss) to reported earnings (loss), and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 4 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 consolidated financial statements taken as a whole. /s/ Deloitte & Touche LLP NEW YORK, N.Y. FEBRUARY 10, 2003 THIS REPORT SET FORTH BELOW IS A COPY OF A PREVIOUSLY ISSUED AUDIT REPORT BY ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH ITS INCLUSION IN THIS FORM 10-K. 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, 2001 and 2000, and the related statements of earnings, common shareholders' equity and cash flows for each of the three years ended December 31, 2001. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 29 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. As explained in Notes 4 and 14 to the financial statements, effective January 1, 2001, International Paper changed its method of accounting for derivative instruments and hedging activities. NEW YORK, N.Y. FEBRUARY 12, 2002 30
INTERNATIONAL PAPER COMPANY CONSOLIDATED STATEMENT OF EARNINGS In millions, except per share amounts, for the years ended December 31 2002 2001 2000 - ------------------------------------------------------------------------------------------------------ Net Sales $24,976 $26,363 $28,180 ------- ------- ------- Costs and Expenses Cost of products sold 18,256 19,409 20,082 Selling and administrative expenses 2,046 2,279 2,283 Depreciation, amortization and cost of timber harvested 1,587 1,870 1,916 Distribution expenses 1,098 1,105 1,104 Taxes other than payroll and income taxes 249 265 287 Merger integration costs -- 42 54 Restructuring and other charges 695 1,117 949 Net (gains) losses on sales and impairments of businesses held for sale (41) 629 -- ------- ------- ------- Total Costs and Expenses 23,890 26,716 26,675 Reversals of reserves no longer required 68 17 34 ------- ------- ------- Earnings (Loss) Before Interest, Income Taxes, Minority Interest, Extraordinary Items and Cumulative Effect of Accounting Changes 1,154 (336) 1,539 Interest expense, net 783 929 816 ------- ------- ------- Earnings (Loss) Before Income Taxes, Minority Interest, Extraordinary Items and Cumulative Effect of Accounting Changes 371 (1,265) 723 Income tax provision (benefit) (54) (270) 117 Minority interest expense, net of taxes 130 147 238 ------- ------- ------- Earnings (Loss) Before Extraordinary Items and Cumulative Effect of Accounting Changes 295 (1,142) 368 Extraordinary items - Net losses on sales and impairments of businesses held for sale, net of taxes and minority interest -- (46) (226) Cumulative effect of accounting changes: Transitional goodwill impairment charge, net of minority interest (1,175) -- -- Derivatives and hedging activities, net of taxes and minority interest -- (16) -- ------- ------- ------- Net Earnings (Loss) $ (880) $(1,204) $ 142 ======= ======= ======= Basic and Diluted Earnings (Loss) Per Common Share Earnings (loss) before extraordinary items and cumulative effect of accounting changes $ 0.61 $ (2.37) $ 0.82 Extraordinary items -- (0.10) (0.50) Cumulative effect of accounting changes: Transitional goodwill impairment charge (2.44) -- -- Derivatives and hedging activities -- (0.03) -- ------- ------- ------- Net earnings (loss) $ (1.83) $ (2.50) $ 0.32 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 31
INTERNATIONAL PAPER COMPANY CONSOLIDATED BALANCE SHEET In millions at December 31 2002 2001 - --------------------------------------------------------------------------------------------------------- Assets Current Assets Cash and temporary investments $ 1,074 $ 1,224 Accounts and notes receivable, less allowances of $169 in 2002 and $179 in 2001 2,780 2,778 Inventories 2,879 2,877 Assets of businesses held for sale 128 219 Other current assets 877 1,057 ------- ------- Total Current Assets 7,738 8,155 ------- ------- Plants, Properties and Equipment, net 14,167 14,616 Forestlands 3,846 4,197 Investments 227 239 Goodwill 5,307 6,543 Deferred Charges and Other Assets 2,507 3,427 ------- ------- Total Assets $33,792 $37,177 ======= ======= Liabilities and Common Shareholders' Equity Current Liabilities Notes payable and current maturities of long-term debt $ -- $ 957 Accounts payable 2,014 1,793 Accrued payroll and benefits 523 435 Liabilities of businesses held for sale 44 77 Other accrued liabilities 1,998 2,079 ------- ------- Total Current Liabilities 4,579 5,341 ------- ------- Long-Term Debt 13,042 12,457 Deferred Income Taxes 1,765 3,339 Other Liabilities 3,778 2,669 Minority Interest 1,449 1,275 International Paper - Obligated Mandatorily Redeemable Preferred Securities of Subsidiaries Holding International Paper Debentures - Note 8 1,805 1,805 Commitments and Contingent Liabilities - Note 11 Common Shareholders' Equity Common stock, $1 par value, 2002 - 484.8 shares, 2001 - 484.3 shares 485 484 Paid-in capital 6,493 6,465 Retained earnings 3,260 4,622 Accumulated other comprehensive income (loss) (2,645) (1,175) ------- ------- 7,593 10,396 Less: Common stock held in treasury, at cost, 2002 - 5.7 shares, 2001 - 2.7 shares 219 105 ------- ------- Total Common Shareholders' Equity 7,374 10,291 ------- ------- Total Liabilities and Common Shareholders' Equity $33,792 $37,177 ======= =======
The accompanying notes are an integral part of these financial statements. 32
INTERNATIONAL PAPER COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS In millions for the years ended December 31 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------- Operating Activities Net earnings (loss) $ (880) $(1,204) $ 142 Cumulative effect of accounting changes 1,175 16 -- Depreciation, amortization and cost of timber harvested 1,587 1,870 1,916 Deferred income tax benefit (399) (584) (323) Payments related to restructuring reserves, legal reserves and merger integration costs (340) (431) (291) Merger integration costs -- 42 54 Restructuring and other charges 695 1,117 949 Reversals of reserves no longer required (68) (17) (34) Net (gains) losses on sales and impairments of businesses held for sale (41) 629 -- Extraordinary items - Net losses on sales and impairments of businesses held for sale -- 73 85 Other, net (3) (76) 78 Changes in current assets and liabilities Accounts and notes receivable 127 417 (59) Inventories 89 300 (143) Accounts payable 199 (289) (147) Accrued liabilities (42) (56) 166 Other (5) (93) 37 ------- ------- ------- Cash Provided By Operations 2,094 1,714 2,430 ------- ------- ------- Investment Activities Invested in capital projects Ongoing businesses (1,005) (1,027) (1,194) Businesses sold and held for sale (4) (22) (158) Mergers and acquisitions, net of cash acquired (28) (150) (5,677) Proceeds from divestitures 535 1,552 2,116 Other 22 106 (1) ------- ------- ------- Cash Provided By (Used For) Investment Activities (480) 459 (4,914) ------- ------- ------- Financing Activities Issuance of common stock 53 25 25 Issuance of debt 2,011 2,889 6,328 Reduction of debt (3,017) (4,268) (2,770) Change in bank overdrafts (33) (171) 118 Purchases of treasury stock (169) (64) (66) Dividends paid (482) (482) (447) Other (95) (27) 206 ------- ------- ------- Cash Provided By (Used For) Financing Activities (1,732) (2,098) 3,394 ------- ------- ------- Effect of Exchange Rate Changes on Cash (32) (49) (165) ------- ------- ------- Change in Cash and Temporary Investments (150) 26 745 Cash and Temporary Investments Beginning of the year 1,224 1,198 453 ------- ------- ------- End of the year $ 1,074 $ 1,224 $ 1,198 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 33
INTERNATIONAL PAPER COMPANY CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY In millions, except share amounts in thousands - ------------------------------------------------------------------------------------------------------------ Accumulated Other Common Stock Issued Comprehensive ------------------- Paid-in Retained Income Shares Amount Capital Earnings (Loss)(1) ------- ------ ------- -------- ------------- Balance, January 1, 2000 414,584 $415 $ 4,078 $ 6,613 $ (739) Issuance of stock for merger 68,706 69 2,360 -- -- Issuance of stock for various plans 870 -- 63 -- -- Repurchase of stock -- -- -- -- -- Cash dividends - Common stock ($1.00 per share) -- -- -- (447) -- Comprehensive income (loss): Net earnings -- -- -- 142 -- Minimum pension liability adjustment (less tax benefit of $13) -- -- -- -- (23) Change in cumulative foreign currency translation adjustment (less tax expense of $123) -- -- -- -- (380) Total comprehensive loss ------- ---- ------- ------- ------- Balance, December 31, 2000 484,160 484 6,501 6,308 (1,142) Issuance of stock for various plans 121 -- (36) -- -- Repurchase of stock -- -- -- -- -- Cash dividends - Common stock ($1.00 per share) -- -- -- (482) -- Comprehensive income (loss): Net loss -- -- -- (1,204) -- Minimum pension liability adjustment (less tax benefit of $4) -- -- -- -- (6) Change in cumulative foreign currency translation adjustment (less tax benefit of $59) -- -- -- -- (10) Net losses on cash flow hedging derivatives: Net loss arising during the period (less tax benefit of $25) -- -- -- -- (67) Less: Reclassificaton adjustment for losses included in net income (less tax benefit of $18) -- -- -- -- 50 Total comprehensive loss ------- ---- ------- ------- ------- Balance, December 31, 2001 484,281 484 6,465 4,622 (1,175) Issuance of stock for various plans 479 1 28 -- -- Repurchase of stock -- -- -- -- -- Cash dividends - Common stock ($1.00 per share) -- -- -- (482) -- Comprehensive income (loss): Net loss -- -- -- (880) -- Minimum pension liability adjustment(2): U.S. plans (less tax benefit of $964) -- -- -- -- (1,543) Non-U.S. plans (less tax benefit of $9) -- -- -- -- (21) Change in cumulative foreign currency translation adjustment (less tax expense of $2) -- -- -- -- 27 Net gains on cash flow hedging derivatives: Net gain arising during the period (less tax expense of $33) -- -- -- -- 71 Less: Reclassificaton adjustment for losses included in net income (less tax expense of $3) -- -- -- -- (4) Total comprehensive loss ------- ---- ------- ------- ------- Balance, December 31, 2002 484,760 $485 $ 6,493 $ 3,260 $(2,645) ======= ==== ======= ======= ======= - ------------------------------------------------------------------------------------------------------------ Total Treasury Stock Common --------------- Shareholders' Shares Amount Equity ------ ------ ------------- Balance, January 1, 2000 1,216 $ 63 $ 10,304 Issuance of stock for merger -- -- 2,429 Issuance of stock for various plans (236) (12) 75 Repurchase of stock 1,710 66 (66) Cash dividends - Common stock ($1.00 per share) -- -- (447) Comprehensive income (loss): Net earnings -- -- 142 Minimum pension liability adjustment (less tax benefit of $13) -- -- (23) Change in cumulative foreign currency translation adjustment (less tax expense of $123) -- -- (380) -------- Total comprehensive loss (261) ------ ----- -------- Balance, December 31, 2000 2,690 117 12,034 Issuance of stock for various plans (1,727) (76) 40 Repurchase of stock 1,730 64 (64) Cash dividends - Common stock ($1.00 per share) -- -- (482) Comprehensive income (loss): Net loss -- -- (1,204) Minimum pension liability adjustment (less tax benefit of $4) -- -- (6) Change in cumulative foreign currency translation adjustment (less tax benefit of $59) -- -- (10) Net losses on cash flow hedging derivatives: Net loss arising during the period (less tax benefit of $25) -- -- (67) Less: Reclassificaton adjustment for losses included in net income (less tax benefit of $18) -- -- 50 -------- Total comprehensive loss (1,237) ------ ----- -------- Balance, December 31, 2001 2,693 105 10,291 Issuance of stock for various plans (1,403) (55) 84 Repurchase of stock 4,390 169 (169) Cash dividends - Common stock ($1.00 per share) -- -- (482) Comprehensive income (loss): Net loss -- -- (880) Minimum pension liability adjustment(2): U.S. plans (less tax benefit of $964) -- -- (1,543) Non-U.S. plans (less tax benefit of $9) -- -- (21) Change in cumulative foreign currency translation adjustment (less tax expense of $2) -- -- 27 Net gains on cash flow hedging derivatives: Net gain arising during the period (less tax expense of $33) -- -- 71 Less: Reclassificaton adjustment for losses included in net income (less tax expense of $3) -- -- (4) -------- Total comprehensive loss (2,350) ------ ----- -------- Balance, December 31, 2002 5,680 $ 219 $ 7,374 ====== ===== ========
(1) The cumulative foreign currency translation adjustment (in millions) was $(1,092), $(1,119) and $(1,109) at December 31, 2002, 2001 and 2000, respectively, and is included as a component of accumulated other comprehensive income (loss). (2) This noncash equity reduction resulted from declines in pension fund asset market values and increases in computed fund liabilities due to lower interest rates. See Note 16. The accompanying notes are an integral part of these financial statements. 34 Notes to Consolidated Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Our Business International Paper is a global forest products, paper and packaging company that is complemented by an extensive distribution system, with primary markets and manufacturing operations in the United States, Canada, Europe, the Pacific Rim and South America. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to available industry capacity and general economic conditions. Financial Statements These financial statements have been prepared in conformity with generally accepted accounting principles in the United States that require the use of management's estimates. Actual future results could differ from management's estimates. On June 20, 2000, International Paper acquired Champion International Corporation (Champion) in a transaction accounted for as a purchase. The accompanying financial statements include Champion's results of operations from the date of acquisition. Consolidation The consolidated financial statements include the accounts of International Paper and its subsidiaries. Minority interest represents minority shareholders' proportionate share of the equity in several of our consolidated subsidiaries, primarily Carter Holt Harvey Limited (CHH), Timberlands Capital Corp. II, Georgetown Equipment Leasing Associates, L.P., Trout Creek Equipment Leasing, L.P. and, prior to their sales in 2001 and 2000, respectively, Zanders Feinpapiere AG (Zanders), and Bush Boake Allen. All significant intercompany balances and transactions are eliminated. Investments in affiliated companies are accounted for by the equity method, including companies owned 20% to 50%. International Paper's share of affiliates' earnings is included in the consolidated statement of earnings. Revenue Recognition Revenue is recognized when the customer takes title and assumes the risks and rewards of ownership. Revenue is recorded at the time of shipment for terms designated f.o.b. (free on board) shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to the customer's delivery site, when title and risk of loss are transferred. Timberland sales revenue is recognized when title and risk of loss pass to the buyer. Shipping and Handling Costs Shipping and handling costs, such as freight to our customers' destinations, are included in distribution expenses in the consolidated statement of earnings. These costs, when included in the sales price charged for our products, are recognized in net sales. 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 is valued at the lower of cost or market and includes all costs directly associated with manufacturing products: materials, labor and manufacturing overhead. 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 valued using the first-in, first-out or average cost methods. Plants, Properties and Equipment Plants, properties and equipment are stated at cost, less accumulated depreciation. Expenditures for betterments are capitalized whereas normal repairs and maintenance are expensed as incurred. For financial reporting purposes, the units-of-production method of depreciation is used for major pulp and paper mills and certain wood products facilities and the straight-line method for other plants and equipment. Annual straight-line depreciation rates are, for buildings, 2 1/2% to 8 1/2%, and, for machinery and equipment, 5% to 33%. For tax purposes, depreciation is computed using accelerated methods. Forestlands At December 31, 2002, International Paper and its subsidiaries controlled about 9 million acres of forestlands in the United States, 1.5 million acres in Brazil, 810,000 acres in New Zealand, and had, through licenses and forest management agreements, harvesting rights on governmentowned timberlands in Canada and Russia. Forestlands include owned property as well as certain timber harvesting rights with terms of one or more years, and are stated at cost, less cost of timber harvested. Costs attributable to timber are charged against income as trees are cut. The rate charged is determined annually based on the relationship of incurred 35 costs to estimated current volume. Cost of timber harvested (COTH) is included in depreciation and amortization in the consolidated statement of earnings. Effective January 1, 2002, International Paper prospectively changed its method of accounting for mid-rotation fertilization expenditures to include such expenditures in the capitalized cost of timberlands. Accordingly, these costs have been subsequently included as part of the cost of timber harvested as trees are sold. Prior to this change, these expenditures were capitalized and amortized to expense over a five-year period. The change was made to better match the total costs of fiber to the related income when the trees are sold. This accounting change had no effect on earnings for the year ended December 31, 2002, and the effects in future years will not be significant. Due to the cumulative nature of the COTH computation, calculation of the cumulative effect of the accounting change on prior periods of including these costs as part of COTH, and disclosure of pro forma amounts for prior years, are not determinable. At December 31, 2001, the company's consolidated balance sheet included $50 million of previously capitalized mid-rotation fertilization costs that will continue to be amortized to expense through 2006. Goodwill Prior to 2002,goodwill was amortized over its estimated period of benefit on a straight-line basis, not to exceed 40 years. Effective January 1, 2002, International Paper adopted Statement of Financial Accounting Standards (SFAS) No. 142, eliminating the periodic charge to earnings for goodwill amortization for 2002 and future years. In addition, as required by SFAS No. 142, an initial assessment of recorded goodwill for possible impairment was conducted as of January 1, 2002. Annual testing for possible goodwill impairment will be performed in the third quarter of each year. See Note 4 for additional disclosures related to SFAS No. 142. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable, as measured by comparing their net book value to the estimated future cash flows generated by their use. Impaired assets are recorded at fair market value, determined principally using discounted future cash flows. Income Taxes International Paper uses the asset and liability method of accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are revalued to reflect new tax rates in the periods rate changes are enacted. 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 (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. See Note 18 for required pro forma and additional disclosures relating to these awards. Environmental Remediation Costs Costs associated with environmental remediation obligations are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are discounted to their present value when the expected cash flows are reliably determinable. Translation of Financial Statements Balance sheets of international operations are translated into U.S. dollars at year-end exchange rates, while statements of earnings are translated at average rates. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in Accumulated other comprehensive income (loss) (OCI). See Note 14 related to derivatives and hedging activities. Reclassifications Certain reclassifications have been made to prior-year amounts to conform with the current year presentation. NOTE 2 EARNINGS PER COMMON SHARE Earnings (loss) per common share before extraordinary items and cumulative effect of accounting changes are computed by dividing earnings (loss) before extraordinary items and cumulative effect of accounting changes by the weighted average number of common shares outstanding. Earnings (loss) per common share before extraordinary items and cumulative effect of accounting changes, assuming dilution, were computed assuming that all potentially dilutive securities, including "in-the-money" stock options, were converted into common shares at the beginning of each year. A reconciliation of the amounts included in the computation of earnings (loss) per common share before extraordinary 36 items and cumulative effect of accounting changes, and earnings (loss) per common share before extraordinary items and cumulative effect of accounting changes, assuming dilution, is as follows:
- -------------------------------------------------------------------------------------- In millions, except per share amounts 2002 2001 2000 - -------------------------------------------------------------------------------------- Earnings (loss) before extraordinary items and cumulative effect of accounting changes $ 295 $(1,142) $ 368 Effect of dilutive securities -- -- -- ------ ------- ----- Earnings (loss) before extraordinary items and cumulative effect of accounting changes - assuming dilution $ 295 $(1,142) $ 368 ====== ======= ===== Average common shares outstanding 481.4 482.6 449.6 Effect of dilutive securities Long-term incentive plan deferred compensation -- (1.0) -- Stock options 1.6 -- 0.4 ------ ------- ----- Average common shares outstanding - assuming dilution 483.0 481.6 450.0 ====== ======= ===== Earnings (loss) per common share before extraordinary items and cumulative effect of accounting changes $ 0.61 $ (2.37) $0.82 ====== ======= ===== Earnings (loss) per common share before extraordinary items and cumulative effect of accounting changes - assuming dilution $ 0.61 $ (2.37) $0.82 ====== ======= =====
Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. Antidilutive securities included preferred securities of a subsidiary trust for the periods presented. Stock options are antidilutive in periods when net losses are recorded. NOTE 3 INDUSTRY SEGMENT INFORMATION Financial information by industry segment and geographic area for 2002, 2001 and 2000 is presented on pages 26 and 27. NOTE 4 RECENT ACCOUNTING DEVELOPMENTS Costs Associated With Exit or Disposal Activities: In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities." The statement changes the measurement and timing of recognition for exit costs, including restructuring charges, and is effective for any such activities initiated after December 31, 2002. It requires that a liability for costs associated with an exit or disposal activity, such as one-time termination benefits, be recognized when the liability is incurred, rather than at the date of a company's commitment to an exit plan. It has no effect on charges recorded for exit activities begun prior to December 31, 2002. This standard, which International Paper will adopt in 2003, will not have a material effect on the company's consolidated financial position or results of operations. Impairment and Disposal of Long-Lived Assets: In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." It establishes a single accounting model for the impairment of long-lived assets to be held and used or to be disposed of by sale or abandonment, and broadens the definition of discontinued operations. International Paper adopted SFAS No. 144 in 2002, with no significant change in the accounting for the impairment and disposal of long-lived assets. Asset Retirement Obligations: In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective in 2003. It requires the recording of an asset and a liability equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists. The asset is required to be depreciated over the life of the related equipment or facility, and the liability accreted each year based on a present value interest rate. This standard, which International Paper will adopt in 2003, will not have a material effect on the company's consolidated financial position or results of operations. Goodwill: In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." It changed the accounting for goodwill by eliminating goodwill amortization beginning in 2002. It also requires at least an annual assessment of recorded goodwill for impairment. The initial test for impairment had to be completed by December 31, 2002, with any impairment charge recorded as the cumulative effect of an accounting change to be retroactively reflected in the first 37 quarter of 2002. Any subsequent impairment charges would be recorded in operating results. The initial test compared the fair value of each of International Paper's business reporting units having recorded goodwill balances with the business unit's carrying amount. Fair value was determined using discounted projected future operating cash flows for all business reporting units except CHH, where the average quoted market price for CHH shares was used. Where the carrying amount exceeded fair value, additional testing was performed for possible goodwill impairment. The fair value for these business reporting units was then allocated to individual assets and liabilities, using a depreciated replacement cost approach for fixed assets, and outside appraised values for intangible assets. Any excess of fair value over the allocated amounts was equal to the implied fair value of goodwill. Where this implied goodwill value was less than the goodwill book value, an impairment charge was recorded. Based on testing completed in the fourth quarter of 2002, a transitional goodwill impairment loss was recorded for the Industrial and Consumer Packaging, CHH and Printing Papers business segments totaling $1.2 billion. This charge had no impact on cash flow. Goodwill arising from major acquisitions that involve multiple business segments is classified as a corporate asset for segment reporting purposes; while goodwill relating to a single business reporting unit is included as an asset of the applicable segment. For goodwill impairment testing, all goodwill was allocated to business segments. The following table presents changes in the goodwill balances as allocated to each business segment for the year ended December 31, 2002.
- ------------------------------------------------------------------------------------------- Balance Transitional Balance January 1, Impairment December 31, In millions 2002 Loss Other 2002 - ------------------------------------------------------------------------------------------- Printing Papers $3,288 $ (426) $ 2 $2,864 Industrial and Consumer Packaging 1,827 (467) (2) 1,358 Distribution 323 -- 3 326 Forest Products 735 -- -- 735 Carter Holt Harvey 346 (343)(a) (3) -- Corporate 24 -- -- 24 ------ ------- --- ------ Total $6,543 $(1,236) $-- $5,307 ====== ======= === ======
(a) Excludes a $61 million credit to minority interest expense. International Paper ceased recording goodwill amortization effective January 1, 2002. This had no effect on cash flow. The following table shows net earnings (loss) for the year ended December 31, 2002 and pro forma net earnings (loss) for the years ended December 31, 2001 and 2000, exclusive of goodwill amortization.
- ------------------------------------------------------------- In millions, for the years ended December 31 2002 2001 2000 - ------------------------------------------------------------- Net earnings (loss) $ (880) $(1,204) $ 142 Add back: Goodwill amortization -- 201 141 ------ ------- ----- Adjusted net earnings (loss) $ (880) $(1,003) $ 283 ====== ======= ===== Basic and Diluted Earnings (Loss) Per Common Share: Net earnings (loss) $(1.83) $ (2.50) $0.32 Goodwill amortization -- 0.42 0.31 ------ ------- ----- Adjusted net earnings (loss) $(1.83) $ (2.08) $0.63 ====== ======= =====
Derivatives and Hedging: On January 1, 2001, International Paper adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138. The cumulative effect of adopting SFAS No. 133 was a $25 million charge to net earnings before taxes and minority interest ($16 million after taxes and minority interest), and a net decrease of $9 million after taxes in OCI. The charge to net earnings primarily resulted from recording the fair value of certain interest rate swaps, which do not qualify under the new rules for hedge accounting treatment. The decrease in OCI primarily resulted from adjusting the foreign currency contracts used as hedges of net investments in foreign operations to fair value. NOTE 5 MERGERS AND ACQUISITIONS In December 2002, CHH acquired Starwood Australia's Bell Bay medium density fiberboard plant in Tasmania for $28 million in cash. In April 2001, CHH acquired Norske Skog's Tasman Kraft pulp manufacturing business for $130 million in cash. In June 2000, International Paper completed the acquisition of Champion, a leading manufacturer of paper for business communications, commercial printing and publications, with significant market pulp, plywood and lumber manufacturing operations. Champion shareholders received $50 in cash per share and $25 worth of International Paper common stock for each Champion share. Champion shares were acquired for approximately $5 billion in cash and 68.7 million shares of International Paper common stock with a fair market value of $2.4 billion. Approximately $2.8 billion of Champion debt was assumed. In April 2000, CHH purchased CSR Limited's medium density fiberboard and particleboard businesses and its Oberon sawmill for approximately $200 million in cash. 38 In March 2000, International Paper acquired Shorewood Packaging Corporation, a leader in the manufacture of premium retail packaging, for approximately $640 million in cash and the assumption of $280 million of debt. All of the above 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. In March 2001, International Paper and CHH each acquired a 25% interest in International Paper Pacific Millennium Limited. The resulting investment is accounted for under the equity method and is included in Investments in the accompanying consolidated balance sheet. NOTE 6 SPECIAL ITEMS INCLUDING RESTRUCTURING AND BUSINESS IMPROVEMENT ACTIONS Restructuring and Other Charges: 2002: During 2002, restructuring and other charges before taxes and minority interest of $695 million ($435 million after taxes and minority interest) were recorded. These charges included a $199 million charge before taxes and minority interest ($130 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $450 million pre-tax charge ($278 million after taxes) for additional exterior siding legal reserves discussed in Note 11, and a charge of $46 million before taxes and minority interest ($27 million after taxes and minority interest) for early debt retirement costs discussed in Note 13. In addition, a $68 million pre-tax credit ($43 million after taxes) was recorded in 2002, including $45 million for the reversal of 2001 and 2000 reserves no longer required and $23 million for the reversal of excess Champion purchase accounting reserves. The $199 million charge for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $101 million charge in the fourth quarter of 2002, a $19 million charge in the third quarter of 2002 and a $79 million charge in the second quarter of 2002. The fourth-quarter charge included $29 million of asset write-downs and $72 million of severance and other charges. The third-quarter charge included $9 million of asset write-downs and $10 million of severance and other charges. The second-quarter charge consisted of $42 million of asset write-downs and $37 million of severance and other charges. The following table and discussion presents detail related to the fourth-quarter charge:
- ---------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - ---------------------------------------------------------------------- Printing Papers (a) $ 2 $26 $ 28 Consumer Packaging (b) 16 9 25 Industrial Packaging (c) -- 3 3 Forest Products (d) 10 2 12 Distribution (e) 1 5 6 Specialty Businesses and Other (f) -- 16 16 Carter Holt Harvey (g) -- 11 11 --- --- ---- $29 $72 $101 === === ====
(a) The Printing Papers business approved a restructuring plan at the Maresquel, France plant in an effort to improve efficiencies. Charges associated with the plan included $1 million of asset write-downs to salvage value, $7 million of severance costs covering the termination of 80 employees and other cash costs of $1 million. Management also implemented a reduction in force initiative at several of its Coated and Supercalendered mills resulting in severance charges of $18 million covering the termination of 245 employees. Also, an additional charge of $1 million was recorded to write down the remaining assets at the Erie, Pennsylvania mill to salvage value. (b) The Consumer Packaging business approved a plan to shut down the Hopkinsville, Kentucky Foodservice plant due to the facility's financial shortfalls, a continuing weak economy, reduced demand from its Quick Service Restaurant (QSR) customers and increased competition for remaining QSR volumes. Charges associated with this shutdown included $10 million to write down assets to their estimated realizable value of $4 million, $3 million of severance costs covering the termination of 327 employees, and other exit costs of $1 million. The Hopkinsville plant had revenues of $47 million, $31 million and $24 million in 2002, 2001 and 2000, respectively. This plant had operating losses of $8 million in 2002, $1 million in 2001 and zero in 2000. Management also implemented a business-reorganization plan for the Foodservice group that included $2 million to write down assets to salvage value, $3 million of severance costs covering the termination of 113 employees and other cash costs of $1 million. The Consumer Packaging charge also included $4 million of asset write-offs and $1 million of other cash charges associated with its international joint ventures. (c) The Industrial Packaging business recorded a charge of $3 million for severance costs relating to the Las Palmas facility in the second phase of an effort to consolidate duplicative facilities and eliminate excess internal capacity. Redundancies associated with this charge included 56 employees. 39 (d) The Forest Products business charge of $12 million resulted from management's decision to exit the development of the wood plastic composite business and shut down the Whelen Springs, Arkansas lumber mill. Charges associated with the wood plastic composite business consisted of $10 million of asset write-downs to salvage value and $1 million of other exit costs. The Whelen Springs Lumber mill was closed due to the impact of the strong dollar on export sales. The Whelen Springs shutdown charge consisted of $1 million of exit costs. (e) The distribution business (xpedx) implemented a plan to consolidate duplicative facilities and reduce ongoing operating logistics and selling and administrative expenses. Charges associated with this plan included $1 million of asset write-downs to salvage value, $2 million of severance costs covering the termination of 68 employees, and other cash costs of $3 million. (f) The Specialty Businesses approved a plan to shut down the Valkeakoski, Finland chemicals plant, as well as a management plan to implement headcount reduction programs within the Chemicals group. Charges associated with the Valkeakoski shutdown included $8 million of other cash costs not including severance. The Valkeakoski plant had revenues of $20 million, $19 million and $19 million in 2002, 2001 and 2000, respectively. This plant had operating earnings of $1 million in both 2002 and 2001, and $2 million in 2000. Charges associated with the headcount reduction programs consisted of $3 million of severance covering 11 employees to be terminated and $1 million of other related costs. The Specialty Businesses also implemented a plan to restructure manufacturing operations at the Polyrey facility in France. The plan includes consolidation of decorative high-pressure laminate production in order to optimize efficiencies and provide higher levels of quality and service. Charges associated with the restructuring included $2 million of severance costs covering the termination of 46 employees and $1 million of other exit costs. Other charges included a $1 million reserve for facility environmental costs at the Natchez, Mississippi facility. (g) CHH recorded a charge of $11 million for severance costs associated with a reduction in force at its Kinleith facility as part of a continuing program to improve the cost structure at the mill. Redundancies associated with the charge included 260 employees. The following table and discussion presents detail related to the third-quarter charge:
- ---------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - ---------------------------------------------------------------------- Specialty Businesses and Other (a) $-- $ 3 $ 3 Carter Holt Harvey (b) 5 7 12 Other (c) 4 -- 4 --- --- --- $ 9 $10 $19 === === ===
(a) The Specialty Businesses charge of $3 million relates to the severance cost for 43 employees in Arizona Chemical's U.S. operations to reduce costs. At December 31, 2002, all employees had been terminated. (b) The CHH severance and other charge of $7 million relates primarily to severance for job reductions at the Kinleith, New Zealand mill (102 employees) and at packaging operations in Australia (45 employees). The Kinleith reductions are part of a continuing program to improve the cost structure at the mill. At December 31, 2002, 45 employees had been terminated. In addition, CHH recorded a $5 million loss related to a write-down of non-refundable tax credits to their estimated realizable value. (c) This $4 million charge relates to the write-down to zero of International Paper's investment in Forest Express, a joint venture engaged in electronic commerce transaction processing for the forest products industry. The following table and discussion presents detail related to the second-quarter charge:
- ---------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - ---------------------------------------------------------------------- Printing Papers (a) $39 $18 $57 Consumer Packaging (b) 3 -- 3 Distribution (c) -- 7 7 Administrative Support Groups (d) -- 12 12 --- --- --- $42 $37 $79 === === ===
(a) The Printing Papers business approved a plan to permanently shut down the Hudson River, New York mill by December 31, 2002, as many of the specialty products produced at the mill were not competitive in current markets. The assets of the mill are currently being marketed for sale. Impairment charges associated with the shutdown included $39 million to write the assets down to their estimated realizable value of approximately $5 million, $9 million of severance costs covering the termination of 294 employees, and other cash costs of $7 million. The Hudson River mill had revenues of $61 million, $80 million and $139 million in 2002, 2001 and 2000, respectively, and operating losses of $15 million in 2002 and $22 million in 2001, and operating earnings of $9 million in 2000. At December 31, 2002, all employees had been terminated. The Printing Papers business also recorded an 40 additional charge of $2 million related to the termination of 52 employees in conjunction with the business's plan to streamline and realign administrative functions at several of its locations. At December 31, 2002, 44 employees had been terminated. (b) The Consumer Packaging business approved the first phase of a plan to consolidate duplicative facilities and eliminate excess internal capacity. The $3 million charge recorded relates to the write-down of assets to their estimated salvage value. (c) The Distribution business (xpedx) severance charge of $7 million reflects the termination of 145 employees in conjunction with the business's plan to consolidate duplicative facilities and eliminate excess internal capacity. At December 31, 2002, all 145 employees had been terminated. (d) During the second quarter of 2002, International Paper implemented the second phase of its cost reduction program to realign its administrative functions across all business and staff support groups. As a result, a $12 million severance charge was recorded covering the termination of 102 employees. At December 31, 2002, 4 employees had been terminated. The following table presents a roll forward of the severance and other costs included in the 2002 restructuring plans:
- ---------------------------------------------------------------------- Severance In millions and Other - ---------------------------------------------------------------------- Opening Balance (second quarter 2002) $ 37 Additions (third quarter 2002) 10 Additions (fourth quarter 2002) 72 2002 Activity Cash charges (15) ---- Balance, December 31, 2002 $104 ====
The severance charges recorded in the second, third and fourth quarters of 2002 related to 1,989 employees. As of December 31, 2002, 575 employees had been terminated. 2001: During 2001, restructuring and other charges of $1.1 billion before taxes and minority interest ($752 million after taxes and minority interest) were recorded. These charges included an $892 million charge before taxes and minority interest ($606 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions and a $225 million pre-tax charge ($146 million after taxes) for additional exterior siding legal reserves discussed in Note 11. In addition, a $17 million pretax credit ($11 million after taxes) was recorded in 2001 for the reversal of excess 2000 and 1999 restructuring reserves. The $892 million charge for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $171 million charge in the fourth quarter of 2001, a $256 million charge in the third quarter of 2001 and a $465 million charge in the second quarter of 2001. The fourth-quarter charge consisted of $84 million of asset write-downs and $87 million of severance and other charges. The third-quarter charge consisted of $183 million of asset write-downs and $73 million of severance and other charges. The second-quarter charge consisted of $240 million of asset write-downs and $225 million of severance and other charges. The following table and discussion presents detail related to the fourth-quarter charge:
- ---------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - ---------------------------------------------------------------------- Printing Papers (a) $-- $18 $ 18 Consumer Packaging (b) 29 21 50 Industrial Packaging (c) 41 25 66 Forest Products (d) 12 9 21 Distribution (e) 2 14 16 --- --- ---- $84 $87 $171 === === ====
(a) The Printing Papers business recorded a fourth-quarter charge of $10 million for severance costs related to the reorganization of its Riegelwood, North Carolina mill, and an $8 million charge for additional severance costs related to the Erie, Pennsylvania mill shutdown. The total charge covers the termination of 108 employees. At December 31, 2002, all 108 employees had been terminated. (b) The Consumer Packaging business implemented a plan to reduce excess internal capacity and improve profitability across its domestic converting business. The plan includes $29 million for plant and production line shutdowns, severance of $12 million to cover the termination of 593 employees, and other cash costs of $9 million. At December 31, 2002, all 593 employees had been terminated. (c) The Industrial Packaging business announced the shutdown of the Oswego, New York containerboard mill as part of ongoing optimization efforts. Charges associated with this shutdown included $17 million to write down assets to salvage value, $7 million of severance costs covering the termination of 102 employees, and other exit costs of $2 million. The Oswego mill had revenues of $39 million, $44 million and $37 million in 2001, 2000 and 1999, respectively. This mill had operating earnings of $8 million, $10 million and $6 million in 2001, 2000 and 1999, respectively. At December 31, 2002, 101 employees had been terminated. Management also approved a plan to reconfigure facility assets at the Savannah, Georgia mill. This was the second phase in the mill's rationalization program. Charges associated with the Savannah plan included $14 million of asset write-downs to salvage value, $11 million of severance costs covering the termination of 150 employees, and other 41 cash costs of $1 million. At December 31, 2002, 149 employees had been terminated. The Industrial Packaging charge also included $4 million of additional asset write-offs at the previously shut down Gardiner, Oregon mill, a $4 million charge to cover demolition costs at the Durham Paper mill in Rieglesville, Pennsylvania, a $3 million asset write-off related to the announced shutdown of the Jackson, Mississippi sheet plant, and a $3 million write-off of deferred software costs related to the discontinued implementation of a Union Camp order management system. (d) The Forest Products business approved a plan to shut down the Morton, Mississippi lumber mill. Charges associated with the shutdown included $12 million of asset write-downs to salvage value, $3 million of severance costs covering the termination of 185 employees, and $6 million of other exit costs. The Morton mill had sales of $35 million, $38 million and $51 million in 2001, 2000 and 1999, respectively, and operating losses of $4 million and $3 million in 2001 and 2000, respectively, and operating income of $3 million in 1999. At December 31, 2002, 183 employees had been terminated. (e) xpedx implemented a plan to reduce operating and selling costs. Charges associated with this plan included $2 million of asset write-downs, $11 million of severance costs covering the termination of 325 employees, and other cash costs of $3 million. At December 31, 2002, all 325 employees had been terminated. The following table and discussion presents detail related to the third-quarter charge:
- --------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - --------------------------------------------------------- Printing Papers (a) $ 92 $ 43 $135 Consumer Packaging (b) 89 27 116 Distribution (c) 2 3 5 ---- ---- ---- $183 $ 73 $256 ==== ==== ====
(a) The Printing Papers business approved a plan to shut down the Erie, Pennsylvania mill due to excess capacity in pulp and paper and non-competitive cost of operations. Charges associated with the Erie shutdown included $92 million to write the assets down to their estimated salvage value, $24 million of severance costs covering the termination of 797 employees, and other cash costs of $19 million. The mill had revenues of $167 million, $206 million and $193 million in 2001, 2000 and 1999, respectively. The mill had an operating loss of $33 million in 2001, operating income of $3 million in 2000 and an operating loss of $20 million in 1999. At December 31, 2002, all 797 employees had been terminated. (b) The Consumer Packaging business implemented a plan to exit the Aseptic Packaging business. The plan included the shutdown or sale of various Aseptic Packaging facilities. Included in this charge are $89 million to write the assets down to their estimated realizable value of $35 million, $15 million of severance costs covering the termination of 300 employees, and $12 million of other cash costs. At December 31, 2002, 299 employees had been terminated. (c) xpedx approved the shutdown of its Nationwide Kansas City, Missouri distribution center to eliminate excess internal capacity. The xpedx Olathe, Kansas facility will continue to service Kansas City and outlying cities in the states of Missouri and Kansas. Charges associated with the shutdown included $2 million of asset write-downs, $2 million of severance costs covering the termination of 79 employees, and other cash costs of $1 million. At December 31, 2002, all 79 employees had been terminated. The following table and discussion presents detail related to the second-quarter charge:
- ----------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - ----------------------------------------------------------------- Printing Papers (a) $ 9 $ 23 $ 32 Consumer Packaging (b) 151 69 220 Industrial Packaging (c) 62 20 82 Industrial Papers (d) 3 5 8 Forest Products (e) 1 12 13 Distribution (f) 4 21 25 Carter Holt Harvey (g) 10 -- 10 Administrative Support Groups (h) -- 75 75 ---- ---- ---- $240 $225 $465 ==== ==== ====
(a) The Printing Papers business shut down the Hudson River mill No. 3 paper machine located in Corinth, New York due to excess internal capacity. The machine was written down by $9 million to its estimated fair value of zero. A severance charge of $10 million was recorded to cover the termination of 208 employees. At December 31, 2002, all 208 employees had been terminated. Also, the Printing Papers business implemented a plan to streamline and realign administrative functions at several of its locations. Charges associated with this plan included $6 million of severance costs covering the termination of 82 employees, and other cash costs of $7 million. At December 31, 2001, all 82 employees had been terminated. (b) In June 2001, the Consumer Packaging business shut down the Moss Point, Mississippi mill and announced the shutdown of its Clinton, Iowa facility due to excess internal capacity. Charges associated with the Moss Point shutdown included $138 million to write the assets down to their estimated salvage value, $21 million of severance costs covering the termination of 363 employees, and other cash costs of $20 million. The Moss Point mill had revenues of $37 million, $127 million and $162 million in 2001, 2000 and 1999, respectively. The mill had an operating loss of $11 million in 2001, and operating earnings of $4 million and zero in 2000 and 1999, respectively. At 42 December 31, 2002, all 363 employees had been terminated. Charges associated with the Clinton shutdown included $7 million to write the assets down to their estimated salvage value, $7 million of severance costs covering the termination of 327 employees, and other cash costs of $3 million. The Clinton facility had revenues of $51 million, $100 million and $105 million in 2001, 2000 and 1999, respectively. The facility had no operating income in 2001, an operating loss of $1 million in 2000 and operating income of $1 million in 1999. At December 31, 2002, all 327 employees had been terminated. Additionally, the Consumer Packaging business implemented a plan to reduce excess internal capacity and streamline administrative functions at several of its locations. Charges associated with this plan included $6 million of asset write-downs to salvage value, $15 million of severance costs covering the termination of 402 employees, and other cash costs of $3 million. At December 31, 2002, all 402 employees had been terminated. (c) The Industrial Packaging business shut down the Savannah, Georgia mill No. 2, No. 4 and No. 6 paper machines due to excess internal capacity. The machines were written down by $62 million to their estimated fair value of zero, with severance charges of $11 million also recorded to cover the termination of 290 employees. At December 31, 2001, all 290 employees had been terminated. Also, Industrial Packaging implemented a plan to streamline and realign administrative functions at several of its locations, resulting in a severance charge of $9 million covering the termination of 146 employees. At December 31, 2001, all 146 employees had been terminated. (d) Industrial Papers implemented a plan to reduce excess internal capacity and streamline administrative functions at several of its locations. Charges associated with this plan included asset write-downs to salvage value of $3 million and severance costs of $5 million covering the termination of 123 employees. At December 31, 2002, all 123 employees had been terminated. (e) The Forest Products business charge of $13 million reflects the reorganization of its regional operating structure and streamlining of administrative functions. The charge included $1 million of asset write-downs to salvage value, $9 million of severance costs covering the termination of 130 employees, and other cash costs of $3 million. At December 31, 2001, all 130 employees had been terminated. (f) xpedx implemented a plan to consolidate duplicate facilities and eliminate excess internal capacity. Charges associated with this plan included $4 million of asset write-downs to salvage value, $14 million of severance costs covering the termination of 394 employees, and other cash costs of $7 million. At December 31, 2002, all 394 employees had been terminated. (g) The CHH charge of $10 million was recorded to write down the assets of its Mataura mill to their estimated fair value of zero as a result of the decision to permanently shut down this facility, which had previously been indefinitely idled. (h) During the second quarter of 2001, International Paper implemented a cost reduction program to realign its administrative functions across all business and staff support groups. As a result, a $75 million severance charge was recorded covering the termination of 985 employees. At December 31, 2002, all 985 employees had been terminated. The following table presents a roll forward of the severance and other costs included in the 2001 restructuring plans:
- ----------------------------------------------------------------- Severance In millions and Other - ----------------------------------------------------------------- Opening Balance (second quarter 2001) $ 225 Additions (third quarter 2001) 73 Additions (fourth quarter 2001) 87 2001 Activity Cash charges (131) 2002 Activity Cash charges (131) Reclassifications: Deferred payments to severed employees (30) Environmental remediation and other exit costs (62) Reversals of reserves no longer required (31) ----- Balance, December 31, 2002 $ -- =====
Certain deferred payments for severed employees and environmental remediation have been reclassified to Accounts payable and Other liabilities, respectively. The severance charges recorded in the second, third and fourth quarters of 2001 related to 6,089 employees. As of December 31, 2002, 6,084 employees had been terminated. 2000: During 2000, restructuring and other charges before taxes and minority interest of $949 million ($589 million after taxes and minority interest) were recorded. These charges included an $824 million charge before taxes and minority interest ($509 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions and a $125 million pre-tax charge ($80 million after taxes) for additional exterior siding legal reserves discussed in Note 11. In addition, a $34 million pretax credit ($21 million after taxes) was recorded in 2000 for the reversal of excess 1999 restructuring reserves and Union Camp merger-related termination benefit reserves. The $824 million charge for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $753 million charge in the fourth quarter of 2000 and a $71 million charge in the second quarter of 2000. The fourth- 43 quarter charge consisted of $536 million of asset write-downs and $217 million of severance and other charges. The second-quarter charge consisted of $40 million of asset write-downs and $31 million of severance and other charges. The following table and discussion presents detail related to the fourth-quarter charge:
- ---------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - ---------------------------------------------------------- Printing Papers (a) $293 $103 $396 Consumer Packaging (b) 86 7 93 Industrial Packaging (c) 114 46 160 Chemicals and Petroleum (d) 16 18 34 Forest Products (e) 15 20 35 Distribution (f) 3 19 22 Carter Holt Harvey (g) 1 4 5 Other (h) 8 -- 8 ---- ---- ---- $536 $217 $753 ==== ==== ====
(a) The Printing Papers business announced the shutdowns of the Mobile, Alabama and the Lock Haven, Pennsylvania mills. The announcements were in conjunction with the business's plan to realign and rationalize papermaking capacity to benefit future operations. Charges associated with the Mobile shutdown included $223 million to write assets down to their salvage value, $31 million of severance costs covering the termination of 760 employees, and other exit costs of $41 million. The Mobile mill had revenues of $274 million and $287 million in 2000 and 1999, respectively. This mill had operating earnings of $34 million and $8 million in 2000 and 1999, respectively. At December 31, 2001, all 760 employees had been terminated. Charges associated with the Lock Haven shutdown included $70 million to write the assets down to their salvage value, $16 million of severance costs covering the termination of 589 employees, and other exit costs of $15 million. The Lock Haven mill had revenues of $267 million and $225 million in 2000 and 1999, respectively. This mill had an operating loss of $21 million in 2000 and operating earnings of $12 million in 1999. At December 31, 2002, 588 employees had been terminated. (b) The Consumer Packaging business shut down the Beverage Packaging converting plant in Jamaica in December 2000, and the packaging facility in Cincinnati, Ohio in March 2001. Production at the Jamaica plant was moved to Venezuela to increase plant utilization. The Cincinnati facility was closed in order to better align our manufacturing system with customer demand. Charges associated with these shutdowns include $6 million of asset write-downs to salvage value, $5 million of severance costs covering the termination of 239 employees, and other exit costs of $2 million. At December 31, 2002, all 239 employees had been terminated. The Consumer Packaging charge also included an $80 million asset impairment due to continuing losses in its aseptic business. The aseptic assets were written down to their estimated fair market value based on expected future discounted cash flows. (c) The Industrial Packaging business charge of $160 million is related to the shutdown of the Camden, Arkansas mill, the shutdown of the Pedemonte, Italy container plant and the write-down of the Walsum No. 10 paper machine. The Camden mill, which produced unbleached kraft and multi-wall paper, was closed in December 2000 due to the declining kraft paper market, excess internal capacity and shrinking customer demand. The mill's assets were written down $102 million to their salvage value, and severance costs of $24 million were recorded to cover the termination of 613 employees. Other exit costs totaled $15 million. The Camden mill had revenues of $151 million and $162 million and operating earnings of $14 million and $22 million in 2000 and 1999, respectively. At December 31, 2001, all 613 employees had been terminated. Charges associated with the Pedemonte plant shutdown included $2 million of asset write-downs to salvage value, $3 million of severance costs covering the termination of 83 employees, and $4 million of other exit costs. The Pedemonte plant had revenues of $9 million and $11 million in 2000 and 1999, respectively. This plant had operating losses of $2 million in both 2000 and 1999. At December 31, 2001, all 83 employees had been terminated. The business also wrote down the Walsum No. 10 paper machine acquired in the Union Camp merger by $10 million to its estimated fair market value. (d) The Chemicals and Petroleum business charge of $34 million was related to the announced shutdown of the Oakdale, Louisiana plant. This was part of the business's Asset Rationalization Program to increase earnings, improve plant efficiencies and reduce excess internal capacity. A portion of the facility was shut down at the end of 2000, with the remainder closed in early 2002. The charge included $16 million to write the assets down to their estimated fair market value of zero, $1 million of severance costs covering the termination of 61 employees, and $17 million of other exit costs. The Oakdale plant had revenues of $16 million, $31 million and $30 million in 2001, 2000 and 1999, respectively, and no operating earnings in 2001, $3 million in 2000 and no operating earnings in 1999. At December 31, 2002, all 61 employees had been terminated. (e) The Forest Products business charge of $35 million was primarily related to the announced shutdown of the Washington, Georgia lumber mill and restructuring costs associated with the Mobile mill closure. The Washington lumber mill was closed in January 2001 due to unfavorable market conditions and excess internal capacity. The mill had revenues of $54 million and $66 million in 2000 and 1999, respectively. This facility had an operating loss of $6 million in 2000 and operating income of $2 million in 1999. The Forest Products business charge included $15 million of asset write-downs to salvage value, $7 million of severance costs covering the termination of 264 employees, and $13 million 44 of other exit costs. At December 31, 2002, all 264 employees had been terminated. (f) xpedx, our distribution business, implemented a restructuring plan to consolidate duplicate facilities, eliminate excess internal capacity and increase productivity. The $22 million charge associated with this plan included $3 million of asset write-downs to salvage value, $15 million of severance costs covering the termination of 433 employees, and $4 million of other cash costs. At December 31, 2002, all 433 employees had been terminated. (g) The CHH charge of $5 million is related to cost reduction actions primarily associated with the tissue and packaging businesses. This charge included $1 million of asset write-downs and $4 million of severance costs covering the termination of 145 employees. At December 31, 2001, all 145 employees had been terminated. (h) This $8 million charge relates to the write-down of our investment in PaperExchange.com, an online provider of e-commerce for the paper industry, to its estimated fair market value. The following table and discussion presents detail related to the second-quarter charge:
- ---------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - ---------------------------------------------------------- Printing Papers (a) $22 $ 7 $29 Consumer Packaging (b) 7 9 16 Industrial Papers (c) 9 4 13 Other (d) 2 11 13 --- --- --- $40 $31 $71 === === ===
(a) The Printing Papers business shut down the Millers Falls, Massachusetts mill in August 2000 due to excess internal capacity. Charges associated with the shutdown included $22 million to write down the assets to their estimated fair market value of zero, $2 million of severance costs covering the termination of 119 employees, and other exit costs of $3 million. The Millers Falls mill had revenues of $33 million and $39 million in 2000 and 1999, respectively. The mill had no operating income in 2000 and operating income of $3 million in 1999. At December 31, 2000, all 119 employees had been terminated. Also, a severance charge of $2 million was recorded covering the elimination of 108 salaried positions at the Franklin, Virginia mill in a continuing effort to improve its cost effectiveness and long-term competitive position. At December 31, 2001, all 108 employees had been terminated. (b) The Consumer Packaging business implemented a plan to reduce excess internal capacity and streamline administrative functions at several of its locations as a result of the Shorewood acquisition. As a result, the Richmond, Virginia facility was shut down in June 2000. Charges associated with this shutdown included $6 million to write down assets to their fair market value of zero, $2 million of severance costs covering the termination of 126 employees, and other exit costs of $1 million. This facility had revenues of $8 million and $23 million in 2000 and 1999, respectively. The Richmond facility had operating losses of $2 million and $1 million in 2000 and 1999, respectively. At December 31, 2001, all 126 employees had been terminated. Management also idled the lithographic department of the Clinton, Iowa facility. This action allowed the Retail Packaging business to better focus its resources for further profit improvement. Related charges included $1 million of asset write-downs, $3 million of severance costs covering the termination of 187 employees, and $2 million of other exit costs. At December 31, 2001, all 187 employees had been terminated. A severance reserve of $1 million was also established to streamline the Consumer Packaging business. This reserve covered the termination of 17 employees. At December 31, 2000, all 17 employees had been terminated. (c) Industrial Papers shut down the Knoxville, Tennessee converting facility in December 2000 to reduce excess internal capacity. Assets were written down $9 million to their estimated fair market value and a severance charge of $1 million was recorded to terminate 120 employees. Other exit costs totaled $3 million. The Knoxville facility had revenues of $46 million and $62 million in 2000 and 1999, respectively. This facility had operating income of $2 million in both 2000 and 1999. At December 31, 2001, all 120 employees had been terminated. (d) Other includes $8 million related to Industrial Packaging, primarily for the shutdown of the Tupelo, Mississippi sheet plant. The Industrial Packaging charge included $2 million of asset write-offs, $5 million of severance costs covering the termination of 221 employees and $1 million of other cash costs. At December 31, 2001, all 221 employees had been terminated. Other also includes $5 million related to the indefinite shutdown of CHH's Mataura paper mill. This charge included $3 million of severance costs covering the termination of 158 employees and $2 million of other cash costs. At December 31, 2000, all 158 employees had been terminated. 45 The following table presents a roll forward of the severance and other costs included in the 2000 restructuring plans:
- ---------------------------------------------------------------- Severance In millions and Other - ---------------------------------------------------------------- Opening Balance (second quarter 2000) $ 31 Additions (fourth quarter 2000) 217 2000 Activity Cash charges (19) 2001 Activity Cash charges (148) Reversal of reserves no longer required (14) 2002 Activity Cash charges (38) Reclassifications: Deferred payments to severed employees (4) Environmental remediation and other exit costs (18) Reversal of reserves no longer required (7) ----- Balance, December 31, 2002 $ -- =====
Certain deferred payments for severed employees and environmental remediation have been reclassified to Accounts payable and Other liabilities, respectively. The severance charges recorded in the second and fourth quarters of 2000 related to 4,243 employees. As of December 31, 2002, 4,242 employees had been terminated. Certain reserves were determined to no longer be required, resulting in $7 million and $14 million being reversed to income in the fourth quarters of 2002 and 2001, respectively. Merger Integration Costs: During 2001 and 2000, International Paper recorded pre-tax charges of $42 million ($28 million after taxes) and $54 million ($33 million after taxes), respectively, for Champion and Union Camp merger integration costs. These costs consisted primarily of systems integration, employee retention, travel and other one-time cash costs related to the integrations of Champion and Union Camp. Extraordinary Items: During the first quarter of 2001, pre-tax losses totaling $73 million ($46 million after taxes) were recorded, including $60 million ($38 million after taxes) for impairment losses to reduce the assets of Masonite Corporation (Masonite) to their estimated realizable value based on offers received, and $13 million ($8 million after taxes) from a loss on the sale of oil and gas properties and fee mineral and royalty interests. Pursuant to the pooling-of-interest rules, these losses were recorded as extraordinary items in Net losses on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. In the first quarter of 2001, International Paper completed the sale of its interest in Zanders, a European coated paper business, to M-Real (formerly Metsa Serla) for approximately $120 million and the assumption of $80 million of debt. This transaction resulted in a loss of $360 million before taxes ($245 million after taxes), which was recorded in the third quarter of 2000 (see below) when the decision was made to sell this business. In the fourth quarter of 2000, Fine Papers, the Chemical Cellulose Pulp business and the Flexible Packaging business in Argentina were written down to their estimated fair market values of approximately $235 million based on projected sales proceeds, resulting in a pre-tax charge of $373 million ($231 million after taxes). Also in the fourth quarter, International Paper sold its interest in Bush Boake Allen, a majority-owned subsidiary, for $640 million, resulting in a gain of $368 million before taxes and minority interest ($183 million after taxes and minority interest). CHH also sold its Plastics division in November, which resulted in a loss of $5 million before taxes and minority interest ($2 million after taxes and minority interest). During the third quarter of 2000, International Paper recorded a loss of $460 million before taxes ($310 million after taxes) to write down the net assets of Masonite and Zanders to their estimated realizable value of $520 million. In the first quarter of 2000, International Paper sold its equity interest in Scitex for $79 million, and CHH sold its equity interest in Compania de Petroleos de Chile (COPEC) for just over $1.2 billion. These sales resulted in a combined gain of $385 million before taxes and minority interest ($134 million after taxes and minority interest). Pursuant to the pooling-of-interest rules, the 2000 gains and losses discussed above, totaling a net $85 million loss before taxes and minority interest ($226 million after taxes and minority interest), were recorded as extraordinary items in Net losses on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. NOTE 7 BUSINESSES HELD FOR SALE AND DIVESTITURES In 2000, International Paper announced a divestment program following the acquisition of Champion and the completion of a strategic analysis to focus on its core businesses of paper, packaging and forest products. Through December 31, 2002, more than $3 billion had been realized under the program, including cash and notes received plus debt assumed by the buyers. 46 Businesses Held for Sale: Certain smaller businesses that are being marketed for sale in 2003 remained in the divestment program at December 31, 2002. The Decorative Products Division was also included in this program prior to its sale in the third quarter of 2002. Sales and operating earnings for each of the three years ended December 31, 2002, 2001 and 2000 for these businesses, as well as for other businesses sold through their respective divestiture dates were:
- ------------------------------------------- In millions 2002 2001 2000 - ------------------------------------------- Sales $323 $1,134 $2,886 Operating Earnings $ 10 $ 39 $ 154
The sales and operating earnings for these businesses are included in "Specialty Businesses and Other" of the company's industry segment information in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The assets of businesses held for sale, totaling $128 million at December 31, 2002 and $219 million at December 31, 2001, are included in Assets of businesses held for sale in current assets in the accompanying consolidated balance sheet. The liabilities of businesses held for sale, totaling $44 million at December 31, 2002 and $77 million at December 31, 2001, are included in Liabilities of businesses held for sale in current liabilities in the accompanying consolidated balance sheet. The decreases in these balances since December 31, 2001 reflect divestitures in 2002. In June 2002, International Paper announced that it would discontinue efforts to divest its Arizona Chemical and Industrial Papers businesses after sales efforts did not generate acceptable offers, and made a decision to operate these two businesses. As a result of these actions, Assets and Liabilities of businesses held for sale as of December 31, 2001 were reduced by $429 million and $138 million, respectively, with increases in the related corresponding asset and liability accounts in the accompanying consolidated balance sheet. Operating results for these businesses are included in the Specialty Businesses and Other segment for all periods presented. Divestitures: Net (Gains) Losses on Sales and Impairments of Businesses Held for Sale In the fourth quarter of 2002, International Paper recorded a $10 million pre-tax credit ($4 million after taxes) to adjust estimated accrued costs of businesses previously sold. In the third quarter of 2002, International Paper completed the sale of its Decorative Products operations to an affiliate of Kohlberg & Co. for approximately $100 million in cash and a note receivable with a fair market value of $13 million. This transaction resulted in no gain or loss as these assets had previously been written down to fair market value. Also during the third quarter of 2002, a net gain of $3 million before taxes ($1 million after taxes) was recorded related to adjustments of previously recorded costs of businesses held for sale. During the second quarter of 2002, a net gain on sales of businesses held for sale of $28 million before taxes and minority interest ($96 million after taxes and minority interest) was recorded, including a pre-tax gain of $63 million ($40 million after taxes) from the sale in April 2002 of International Paper's oriented strand board facilities to Nexfor Inc. for $250 million, and a net charge of $35 million before taxes and minority interest (a gain of $56 million after taxes and minority interest) relating to other sales and adjustments of previously recorded estimated costs of businesses held for sale. This net pre-tax charge included: (1) a $2 million net loss associated with the sales of the Wilmington carton plant and CHH's distribution business; (2) an additional loss of $12 million to write down the net assets of Decorative Products to the amount subsequently realized on sale; (3) $11 million of additional expenses relating to the decision to continue to operate Arizona Chemical, including a $3 million adjustment of previously estimated costs incurred in connection with the prior sale effort and an $8 million charge to permanently close a production facility; and (4) a $10 million charge for additional expenses relating to prior divestitures. The impairment charge recorded for Arizona Chemical in the fourth quarter of 2001 (see below) included a tax expense based on the form of sale being negotiated at that time. As a result of the decision in the second quarter of 2002 to discontinue sale efforts and to hold and operate Arizona Chemical in the future, this provision was no longer required. Consequently, special items for the second quarter include a gain of $28 million before taxes and minority interest, with an associated $96 million benefit after taxes and minority interest. The net 2002 gains, totaling $41 million, discussed above are included in Net gains (losses) on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. In the fourth quarter of 2001, a pre-tax impairment loss of $582 million ($524 million after taxes) was recorded including $576 million to write down the net assets of Arizona Chemical, Decorative Products and Industrial Papers to an estimated realizable value of approximately $550 million, and $6 million of severance for the reduction of 47 189 employees in the Chemical Cellulose Pulp business. Also in the fourth quarter, International Paper sold its Mobile, Alabama Retail Packaging facility to Ampac, resulting in a pre-tax loss of $9 million. In the third quarter of 2001, International Paper sold Masonite to Premdor Inc. of Toronto, Canada, resulting in a pre-tax loss of $87 million, its Flexible Packaging business to Exo-Tech Packaging, LLC, resulting in a pre-tax loss of $31 million, and its Curtis/Palmer hydroelectric generating project in Corinth, New York to TransCanada Pipelines Limited, resulting in a pre-tax gain of $215 million. Also, in the third quarter, a pre-tax impairment loss of $50 million ($32 million after taxes) was recorded to write down the Chemical Cellulose assets to their expected realizable value of approximately $25 million. In the second quarter of 2001, a pre-tax impairment loss of $85 million ($55 million after taxes) was recorded to reduce the carrying value of the Flexible Packaging assets to their expected realizable value of approximately $85 million based on preliminary offers received. The 2001 losses discussed above, totaling $629 million, are included in Net (gains) losses on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. Structured Transactions In connection with a sale of forestlands in the state of Washington in 2001, International Paper received notes having a value of approximately $480 million on the date of sale. During 2001, International Paper transferred the Notes to an unconsolidated entity in exchange for a preferred interest in that entity valued at approximately $480 million, and accounted for this transfer as a sale of the Notes for financial reporting purposes with no associated gain or loss. Also during 2001, the entity acquired approximately $561 million of other International Paper debt obligations for cash. At December 31, 2001, International Paper offset, for financial reporting purposes, the $480 million of International Paper debt obligations held by the entity since International Paper had, and intended to effect, a legal right to net settle these two amounts. In December 2002, International Paper acquired an option to purchase the third party's interest in the unconsolidated entity and modified the terms of the entity's special loss allocation between the third party and International Paper. These actions required the entity to be consolidated by International Paper at December 31, 2002, resulting in increases in installment notes receivable (included in Deferred charges and other assets) of $480 million, Long-term debt of $460 million and Minority interest of $20 million. Also, in connection with the sale of the oil and gas properties and fee mineral and royalty interests in 2001, International Paper received a non-controlling preferred limited partnership interest valued at approximately $234 million. The unconsolidated partnership also loaned $244 million to International Paper in 2001. Since International Paper has, and intends to effect, a legal right to net settle these two amounts, we have offset for financial reporting purposes the preferred interest against the note payable. NOTE 8 PREFERRED SECURITIES OF SUBSIDIARIES In September 1998, International Paper Capital Trust III issued $805 million of International Paper-obligated mandatorily redeemable preferred securities. International Paper Capital Trust III is a wholly owned consolidated subsidiary of International Paper and its sole assets are International Paper 7 7/8% debentures. The obligations of International Paper Capital Trust III related to its preferred securities are fully and unconditionally guaranteed by International Paper. These preferred securities are mandatorily redeemable on December 1, 2038. In June 1998, IP Finance (Barbados) Limited, a non-U.S. wholly owned consolidated subsidiary of International Paper, issued $550 million of preferred securities with a dividend payment based on LIBOR. These preferred securities are mandatorily redeemable on June 30, 2008. In March 1998, Timberlands Capital Corp. II, Inc., a wholly owned consolidated subsidiary of International Paper, issued $170 million of 7.005% preferred securities as part of the financing to repurchase the outstanding units of IP Timberlands, Ltd. These securities are not mandatorily redeemable and are classified in the consolidated balance sheet as a minority interest liability. In the third quarter of 1995, International Paper Capital Trust (the Trust) issued $450 million of International Paper-obligated mandatorily redeemable preferred securities. The Trust is a wholly owned consolidated subsidiary of International Paper and its sole assets are International Paper 5 1/4% convertible subordinated debentures. The obligations of the Trust related to its preferred securities are fully and unconditionally guaranteed by International Paper. These preferred securities are convertible into International Paper common stock. Distributions paid under all of the preferred securities noted above were $115 million, $129 million and $141 million in 2002, 2001 and 2000, respectively. The expense related to these preferred securities is shown in minority interest expense in the consolidated statement of earnings. 48 NOTE 9 SALE OF LIMITED PARTNERSHIP INTERESTS During 1993, International Paper contributed assets with a fair market value of approximately $900 million to two newly formed limited partnerships, Georgetown Equipment Leasing Associates, L.P. and Trout Creek Equipment Leasing, L.P. These partnerships are separate and distinct legal entities from International Paper and have separate assets, liabilities, business functions and operations. However, for accounting purposes, these assets continue to be consolidated, with the minority shareholders' interests reflected as minority interest in the accompanying consolidated financial statements. The purpose of the partnerships is to invest in and manage a portfolio of assets including pulp and paper equipment used at the Georgetown, South Carolina and Ticonderoga, New York mills. This equipment is leased to International Paper under long-term leases. Partnership assets also include floating rate notes and cash. During 1993, outside investors purchased a portion of our limited partner interests for $132 million and also contributed an additional $33 million to one of these partnerships. At December 31, 2002, International Paper held aggregate general and limited partner interests totaling 69% in Georgetown Equipment Leasing Associates, L.P. and 66% in Trout Creek Equipment Leasing, L.P. NOTE 10 INCOME TAXES The components of International Paper's earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of accounting changes by taxing jurisdiction were:
- ---------------------------------------------------------- In millions 2002 2001 2000 - ---------------------------------------------------------- Earnings (loss) U.S. $ 263 $(1,683) $ 202 Non-U.S. 108 418 521 ----- ------- ----- $ 371 $(1,265) $ 723 ===== ======= =====
The provision (benefit) for income taxes by taxing jurisdiction was:
- ---------------------------------------------------------- In millions 2002 2001 2000 - ---------------------------------------------------------- Current tax provision U.S. federal $ 175 $ 186 $ 130 U.S. state and local 54 3 41 Non-U.S. 111 100 102 ----- ------- ----- $ 340 $ 289 $ 273 ===== ======= ===== Deferred tax provision (benefit) U.S. federal $(231) $ (455) $ (31) U.S. state and local (146) (116) (65) Non-U.S. (17) 12 (60) ----- ------- ----- $(394) $ (559) $(156) ===== ======= ===== Income tax provision (benefit) $ (54) $ (270) $ 117 ===== ======= =====
International Paper made income tax payments, net of refunds, of $295 million, $333 million and $298 million in 2002, 2001 and 2000, respectively. A reconciliation of income tax expense (benefit) using the statutory U.S. income tax rate compared with actual income tax expense (benefit) follows:
- ----------------------------------------------------------- In millions 2002 2001 2000 - ----------------------------------------------------------- Earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of accounting changes $ 371 $(1,265) $ 723 Statutory U.S. income tax rate 35% 35% 35% ----- ------- ----- Tax expense (benefit) using statutory U.S. income tax rate $ 130 $ (443) $ 253 State and local income taxes (60) (73) (15) Non-U.S. tax rate differences (50) (19) (80) Permanent differences on sales of non-strategic assets (70) 180 -- Nondeductible business expenses 13 12 10 Tax benefit on export sales (4) (4) (18) Minority interest (43) (70) (82) Goodwill amortization -- 55 39 Net U.S. tax on non-U.S. dividends 27 108 28 Other, net 3 (16) (18) ----- ------- ----- Income tax provision (benefit) $ (54) $ (270) $ 117 ===== ======= ===== Effective income tax rate (15)% 21% 16% ===== ======= =====
49 The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 2002 and 2001 were as follows:
- ---------------------------------------------------------------- In millions 2002 2001 - ---------------------------------------------------------------- Deferred tax assets: Postretirement benefit accruals $ 363 $ 394 Pension benefit accruals 397 -- Alternative minimum and other tax credits 423 421 Net operating loss carryforwards 1,295 906 Compensation reserves 174 170 Legal reserves 174 1 Other 527 504 ------- ------- Gross deferred tax assets 3,353 2,396 Less: valuation allowance (169) (171) ------- ------- Net deferred tax assets $ 3,184 $ 2,225 ======= ======= Deferred tax liabilities: Plants, properties, and equipment $(2,832) $(2,846) Prepaid pension costs -- (579) Forestlands (1,092) (968) Other (253) (148) ------- ------- Total deferred tax liabilities $(4,177) $(4,541) ======= ======= Net deferred tax liability $ (993) $(2,316) ======= =======
The valuation allowance for deferred tax assets as of January 1, 2002 was $171 million. The net change in the total valuation allowance for the year ended December 31, 2002 was a decrease of $2 million. During the fourth quarter of 2002, International Paper completed a review of its deferred income tax accounts, including the effects of state tax credits and the taxability of the company's operations in various state taxing jurisdictions. As a result of this review, the Company recorded a decrease of approximately $46 million in the income tax provision in the 2002 fourth quarter, reflecting the effect of the estimated state income tax effective rate applied to these deferred tax items. International Paper has U.S. federal and non-U.S. net operating loss carryforwards that expire as follows: years 2003 through 2012 - $281 million, years 2013 through 2022 - $2.4 billion, and indefinite carryforward - $639 million. International Paper has tax benefits from net operating loss carryforwards for state tax jurisdictions of approximately $233 million that expire as follows: years 2003 through 2012 - $46 million, and years 2013 through 2022 - $187 million. International Paper also has federal and state tax credit carryforwards that expire as follows: years 2003 through 2022 - $91 million, and indefinite carryforward - $380 million. Deferred taxes are not provided for temporary differences of approximately $2.5 billion, $1.8 billion and $1.8 billion as of December 31, 2002, 2001 and 2000, respectively, representing earnings of non-U.S. subsidiaries that are intended to be permanently reinvested. Computation of the potential deferred tax liability associated with these undistributed earnings is not practicable. NOTE 11 COMMITMENTS AND CONTINGENT LIABILITIES Certain property, machinery and equipment are leased under cancelable and non-cancelable agreements. At December 31, 2002, total future minimum rental commitments under non-cancelable leases were $1,022 million, due as follows: 2003 -$229 million, 2004 - $167 million, 2005 - $180 million, 2006 - $99 million, 2007 - $84 million, and thereafter - $263 million. Rent expense was $267 million, $230 million and $218 million for 2002, 2001 and 2000, respectively. International Paper entered into an agreement in 2000 to guarantee, for a fee, an unsecured contractual credit agreement of an unrelated third party customer. The guarantee, which expires in 2008, was made in exchange for a ten-year contract as the exclusive paper supplier to the customer. Both the loan to the customer and the guarantee are unsecured. International Paper would be required to perform under the guarantee upon default on the loan by the unrelated third party. The maximum amount of potential future payments is $110 million in principal plus any accrued but unpaid interest. There is no liability recorded on International Paper's books for the guarantee. In connection with sales of businesses, property, equipment, forestlands, and other assets, International Paper commonly makes representations and warranties relating to such businesses or assets, and may enter into standard commercial indemnification arrangements with respect to tax and environmental liabilities and other matters. Where any liabilities for such matters are probable and subject to reasonable estimation, accrued liabilities are recorded at the time of sale as a cost of the transaction. International Paper believes that possible future unrecorded liabilities for these matters, if any, would not have a material adverse effect on its consolidated financial position or results of operations. Exterior Siding and Roofing Litigation Three nationwide class action lawsuits relating to exterior siding and roofing products manufactured by Masonite that were filed against International Paper have been settled in recent years. The first suit, entitled Judy Naef v. Masonite and International Paper, was filed in December 1994 (Hardboard Lawsuit). The plaintiffs alleged that hardboard siding manufactured by Masonite fails prematurely, allowing moisture intrusion that in turn causes damage to the structure underneath the siding. The class consisted of all 50 U.S. property owners having Masonite hardboard siding installed on and incorporated into buildings between January 1, 1980 and January 15, 1998. The Court granted final approval of the settlement on January 15, 1998. The settlement provides for monetary compensation to class members meeting the settlement requirements on a claims-made basis, which requires a class member to individually submit proof of damage to, or caused by, Masonite product, proof of square footage involved, and proofs of various other matters in order to qualify for payment with respect to a claim. It also provides for the payment of attorneys' fees equaling 15% of the settlement amounts paid to class members, with a non-refundable advance of $47.5 million plus $2.5 million in costs. For siding that was installed between January 1, 1980 and December 31, 1989, claims must be made by January 15, 2005, and for siding installed between January 1, 1990 through January 15, 1998, claims must be made by January 15, 2008. The second suit, entitled Cosby, et. al. v. Masonite Corporation, et. al., was filed in 1997 (Omniwood Lawsuit). The plaintiffs made allegations with regard to Omniwood siding manufactured by Masonite which were similar to those alleged in the Hardboard Lawsuit. The class consisted of all U.S. property owners having Omniwood siding installed on and incorporated into buildings from January 1, 1992 to January 6, 1999. The settlement relating to the Omniwood Lawsuit provides that qualified claims must be made by January 6, 2009 for Omniwood siding that was installed between January 1, 1992 and January 6, 1999. The third lawsuit, entitled Smith, et. al. v. Masonite Corporation, et. al., was filed in 1995 (Woodruf Lawsuit). The plaintiffs alleged that Woodruf roofing manufactured by Masonite is defective and causes damage to the structure underneath the roofing. The class consisted of all U.S. property owners who had incorporated and installed Masonite Woodruf roofing from January 1, 1980 to January 6, 1999. The settlement relating to the Woodruf Lawsuit provides that for product installed between January 1, 1980 and December 31, 1989, claims must be made by January 6, 2006, and for product installed between January 1, 1990 and January 6, 1999, claims must be made by January 6, 2009. The Court granted final approval of the settlements of the Omniwood and Woodruf Lawsuits on January 6, 1999. The settlements provide for monetary compensation to class members meeting the settlement requirements on a claims-made basis, which requires a class member to individually submit proof of damage to, or caused by, Masonite product, proof of square footage involved, and proofs of various other matters. The settlements also provide for payment of attorneys' fees equaling 13% of the settlement amounts paid to class members with a non-refundable advance of $1.7 million plus $75,000 in costs for each of the two cases. Claim Filing and Determination Once a claim is determined to be valid under the respective settlement agreement covering the claim, the amount of the claim is determined by reference to a negotiated compensation formula established under the settlement agreement designed to compensate the homeowner for all damage to the structure. The compensation formula is based on (1) the average cost per square foot for product replacement, including material and labor as calculated by industry standards, in the area in which the structure is located, adjusted for inflation, or (2) the cost of appropriate refinishing as determined by industry standards in such area, adjusted for inflation. Persons receiving compensation pursuant to this formula also agree to release International Paper and Masonite from all other property damage claims relating to the product in question. In connection with the products involved in the lawsuits described above, where there is damage, the process of degradation, once begun, continues until repairs are made. International Paper estimates that approximately 4 million structures have installed products that are the subject of the Hardboard Lawsuit, 300,000 structures have installed products that are subject to the Omniwood Lawsuit and 86,000 structures have installed products that are the subject of the Woodruf Lawsuit. Masonite stopped selling the hardboard siding in May 2001, the products involved in the Woodruf Lawsuit in May 1996, and the products involved in the Omniwood Lawsuit in September 1996. Persons who are class members under the Hardboard, Omniwood and Woodruf Lawsuits who do not pursue remedies under the respective settlement agreement pertaining to such suits, may have recourse to warranties, if any, in existence at the expiration of the respective terms established under the settlement agreements for making claims. The warranty period generally extends for 25 years following the installation of the product in question and, although the warranties vary from product to product, they generally provide for a payment of up to two times the purchase price. 51 Reserve Analysis The following table presents an analysis of the net reserve activity related to the Hardboard, Omniwood and Woodruf Lawsuits for the years ended December 31, 2002, 2001 and 2000.
