-----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, GTWu+3iQ6WXSNLuE+K2KqVMRxyDQ+wcVFq0Fnv9SEdTd/p1yVqca60+offP1Z439 VOn3/HVl5akQS2pXDNynLA== 0000950130-02-001668.txt : 20020415 0000950130-02-001668.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950130-02-001668 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020318 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-03157 FILM NUMBER: 02578069 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-K405 1 d10k405.txt FORM 10-K 405 ================================================================================ 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 Fiscal Year Ended December 31, 2001 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934 For the transition period from to COMMISSION FILE NO. 1-3157 INTERNATIONAL PAPER COMPANY (Exact name of Company as specified in its charter) New York 13-0872805 (State or other jurisdiction of (I.R.S. Employee Identification No.) incorporation or organization) 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: Name of each exchange on Title of each class 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 Company (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. [X] ----------------- The aggregate market value of the common stock of the Company outstanding as of March 12, 2002, held by non-affiliates of the Company was $21,399,113,271, calculated on the basis of the closing price on the Composite Tape on March 12, 2002. For this computation, the Company has excluded the market value of all common stock beneficially owned by all executive officers and directors of the Company and their associates as a group and treasury stock. Such exclusion is not to signify in any way that members of this group are 'affiliates' of the Company. The number of shares outstanding of the Company's common stock, as of March 12, 2002:
Outstanding In Treasury ----------- ----------- 482,716,847 1,912,972
The following documents are incorporated by reference into the parts of this report indicated below: 2001 Annual Report to Shareholders (Inside front cover and pages 18 through 78)............................... Parts I, II, and IV Proxy Statement dated March 25, 2002 (to be filed on or about March 25, 2002) Part III
================================================================================ PART I 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, 2001, the Company operated 33 pulp, paper and packaging mills, 90 converting and packaging plants, 35 wood products facilities, seven specialty panels and laminated products plants and eight specialty chemicals plants. Production facilities at December 31, 2001 in Europe, Asia, South America and Canada included 12 pulp, paper and packaging mills, 45 converting and packaging plants, 10 wood products facilities, three specialty panels and laminated products plants and seven specialty chemicals plants. We distribute printing, packaging, graphic arts, maintenance and industrial products through over 289 distribution branches located primarily in the United States. At December 31, 2001, the Company and its subsidiaries controlled about 10.4 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. Through Carter Holt Harvey, a New Zealand company which is approximately 50.4% owned by International Paper, the Company operates five mills producing pulp, paper, packaging and tissue products, 24 converting and packaging plants and 63 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 Other Businesses. A description of these business segments can be found on pages 19 through 21 of our 2001 Annual Report to Shareholders (Annual Report), which information is incorporated herein by reference. From 1996 through 2001, International Paper's capital expenditures approximated $8.1 billion, excluding expenditures for mergers and acquisitions. These capital expenditures reflect our continuing efforts to improve product quality and environmental performance, lower costs, and improve forestlands. Capital spending in 2001 was $1.0 billion and is budgeted to be approximately $1.0 billion in 2002. This amount is below our annual depreciation and amortization expense of $1.9 billion. You can find more information about capital expenditures on page 25 of our Annual Report, which information is incorporated herein by reference. Discussions of mergers and acquisitions can be found on pages 26 and 48 of the Annual Report, which information is incorporated herein by reference. You can find discussions of restructuring charges, divestitures and other special items on pages 26, 27, 29 through 32 and 48 through 59 of the Annual Report, which information is incorporated herein by reference. Throughout this 10-K report, 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. 2 Financial Information Concerning Industry Segments The financial information concerning segments is set forth on pages 38 and 39 of the Annual Report, which information is incorporated herein by reference. Financial Information About International and Domestic Operations The financial information concerning international and domestic operations and export sales is set forth on page 39 of the Annual Report, which information is incorporated herein by reference. 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. 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 18 through 25 of the Annual Report, which information is incorporated herein by reference. Marketing and Distribution The Company sells paper and packaging products through our own 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 19 through 21 of the Annual Report, which information is incorporated herein by reference. 3 Sales volumes of major products for 2001, 2000 and 1999 were as follows: Sales By Volume (1) (2) (3) (Unaudited)
2001 2000 1999 ----- ----- ----- Printing papers (In thousands of tons) Uncoated Papers and Bristols............... 6,439 5,957 5,342 Coated papers.............................. 2,132 2,062 1,263 Market Pulp(4)............................. 2,531 1,996 1,503 Packaging Containerboard............................. 2,091 2,347 2,874 Bleached Packaging Board................... 1,247 1,339 1,460 Kraft...................................... 587 489 423 Industrial and Consumer Packaging.......... 4,683 5,135 5,064 Forest Products (In millions) Panels..................................... 2,991 2,380 1,910 Lumber (board feet)........................ 4,089 3,302 2,759 MDF and Particleboard (sq. ft. 3/4"--basis) 660 654 385
- -------- (1) Includes third party and inter-segment sales. (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; Cincinnati, Ohio; Kaukauna, Wisconsin; Odenton, Maryland; Jacksonville, Florida; Savannah, Georgia; Annecy, France; 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 2001 was $92 million; $92 million in 2000, including Champion for the period of July-December; and $88 million in 1999. 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 33 through 35 of the Annual Report, which information is incorporated herein by reference. Employees As of December 31, 2001, the Company had approximately 100,000 employees, 63,000 of whom were located in the United States. Of the domestic employees, approximately 35,000 are hourly employees, 21,000 of whom are represented by the Paper, Allied-Industrial, Chemical and Energy International Union. 4 During 2001, labor agreements were ratified at four mills. During 2002 labor agreements are scheduled to be negotiated at six mills: Texarkana; Ticonderoga; Savannah; Courtland; Augusta and Pineville. During 2001, 19 labor agreements were settled in non-papermill operations. Settlements included 12 in paper converting, three in building materials, two in distribution, one in chemicals and one office workers unit. During 2002, 25 non-papermill operations will negotiate new labor agreements. In 2001, effects of sale, closure or downsizing agreements were bargained with unions at 18 locations including six papermills, four building materials plants, five paper converting operations, two distribution sites and one forest resources operation. Approximately 5,600 of our U.S. based hourly employees are subject to labor agreements that are scheduled to be negotiated during 2002. 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 report and in our 2001 Annual Report to Shareholders, and in particular, statements found in Management's Discussion and Analysis, that are not historical in nature may constitute forward-looking statements. These statements are often identified by the words, "believe," "expect," "plan," "appear," "project," "estimate," "intend," and words of similar import. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include, among other things, the timing and magnitude of the expected economic recovery, fluctuations in foreign currency exchange rates against the U.S. dollar, fluctuations in interests rates, changes in overall demand, whether our initiatives relating to balancing our supply with customer demand will be successful, changes in domestic or foreign competition, changes in the cost or availability of raw materials, the cost of compliance with environmental laws and regulations, and whether anticipated savings from restructuring activities and facility rationalizations can be achieved. In view of such uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. International Paper does not assume any obligation to update these forward-looking statements. Item 2. Properties Forestlands The principal raw material used by International Paper is wood in various forms. As of December 31, 2001, the Company or its subsidiaries controlled approximately 10.4 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. An additional 810,000 acres of forestlands in New Zealand were held through Carter Holt Harvey, a consolidated subsidiary of the Company. During 2001, the U.S. forestlands supplied 18 million tons of roundwood to the Company's U.S. facilities. This amounted to the following percentages of the roundwood requirements of its U.S. mills and forest products facilities: 19% in its Northern mills and 41% in its Southern mills. The balance was acquired from other private industrial and nonindustrial forestland owners, with only an insignificant amount coming from public lands of the United States government. In addition, in 2001, 10 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. 5 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 2002, dispositions, and restructuring activities as of December 31, 2001 on pages 19, 25 through 32 and 48 through 59 of the Annual Report, which information is incorporated herein by reference. Item 3. Legal Proceedings Information concerning the Company's legal proceedings is set forth on pages 33 through 35 and 61 through 65 of the Annual Report, which information is incorporated herein by reference. 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, 2001. 