- ------------------------------------------------------- Hard- Omni- In millions board wood Woodruf Total - ------------------------------------------------------- Balance, December 31, 1999 $ 32 $ 35 $ 9 $ 76 Additional provision 110 10 5 125 Payments (117) (13) (12) (142) Financial collar reimbursement 48 -- -- 48 Other (7) (10) 2 (15) ----- ---- --- ---- Balance, December 31, 2000 66 22 4 92 Additional provision 187 22 16 225 Payments (143) (24) (11) (178) Financial collar reimbursement 52 -- -- 52 Other 17 -- -- 17 ----- ---- --- ---- Balance, December 31, 2001 179 20 9 208 Additional provision 305 134 11 450 Payments (161) (16) (8) (185) Insurance collections 34 -- -- 34 ----- ---- --- ---- Balance, December 31, 2002 $ 357 $138 $12 $507 ===== ==== === ====
Additional Provisions During the third quarter of 2000, a determination was made that an additional $125 million provision was required to cover an expected shortfall in the reserves, resulting primarily from a higher than anticipated number of claims relating to the Hardboard Lawsuit. This increase was based on an independent third party statistical study of future costs, which analyzed trends in the claims experience through May 30, 2000. This amount was based on a statistical outcome that assumed that the claims rate (a) doubles in one state for one additional year, levels off for two years, and then declines by 45% per year, (b) remains level in another state for two years and then declines by 45% per year, and (c) in all other areas, declines by 45% per year. The statistical model used to develop this outcome also included assumptions on the expected geographic patterns of claims and assumptions related to the cost of claims, including forecasts relating to the rate of inflation. Average claim costs were calculated from historical claims records, taking into consideration structure type, location and source of the claim. In the third quarter of 2001, a determination was made that an additional provision would be required to cover an expected shortfall in the reserves that had arisen since the third quarter of 2000 due to actual claims experience exceeding projections. An additional $225 million was added to the existing reserve balance at that time. This increase was based on an independent third party statistical study of future costs, which analyzed trends in the claims experience through August 31, 2001. The amount was based on a statistical outcome that assumed that Hardboard claims growth continued through mid-2002, then declined by 50% per year. Omniwood claims growth was assumed to continue through mid-2002, decline by 50% in 2003 and thereafter increase at the rate of 10% per year. Woodruf claims were assumed to decline at a rate of 50% per year. Unit costs per claim were assumed to hold at the 2001 level. The statistical model used to develop this outcome also included assumptions on the geographic patterns of claims rates and assumptions related to the cost of claims, including forecasts relating to the rate of inflation. Average claim costs were calculated from historical claims records, taking into consideration structure type, location and source of the claim. During 2002, tracking of the actual versus projected number of claims filed and average cost per claim indicated that, although total claims costs were approximately equal to projected amounts, the number of claims filed was higher than projected, offsetting the effect of lower average claims payment amounts. Accordingly, updated projections were developed by two independent consultants utilizing the most current claims experience data. Principal assumptions used in the development of these projections were that the number of Hardboard claims filed, which account for approximately 85% of all claims costs, would average slightly above current levels until January 2005, then would decline by about 70% in 2005 and remain flat. Average claims costs were assumed to continue to decline at the rate experienced during the last twelve months. While management believes that the assumptions used in developing these outcomes represent the most probable scenario, factors which could cause actual results to vary from these assumptions include: (1) area specific assumptions as to growth in claims rates could be incorrect, (2) locations where previously there had been little or no claims could emerge as significant geographic locations, and (3) the cost per claim could vary materially from that projected. The first consultant provided two statistical outcomes, with the higher outcome indicating a required provision of approximately $430 million. The second consultant provided a range of possible outcomes, with the most probable outcome indicating a required provision of approximately $475 million. The estimate ranged from a low (a 95% probability that future charges would exceed this amount) of $338 million to a high (a 5% probability that future charges would exceed this amount) of $635 million. Using these 52 projections, management determined that a provision of $450 million should be recorded in the fourth quarter of 2002 as an estimate of the most probable outcome based on the consultants' projections. Reserve Balances At December 31, 2002, net reserves for these matters totaled $507 million, including $357 million for the Hardboard Lawsuit, $138 million for the Omniwood Lawsuit and $12 million for the Woodruf Lawsuit. The reserve balance for claims relating to the Hardboard Lawsuit is net of $9 million of expected insurance recoveries remaining from the initial $70 million estimate of insurance recoveries. At December 31, 2002, there were $30 million of costs associated with claims inspected and not paid ($25 million for Hardboard siding, $4 million for Omniwood and $1 million for Woodruf) and $29 million of costs associated with claims in process and not yet inspected ($24 million for claims related to the Hardboard Lawsuit, $4 million for claims related to the Omniwood Lawsuit and $1 million for claims related to the Woodruf Lawsuit). The aggregate of the reserve and insurance receivable at December 31, 2002 amounted to $516 million, as reflected in the table in the following paragraph. The estimated claims reserve includes $457 million for unasserted claims that are probable of assertion. At December 31, 2002, the components of the required reserve and the classification of such amounts in the consolidated balance sheet are summarized as follows:
- ------------------------------------------------------------------ In millions - ------------------------------------------------------------------ Aggregate reserve (in Other accrued liabilities) $516 Insurance receivable (in Deferred charges and other assets) (9) ---- Reserve required $507 ====
Claims Statistics The average settlement cost per claim for the years ended December 31, 2002, 2001, and 2000 for the Hardboard, Omniwood and Woodruf Lawsuits is set forth in the table below: Average Settlement Cost Per Claim
- ----------------------------------------------------------------------- Hardboard Omniwood Woodruf Single Multi- Single Multi- Single Multi- In thousands Family Family Family Family Family Family - ----------------------------------------------------------------------- December 31, 2002 $2.4 $4.3 $4.4 $7.7 $4.7 $9.3 December 31, 2001 $3.3 $7.0 $5.9 $6.8 $5.3 $4.2 December 31, 2000 $3.9 $9.5 $6.2 $4.2 $5.2 $2.8
The above information is calculated by dividing the amount of claims paid by the number of claims paid. Through December 31, 2002, net settlement payments totaled $588 million ($484 million for claims relating to the Hardboard Lawsuit, $64 million for claims relating to the Omniwood Lawsuit and $40 million for claims relating to the Woodruf Lawsuit), including $51 million of non-refundable attorneys' advances discussed above ($47.5 million for the Hardboard Lawsuit and $1.7 million for each of the Omniwood Lawsuit and Woodruf Lawsuit). Also, payments of $17 million have been made to the attorneys for the plaintiffs in the Omniwood and Woodruf Lawsuits. In addition, International Paper has received $61 million related to the Hardboard Lawsuit from our insurance carriers through December 31, 2002. International Paper has the right to terminate each of the settlements after seven years from the dates of final approval. The liability for these matters has been retained after the sale of Masonite. The following table shows an analysis of claims statistics related to the Hardboard, Omniwood and Woodruf Lawsuits for the years ended December 31, 2002, 2001 and 2000: Claims Activity
- ------------------------------------------------------------------------------------------------------- In thousands Hardboard Omniwood Woodruf Total --------------- --------------- --------------- --------------- No. of Single Multi- Single Multi- Single Multi- Single Multi- Claims Pending Family Family Family Family Family Family Family Family Total - ------------------------------------------------------------------------------------------------------- December 31, 1999 11.3 2.7 1.2 0.1 1.8 0.1 14.3 2.9 17.2 No.of Claims Filed 25.5 9.4 2.2 0.2 2.5 0.1 30.2 9.7 39.9 No.of Claims Paid (15.6) (5.6) (1.9) (0.1) (2.4) -- (19.9) (5.7) (25.6) No.of Claims Dismissed (5.3) (2.0) (0.5) -- (0.7) -- (6.5) (2.0) (8.5) December 31, 2000 15.9 4.5 1.0 0.2 1.2 0.2 18.1 4.9 23.0 No.of Claims Filed 46.2 8.7 2.2 0.4 1.9 0.1 50.3 9.2 59.5 No.of Claims Paid (23.1) (6.1) (1.4) (0.2) (1.2) (0.1) (25.7) (6.4) (32.1) No.of Claims Dismissed (9.0) (1.7) (0.4) (0.1) (0.4) -- (9.8) (1.8) (11.6) December 31, 2001 30.0 5.4 1.4 0.3 1.5 0.2 32.9 5.9 38.8 No.of Claims Filed 48.3 10.9 3.5 0.5 1.4 0.1 53.2 11.5 64.7 No.of Claims Paid (36.0) (9.2) (2.6) (0.4) (1.3) -- (39.9) (9.6) (49.5) No.of Claims Dismissed (13.7) (3.1) (0.4) -- (0.5) -- (14.6) (3.1) (17.7) December 31, 2002 28.6 4.0 1.9 0.4 1.1 0.3 31.6 4.7 36.3
53 Insurance Matters In November 1995, International Paper and Masonite commenced a lawsuit in the Superior Court of the State of California against certain of their insurance carriers because of their refusal to indemnify International Paper and Masonite for the settlement relating to the Hardboard Lawsuit and the refusal of one insurer, Employer's Insurance of Wausau, to provide a defense of that lawsuit. During the fall of 2001, a trial of Masonite's claim that Wausau breached its duty to defend was conducted in a state court in California. The jury found that Wausau had breached its duty to defend Masonite and awarded Masonite $13 million for its expense to defend the Hardboard Lawsuit; an additional $12 million in attorneys' fees and interest for Masonite's expense to prosecute the duty to defend its case against Wausau - based on a finding that Wausau had acted in bad faith; and an additional $68 million in punitive damages. In a post-trial proceeding, the court awarded an additional $2 million in attorneys' fees based on the finding that Wausau had acted in bad faith. As of December 31, 2002, all post-trial motions brought by Wausau seeking to upset the jury verdict have been denied but no judgment has been entered by the court. Masonite has agreed to pay amounts equal to the proceeds of its bad faith and punitive damage award to International Paper and has assigned its breach of contract claim against Wausau to International Paper. The trial court has scheduled the trial of the claims for indemnification to begin on April 7, 2003. Because of the uncertainties inherent in the litigation, International Paper is unable to estimate the amount that it will recover against those insurance carriers. However, as of December 31, 2002, International Paper had received $61 million, and had signed a settlement agreement with one of its insurers that provides, subject to a contingency in the agreement, for the payment to International Paper of an additional $40 million. Under a financial collar arrangement, International Paper contracted with a third party for payment in an amount up to $100 million for certain costs relating to the Hardboard Lawsuit if payments by International Paper with respect thereto exceeded $165 million. The arrangement with the third party is in excess of insurance otherwise available to International Paper, which is the subject of the separate litigation referred to above. Accordingly, International Paper believes that the obligation of the third party with respect to this financial collar does not constitute "other valid and collectible insurance" that would either eliminate or otherwise affect its right to collect insurance coverage available to it and Masonite under the insurance policies, which are the subject of this separate litigation. At December 31, 2001, International Paper had received the $100 million. A dispute between International Paper and the third party, concerning a number of issues, including the timing of International Paper's obligation to repay the third party, is the subject of an arbitration commenced in 2002 by the third party in London, England. Summary While International Paper believes that the reserve balances established for these matters are adequate, and that additional amounts will be recovered from its insurance carriers in the future relating to these claims, International Paper is unable to estimate at this time the amount of additional charges, if any, that may be required for these matters in the future. International Paper is also involved in various other inquiries, administrative proceedings and litigation relating to contracts, sales of property, environmental protection, tax, antitrust, personal injury and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, International Paper believes that the outcome of any of the other lawsuits or claims that are pending or threatened, or all of them combined, including the preceding class action settlements, 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 2002 2001 - ---------------------------------------------------- Raw materials $ 469 $ 486 Finished pulp, paper and packaging products 1,694 1,681 Finished lumber and panel products 158 174 Operating supplies 517 506 Other 41 30 ------ ------ Inventories $2,879 $2,877 ====== ======
The last-in, first-out inventory method is used to value most of International Paper's U.S. inventories. Approximately 73% of total raw materials and finished products inventories were valued using this method. If the first-in, first-out method had been used, it would have increased total inventory balances by approximately $150 million and $219 million at December 31, 2002 and 2001, respectively. 54 Plants, properties and equipment by major classification were:
- ---------------------------------------------------------- In millions at December 31 2002 2001 - ---------------------------------------------------------- Pulp, paper and packaging facilities Mills $24,779 $23,815 Packaging plants 3,010 2,751 Wood products facilities 2,446 2,720 Other plants, properties and equipment 2,029 1,694 ------- ------- Gross cost 32,264 30,980 Less: Accumulated depreciation 18,097 16,364 ------- ------- Plants, properties and equipment, net $14,167 $14,616 ======= =======
Interest costs related to the development of certain long-term assets are capitalized and amortized over the related assets' estimated useful lives. Capitalized net interest costs were $12 million in 2002, $13 million in 2001 and $25 million in 2000. Interest payments made during 2002, 2001 and 2000 were $904 million, $986 million and $816 million, respectively. Total interest expense was $891 million in 2002, $1.1 billion in 2001 and $938 million in 2000. NOTE 13 DEBT AND LINES OF CREDIT In October 2002, International Paper completed a private placement with registration rights of $1.0 billion aggregate principal amount 5.85% notes due October 30, 2012. On November 15, 2002, the sale of an additional $200 million principal amount of 5.85% notes due October 30, 2012 was completed. The net proceeds of these sales were used to refinance most of International Paper's $1.2 billion aggregate principal amount of 8% notes due July 8, 2003 that were issued in connection with the Champion acquisition. The pretax early retirement cost of $41 million is included in Restructuring and other charges in the accompanying consolidated statement of earnings. Also during 2002, approximately $1.8 billion of long-term debt was repaid, including about $800 million of Champion acquisition debt. Increases in 2002 included approximately $800 million from new borrowings, and noncash increases of approximately $620 million, including $460 million relating to the consolidation of a debt obligation of a special purpose entity following the modification of the terms of the related agreement. A summary of long-term debt follows:
- ------------------------------------------------------------- In millions at December 31 2002 2001 - ------------------------------------------------------------- 8 7/8% to 10.5% notes - due 2008 - 2012 $ 436 $ 477 8 7/8% notes - due 2004 306 450 9.25% debentures - due 2011 125 247 8 3/8% to 9 1/2% debentures - due 2015 - 2024 300 300 8% to 8 1/8% notes - due 2003 - 2005 1,000 2,198 7% to 7 7/8% notes - due 2004 - 2007 946 1,095 6 7/8% to 8 1/8% notes - due 2023 - 2029 742 742 6.65% notes - due 2037 94 93 6.5% notes - due 2007 149 148 6.4% to 7.75% debentures - due 2023 - 2027 878 871 6 1/8% notes - due 2003 200 200 5.85% notes - due 2012 1,202 -- 5 3/8% euro notes - due 2006 255 225 5 1/8% debentures - due 2012 95 93 6.75% notes - due 2011 1,000 1,000 Zero-coupon convertible debentures - due 2021 1,058 1,018 Medium-term notes - due 2003 - 2009 (a) 82 162 Floating rate notes - due 2004 - 2012 (b) 1,499 1,328 Environmental and industrial development bonds - due 2003 - 2033 (c,d) 2,337 2,420 Commercial paper and bank notes (e) 44 156 Other (f) 294 191 ------- ------- Total (g) 13,042 13,414 Less: Current maturities -- 957 ------- ------- Long-term debt $13,042 $12,457 ======= =======
(a) The weighted average interest rate on these notes was 8.2% in 2002 and 8.1% in 2001. (b) The weighted average interest rate on these notes was 2.1% in 2002 and 2.9% in 2001. (c) The weighted average interest rate on these bonds was 5.9% in 2002 and 6.2% in 2001. (d) Includes $97 million of bonds at December 31, 2002 and $111 million of bonds at December 31, 2001, which may be tendered at various dates and/or under certain circumstances. (e) The weighted average interest rate was 4.9% in 2002 and 3.4% in 2001. Includes $26 million in 2002 of non-U.S. dollar denominated borrowings with a weighted average interest rate of 6.3%. (f) Includes $111 million at December 31, 2002, related to interest rate swaps treated as fair value hedges and $65 million of Australian borrowings with a weighted average interest rate of 5%. (g) The fair market value was approximately $13.7 billion at both December 31, 2002 and 2001. 55 In August 2001, under a previously filed shelf registration statement, International Paper issued $1.0 billion principal amount of 6.75% Senior Unsecured Notes due September 1, 2011, which yielded net proceeds of $993 million. These notes carry a fixed interest rate with interest payable semiannually on March 1 and September 1 of each year. Most of the proceeds of this issuance were used to retire $800 million of money market notes due in 2002. In June 2001, International Paper completed a private placement offering of $2.1 billion principal amount at maturity zero-coupon Convertible Senior Debentures due June 20, 2021, which yielded net proceeds of approximately $1.0 billion. The debt accretes to face value at maturity at a rate of 3.75% per annum, subject to annual upward adjustment after June 20, 2004 if International Paper's stock price falls below a certain level for a specified period. The securities are convertible into shares of International Paper common stock at the option of debenture holders subject to certain conditions as defined in the debt agreement. International Paper may be required to repurchase the securities on June 20th in each of the years 2004, 2006, 2011 and 2016 at a repurchase price equal to the accreted principal amount to the repurchase date. International Paper also has the option to redeem the securities on or after June 20, 2006 under certain circumstances. The net proceeds of this issuance were used to retire higher interest rate commercial paper borrowings. On June 20, 2000, International Paper issued $5 billion of debt to finance the acquisition of Champion and assumed $2.8 billion of Champion debt for a total of $7.8 billion. Total maturities of long-term debt over the next five years are 2003 - $0, 2004 - - $1.8 billion, 2005 - $1.7 billion, 2006 -$709 million and 2007 - $488 million. At December 31, 2002 and 2001, International Paper classified $485 million and $750 million, respectively, of tenderable bonds, commercial paper and bank notes and current maturities of long-term debt as long-term debt. International Paper has the intent and ability to renew or convert these obligations. At December 31, 2002, unused contractually committed bank credit agreements amounted to $2.5 billion. The agreements generally provide for interest rates at a floating rate index plus a predetermined margin dependent upon International Paper's credit rating. A $750 million agreement extends through March 2004, and has a facility fee of 0.15% that is payable quarterly. A 364-day facility provides for $1.5 billion of credit through March 2003 and has a facility fee of 0.10% that is payable quarterly. The company is currently negotiating a new credit facility for $1.5 billion to replace this facility. CHH has one multi-currency credit facility that supports its commercial paper program. A $283 million line of credit matures in three tranches from 2003 to 2006. The facility fee ranges from 0.22% to 0.49% at current credit ratings and is payable quarterly. In addition, International Paper has up to $600 million of commercial paper financings available under a receivables securitization program established in December 2001. The program extends through December 2003 with a facility fee of 0.15%. At December 31, 2002, outstanding debt included approximately $44 million of commercial paper and bank notes with interest rates that fluctuate based on market conditions and our credit rating. At December 31, 2002, International Paper's long-term debt was rated BBB by Standard & Poor's and Baa2 by Moody's Investor Services, both with a stable outlook, and International Paper's commercial paper was rated A-2 by Standard & Poor's and P-2 by Moody's Investor Services. NOTE 14 DERIVATIVES AND HEDGING ACTIVITIES International Paper periodically uses derivatives and other financial instruments to hedge exposures to interest rate, commodity and currency risks. For hedges that meet the criteria under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," International Paper, at inception, formally designates and documents the instrument as a hedge of a specific underlying exposure, as well as the risk management objective and strategy for undertaking each hedge transaction. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the value or cash flows of the underlying exposures being hedged. Derivatives are recorded in the consolidated balance sheet at fair value, determined using available market information or other appropriate valuation methodologies, in other current or noncurrent assets or liabilities. The earnings impact resulting from the change in fair value of the derivative instruments is recorded in the same line item in the consolidated statement of earnings as the underlying exposure being hedged. The financial instruments that are used in hedging transactions are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in either the fair value or cash flows of the related underlying exposures. The ineffective portion of a financial instrument's change in fair value, if any, would be recognized currently in earnings together with the changes in fair value of derivatives not designated as hedges. 56 Interest Rate Risk Interest rate swaps may be used to manage interest rate risks associated with International Paper's debt. Some of these instruments qualify for hedge accounting in accordance with SFAS No. 133 and others do not. Interest rate swap agreements with a total notional amount of approximately $1.0 billion and maturities ranging from one to 22 years do not qualify as hedges under SFAS No. 133 and, consequently, were recorded at fair value on the transition date by a pre-tax charge of approximately $20 million to earnings. For the year ended December 31, 2002, the change in fair value of the swaps was immaterial, and is not expected to have a material impact on earnings in the future, although some volatility in a quarter is possible due to unforeseen market conditions. The remainder of International Paper's interest rate swap agreements qualify as fully effective fair value hedges under SFAS No. 133. At December 31, 2002 and 2001, outstanding notional amounts for its interest rate swap fair value hedges amounted to $1.6 billion and $1.5 billion, respectively. The fair values of these swaps were a net asset of approximately $111 million at December 31, 2002 and a net liability of $11 million at December 31, 2001. In November 2002, interest rate swaps with a notional value of $550 million were terminated in connection with the early retirement of International Paper's $1.2 billion notes due in July 2003. The resulting gain of approximately $6 million is included in Restructuring and other charges in the accompanying consolidated statement of earnings (see Note 6). During 2002, International Paper entered into agreements to fix interest rates on an anticipated $1.15 billion issuance of debt. Upon issuance of the debt in the fourth quarter of 2002, these agreements generated a pre-tax loss of $2.8 million that was recorded in OCI. This amount is being amortized to interest expense over the term of the bonds through October 30, 2012, yielding an effective interest rate of 5.94%. Commodity Risk To minimize volatility in earnings due to large fluctuations in the price of commodities, International Paper currently uses swap and option contracts to manage risks associated with market fluctuations in energy prices. Such cash flow hedges with maturities of 12 months or less are accounted for by deferring the after-tax quarterly change in fair value of the outstanding contracts in OCI. On the date a contract matures, the gain or loss is reclassified into cost of products sold concurrently with the recognition of the commodity purchased. For the year ended December 31, 2002, International Paper reclassified after-tax losses of $10 million from OCI. This amount represents the after-tax cash settlements on the maturing energy hedge contracts. Unrealized after-tax gains of $24 million were recorded to OCI during the year ended December 31, 2002. After-tax gains of $13 million as of December 31, 2002 are expected to be reclassified into earnings in 2003. The net fair value of the energy hedge contracts as of December 31, 2002 is an $18 million asset. Foreign Currency Risk International Paper's policy has been to hedge certain investments in foreign operations with borrowings denominated in the same currency as the operation's functional currency or by entering into long-term cross-currency and interest rate swaps, or short-term foreign exchange contracts. These financial instruments are effective as a hedge against fluctuations in currency exchange rates. Gains or losses from changes in the fair value of these instruments, which are offset in whole or in part by translation gains and losses on the foreign operation's net assets hedged, are recorded as translation adjustments in OCI. Upon liquidation or sale of the foreign investments, the accumulated gains or losses from the revaluation of the hedging instruments, together with the translation gains and losses on the net assets, are included in earnings. For the year ended December 31, 2002, net losses included in OCI on derivative and debt instruments hedging foreign net investments amounted to $46 million after taxes and minority interest. Long-term cross-currency and interest rate swaps and short-term currency swaps are used to mitigate the risk associated with changes in foreign exchange rates, which will affect the fair value of debt denominated in a foreign currency. These hedges existing as of December 31, 2002, totaling a net fair value liability of $90 million have not been designated as hedges pursuant to SFAS No. 133. The impact on earnings from changes in the derivative values is substantially offset by the earnings impact from remeasuring the foreign currency debt each period. Foreign exchange contracts (including forward, swap and purchase option contracts) are also used to hedge certain transactions, primarily trade receipts and payments denominated in foreign currencies, to manage volatility associated with these transactions and to protect International Paper from currency fluctuations between the contract date and ultimate settlement. These contracts, most of which have been designated as cash flow hedges, had maturities of five years or less as of December 31, 2002. For the year ended December 31, 2002, net unrealized gains totaling $49 million after taxes and minority interest were recorded in OCI, net of $14 million income after taxes and minority interest reclassified to earnings. As of December 31, 2002, gains of $19 million after taxes and minority interest are expected to be reclassified to earnings in 2003. Other 57 contracts are used to offset the earnings impact relating to the variability in exchange rates on certain short-term monetary assets and liabilities denominated in nonfunctional currencies and are not designated as hedges. Changes in the fair value of these instruments, recognized currently in earnings to offset the remeasurement of the related assets and liabilities, were not significant. International Paper does not hold or issue financial instruments for trading purposes. The counterparties to swap agreements and foreign exchange contracts consist of a number of major international financial institutions. International Paper continually monitors its positions with and the credit quality of these financial institutions and does not expect nonperformance by the counterparties. NOTE 15 CAPITAL STOCK The authorized capital stock at both December 31, 2002 and 2001 consisted of 990,850,000 shares of common stock, $1 par value; 400,000 shares of cumulative $4 preferred stock, without par value (stated value $100 per share); and 8,750,000 shares of serial preferred stock, $1 par value. The serial preferred stock is issuable in one or more series by the Board of Directors without further shareholder action. NOTE 16 RETIREMENT PLANS International Paper maintains pension plans that provide retirement benefits to substantially all employees. Employees generally are eligible to participate in the plans upon completion of one year of service and attainment of age 21. The plans provide defined benefits based on years of credited service and either final average earnings (salaried employees), hourly job rates or specified benefit rates (hourly and union employees). U.S. Defined Benefit Plans International Paper makes contributions that are sufficient to fully fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). Net Periodic Pension Income Service cost is the actuarial present value of benefits attributed by the plans' benefit formula to services rendered by employees during the year. Interest cost represents the increase in the projected benefit obligation, which is a discounted amount, due to the passage of time. The expected return on plan assets reflects the computed amount of current year earnings from the investment of plan assets using an estimated long-term rate of return. Net periodic pension income for qualified and nonqualified defined benefit plans comprised the following:
- ----------------------------------------------- In millions 2002 2001 2000 - ----------------------------------------------- Service cost $ (96) $(101) $ (98) Interest cost (466) (459) (397) Expected return on plan assets 663 727 615 Amortization of net transition obligation -- -- (2) Actuarial loss (7) (6) (5) Amortization of prior service cost (19) (20) (19) Curtailment loss -- -- (2) Settlement gain -- -- 9 ----- ----- ----- Net periodic pension income (a) $ 75 $ 141 $ 101 ===== ===== =====
(a) Excludes $3 million and $75 million of expense in 2002 and 2001, respectively, for curtailment and settlement charges relating to divestitures that were recorded in Restructuring and other charges and Net gains (losses) on sales and impairments of businesses held for sale in the consolidated statement of earnings. The decrease in 2002 U.S. pension income was principally due to a reduction in the expected long-term rate of return on plan assets to 9.25% for 2002 from 10% for 2001, with smaller impacts from a reduction in the assumed discount rate to 7.25% for 2002 from 7.50% for 2001, and a reduction in the assumed rate of future compensation increase to 4.50% in 2002 from 4.75% in 2001. The increase in pension income in 2001 was primarily due to the inclusion of the return on Champion plan assets added to the plans after the acquisition date. International Paper evaluates its actuarial assumptions on an annual basis and considers changes in these long-term factors based upon market conditions and the requirements of SFAS No. 87, "Employers' Accounting for Pensions." Weighted average assumptions as of December 31, 2002, 2001 and 2000 were as follows:
- -------------------------------------------- In millions 2002 2001 2000 - -------------------------------------------- Discount rate 6.50% 7.25% 7.50% Expected long-term return on plan assets 9.25% 10.00% 10.00% Rate of compensation increase 3.75% 4.50% 4.75%
58 To calculate pension expense for 2003, the company will use a discount rate of 6.50%, an expected long-term rate of return on plan assets of 8.75% and a 3.75% rate of compensation increase. As a result of these assumption changes, the company estimates that it will record net pension expense of approximately $25 million for its U.S. defined benefit plans in 2003. The following illustrates the effect on pension expense for 2003 of a 25 basis point decrease in these assumptions:
- -------------------------------------------------- In millions 2003 - -------------------------------------------------- Expense/(Income): Discount rate $14 Expected long-term return on plan assets 17 Rate of compensation increase (6)
2002 Minimum Pension Liability Adjustment At December 31, 2001, a prepaid pension cost asset of approximately $1.6 billion related to International Paper's qualified pension plan was included in Deferred charges and other assets in the accompanying consolidated balance sheet. At December 31, 2002, the market value of plan assets was less than the accumulated benefit obligation (ABO) for this plan. In accordance with the requirements of SFAS No. 87, the prepaid asset of approximately $1.7 billion at December 31, 2002 was written off, and a net minimum liability of $992 million was established equal to the shortfall of the market value of plan assets below the ABO, resulting in an after-tax direct charge to Common shareholders' equity of $1.5 billion, with no impact on earnings, earnings per share or cash. This reduction had no adverse affect on International Paper's debt covenants. Unrecognized Actuarial Losses SFAS No. 87 provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets, and other assumption changes. These net gains and losses are recognized prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans (approximately 15 years) to the extent that they are not offset by gains and losses in subsequent years. Unrecognized actuarial losses in the table below increased during 2002 to approximately $2.9 billion due principally to the decline in the fair value of plan assets and lower discount rates. Unless offset by the future unrecognized gains from higher discount rates or higher than projected returns on plan assets in future years, the amortization of these unrecognized losses will increase pension expense by approximately $30 million per year for each of the next three years. Included in the following table are the changes in benefit obligation, and plan assets for 2002 and 2001 and the plans' funded status and amounts recognized in the consolidated balance sheet as of December 31, 2002 and 2001. The benefit obligation as of December 31, 2002 increased by $692 million, principally as a result of a decrease in the discount rate used in computing the estimated benefit obligation. Plan assets decreased $918 million principally as a result of the sharp decline in the stock market during 2002, and the resulting negative actual return on plan assets, and benefits paid during 2002.
- ------------------------------------------------------------- In millions 2002 2001 - ------------------------------------------------------------- Change in projected benefit obligation: Benefit obligation, January 1 $ 6,419 $6,319 Service cost 96 101 Interest cost 466 459 Actuarial loss 533 47 Benefits paid (466) (432) Acquisitions (a) -- 23 Divestitures (b) 6 (90) Restructuring (c) (3) (33) Special termination benefits (d) 2 4 Plan amendments 58 21 ------- ------ Benefit obligation, December 31 $ 7,111 $6,419 ======= ====== Change in plan assets: Fair value of plan assets, January 1 $ 6,502 $7,253 Actual return on plan assets (486) (229) Company and participants' contributions 15 14 Benefits paid (466) (432) Acquisitions -- 2 Divestitures (b) 19 (106) ------- ------ Fair value of plan assets, December 31 $ 5,584 $6,502 ======= ====== Funded status $(1,527) $ 83 Unrecognized actuarial loss 2,888 1,228 Unamortized prior service cost 180 144 ------- ------ Prepaid benefit costs $ 1,541 $1,455 ======= ====== Amounts recognized in the consolidated balance sheet consist of: Prepaid benefit cost $ -- $1,580 Accrued benefit liability (1,202) (182) Intangible asset 180 1 Minimum pension liability adjustment included in accumulated other comprehensive income 2,563 56 ------- ------ Net amount recognized $ 1,541 $1,455 ======= ======
(a) Includes $23.3 million for 2001 in special termination benefits attributable to the elimination of positions in 59 connection with a severance program provided to employees whose jobs were eliminated as a result of the acquisition of Champion. Also included was a curtailment gain of $1.1 million for 2001. (b) Included in Net gains (losses) on sales and impairments of businesses held for sale in the consolidated statement of earnings is $8.8 million and $14.5 million for 2002 and 2001, respectively, in curtailment losses and $10.6 million of settlement gains and $44.6 million of settlement losses for 2002 and 2001, respectively, related to the divestitures of Masonite, Petroleum and Minerals, Flexible Packaging, Decorative Products and other smaller businesses. (c) Included in Restructuring and other charges was $2.6 million and $11.8 million for 2002 and 2001, respectively, in curtailment losses relating to a cost reduction program and facility rationalizations. (d) Included in Restructuring and other charges was $2.4 million and $3.6 million for 2002 and 2001, respectively, for special termination benefits attributable to the elimination of approximately 465 positions in connection with facility rationalizations. For pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation, and fair value of plans assets were $7.1 billion, $6.8 billion, and $5.6 billion, respectively, as of December 31, 2002 and $221.5 million, $181.8 million, and $0, respectively, as of December 31, 2001. Plan assets, which are held in master trust accounts, consist of approximately 60% equity securities, 30% fixed income securities and 10% real estate and other, and include investments in International Paper common stock in the amounts of $25 million (.4%) and $219 million (3%) at December 31, 2002 and 2001, respectively. Non-U.S. Defined Benefit Plans Generally, International Paper'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 our non-U.S. plans was $26 million for 2002, $19 million for 2001 and $24 million for 2000. The non-U.S. plans' projected benefit obligations and fair values of plan assets as of December 31, 2002 amounted to $416 million and $287 million, respectively. For non-U.S. plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligations, accumulated benefit obligations, and fair values of plan assets totaled $346 million, $286 million, and $217 million, respectively. Plan assets are composed principally of common stocks and fixed income securities. In accordance with SFAS No. 87, minimum liability adjustments of $46 million were recorded in 2002, resulting in a charge to equity of $21 million after taxes and minority interest. Other Plans International Paper sponsors defined contribution plans (primarily 401(k)) to provide substantially all U.S. salaried and certain hourly employees of International Paper an opportunity to accumulate personal funds for their retirement. Contributions may be made on a before-tax basis to substantially all of these plans. As determined by the provisions of each plan, International Paper matches the employees' basic voluntary contributions. Such matching contributions to the plans were approximately $66 million, $78 million and $65 million for the plan years ending in 2002, 2001 and 2000, respectively. The net assets of these plans approximated $3.5 billion as of the 2002 plan year-end including approximately $799 million (23%) in International Paper common stock. NOTE 17 POSTRETIREMENT BENEFITS International Paper provides certain retiree health care and life insurance benefits covering a majority of U.S. salaried and certain hourly employees. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. An amendment in 1992 to one of the plans limits the maximum annual company contribution for health care benefits for retirees after January 1, 1992, based on age at retirement and years of service after age 50. Amortization of this plan amendment, which reduced annual net postretirement benefit cost, was completed in 1999. International Paper does not prefund these benefits and has the right to modify or terminate certain of these plans in the future. The components of postretirement benefit expense in 2002, 2001 and 2000 were as follows:
- ------------------------------------------ In millions 2002 2001 2000 - ------------------------------------------ Service cost $ 8 $ 10 $10 Interest cost 59 56 45 Actuarial loss 12 -- -- Amortization of prior service cost (20) (10) (6) Curtailment gain -- -- (2) Settlement gain -- -- (2) ---- ---- --- Net postretirement benefit cost $ 59 $ 56 $45 ==== ==== ===
60 The plan is only funded in an amount equal to benefits paid. The following table presents the changes in benefit obligation and plan assets for 2002 and 2001:
- --------------------------------------------------------- In millions 2002 2001 - --------------------------------------------------------- Change in benefit obligation: Benefit obligation, January 1 $ 856 $ 822 Service cost 8 10 Interest cost 59 56 Participants' contributions 29 26 Actuarial loss 175 88 Benefits paid (121) (102) Plan amendments (111) (43) Acquisitions (a) -- 5 Divestitures (b) (5) (6) Curtailment gain (c) -- (5) Special termination benefits (d) -- 5 ----- ----- Benefit obligation, December 31 $ 890 $ 856 ===== ===== Change in plan assets: Fair value of plan assets, January 1 $ -- $ -- Company contributions 92 76 Participants' contributions 29 26 Benefits paid (121) (102) ----- ----- Fair value of plan assets, December 31 $ -- $ -- ===== ===== Funded status $(890) $(856) Unamortized prior service cost (160) (72) Unrecognized actuarial loss 242 84 ----- ----- Accrued benefit cost $(808) $(844) ===== =====
(a) Includes $4.0 million in 2001 for special termination benefits attributable to the elimination of positions in connection with a severance program provided to employees whose jobs were eliminated as a result of the Champion acquisition. (b) Included in Net gains (losses) on sales and impairments of businesses held for sale in 2002 and 2001 were curtailment gains of $1 million and $5.6 million, respectively related to the sales of Masonite, Flexible Packaging, Decorative Products and other smaller businesses. (c) Included in Restructuring and other charges are $1.2 million and $3.4 million of curtailment gains related to the elimination of 396 positions in 2002 and 4,311 positions in 2001 in connection with a cost reduction program and facility rationalizations. (d) Includes $5 million in 2001 for special termination benefits attributable to the elimination of approximately 515 positions in connection with a facility rationalization program begun in 2000. Future benefit costs were estimated assuming medical costs would increase at a 10% annual rate, decreasing to a 5% annual growth rate ratably over the next five 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, 2002 by $58 million. A 1% decrease in the annual trend rate would have decreased the accumulated postretirement benefit obligation at December 31, 2002 by $53 million. The effect on net postretirement benefit cost from a 1% increase or decrease would be approximately $4 million. The weighted average discount rate used to estimate the accumulated postretirement benefit obligation at December 31, 2002 was 6.50% compared with 7.25% at December 31, 2001. In addition to the U.S. plan, certain Canadian and Brazilian employees are eligible for retiree health care and life insurance. Costs and obligations for these plans were not significant. NOTE 18 INCENTIVE PLANS International Paper currently has a Long-Term Incentive Compensation Plan (LTICP) that includes a Stock Option Program, a Restricted Performance Share Program and a Continuity Award Program, administered by a committee of nonemployee members of the Board of Directors (Committee) who are not eligible for awards. Also, stock appreciation rights (SAR's) have been awarded to employees of a non-U.S. subsidiary, with 17,745 and 14,961 issued and outstanding at December 31, 2002 and 2001, respectively. We also have other performance-based restricted share/unit programs available to senior executives and directors. International Paper applies the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations and the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," in accounting for our plans. Stock Option Program International Paper accounts for stock options using the intrinsic value method under APB Opinion No. 25. Under this method, compensation expense is recorded over the related service period when the market price exceeds the option price at the measurement date, which is the grant date for International Paper's options. No compensation expense is recorded as options are issued with an exercise price equal to the market price of International Paper stock on the grant date. During each reporting period, fully diluted earnings per share is calculated by assuming that "in-the-money" options are exercised and the exercise proceeds are used to repurchase shares in the marketplace. When options are actually exercised, option proceeds are credited to equity and issued shares are included in the computation of earnings per common share, with no effect on reported earnings. Equity is 61 also increased by the tax benefit that International Paper will receive in its tax return for income reported by the optionees in their individual tax returns. Under the current program, officers and certain other employees may be granted options to purchase International Paper common stock. The option price is the market price of the stock on the close of business on the day prior to the date of grant. During 2001, the program was changed so that options must be vested before they can be exercised. Upon exercise of an option, a replacement option may be granted under certain circumstances with an exercise price equal to the market price at the time of exercise and with a term extending to the expiration date of the original option. For pro forma disclosure purposes, the fair market value of each option grant has been estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2002, 2001 and 2000, respectively:
- -------------------------------------------------- In millions 2002 2001 2000 - -------------------------------------------------- Initial Options (a) Risk-Free Interest Rate 3.29% 3.91% 6.17% Price Volatility 33.99% 41.02% 45.00% Dividend Yield 2.74% 2.61% 2.50% Expected Term in Years 3.50 3.00 2.50(c) Replacement Options (b) Risk-Free Interest Rate 2.92% 4.40% 6.45% Price Volatility 38.62% 39.51% 45.00% Dividend Yield 2.33% 2.64% 2.50% Expected Term in Years 1.80 2.10 2.10
(a) The average fair market values of initial option grants during 2002, 2001 and 2000 were $8.77, $9.45 and $11.86, respectively. (b) The average fair market values of replacement option grants during 2002, 2001 and 2000 were $8.59, $9.02 and $13.44, respectively. (c) In 2000, the vesting period for current and prospective option grants under the Stock Option Program was reduced from four to two years. A summary of the status of the Stock Option Program as of December 31, 2002, 2001 and 2000 and changes during the years ended on those dates is presented below:
- ------------------------------------------------- Weighted Average Exercise Options (a,b) Price - ------------------------------------------------- Outstanding at January 1, 2000 15,798,935 $43.14 Granted 9,527,442 43.29 Exercised (1,052,107) 41.84 Forfeited (233,724) 51.96 Expired (177,568) 49.97 ---------- ------ Outstanding at December 31, 2000 23,862,978 43.12 Granted 7,399,497 35.38 Exercised (343,597) 32.83 Forfeited (1,118,971) 38.00 Expired (689,782) 51.25 ---------- ------ Outstanding at December 31, 2001 29,110,125 41.28 Granted 11,927,766 37.36 Exercised (1,345,421) 34.62 Forfeited (1,841,489) 40.51 Expired (696,961) 51.24 ---------- ------ Outstanding at December 31, 2002 37,154,020 $40.11 ==========
(a) The table does not include Continuity Award tandem stock options described below. No fair market value is assigned to these options under SFAS No. 123. The tandem restricted shares accompanying these options are expensed over their vesting period. (b) The table includes options outstanding under an acquired company plan under which options may no longer be granted. The following table summarizes information about stock options outstanding at December 31, 2002:
- ----------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------- --------------------------- Weighted Weighted Weighted Range of Options Average Average Options Average Exercise Outstanding Remaining Exercise Outstanding Exercise Prices as of 12/31/02 Life Price as of 12/31/02 Price - ----------------------------------------------------- --------------------------- $29.31-$33.80 11,418,916 7.9 $31.40 6,102,443 $30.40 $33.81-$39.77 8,260,517 7.3 $36.05 2,270,624 $38.61 $39.78-$45.74 9,163,676 6.8 $41.82 3,978,571 $42.37 $45.75-$51.71 2,914,441 4.4 $47.58 2,914,441 $47.58 $51.72-$57.68 1,650,692 2.0 $54.50 1,650,692 $54.50 $57.69-$63.65 3,548,228 6.2 $59.02 3,548,228 $59.02 $63.66-$69.63 197,550 6.8 $64.77 197,550 $64.77 ---------- --- ------ ---------- ------ 37,154,020 6.8 $40.11 20,662,549 $43.20 ========== ==========
62 Performance - Based Restricted Shares Under the Restricted Performance Share Program, contingent awards of International Paper common stock are granted by the Committee. Shares are earned on the basis of International Paper's financial performance over a period of consecutive calendar years as determined by the Committee. The Restricted Performance Share Program in effect at the beginning of 1999 was terminated during 1999. A one-time Transitional Performance Unit Program was in effect from July 1, 1999 to December 31, 2000. During 2001, a new Restricted Performance Share Program was approved and awards vesting over a three-year period were granted. In 2002, awards vesting over a two-year period were granted. Compensation expense for this variable plan is recorded over the applicable vesting period. The following summarizes the activity of all performance-based programs for the three years ending December 31, 2002:
- ------------------------------------------------------------------------ Shares - ------------------------------------------------------------------------ Outstanding at January 1, 2000 85,019 Granted -- Issued (26,537) Forfeited (58,482) --------- Outstanding at December 31, 2000 -- Granted 1,283,100 Issued (9,243) Forfeited (59,757) --------- Outstanding at December 31, 2001 1,214,100 Granted 583,690 Issued (330,437) Forfeited (190,013) --------- Outstanding at December 31, 2002 1,277,340 =========
Continuity Award Program The Continuity Award Program provides for the granting of tandem awards of restricted stock and/or nonqualified stock options to key executives. Grants are restricted and awards conditioned on attainment of specified age and years of service requirements. Awarding of a tandem stock option results in the cancellation of the related restricted shares. The Continuity Award Program also provides for awards of restricted stock to key employees. The following summarizes the activity of the Continuity Award Program for the three years ending December 31, 2002:
- ------------------------------------------------------------------------ Shares - ------------------------------------------------------------------------ Outstanding at January 1, 2000 510,856 Granted 76,165 Issued (18,303) Forfeited (a) (112,000) -------- Outstanding at December 31, 2000 456,718 Granted 22,350 Issued (70,970) Forfeited (a) (64,000) -------- Outstanding at December 31, 2001 344,098 Granted 14,000 Issued (79,526) Forfeited (a) (40,500) -------- Outstanding at December 31, 2002 238,072 -------- --------
(a) Also includes restricted shares cancelled when tandem stock options were awarded. 200,000 and 560,000 tandem options were awarded in 2001 and 2000, respectively. No tandem options were awarded in 2002. At December 31, 2002 and 2001, a total of 12.6 million and 17.6 million shares, respectively, were available for grant under the LTICP. In 1999, shareholders approved an additional 25.5 million shares to be made available for grant, with 3.0 million of these shares reserved specifically for the granting of restricted stock. No additional shares were made available during 2002, 2001 or 2000. A total of 2.7 million shares and 3.0 million shares were available for the granting of restricted stock as of December 31, 2002 and 2001, respectively. The compensation cost charged to earnings for all the incentive plans was $28 million, $38 million and $28 million for 2002, 2001 and 2000, respectively. 63 Had compensation cost for International Paper's stock-based compensation programs been determined consistent with the provisions of SFAS No. 123, its net earnings, earnings per common share and earnings per common share - assuming dilution would have been reduced to the pro forma amounts indicated below:
- ---------------------------------------------------------------------------- In millions, except per share amounts 2002 2001 2000 - ---------------------------------------------------------------------------- Net Earnings (Loss) As reported $ (880) $(1,204) $ 142 Pro forma (921) (1,257) 104 Earnings (Loss) Per Common Share As reported $(1.83) $ (2.50) $0.32 Pro forma (1.92) (2.60) 0.23 Earnings (Loss) Per Common Share - assuming dilution As reported $(1.83) $ (2.50) $0.32 Pro forma (1.92) (2.60) 0.23
The effect on 2002, 2001 and 2000 pro forma net earnings, earnings per common share and earnings per common share - assuming dilution of expensing the estimated fair market value of stock options is not necessarily representative of the effect on reported earnings for future years due to the vesting period of stock options and the potential for issuance of additional stock options in future years. NOTE 19 SUBSEQUENT EVENTS In January 2003, International Paper announced that it would close the Natchez, Mississippi dissolving pulp mill by mid-2003 and exit the Chemical Cellulose Pulp business. 64 Interim Financial Results (Unaudited)
- -------------------------------------------------------------------------------------------------------------------- In millions, except per share amounts and stock prices 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year - -------------------------------------------------------------------------------------------------------------------- 2002 (Restated)(a) Net Sales $ 6,038 $6,305 $6,343 $6,290 $24,976 Gross Margin(b) 1,573 1,717 1,732 1,698 6,720 Earnings (Loss) Before Income Taxes, Minority Interest and Cumulative Effect of Accounting Change 139 (c) 236 (d) 268 (e) (272)(f) 371 (c-f) Net Earnings (Loss) (1,110)(c) 215 (d) 145 (e) (130)(f,g) (880)(c-g) Per Share of Common Stock Earnings (Loss) $ (2.31)(c) $ 0.45 (d) $ 0.30 (e) $(0.27)(f,g) $ (1.83)(c-g) Earnings (Loss) - Assuming Dilution (2.31)(c) 0.45 (d) 0.30 (e) (0.27)(f,g) (1.83)(c-g) Dividends 0.25 0.25 0.25 0.25 1.00 Common Stock Prices High $ 46.19 $45.20 $44.10 $39.60 $ 46.19 Low 37.89 39.13 31.75 31.35 31.35 2001 Net Sales $ 6,894 $6,686 $6,529 $6,254 $26,363 Gross Margin(b) 1,756 1,772 1,740 1,686 6,954 Earnings (Loss) Before Income Taxes, Minority Interest, Extraordinary Items and Cumulative Effect of Accounting Change 87 (h) (432)(j) (287)(k) (633)(l) (1,265)(h,j-l) Net Earnings (Loss) (44)(h,i) (313)(j) (275)(k) (572)(l) (1,204)(h-l) Per Share of Common Stock Earnings (Loss) $ (0.09)(h) $(0.65)(j) $(0.57)(k) $(1.19)(l) $ (2.50)(h-l) Earnings (Loss) - Assuming Dilution (0.09)(h,i) (0.65)(j) (0.57)(k) (1.19)(l) (2.50)(h-l) Dividends 0.25 0.25 0.25 0.25 1.00 Common Stock Prices High $ 43.25 $41.00 $42.50 $41.80 $ 43.25 Low 32.90 33.31 30.70 33.61 30.70
Footnotes to Interim Financial Results (a) 2002 first quarter net earnings have been restated as required under SFAS No. 142, to reflect the $1.2 billion ($2.44 per share) transitional goodwill impairment charge for the adoption of SFAS No. 142. Net earnings as previously reported in the first quarter 10-Q were $65 million, and both basic and diluted earnings per share, as previously reported, were $0.13. (b) Gross margin represents net sales less cost of products sold. (c) Includes a $10 million pre-tax credit ($7 million after taxes) for the reversal of fourth quarter 2001 restructuring reserves no longer required. (d) Includes a $28 million gain before taxes and minority interest ($96 million after taxes and minority interest) related to sales and expenses of businesses held for sale and a $79 million charge before taxes ($50 million after taxes) for asset shutdowns of excess internal capacity and cost reduction actions. (e) Includes a $3 million pre-tax gain ($1 million after taxes) related to adjustments of previously recorded costs of businesses held for sale and a $19 million charge before taxes and minority interest ($9 million after taxes and minority interest) for asset write-downs and cost reduction actions. 65 (f) Includes a charge of $101 million before taxes and minority interest ($71 million after taxes and minority interest) for facility closures, administrative realignment severance costs, and cost reduction actions, a pre-tax charge of $450 million ($278 million after taxes) for additions to the existing exterior siding legal reserves, a charge of $46 million before taxes and minority interest ($27 million after taxes and minority interest) for early debt retirement costs, a pre-tax credit of $58 million ($36 million after taxes) for the reversal of restructuring and realignment reserves no longer required, and a credit of $10 million before taxes ($4 million after taxes) to adjust accrued costs of businesses sold or held for sale. (g) Reflects a decrease of $46 million in the income tax provision in the fourth quarter of 2002 for a reduction of deferred state income tax liabilities. (h) Includes $10 million of pre-tax charges ($6 million after taxes) for Champion merger integration costs. (i) Includes an extraordinary pre-tax charge of $73 million ($46 million after taxes) related to the impairment of Masonite and the divestiture of the Petroleum and Minerals assets. (j) Includes $32 million of pre-tax charges ($22 million after taxes) for Champion merger integration costs. Also includes a charge of $465 million before taxes and minority interest ($300 million after taxes and minority interest) for facility closures, administrative realignment and related severance reserves and a pre-tax charge of $85 million ($55 million after taxes) for impairment losses on assets of businesses held for sale. (k) Includes a net gain of $47 million before taxes (net loss of $2 million after taxes) related to the disposition and impairment losses on assets of businesses held for sale and charges in the amount of $481 million before taxes ($341 million after taxes) in connection with facility and business rationalizations and an increase in litigation related reserves. (l) Includes a pre-tax charge of $171 million ($111 million after taxes) for asset shutdowns of excess internal capacity and cost reduction actions, a pre-tax charge of $591 million ($530 million after taxes) related to dispositions and asset impairments of businesses held for sale, and a $17 million pre-tax credit ($11 million after taxes) for the reversal of reserves no longer required. 66 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In April 2002, the Company engaged Deloitte & Touche LLP (Deloitte & Touche) to serve as International Paper's independent auditor for 2002. Prior to that date, Arthur Andersen LLP (Andersen) had served as the Company's independent public accountants. The reports by Andersen on the Company's consolidated financial statements for the past two years did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. Andersen's report on International Paper's consolidated financial statements for 2001 was issued on an unqualified basis in conjunction with the publication of International Paper's 2001 Annual Report to Shareowners and the filing of International Paper's Annual Report on Form 10-K. During the Company's two most recent fiscal years, and through the date of the change, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to Andersen's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for such years; and there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K. The decision to change accountants was recommended by the Audit and Finance Committee and approved by the Board of Directors on April 9, 2002. During 2002, there were no disagreements with Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to Deloitte & Touche's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for 2002 and there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors of the Company is hereby incorporated by reference to our definitive proxy statement which will be filed with the Securities and Exchange Commission (SEC) within 120 days of the close of our fiscal year. Information with respect to the executive officers of the Company is set forth below: John T. Dillon, 64, chairman and chief executive officer since 1996. John V. Faraci, 53, president since 2003 and chief financial officer since 2000. Prior to this he was executive vice president and chief financial officer from 2000 to 2003. From 1999 to 2000 he was senior vice president - finance and chief financial officer. From 1995 until 1999 he was chief executive officer and managing director of Carter Holt Harvey Limited, of New Zealand. Robert M. Amen, 53, executive vice president since 2000. He served as President - - International Paper - Europe from 1996 to 2000. Marianne M. Parrs, 58, executive vice president since 1999. She was senior vice president and chief financial officer from 1995 to 1999. James P. Melican Jr., 62, executive vice president since 1991. David W. Oskin, 60, executive vice president since 1995. Announced his resignation from the Company on January 17, 2003. George A. O'Brien, 54, senior vice president - forest resources and wood products since November 2001. Prior to that he was senior vice president - forest resources from 1999 to 2001. From 1997 to 1999 he was vice president - forest resources. Christopher P. Liddell, 44, vice president - finance and controller since February 2003 and vice president - finance since December 2002. Prior to that he was chief executive officer of Carter Holt Harvey Limited from 1999 to 2002 and chief financial officer of Carter Holt Harvey Limited from 1995 to 1998. Executive officers of International Paper are elected to hold office until the next annual meeting of the Board of Directors following the annual meeting of shareholders and until election of successors, subject to removal by the Board. Information with respect to compliance with Section 16(a) of the Securities and Exchange Act is hereby incorporated by reference to our definitive proxy statement which will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information with respect to the compensation of executives and directors of the Company is hereby incorporated by reference to our definitive proxy statement which will be filed with the SEC within 120 days of the close of our fiscal year. 67 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS A description of the security ownership of certain beneficial owners and management and equity compensation plan information is hereby incorporated by reference to our definitive proxy statement which will be filed with the SEC within 120 days of the close of our fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS A description of certain relationships and related transactions is hereby incorporated by reference to our definitive proxy statement which will be filed with the SEC within 120 days of the close of our fiscal year. PART IV ITEM 14. CONTROLS AND PROCEDURES Within 90 days prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-14(c) under the Securities Exchange Act (Act). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports we file under the Act is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company's disclosure obligations under the Act and the SEC rules thereunder. Changes in Internal Controls There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements - See Item 8. Financial Statements and Supplementary Data. (2) Financial Statement Schedules - The following additional financial data should be read in conjunction with the financial statements in Item 8. Schedules not included with this additional financial data have been omitted because they are not applicable, or the required information is shown in the financial statements or the notes thereto. Additional Financial Data 2002, 2001 and 2000 Report of Independent Auditors on Financial Statement Schedule for 2002......... 71 Report of Independent Public Accountants on Financial Statement Schedule for 2001 and 2000... 71 Consolidated Schedule: II-Valuation and Qualifying Accounts.......................... 72 (3) Exhibits: (3.1) Form of Restated Certificate of Incorporation of International Paper Company (incorporated by reference to the Company's Report on Form 8-K dated November 20, 1990, File No. 1-3157). (3.2) Certificate of Amendment to the Certificate of Incorporation of International Paper Company (incorporated herein by reference to Exhibit (3) (i) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No. 1-3157). (3.3) Certificate of Amendment of the Certificate of Incorporation of International Paper Company (incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 1-3157). (3.4) By-laws of the Company, as amended (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, File No. 1-3157). (4.1) Specimen Common Stock Certificate (incorporated by reference to Exhibit 2-A to the Company's registration statement on Form S-7, No. 2-56588, dated June 10, 1976). (4.2) Indenture, dated as of April 12, 1999, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to International Paper's Report on Form 8-K filed on June 29, 2000, File No. 1-3157). (4.3) 8 1/8% Notes Due July 8, 2005 Supplemental Indenture dated as of June 14, 2000, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.4 to International Paper's Report on Form 8-K filed on June 29, 2000, File No. 1-3157). 68 (4.4) Form of new 8 1/8% Notes due July 8, 2005 (incorporated by reference to Exhibit 4.1 to International Paper Company's Registration Statement on Form S-4 dated October 23, 2000, as amended November 15, 2000, File No. 333-48434). (4.5) Zero Coupon Convertible Senior Debentures due June 20, 2021 (incorporated by reference to Exhibit 4.2 to International Paper Company's Registration Statement on Form S-3 dated June 20, 2001, as amended September 7, 2001, October 31, 2001 and January 16, 2002, File No. 333-69082). (4.6) 6.75% Notes due 2011 Supplemental Indenture between International Paper Company and The Bank of New York (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated September 30, 2001, File No. 1-3157). In accordance with Item 601 (b) (4) (iii) (A) of Regulation S-K, certain instruments respecting long-term debt of the Company have been omitted but will be furnished to the Commission upon request. (10.1) Long-Term Incentive Compensation Plan, as amended (incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001). (10.2) Restricted Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 99 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No. 1-3157). (10.3) Management Incentive Plan, amended and restated as of January 1, 2002. (10.4) Form of individual non-qualified stock option agreement under the Company's Long-Term Incentive Compensation Plan (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 1-3157). (10.5) Form of individual executive continuity award under the Company Long-Term Incentive Compensation Plan (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File No. 1-3157). (10.6a) Form of Change of Control Agreement for Chief Executive Officer (incorporated by reference to Exhibit 10.8a to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 1-3157). (10.6b) Form of Change of Control Agreement--Tier I (incorporated by reference to Exhibit 10.8b to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 1-3157). (10.6c) Form of Change of Control Agreement--Tier II (incorporated by reference to Exhibit 10.8c to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 1-3157). (10.7) Unfunded Supplemental Retirement Plan for Senior Managers, as amended (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, File No. 1-3157). (10.8) International Paper Company Unfunded Savings Plan (incorporated by reference to Exhibit 10.11 to the Company's Form 10-K/A for the year 2000 dated January 16, 2002, File No. 1-3157). (10.9) International Paper Company Pension Restoration Plan for Salaried Employees (incorporated by reference to Exhibit 10.12 to the Company's Form 10-K/A for the year 2000 dated January 16, 2002, File No. 1-3157). (10.10) International Paper Company Unfunded Supplemental Plan for Senior Managers (incorporated by reference to Exhibit 10.13 to the Company's Form 10-K/A for the fiscal year ended 2000, dated January 16, 2002, File No. 1-3157). (10.11) 364-Day Credit Agreement dated as of March 8, 2002 between International Paper Company, the Lenders Party Thereto, and the other parties named therein. (11) Statement of Computation of Per Share Earnings. (12) Computation of Ratio of Earnings to Fixed Charges. (21) List of Subsidiaries of Registrant. (23) Consent of Independent Auditors. (24) Power of Attorney. 69 (99.1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (99.2) Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K International Paper filed a report on Form 8-K on October 23, 2002, under Item 5, reporting earnings for the quarter ended September 30, 2002. International Paper filed a report on Form 8-K on October 24, 2002, under Item 5, announcing the commencement of a private placement with institutional investors to raise proceeds from the issuance of 10-year notes. International Paper filed a report on Form 8-K on January 16, 2003, under Items 5 and 9, reporting that International Paper will record a pre-tax charge of $450 million in its fourth quarter 2002 earnings for additional exterior siding and roofing legal reserves, and that International Paper will report fourth quarter operating earnings that will be slightly above First Call consensus estimates of $0.26 per share, before special items. International Paper filed a report on Form 8-K on January 17, 2003, under Item 5, announcing that David W. Oskin, executive vice president, has resigned from the Company. International Paper filed a report on Form 8-K on January 31, 2003, under Items 5 and 9, reporting earnings for the fourth quarter 2002. International Paper filed a report on Form 8-K on February 21, 2003, under Item 5, reporting the promotion of John V. Faraci to president and election to the Company's board of directors. 70 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders of International Paper Company: We have audited the consolidated financial statements of International Paper Company as of and for the year ended December 31, 2002, and have issued our report thereon dated February 10, 2003; such financial statements and report are included in your 2002 Annual Report to Stockholders and are incorporated herein by reference. Our audit also included the financial statement schedule of International Paper Company, listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The consolidated financial statements and financial statement schedule of the Company as of December 31, 2001 and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations. Those other auditors expressed an unqualified opinion on those consolidated financial statements and financial statement schedule in their reports dated February 12, 2002. /s/ Deloitte & Touche LLP New York, N.Y. February 10, 2003 THIS REPORT SET FORTH BELOW IS A COPY OF A PREVIOUSLY ISSUED REPORT ON FINANCIAL STATEMENT SCHEDULE BY ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH ITS INCLUSION IN THIS FORM 10-K. To International Paper Company: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in the Company's 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 12, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, based on our audits, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. New York, N.Y. February 12, 2002 71 SCHEDULE II INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
In millions - --------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2002 -------------------------------------------------------------- Additions Balance at Additions Charged to Deductions Balance at Beginning Charged to Other from End of Period Earnings Accounts Reserves of Period ---------- ---------- ---------- ---------- ---------- Description Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts - current $179 $ 30 $-- $ (40)(a) $169 Restructuring reserves 321 119 -- (336)(b) 104
In millions - --------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2001 -------------------------------------------------------------- Additions Balance at Additions Charged to Deductions Balance at Beginning Charged to Other from End of Period Earnings Accounts Reserves of Period ---------- ---------- ---------- ---------- ---------- Description Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts - current $128 $ 82 $-- $ (31)(a) $179 Restructuring reserves 242 385 -- (306)(b) 321
In millions - --------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2000 -------------------------------------------------------------- Additions Balance at Additions Charged to Deductions Balance at Beginning Charged to Other from End of Period Earnings Accounts Reserves of Period ---------- ---------- ---------- ---------- ---------- Description Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts - current $106 $ 46 $-- $ (24)(a) $128 Restructuring reserves 115 248 -- (121)(b) 242
(a) Includes write-off, less recoveries, of accounts determined to be uncollectible and other adjustments. (b) Includes payments and deductions for reversals of previously established reserves that were no longer required. 72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL PAPER COMPANY By: /S/ BARBARA L. SMITHERS February 28, 2003 ---------------------------- Barbara L. Smithers Vice President and Secretary SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date - ------------------------------------------------------------------------------------------- /S/ JOHN T. DILLON Chairman of the Board, Chief February 28, 2003 - -------------------------------- Executive Officer and John T. Dillon Director /S/ JOHN V. FARACI President, February 28, 2003 - -------------------------------- Chief Financial Officer and Director John V. Faraci /S/ ROBERT J. EATON* Director February 28, 2003 - -------------------------------- Robert J. Eaton /S/ SAMIR G. GIBARA* Director February 28, 2003 - -------------------------------- Samir G. Gibara /S/ JAMES A. HENDERSON* Director February 28, 2003 - -------------------------------- James A. Henderson /S/ ROBERT D. KENNEDY* Director February 28, 2003 - -------------------------------- Robert D. Kennedy /S/ W. CRAIG MCCLELLAND* Director February 28, 2003 - -------------------------------- W. Craig McClelland /S/ DONALD F. MCHENRY* Director February 28, 2003 - -------------------------------- Donald F. McHenry /S/ PATRICK F. NOONAN* Director February 28, 2003 - -------------------------------- Patrick F. Noonan
73 /S/ JANE C. PFEIFFER* Director February 28, 2003 - -------------------------------- Jane C. Pfeiffer /S/ CHARLES R. SHOEMATE* Director February 28, 2003 - -------------------------------- Charles R. Shoemate /S/ CHRISTOPHER P. LIDDELL Vice President - Finance and February 28, 2003 - -------------------------------- Controller Christopher P. Liddell *By: /S/ BARBARA L. SMITHERS February 28, 2003 --------------------------- Barbara L. Smithers Attorney-in-fact
74 CERTIFICATIONS I, John T. Dillon, certify that: 1. I have reviewed this annual report on Form 10-K of International Paper Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /S/ JOHN T. DILLON - -------------------------------------------- John T. Dillon Chairman and Chief Executive Officer February 28, 2003 75 I, John V. Faraci, certify that: 1. I have reviewed this annual report on Form 10-K of International Paper Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /S/ JOHN V. FARACI - -------------------------------------------- John V. Faraci President and Chief Financial Officer February 28, 2003 76 Appendix I 2002 Listing of Facilities (all facilities are owned except as noted otherwise) PRINTING PAPERS Hinton, Alberta, Canada Auburndale, Florida Quesnel, British Columbia, Canada Forest Park, Georgia Business Papers, Coated Papers, Maresquel, France Savannah, Georgia Fine Papers and Pulp Saillat, France Statesboro, Georgia U.S.: Saint Die, France Chicago, Illinois Courtland, Alabama (Anould Mill) Des Plaines, Illinois Selma, Alabama Bartorex, Poland Fort Wayne, Indiana (Riverdale Mill) Klucze, Poland Lexington, Kentucky Pine Bluff, Arkansas Kwidzyn, Poland Lafayette, Louisiana Ontario, California leased Tor-Pal, Poland Shreveport, Louisiana (C & D Center) Svetogorsk, Russia Springhill, Louisiana Cantonment, Florida Inverurie, Scotland Auburn, Maine (Pensacola Mill) Howell, Michigan Augusta, Georgia INDUSTRIAL AND Kalamazoo, Michigan Bastrop, Louisiana CONSUMER PACKAGING Monroe, Michigan (Louisiana Mill) Minneapolis, Minnesota Springhill, Louisiana INDUSTRIAL PACKAGING Houston, Mississippi (C & D Center) Kansas City, Missouri Bucksport, Maine Containerboard Geneva, New York Jay, Maine U.S.: King's Mountain, North Carolina (Androscoggin Mill) Prattville, Alabama Statesville, North Carolina Westfield, Massachusetts Savannah, Georgia Cincinnati, Ohio (C & D center) Terre Haute, Indiana Solon, Ohio Quinnesec, Michigan Mansfield, Louisiana Wooster, Ohio Sturgis, Michigan Pineville, Louisiana Lancaster, Pennsylvania (C & D Center) Vicksburg, Mississippi Mount Carmel, Pennsylvania Sartell, Minnesota Roanoke Rapids, North Carolina Washington, Pennsylvania Ticonderoga, New York International: Georgetown, South Carolina Riegelwood, North Carolina Arles, France Spartanburg, South Carolina Wilmington, North Carolina leased Morristown, Tennessee (Reclaim Center) Corrugated Container Murfreesboro, Tennessee Hamilton, Ohio U.S.: Dallas, Texas Saybrook, Ohio leased Bay Minette, Alabama Edinburg, Texas (2 locations) (C & D center) Decatur, Alabama El Paso, Texas Hazleton, Pennsylvania Conway, Arkansas Ft. Worth, Texas (C & D Center) Fordyce, Arkansas leased San Antonio, Texas Eastover, South Carolina Jonesboro, Arkansas Richmond, Virginia Georgetown, South Carolina Russellville, Arkansas Cedarburg, Wisconsin Sumter, South Carolina Carson, California Fond du Lac, Wisconsin (C & D Center) Hanford, California Franklin, Virginia Modesto, California International: Stockton, California Arapoti, Parana, Brazil Vernon, California Mogi Guacu, Sao Paulo, Brazil Putnam, Connecticut
A-1 International: Cedar Rapids, Iowa DISTRIBUTION Las Palmas, Canary Islands Framingham, Massachusetts xpedx (2 locations) Kalamazoo, Michigan U.S.: Tenerife, Canary Islands Raleigh, North Carolina Stores Group Rancagua, Chile International: Chicago, Illinois Chengdu, China London, Ontario, Canada 147 locations nationwide Guangzhou, China Longueuil, Quebec, Canada 139 leased Arles, France leased SouthCentral Region Chalon-sur-Saone, France Shanghai, China Greensboro, North Carolina Chantilly, France Santiago, Dominican Republic 39 branches in the Mid Creil, France San Salvador, El Salvador leased American and Southeast States LePuy, France Fukusaki, Japan 27 leased Mortagne, France Seoul, Korea 11 branches in Michigan Guadeloupe, French West Taipei, Taiwan and Ohio Indies Guacara,Venezuela 10 leased Wanchai, Hong Kong Midwest Region Asbourne, Ireland Foodservice Denver, Colorado Bellusco, Italy U.S.: 25 branches in the Great Catania, Italy Visalia, California Lakes, Rocky Mountain Pomezia, Italy Shelbyville, Illinois And South Plain States San Felice, Italy Hopkinsville, Kentucky 24 leased Alcala, Spain leased Kenton, Ohio West Region Almeria, Spain leased Jackson, Tennessee Denver, Colorado Barcelona, Spain International: 24 branches in the Bilbao, Spain Brisbane, Australia Northwest and Pacific States Gandia, Spain Santiago, Chile leased 16 leased Valladolid, Spain Bogota, Columbia Specialty Business Group Thrapston, United Kingdom Bombay, India Erlanger, Kentucky Winsford, United Kingdom 3 branches nationwide Shorewood Packaging all leased Kraft Paper U.S.: Northeast Region Courtland, Alabama Waterbury, Connecticut Hartford, Connecticut Savannah, Georgia Indianapolis, Indiana 17 branches in New England Mansfield, Louisiana Louisville, Kentucky and Middle Atlantic States Roanoke Rapids, North Carolina Clifton, New Jersey 12 leased Franklin, Virginia Edison, New Jersey International: Englewood, New Jersey Papeteries de France CONSUMER PACKAGING Harrison, New Jersey leased Pantin, France 2 locations West Deptford, New Jersey 1 leased Bleached Board Hendersonville, North Carolina Chihuahua, Mexico Pine Bluff, Arkansas Weaverville, North Carolina 10 locations Augusta, Georgia Springfield, Oregon all leased Riegelwood, North Carolina Danville, Virginia Georgetown, South Carolina Newport News, Virginia Prosperity, South Carolina Roanoke, Virginia Texarkana, Texas International: Brockville, Ontario, Canada Beverage Packaging Smith Falls, Ontario, Canada U.S.: Toronto, Ontario, Canada Turlock, California Guangzhou, China Plant City, Florida Ebbw Vale, Wales, United Kingdom
A-2 Scaldia, Nijmegen, Netherlands Slaughter Myrtleford, Victoria, Australia Impap Northwest (Milwaukee, OR) Whangarei, Marsden Point, Tczew, Poland 5 locations leased New Zealand 3 leased International: Tokoroa, New Zealand Santana, Amapa, Brazil Decorative Products Processing Plants FOREST PRODUCTS Hinton, Alberta, Canada Auckland, New Zealand Forest Resources Strachan, Alberta, Canada Decorative Products Distribution Center U.S.: Sundre, Alberta, Canada Christchurch, New Zealand leased Approximately 9.0 million Burns Lake, British Columbia, Panel Production Plants - New Zealand acres in the South and North Canada (2 plants) Auckland International: Houston, British Columbia, Canada Kopu Approximately 1.5 million 100 Mile House, British Columbia, Rangiora acres in Brazil Canada Panel Production Plants - Australia Quesnel, British Columbia, Oberon, New South Wales (2 plants) Realty Projects Canada (2 plants) St. Leonards, New South Wales Haig Point Incorporated Williams Lake, British Columbia, leased Daufuskie Island, South Carolina Canada Tumut, New South Wales Gympie, Queensland Wood Products CARTER HOLT HARVEY Mt. Gambier, South Australia U.S.: Bell Bay, Tasmania Chapman, Alabama Forestlands Building Supplies Retail Outlets Citronelle, Alabama Approximately 810,000 Retail Outlets, 39 branches Maplesville, Alabama acres in New Zealand (owned & leased) in New Zealand (23 leased) Opelika, Alabama Pulp and Paper Thorsby, Alabama Wood Products Kraft Paper, Pulp, Coated and Moundville, Alabama Sawmills and Processing Plants Uncoated Papers and Bristols (Tuskalusa Mill) Morwell, Australia leased Kinleith, New Zealand Gurdon, Arkansas Oberon, New South Wales, Cartonboard Leola, Arkansas Australia leased Whakatane, New Zealand McDavid, Florida Mt. Gambier, South Australia, Containerboard Whitehouse, Florida Australia leased Kinleith, New Zealand Augusta, Georgia Box Hill, Victoria, Penrose, New Zealand Folkston, Georgia Australia leased Fiber Recycling Operations Meldrim, Georgia Myrtleford, Victoria, Auckland, New Zealand leased Springhill, Louisiana Australia leased Tissue Wiggins, Mississippi Kopu, New Zealand Pulp and Tissue Mills Joplin, Missouri Nelson, New Zealand Box Hill, Victoria, Australia Madison, New Hampshire Putaruru, New Zealand Kawerau, New Zealand Armour, North Carolina Rotorua, New Zealand Conversion Sites Seaboard, North Carolina Taupo, New Zealand Box Hill, Victoria, Australia Johnston, South Carolina Tokoroa, New Zealand Clayton, Victoria, Australia leased Newberry, South Carolina Timber Merchants - Australia Keon Park, Victoria, Australia leased Sampit, South Carolina Sydney, New South Wales leased Suva, Fiji leased Camden, Texas Hamilton Central, Queensland leased Auckland, New Zealand Corrigan, Texas Mt.Gambier, South Australia Kawerau, New Zealand Henderson, Texas Box Hill, Victoria leased Te Rapa, New Zealand New Boston, Texas Perth, Western Australia leased Franklin, Virginia Plywood Mills Nangwarry, South Australia, Australia