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Dividends per share data on the Company's common stock and the high and low sale prices for the Company's common stock are set forth on page 74 of the Annual Report and are incorporated herein by reference. As of March 12, 2002, there were 39,653 holders of record of the Company's common stock. Item 6. Selected Financial Data The Company columnar table showing selected financial data for the Company is set forth on pages 74 through 76 of the Annual Report and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation Management discussion and analysis on the consolidated financial statements are set forth on pages 18 through 37 of the Annual Report and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Quantitative and qualitative disclosures about market risk are set forth on pages 36 and 37 of the Annual Report and are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Company's consolidated financial statements, the notes thereto and the reports of the independent public accountants and Company management are set forth on pages 40 through 73 of the Annual Report and are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 7 PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to the directors of the Company is included on pages 11 through 13 of the Company's Proxy Statement, dated March 25, 2002 (Proxy Statement), to be filed on or about March 25, 2002, which information is incorporated herein by reference. Information with respect to the executive officers of the Company is set forth below: John T. Dillon, 63, chairman and chief executive officer since 1996. Prior to that he was executive vice president-packaging from 1987 to 1995, when he became president and chief operating officer. Robert M. Amen, 52, executive vice president since 2000. He served as President of International Paper- Europe from 1996 to 2000 and prior to that was vice president-consumer packaging. John V. Faraci, 52, executive vice president and chief financial officer since 2000. Prior to that he was senior vice president-finance and chief financial officer from 1999. From 1995 until 1999 he was chief executive officer and managing director of Carter Holt Harvey Limited of New Zealand. James P. Melican Jr., 61, executive vice president since 1991. Prior to that he was senior vice president and general counsel from 1987 until 1991. David W. Oskin, 59, executive vice president since 1995. He was chief executive and managing director of Carter Holt Harvey Limited of New Zealand from 1992 to 1995. Prior to that he was senior vice president-distribution, timber and wood. Marianne M. Parrs, 58, executive vice president since 1999. She was senior vice president and chief financial officer from 1995 to 1999. Andrew R. Lessin, 59, vice president-finance and chief accounting officer since 2000. From 1995 to 2000 he was vice president and controller. Prior to that he was controller from 1991 to 1995. William B. Lytton, 53, senior vice president and general counsel since January 1999. From 1996 to 1999 he was vice president and general counsel. 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 set forth on page 16 of the Proxy Statement and is incorporated herein by reference. Item 11. Executive Compensation Information with respect to the compensation of executives and directors of the Company is included in the Proxy Statement on the pages set forth below, which information is incorporated herein by reference: A description of the compensation of the Company's directors is set forth on page 10. 8 A discussion regarding the Company's compensation committee interlocks and insider participation is set forth on page 16. A description of the compensation of the Company's executive officers is set forth on pages 14 through 16 and pages 18 through 23. A discussion regarding termination agreements with various executive officers of the Company is set forth on pages 24 and 25. The Report of the Management Development and Compensation Committee of the Board of Directors is set forth on pages 14 through 16. The Performance Graph comparing an investment in Company Stock with an investment in the S&P 500 and peer group companies is set forth on page 17. Item 12. Security Ownership of Certain Beneficial Owners and Management A description of the security ownership of certain beneficial owners and management is set forth on pages 8 and 9 of the Proxy Statement and is incorporated herein by reference. The table showing ownership of the Company's common stock held by individual directors and by directors and executive officers as a group is set forth on pages 8 and 9 of the Proxy Statement, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions A description of certain relationships and related transactions is set forth on page 7 of the Proxy Statement and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report: 1. Consolidated financial statements The consolidated financial statements of the Company and consolidated subsidiaries listed below are incorporated herein by reference to the following pages of the Annual Report:
Page ----- Consolidated statement of earnings for fiscal years ended December 31, 2001, 2000 and 1999............................................................... 41 Consolidated balance sheet at December 31, 2001 and 2000...................... 42 Consolidated statement of cash flows for fiscal years ended December 31, 2001, 2000 and 1999............................................................... 43 Consolidated statement of common shareholders' equity......................... 44 Notes to consolidated financial statements.................................... 45-73 Report of independent public accountants...................................... 40
2. Financial statement schedule The following additional financial data should be read in conjunction with the financial statements in the Annual Report. 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 notes thereto. 9 ADDITIONAL FINANCIAL DATA 2001, 2000 AND 1999 Report of Independent Public Accountants on Financial Statement Schedule... 13 Consolidated Schedule: II Valuation and Qualifying Accounts................................... 14 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. (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) Floating Rate Notes Supplemental Indenture, dated as of June 14, 2000, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.2 to International Paper's Report on Form 8-K filed on June 29, 2000, File No. 1-3157). (4.4) 8% Notes Due July 8, 2003 Supplemental Indenture, dated as of June 14, 2000, between International Paper and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.3 to International Paper's Report on form 8-K filed on June 29, 2000, File No. 1-3157). (4.5) 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). (4.6) Form of New Floating Rate Notes due July 8, 2002 (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). (4.7) Form of New 8% Notes due July 8, 2003 (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). (4.8) Form of New 8 1/8% Note 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).
10 (4.9) Zero Coupon Convertible 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). (4.10) 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). (4.11) 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 (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) Champion Merger Integration Chief Executive Officer Performance Plan (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-3157). (10.4) Champion Merger Integration Savings and Synergy Plan (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-3157). (10.5) Management Incentive Plan (incorporated by reference to Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 1-3157). (10.6) Form of individual non-qualified stock option agreement under the Company's Long-Term Incentive Compensation Plan. (10.7) 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). (10.8a) Form of Change of Control Agreement for Chief Executive Officer (10.8b) Form of Change of Control Agreement--Tier I (10.8c) Form of Change of Control Agreement--Tier II (10.9) Unfunded Supplemental Retirement Plan for Senior Managers, as amended. (10.11) International Paper Company Unfunded Savings Plan (incorporated by reference to the Company's Form 10K/A for the year 2000 dated January 16, 2002, File No. 1-3157). (10.12) International Paper Company Pension Restoration Plan for Salaried Employees (incorporated by reference to the Company's Form 10K/A for the year 2000 dated January 16, 2002, File No. 1-3157). (10.13) International Paper Company Unfunded Supplemental Plan for Senior Managers (incorporated by reference to the Company's Form 10K/A for the fiscal year ended 2000, dated January 16, 2002, File No. 1-3157). (10.14) Agreement by and between C.W. Smith and International Paper Company (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, File No. 1-3157). (11) Statement of Computation of Per Share Earnings. (12) Computation of Ratio of Earnings to Fixed Charges. (13) 2001 Annual Report to Shareholders of the Company. (21) List of Subsidiaries of Registrant. (23) Consent of Independent Public Accountants (Arthur Andersen LLP). (24) Power of Attorney.
11 (b) Reports on Form 8-K International Paper filed a report on Form 8-K on October 17, 2001, reporting earnings for the quarter ended September 30, 2001. International Paper filed a report on Form 8-K on November 27, 2001 under Item 9, reporting that Mr. Amen was speaking at an industry conference and including copies of his presentation. International Paper filed a report on Form 8-K on January 22, 2002 under Item 5, reporting earnings for quarter ended December 31, 2001 and earnings for the year ended December 31, 2001. 12 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE 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. ARTHUR ANDERSEN LLP New York, N.Y. February 12, 2002 13 SCHEDULE II INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 2001 --------------------------------------------------------- Additions Balance at Additions Charged to Deductions Balance at Beginning of Charged to Other From End of Description Period Earnings Accounts Reserves Period - ----------- ------------ ---------- ---------- ---------- ---------- (In millions) Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts--current........... $128 $ 82 $ (31)(a) $179 Restructuring reserves............... 242 385 (306)(b) 321
For the Year Ended December 31, 2000 --------------------------------------------------------- Additions Balance at Additions Charged to Deductions Balance at Beginning of Charged to Other From End of Description Period Earnings Accounts Reserves Period - ----------- ------------ ---------- ---------- ---------- ---------- (In millions) Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts--current........... $106 $ 46 $ (24)(a) $128 Restructuring reserves............... 115 248 (121)(b) 242