A-3 Packaging Niort, France Case Manufacturing Greaker, Norway Suva, Fiji Sandarne, Sweden Northern, Auckland, New Zealand Bedlington, United Kingdom Case South Island, Christchurch, Chester-le-Street, United Kingdom New Zealand Hamilton, New Zealand Chemical Cellulose Pulp Central, Levin, New Zealand Natchez, Mississippi Carton Manufacturing Smithfield, New South Wales, IP Mineral Resources Australia Houston, Texas leased Crestmead, Queensland, Australia leased Chocolate Bayou Water Company Woodville, South Australia, Alvin, Texas Australia Dandenong, Victoria, Industrial Papers Australia leased U.S.: Reservoir, Victoria, Lancaster, Ohio Australia leased De Pere, Wisconsin Auckland, New Zealand Kaukauna, Wisconsin Corrugated Manufacturing Menasha, Wisconsin Melbourne, Australia leased International: Sydney, Australia leased Heerlen, Netherlands Paper Bag Manufacturing Penrose, New Zealand Polyrey Paper Cups Bergerac, France Brisbane, Queensland, Australia (Couze Mill) Packaging and Tissue Head Office Ussel, France South Yarra, Victoria, Australia leased Graphics (Pre-Press) Mentone, Victoria, Australia SPECIALTY BUSINESSES AND OTHER Chemicals U.S.: Panama City, Florida Pensacola, Florida Port St. Joe, Florida Savannah, Georgia Valdosta, Georgia Picayune, Mississippi Dover, Ohio International: Oulu, Finland Valkeakoski, Finland A-4 EX-10 3 ex10-3.txt EXHIBIT 10.3 Exhibit 10.3 [INTERNATIONAL PAPER LOGO] MANAGEMENT INCENTIVE PLAN (MIP) Amended and Restated as of January 1, 2002 I. Purposes of the Plan The purposes of this Amended and Restated Management Incentive Plan are: (a) to provide greater incentive for Participants to exert their best efforts to increase the profitability of the Company, (b) to attract and retain the best talent available, and (c) to further align the interests of the participants and shareholders. The awards made under the Plan are not a form of deferred regular compensation with respect to the Participants' normal performance of their regular duties, but are instead intended to provide an incentive to achieve higher than expected levels of performance. II. Definitions o Business: "Business" means one of the Business Groups reporting to the Executive Office. o Committee: "Committee" means the Management Development and Compensation Committee of the Company's Board of Directors. o Company: "Company" means International Paper Company, a New York corporation, together with its subsidiaries. o Employees: "Employees" means those persons who are full-time employees of the Company. o Award Scale: "Award Scale" means the conversion of the performance objective rating to a percent of target award earned. o Industry Financial Performance Peer Group: "Industry Financial Performance Peer Group" means that representative group of companies in the paper and forest products industry with which the Company competes, as determined from time to time by the Company, listed in Appendix A. o Participant: "Participant" means a person who has been designated as a participant in the Plan, according to Section V. o Performance Objective Rating: "Performance Objective Rating" means the percentage amount assigned to a Performance Objective for a level of achievement which translates to a percentage of the Target Award. o Performance Objectives: "Performance Objectives" mean the measures developed around ROI, customer, operational excellence, and people or other objectives as identified by the Company upon which awards may be earned. o Plan: "Plan" means this Amended and Restated Management Incentive Plan, as may be amended from time to time. o Plan Year: "Plan Year" means the twelve month period corresponding to the Company's fiscal year. o Return on Investment/ROI: "Return on Investment" or "ROI" means earnings before interest and after taxes divided by capital employed, with or without the effect of cyclical product pricing. o Target Award: "Target Award" means an amount equal to the percentage of salary range midpoint applicable to the actual position level of each Participant, shown in Appendix B. III. Plan Description The Plan is an annual cash incentive plan developed around the achievement of pre-established Return on Investment (ROI) measures and appropriate key performance objectives promoting Customers, Operational Excellence, and People and funded by the Company's level of performance against those objectives. Total awards cannot exceed the amount funded for the MIP pool generated by overall corporate performance and approved by the Committee. IV. Administration of the Plan The Plan operates at the discretion of the Management Development and Compensation Committee (Committee) of the Board of Directors. The Committee may exercise considerable discretion and judgment in interpreting the Plan, and adopting, from time to time, rules and regulations that govern the administration of the Plan. The Committee delegates authority to the Chairman and Chief Executive Officer or his designee, for the day-to-day administration of the Plan, except for any participant considered an Officer/Insider of the Company or those designated as coporate Senior Vice President or higher. Decisions of the Committee are final, conclusive and binding on all parties, including the Company, its shareholders, and employees. V. Participation in the Plan Participants in the Plan are limited to employees of the Company, whose position level is 14 - 43 and are considered to have a meaningful impact on the Company's performance as determined by the Chairman and Chief Executive Officer or his designee. Employees who are eligible for participation in any other annual, recurring variable cash compensation plan of the Company are not eligible for participation in this Plan. Participation in this Plan, or receipt of an award under this Plan, does not give a Participant or Employee any right to a subsequent award, nor any right to continued employment by the Company for any period. VI. Award Pool and Award Scale A. Pool: The total corporate award pool will be determined by corporate performance defined as: o 40% Weight: Improvement of Return on Investment (ROI), without the effects of cyclical product pricing. Achievement of Objective % of Target Award ------------------------ ----------------- 125% 200% 100% 100% 70% 50% Below 70% 0% o 20% Weight: Return on Investment as compared to Industry Financial Performance Peer Group rank. Rank % of Target Award --------------- ----------------- Top Quartile 150 - 200% 2nd Quartile 101 - 149% Median 100% 3rd Quartile 25 - 99% Bottom Quartile 0% o 40% Weight: Key Company Drivers: People, Customers, and Operational Excellence. o 15% Aggregate Weighted Achievement Score of Customer Objectives (Customers) o 15% Aggregate Weighted Achievement Score of Operational Excellence Objectives (Operational Excellence) o 10% Diversity (People) Improvement Goal % of Target Award ---------------- ----------------- 100% or Higher 100% 70% 70% Below 70% 0% B. Business Objectives o Business objectives must reflect the 60/40 ratio of financial to non-financial objectives. Non-Financial objectives should include specific goals under each of the major performance drivers of People, Customers, and Operational Excellence, and weighted as appropriate for the specific business, but not to exceed 40% of the overall business award. o The business performance achievement percentage may be modified by the Executive Office to ensure that the overall MIP award pool is not exceeded. C. Performance Objective Rating. Each performance objective will be evaluated at the end of the plan year and assigned a rating representing the level at which the objective was achieved. Ratings will be assigned by appropriate management levels for final review and approval by the Chairman and Chief Executive Officer before submitting to the Committee for final approval. In connection with Company ROI and Competitive ROI, the Committee may take into account, without limitation, such items as unforeseen changes in economic conditions. Overall MIP awards may be reduced for deteriorating safety performance. VII. Allocation of Incentive Compensation Pools Among Business/Corporate Staff Units: Pool amounts available under the MIP for payment of individual awards will be earned and allocated to Corporate and Business Participants based upon: A. Corporate Level Participants. Members of the Executive Office and all Corporate Staff members not specifically assigned to a business are considered corporate participants. As such, these participants' award pool is based: o 100% upon Achievement of Corporate Objectives. B. Business Level Participants. Participants other than members of the Executive Office or Corporate Staff members and whose primary responsibilities rest within a business unit are considered Business Participants. As such, these participants' award pool is based: o 50% upon Corporate Objectives o 50% upon Business Objectives. VIII. Award Recommendations. A. Recommendations. The Chairman and Chief Executive Officer will submit to the Committee at the end of each Plan Year individual award recommendations for participants considered Officers/Insiders/Senior Vice Presidents or higher and an aggregate award amount for all other participants. B. Granting of Awards. The Committee, in its sole discretion, may approve, revise or disapprove any recommended award to an Officer/Insider/Senior Vice President as it deems appropriate. Any award to an Officer/Insider/Senior Vice President will be subject to approval by the full Board of Directors of the Company. C. Death, Disability or Retirement of a Participant. A Participant whose employment terminates during a Plan Year because of death, disability or retirement (or who is granted a leave of absence) may, at the discretion of the Committee and under such rules as the Committee may from time to time prescribe, be eligible for consideration for a pro-rata award based on the period of active employment during the Plan Year. If a Participant's employment with the Company is terminated for any reason other than death, disability, retirement, or the grant of a leave of absence, prior to actual payment of an award, such award will be canceled and the Participant will have no right to receive payment. IX. Method and Time of Payment of Awards A. Type of Payment. As soon as practical after an individual incentive award under this Plan has been approved by the Committee (or approved by the Board of Directors with respect to an award to an Officer/Insider/Senior Vice President), the award will be paid to the Participant in cash unless the Participant has elected to defer payment as described in Article IX(C). B. Payment to Beneficiaries. If a Participant dies prior to receipt of an approved award under the Plan, the award will be paid to such beneficiary or beneficiaries as the Participant has designated in writing. The beneficiary designation will state whether payment will be made in a lump-sum or in quarterly installments over a specified period of time (not to exceed forty calendar quarters). If a Participant dies without having a filed a beneficiary designation, the award will be paid in a lump-sum to the Participant's estate. C. Deferral of Payment. Any Participant may elect to defer payment, not to exceed 85%, of any award under this Plan by filing an irrevocable Election to Defer Payment with the Company by a date determined by the Company. Awards or portions elected to be deferred will be invested in accounts under the Company's savings plans as directed by the participants. X. Modification, Suspension or Termination of Plan. The Board of Directors may at any time suspend, terminate, modify or amend any or all of the provisions of this Plan. XI. Governing Law. The Plan is governed by the laws of the State of New York. XII. Tax Withholding. The Company will deduct from any award made under the Plan, a sufficient amount to cover withholding of any federal, state, local or foreign jurisdiction taxes required by law, or to take such other action as may be necessary to satisfy any such withholding obligations. XIII. Non-Transferability of Award. No award, under this Plan, and no rights or interests therein, will be assignable or transferable by a Participant (or legal representative). XIV. Effective Date. This Plan is effective as of January 1, 2002 and continues until terminated, suspended, modified, or amended. Appendix A Industry Financial Performance Peer Group o Boise Cascade o Georgia-Pacific o Smurfit Stone o Stora Enso o UPM-Kymmene o Westvaco/Mead o Weyerhaueser Appendix B Management Incentive Plan (MIP) Target Awards Position Level Target Award (% of Midpoint) - -------------- ---------------------------- 43 100% 37 75% 36 75% 35 70% 34 70% 33 65% 32 65% 31 60% 30 55% 29 50% 28 50% 27 45% 26 45% 25 40% 24 40% 23 35% 22 30% 21 30% 20 25% 19 25% 18 20% 17 15% 16 15% 15 10% 14 10% EX-10 4 ex10-11.txt EXHIBIT 10.11 EX. 10.11 ================================================================================ 364-DAY CREDIT AGREEMENT dated as of March 8, 2002 between INTERNATIONAL PAPER COMPANY The LENDERS Party Hereto BANK OF AMERICA, as Syndication Agent ---------- BNP PARIBAS, DEUTSCHE BANC ALEX. BROWN INC. and JPMORGAN CHASE BANK, as Co-Documentation Agents ---------- SALOMON SMITH BARNEY INC. and BANC OF AMERICA SECURITIES LLC, as Joint Lead Arrangers and Joint Book Managers ---------- CITIBANK, N.A., as Administrative Agent $1,500,000,000 ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS............................................................ 1 SECTION 1.01. Defined Terms................................................... 1 SECTION 1.02. Classification of Loans and Borrowings..........................16 SECTION 1.03. Terms Generally.................................................16 SECTION 1.04. Accounting Terms and Determinations.............................16 SECTION 1.05. Currencies; Currency Equivalents................................17 ARTICLE II THE CREDITS...........................................................18 SECTION 2.01. The Commitments; Borrowings by Approved Borrowers...............18 SECTION 2.02. Loans and Borrowings............................................18 SECTION 2.03. Requests for Syndicated Borrowings..............................19 SECTION 2.04. Competitive Bid Procedure.......................................20 SECTION 2.05. Funding of Borrowings...........................................22 SECTION 2.06. Interest Elections..............................................23 SECTION 2.07. Changes of Commitments..........................................25 SECTION 2.08. Repayment of Loans; Evidence of Debt............................27 SECTION 2.09. Prepayment of Loans.............................................28 SECTION 2.10. Fees............................................................30 SECTION 2.11. Interest........................................................30 SECTION 2.12. Alternate Rate of Interest......................................31 SECTION 2.13. Increased Costs.................................................32 SECTION 2.14. Break Funding Payments..........................................33 SECTION 2.15. U.S. Taxes......................................................34 SECTION 2.16. Foreign Taxes...................................................35 SECTION 2.17. Payments Generally; Pro Rata Treatment; Sharing of Set-offs.....36 SECTION 2.18. Mitigation Obligations; Replacement of Lenders..................38 SECTION 2.19. Term-Out Option.................................................39 SECTION 2.20. Extension of Commitment Termination Date........................39 ARTICLE III REPRESENTATIONS AND WARRANTIES.......................................41 SECTION 3.01. Corporate Existence.............................................41 SECTION 3.02. Financial Condition.............................................41 SECTION 3.03. Litigation......................................................41 SECTION 3.04. No Breach.......................................................42 SECTION 3.05. Corporate Action of the Company.................................42 SECTION 3.06. Approvals.......................................................42 SECTION 3.07. Use of Loans....................................................42 SECTION 3.08. ERISA...........................................................42 SECTION 3.09. Taxes...........................................................42
-i- SECTION 3.10. Investment Company Act..........................................43 SECTION 3.11. Public Utility Holding Company Act..............................43 SECTION 3.12. Credit Agreements...............................................43 SECTION 3.13. Hazardous Materials and Environmental Matters...................43 SECTION 3.14. Full Disclosure.................................................44 SECTION 3.15. Existence of Approved Borrowers.................................44 SECTION 3.16. No Breach.......................................................44 SECTION 3.17. Corporate Action................................................44 SECTION 3.18. Approvals.......................................................44 SECTION 3.19. Taxes on Payments of Approved Borrowers.........................45 ARTICLE IV GUARANTEE.............................................................45 SECTION 4.01. Guarantee.......................................................45 SECTION 4.02. Obligations Unconditional.......................................45 SECTION 4.03. Reinstatement...................................................46 SECTION 4.04. Subrogation.....................................................46 SECTION 4.05. Remedies........................................................46 SECTION 4.06. Continuing Guarantee............................................47 ARTICLE V CONDITIONS.............................................................47 SECTION 5.01. Effective Date..................................................47 SECTION 5.02. Initial Loan to any Approved Borrower...........................48 SECTION 5.03. Each Credit Event...............................................49 ARTICLE VI COVENANTS OF THE COMPANY..............................................49 SECTION 6.01. Financial Statements............................................49 SECTION 6.02. Litigation......................................................51 SECTION 6.03. Corporate Existence, Etc........................................51 SECTION 6.04. Insurance.......................................................52 SECTION 6.05. Use of Proceeds.................................................52 SECTION 6.06. Prohibition of Fundamental Changes..............................52 SECTION 6.07. Limitation on Liens.............................................53 SECTION 6.08. Total Debt to Total Capital Ratio...............................55 SECTION 6.09. Minimum Consolidated Net Worth..................................55 ARTICLE VII EVENTS OF DEFAULT....................................................55 ARTICLE VIII THE ADMINISTRATIVE AGENT............................................57 ARTICLE IX MISCELLANEOUS.........................................................60 SECTION 9.01. Notices.........................................................60
-ii- SECTION 9.02. Waivers; Amendments.............................................60 SECTION 9.03. Expenses; Indemnity; Damage Waiver..............................61 SECTION 9.04. Successors and Assigns..........................................62 SECTION 9.05. Survival........................................................65 SECTION 9.06. Counterparts; Integration; Effectiveness........................66 SECTION 9.07. Severability....................................................66 SECTION 9.08. Right of Setoff.................................................66 SECTION 9.09. Governing Law; Jurisdiction; Etc................................66 SECTION 9.10. Waiver Of Jury Trial............................................67 SECTION 9.11. Headings........................................................67 SECTION 9.12. Treatment of Certain Information; Confidentiality...............68 SECTION 9.13. European Monetary Union.........................................68 SECTION 9.14. Judgment Currency...............................................70 SCHEDULE I - Commitments SCHEDULE II - Material Agreements SCHEDULE III - Approved Borrowers SCHEDULE IV - MCR COST SCHEDULE V - Permitted Dispositions SCHEDULE VI - Existing Liens EXHIBIT A - Form of Assignment and Acceptance EXHIBIT B-1 - Form of Opinion of Counsel to the Company EXHIBIT B-2 - Form of Opinion of Counsel to any Approved Borrower EXHIBIT C - Form of Opinion of Special New York Counsel to Citibank EXHIBIT D-1 - Form of Designation Letter EXHIBIT D-2 - Form of Termination Letter EXHIBIT E - Form of Assumption Agreement
-iii- 364-DAY CREDIT AGREEMENT dated as of March 8, 2002, between INTERNATIONAL PAPER COMPANY, the LENDERS party hereto, and CITIBANK, N.A., as Administrative Agent. The Company has requested that the Lenders (as hereinafter defined) make loans to the Company and to Approved Borrowers (as so defined) in an aggregate principal amount not exceeding $1,500,000,000 at any one time outstanding. The Lenders are prepared to make such loans upon the terms and conditions hereof, and, accordingly, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans constituting such Borrowing, are denominated in Dollars and bearing interest at a rate determined by reference to the Alternate Base Rate. "Adjusted Eurocurrency Rate" means, for the Interest Period for any Eurocurrency Borrowing, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the Eurocurrency Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate for such Interest Period. "Administrative Agent" means Citibank, N.A., in its capacity as Administrative Agent for the Lenders hereunder. "Administrative Agent's Account" means, for each Currency, an account in respect of such Currency designated by the Administrative Agent in a notice to the Company and the Lenders. "Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Agreed Foreign Currency" means, at any time, any of English Pounds Sterling, Euros, Swedish Kroner, Swiss Francs, Japanese Yen, and, with the agreement of the Required Lenders, any other Foreign Currency, so long as, in respect of any such specified Currency or other Foreign Currency, at such time (a) such Currency is dealt with in the London interbank deposit market, (b) such Currency is freely transferable and convertible into Dollars in the London foreign exchange market and (c) no central bank or other governmental authorization in the country of issue of such Currency (including, in the case of the Euro, any authorization by 364-Day Credit Agreement -2- the European Central Bank) is required to permit use of such Currency by any Lender for making any Loan hereunder and/or to permit the Company to borrow and repay the principal thereof and to pay the interest thereon, unless such authorization has been obtained and is in full force and effect. "Alternate Base Rate" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the higher of (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate and (b) 0.50% per annum above the Federal Funds Effective Rate. Each change in any interest rate provided for herein based upon the Alternate Base Rate resulting from a change in the Alternate Base Rate shall take effect at the time of such change in the Alternate Base Rate. "Applicable Percentage" means, with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. "Applicable Rate" means, for any day, with respect to the facility fees payable hereunder, or with respect to any Syndicated Eurocurrency Loan, as the case may be, the applicable rate per annum set forth below under the caption "Facility Fee" or "Eurocurrency Margin", respectively, based upon the long-term debt ratings by Moody's and S&P, respectively, applicable on such date to the Index Debt:
================================================================================== Long-term debt Eurocurrency Margin rating -------------------------------------------------- Moody's/S&P Facility Fee (before Term-Out Option) (after Term-Out Option) ================================================================================== A2/A or above 6 bps 31.5 bps 56.5 bps - ---------------------------------------------------------------------------------- A3/A- 7 bps 43 bps 68 bps - ---------------------------------------------------------------------------------- Baa1/BBB+ 8.5 bps 54 bps 79 bps - ---------------------------------------------------------------------------------- Baa2/BBB 10 bps 65 bps 90 bps - ---------------------------------------------------------------------------------- Baa3/BBB- or lower 15 bps 85 bps 135 bps ==================================================================================
For purposes of the foregoing, (i) if either Moody's or S&P shall not have in effect a rating for the Index Debt (other than by reason of the circumstances referred to in the last sentence of this definition), then such rating agency shall be deemed to have established a rating in the lowest category in the schedule above; (ii) if the ratings established or deemed to have been established by Moody's and S&P for the Index Debt shall fall within different categories in the schedule above, the Applicable Rate shall be based on the higher of the two ratings; (iii) if the ratings established or deemed to have been established by Moody's and S&P for the Index 364-Day Credit Agreement -3- Debt shall be changed (other than as a result of a change in the rating system of Moody's or S&P), such change shall be effective as of the date on which it is first announced by the applicable rating agency; and (iv) if any Event of Default shall have occurred and be continuing, each of Moody's and S&P shall be deemed to have established a rating in the lowest category in the schedule above. Each change in the Applicable Rate shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody's or S&P shall change, or if either such rating agency shall cease to be in the business of rating corporate debt obligations, the Company (on its own behalf and on behalf of each Approved Borrower) and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Rate shall be determined by reference to the rating most recently in effect prior to such change or cessation. "Approved Borrower" means (i) each of the entities set forth on Schedule III and (ii) any Wholly Owned Consolidated Subsidiary of the Company as to which a Designation Letter has been delivered to the Administrative Agent and as to which a Termination Letter shall not have been delivered to the Administrative Agent, which Subsidiary has been approved as a borrower hereunder by the Administrative Agent, all in accordance with Section 2.01(b). "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee pursuant to Section 9.04, in substantially the form of Exhibit A. "Assuming Lender" means any assignee not previously a Lender that becomes a Lender hereunder pursuant to Section 2.07(e). "Assumption Agreement" means an agreement, in substantially the form of Exhibit E, pursuant to which an assignee agrees to become an Assuming Lender hereunder pursuant to Section 2.07(e) and agrees to be bound by all obligations of a Lender under this Agreement. "Aussedat Rey" means Aussedat Rey S.A., a French corporation. "Availability Period" means the period from and including the Effective Date to but excluding the earlier of the Commitment Termination Date and the date of termination of the Commitments. "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Borrowers" means the Company and each Approved Borrower. "Borrowing" means (a) all ABR Loans made, converted or continued on the same date or (b) all Syndicated Eurocurrency Loans or Competitive Loans of the same Class, Type and Currency that have the same Interest Period (or any single Competitive Loan that does not have the same Interest Period as any other Competitive Loan of the same Type and Currency). For purposes hereof, the date of a Syndicated Borrowing comprising one or more Loans that have 364-Day Credit Agreement -4- been converted or continued shall be the effective date of the most recent conversion or continuation of such Loan or Loans. "Borrowing Request" means a request by a Borrower for a Syndicated Borrowing in accordance with Section 2.03. "Business Day" means any day (a) that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed, (b) if such day relates to a Competitive Bid Request or Competitive Bid for a Competitive Eurocurrency Loan (other than any such Loan denominated in Euros), or to a borrowing of, a payment or prepayment of principal of or interest on, a continuation or conversion of or into, or the Interest Period for, a Eurocurrency Borrowing (other than any such Borrowing denominated in Euros), or to a notice by the Company with respect to any such borrowing, payment, prepayment, continuation, conversion, or Interest Period, that is also (i) a day (other than a Saturday or Sunday) on which commercial banks are open for general business in London and (ii) if the applicable Currency is an Agreed Foreign Currency (other than Euros) that is also a day on which commercial banks are open for general business in the Principal Financial Center for such Currency and (c) if such day relates to a Competitive Bid Request or Competitive Bid for a Competitive Eurocurrency Loan denominated in Euros, or to a borrowing or continuation of, a payment or prepayment of principal of or interest on, or the Interest Period for, any Borrowing denominated in Euros, or to a notice by the Company with respect to any such borrowing, continuation, payment, prepayment or Interest Period, that is also a Target Operating Day. "Capital Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board) and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13). "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.13(b), by any lending office of such Lender or by such Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Citibank" means Citibank, N.A. "Class", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans constituting such Borrowing, are Syndicated Loans or Competitive Loans. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 364-Day Credit Agreement -5- "Commitment" means, with respect to each Lender, the commitment of such Lender to make Syndicated Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lender's Revolving Credit Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.07 and (b) reduced or increased from time to time pursuant to Section 2.07(b), 2.07(e), 2.20(b) or pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender's Commitment is set forth on Schedule I, in the Assumption Agreement or confirmation entered into pursuant to Section 2.07(e), in the agreement of such Lender entered into pursuant to 2.20(b), or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders' Commitments is $1,500,000,000. "Commitment Increase Date" has the meaning assigned to such term in Section 2.07(e). "Commitment Termination Date" means March 7, 2003, as the same may be extended pursuant to Section 2.20. "Company" means International Paper Company, a New York corporation. "Competitive", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans constituting such Borrowing, are made pursuant to Section 2.04. "Competitive Bid" means an offer by a Lender to make a Competitive Loan in accordance with Section 2.04. "Competitive Bid Rate" means, with respect to any Competitive Bid, the Margin or the Fixed Rate, as applicable, offered by the Lender making such Competitive Bid. "Competitive Bid Request" means a request by a Borrower for Competitive Bids in accordance with Section 2.04. "Consolidated Net Worth" means, as at any time, the sum of the following for the Company and its Consolidated Subsidiaries determined on a consolidated basis (without duplication) in accordance with GAAP: (a) the amount of capital stock; plus (b) the amount of surplus and retained earnings (or, in the case of a surplus or retained earnings deficit, minus the amount of such deficit); minus (c) the cost of treasury shares. provided, however, the foregoing calculation shall not take into account any impairment of goodwill arising under FASB 142. "Consolidated Subsidiary" means, as to any Person, each Subsidiary of such Person (whether now existing or hereafter created or acquired) the financial statements of which 364-Day Credit Agreement -6- shall be (or should have been) consolidated with the financial statements of such Person in accordance with GAAP. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Currency" means Dollars or any Foreign Currency. "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Designation Letter" has the meaning assigned to such term in Section 2.01(b). "Dollar Equivalent" means, with respect to any Borrowing denominated in any Foreign Currency, the amount of Dollars that would be required to purchase the amount of the Foreign Currency of such Borrowing on the date two Business Days prior to the date of such Borrowing (or, in the case of any determination made under Section 2.09(b) or redenomination under the last sentence of Section 2.17(a), on the date of determination or redenomination therein referred to), based upon the spot selling rate at which the Administrative Agent offers to sell such Foreign Currency for Dollars in the London foreign exchange market at approximately 11:00 a.m., London time, for delivery two Business Days later. "Dollars" or "$" refers to lawful money of the United States of America. "Effective Date" means the date on which the conditions specified in Section 5.01 are satisfied (or waived in accordance with Section 9.02). "Environmental Laws" means any and all Federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment including ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company or is under common control (within the meaning of Section 414(c) of the Code) with the Company. 364-Day Credit Agreement -7- "Eurocurrency", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans constituting such Borrowing, are bearing interest at a rate determined by reference to (a) in the case of a Syndicated Loan or Borrowing, the Adjusted Eurocurrency Rate, or (b) in the case of a Competitive Loan or Borrowing, the Eurocurrency Rate. "Eurocurrency Rate" means, for the Interest Period for any Eurocurrency Borrowing denominated in any Currency, the rate appearing on the Screen at the Specified Time on the Quotation Date for such Currency, as IBOR for deposits denominated in such Currency with a maturity comparable to such Interest Period. In the event that such rate is not available on the Screen at such Specified Time for any reason, then, unless the last sentence of Section 9.13(e) is applicable, the Eurocurrency Rate for such Interest Period shall be the rate at which deposits in such Currency in the amount of $5,000,000 (or its equivalent in the applicable Foreign Currency) and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at the Specified Time on the Quotation Date; provided that the Eurocurrency Rate for any Eurocurrency Borrowing for any Interest Period denominated in Sterling shall be increased by the MCR Cost. "Eur-IBOR" means for Euros, the rate at which deposits denominated in Euros are offered to leading banks in the Brussels interbank market. "Euros" has the meaning assigned to such term in Section 9.13(a). "Event of Default" has the meaning assigned to such term in Article VII. "Excluded Taxes" means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of any Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which such Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Company under Section 2.18(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement or is attributable to such Foreign Lender's failure or inability to comply with Section 2.15(e), except to the extent that such Foreign Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from such Borrower with respect to such withholding tax pursuant to Section 2.15(a). "Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such date (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of 364-Day Credit Agreement -8- the quotations for such day for such transactions received by Citibank from three Federal funds brokers of recognized standing selected by it. "5-Year Credit Agreement" means the 5-Year Credit Agreement dated as of March 31, 1999 between the Company, the lenders named therein and JPMorgan Chase, as Administrative Agent. "Fixed Rate" means, with respect to any Competitive Loan (other than a Competitive Eurocurrency Loan), the fixed rate of interest per annum specified by the Lender making such Competitive Loan in its related Competitive Bid. "Fixed Rate Loan" means a Competitive Loan bearing interest at a Fixed Rate. "Foreign Currency" means at any time any currency other than Dollars. "Foreign Currency Equivalent" means, with respect to any amount in Dollars, the amount of any Foreign Currency that could be purchased with such amount of Dollars using the reciprocal of the foreign exchange rate(s) specified in the definition of the term "Dollar Equivalent", as determined by the Administrative Agent. "Foreign Jurisdiction" means any jurisdiction other than the United States of America, a State thereof, the District of Columbia or any political subdivision of any of the foregoing. "Foreign Lender" means any Lender that is organized under the laws of a Foreign Jurisdiction. "Foreign Taxes" means, with respect to any Approved Borrower organized under a Foreign Jurisdiction, all present and future income, stamp, registration and other taxes and levies, imposts, deductions, charges, compulsory loans and withholdings whatsoever, and all interest, penalties or similar amounts with respect thereto, now or hereafter imposed, assessed, levied or collected by such Foreign Jurisdiction, or any political subdivision or taxing authority thereof or therein, or by any federal or other association of or with which such Foreign Jurisdiction may be a member or associated, on or in respect of this Agreement, the Loans made to such Approved Borrower, the recording, registration, notarization or other formalization of any thereof, the enforcement thereof or the introduction thereof in any judicial proceedings, or on or in respect of any payments of principal, interest, premiums, charges, fees or other amounts made on, under or in respect of any thereof, excluding, however income taxes imposed upon the overall net income of any Lender organized under the laws of such Foreign Jurisdiction and having an applicable lending office in such Foreign Jurisdiction. "GAAP" means generally accepted accounting principles applied on a basis consistent with those which, in accordance with Section 1.04, are to be used in making the calculations for purposes of determining compliance with the terms of this Agreement. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any 364-Day Credit Agreement -9- agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" means a guarantee, an endorsement, a contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock of any corporation, or an agreement to purchase, sell or lease (as lessee or lessor) property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of his, her or its obligations or an agreement to assure a creditor against loss, and including causing a bank to open a letter of credit for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall have a correlative meaning. "Guaranteed Obligations" has the meaning assigned to such term in Section 4.01. "Guarantor" means the Company in its capacity as the guarantor under Article IV. "IBOR" means (a) for all Currencies other than Euros, LIBOR and (b) for Euros, Eur-IBOR. "Increasing Lender" has the meaning assigned to such term in Section 2.07(e)(i). "Indebtedness" means, as to any Person: (a) indebtedness created, issued or incurred by such Person for borrowed money (whether by loan or the issuance and sale of debt securities); (b) obligations of such Person to pay the deferred purchase or acquisition price of property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) indebtedness of others secured by a Lien on the property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for the account of such Person; (e) Capital Lease Obligations of such Person; and (f) Indebtedness of others Guaranteed by such Person. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Index Debt" means senior, unsecured, long-term indebtedness for borrowed money of the Company that is not guaranteed by any other Person or subject to any other credit enhancement. "Interest Election Request" means a request by a Borrower to convert or continue a Syndicated Borrowing in accordance with Section 2.06. 364-Day Credit Agreement -10- "Interest Payment Date" means (a) with respect to any ABR Loan, each Quarterly Date, (b) with respect to any Eurocurrency Loan, the last day of each Interest Period therefor and, in the case of any Interest Period for a Eurocurrency Loan that is more than three months long, each day prior to the last day of such Interest Period that occurs at intervals of three months after the first day of such Interest Period and (c) with respect to any Fixed Rate Loan, the last day of the Interest Period therefor and, in the case of any Interest Period for a Fixed Rate Loan that is more than 90 days long (unless otherwise specified in the applicable Competitive Bid Request), each day prior to the last day of such Interest Period that occurs at intervals of 90 days after the first day of such Interest Period, and any other dates that are specified in the applicable Competitive Bid Request as Interest Payment Dates with respect to such Loan. "Interest Period" means: (a) for any Borrowing (other than an ABR Borrowing), the Interest Period of the Loan or Loans constituting such Borrowing; (b) for any Syndicated Eurocurrency Loan, the period commencing on the date of such Loan and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter or, with respect to such portion of any Syndicated Eurocurrency Loan denominated in a Foreign Currency that is scheduled to be repaid on the Commitment Termination Date, a period of less than one month's duration commencing on the date of such Loan and ending on the Commitment Termination Date, as specified in the applicable Borrowing Request or Interest Election Request; (c) for any Competitive Eurocurrency Loan, the period commencing on the date of such Loan and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter (provided that in no event shall any such Interest Period end after the Commitment Termination Date) or, with respect to such portion of any Competitive Eurocurrency Loan denominated in a Foreign Currency that is scheduled to be repaid on the Commitment Termination Date, a period of less than one month's duration commencing on the date of such Loan and ending on the Commitment Termination Date, as specified in the applicable Competitive Bid Request; and (d) for any Fixed Rate Loan, the period (which shall not be less than 30 days or more than 360 days) commencing on the date of such Loan and ending on the date specified in the applicable Competitive Bid Request (provided that in no event shall any Interest Period for a Fixed Rate Loan end after the Commitment Termination Date); provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurocurrency Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, and (ii) any Interest Period pertaining to a Eurocurrency Borrowing (other than an Interest Period pertaining to a Eurocurrency Borrowing denominated in a Foreign Currency that ends on the Commitment Termination Date that is permitted to be of less than one month's duration as provided in this definition) that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such 364-Day Credit Agreement -11- Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Loan initially shall be the date on which such Loan is made and, in the case of a Syndicated Loan, thereafter shall be the effective date of the most recent conversion or continuation of such Loan. "IPISA" means International Paper Investments S.A., a French corporation. "JPMorgan" means JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank). "Kwidzyn" means International Paper Kwidzyn S.A., a Polish joint stock company. "Kwidzyn Entity" means (i) Kwidzyn, (ii) Kwidzyn France, as long as it holds no assets other than (A) interests in Kwidzyn, (B) cash and cash equivalents and (C) "political risk" insurance policies with respect to Kwidzyn, and (iii) international Paper Investments (Poland), Inc., a Delaware corporation, as long as it holds no assets other than (A) interests in and contracts with Kwidzyn, (B) unless Kwidzyn France is not then a Kwidzyn Entity, interests in Kwidzyn France and (C) cash and cash equivalents. "Kwidzyn France" means Celouse et Papiers de Pologne, S.A., a French corporation. "Lenders" means the Persons listed on Schedule I and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance or pursuant to Section 2.07(e) or 2.20, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. "LIBOR" means for all Currencies other than Euros, the rate at which deposits denominated in such Currency are offered to leading banks in the London interbank market. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For purposes of this Agreement, the Company or any of its Subsidiaries shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loans" means the loans made by the Lenders to the Borrowers pursuant to this Agreement. "Local Time" means, with respect to any Loan denominated in or any payment to be made in any Currency, the local time in the Principal Financial Center for the Currency in which such Loan is denominated or such payment is to be made. "Margin" means, with respect to any Competitive Loan bearing interest at a rate based on the Eurocurrency Rate, the marginal rate of interest, if any, to be added to or subtracted 364-Day Credit Agreement -12- from the Eurocurrency Rate to determine the rate of interest applicable to such Loan, as specified by the Lender making such Loan in its related Competitive Bid. "Margin Stock" means margin stock within the meaning of Regulations U and X. "Material Adverse Effect" means a material adverse change in, or material adverse effect on, the business, results of operations or financial condition of the Company and its Subsidiaries, taken as a whole. "Material Subsidiary" means any Subsidiary of the Company that (a) is an Approved Borrower or (b) has total assets equal to 5% or more of Consolidated Net Worth. "Maturity Date" means the Commitment Termination Date, as such date may be extended pursuant to the Term-Out Option. "MCR Cost" means, with respect to any Lender, the cost imputed to such Lender of compliance with the Mandatory Cost Rate requirements of the Bank of England during the relevant period, determined in accordance with Schedule IV. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate and which is covered by Title IV of ERISA. "1999 Credit Agreement" means the 364-Day Credit Agreement dated as of March 31, 1999 between the Company, each of the banks that is a signatory thereto and JPMorgan, as Administrative Agent. "Obligors" means the Borrowers and the Guarantor. "Other Taxes" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any employee benefit or other plan established or maintained by the Company or any ERISA Affiliate and which is covered by Title IV of ERISA, other than a Multiemployer Plan. 364-Day Credit Agreement -13- "Principal Financial Center" means, in the case of any Currency, the principal financial center where such Currency is cleared and settled, as determined by the Administrative Agent. "Project Indebtedness" means (i) Indebtedness of any Kwidzyn Entity or (ii) Indebtedness of the Company, IPISA or Aussedat Rey that constitutes Indebtedness of such Person due solely to the pledge, on a non-recourse basis, by such Person of Indebtedness or capital stock of any Kwidzyn Entity held by such Person to secure Indebtedness of any Kwidzyn Entity to any other Person or Persons or (iii) Indebtedness of the Company or any Subsidiary incurred to finance the acquisition, construction or development of Project Assets (as defined in Section 6.07(h)); provided in the case of this clause (iii) that (x) such Indebtedness is non-recourse to any other assets and (y) the aggregate principal amount of such Indebtedness may at no time exceed $200,000,000. "Quarterly Dates" means the last Business Day of March, June, September and December in each year, the first of which shall be the first such day after the date hereof. "Quotation Date" means, for the Interest Period for any Eurocurrency Borrowing denominated in any Currency the date two Business Days prior to the commencement of such Interest Period, provided that if market practice differs in the relevant interbank market for any Foreign Currency, the "Quotation Date" for such Foreign Currency shall be determined by the Administrative Agent in accordance with market practice in the relevant interbank market (and if quotations would normally be given by leading banks in the relevant interbank market on more than one day, the "Quotation Date" shall be the last of such days). "Register" has the meaning assigned to such term in Section 9.04. "Regulations D, U and X" means, respectively, Regulations D, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be amended or supplemented from time to time. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Required Lenders" means, at any time, Lenders having Revolving Credit Exposures and unused Commitments representing more than 50% of the sum of the total Revolving Credit Exposures and unused Commitments at such time (provided that, and for all purposes after the Loans become due and payable pursuant to Article VII or the Commitments expire or terminate, the outstanding Competitive Loans of the Lenders shall be included in their respective Revolving Credit Exposures in determining the Required Lenders). "Revolving Credit Exposure" means, with respect to any Lender at any time, the aggregate outstanding principal amount of such Lender's Syndicated Loans at such time (including after exercise by the Company of any Term-Out Option pursuant to Section 2.19). 364-Day Credit Agreement -14- "S&P" means Standard & Poor's Ratings Services, a Division of The McGraw-Hill Companies, Inc. "Screen" means, for any Currency, the relevant display page for IBOR for such Currency (as determined by the Administrative Agent) on the Telerate Service; provided that, if the Administrative Agent determines that there is no such relevant display page for IBOR for such Currency, "Screen" shall mean the relevant display page for IBOR for such Currency (as determined by the Administrative Agent) on the Reuter Monitor Money Rates Service. As of the date hereof, the relevant display page for IBOR for all Currencies other than Euros is Page 3750, and the relevant display page for IBOR for Euros is Page 248. "Specified Time" means, for the Interest Period for any Eurocurrency Borrowing denominated in any Currency, (a) for all Currencies other than English Pounds Sterling or Euros, approximately 11:00 a.m., London time, on the relevant Quotation Date, (b) for English Pounds Sterling, approximately 11:00 a.m., London time, on the relevant Quotation Date and (c) for Euros, approximately 11:00 a.m., Brussels time, on the relevant Quotation Date. "Statutory Reserve Rate" means, for the Interest Period for any Eurocurrency Borrowing, a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the arithmetic mean, taken over each day in such Interest Period, of the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject for eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurocurrency Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subsidiary" means, as to any Person, (a) any corporation of which at least a majority of the outstanding shares of stock whose class or classes have by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person and (b) any partnership or other entity in which such Person and/or one or more Subsidiaries of such Person shall have an ownership or controlling interest (whether in the form of voting or participation in profits or capital contribution) of more than 50%. "Wholly Owned Subsidiary" means any Subsidiary of which all of such shares or ownership interests, other than (in the case of a corporation) directors' qualifying shares, are so owned or controlled. "Syndicated Loan" means a Loan made pursuant to Section 2.01. 364-Day Credit Agreement -15- "Tangible Assets" means, at any time, Total Assets minus the sum of the items identified in clause (c) of the definition in this Section 1.01 of the term "Tangible Net Worth". "Tangible Net Worth" means, as at any time, the sum of the following for the Company and its Consolidated Subsidiaries determined on a consolidated basis (without duplication) in accordance with GAAP: (a) the amount of capital stock; plus (b) the amount of surplus and retained earnings (or, in the case of a surplus or retained earnings deficit, minus the amount of such deficit); minus (c) the sum of the following: cost of treasury shares and the book value of all assets of the Company and its Consolidated Subsidiaries which should be classified as intangibles (without duplication of deductions in respect of items already deducted in arriving at surplus and retained earnings) but in any event including goodwill, research and development costs, trademarks, trade names, copyrights, patents and franchises, unamortized debt discount and expense, and any write-up in the book value of assets resulting from a revaluation thereof subsequent to September 30, 2001 (other than any write-up, at the time of its acquisition, in the book value of any asset acquired subsequent to September 30, 2001). "Target Operating Day" has the meaning assigned to such term in Section 9.13(a). "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Term-Out Option" means the option of the Company to extend the Maturity Date pursuant to Section 2.19. "Termination Letter" has the meaning assigned to such term in Section 2.01(b). "Total Assets" means, at any time, the total assets of the Company and its Consolidated Subsidiaries at such time determined on a consolidated basis (without duplication) in accordance with GAAP. "Total Capital" means, at any date, Consolidated Net Worth plus Total Debt plus (i) the amount of the minority interest in Carter Holt Harvey, Ltd. and (ii) the amount of the minority interest represented by the Tax Deductible Convertible Preferred issued by International Paper Capital Trust, each determined as of such date. "Total Debt" means, at any time, the aggregate outstanding principal amount of all Indebtedness of the Company and its Consolidated Subsidiaries at such time determined on a consolidated basis (without duplication) in accordance with GAAP. 364-Day Credit Agreement -16- "2001 Credit Agreement" means the Amended and Restated Credit Agreement dated as of June 12, 2001 between the Company, International Paper Financial Services, Inc., each of the lenders party thereto and Credit Suisse First Boston, as Administrative Agent. "Type", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans constituting such Borrowing, is determined by reference to the Adjusted Eurocurrency Rate, the Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the Eurocurrency Rate or a Fixed Rate. SECTION 1.02. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a "Syndicated Loan"), by Type (e.g., a "Eurocurrency Loan") or by Class and Type (e.g., a "Syndicated Eurocurrency Loan"). Borrowings also may be classified and referred to by Class (e.g., a "Syndicated Borrowing"), by Type (e.g., a "Eurocurrency Borrowing") or by Class and Type (e.g., a "Syndicated Eurocurrency Borrowing"). Loans and Borrowings may also be identified by Currency. SECTION 1.03. Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.04. Accounting Terms and Determinations. (a) Accounting Terms. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall (unless otherwise disclosed to the Lenders in writing at the time of delivery thereof in the manner described in subsection (b) below) be prepared in accordance with generally accepted accounting principles applied on a basis consistent with that used in the preparation of the latest financial statements furnished to the Lenders hereunder (which, until the first financial statements are delivered under Section 6.01, shall mean the financial statements referred to in Section 3.02). All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of generally accepted accounting 364-Day Credit Agreement -17- principles applied on a basis consistent with that used in the preparation of the latest annual or quarterly financial statements furnished to the Lenders pursuant to Section 6.01 unless (i) the Company shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (ii) the Required Lenders shall so object in writing within 30 days after delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 6.01, shall mean the financial statements referred to in Section 3.02). (b) Descriptions of Material Variations. The Company shall deliver to the Lenders at the same time as the delivery of any annual or quarterly financial statement under Section 6.01 a description in reasonable detail of any material variation between the application of accounting principles employed in the preparation of such statement and the application of accounting principles employed in the preparation of the next preceding annual or quarterly financial statements as to which no objection has been made in accordance with the last sentence of paragraph (a) above and reasonable estimates of the difference between such statements arising as a consequence thereof. (c) Changes of Fiscal Years. To enable the ready and consistent determination of compliance with the covenants set forth in Article VI, the Company will not change the last day of its fiscal year from December 31 of each year, or the last days of the first three fiscal quarters in each of its fiscal years from March 31, June 30 and September 30 of each year, respectively, without giving prior notice of such change to each Lender and the Administrative Agent. SECTION 1.05. Currencies; Currency Equivalents. At any time, any reference in the definition of the term "Agreed Foreign Currency" or in any other provision of this Agreement to the Currency of any particular nation means the lawful currency of such nation at such time whether or not the name of such Currency is the same as it was on the date hereof. Except as provided in Section 2.09(b) and the last sentence of Section 2.17(a), for purposes of determining (i) whether the amount of any Borrowing, together with all other Borrowings then outstanding or to be borrowed at the same time as such Borrowing, would exceed the aggregate amount of the Commitments, (ii) the aggregate unutilized amount of the Commitments and (iii) the outstanding aggregate principal amount of Borrowings, the outstanding principal amount of any Borrowing that is denominated in any Foreign Currency shall be deemed to be the Dollar Equivalent of the amount of the Foreign Currency of such Borrowing determined as of the date of such Borrowing (determined in accordance with the last sentence of the definition of the term "Borrowing"). Wherever in this Agreement in connection with a Borrowing or Loan an amount, such as a required minimum or multiple amount, is expressed in Dollars, but such Borrowing or Loan is denominated in a Foreign Currency, such amount shall be the relevant Foreign Currency Equivalent of such Dollar amount (rounded to the nearest 1,000 units of such Foreign Currency). 364-Day Credit Agreement -18- ARTICLE II THE CREDITS SECTION 2.01. The Commitments; Borrowings by Approved Borrowers. (a) The Commitments. Subject to the terms and conditions set forth herein, each Lender agrees to make Syndicated Loans in Dollars or in any Agreed Foreign Currency to the Borrowers from time to time during the Availability Period in an aggregate principal amount that will not result in (a) such Lender's Revolving Credit Exposure exceeding such Lender's Commitment or (b) the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the total Commitments. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrowers may borrow, prepay and reborrow Syndicated Loans. (b) Borrowings by Approved Borrowers. The Company may, at any time or from time to time during the Availability Period, designate one or more Wholly Owned Consolidated Subsidiaries as Borrowers hereunder by furnishing to the Administrative Agent a letter (a "Designation Letter") in duplicate, substantially in the form of Exhibit D-1, duly completed and executed by the Company and such Subsidiary. Upon approval by the Administrative Agent (which approval shall not be unreasonably withheld) of such Subsidiary as an Approved Borrower, which approval shall be evidenced by the Administrative Agent signing and returning to the Company a copy of such Designation Letter, such Subsidiary shall be an Approved Borrower. So long as all principal and interest on all Loans of any Approved Borrower and all other amounts payable by such Approved Borrower hereunder have been paid in full, the Company may terminate its status as an Approved Borrower hereunder by furnishing to the Administrative Agent a letter (a "Termination Letter"), substantially in the form of Exhibit D-2, duly completed and executed by the Company and such Approved Borrower. Any Termination Letter furnished in accordance with this Section shall be effective upon receipt by the Administrative Agent. Notwithstanding the foregoing, the delivery of a Termination Letter with respect to any Approved Borrower shall not affect any obligation of such Approved Borrower theretofore incurred. SECTION 2.02. Loans and Borrowings. (a) Obligations of Lenders. Each Syndicated Loan shall be made as part of a Borrowing consisting of Loans of the same Currency and Type made by the Lenders ratably in accordance with their respective Commitments. Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.04. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments and Competitive Bids of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Type of Loans. Subject to Section 2.12, (i) each Syndicated Borrowing shall be constituted entirely of ABR Loans or of Eurocurrency Loans denominated in a single Currency as the respective Borrower may request in accordance herewith, and (ii) each Competitive Borrowing shall be constituted entirely of Eurocurrency Loans or Fixed Rate Loans 364-Day Credit Agreement -19- denominated in a single Currency as the respective Borrower may request in accordance herewith. Each ABR Loan shall be denominated in Dollars. Each Lender at its option may make any Eurocurrency Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrowers to repay such Loan in accordance with the terms of this Agreement. (c) Minimum Amounts; Limitation on Number of Borrowings. At the commencement of the Interest Period for any Syndicated Borrowing, such Syndicated Borrowing shall be in an aggregate amount of $15,000,000 or a larger multiple of $1,000,000; provided that an ABR Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments. Each Competitive Borrowing shall be in an aggregate amount equal to $5,000,000 or a larger multiple of $1,000,000. Borrowings of more than one Class, Currency and Type may be outstanding at the same time; provided that there shall not at any time be more than a total of fifteen Syndicated Eurocurrency Borrowings outstanding. (d) Limitations on Lengths of Interest Periods. Notwithstanding any other provision of this Agreement, no Borrower shall be entitled to request, or to elect to convert to or continue as a Syndicated Eurocurrency Borrowing, any Borrowing if the Interest Period requested therefor would end after the Commitment Termination Date. SECTION 2.03. Requests for Syndicated Borrowings. To request a Syndicated Borrowing, a Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Syndicated Eurocurrency Borrowing denominated in Dollars, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing, (b) in the case of a Syndicated Eurocurrency Borrowing denominated in a Foreign Currency, not later than 11:00 a.m., London time, three Business Days before the date of the proposed Borrowing or (c) in the case of an ABR Borrowing, not later than 10:00 a.m., New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Company (on its own behalf or, as applicable, on behalf of an Approved Borrower). Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the Borrower and the aggregate amount and Currency of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) in the case of a Syndicated Borrowing denominated in Dollars, whether such Borrowing is to be an ABR Borrowing or a Eurocurrency Borrowing; (iv) in the case of a Syndicated Eurocurrency Borrowing, the Interest Period therefor, which shall be a period contemplated by the definition of the term "Interest Period" and permitted under Section 2.02(d); and 364-Day Credit Agreement -20- (v) the location and number of the account to which funds are to be disbursed, which shall comply with the requirements of Section 2.05. If no election as to the Type of Syndicated Borrowing is specified, then the requested Syndicated Borrowing shall be an ABR Borrowing unless an Agreed Foreign Currency has been specified, in which case the requested Syndicated Borrowing shall be a Eurocurrency Borrowing denominated in such Agreed Foreign Currency. If no Interest Period is specified with respect to any requested Syndicated Eurocurrency Borrowing, (i) if the Currency specified for such Borrowing is Dollars (or if no Currency has been so specified), the requested Borrowing shall be made instead as an ABR Borrowing, and (ii) if the Currency specified for such Borrowing is an Agreed Foreign Currency, the respective Borrower shall be deemed to have selected an Interest Period of one month's duration. If no election as to the Currency of a Syndicated Borrowing is specified, then the requested Syndicated Borrowing shall be denominated in Dollars. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.04. Competitive Bid Procedure. (a) Requests for Bids by the Borrowers. Subject to the terms and conditions set forth herein, from time to time during the Availability Period a Borrower may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans denominated in Dollars or in any Foreign Currency; provided that the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans at any time shall not exceed the total Commitments. To request Competitive Bids, a Borrower shall notify the Administrative Agent of such request by telephone, in the case of a Eurocurrency Borrowing, not later than 11:00 a.m., New York City time, four Business Days (or, in the case of a Eurocurrency Borrowing denominated in a Foreign Currency, 11:00 a.m., London time, five Business Days) before the date of the proposed Borrowing and, in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time (or, in the case of a Fixed Rate Borrowing denominated in a Foreign Currency, 10:00 a.m., London time), two Business Days before the date of the proposed Borrowing; provided that the Borrowers may in the aggregate submit up to (but not more than) three Competitive Bid Requests on the same day, and a Competitive Bid Request shall not be made within five Business Days after the date of any previous Competitive Bid Request, unless any and all such previous Competitive Bid Requests shall have been withdrawn or all Competitive Bids received in response thereto rejected. Each such telephonic Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Competitive Bid Request in a form approved by the Administrative Agent and signed by the Company (on behalf of itself or, as applicable, an Approved Borrower). Each such telephonic and written Competitive Bid Request shall specify the following information in compliance with Section 2.02: (i) the Borrower and the aggregate amount and Currency of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; 364-Day Credit Agreement -21- (iii) whether such Borrowing is to be a Eurocurrency Borrowing or a Fixed Rate Borrowing; (iv) the Interest Period for such Borrowing, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the account to which funds are to be disbursed, which shall comply with the requirements of Section 2.05. Promptly following receipt of a Competitive Bid Request in accordance with this Section, the Administrative Agent shall notify the Lenders of the details thereof by telecopy, inviting the Lenders to submit Competitive Bids. (b) Making of Bids by Lenders. Each Lender may (but shall not have any obligation to) make one or more Competitive Bids in response to a Competitive Bid Request. Each Competitive Bid by a Lender must be in a form approved by the Administrative Agent and must be received by the Administrative Agent by telecopy, in the case of a Competitive Eurocurrency Borrowing, not later than 9:30 a.m, New York City time, three Business Days (or, in the case of a Competitive Eurocurrency Borrowing denominated in a Foreign Currency, 9:30 a.m, London time, four Business Days) before the proposed date of such Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 9:30 a.m, New York City time (or, in the case of a Fixed Rate Borrowing denominated in a Foreign Currency, 9:30 a.m, London time), on the proposed date of such Competitive Borrowing. Competitive Bids that do not conform substantially to the form approved by the Administrative Agent may be rejected by the Administrative Agent, and the Administrative Agent shall notify the applicable Lender of such rejection as promptly as practicable. Each Competitive Bid shall specify (i) the principal amount (which shall be $15,000,000 or a larger multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the respective Borrower) of the Competitive Loan or Loans that such Lender is willing to make, (ii) the Competitive Bid Rate or Competitive Bid Rates at which such Lender is prepared to make such Loan or Loans (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) and (iii) the Interest Period for each such Loan and the last day thereof. (c) Notification of Bids by Administrative Agent. The Administrative Agent shall promptly notify the respective Borrower by telecopy of the Competitive Bid Rate and the principal amount specified in each Competitive Bid and the identity of the Lender that shall have made such Competitive Bid. (d) Acceptance of Bids by the Borrowers. Subject only to the provisions of this paragraph, a Borrower may accept or reject any Competitive Bid. Such Borrower shall notify the Administrative Agent by telephone, confirmed by telecopy in a form approved by the Administrative Agent, whether and to what extent such Borrower has decided to accept or reject each Competitive Bid, in the case of a Competitive Eurocurrency Borrowing, not later than 10:30 a.m, New York City time, three Business Days (or, in the case of a Eurocurrency Borrowing denominated in a Foreign Currency, 2:00 p.m., London time, four Business Days) before the date of the proposed Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 10:30 a.m, New York City time (or, in the case of a Fixed Rate 364-Day Credit Agreement -22- Borrowing denominated in a Foreign Currency, 10:30 a.m, London time), on the proposed date of the Competitive Borrowing; provided, that (i) the failure of such Borrower to give such notice shall be deemed to be a rejection of each Competitive Bid, (ii) such Borrower shall not accept a Competitive Bid made at a particular Competitive Bid Rate if such Borrower rejects a Competitive Bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by such Borrower shall not exceed the aggregate amount of the requested Competitive Borrowing specified in the related Competitive Bid Request, (iv) to the extent necessary to comply with clause (iii) of this proviso, such Borrower may accept Competitive Bids at the same Competitive Bid Rate in part, which acceptance, in the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Competitive Bid, and (v) except pursuant to clause (iv) of this proviso, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a principal amount of $15,000,000 or a larger multiple of $1,000,000; provided further that if a Competitive Loan must be in an amount less than $15,000,000 because of the provisions of clause (iv) of the first proviso of this paragraph, such Competitive Loan may be in an amount of $1,000,000 or any multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to such clause (iv) the amounts shall be rounded to multiples of $1,000,000 in a manner determined by the Company. A notice given by any Borrower pursuant to this paragraph shall be irrevocable. (e) Notification of Acceptances by the Administrative Agent. The Administrative Agent shall promptly notify each bidding Lender by telecopy whether or not its Competitive Bid has been accepted (and, if so, the amount and Competitive Bid Rate so accepted), and each successful bidder will thereupon become bound, subject to the terms and conditions hereof, to make the Competitive Loan in respect of which its Competitive Bid has been accepted. (f) Bids by the Administrative Agent. If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such Competitive Bid directly to the respective Borrower at least one quarter of an hour earlier than the time by which the other Lenders are required to submit their Competitive Bids to the Administrative Agent pursuant to paragraph (b) of this Section. (g) Continuing Obligations of Lenders. The extension of any Competitive Loan by any Lender shall not constitute utilization of such Lender's Commitment hereunder, and such Lender shall remain obligated (as provided in Section 2.17(c)) to make Loans in an amount equal to its pro rata share of the aggregate Commitments under this Agreement, provided that in no event shall the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans at any time exceed the total Commitments. SECTION 2.05. Funding of Borrowings. (a) Funding by Lenders. Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, Local Time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the respective Borrower by promptly crediting the amounts so received, in like 364-Day Credit Agreement -23- funds, to an account maintained with the Administrative Agent in New York City and designated by such Borrower in the applicable Borrowing Request or Competitive Bid Request. (b) Presumption by the Administrative Agent. Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the respective Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and such Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to such Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate or (ii) in the case of such Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. SECTION 2.06. Interest Elections. (a) Elections by Borrowers for Syndicated Borrowings. Each Syndicated Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Syndicated Eurocurrency Borrowing, shall have the Interest Period specified in such Borrowing Request. Thereafter, a Borrower may elect to convert such Borrowing to a Borrowing of a different Type or to continue such Borrowing as a Borrowing of the same Type and, in the case of a Syndicated Eurocurrency Borrowing, may elect the Interest Period therefor, all as provided in this Section; provided, however, that (i) a Syndicated Borrowing denominated in one Currency may not be continued as, or converted to, a Syndicated Borrowing in a different Currency, (ii) no Syndicated Eurocurrency Borrowing denominated in a Foreign Currency may be continued if, after giving effect thereto, the sum of the Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans would exceed the aggregate Commitments, and (iii) a Syndicated Eurocurrency Borrowing denominated in a Foreign Currency may not be converted to a Borrowing of a different Type. A Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans constituting such Borrowing, and the Loans constituting each such portion shall be considered a separate Borrowing. This Section shall not apply to Competitive Borrowings, which may not be converted or continued. (b) Notice of Elections. To make an election pursuant to this Section, a Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Company were requesting a Syndicated Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written 364-Day Credit Agreement -24- Interest Election Request in a form approved by the Administrative Agent and signed by the Company (on behalf of itself or, as applicable, on behalf of an Approved Borrower). (c) Information in Interest Election Requests. Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (i) the Borrower and the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) of this paragraph shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether, in the case of a Borrowing denominated in Dollars, the resulting Borrowing is to be an ABR Borrowing or a Eurocurrency Borrowing; and (iv) if the resulting Borrowing is a Eurocurrency Borrowing, the Interest Period therefor after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period" and permitted under Section 2.02(d). If any such Interest Election Request requests a Eurocurrency Borrowing (whether denominated in Dollars or a Foreign Currency) but does not specify an Interest Period, then the respective Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Notice by the Administrative Agent to Lenders. Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) Failure to Elect; Events of Default. If a Borrower fails to deliver a timely Interest Election Request with respect to a Syndicated Eurocurrency Borrowing prior to the end of the Interest Period therefor, then, unless such Borrowing is repaid as provided herein, (i) if such Borrowing is denominated in Dollars, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing, and (ii) if such Borrowing is denominated in a Foreign Currency, the Company shall be deemed to have selected an Interest Period of one month's duration. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrowers, then, so long as an Event of Default is continuing (A) no outstanding Syndicated Borrowing denominated in Dollars may be converted to or continued as a Syndicated Eurocurrency Borrowing, (B) unless repaid, each Syndicated Eurocurrency Borrowing denominated in Dollars shall be converted to an ABR Borrowing at the end of the Interest Period therefor and (C) no outstanding Syndicated Eurocurrency Borrowing denominated in a Foreign Currency may have an Interest Period of more than one month's duration. 364-Day Credit Agreement -25- SECTION 2.07. Changes of Commitments. (a) Scheduled Termination. Unless previously terminated, subject to Section 2.20, the aggregate amount of the Commitments shall terminate on the Commitment Termination Date. (b) Voluntary Termination or Reduction. The Company may at any time terminate or from time to time reduce the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is $15,000,000 or a larger multiple of $1,000,000 and (ii) the Company shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Syndicated Loans in accordance with Section 2.09, the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans would exceed the total Commitments. (c) Notice of Voluntary Termination or Reduction. The Company shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any such notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Company pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Company may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Company (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. (d) Effect of Termination or Reduction. Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments. (e) Increase of Commitments. (i) Requests for Increase by Company. The Company may at any time, by notice to the Administrative Agent, propose that the aggregate amount of the Commitments hereunder be increased (each such proposed increase being a "Commitment Increase"), effective as of a date (the "Commitment Increase Date") that shall be specified in such notice and that shall be prior to the Commitment Termination Date; provided that (A) the Company may not propose more than one Commitment Increase during any calendar month, (B) the proposed Commitment Increase in respect of the Commitment of either (i) any Increasing Lender or (ii) any Assuming Lender for each Commitment Increase Date shall be in the aggregate amount of $10,000,000 or a multiple of $1,000,000 in excess thereof, provided that the minimum amount of the Commitment of any Assuming Lender shall be $20,000,000, 364-Day Credit Agreement -26- (C) in no event shall the aggregate amount of the Commitments hereunder, and under the 5-Year Credit Agreement, at any time exceed $2,350,000,000, (D) no Default shall have occurred and be continuing on such Commitment Increase Date or shall result from the proposed Commitment Increase, (E) the representations and warranties contained in Article III shall be correct on and as of the Commitment Increase Date as if made on and as of such date, and (F) immediately after giving effect to such Commitment Increase, no Lender shall hold more than 20% of the aggregate amount of the Commitments. The Administrative Agent shall notify the Lenders of a proposed Commitment Increase promptly upon its receipt of any notice from the Company with respect to such proposed Commitment Increase. It shall be in each Lender's sole discretion whether to increase its Commitment hereunder in connection with any proposed Commitment Increase. No later than 10 Business Days (or such longer period as the Company and the Administrative Agent shall agree) after its receipt of the Company's notice proposing a Commitment Increase, each Lender that is willing to increase its Commitment hereunder (each such Lender being an "Increasing Lender") shall deliver to the Administrative Agent a notice in which such Lender shall set forth the maximum increase in its Commitment to which such Lender is willing to agree, and the Administrative Agent shall promptly provide to the Company a copy of such Increasing Lender's notice. (ii) Acceptance of Commitment Increase by Company. If agreement is reached prior to the relevant Commitment Increase Date with any Increasing Lenders and Assuming Lenders, if any, as to a Commitment Increase (the amount of which may be less than (subject to the limitation set forth in clause (i)(B) of this Section 2.07(e)) but not greater than that amount specified in the applicable notice from the Company), the Company shall deliver, no later than three Business Days prior to such Commitment Increase Date, a notice thereof in reasonable detail to the Administrative Agent (and the Administrative Agent shall give notice thereof to the Lenders, including any Assuming Lenders). The Assuming Lenders, if any, shall become Lenders hereunder as of such Commitment Increase Date and the Commitments of any Increasing Lenders and such Assuming Lenders shall be increased as of such Commitment Increase Date; provided that: (x) the Administrative Agent shall have received on or prior to 9:00 a.m., New York City time, on such Commitment Increase Date a certificate of a duly authorized officer of the Company stating that each of the applicable conditions to such Commitment Increase set forth in this Section 2.07(e) has been satisfied; (y) with respect to each Assuming Lender, the Administrative Agent shall have received, on or prior to 9:00 a.m., New York City time, on such Commitment Increase Date, an appropriate Assumption Agreement in substantially the form of Exhibit E, duly executed by such Assuming Lender and the Company and acknowledged by the Administrative Agent; and 364-Day Credit Agreement -27- (z) each Increasing Lender shall have delivered to the Administrative Agent, on or prior to 9:00 a.m., New York City time, on such Commitment Increase Date, confirmation in writing satisfactory to the Administrative Agent as to its increased Commitment, with a copy of such confirmation to the Company. (iii) Recordation into Register. Upon its receipt of confirmation from a Lender that it is increasing its Commitment hereunder, together with the certificate referred to in clause (ii)(x) above, the Administrative Agent shall (A) record the information contained therein in the Register and (B) give prompt notice thereof to the Company. Upon its receipt of an Assumption Agreement executed by an Assuming Lender, together with the certificate referred to in clause (ii)(x) above, the Administrative Agent shall, if such Assumption Agreement has been completed and is in substantially the form of Exhibit E, (x) accept such Assumption Agreement, (y) record the information contained therein in the Register and (z) give prompt notice thereof to the Company. (iv) Adjustments of Borrowings upon Effectiveness of Increase. In the event that the Administrative Agent shall have received notice from the Company as to any agreement with respect to a Commitment Increase on or prior to the relevant Commitment Increase Date and the actions provided for in clauses (ii)(x) through (ii)(z) above shall have occurred by 9:00 a.m., New York City time, on such Commitment Increase Date, the Administrative Agent shall notify the Lenders (including any Assuming Lenders) of the occurrence of such Commitment Increase Date promptly on such date by facsimile transmission or electronic messaging system. On the date of such increase, the Borrowers shall each prepay their respective then outstanding Syndicated Loans (if any) in full, and shall simultaneously borrow new Syndicated Loans hereunder in an amount equal to such prepayment, so that, after giving effect thereto, the Syndicated Loans of the respective Lenders to each Borrower are held ratably by the Lenders in accordance with their respective Commitments (after giving effect to such Commitment Increases). SECTION 2.08. Repayment of Loans; Evidence of Debt. (a) Repayment. Subject to Section 2.19, each Borrower hereby unconditionally promises to pay the Loans as follows: (i) to the Administrative Agent for account of the Lenders the outstanding principal amount of the Syndicated Loans on the Commitment Termination Date, and (ii) to the Administrative Agent for account of the respective Lender the then unpaid principal amount of each Competitive Loan of such Lender on the last day of the Interest Period therefor. (b) Manner of Payment. Prior to any repayment or prepayment of any Borrowings hereunder, the respective Borrower shall select the Borrowing or Borrowings to be paid and shall notify the Administrative Agent by telephone (confirmed by telecopy) of such selection not later than 11:00 a.m., New York City time, three Business Days before the scheduled date of such repayment; provided that each repayment of Borrowings shall be applied to repay any outstanding ABR Borrowings before any other Borrowings. If a Borrower fails to 364-Day Credit Agreement -28- make a timely selection of the Borrowing or Borrowings to be repaid or prepaid, such payment shall be applied, first, to pay any outstanding ABR Borrowings of such Borrower and, second, to other Borrowings of such Borrower in the order of the remaining duration of their respective Interest Periods (the Borrowing with the shortest remaining Interest Period to be repaid first), and for these purposes, Competitive Loans shall be deemed to be in the same Class as Syndicated Loans. Each payment of a Syndicated Borrowing shall be applied ratably to the Loans included in such Borrowing. (c) Maintenance of Loan Accounts by Lenders. Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrowers to such Lender resulting from each Loan made by such Lender, including the amounts and Currency of principal and interest payable and paid to such Lender from time to time hereunder. (d) Maintenance of Loan Accounts by the Administrative Agent. The Administrative Agent shall maintain accounts in which it shall record (i) the amount and Currency of each Loan made hereunder, the Class and Type thereof and each Interest Period therefor, (ii) the amount and Currency of any principal or interest due and payable or to become due and payable from each Borrower to each Lender hereunder and (iii) the amount and Currency of any sum received by the Administrative Agent hereunder for account of the Lenders and each Lender's share thereof. (e) Effect of Entries. The entries made in the accounts maintained pursuant to paragraph (c) or (d) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of a Borrower to repay the Loans in accordance with the terms of this Agreement. (f) Promissory Notes. Any Lender may request that Loans made by it to a Borrower be evidenced by a promissory note. In such event, such Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.09. Prepayment of Loans. (a) Optional Prepayments. Each Borrower shall have the right at any time and from time to time to prepay any Borrowing made to it in whole or in part, subject to the requirements of this Section; provided that no Borrower shall have the right to prepay any Competitive Loan without the prior consent of the Lender thereof. 364-Day Credit Agreement -29- (b) Mandatory Prepayments. (i) Determination of Amount Outstanding. On each Quarterly Date and promptly upon the receipt by the Administrative Agent of a Currency Valuation Notice (as defined below), the Administrative Agent shall determine the sum of the aggregate Revolving Credit Exposure plus the aggregate outstanding principal amount of all Competitive Loans. For the purpose of this determination, the outstanding principal amount of any Loan that is denominated in any Foreign Currency shall be deemed to be the Dollar Equivalent of the amount in the Foreign Currency of such Loan, determined as of such Quarterly Date or, in the case of a Currency Valuation Notice received by the Administrative Agent prior to 11:00 a.m., New York City time, on a Business Day, on such Business Day or, in the case of a Currency Valuation Notice otherwise received, on the first Business Day after such Currency Valuation Notice is received. Upon making such determination, the Administrative Agent shall promptly notify the Lenders and the Company thereof. (ii) Prepayment. If, on the date of such determination such sum exceeds 105% of the aggregate amount of the Commitments as then in effect, the Borrowers shall, if requested by the Required Lenders (through the Administrative Agent), prepay the Syndicated Loans and Competitive Loans in such amounts as shall be necessary so that after giving effect thereto the sum of the aggregate Revolving Credit Exposure plus the aggregate outstanding principal amount of all Competitive Loans does not exceed the Commitments. For purposes hereof, "Currency Valuation Notice" means a notice given by the Required Lenders to the Administrative Agent stating that such notice is a "Currency Valuation Notice" and requesting that the Administrative Agent determine the sum of the aggregate Revolving Credit Exposure plus the aggregate outstanding principal amount of all Competitive Loans. The Administrative Agent shall not be required to make more than one valuation determination pursuant to Currency Valuation Notices within any rolling three month period. Any prepayment pursuant to this paragraph shall be applied, first, to Syndicated Loans outstanding and second, to Competitive Loans outstanding. (c) Notices, Etc. Each Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any optional prepayment to be made by it hereunder (i) in the case of prepayment of a Syndicated Eurocurrency Borrowing or of a Competitive Borrowing, not later than 11:00 a.m., New York City time (or, in the case of a Borrowing denominated in a Foreign Currency, 11:00 a.m., London time), two Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date, the principal amount of each Borrowing or portion thereof to be prepaid and, in the case of a mandatory prepayment, a reasonably detailed calculation of the amount of such prepayment; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.07, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.07. Promptly following receipt of any such notice relating to a Syndicated Borrowing or 364-Day Credit Agreement -30- Competitive Borrowing, the Administrative Agent shall advise the relevant Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of a Borrowing of the same Type as provided in Section 2.02, except as necessary to apply fully the required amount of a mandatory prepayment. Each prepayment of a Syndicated Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.11 and shall be made in the manner specified in Section 2.08(b). SECTION 2.10. Fees. (a) Facility Fee. The Company agrees to pay to the Administrative Agent for account of each Lender a facility fee, which shall accrue at the Applicable Rate on the daily amount of the Commitment of such Lender (whether used or unused) during the period from and including the Effective Date to but excluding the earlier of the date such Commitment terminates and the Commitment Termination Date; provided that, if such Lender continues to have any Revolving Credit Exposure after its Commitment terminates, then such facility fee shall continue to accrue on the daily amount of such Lender's Revolving Credit Exposure from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Revolving Credit Exposure. Accrued facility fees shall be payable on each Quarterly Date and on the earlier of the date the Commitments terminate and the Commitment Termination Date, commencing on the first such date to occur after the date hereof; provided that any facility fees accruing after the date on which the Commitments terminate shall be payable on demand. All facility fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) Administrative Agent Fees. The Company agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Company and the Administrative Agent. (c) Payment of Fees. All fees payable hereunder shall be paid on the dates due, in Dollars and immediately available funds, to the Administrative Agent for distribution, in the case of facility fees, to the Lenders entitled thereto. Fees paid shall not be refundable under any circumstances. SECTION 2.11. Interest. (a) ABR Loans. The Loans constituting each ABR Borrowing shall bear interest at a rate per annum equal to the Alternate Base Rate. (b) Eurocurrency Loans. The Loans constituting each Eurocurrency Borrowing shall bear interest at a rate per annum equal to (i) in the case of a Syndicated Eurocurrency Borrowing, the Adjusted Eurocurrency Rate for the Interest Period for such Borrowing plus the Applicable Rate, or (ii) in the case of a Competitive Eurocurrency Borrowing, the Eurocurrency Rate for the Interest Period for such Borrowing plus (or minus, as applicable) the Margin applicable to such Loan. 364-Day Credit Agreement -31- (c) Fixed Rate Loans. Each Fixed Rate Loan shall bear interest at a rate per annum equal to the Fixed Rate applicable to such Loan. (d) Default Interest. Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by a Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration, by mandatory prepayment or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided above or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section. (e) Payment of Interest. Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Syndicated Loans, upon termination of the Commitments; provided that (i) interest accrued pursuant to paragraph (d) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Loan prior to the Commitment Termination Date), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Syndicated Eurocurrency Borrowing denominated in Dollars prior to the end of the Interest Period therefor, accrued interest on such Borrowing shall be payable on the effective date of such conversion. (f) Computation. All interest hereunder shall be computed on the basis of a year of 360 days, except that (i) interest in respect of Eurocurrency Borrowings denominated in English Pounds Sterling shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and (ii) interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the base rate of Citibank shall be computed on the basis of a year of 365 days (or 366 days in a leap year); interest shall in each case be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted Eurocurrency Rate or Eurocurrency Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.12. Alternate Rate of Interest. If prior to the commencement of the Interest Period for any Eurocurrency Borrowing (the Currency of such Borrowing herein called the "Affected Currency"): (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted Eurocurrency Rate (in the case of a Syndicated Eurocurrency Borrowing) or the Eurocurrency Rate (in the case of a Competitive Eurocurrency Borrowing) for the Affected Currency for such Interest Period; or (b) the Administrative Agent is advised by the Required Lenders (or, in the case of a Competitive Eurocurrency Borrowing, any Lender that is required to make such Loan) that the Adjusted Eurocurrency Rate (in the case of a Syndicated Eurocurrency Borrowing) or the Eurocurrency Rate (in the case of a Competitive Eurocurrency Borrowing) for the Affected Currency for such Interest Period will not adequately and 364-Day Credit Agreement -32- fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrowers and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrowers and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Syndicated Borrowing to, or the continuation of any Syndicated Borrowing as, a Syndicated Eurocurrency Borrowing denominated in the Affected Currency shall be ineffective and, if the Affected Currency is Dollars, such Syndicated Borrowing (unless prepaid) shall be continued as, or converted to, an ABR Borrowing, (ii) if the Affected Currency is Dollars and any Borrowing Request requests a Syndicated Eurocurrency Borrowing denominated in Dollars, such Borrowing shall be made as an ABR Borrowing, (iii) if the Affected Currency is a Foreign Currency, any Borrowing Request that requests a Syndicated Eurocurrency Borrowing denominated in the Affected Currency shall be ineffective and (iv) any request by a Borrower for a Competitive Eurocurrency Borrowing denominated in the Affected Currency shall be ineffective; provided that (A) if the circumstances giving rise to such notice do not affect all the Lenders, then requests by a Borrower for Competitive Eurocurrency Borrowings denominated in the Affected Currency may be made to Lenders that are not affected thereby, and (b) the provisions of this Section shall not apply to any determination of the Adjusted Eurocurrency Rate or the Eurocurrency Rate (as the case may be) for the Interest Period for any Eurocurrency Borrowing if the applicable Eurocurrency Rate is available on the Screen as contemplated by the first sentence of the definition of "Eurocurrency Rate". SECTION 2.13. Increased Costs. (a) Increased Costs Generally. If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted Eurocurrency Rate); or (ii) impose on any Lender or the London interbank market any other condition affecting this Agreement or Eurocurrency Loans or Fixed Rate Loans made by such Lender; and the result of any of the foregoing shall be to increase the cost to such Lenders of making or maintaining any Eurocurrency Loan or Fixed Rate Loan to any Borrower (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then the respective Borrower will pay to such Lender, in Dollars, such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) Capital Requirements. If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of 364-Day Credit Agreement -33- this Agreement or the Loans made by such Lender to a level below that which such Lender or such Lender's holding company could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy), then from time to time the Company will pay to such Lender, in Dollars, such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (c) Certificates from Lenders. A certificate of a Lender setting forth the amount or amounts, in Dollars, necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section, and setting forth calculations of such amount or amounts, shall be delivered to the Company and shall be conclusive absent manifest error. The respective Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Delay in Requests. Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation; provided that no Borrower shall be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than six months prior to the date that such Lender notifies the Company of the Change in Law giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the six-month period referred to above shall be extended to include the period of retroactive effect thereof. (e) Competitive Loans. Notwithstanding the foregoing provisions of this Section, a Lender shall not be entitled to compensation pursuant to this Section in respect of any Competitive Loan if the Change in Law that would otherwise entitle it to such compensation shall have been publicly announced prior to submission of the Competitive Bid pursuant to which such Loan was made. SECTION 2.14. Break Funding Payments. In the event of (a) the payment of any principal of any Eurocurrency Loan or Fixed Rate Loan of any Borrower other than on the last day of an Interest Period therefor (including as a result of an Event of Default), (b) the conversion of any Syndicated Eurocurrency Loan of any Borrower other than on the last day of an Interest Period therefor, (c) the failure to borrow, convert, continue or prepay any Syndicated Loan of any Borrower on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable under Section 2.09(c) and is revoked in accordance herewith), (d) the failure by any Borrower to borrow any Competitive Loan after accepting the Competitive Bid to make such Loan, (e) the assignment of any Syndicated Eurocurrency Loan or Fixed Rate Loan of any Borrower other than on the last day of an Interest Period therefor as a result of a request by the Company pursuant to Section 2.18 or (f) any repayment of all or any portion of any Syndicated Eurocurrency Loan or Fixed Rate Loan other than on the last day of an Interest Period therefor as a result of a request by the Company for a Commitment Increase pursuant to Section 2.07(e) and a resulting adjustment of outstanding Borrowings as between Lenders under paragraph (iv) of said Section, then, in any such event, 364-Day Credit Agreement -34- such Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurocurrency Loan, the loss to any Lender attributable to any such event shall be deemed to include an amount determined by such Lender to be equal to the excess, if any, of (i) the amount of interest that such Lender would pay for a deposit equal to the principal amount of such Loan denominated in the Currency of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the Adjusted Eurocurrency Rate for such Currency (in the case of a Syndicated Eurocurrency Loan) or the Eurocurrency Rate for such Currency (in the case of a Competitive Eurocurrency Loan) for such Interest Period, over (ii) the amount of interest that such Lender would earn on such principal amount for such period if such Lender were to invest such principal amount for such period at the interest rate that would be bid by such Lender (or an affiliate of such Lender) for deposits denominated in such Currency from other banks in the eurocurrency market at the commencement of such period. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Company and shall be conclusive absent manifest error. The respective Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.15. U.S. Taxes. (a) Payments Free of Taxes. Any and all payments by or on account of any obligation of any Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if any Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Borrower shall make such deductions and (iii) such Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) Payment of Other Taxes by the Borrowers. In addition, each Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) Indemnification by the Company. The Company shall indemnify the Administrative Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to 364-Day Credit Agreement -35- the Company by a Lender, or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error. (d) Evidence of Payments. As soon as practicable after any payment of Indemnified Taxes or Other Taxes by any Borrower to a Governmental Authority, such Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Foreign Lenders. Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the United States of America, or any treaty to which the United States of America is a party, with respect to payments under this Agreement by any Borrower shall deliver to the Company (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Company, such properly completed and executed documentation prescribed by applicable law as will permit such payments by such Borrower to be made without withholding or at a reduced rate. SECTION 2.16. Foreign Taxes. (a) Payments to be Made Free and Clear of Foreign Taxes. All payments on account of the principal of and interest on the Loans, fees and all other amounts payable hereunder by any Approved Borrower organized under a Foreign Jurisdiction to or for the account of the Administrative Agent or any Lender, including amounts payable under paragraph (b) of this Section, shall be made free and clear of and without reduction or liability for Foreign Taxes. Such Approved Borrower will pay all Foreign Taxes applicable to it, without charge to or offset against any amount due to the Administrative Agent or any Lender, prior to the date on which penalties attach thereto, except for any such Foreign Taxes (other than Foreign Taxes imposed on or in respect of any amount payable by such Approved Borrower hereunder) the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained, so long as no claim for such Foreign Taxes is made on the Administrative Agent or any Lender. (b) Indemnification by Approved Borrowers. Each Approved Borrower organized under a Foreign Jurisdiction shall indemnify the Administrative Agent and each Lender against, and reimburse the Administrative Agent and each Lender on demand for, any Foreign Taxes applicable to it and any loss, liability, claim or expense, including interest, penalties and legal fees, that the Administrative Agent or such Lender may incur at any time arising out of or in connection with any failure of such Approved Borrower to make any payment of Foreign Taxes when due. (c) Gross-Up for Foreign Taxes. In the event that any Approved Borrower organized under a Foreign Jurisdiction is required by applicable law, decree or regulation to deduct or withhold Foreign Taxes from any amounts payable on, under or in respect of this Agreement or the Loans made to it, such Approved Borrower shall (to the fullest extent permitted by applicable law) promptly pay the Person entitled to such amount such additional amounts as may be required, after the deduction or withholding of Foreign Taxes, to enable such 364-Day Credit Agreement -36- Person to receive from such Approved Borrower on the due date thereof, an amount equal to the full amount stated to be payable to such Person under this Agreement. Each Lender shall provide to such Approved Borrower such forms or certificates as such Approved Borrower may reasonably request to establish such Lender's entitlement to an exemption from or reduction of Foreign Taxes, but no Lender shall be required to provide any form or certificate if it determines in its discretion that the provision of such form or certificate could adversely affect it or it is not legally entitled to provide such form or certificate. (d) Evidence of Payment of Foreign Taxes. Each Approved Borrower organized under a Foreign Jurisdiction shall furnish to the Administrative Agent, upon the request of any Lender (through the Administrative Agent), together with sufficient certified copies for distribution to each Lender requesting the same (identifying the Lenders that have so requested), original official tax receipts (or certified copies thereof) in respect of each payment of Foreign Taxes required under this Section made by such Approved Borrower or such other information, documents and receipts that the Administrative Agent or such Lender may reasonably require to establish to its satisfaction that full and timely payment has been made of all Foreign Taxes required to be paid under this Section within 30 days after the date such payment is made. SECTION 2.17. Payments Generally; Pro Rata Treatment; Sharing of Set-offs. (a) Payments by the Borrowers. Each Borrower shall make each payment required to be made by it hereunder (whether of principal, interest or fees, or under Section 2.13, 2.14, 2.15 or 2.16, or otherwise) prior to 12:00 noon, Local Time, on the date when due, in immediately available funds, without set-off, counterclaim or other deduction. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at the Administrative Agent's Account, except that payments pursuant to Sections 2.13, 2.14, 2.15, 2.16 and 9.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder (including facility fees, payments required under Section 2.13, and payments required under Section 2.14 relating to any Loan denominated in Dollars, but not including principal of, and interest on, any Loan denominated in any Foreign Currency or payments relating to any such Loan required under Section 2.14, which are payable in such Foreign Currency) shall be made in Dollars. Notwithstanding the foregoing, if any Borrower shall fail to pay any principal of any Loan when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), the unpaid portion of such Loan shall, if such Loan is not denominated in Dollars, automatically be redenominated in Dollars on the due date thereof (or, if such due date is a day other than the last day of the Interest Period therefor, on the last day of such Interest Period) in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such principal shall be payable on demand; and if any Borrower shall fail to pay any interest on any Loan that is not denominated in Dollars, such interest shall automatically be redenominated in Dollars on the due 364-Day Credit Agreement -37- date therefor (or, if such due date is a day other than the last day of the Interest Period therefor, on the last day of such Interest Period) in an amount equal to the Dollar Equivalent thereof on the date of such redenomination and such interest shall be payable on demand. (b) Application of Insufficient Payments. If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, to pay principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties. (c) Pro Rata Treatment. Except to the extent otherwise provided herein: (i) each Syndicated Borrowing shall be made from the Lenders, each payment of a facility fee under Section 2.10 shall be made for account of the Lenders, and each termination or reduction of the amount of the Commitments under Section 2.07 shall be applied to the respective Commitments of the Lenders, pro rata according to the amounts of their respective Commitments (or, in the case of payment of facility fees, pro rata according to the amounts of their respective Revolving Credit Exposures); (ii) each Syndicated Borrowing shall be allocated pro rata among the Lenders according to the amounts of their respective Commitments (in the case of the making of Syndicated Loans) or their respective Loans (in the case of conversions and continuations of Loans); (iii) each payment or prepayment of principal of Syndicated Loans by any Borrower shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Syndicated Loans of such Borrower held by them; and (iv) each payment of interest on Syndicated Loans by any Borrower shall be made for account of the Lenders pro rata in accordance with the amounts of interest on such Loans of such Borrower then due and payable to the respective Lenders. (d) Sharing of Payments by Lenders. If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Syndicated Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Syndicated Loans and accrued interest thereon then due than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Syndicated Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Syndicated Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by a Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Company or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). Each Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise 364-Day Credit Agreement -38- against such Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of such Borrower in the amount of such participation. (e) Presumptions of Payment. Unless the Administrative Agent shall have received notice from a Borrower prior to the date on which any payment is due to the Administrative Agent for account of the Lenders hereunder that the respective Borrower will not make such payment, the Administrative Agent may assume that such Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if such Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Federal Funds Effective Rate. (f) Certain Deductions by the Administrative Agent. If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.05(b) or 2.17(e), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.18. Mitigation Obligations; Replacement of Lenders. (a) Designation of a Different Lending Office. If any Lender requests compensation under Section 2.13, or if any Borrower is required to pay any additional amount to any Lender or any Governmental Authority for account of any Lender pursuant to Section 2.15 or 2.16, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.13, 2.15 or 2.16, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. Each Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) Replacement of Lenders. If any Lender requests compensation under Section 2.13, or if any Borrower is required to pay any additional amount to any Lender or any Governmental Authority for account of any Lender pursuant to Section 2.15 or 2.16, or if any Lender defaults in its obligation to fund Loans hereunder, then the Company may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement (other than any outstanding Competitive Loans held by it) to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Company shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall 364-Day Credit Agreement -39- have received payment of an amount equal to the outstanding principal of its Loans (other than Competitive Loans), accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrowers (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.13 or payments required to be made pursuant to Section 2.15 or 2.16, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Company to require such assignment and delegation cease to apply. SECTION 2.19. Term-Out Option. If the Commitment Termination Date shall not have been extended pursuant to the terms of Section 2.20, the Company may, by notice to the Administrative Agent, which shall promptly notify the Lenders, not later than 15 days prior to the Commitment Termination Date, extend the Maturity Date for all Loans (other than any Competitive Loans) outstanding at the close of business on the Commitment Termination Date to the first anniversary of the Commitment Termination Date; provided that such extension shall not be effective unless: (i) no Default shall have occurred and be continuing on each of the date of the notice requesting such extension and on the Commitment Termination Date; and (ii) the representations and warranties of the Company in Part A of Article III (other than the last sentence of Section 3.02) shall be true and complete on and as of each of the date of the notice requesting the such extension and on the Commitment Termination Date with the same force and effect as if made on and as of such date. Upon giving effect to such extension, the Commitments of the Lenders to make Loans shall terminate on the Commitment Termination Date. SECTION 2.20. Extension of Commitment Termination Date. (a) Requests for Extension. The Company may, by notice to the Administrative Agent (which shall promptly notify the Lenders) not earlier than 60 days and not later than 45 days prior to the Commitment Termination Date then in effect hereunder (the "Existing Commitment Termination Date"), request that each Lender extend such Lender's Commitment Termination Date for an additional 364 days from the Existing Commitment Termination Date. (b) Lender Elections to Extend. Each Lender, acting in its sole and individual discretion, shall, by notice to the Administrative Agent given not earlier than 45 days prior to the Existing Commitment Termination Date and not later than the date (the "Notice Date") that is 30 days prior to the Existing Commitment Termination Date, advise the Administrative Agent whether or not such Lender agrees to such extension (and each Lender that determines not to so extend its Commitment Termination Date (a "Non-Extending Lender") shall notify the Administrative Agent (which shall notify the other Lenders) of such fact promptly after such determination (but in any event no later than the Notice Date)) and any Lender that does not so advise the Administrative Agent on or before the Notice Date shall be deemed to be a Non-Extending Lender. The election of any Lender to agree to such extension shall not obligate any other Lender to so agree. The 364-Day Credit Agreement -40- Commitments of each Non-Extending Lender shall be terminated on the Existing Commitment Termination Date unless such Non-Extending Lender is replaced pursuant to paragraph (d) of this Section. (c) Notification by Administrative Agent. The Administrative Agent shall notify the Company of each Lender's determination under this Section 2.20 no later than the date 25 days prior to the Existing Commitment Termination Date (or, if such date is not a Business Day, on the next preceding Business Day). (d) Additional Commitment Lenders. The Company shall have the right on or before the Existing Commitment Termination Date to replace each Non-Extending Lender with, and add as "Lenders" under this Agreement in place thereof, one or more additional lenders (each, an "Additional Commitment Lender") with the approval of the Administrative Agent (which approval shall not be unreasonably withheld), each of which Additional Commitment Lenders shall have entered into an agreement in form and substance satisfactory to the Company and the Administrative Agent pursuant to which such Additional Commitment Lender shall, effective as of the Existing Commitment Termination Date, undertake a Commitment (and, if any such Additional Commitment Lender is already a Lender, its Commitment shall be in addition to such Lender's Commitment hereunder on such date), provided that, notwithstanding the foregoing, the Company may not replace any Non-Extending Lender with an Additional Commitment Lender not already a Lender hereunder unless the Company shall first have offered to the existing Lenders the right to increase their Commitments hereunder to replace the Commitment of the Non-Extending Lender. (e) Minimum Extension Requirement. If (and only if) the total of the Commitments of the Lenders that have agreed so to extend their Commitment Termination Date and the additional Commitments of the Additional Commitment Lenders shall be not less than 51% of the aggregate amount of the Commitments in effect immediately prior to the Existing Commitment Termination Date, then, effective as of the Existing Commitment Termination Date, the Commitment Termination Date of each Lender that has agreed so to extend its Commitment Termination Date and of each Additional Commitment Lender shall be extended to the date falling 364 days after the Existing Commitment Termination Date (except that, if such date is not a Business Day, such Commitment Date as so extended shall be the next preceding Business Day) and each Additional Commitment Lender shall thereupon become a "Lender" for all purposes of this Agreement. (f) Conditions to Effectiveness of Extensions. Notwithstanding the foregoing, the extension of the Commitment Termination Date pursuant to this Section 2.20 shall not be effective unless: (i) no Default or Event of Default shall have occurred and be continuing on the date of such extension and after giving effect thereto; (ii) the representations and warranties contained in this Agreement are true and correct on and as of the date of such extension and after giving effect thereto, as though made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and 364-Day Credit Agreement -41- (iii) on or before the Commitment Termination Date of each Non-Extending Lender, (x) the Company shall have paid in full the principal of and interest on all of the Loans made by such Non-Extending Lender to the Company and to Approved Borrowers hereunder; and (y) the Company shall have paid in full all other amounts owing to such Lender hereunder. ARTICLE III REPRESENTATIONS AND WARRANTIES Representations and Warranties. Each of the Company and the Approved Borrowers, as applicable, represents and warrants to the Lenders that: Part A. Representations and Warranties of the Company. SECTION 3.01. Corporate Existence. Each of the Company and its Material Subsidiaries: (a) is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation (or, in the case of a Material Subsidiary that is not a corporation, is a partnership or other entity duly organized and validly existing under the laws of its jurisdiction of organization); (b) has all requisite legal power, and has all material governmental licenses, authorizations, consents and approvals, necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a Material Adverse Effect. SECTION 3.02. Financial Condition. The consolidated balance sheet of the Company and its Consolidated Subsidiaries as at December 31, 2000 and the related consolidated statements of earnings, cash flow and common shareholders' equity of the Company and its Consolidated Subsidiaries for the fiscal year ended on said date, with the opinion thereon of Arthur Andersen LLP, and the unaudited consolidated balance sheet of the Company and its Consolidated Subsidiaries as at September 30, 2001 and the related consolidated statements of earnings and cash flow of the Company and its Consolidated Subsidiaries for the nine-month period ended on said date, in each case heretofore furnished to each of the Lenders, are complete and correct and fairly present the consolidated financial condition of the Company and its Consolidated Subsidiaries as at said dates and the consolidated results of their operations for the fiscal year, and nine-month period ended on said dates (subject, in the case of such financial statements as at September 30, 2001, to normal year-end audit adjustments), all in accordance with GAAP. Neither the Company nor any of its Material Subsidiaries had on said dates any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said balance sheets as at said dates. Since September 30, 2001, there has been no event or condition that could result in a Material Adverse Effect. SECTION 3.03. Litigation. Except as disclosed to the Lenders in writing prior to the date of this Agreement, the legal or arbitral proceedings, and proceedings by or before any 364-Day Credit Agreement -42- Governmental Authority, now pending or (to the knowledge of the Company) threatened against the Company and/or any of its Material Subsidiaries will not, in the opinion of the General Counsel of the Company, result in imposition of liability or assessment against (including seizure of) property that would result in a Material Adverse Effect. SECTION 3.04. No Breach. None of the execution and delivery of this Agreement, the consummation of the transactions herein contemplated and compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent under, the charter or by-laws of the Company, or any applicable law or regulation, or any order, writ, injunction or decree of any Governmental Authority, or any agreement or instrument to which the Company or any of its Material Subsidiaries is a party or by which any of them is bound or to which any of them is subject, or constitute a default under any such agreement or instrument. SECTION 3.05. Corporate Action of the Company. The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under this Agreement; the execution, delivery and performance by the Company of this Agreement have been duly authorized by all necessary corporate action on its part; and this Agreement has been duly and validly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally. SECTION 3.06. Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority are necessary for the execution, delivery or performance by the Company of this Agreement or for the validity or enforceability thereof. SECTION 3.07. Use of Loans. Neither the Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock and no part of the proceeds of any Loan hereunder will be used to buy or carry, or to extend credit to others to buy or carry, any Margin Stock. SECTION 3.08. ERISA. The Company and the ERISA Affiliates have fulfilled their respective obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or any Plan or Multiemployer Plan (other than to make contributions in the ordinary course of business). SECTION 3.09. Taxes. United States Federal income tax returns of the Company have been examined and closed through the fiscal year of the Company ended December 31, 1994. The Company and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries except for those being contested in good faith and for which adequate reserves have been established in accordance with GAAP. The charges, accruals and reserves on 364-Day Credit Agreement -43- the books of the Company and its Material Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Company, adequate. If the Company is a member of an affiliated group of corporations filing consolidated returns for United States Federal income tax purposes, it is the "common parent" of such group. SECTION 3.10. Investment Company Act. None of the Company or any of the Approved Borrowers is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. SECTION 3.11. Public Utility Holding Company Act. None of the Company or any of the Approved Borrowers is a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 3.12. Credit Agreements. Schedule II is a complete and correct list, as of the date of this Agreement, of each credit agreement, loan agreement, indenture, purchase agreement, guarantee or other arrangement providing for or otherwise relating to any Indebtedness or any extension of credit (or commitment for any extension of credit) to, or guarantee by, the Company or any of its Material Subsidiaries the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $150,000,000 and the aggregate principal or face amount outstanding or which may become outstanding under each such arrangement is correctly described in Schedule II. SECTION 3.13. Hazardous Materials and Environmental Matters. (a) Licenses and Permits, Etc. The Company and each of its Material Subsidiaries have obtained all permits, licenses and other authorizations required under all Environmental Laws, except to the extent failure to have any such permit, license or authorization could not in the aggregate reduce by more than 25% the annual tonnage capacity of the paper processing operations of the Company and its Consolidated Subsidiaries. The Company and each of its Material Subsidiaries are in compliance with the terms and conditions of all such permits, licenses and authorizations, and are also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Environmental Law or in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, except to the extent failure to comply could not in the aggregate reduce by more than 25% the annual tonnage capacity of the paper processing operations of the Company and its Consolidated Subsidiaries. (b) Compliance Review. In the ordinary course of its business, the Company conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Company and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility 364-Day Credit Agreement -44- or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or hazardous substances, and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of this review, the Company has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a Material Adverse Effect. SECTION 3.14. Full Disclosure. The Company has heretofore furnished to each of the Lenders a true copy of (i) the Company's annual report to shareholders for 2000 setting forth consolidated audited financial statements for the year ended December 31, 2000, (ii) the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2001 and (iii) the Company's report on Form 10-K/A, dated as of January 16, 2002, in each case, as filed with the Securities and Exchange Commission. Except as disclosed in writing to the Lenders, the annual, quarterly and other periodic reports most recently delivered to the Lenders pursuant to this Section or Section 3.02 do not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. Part B. Representations and Warranties of the Approved Borrowers. Each Approved Borrower represents and warrants to the Lenders that: SECTION 3.15. Existence of Approved Borrowers. It (a) is duly organized and validly existing under the laws of the jurisdiction of its formation; (b) has all requisite power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a Material Adverse Effect. SECTION 3.16. No Breach. None of the execution and delivery of its Designation Letter, the consummation of the transactions herein contemplated and compliance with the terms and provisions hereof will conflict with or result in a breach of, or require any consent under, the charter or by-laws of such Approved Borrower, or any applicable law or regulation, or any order, writ, injunction or decree of any Governmental Authority, or any agreement or instrument to which such Approved Borrower or any of its Subsidiaries is a party or by which any of them is bound or to which any of them is subject, or constitute a default under any such agreement or instrument. SECTION 3.17. Corporate Action. Such Approved Borrower has all necessary power and authority to execute, deliver and perform its obligations under its Designation Letter and to perform its obligations hereunder; the execution and delivery by such Approved Borrower of its Designation Letter and the performance by such Approved Borrower hereunder and thereunder have been duly authorized by all necessary action on its part; and its Designation Letter when executed and delivered by such Approved Borrower, will constitute, the legal, valid and binding obligation of such Approved Borrower, enforceable in accordance with its terms. SECTION 3.18. Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority are necessary for the execution, 364-Day Credit Agreement -45- delivery or performance by such Approved Borrower of its Designation Letter or for the validity or enforceability thereof. SECTION 3.19. Taxes on Payments of Approved Borrowers. Except as disclosed to the Lenders in writing prior to the delivery of such Approved Borrower's Designation Letter, there is no income, stamp or other tax of any country, or of any taxing authority thereof or therein, imposed by or in the nature of withholding or otherwise, which is imposed on any payment to be made by such Approved Borrower pursuant hereto, or is imposed on or by virtue of the execution, delivery or enforcement of its Designation Letter. ARTICLE IV GUARANTEE SECTION 4.01. Guarantee. The Guarantor hereby guarantees to each Lender and the Administrative Agent and their respective successors and assigns the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the Loans made by the Lenders to any Approved Borrower and all other amounts from time to time owing to the Lenders or the Administrative Agent by any Approved Borrower under this Agreement pursuant to its Designation Letter, in each case strictly in accordance with the terms thereof (such obligations being herein collectively called the "Guaranteed Obligations"). The Guarantor hereby further agrees that if any Approved Borrower shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations, the Guarantor will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. SECTION 4.02. Obligations Unconditional. The obligations of the Guarantor under Section 4.01 are absolute and unconditional irrespective of the value, genuineness, validity, regularity, legality or enforceability of the obligations of any Approved Borrower under this Agreement or any other agreement or instrument referred to herein or therein (including any Designation Letter), or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor (including any immunity, sovereign or otherwise, to which any Approved Borrower may be entitled), it being the intent of this Section that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not affect the liability of the Guarantor hereunder: (i) at any time or from time to time, without notice to the Guarantor, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; 364-Day Credit Agreement -46- (ii) any of the acts mentioned in any of the provisions of this Agreement or any other agreement or instrument referred to herein or therein shall be done or omitted; or (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented, or amended in any respect, or any right under this Agreement or any other agreement or instrument referred to herein or therein shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with. The Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Administrative Agent or any Lender exhaust any right, power or remedy or proceed against any Approved Borrower under this Agreement or any other agreement or instrument referred to herein or therein, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. SECTION 4.03. Reinstatement. The obligations of the Guarantor under this Article IV shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Approved Borrower in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise and the Guarantor agrees that it will indemnify the Administrative Agent and each Lender on demand for all reasonable costs and expenses (including fees of counsel) incurred by the Administrative Agent or such Lender in connection with such rescission or restoration. SECTION 4.04. Subrogation. The Guarantor hereby waives all rights of subrogation or contribution, whether arising by operation of law (including any such right arising under the Bankruptcy Code, as now or hereafter in effect) or otherwise, by reason of any payment by it pursuant to the provisions of this Article IV and further agrees that for the benefit of each of its creditors (including each Lender and the Administrative Agent) that any such payment by it of the Guaranteed Obligations of any Approved Borrower shall constitute a contribution of capital by the Guarantor to such Approved Borrower or, if evidenced by an instrument in form and substance (and containing terms of subordination) satisfactory to the Required Lenders, indebtedness subordinated in right of payment to the principal of and interest (including post-petition interest) on the Loans owing by such Approved Borrower. SECTION 4.05. Remedies. The Guarantor agrees that, as between the Guarantor and the Lenders, the obligations of any Approved Borrower under this Agreement may be declared to be forthwith due and payable as provided in Article VII (and shall be deemed to have become automatically due and payable in the circumstances provided in Article VII) for purposes of Section 4.01 notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against any Approved Borrower and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by such Approved Borrower) shall forthwith become due and payable by the Guarantor for purposes of said Section 4.01. 364-Day Credit Agreement -47- SECTION 4.06. Continuing Guarantee. The guarantee in this Article IV is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. ARTICLE V CONDITIONS SECTION 5.01. Effective Date. The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which the Administrative Agent shall have received each of the following documents, each of which shall be satisfactory to the Administrative Agent (and to the extent specified below, to each Lender) in form and substance (or such condition shall have been waived in accordance with Section 9.02): (a) Executed Counterparts. From each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page to this Agreement) that such party has signed a counterpart of this Agreement. (b) Opinion of Counsel to the Company. A favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of Barbara Smithers, Vice President, Corporate Secretary and counsel for the Company substantially in the form of Exhibit B-1 (and the Company hereby instructs such counsel to deliver such opinion to the Lenders and the Administrative Agent). (c) Opinion of Special New York Counsel to Citibank. An opinion, dated the Effective Date, of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to Citibank, substantially in the form of Exhibit C (and Citibank hereby instructs such counsel to deliver such opinion to the Lenders). (d) Corporate Documents. Such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Company, the authorization of the borrowings hereunder by the Company, and its Guarantee of obligations of the Approved Borrowers, all in form and substance satisfactory to the Administrative Agent and its counsel. (e) Officer's Certificate. A certificate, dated the Effective Date and signed by the President, a Vice President or a senior financial officer of the Company, confirming compliance with the conditions set forth in the lettered clauses of the first sentence of Section 5.03. (f) 1999 and 2001 Credit Agreements. Evidence that the principal of and interest on, and all other amounts owing in respect of (i) the "Loans" (if any) outstanding under the 1999 Credit Agreement shall have been paid in full, and all "Commitments" to make "Loans" thereunder shall have been terminated and (ii) the "Revolving Credit Loans" (if any) outstanding under the 2001 Credit Agreement shall have been paid in full, and all 364-Day Credit Agreement -48- "Commitments" to make "Revolving Credit Loans" thereunder shall have been terminated. (g) Other Documents. Such other documents as the Administrative Agent or any Lender or special New York counsel to Citibank may reasonably request. The effectiveness of the obligations of the Lenders to make Loans hereunder shall also be subject to the conditions precedent that: (i) No Material Adverse Change. Since September 30, 2001, there has been no material adverse change in the consolidated financial condition, operations, business or prospects taken as a whole of the Company and its Subsidiaries from that set forth in the respective financial statements of the Company as at said date (and the Administrative Agent shall have received a certificate to such effect from a senior financial officer of the Company). (ii) Fees. The Company shall have paid such fees as it shall have agreed to pay to any Lender or the Administrative Agent in connection herewith, including the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to Citibank, in connection with the negotiation, preparation, execution and delivery of this Agreement and the Loans hereunder (to the extent that statements for such fees and expenses have been delivered to the Company). The Administrative Agent shall notify the Company and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) on or prior to 3:00 p.m., New York City time, on March 26, 2002 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). SECTION 5.02. Initial Loan to any Approved Borrower. The obligations of the Lenders to make Loans hereunder to any Approved Borrower shall not become effective until the date on which the Administrative Agent shall have received each of the following documents, each of which shall be satisfactory to the Administrative Agent (and to the extent specified below, to each Lender) in form and substance (or such condition shall have been waived in accordance with Section 9.02): (a) Designation Letter. A Designation Letter, duly executed by such Approved Borrower and the Company. (b) Opinion of Counsel to Approved Borrower. A favorable written opinion (addressed to the Administrative Agent and the Lenders) of counsel for such Approved Borrower satisfactory to the Administrative Agent substantially in the form of Exhibit B-2, with such changes therein as the Administrative Agent may request to address matters of foreign law. 364-Day Credit Agreement -49- (c) Corporate Documents. Such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of such Approved Borrower, the authorization of the borrowings hereunder by such Approved Borrower, all in form and substance satisfactory to the Administrative Agent and its counsel. (d) Financial Statements. The financial statements of such Approved Borrower required pursuant to the fourth paragraph of such Approved Borrower's Designation Letter. (e) Other Documents. Such other documents as the Administrative Agent or any Lender or special New York counsel to Citibank may reasonably request. SECTION 5.03. Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) the representations and warranties of the Company in Part A of Article III (other than the last sentence of Section 3.02) shall be true and correct on and as of the date of such Borrowing; (b) in the case of any Borrowing by an Approved Borrower, the representations and warranties of such Approved Borrower in Part B of Article III shall be true and correct on and as of the date of such Borrowing; and (c) at the time of and immediately after giving effect to such Borrowing, no Default shall have occurred and be continuing. Each Borrowing shall be deemed to constitute a representation and warranty by the Company and the respective Borrower on the date thereof as to the matters specified in the preceding sentence. ARTICLE VI COVENANTS OF THE COMPANY The Company agrees that, so long as any of the Commitments are in effect and until payment in full of all Loans hereunder, all interest thereon and all other amounts payable by any Obligor hereunder: Part A. Affirmative Covenants. SECTION 6.01. Financial Statements. The Company shall deliver to the Administrative Agent on behalf of the Lenders (and upon receipt thereof the Administrative Agent shall promptly deliver to the Lenders): (a) as soon as available and in any event within 55 days after the end of each of the first three quarters of each fiscal year of the Company, consolidated statements of 364-Day Credit Agreement -50- earnings and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated balance sheet as at the end of such period, setting forth in each case in comparative form the corresponding consolidated figures for the corresponding period in the preceding fiscal year, accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said financial statements fairly present the consolidated financial condition and results of operations, as the case may be, of the Company and its Consolidated Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within 100 days after the end of each fiscal year of the Company, consolidated statements of earnings, cash flow and common shareholders' equity of the Company and its Consolidated Subsidiaries for such year and the related consolidated balance sheet as at the end of such year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied by an unqualified opinion thereon of Arthur Andersen LLP or any other independent certified public accountants of recognized national standing, which opinion shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries as at the end of, and for, such fiscal year, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default; (c) promptly upon their becoming available, copies of all regular periodic reports which the Company shall have filed with the Securities and Exchange Commission (or any Governmental Authority substituted therefor) or any national securities exchange; (d) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (e) promptly after the Company knows or has reason to know that any Default has occurred, a notice of such Default describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken and proposes to take with respect thereto; (f) as soon as available and in any event within 100 days after the end of each fiscal year of each Approved Borrower, statements of earnings, cash flow and common shareholders' equity (if any) of such Approved Borrower for such year and the related balance sheet as at the end of such year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said financial statements fairly present the financial condition and results of operations of such Approved Borrower in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such fiscal year; and 364-Day Credit Agreement -51- (g) from time to time such other information regarding the business, affairs or financial condition of the Company or any of its Material Subsidiaries (including any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as the Administrative Agent may reasonably request (on its own behalf or on behalf of any Lender). The Company will furnish to the Administrative Agent, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate of a senior financial officer of the Company (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken and proposes to take with respect thereto) and (ii) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 6.08 and 6.09 as of the end of the respective quarterly fiscal period or fiscal year. SECTION 6.02. Litigation. The Company will promptly give to the Administrative Agent (and upon receipt thereof the Administrative Agent shall promptly give to the Lenders) notice of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting the Company or any of its Material Subsidiaries, except any proceeding which, if adversely determined, would not have a Material Adverse Effect. SECTION 6.03. Corporate Existence, Etc. The Company will, and will cause each of its Material Subsidiaries to: preserve and maintain its legal existence and all of its material rights, privileges and franchises (provided that nothing in this Section shall prohibit any transaction expressly permitted under Section 6.06); comply with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority if failure to comply with such requirements (i) will in the opinion of the General Counsel of the Company result in imposition of liability or assessment against (including seizure of) property in an aggregate amount (as to all such failures to comply) exceeding 10% of Consolidated Net Worth or (ii) could in the aggregate (as to all such failures to comply) reduce by more than 25% the annual tonnage capacity of the paper processing operations of the Company and its Consolidated Subsidiaries; pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; maintain all of its properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; provided, however, that the Company or any Subsidiary of the Company may discontinue the maintenance of a property if such discontinuance is, in the opinion of the Company, desirable in the conduct of its business and is not likely to have a Material Adverse Effect; and upon reasonable advance notice, permit representatives of any Lender or the Administrative Agent, during normal business hours, to examine, copy and make extracts from its books and records, to inspect its properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Lender or the Administrative Agent. 