For the Year Ended December 31, 1999 --------------------------------------------------------- Additions Balance at Additions Charged to Deductions Balance at Beginning of Charged to Other From End of Description Period Earnings Accounts Reserves Period - ----------- ------------ ---------- ---------- ---------- ---------- (In millions) Reserves Applied Against Specific Assets Shown on Balance Sheet: Doubtful accounts--current........... $115 $ 34 $ (43)(a) $106 Restructuring reserves............... 71 149 (105)(b) 115
- -------- (a) Includes write-offs, 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. 14 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 /S/ BARBARA L. SMITHERS By: ----------------------------- Barbara L. Smithers Vice President and Secretary March 18, 2002 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 March 18, 2002 - ----------------------------- Executive Officer and John T. Dillon Director /S/ ROBERT J. EATON * Director March 18, 2002 - ----------------------------- Robert J. Eaton /S/ SAMIR G. GIBARA* Director March 18, 2002 - ----------------------------- Samir G. Gibara /S/ JAMES A. HENDERSON* Director March 18, 2002 - ----------------------------- James A. Henderson /S/ JOHN R. KENNEDY* Director March 18, 2002 - ----------------------------- John R. Kennedy /S/ ROBERT D. KENNEDY* Director March 18, 2002 - ----------------------------- Robert D. Kennedy /S/ W. CRAIG MCCLELLAND* Director March 18, 2002 - ----------------------------- W. Craig McClelland /S/ DONALD F. MCHENRY* Director March 18, 2002 - ----------------------------- Donald F. McHenry /S/ PATRICK F. NOONAN* Director March 18, 2002 - ----------------------------- Patrick F. Noonan /S/ JANE C. PFEIFFER* Director March 18, 2002 - ----------------------------- Jane C. Pfeiffer /S/ JEREMIAH J. SHEEHAN* Director March 18, 2002 - ----------------------------- Jeremiah J. Sheehan /S/ CHARLES R. SHOEMATE* Director March 18, 2002 - ----------------------------- Charles R. Shoemate /S/ JOHN V. FARACI March 18, 2002 - ----------------------------- Executive Vice President and John V. Faraci Chief Financial Officer /S/ ANDREW R. LESSIN March 18, 2002 - ----------------------------- Vice President--Finance and Andrew R. Lessin Chief Accounting Officer
/S/ BARBARA L. SMITHERS *By: ------------------------- Barbara L. Smithers Attorney-in-fact 15 Appendix I 2001 Listing of Facilities (All facilities are owned except noted otherwise) PRINTING PAPERS Svetogorsk, Russia Solon, Ohio Inverurie, Scotland Wooster, Ohio Business Papers, Coated Lancaster, Pennsylvania Papers, Fine Papers and INDUSTRIAL AND CONSUMER Mount Carmel, Pulp PACKAGING Pennsylvania U.S.: Washington, Courtland, Alabama INDUSTRIAL PACKAGING Pennsylvania Selma, Georgetown, South Alabama (Riverdale Containerboard Carolina Mill) U.S.: Spartanburg, South Pine Bluff, Arkansas Prattville, Alabama Carolina Mira Loma, California Savannah, Georgia Morristown, Tennessee leased (C & D Center) Terre Haute, Indiana Murfreesboro, Tennessee Pensacola, Florida Mansfield, Louisiana Dallas, Texas Augusta, Georgia Pineville, Louisiana Edinburg, Texas Bastrop, Vicksburg, Mississippi El Paso, Texas Louisiana (Louisiana Oswego, New York Ft. Worth, Texas Mill) Roanoke Rapids, North San Antonio, Texas Springhill, Carolina Richmond, Virginia Louisiana (C & D Georgetown, South Cedarburg, Wisconsin Center) Carolina Fond du Lac, Wisconsin Bucksport, Maine International: Emerging Markets Jay, Arles, France Ranagua, Chile Maine (Androscoggin Bayamon, Puerto Rico Mill) Corrugated Container International: West Springfield, U.S.: Las Palmas, Canary Massachusetts leased Bay Minette, Alabama Islands (2 locations) Westfield, Decatur, Alabama Tenerife, Canary Massachusetts (C & D Conway, Arkansas Islands center) Fordyce, Arkansas Arles, France Quinnesec, Michigan leased Chalon-sur-Saone, Sturgis, Michigan (C & Jonesboro, Arkansas France D Center) Russellville, Arkansas Chantilly, France Sartell, Minnesota Carson, California Creil, France Corinth, New Hanford, California LePuy, France York (Hudson River Modesto, California Mortagne, France Mill) Stockton, California Guadeloupe, French Ticonderoga, New York Vernon, California West Indies Riegelwood, North Putnam, Connecticut Asbourne, Ireland Carolina Auburndale, Florida Bellusco, Italy Wilmington, North Forest Park, Georgia Catania, Italy Carolina leased Savannah, Georgia Pomezia, Italy (Reclaim Center) Statesboro, Georgia San Felice, Italy Hamilton, Ohio Chicago, Illinois Alcala, Spain leased Saybrook, Ohio Des Plaines, Illinois Almeria, Spain leased leased (C & D center) Fort Wayne, Indiana Barcelona, Spain Erie, Pennsylvania Lexington, Kentucky Bilbao, Spain Hazleton, LaFayette, Louisiana Gandia, Spain Pennsylvania (C & D Shreveport, Louisiana Valladolid, Spain Center) Springhill, Louisiana Thrapston, United Lock Haven, Auburn, Maine Kingdom Pennsylvania Howell, Michigan Winsford, United Eastover, South Kalamazoo, Michigan Kingdom Carolina Monroe, Michigan Kraft Paper Georgetown, South Minneapolis, Minnesota Savannah, Georgia Carolina Houston, Mississippi Mansfield, Louisiana Sumter, South Kansas City, Missouri Roanoke Rapids, North Carolina (C & D Geneva, New York Carolina Center) King's Mountain, North Courtland, Alabama Franklin, Virginia Carolina Franklin, Virginia Statesville, North International: Carolina CONSUMER PACKAGING Cincinnati, Ohio Mogi Guacu, Sao Paulo, Brasil Bleached Board Aropoti Parana, Brasil Pine Bluff, Arkansas Hinton, Alberta, Canada Augusta, Georgia Quesnel, British Riegelwood, North Columbia, Canada Carolina Maresquel, France Georgetown, South Saillat, France Carolina Saint Die, Prosperity, South France (Anould Mill) Carolina Strasbourg, France (La Robertsau Mill) Klucze, Poland Kwidzyn, Poland
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Texarkana, Texas DISTRIBUTION Gurdon, Arkansas Whelen Springs, Beverage Packaging Xpedx Arkansas U.S.: U.S.: McDavid, Florida Turlock, California Stores Group Whitehouse, Florida Plant City, Florida Chicago, Illinois Augusta, Georgia Cedar Rapids, Iowa 155 locations Cordele, Georgia Kansas City, Kansas nationwide 147 leased Folkston, Georgia Framingham, SouthCentral Region Meldrim, Georgia Massachusetts Greensboro, North Springhill, Louisiana Kalamazoo, Michigan Carolina Wiggins, Mississippi Raleigh, North Carolina 28 branches in the Joplin, Missouri International: Middle Madison, New Hampshire London, Ontario, Canada Atlantic and Armour, North Carolina Longueuil, Quebec, Southeast States 12 Seaboard, North Canada leased leased Carolina Shanghai, China 7 branches in Johnston, South Santiago, Dominican Michigan and Ohio Carolina Republic 1 leased Newberry, South San Salvador, El West Region Carolina Salvador leased Denver, Colorado Sampit, South Carolina Fukusaki, Japan 62 branches in the Camden, Texas Seoul, Korea West, Corrigan, Texas Taipei, Taiwan Midwest and South Henderson, Texas Guacara,Venezuela States 41 leased Jefferson, Texas Specialty Business Nacogdoches, Texas Foodservice Group New Boston, Texas U.S.: Erlanger, Kentucky Franklin, Virginia Visalia, California 3 branches Slaughter Shelbyville, Illinois nationwide all leased Dallas, Texas (Miller Hopkinsville, Kentucky Northeast Region Rd) Wilmington, North Hartford, Connecticut Northwest (Milwaukee, Carolina 15 branches in New OR) leased Kenton, Ohio England Jackson, Tennessee and Middle Atlantic International: International: States 13 leased Burns Lake, British Brisbane, Australia International: Columbia (2 plants) Santiago, Chile leased Papateries de France Houston, British Bogota, Columbia Pantin, France 2 Columbia Bombay, India locations 1 leased 100 Mile House, Manila, Philippines Chihuahua, Mexico 10 British Columbia leased locations all leased Quesnel, British Scalida, Nijmegen, Columbia (2 plants) Shorewood Packaging Netherlands 2 Williams Lake, British U.S.: locations Columbia Waterbury, Connecticut 1 leased Hinton, Alberta LaGrange, Georgia Impap Strachan, Alberta Indianapolis, Indiana Tczew, Poland 5 Sundre, Alberta Louisville, Kentucky locations 3 leased Hendersonville, North CARTER HOLT HARVEY Carolina FOREST PRODUCTS Weaverville, North Forest Resources Forestlands Carolina U.S.: Approximately 810,000 Clifton, New Jersey Approximately 10.4 acres in New Zealand Edison, New Jersey million Englewood, New Jersey acres in the U.S., Wood Products Harrison, New Jersey mostly in the South Sawmills and leased International: Processing Plants West Deptford, New Approximately 1.5 Mt. Gambier, South Jersey million acres in Australia Springfield, Oregon Brazil Myrtleford, Victoria Danville, Virginia Oberon, New South Newport News, Virginia Realty Projects Wales Roanoke, Virginia Haig Point Incorporated Morwell, Australia International: Daufuskie Island, Box Hill, Victoria Smith Falls, Ontario, South Carolina leased Canada Kopu, New Zealand Brockville, Ontario, Wood Products Nelson, New Zealand Canada U.S.: Putaruru, New Zealand Toronto, Ontario, Chapman, Alabama Rotorua, New Zealand Canada Citronelle, Alabama Taupo, New Zealand Ebbw Vale, Wales, Maplesville, Alabama Tokoroa, New Zealand United Kingdom Opelika, Alabama Guangzhou, China Thorsby, Alabama Timber Tuscaloosa, Alabama Merchants--Australia Leola, Arkansas Box Hill, Victoria leased Hamilton Central, Queensland Sydney, New South Wales leased
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Plywood Mills Crestmead, Queensland, Industrial Papers Myrtleford, Victoria Australia leased U.S.: Nangwarry, South Dandenong, Victoria, Lancaster, Ohio Australia Australia leased De Pere, Wisconsin Tokoroa, New Zealand Reservoir, Victoria, Kaukauna, Wisconsin Whangarei, Marsden Australia leased Menasha, Wisconsin Point, New Zealand Smithfield, New South International: Wales, Limburg, Netherlands Panel Production Plants--New Zealand Australia Auckland Woodville, Australia Decorative Products Kopu Auckland, New Zealand Particleboard Rangiora Corrugated Franklin, Virginia Panel Production Manufacturing Stuart, Virginia Plants--Australia Sydney, Australia Waverly, Virginia Gympie, Queensland leased Mt. Gambier Melbourne, Australia Specialty Panels (2 plants) leased U.S.: Oberon, New South Paper Bag Chino, California Wales Manufacturing leased (2 plants) Penrose, New Zealand Glasgow, Kentucky Tumut, New South Wales Paper Cups Odenton, Maryland St. Leonards, New Brisbane, Australia Statesville, North South Wales leased Packaging and Tissue Carolina Building Supplies Head Office Tarboro, North Carolina Retail Outlets South Yarra, Victoria, Hampton, South Carolina Retail Outlets, 38 Australia leased Oshkosh, Wisconsin branches in Distribution International: New Zealand (22 Paper Merchant Bergerac, France leased) Warehousing and (Couze Mill) Pulp and Paper Distribution Centers, Ussel, France Kraft Paper, Pulp, Australia, 3 Barcelona, Spain Coated and Uncoated locations (3 leased) (Durion Mill) Papers and Bristols New Zealand, 4 Kinleith, New Zealand locations (3 leased) Cartonboard Whakatane, New Zealand OTHER BUSINESSES Containerboard Chemicals Kinleith, New Zealand U.S.: Penrose, New Zealand Panama City, Florida Fiber Recycling Pensacola, Florida Operation Port St. Joe, Florida Auckland, New Zealand Savannah, Georgia leased Valdosta, Georgia Specialty Products Oakdale, Louisiana Operations Picayune, Mississippi Auckland, New Zealand Dover, Ohio Tissue International: Pulp and Tissue Oulu, Finland Mills--New Zealand Valkeakoski, Finland Kawerau, New Zealand Niort, France Box Hill, Victoria Greaker, Norway Conversion Sites Sandarne, Sweden Box Hill, Victoria, Chester-Le-Street, Australia leased United Kingdom Clayton, Victoria, Bedlington, United Australia leased Kingdom Keon Park, Victoria, Australia leased Chemical Cellulose Pulp Suva, Fiji leased Natchez, Mississippi Auckland, New Zealand (2 plants) Hardrock Minerals Kawerau, New Zealand Alvin, Texas Te Rapa, New Zealand leased Packaging Case Manufacturing Suva, Fiji leased Central (Levin, New Zealand) Northern (Auckland, New Zealand) Solid Fibre (Hamilton, New Zealand) Southern (Christchurch, New Zealand) Carton Manufacturing
A-3 EX-3.4 3 dex34.txt BY-LAWS FO THE COMPANY AS AMENDED ON FEB. 13, 2001 Exhibit 3.4 ================================================================================ By-Laws of International Paper Company ---------------- As Amended February 13, 2001 ---------------- INTERNATIONAL [LOGO] PAPER ================================================================================ BY-LAWS OF INTERNATIONAL PAPER COMPANY ---------------- ARTICLE I STOCKHOLDERS' MEETINGS SECTION 1. Annual Meeting. The annual meeting of the Stockholders of the Corporation for the election of Directors, and for the transaction of such other business as may come before the meeting, shall be held on such date and at such place within or without the State of New York as shall have been fixed by the Board of Directors on a timely basis. SECTION 2. Special Meetings. Special meetings of the Stockholders, unless otherwise provided by statute, or by the Certificate of Incorporation or other certificate filed pursuant to law, at any time may be called or caused to be called by a majority of the Board of Directors or by the Chairman of the Board, or by the President. Special meetings shall be held at such place within or without the State of New York as is specified in the call thereof. SECTION 3. Notice of Meetings. Unless otherwise required by statute, the notice of every meeting of the Stockholders shall be in writing and shall state the place, date and hour of the meeting. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called. A copy of the notice of any meeting shall be given personally, electronically or by mail, not less than ten nor more than fifty days before the date of the meeting, to each Stockholder entitled to vote at the meeting and to each Stockholder who, by reason of any action proposed at such meeting, is entitled by law to notice thereof. If mailed, it shall be directed to a Stockholder at his address as it appears on the record of Stockholders or, if he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, then directed to him at such other address. If transmitted electronically, such notice is given when directed to the Shareholder's electronic mail address as supplied by the Shareholder to the Secretary of the Corporation or as otherwise directed pursuant to the Shareholder's authorization or instructions. SECTION 4. Quorum. Proxies. Voting. Except as otherwise provided by law or by the Certificate of Incorporation or other certificate filed pursuant to law, at any meeting of the Stockholders there must be present in person or by proxy the holders of record of stock representing at least one-third of the number of votes entitled to be cast upon any question to be considered at the meeting in order to constitute a quorum for the determination of such question, but a less interest may adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum be present, and thereupon any business may be transacted at the adjourned meeting which might have been transacted at the meeting as originally called. Except as otherwise provided by law or by the Certificate of Incorporation or other certificate filed pursuant to law or by the By-Laws of the Corporation, a majority vote of a quorum at a meeting shall decide any question brought before such meeting. Every holder of record of stock of a class entitled to vote at a meeting shall be entitled to one vote for every share of such stock standing in his name on the books of the Corporation, and may vote either in person or by proxy. SECTION 5. Presiding Officer and Secretary. At all meetings of the Stockholders the Chairman of the Board, or in his absence the President, or in his absence a Vice Chairman of the Board or a Vice President designated by the Board of Directors, or if none be present, the appointee of the meeting, shall preside. The Secretary of the Corporation, or in his absence an Assistant Secretary, or if none be present, the appointee of the Presiding Officer of the meeting, shall act as Secretary of the meeting. SECTION 6. Inspectors. At each meeting of Stockholders at which Directors are to be elected the Presiding Officer shall appoint two Inspectors of Election who shall perform the duties required by the statute at that meeting and any adjournment thereof. If any Inspector shall refuse to serve, or neglect to attend at the election or his office becomes vacant, the Presiding Officer shall appoint an Inspector in his place. The Presiding Officer of any meeting may also appoint, at such meeting, two Inspectors with authority to count and report upon the votes cast at such meeting upon such questions (other than the election of Directors) as may be voted upon by ballot. Inspectors shall be sworn. SECTION 7. Stockholders' Meetings. No business may be transacted at an annual meeting of Stockholders of the Corporation, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or any duly authorized committee thereof, (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors or any duly authorized committee thereof or (c) otherwise properly brought before the annual meeting by any Stockholder of the Corporation (i) who is a Stockholder of record on the date of the giving of the notice provided for in this Section and on the record date for the determination of Stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section. Business shall be brought before the annual meeting by any Stockholder of the Corporation by notice in writing delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation at the principal executive offices of the Corporation, and received by such person not less than ninety (90) days nor more than one-hundred twenty (120) days prior to any meeting of the Stockholders. At Stockholder's notice to the Secretary shall set forth as to each matter such Stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such Stockholder, (iii) the number of shares of stock of the Corporation which are owned beneficially or of record by such Stockholder, (iv) a description of all arrangements or understandings between such Stockholder and any other person or persons (including their names) in connection with the proposal of such business by such Stockholder and any material interest of such Stockholder in such business and (v) a representation that such Stockholder intends to appear in person or by proxy at the meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of Stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section, provided, however, that once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section shall be deemed to preclude discussion by any Stockholder of any such business. The Presiding Officer of the meeting may, if the facts warrant, determine and declare to the meeting that business was not properly brought before the annual meeting in accordance with the foregoing procedure, and if such person should so determine, he or she shall so declare to the meeting and such business shall not be transacted. Nothing in this Section 7 shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act and to put before such meeting any proposals so included in the Corporation's proxy statement at his or her request. For purposes of this Section 7 and Article II, Section 9, "public disclosure" shall mean disclosure in a communication sent by first class mail to Stockholders, in a press release reported by the Dow Jones News Service, Reuters Information Services, Inc., Associated Press or comparable national news service or in a document filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. ARTICLE II BOARD OF DIRECTORS SECTION 1. Number. Election. Vacancies. Term of Office. Within the limits provided by the Corporation's Certificate of Incorporation or other certificate filed pursuant to law, the Board of Directors shall determine from time to time the number of Directors who shall constitute the entire Board of Directors. Any such determination made by the Board of Directors shall continue in effect 2 unless and until changed by the Board of Directors, but no such changes shall affect the term of any Director then in office and, in case any of the Directors then in office shall have been elected by holders of the Cumulative $4 Preferred Stock in accordance with the provisions of the Certificate of the Corporation filed May 31, 1946 pursuant to Section Thirty-six of the Stock Corporation law (hereafter in this Section 1 referred to as the "Certificate filed May 31, 1946"), no increase in the number of Directors then in office shall be made which would reduce the number of Directors then in office elected as aforesaid to less than one-third (or the nearest whole number thereto) of the total number of Directors then in office. The Board of Directors shall from time to time make such determinations pursuant to this Section 1 as shall be necessary or appropriate in order to ensure that, under any circumstances, the holders of each series of the Serial Preferred Stock shall be able, giving effect to all applicable provisions of the Corporation's Certificate of Incorporation, and of these By-Laws (including, without limitation, the preceding sentence), duly and effectively to exercise any exclusive right conferred upon them by the Certificate of Incorporation or any certificate filed pursuant to law to elect Directors of the Corporation. Except as otherwise provided in the Certificate of Incorporation or other certificate filed pursuant to law, at each annual meeting of the Stockholders, the successors to the class of Directors whose terms shall then expire, up to the number determined in accordance with the foregoing provisions and with the provisions of the Certificate of Incorporation or other certificate filed pursuant to law, shall be elected by ballot or by proxy by the holders of the Common Stock by a plurality of the votes cast at such election. Except as otherwise provided by law or in the Certificate of Incorporation or other certificate filed pursuant to law and except