364-Day Credit Agreement -52- SECTION 6.04. Insurance. The Company will maintain, and will cause each of its Subsidiaries to maintain, insurance underwritten by financially sound and reputable insurers, or self insurance (in accordance with normal industry practice) in such amounts and against such risks as ordinarily is carried or maintained by owners of like businesses and properties in similar circumstances. SECTION 6.05. Use of Proceeds. The Company will, and will cause each Approved Borrower to, use the proceeds of the Loans made to it hereunder solely for its general corporate purposes (in compliance with all applicable legal and regulatory requirements), including acquisition financing and commercial paper liquidity; provided that neither the Administrative Agent nor any Lender shall have any responsibility as to the use of any of such proceeds. Part B. Negative Covenants. SECTION 6.06. Prohibition of Fundamental Changes. The Company will not, nor will it permit any of its Material Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). The Company will not, and will not permit any of its Material Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or a substantial part of its business or assets, whether now owned or hereafter acquired (excluding any inventory or other assets sold or disposed of in the ordinary course of business). Notwithstanding the foregoing provisions of this Section: (a) any Subsidiary of the Company may be merged or consolidated with or into: (i) the Company if the Company shall be the continuing or surviving corporation or (ii) any other Subsidiary; provided that if any such transaction shall be between a Subsidiary and a Wholly Owned Subsidiary, the Wholly Owned Subsidiary shall be the continuing or surviving corporation; (b) any Subsidiary of the Company may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Company or a Wholly Owned Subsidiary of the Company; (c) the Company or any Subsidiary of the Company may merge or consolidate with any other Person if (i) in the case of a merger or consolidation of the Company, any successor entity (if other than Company) assumes, in a manner satisfactory to the Administrative Agent, all of the Company's obligations under this Agreement (and, in that connection, delivers to the Administrative Agent such evidence of corporate authorization and opinions of counsel as are consistent with those delivered by the Company pursuant to Section 5.01 on the Effective Date and are reasonably requested by the Administrative Agent) and, in the case of a merger or consolidation of any Subsidiary, the surviving corporation is a Wholly Owned Subsidiary of the Company and (ii) after giving effect thereto no Default would exist hereunder; and (d) in addition to the dispositions permitted pursuant to clauses (a) through (c) of this Section, the Company or any Subsidiary of the Company may sell or otherwise 364-Day Credit Agreement -53- dispose of (i) assets (including by merger or consolidation) if, after giving effect to any such sale or disposition, the book value of such assets, together with the aggregate book value of the assets so sold or disposed of since September 30, 2001, does not exceed 20% of Total Assets at September 30, 2001 and (ii) the assets specified on Schedule V. SECTION 6.07. Limitation on Liens. The Company will not, nor will it permit any of its Material Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except: (a) Liens imposed by any Governmental Authority for taxes, assessments or charges not yet due or which are being contested in good faith and by appropriate proceedings if, unless the amount thereof is not material with respect to it or its financial condition, adequate reserves with respect thereto are maintained on the books of the Company or any of its Material Subsidiaries, as the case may be, in accordance with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings; (c) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of property or minor imperfections in title thereto which, in the aggregate, are not material in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Material Subsidiaries; (f) Liens on assets of Persons that become Subsidiaries of the Company after the date of this Agreement, provided that such Liens are in existence at the time the respective Persons become Subsidiaries of the Company and were not created in anticipation thereof; (g) Liens upon real and/or tangible personal property acquired after the date hereof (by purchase, construction or otherwise) by the Company or any of its Material Subsidiaries, each of which Liens either (A) existed on such property before the time of its acquisition and was not created in anticipation thereof, or (B) was created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including the cost of construction) of the respective property; provided 364-Day Credit Agreement -54- in the case of clause (B) that such Lien attaches to such asset within 270 days after the acquisition or completion of construction and commencement of full operations thereof; provided further that no such Lien shall extend to or cover any property of the Company or such Material Subsidiary other than the respective property so acquired and improvements thereon; and provided further, that the principal amount of Indebtedness secured by any such Lien shall at no time exceed 95% of the fair market value (as determined in good faith by a senior financial officer of the Company) of the respective property at the time it was acquired (by purchase, construction or otherwise); (h) Liens on assets consisting of a capital project and rights related thereto ("Project Assets") securing Indebtedness incurred to finance the acquisition, construction or development of such Project Assets; provided that (x) such Indebtedness is non-recourse to any other assets; (y) the aggregate principal amount of Indebtedness secured by Liens permitted by this paragraph (h) may at no time exceed $200,000,000 and (z) such Liens attach to such Project Assets within two years after the initial acquisition or completion of construction or development of such Project Assets; (i) Liens upon real and/or personal property of the Company or any Material Subsidiary of the Company in favor of the United States of America or any State thereof, any department, agency or instrumentality or political subdivision of the United States or any State thereof, or any bonding authority (including any authority established for the issuance of industrial revenue bonds or similar instruments) to secure partial, progress, or advance or other payments pursuant to any contract or statute or to secure Indebtedness (including, but not limited to, industrial revenue bonds and similar instruments) incurred for the purpose of refinancing all or any part of the purchase price or cost of constructing or improving such property; (j) Liens on accounts receivable and related contract rights, letters of credit, accounts and similar assets arising in connection with any securitization transaction, and Liens on promissory notes, regulatory and any other related assets in connection with any financing transaction, in each case whether denominated as sales or borrowings; (k) Liens granted to provide security in substitution for collateral presently securing existing Indebtedness, so long as such substitute collateral does not cover any property other than the property securing such existing Indebtedness; (l) Liens securing judgments up to $200,000,000 for the payment of money in an amount not resulting (whether immediately or with the passage of time) in an Event of Default under subsection (h) of Article VII; (m) Liens in existence on the date hereof and listed on Schedule VI; (n) additional Liens upon property, assets or revenues created after the date hereof, provided that the aggregate outstanding Indebtedness secured thereby and incurred on and after the date hereof shall not at any time exceed 10% of Tangible Assets; and (o) any extension, renewal or replacement of the foregoing, provided, however, 364-Day Credit Agreement -55- that the Liens permitted hereunder shall not be spread to cover any additional Indebtedness or property (other than a substitution of like property); and provided further that the sale, mortgage or other transfer of timber in connection with an arrangement under which the Company or any of its Subsidiaries is obligated to cut such timber (or any portion thereof) in order to provide the transferee with a specified amount of money (however determined) shall not be deemed to create Indebtedness secured by a Lien hereunder. SECTION 6.08. Total Debt to Total Capital Ratio. The Company will not at any time permit the ratio of Total Debt to Total Capital to exceed 0.60 to 1. SECTION 6.09. Minimum Consolidated Net Worth. The Company will not at any time permit Consolidated Net Worth to be less than $9,000,000,000. ARTICLE VII EVENTS OF DEFAULT If one or more of the following events (herein called "Events of Default") shall occur and be continuing: (a) Any Borrower shall default in the payment when due of any principal of any Loan; or any Borrower shall default in the payment when due of any interest on any Loan or any other amount payable by it hereunder and such default shall continue unremedied for five or more Business Days; or (b) Any event specified in any note, agreement, indenture or other document evidencing or relating to any Indebtedness (other than (i) Indebtedness hereunder, (ii) Project Indebtedness, or (iii) Indebtedness owed by any Material Subsidiary to the Company) of the Company or any of its Material Subsidiaries aggregating $200,000,000 or more shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase or otherwise), prior to its stated maturity; or (c) Any representation, warranty or certification made or deemed made herein or in any Designation Letter (or in any modification or supplement hereto or thereto) by any Obligor, or any certificate furnished to any Lender or the Administrative Agent pursuant to the provisions hereof or of any Designation Letter (or thereof), shall prove to have been false or misleading in any material respect as of the time made or furnished; or (d) The Company shall default in the performance of any of its obligations under any of Sections 6.06, 6.07, 6.08 or 6.09; or any Obligor shall default in the performance of any of its other obligations in this Agreement and such default shall continue unremedied for a period of thirty days after notice thereof to such Obligor (through 364-Day Credit Agreement -56- notification to the Company) by the Administrative Agent or any Lender (through the Administrative Agent); or (e) The Company or any of its Material Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) The Company or any of its Material Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code (as now or hereafter in effect), (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) A proceeding or case shall be commenced, without the application or consent of the Company or any of its Material Subsidiaries, in any court of competent jurisdiction, seeking (i) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of the Company or such Material Subsidiary or of all or any substantial part of its assets, or (iii) similar relief in respect of the Company or such Material Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 90 or more days; or an order for relief against the Company or such Material Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (h) A final judgment or judgments for the payment of money in excess of $200,000,000 in the aggregate shall be rendered by a court or courts against the Company and/or any of its Material Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company or the relevant Material Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (i) An event or condition shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall be reasonably likely in the opinion of the General Counsel of the Company to incur a liability to a Plan, a Multiemployer Plan or PBGC (or any combination of the foregoing) which is in excess of 10% of Consolidated Net Worth; or 364-Day Credit Agreement -57- (j) Any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended, it being agreed that an employee of the Company or any Consolidated Subsidiary for whom shares are held under an employee stock ownership, employee retirement, employee savings or similar plan and whose shares are voted in accordance with the instructions of such employee shall not be a member of a group of persons within the meaning of said Section 13 or 14 solely because such employee's shares are held by a trustee under said plan) shall acquire, directly or indirectly, beneficial ownership (within the meaning of Rule 13d-3 promulgated by the SEC under said Act, as amended) of 20% or more of the outstanding shares of stock of the Company having by the terms thereof ordinary voting power to elect (whether immediately or ultimately) a majority of the board of directors of the Company (irrespective of whether or not at the time stock of any other class or classes of stock of the Company shall have or might have voting power by reason of the happening of any contingency); or (k) During any period of 24 consecutive calendar months, a majority of the Board of Directors of the Company shall no longer be composed of individuals (i) who were members of said Board on the first day of such period or (ii) whose election or nomination to said Board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of said Board; THEREUPON: (1) in the case of an Event of Default other than one referred to in clause (f) or (g) of this Article VII with respect to any Obligor, (a) the Administrative Agent may and, upon request of the Required Lenders, shall, by notice to the Company, cancel the Commitments and they shall thereupon terminate, and (b) the Administrative Agent may and, upon request of Lenders holding more than 50% of the aggregate unpaid principal amount of the Loans (including Competitive Loans) shall, by notice to the Company, declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Obligors hereunder (including any amounts payable under Section 2.14) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by each Obligor; and (2) in the case of the occurrence of an Event of Default referred to in clause (f) or (g) of this Article VII with respect to any Obligor, the Commitments shall automatically be canceled and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Obligors hereunder (including any amounts payable under Section 2.14) shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by each Obligor. ARTICLE VIII THE ADMINISTRATIVE AGENT Each of the Lenders hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise 364-Day Credit Agreement -58- such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such Person and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Company or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder. The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing by the Required Lenders, and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Company or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders or in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Company or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article V or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Company), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and 364-Day Credit Agreement -59- exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. The Administrative Agent may resign at any time by notifying the Lenders and the Company. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Company, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent's resignation shall nonetheless become effective and (1) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and (2) the Required Lenders shall perform the duties of the Administrative Agent (and all payments and communications provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender directly) until such time as the Required Lenders appoint a successor agent as provided for above in this paragraph. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder (if not already discharged therefrom as provided above in this paragraph). The fees payable by the Company to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Company and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article VIII and Section 9.03 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. 364-Day Credit Agreement -60- ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Company, to it at Office of the Assistant Treasurer - Domestic, International Paper Company, 400 Atlantic Street, Stamford, Connecticut 06921, Attention: Rosemarie A. Loffredo (Telecopy No. (203) 541-8263; Telephone No. (203) 541-8584); (b) if to the Administrative Agent, to Citibank, Two Penn's Way, Suite 200, New Castle, Delaware 19720, Attention of Jason Trala (Telecopy No. (302) 894-6120; Telephone No. (302) 894-6086); and (c) if to a Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto (or, in the case of any such change by a Lender, by notice to the Company and the Administrative Agent). All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. Each Approved Borrower hereby agrees that any notice or other communication provided for herein to be given by or to such Approved Borrower may be given by or to the Company on behalf of such Approved Borrower in the manner specified above and neither the Administrative Agent nor any Lender shall be required to accept as effective any notice or other communication purporting to have been issued directly by an Approved Borrower (and not by the Company on behalf of such Approved Borrower). SECTION 9.02. Waivers; Amendments. (a) No Deemed Waivers; Remedies Cumulative. No failure or delay by the Administrative Agent or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by any Obligor therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a 364-Day Credit Agreement -61- waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time. (b) Amendments. Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by each Obligor and the Required Lenders or by each Obligor and the Administrative Agent with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) alter the manner in which payments or prepayments of principal, interest or other amounts hereunder shall be applied as among the Lenders or Types or Classes of Loans, without the written consent of each Lender, or (v) change any of the provisions of this Section or the percentage in the definition of the term "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder or release the Guarantor's obligations in respect of any Approved Borrower, without the written consent of each Lender; and provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) Costs and Expenses. The Company shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent, or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made hereunder, including in connection with any workout, restructuring or negotiations in respect thereof. 364-Day Credit Agreement -62- (b) Indemnification by the Company. The Company shall indemnify the Administrative Agent and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the transactions contemplated hereby, (ii) any Loan or the use of the proceeds therefrom, (iii) any actual or alleged presence or release of hazardous materials on or from any property owned or operated by the Company or any of its Subsidiaries, or any environmental liability related in any way to the Company or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) Reimbursement by Lenders. To the extent that the Company fails to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent in its capacity as such. (d) Waiver of Consequential Damages, Etc. To the extent permitted by applicable law, no Obligor shall assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the transactions contemplated hereby, any Loan or the use of the proceeds thereof. (e) Payments. All amounts due under this Section shall be payable promptly after written demand therefor. SECTION 9.04. Successors and Assigns. (a) Assignments Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Obligor may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by any Obligor without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. 364-Day Credit Agreement -63- (b) Assignments by Lenders. Any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment to a Lender or an Affiliate of a Lender, each of the Company and the Administrative Agent must give their prior written consent to such assignment (which consent shall not be unreasonably withheld or delayed), (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall be not less than $10,000,000 or a larger multiple of $1,000,000 unless each of the Company and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement, except that this clause (iii) shall not apply to rights in respect of outstanding Competitive Loans, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500 (provided that no Borrower shall be obligated to pay any such fee upon any such assignment), and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; provided further that any consent of the Company otherwise required under this paragraph shall not be required if an Event of Default under clause (a), (f) or (g) of Article VII has occurred and is continuing. Upon acceptance and recording pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.13, 2.14, 2.15, 2.16 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Bank") may grant to a special purpose funding vehicle (an "SPC"), identified as such in writing from time to time by the Granting Bank to the Administrative Agent and the Company, the option to provide to the Borrowers all or any part of any Loan that such Granting 364-Day Credit Agreement -64- Bank would otherwise be obligated to make to the Borrowers pursuant to this Agreement; provided, that (i) nothing herein shall constitute a commitment by any SPC to make any Loan and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Bank shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Bank to the same extent, and as if, such Loan were made by such Granting Bank. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Bank). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 9.04, any SPC may (i) with notice to, but without the prior written consent of, the Company and the Administrative Agent and without paying any processing fee therefor, (x) assign all or any portion of its interest in any Loans to the Granting Bank and (y) pledge all or a portion of its interests in any Loans to the Granting Bank or to any financial institutions (consented to by the Company and Administrative Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Loans (and assign to the Granting Bank and to any such financial institution any such Loans upon a realization in respect of such pledge or in connection with the performance by such financial institution of its liquidity or credit support obligations) and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC, subject to the requirements of Section 9.12(b)(vi). (c) Maintenance of Register by the Administrative Agent. The Administrative Agent, acting for this purpose as an agent of the Borrowers, shall maintain at one of its offices in New York City a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrowers, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by any Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Effectiveness of Assignments. Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information 364-Day Credit Agreement -65- contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Participations. Any Lender may, without the consent of any Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the respective Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, each Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.13, 2.14, 2.15 and 2.16 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. (f) Limitations on Rights of Participants. A Participant shall not be entitled to receive any greater payment under Section 2.13, 2.15 or 2.16 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the respective Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.15 unless the Borrowers are notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrowers, to comply with Section 2.15(e) as though it were a Lender. (g) Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any such pledge or assignment to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto. (h) No Assignments to the Borrowers or Affiliates. Anything in this Section to the contrary notwithstanding, no Lender may assign or participate any interest in any Loan held by it hereunder to any Borrower or any of its Affiliates or Subsidiaries without the prior consent of each Lender. SECTION 9.05. Survival. All covenants, agreements, representations and warranties made by any Obligor herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans, regardless of any investigation made by any such other party or on its 364-Day Credit Agreement -66- behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.13, 2.14, 2.15, 2.16 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof. SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract between and among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 5.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page to this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.07. Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of any Obligor against any of and all the obligations of such Obligor now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.09. Governing Law; Jurisdiction; Etc. (a) Governing Law. This Agreement and each Designation Letter shall be construed in accordance with and governed by the law of the State of New York. (b) Submission to Jurisdiction. Each Obligor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the 364-Day Credit Agreement -67- Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against any Obligor or its properties in the courts of any jurisdiction. (c) Waiver of Venue. Each Obligor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Service of Process. Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01 (and for such purpose, each Approved Borrower hereby irrevocably appoints the Company as its authorized agent to accept such service of process in New York with respect to this Agreement and its Designation Letter). Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.10. Waiver Of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. 364-Day Credit Agreement -68- SECTION 9.12. Treatment of Certain Information; Confidentiality. (a) Treatment of Certain Information. Each Obligor acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to the Company or one or more of its Subsidiaries (in connection with this Agreement or otherwise) by any Lender or by one or more subsidiaries or affiliates of such Lender and each Obligor hereby authorizes each Lender to share any information delivered to such Lender by the Company and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Lender to enter into this Agreement, to any such subsidiary or affiliate, it being understood that any such subsidiary or affiliate receiving such information shall be bound by the provisions of paragraph (b) of this Section as if it were a Lender hereunder. Such authorization shall survive the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof. (b) Confidentiality. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (i) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (ii) to the extent requested by any regulatory authority, (iii) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (iv) to any other party to this Agreement, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (vi) subject to an agreement containing provisions substantially the same as those of this paragraph, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (vii) with the consent of the Company or (viii) to the extent such Information (A) becomes publicly available other than as a result of a breach of this paragraph or (B) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Company. For the purposes of this paragraph, "Information" means all information received from any Obligor relating to the Company or any of its Subsidiaries (or their business), other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by such Obligor; provided that, in the case of information received from an Obligor after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. SECTION 9.13. European Monetary Union. (a) Definitions. As used herein, the following terms shall have the following meanings: "EMU" means economic and monetary union as contemplated in the Treaty on European Union. 364-Day Credit Agreement -69- "EMU Legislation" means legislative measures of the European Council for the introduction of, changeover to or operation of a single or unified European currency (whether known as the euro or otherwise), being in part the implementation of the third stage of EMU. "Euros" means the single currency of Participating Member States of the European Union, which shall be an Agreed Foreign Currency and a Foreign Currency under this Agreement. "National Currency" means the Currency, other than the Euro, of a Participating Member State. "Participating Member State" means each state so described in any EMU Legislation. "Target Operating Day" means any day that is not (i) a Saturday or Sunday, (ii) Christmas Day or New Year's Day or (iii) any other day on which the Trans-European Real-time Gross Settlement Operating System (or any successor settlement system) is not operating (as determined by the Administrative Agent). "Treaty on European Union" means the Treaty of Rome of March 25, 1957, as amended by the Single European Act 1986 and the Maastricht Treaty (which was signed at Maastricht on February 7, 1992, and came into force on November 1, 1993), as amended from time to time. (b) Effectiveness of Provisions. The provisions of paragraphs (c) through (h) of this Section shall be effective on the date hereof, provided that, if and to the extent that any such provision relates to any state (or the Currency of such state) that is not a Participating Member State on the date hereof, such provision shall become effective in relation to such state (and such Currency) at and from the date on which such state becomes a Participating Member State. (c) Redenomination and Alternative Currencies. Each obligation under this Agreement of a party to this Agreement which has been denominated in the National Currency of a state that is not a Participating Member State on the date hereof shall, effective upon the date on which such state becomes a Participating Member State, be redenominated in Euros in accordance with EMU Legislation; provided that, if and to the extent that any EMU Legislation provides that an amount denominated either in Euros or in the National Currency of a Participating Member State and payable within the Participating Member State by crediting an account of the creditor can be paid by the debtor either in Euros or in such National Currency, any party to this Agreement shall be entitled to pay or repay any such amount either in Euros or in such National Currency. (d) Payments by the Administrative Agent Generally. With respect to the payment of any amount denominated in Euros or in a National Currency, the Administrative Agent shall not be liable to any Borrower or any of the Lenders in any way whatsoever for any delay, or the consequences of any delay, in the crediting to any account of any amount required by this Agreement to be paid by the Administrative Agent if the Administrative Agent shall have 364-Day Credit Agreement -70- taken all relevant steps to achieve, on the date required by this Agreement, the payment of such amount in immediately available, freely transferable, cleared funds (in Euros or in such National Currency, as the case may be) to the account of any Lender in the Principal Financial Center in the Participating Member State which such Borrower or such Lender, as the case may be, shall have specified for such purpose. For the purposes of this paragraph, "all relevant steps" means all such steps as may be prescribed from time to time by the regulations or operating procedures of such clearing or settlement system as the Administrative Agent may from time to time determine for the purpose of clearing or settling payments in Euros or such National Currency. (e) Certain Rate Determinations. For the purposes of determining the date on which the Eurocurrency Rate is determined under this Agreement for the Interest Period for any Borrowing denominated in Euros (or in any National Currency), references in this Agreement to Business Days shall be deemed to be references to Target Operating Days. In addition, if the Administrative Agent determines, with respect to the Interest Period for any Borrowing denominated in a National Currency, that there is no IBOR displayed on the Screen for deposits denominated in such National Currency, the Eurocurrency Rate for such Interest Period shall be based upon IBOR displayed on the Screen for the offering of deposits denominated in Euros. (f) Basis of Accrual. If the basis of accrual of interest or fees expressed in this Agreement with respect to the Currency of any state that becomes a Participating Member State shall be inconsistent with any convention or practice in the interbank market for the basis of accrual of interest or fees in respect of the Euro, such convention or practice shall replace such expressed basis effective as of and from the date on which such state becomes a Participating Member State; provided that, with respect to any Borrowing denominated in such Currency that is outstanding immediately prior to such date, such replacement shall take effect at the end of the Interest Period therefor. (g) Rounding. Without prejudice and in addition to any method of conversion or rounding prescribed by the EMU Legislation, each reference in this Agreement to a minimum amount, or to a multiple of a specified amount, in a National Currency to be paid to or by the Administrative Agent shall be replaced by a reference to such reasonably comparable and convenient amount, or to a multiple of such reasonably comparable and convenient amount, in Euros as the Administrative Agent may from time to time reasonably specify. (h) Other Consequential Changes. Without prejudice to the respective liabilities of any Borrower to the Lenders and the Lenders to any Borrower under or pursuant to this Agreement, except as expressly provided in this Section, each provision of this Agreement shall be subject to such reasonable changes of construction as the Administrative Agent may from time to time reasonably specify to be necessary or appropriate to reflect the introduction of or changeover to the Euro in Participating Member States. SECTION 9.14. Judgment Currency. This is an international loan transaction in which the specification of Dollars or any Foreign Currency, as the case may be (the "Specified Currency"), and payment in New York City or the country of the Specified Currency, as the case may be (the "Specified Place"), is of the essence, and the Specified Currency shall be the currency of account in all events relating to Loans denominated in the Specified Currency. The payment obligations of the Obligors under this Agreement shall not be discharged or satisfied by 364-Day Credit Agreement -71- an amount paid in another currency or in another place, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on conversion to the Specified Currency and transfer to the Specified Place under normal banking procedures does not yield the amount of the Specified Currency at the Specified Place due hereunder. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due hereunder in the Specified Currency into another currency (the "Second Currency"), the rate of exchange that shall be applied shall be the rate at which in accordance with normal banking procedures the Administrative Agent could purchase the Specified Currency with the Second Currency on the Business Day next preceding the day on which such judgment is rendered. The obligation of any Borrower in respect of any such sum due from it to the Administrative Agent or any Lender hereunder (in this Section called an "Entitled Person") shall, notwithstanding the rate of exchange actually applied in rendering such judgment, be discharged only to the extent that on the Business Day following receipt by such Entitled Person of any sum adjudged to be due hereunder in the Second Currency such Entitled Person may in accordance with normal banking procedures purchase and transfer to the Specified Place the Specified Currency with the amount of the Second Currency so adjudged to be due; and such Obligor hereby, as a separate obligation and notwithstanding any such judgment, agrees to indemnify such Entitled Person against, and to pay such Entitled Person on demand, in the Specified Currency, the amount (if any) by which the sum originally due to such Entitled Person in the Specified Currency hereunder exceeds the amount of the Specified Currency so purchased and transferred. 364-Day Credit Agreement -72- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. INTERNATIONAL PAPER COMPANY By /s/ Rosemarie A. Loffredo -------------------------------------- Name: Rosemarie A. Loffredo Title: Assistant Treasurer - Domestic LENDERS CITIBANK, N.A., individually and as Administrative Agent By /s/ P.M. Chonkar -------------------------------------- Name: P.M. Chonkar Title: Managing Director BANK OF AMERICA, N.A. By: /s/ Michael Balok -------------------------------------- Name: Michael Balok Title: Managing Director BNP PARIBAS By: /s/ Bruno Lavole -------------------------------------- Name: Bruno Lavole Title: Managing Director By: /s/ Christopher Criswell -------------------------------------- Name: Christopher Criswell Title: Managing Director 364-Day Credit Agreement DEUTSCHE BANK AG NEW YORK BRANCH By: /s/ Hans-Josef Thiele -------------------------------------- Name: Hans-Josef Thiele Title: Director By: /s/ Christian Dallwitz -------------------------------------- Name: Christian Dallwitz Title: Vice President JPMORGAN CHASE BANK By: /s/ Peter S. Predun -------------------------------------- Name: Peter S. Predun Title: Vice President BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: /s/ Pamela Donnelly -------------------------------------- Name: Pamela Donnelly Title: Vice President ABN AMRO BANK N.V. By: /s/ Richard Schrage -------------------------------------- Name: Richard Schrage Title: Vice President By: /s/ Dean P. Giglio -------------------------------------- Name: Dean P. Giglio Title: Vice President 364-Day Credit Agreement WESTDEUTSCHE LANDESBANK GIROZENTRALE By: /s/ Felicia La Forgia -------------------------------------- Name: Felicia La Forgia Title: Vice President By: /s/ Walter T. Duffy III -------------------------------------- Name: Walter T. Duffy III Title: Associate Director THE BANK OF NEW YORK By: /s/ Eliza S. Adams -------------------------------------- Name: Eliza S. Adams Title: Vice President ING (U.S.) CAPITAL LLC By: /s/ John Kippax -------------------------------------- Name: John Kippax Title: Managing Director BANK ONE, NA (Main Office Chicago) By: /s/ Jeffrey Lubatkin -------------------------------------- Name: Jeffrey Lubatkin Title: Director 364-Day Credit Agreement COMMERZBANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Robert J. Donohue -------------------------------------- Name: Robert J. Donohue Title: Senior Vice President By: /s/ Peter Doyle -------------------------------------- Name: Peter Doyle Title: Vice President CREDIT SUISSE FIRST BOSTON, CAYMAN ISLANDS BRANCH By: /s/ David W. Kratovil -------------------------------------- Name: David W. Kratovil Title: Director By: /s/ Jay Chall -------------------------------------- Name: Jay Chall Title: Director FORTIS (USA) FINANCE LLC By: /s/ E. Matthews -------------------------------------- Name: E. Matthews Title: Senior Vice President By: /s/ Eugene Oliva -------------------------------------- Name: Eugene Oliva Title: Senior Vice President 364-Day Credit Agreement MELLON BANK, N.A. By: /s/ Leonard M. Karpen, Jr. -------------------------------------- Name: Leonard M. Karpen, Jr. Title: Vice President MERRILL LYNCH BANK USA By: /s/ D. Kevin Imlay -------------------------------------- Name: D. Kevin Imlay Title: Senior Lending Officer THE DAI-ICHI KANGYO BANK, LTD By: /s/ Ricky Simmons -------------------------------------- Name: Ricky Simmons Title: Vice President UBS AG By: /s/ Wilfred V. Saint -------------------------------------- Name: Wilfred V. Saint Title: Associate Director Banking Products Services, US By: /s/ Jennifer L. Poccia -------------------------------------- Name: Jennifer L. Poccia Title: Associate Director Banking Products Services, US 364-Day Credit Agreement THE UFJ BANK, LIMITED By: /s/ Hideo Uenishi -------------------------------------- Name: Hideo Uenishi Title: Vice President PNC BANK, NATIONAL ASSOCIATION By: /s/ Michael Nardo -------------------------------------- Name: Michael Nardo Title: Managing Director NORDDEUTSCHE LANDESBANK GIROZENTRALE By: /s/ Stephen K. Hunter -------------------------------------- Name: Stephen K. Hunter Title: Senior Vice President By: /s/ Josef Haas -------------------------------------- Name: Josef Haas Title: Vice President SUMITOMO MITSUI BANKING CORPORATION By: /s/ Edward D. Henderson, Jr. -------------------------------------- Name: Edward D. Henderson, Jr. Title: Senior Vice President 364-Day Credit Agreement SUNTRUST BANK By: /s/ Todd Sheets -------------------------------------- Name: Todd Sheets Title: Associate Vice President 364-Day Credit Agreement EX-11 5 ex-11.txt EXHIBIT 11 Exhibit 11 INTERNATIONAL PAPER COMPANY STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (In millions, except per share amounts)
For the Years Ended December 31, ------------------------------------ 2002 2001 2000 ------- ------- ------ Net earnings (loss) $ (880) $(1,204) $ 142 Effect of dilutive securities - - - ------- ------- ------ Net earnings (loss) - assuming dilution $ (880) $(1,204) $ 142 ======= ======= ====== Average common shares outstanding 481.4 482.6 449.6 Effect of dilutive securities Long-term incentive plan deferred compensation - (1.0) - Stock options 1.6 - 0.4 ------- ------- ------ Average common shares outstanding - assuming dilution 483.0 481.6 450.0 ======= ======= ====== Earnings (loss) per common share $ (1.83) $ (2.50) $ 0.32 ======= ======= ====== Earnings (loss) per common share - assuming dilution $ (1.83) $ (2.50) $ 0.32 ======= ======= ======
Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. Antidilutive securities include preferred securities of a subsidiary trust for the periods presented. Stock options are antidilutive in periods when net losses are recorded. EX-12 6 ex-12.txt EXHIBIT 12 Exhibit 12 INTERNATIONAL PAPER COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollar amounts in millions) (Unaudited)
For the Years Ended December 31, --------------------------------------------------------------- TITLE 1997 1998 1999 2000 2001 2002 ------- -------- -------- -------- --------- -------- A) Earnings (loss) before income taxes, minority interest, extraordinary items and accounting changes $ 143.0 $ 429.0 $ 448.0 $ 723.0 $(1,265.0) $ 371.0 B) Minority interest expense, net of taxes (140.0) (87.0) (163.0) (238.0) (147.0) (130.0) C) Fixed charges excluding capitalized interest 826.6 866.7 820.9 1,151.5 1,256.0 1,095.3 D) Amortization of previously capitalized interest 37.0 38.8 17.0 23.5 31.8 43.3 E) Equity in undistributed earnings of affiliates (40.4) 23.7 (41.6) 5.6 13.5 21.5 ------- -------- -------- -------- --------- -------- F) Earnings (loss) before income taxes, extraordinary items, accounting changes and fixed charges $ 826.2 $1,271.2 $1,081.3 $1,665.6 $ (110.7) $1,401.1 ======= ======== ======== ======== ========= ======== Fixed Charges G) Interest and amortization of debt expense $ 720.0 $ 716.9 $ 611.5 $ 938.1 $ 1,050.3 $ 891.3 H) Interest factor attributable to rentals 83.0 80.7 76.3 72.8 76.7 89.0 I) Preferred dividends of subsidiaries 23.6 69.1 133.1 140.6 129.0 115.0 J) Capitalized interest 71.6 53.4 29.3 25.2 13.2 12.3 ------- -------- -------- -------- --------- -------- K) Total fixed charges $ 898.2 $ 920.1 $ 850.2 $1,176.7 $ 1,269.2 $1,107.6 ======= ======== ======== ======== ========= ======== L) Ratio of earnings to fixed charges 1.38 1.27 1.42 1.26 ======== ======== ======== ======== M) Deficiency in earnings necessary to cover fixed charges $ (72.0) $(1,379.9) ======= =========
Note: Dividends on International Paper's preferred stock are insignificant. As a result, for all periods presented, the ratios of earnings to fixed charges and preferred stock dividends are the same as the ratios of earnings to fixed charges. EX-21 7 ex-21.txt EXHIBIT 21 Exhibit 21 INTERNATIONAL PAPER COMPANY SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 2002 The following table lists the names of certain subsidiaries of International Paper Company. The table omits names of certain subsidiaries since the omitted subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of December 31, 2002.
State or Jurisdiction of Incorporation ------------- U. S. Subsidiaries: - ------------------- IP Pacific Timberlands, Inc. (including subsidiaries) Delaware Shorewood Packaging Corporation (including subsidiaries) Delaware Timberlands Capital Corp. II, Inc. (including subsidiaries) Delaware The Branigar Organization, Inc. (including subsidiaries) Illinois Non - U. S. Subsidiaries: - ------------------------- Carter Holt Harvey Limited (including subsidiaries) New Zealand Weldwood of Canada Limited (including subsidiaries) Canada International Paper do Brasil LTDA (including subsidiaries) Brazil International Paper Investments (France) S.A. (including subsidiaries) France
EX-23 8 ex-23.txt EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-32527, 33-51447, 33-62283, 333-02137, 333-62661 and 333-69082 of International Paper Company on Form S-3, Registration Statement Nos. 333-24869, 333-47583 and 333-48434 on Form S-4 and Registration Statement Nos. 33-11117, 333-00843, 333-01667, 333-37390, 333-75235, 333-85818, 333-85820, 333-85822, 333-85824, 333-85826, 333-85828 and 333-85830 on Form S-8, of our report dated February 10, 2003, appearing in this Annual Report on Form 10-K of International Paper Company for the year ended December 31, 2002. /s/ Deloitte & Touche LLP New York, N.Y. February 27, 2003 EX-24 9 ex24.txt EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY Know all Men by these Presents that the undersigned hereby constitutes and appoints BARBARA L. SMITHERS AND JAMES P. MELICAN and each of them (with full power to each of them to act alone) their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for them on their behalf and in their name, place and stead, in any and all capacities, to sign, execute and affix their seal thereto and file Annual Report of International Paper Company on Form 10-K (or any other appropriate form), under the Securities Exchange Act of 1934, as amended, together with any and all amendments to such Annual Report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, for all intents and purposes, and that the undersigned hereby ratify and confirm all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Executed on the 11th day of February, 2003, at Stamford, Connecticut.
NAME TITLE - ---- ----- /s/ ROBERT J. EATON - --------------------------------------- Robert J. Eaton Director /s/ SAMIR G. GIBARA - --------------------------------------- Samir G. Gibara Director /s/ JAMES A. HENDERSON - -------------------------------------- James A. Henderson Director
NAME TITLE - ---- ----- /s/ ROBERT D. KENNEDY - ------------------------------------ Robert D. Kennedy Director /s/ W. CRAIG McCLELLAND - ------------------------------------ W. Craig McClelland ` Director /s/ DONALD F. McHENRY - ------------------------------------ Donald F. McHenry Director /s/ PATRICK F. NOONAN - ------------------------------------ Patrick F. Noonan Director /s/ JANE C. PFEIFFER - ------------------------------------ Jane C. Pfeiffer Director /s/ CHARLES R. SHOEMATE - --------------------------------------- Charles R. Shoemate Director
EX-99 10 ex99-1.txt EXHIBIT 99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, John T. Dillon, Chairman and Chief Executive Officer, state and attest that, to the best of my knowledge, 1) The Annual Report on Form 10-K of International Paper Company for the Fiscal Year Ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of International Paper Company. By: /s/ John T. Dillon -------------------------------------- John T. Dillon Chairman and Chief Executive Officer February 28, 2003 Subscribed and sworn to before me this 28th day of February 2003. /s/ Carol M. Samalin - ------------------------------ Notary Public State of Connecticut My commission expires July 31, 2006 EX-99 11 ex99-2.txt EXHIBIT 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, John V. Faraci, President and Chief Financial Officer, state and attest that, to the best of my knowledge, 1) The Annual Report on Form 10-K of International Paper Company for the Fiscal Year Ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of International Paper Company. By: /s/ John V. Faraci -------------------------------------- John V. Faraci President and Chief Financial Officer February 28, 2003 Subscribed and sworn to before me this 28th day of February 2003. /s/ Carol M. Samalin - ------------------------------------ Notary Public State of Connecticut My Commission expires July 31, 2006 -----END PRIVACY-ENHANCED MESSAGE-----