as otherwise provided in this paragraph, any vacancy in the Board occurring during the year, occurring as a result of an increase in the number of Directors who shall constitute the Board or any other vacancy, may be filled only by the vote of the Board provided that a quorum is then in office and present, or by a majority of the Directors then in office, if less than a quorum is then in office or by a sole remaining Director. Any vacancy in the Board occurring during the year with respect to Directors who may have been elected by holders of the Cumulative $4 Preferred Stock in accordance with the provisions of the Certificate filed May 31, 1946 may only be filled by the holders of the Cumulative $4 Preferred Stock at a special meeting of such holders in the same manner as at an annual meeting. Except as otherwise provided by statute, or in the Certificate of Incorporation or other certificate filed pursuant to law, the term of office of each Director heretofore or hereafter elected shall be from the time of his election and qualification until the third annual meeting next following his election and until his successor shall have been duly elected and shall have qualified. Directors need not be Stockholders. SECTION 2. Resignations. Any Director may resign his office at any time by delivering his resignation in writing to the Corporation, and the acceptance of such resignation, unless required by the terms thereof, shall not be necessary to make such resignation effective. SECTION 3. Method of Electing Entirely New Board. In case the entire Board of Directors shall die or resign, any Stockholder may call a special meeting in the same manner that the Chairman of the Board may call such meeting, and Directors for the unexpired terms may be elected at any such special meeting in the manner provided for their election at annual meetings. SECTION 4. Powers. Except as provided by law, or by the Certificate of Incorporation or other certificate of the Corporation filed pursuant to law, or by these By-Laws, the powers, business and affairs of the Corporation shall be exercised and managed by the Board of Directors. SECTION 5. Meetings. Regular meetings of the Board of Directors shall be held at such regular intervals and at such fixed time and place as from time to time may be determined by the Board, and no notice of such meetings shall be required. Special meetings of the Board of Directors shall be held whenever called by direction of the Chairman of the Board, or of a Vice Chairman of the Board, or of the President, or of any two of the Directors for the time being in office. 3 The Secretary shall give notice of each special meeting by mailing the same not later than the second day before the meeting, or personally or by telegraphing or telephoning the same not later than the day before the meeting, to each Director, but such notice may be waived by any Director. The Chairman of the Board, or in his absence, the President, or in his absence, a Vice Chairman (to be designated by the persons present at the meeting in the event of more than one Vice Chairman being present) shall preside at all meetings of the Board of Directors. If all of the aforesaid officers be absent or decline to act, the persons present may choose one of their number to act as chairman of the meeting. At the first meeting held after the annual meeting of Stockholders, the Board of Directors shall elect the Executive Officers of the Corporation, each of whom shall hold his office until the next annual election of Officers and until another is elected and qualified in his stead, unless sooner removed. Any Director may vote or act on behalf of the Corporation in contracting with any other company, notwithstanding he may be an Officer, Director or Stockholder therein. Any one or more members of the Board of Directors or any Committee thereof may participate in a meeting of the Board of Directors of such Committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. SECTION 6. Quorum. One-third of the total number of Directors determined pursuant to Section 1 of this Article as constituting the Board of Directors shall constitute a quorum for the transaction of business, but if there shall be less than a quorum at any meeting of the Board, a majority of those present (or if only one be present, then that one) may adjourn the meeting from time to time and the meeting may be held as adjourned without further notice. SECTION 7. Committees. The Board of Directors may appoint an Executive Committee and such other committee or committees as they may determine. Such committee or committees shall have such powers as shall be specified by resolution of the Board of Directors. The Executive Committee, so far as permitted by law, may be vested with all of the powers of the Board of Directors when the Board of Directors is not in session. One-third of the total number of Directors appointed to a Committee shall constitute a quorum for the transaction of business. SECTION 8. Compensation of Directors. Directors shall be entitled to reasonable compensation for their services. They may be paid a fixed salary and may also receive a fee for attendance at any meeting of the Board of Directors or of any Committee of the Board. The amount of compensation shall be determined by resolution of the Board. Nothing herein contained shall preclude any Director from serving in any other capacity and receiving compensation therefor. SECTION 9. Nominations. Nominations for election to the Board of Directors of the Corporation at a meeting of the Stockholders may be made (a) by the Board, or on behalf of the Board by any nominating committee appointed by the Board, or (b) by any Stockholder of the Corporation (i) who is a Stockholder of record on the date of the giving of the notice provided for in this Section and on the record date for the determination of Stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section. Stockholder nominations shall be made by notice in writing delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation at the principal executive offices of the Corporation, and received by such person not less than ninety (90) days nor more than one-hundred twenty (120) days prior to any meeting of the Stockholders called for the election of Directors. Such notice shall set forth (a) as to each proposed nominee who is not an incumbent Director (i) the name, age, business address and residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee, and (iv) any other information concerning the nominee that must be disclosed of nominees in proxy solicitations pursuant to Section 14 of the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act") and the rules and regulations promulgated thereunder and (b) as to the Stockholder giving the notice (i) the 4 name and record address of such Stockholder, (ii) the number of shares of stock of the Corporation which are beneficially owned by such Stockholder, (iii) a description of all arrangements or understandings between such Stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such Stockholder, (iv) a representation that such Stockholder intends to appear in person or by proxy at the annual meeting to nominate the persons named in its notice and (v) any other information relating to such Stockholder that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice shall be accompanied by the written consent of each proposed nominee to serve as a Director of the Corporation. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth herein. The Presiding Officer of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if such person should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III OFFICERS AND AGENTS SECTION 1. General. The Elected Officers of the Corporation shall be elected by the Board of Directors. The Elected Officers of the Corporation may include a Chief Executive Officer, a President, one or more Executive Vice Presidents, Senior Vice Presidents, and Vice Presidents, a Treasurer, a Secretary and such other Elected Officers as may be deemed necessary or desirable. Any two or more such offices may be held by the same person, except the offices of President and Secretary. The Board of Directors, at any time and from time to time, may appoint or authorize the Chief Executive Officer, to appoint one or more Vice Presidents, a Controller, an Auditor, a Chief Tax Officer, one or more Assistant Treasurers and one or more Assistant Secretaries, and such other Officers or agents as may be deemed necessary or desirable, and may prescribe or authorize the Chief Executive Officer to prescribe the powers and duties of each, and fill any vacancy which may occur in any such office. All Elected Officers shall be subject to removal at any time by the affirmative vote of a majority of the whole Board of Directors. All other Officers, and all heads of departments, managers, assistant managers, agents and employees of the Corporation, may be removed at any time, by vote of the Board of Directors, or by the Officer appointing them, or by any other superior Officers or any Committee thereunto authorized by the Board. SECTION 2. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Stockholders and of the Board of Directors. He shall have such other powers and perform such other duties as may, from time to time, be specified by the Board of Directors. SECTION 3. Vice Chairman of the Board. A Vice Chairman of the Board, in the absence of the Chairman of the Board and the President, shall preside at meetings of the Stockholders and of the Board of Directors. He shall have such other powers and perform such other duties as may, from time to time, be specified by the Board of Directors or by the chief executive officer of the Corporation. He shall be subject to the control of the Board of Directors and to the powers of the chief executive officer of the Corporation. SECTION 4. President. The President, in the absence of the Chairman of the Board, shall preside at meetings of the Stockholders and of the Board of Directors. He shall have such other powers and perform such other duties as may, from time to time, be specified by the Board of Directors or by the the chief executive officer of the Corporation. He shall be subject to the control of the Board of Directors and to the powers of the chief executive officer of the Corporation. SECTION 5. Chief Executive Officer. The chief executive officer shall have general charge of the business of the Corporation and the power to formulate all plans and policies in connection therewith, 5 subject to the control of the Board of Directors. He shall keep the Board of Directors fully informed and shall freely consult with the Board concerning the business of the Corporation. He shall have such other powers and perform such other duties as may, from time to time, be specified by the Board of Directors. SECTION 6. Vice Presidents. Any Vice President shall have such powers and perform such duties as may, from time to time, be specified by the Board of Directors or by the chief executive officer of the Corporation. SECTION 7. Treasurer. The Treasurer shall have the care and custody of the funds and securities of the Corporation and shall have such powers and perform such duties as are incident to the office of Treasurer, or as may, from time to time, be specified by the Board of Directors or by the chief executive officer of the Corporation. He shall be subject to the control of the Board of Directors and to the powers of the chief executive officer of the Corporation. SECTION 8. Assistant Treasurers. Any Assistant Treasurer shall perform such duties as the Treasurer or the chief executive officer of the Corporation or the Board of Directors may from time to time assign to him. SECTION 9. Secretary. The Secretary shall have the care and custody of the seal and minute books of the Corporation and shall have such powers and perform such duties as are incident to the office of Secretary or as may, from time to time, be specified by the Board of Directors. He shall be subject to the control of the Board of Directors. SECTION 10. Assistant Secretaries. Any Assistant Secretary shall perform such duties as the Secretary or the chief executive officer of the Corporation of the Board of Directors may from time to time assign to him. SECTION 11. Controller. If a Controller shall have been elected, he shall be the chief accounting officer of the Corporation and shall have such powers and perform such duties as may, from time to time, be specified by the Board of Directors or the chief executive officer of the Corporation. SECTION 12. Auditor. If an Auditor shall have been elected, he shall have full charge of the auditing of all accounts of every kind, subject to the control of the Board of Directors, and shall also perform such other duties as the Board of Directors or the chief executive officer of the Corporation may from time to time direct. SECTION 13. Chief Tax Officer. The Chief Tax Officer shall have responsibility for all tax matters of the Corporation, subject to control of the Board of Directors, and shall have such powers and perform such other duties as the Board of Directors or the chief executive officer or the chief financial officer may from time to time direct. ARTICLE IV CAPITAL STOCK SECTION 1. Certificates of Shares and Uncertificated Shares. The shares of each class of the capital stock of the Corporation shall be represented by certificates or shall be uncertificated. Each registered holder of shares, upon request to the Company, shall be provided with a certificate of stock representing the number of shares owned by such holder. Certificates of stock shall be issued in such forms, not inconsistent with law or with the Certificate of Incorporation or other certificate filed pursuant to law, as shall be approved by the Board of Directors. SECTION 2. Transfers of Shares of Stock. Transfers of shares shall only be made upon the books of the Corporation by the holder in person, or by the power of attorney duly executed and filed with the Corporation, and on the surrender and cancellation of the certificate or certificates of such shares properly assigned. The Board of Directors shall have power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration of certificates of shares in the capital stock of the Corporation. 6 SECTION 3. Record Dates. For the purpose of determining the Stockholders entitled to notice of or to vote at any meeting of Stockholders or any adjournment thereof, or for the purpose of determining Stockholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board may fix, in advance, a date as the record for any such determination of Stockholders. Such date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. SECTION 4. Lost Certificates. No certificate of shares in the capital stock of the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed, except on delivery to the Corporation of a bond of indemnity, against such lost, stolen or destroyed certificate, with such surety or security, if any, as shall be approved by the Treasurer or Secretary. Proper and legal evidence of such loss, theft or destruction shall be produced to the Treasurer or Secretary, if they require the same. The Treasurer or Secretary may (except as otherwise provided in any agreement executed and delivered on behalf of the Corporation and authorized by the Board of Directors) in their discretion refuse to issue such new certificate, save upon the order of the court having jurisdiction in such matters. ARTICLE V DIVIDENDS Dividends may be declared and paid out of funds of the Corporation legally available therefor as often and at such times and to such extent as the Board of Directors may determine, consistent with the provisions of the Certificate of Incorporation or other certificate filed pursuant to law. ARTICLE VI SEAL The seal of the Corporation shall consist of a flat-faced circular die with the name of the Corporation in a circle and the year of its incorporation in the center. ARTICLE VII WAIVER Any notice required by the By-Laws of the Corporation to be given to Directors or Stockholders for any meeting may be waived by any Director or Stockholder in writing, signed by such Director or Stockholder or by his attorney thereunto authorized, and filed with the Secretary of the Corporation. ARTICLE VIII CHECKS, DRAFTS, NOTES, ETC. Funds of the Corporation on deposit with banks shall be disbursed by checks or drafts signed by such officer or officers as the Board of Directors from time to time designate or by such person or persons as shall from time to time be designated either by the Board of Directors or by such officer or officers as the Board shall from time to time authorize so to do. Notes, drafts, acceptances, bills of exchange, or other obligation for the payment of money (other than checks and drafts on banks with which the Corporation has funds on deposit) made, accepted, or endorsed, shall be signed by such officer or officers or person or persons as the Board of Directors shall from time to time designate. ARTICLE IX INDEMNIFICATION The Corporation shall indemnify each Officer or Director who is made, or threatened to be made, a party to any action by reason of the fact that he or she is or was an Officer or Director of the Corporation, or is or was serving at the request of the Corporation in any capacity for the Corporation or any other enterprise, to the fullest extent permitted by applicable law. The Corporation may, so far as permitted by law, enter into an agreement to indemnify and advance expenses to any Officer or Director who is made, or threatened to be made, a party to any such action. 7 ARTICLE X AMENDMENTS These By-Laws, or any of them, may be altered, amended, or repealed, and new By-Laws may be adopted, at any annual meeting of the Stockholders, or at any special meeting called for that purpose, by a vote of a majority of the shares represented and entitled to vote thereat. The Board of Directors shall have the power, by a majority vote of the whole Board, to alter or amend or repeal these By-Laws, but any such action of the Board of Directors may be amended or repealed by the Stockholders at any annual meeting. I, , a duly appointed Assistant Secretary of International Paper Company, a corporation duly organized and existing under the laws of the State of New York, hereby certify that the foregoing comprises a true and complete copy of the By-Laws of said International Paper Company as amended to the date hereof, and that the same in force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of said International Paper Company this day of , 20 . -------------------------------------------------- Assistant Secretary of International Paper Company 8 EX-10.1 4 dex101.txt LONG-TERM INCENTIVE COMPENSATION PLAN Exhibit 10.1 AMENDED AND RESTATED INTERNATIONAL PAPER COMPANY LONG-TERM INCENTIVE COMPENSATION PLAN 1. Purpose and Effective Date This plan shall be known as the International Paper Company Long-Term Incentive Compensation Plan (the "Plan"). The purpose of this Plan is to provide incentive for senior management officers and employees of the Company and its subsidiaries (the "Company") to improve the performance of the Company on a long-term basis, and to attract and retain in the employ of the Company persons of outstanding competence. The terms "subsidiary" and "subsidiaries" as used herein shall mean corporations which are owned or controlled by International Paper Company, directly or indirectly. The effective date of the Plan is January 1, 1989. The Plan was amended in 1994, 1999 and 2000 by a vote of shareholders. 2. Administration of the Plan (a) The Plan shall be administered by a committee (the "Committee") which shall be composed of members of the Board of Directors of the Company and which shall be constituted so as to permit the Plan to comply with the provisions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act") (or any successor rule) and Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Committee is authorized to administer and interpret the Plan, to authorize, change, and waive the restrictions and conditions imposed on awards and stock options under the Plan, to delegate the granting of awards hereunder, and to adopt such rules and regulations for carrying out the Plan as it may deem appropriate. Decisions of the Committee or its delegates on all matters relating to the Plan shall be in the Committee's sole discretion and shall be conclusive and binding on all parties, including the Company, the shareholders and the participants. (b) No member of the Committee or any employee acting on its behalf shall incur any liability for any action or failure to act in connection with this Plan. The Company shall indemnify each member of the Committee and any employee acting on its behalf against any and all claims, losses, damages, expenses and liabilities arising from any action or failure to act. 3. Participants (a) Participation in this Plan shall be limited to senior managers and other key employees of the Company as determined by the Committee or its delegates. Awards of stock and stock appreciation rights and grants of stock options may be made to such employees and for such respective numbers of Shares, as the Committee or its delegates, in their absolute discretion 1 shall determine (all such individuals to whom awards and options shall be granted being herein called "participants"). (b) Members of the Board of Directors who are also employees of the Company shall be eligible to participate in the Plan. However, members of the Board of Directors who are not also employees of the Company shall be ineligible for awards under this Plan. Notwithstanding the foregoing, any members of the Board of Directors who are also retired employees of the Company shall be entitled to the portions of their awards which are earned or vested pursuant to the provisions of the Plan. (c) A person who is compensated on the basis of a fee or retainer, as distinguished from salary, shall not be eligible for participation in the Plan. (d) Participation in this Plan, or receipt of an award or option under this Plan, shall not give a participant any right to a subsequent award or option, nor any right to continued employment by the Company for any period, nor shall the granting of an award or option give the Company any right to continued services of the participant for any period. Likewise, participation in the Plan will not in any way affect the Company's right to terminate the employment of the participant at any time with or without cause. 4. Definitions (a) "Stock" or "Share" shall mean a share of the common stock of $1.00 par value of International Paper Company. (b) "Performance Shares" shall mean Shares contingently awarded with respect to an Award Period and issued with the restriction that the holder may not sell, transfer, pledge, or assign such Shares, and with such other restrictions as the Committee in its sole discretion may determine (including, without limitation, restrictions with respect to forfeiture of the Shares and with respect to reinvestment of dividends in additional restricted Shares), which restrictions may lapse separately or in combination at such time or times (in installments or otherwise) as the Committee may determine. (c) "Stock Appreciation Right" or "SAR" shall mean a right included in an award under this Plan to receive upon exercise of the SAR a payment equal to the amount of the appreciation in the fair market value of a Share over the exercise price which is set forth in the SAR provided that the exercise price is not less than the fair market value of a Share on the date the SAR is granted. Payment upon exercise of an SAR may be in the form of cash, or restricted stock, or unrestricted stock, or a combination, as determined by the Committee in its sole discretion. SARs may be awarded separately or in combination with other awards and stock options under this Plan pursuant to terms and conditions contained in an award agreement as determined by the Committee. 2 (d) "Change of Control of the Company" shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the 1934 Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act (other than employee benefit plans sponsored by the Company) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company, cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election, by the Company's shareholders of each new director was approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of the period. 5. Stock Available for the Plan Subject to the adjustments permitted by Section 6 of the Plan, an aggregate of twenty-five million five-hundred thousand (25,500,000) Shares shall be available under the Plan as amended by the shareholders at the 1999 Annual Meeting for delivery pursuant to the future awards, and options granted pursuant to the Plan, together with any Shares previously authorized by shareholders under the Plan, as previously amended, which are not yet issued to, or are reacquired from, participants in the Plan as previously amended. Such Shares shall be either previously unissued Shares or reacquired Shares. Shares covered by awards which are not earned, or which are settled in cash, or which are forfeited or terminated for any reason, and options which expire unexercised or which are exchanged for other awards, shall again be available for other awards and stock options under the Plan. Shares received by the Company in connection with the exercise of stock options by delivery of other Shares, and received in connection with payment of withholding taxes, shall again be available for delivery under the Plan. Shares reacquired by the Company on the open market using the cash proceeds received by the Company from the exercise of stock options granted under the Plan as previously amended shall be available for awards and options up to the number of Shares issued upon option exercises which generated such proceeds, provided any such exercise occurred on or after January 1, 1989. Notwithstanding the foregoing, the maximum number of Shares available for delivery pursuant to future awards, options and SARs to executive officers of the Company who, at the time of grant, are subject to the provisions of Section 16 of the 1934 Act shall not exceed 14,600,000 Shares, subject to the adjustments permitted by Section 6 of the Plan. Notwithstanding any other provision of this Plan, subject, however, to the adjustments permitted by Section 6 of the Plan, the aggregate number of Shares that can be covered by future stock options or SARs granted to any individual in any period of three consecutive fiscal years shall be 1,800,000 and the aggregate number of restricted Shares issued under this Plan after the 1999 annual meeting of shareholders may not exceed 3,000,000 Shares. 3 6. Changes in Stock and Exercise Price of Stock Options and SARs In the event of any stock dividend, split-up, reclassification or other analogous change in capitalization or any distribution (other than regular cash dividends) to holders of the Company's common stock, the Committee shall make such adjustments, if any, as it deems to be equitable in the exercise price of outstanding options and SARs, and in the number of Performance Shares awarded and earned, and in the number of Shares covered by any outstanding stock options and SARs, granted under this Plan, and in the aggregate number of Shares covered by this Plan. 7. Time of Granting Awards and Stock Options Nothing contained in this Plan, or in any resolution adopted or to be adopted by the Board of Directors or the shareholders of the Company, shall constitute the granting of an award or stock option under this Plan. The granting of an award or stock option pursuant to the Plan shall take place only when authorized by the Committee or its delegates. 8. Death or Disability of a Participant In the event of the death of a participant, a stock option or an SAR may be exercised within one year of the participant's death by the participant's designated beneficiary or beneficiaries (or if no beneficiary has been designated or survives the participant, by the person or persons who have acquired the rights of the participant by will or under the laws of descent and distribution). If a participant becomes disabled, the participant may exercise a stock option or an SAR within one year after the date of the disability. For purposes of this Plan, the term "disabled" shall refer to the condition of total disability defined in the Company's long-term disability plan. A participant may file with the Committee a designation of a beneficiary or beneficiaries on a form approved by the Committee, which designation may be changed or revoked by the participant's sole action, provided that the change or revocation is filed with the Committee on a form approved by it. In case of the death of the participant, before termination of employment or after retirement or disability, any portions of the participant's award to which the participant's designated beneficiary or estate is entitled under the Plan and the award agreement, shall be paid to the beneficiary or beneficiaries so designated or, if no beneficiary has been designated or survives such participant, shall be delivered as directed by the executor or administrator of the participant's estate. 9. Retirement of Holder of Stock Option or SAR If a participant retires under a Company pension plan, the participant may exercise a stock option or an SAR within its remaining term unless otherwise provided in the award agreement. Retirement under any of the Company's pension plans shall cause incentive stock options to be treated for federal income tax purposes as non-qualified stock options on a date which is three 4 months after the date of retirement. For purposes of this section, retirement shall be given the meaning used under the Company's pension plan for salaried employees. 10. Non-Transferability of Awards No award, stock option or SAR under this Plan, and no rights or interests therein, shall be assignable or transferable by a participant (or legal representative), except at death by will or by the laws of descent and distribution unless otherwise permitted by the Committee and by law and, in the case of incentive stock options, to the extent consistent with Section 422 of the Code. 11. Modification of the Plan The Board of Directors, without further approval of the shareholders, may at any time amend the Plan to take into account and comply with any changes in applicable securities or federal income tax laws and regulations, or other applicable laws and regulations, including without limitation, any modifications to Rule 16b-3 under the 1934 Act or Section 162(m) of the Code (or any successor rule, provision or regulation), terminate or modify or suspend (and if suspended, may reinstate) any or all of the provisions of this Plan, except that no modification of this Plan shall without the approval of the Company's shareholders increase the total number of Shares for which awards, stock options and SARs may be granted under the Plan (except pursuant to Section 6). RESTRICTED PERFORMANCE SHARE AWARDS 12. Terms and Conditions of Awards of Performance Shares (a) Each award of Performance Shares under this Plan shall be contingently awarded with respect to a period of consecutive calendar years as determined by the Committee (herein called an "Award Period") and shall be made from reacquired Shares. The first complete Award Period under this Plan began with the year 1989. A new Award Period shall commence at the beginning of each calendar year. (b) The Performance Shares awarded under this Plan will be earned by a participant on the basis of the Company's financial performance over the Award Period for which it was awarded, on the basis of pre-established performance goals determined by the Committee in its sole discretion. The Performance measurement criteria used for Performance Shares shall be limited to one or more of: earnings per share, return on stockholders equity, return on investment, return on assets, growth in earnings, growth in sales revenue, and shareholder returns. Such criteria may be measured based on the Company's results or on the Company's performance as measured against a group of peer companies selected by the Committee. In applying such criteria, earnings may be calculated based on the exclusion of discontinued operations and extraordinary items. Subject to the adjustments permitted by Section 6 of the Plan, the maximum number of Performance Shares that can be earned for any one individual for any future Award Period is 100,000. Subject to such maximum number of Shares, the amount, if any, that may be earned by 5 a participant receiving Performance Shares may vary in accordance with the level of achievement of the performance goal or goals established by the Committee. (c) A participant's rights with respect to all unearned Performance Shares shall terminate at the end of each Award Period. (d) The number of Shares determined by the Committee to have been earned with respect to any Award Period shall be final, conclusive and binding upon all parties, including the Company, the shareholders and the participants. (e) All dividend equivalents credited on Performance Shares during an Award Period shall be reinvested in additional Performance Shares (which shall be allocated to the same Award Period, and shall be subject to being earned by the participant on the same basis as the original award). (f) All dividends paid on earned restricted Shares under this part of the Plan shall be paid in cash. (g) As a condition of any award of Performance Shares under this Plan, each participant shall enter into an award agreement authorized by the Committee. The Committee may in its sole discretion, include additional conditions and restrictions in the award agreement entered into under this Plan. Settlements in Shares may be subject to forfeiture and other contingencies as the Committee may determine. (h) At the discretion of the Committee, SARs may be awarded separately or in combination with other awards or grants under this portion of the Plan. (i) In the event a Change of Control of the Company occurs, then (A) all restrictions shall be immediately removed with respect to all earned Performance Shares and (B) a pro rata portion of each outstanding Award that would have been earned were Company performance to reach the goals established by the Committee for each uncompleted Award Period shall be deemed earned (based on the number of months of the total Award Period which have been completed prior to the Change of Control), and all restrictions shall be immediately removed with respect to that number of shares; the remaining portion of each Award shall remain outstanding as Performance Shares subject to the provisions of this Plan and the participant's award agreements. 6 STOCK OPTION AWARDS 13. Terms and Conditions of Stock Options (a) The Committee and its delegates shall have the sole authority to grant stock options under this Plan. Such grants may consist of non-qualified stock options, or Incentive Stock Options, or any combination thereof, as the Committee shall decide from time to time. The aggregate fair market value (determined at the time the option is granted) of the Stock with respect to which Incentive Stock Options are exercisable for the first time by an individual during a calendar year shall not exceed $100,000 as determined under Section 422A of the Internal Revenue Code or comparable legislation. The maximum number of Shares for which stock options can be awarded to any one individual over any consecutive three-year period commencing on the effective date of the amendment to the Plan is 1,800,000 Shares, subject to the adjustments permitted by Section 6 of the Plan. (b) The term of each option granted under the Plan shall be set by the Committee, but in no event shall an Incentive Stock Option be exercised after ten years following the date of its grant under this Plan. (c) The exercise price of each option granted under the Plan shall be no less than the fair market value of the underlying Stock at the time the option is granted as determined by the Committee. (d) Prior to the exercise of the option and delivery of the Stock represented thereby, the participant shall have no rights to any dividends nor be entitled to any voting rights on any Stock represented by outstanding options. (e) As a condition of any grant of a stock option under this Plan, each participant shall enter into an award agreement authorized by the Committee. The Committee may, in its sole discretion, include additional conditions and restrictions in the award agreement entered into under this Plan. (f) At the discretion of the Committee, SARs may be awarded separately or in combination with other awards or grants under this part of the Plan. 14. Exercise of Stock Options (a) Each stock option granted under this Plan shall be exercisable as provided in accordance with the document evidencing the option by full payment of the option price in cash or at the discretion of the Committee in Stock owned by the participant (including Performance Shares and other restricted Shares awarded under this Plan). Unless otherwise provided herein, a participant may exercise a stock option only if he or she is an employee of the Company and has continuously been an employee of the Company since the date the option was granted. 7 (b) If a stock option under this Plan is exercised by a participant, then, at the discretion of the Committee, the participant may receive a replacement option under this part of the Plan to purchase a number of Shares equal to the number of Shares which the participant purchased on the exercise of the option, with an exercise price equal to the current fair market value, and with a term extending to the expiration date of the original stock option. If a stock option is exercised by delivery of restricted Shares, then the participant shall receive an equal number of identically restricted Shares; the remaining option exercise Shares shall contain any applicable restrictions which are set forth in the participant's award agreement and shall otherwise be unrestricted. (c) In the event a Change of Control of the Company occurs, all stock options granted under this part of the Plan shall be immediately exercisable, and all restrictions on Shares issued under this plan pursuant to the exercise of stock option shall be immediately removed. CONTINUITY AWARDS 15. Terms and Conditions of Executive Continuity Awards (a) Executive Continuity Awards may be made from time to time under this Plan at the discretion of the Committee, in such amounts and upon such terms and conditions as are established by the Committee under this portion of the Plan. (b) An executive Continuity Award shall consist of a tandem grant of restricted Shares together with a related non-qualified stock option (options to be granted in accordance with the provisions of sections 13-14 of this Plan) to purchase a specified number of Shares, in such amounts as may be determined by the Committee. All dividends paid on the restricted Shares shall be reinvested in additional shares of restricted Shares (subject to the same restrictions, terms and conditions). Upon attainment of age 65, (or death or the executive's becoming disabled) or such other age as is determined in the sole discretion of the Committee, or upon a Change of Control of the Company (as limited under subsection (h) below), the restrictions on the award will be removed, and the award will vest in the following manner, except as otherwise determined by the Committee: (i) If the current realizable gain on a tandem stock option is greater than the current market value of the related restricted Shares (including re-invested dividends), then all such shares of restricted Shares shall be canceled and the term of the stock option shall continue for the term set forth in the award agreement. (ii) If the current market value of the restricted Shares (including re-invested dividends) is greater than the current realizable gain on any related tandem stock option, then the option shall be canceled and the restrictions shall be removed from all of the related restricted Shares. 8 (c) If a stock option granted under this portion of the Plan is exercised prior to the executive's attainment of an age determined by the Committee, the related shares of restricted Shares shall be canceled, and the additional Shares issued upon the exercise of the stock option shall be restricted and subject to either forfeiture or repurchase by the Company at the option exercise price for a period ranging up to 12 years from the date of the grant of the option, or longer, as determined by the Committee and set forth in the award agreement. (d) A stock option granted under this portion of the Plan shall be exercisable as provided in accordance with the document evidencing the option by full payment of the option price in cash or, at the discretion of the Committee, in Stock owned by the participant (including Performance Shares awarded under this Plan). At the discretion of the Committee, the participant may receive a replacement stock option to purchase a number of shares equal to the number of shares purchased by the participant in exercising the option, with an exercise price equal to the current market value, and with a term extending to the expiration date of the original stock option. If an option is exercised by delivery of restricted Shares, then the participant shall receive an equal number of identically restricted Shares; the remaining option exercise Shares shall be subject to the Company's right to impose restrictions on such Shares as described in subsection (c) above. (e) As a condition of any executive Continuity Award under this Plan, each participant shall enter into an award agreement authorized by the Committee. The Committee may, in its sole discretion, include additional conditions and restrictions in the award agreement. (f) At the discretion of the Committee, SARs may be awarded separately or in combination with other awards or grants under this portion of the Plan. (g) In the event a Change of Control of the Company occurs, all restrictions shall be immediately removed with respect to the exercise of stock options under this part of the Plan and with respect to Shares issued upon the exercise of any stock option. A Change of Control, for these purposes, shall not include a transaction initiated by management such as a management led buyout or recapitalization except where such transaction (i) is in response to the acquisition of 10% or more of the Company's stock or the announcement of a tender offer for 20% or more of the Company's stock (other than by employee benefit plans sponsored by the Company); or (ii) is approved by the Board in accordance with the standards set forth in Section 717 of the New York Business Corporation Law or any successor provision. 16. Terms and Conditions of Other Continuity Awards (a) Awards of restricted stock hereinafter called "continuity awards" may be made from time to time under the Plan at the discretion of the Committee or its delegates, in such amounts and upon such terms and conditions as are established by the Committee or its delegates under this portion of the Plan. All dividends paid on the restricted Shares shall be reinvested in additional shares of restricted Shares (subject to the same restrictions, terms and conditions.) 9 (b) As a condition of any such continuity award under this Plan, each participant shall enter into an award agreement authorized by the Committee or its delegates. The Committee or its delegates, in their sole discretion, may include additional conditions or restrictions in the award agreement. (c) In the event a Change of Control of the Company occurs, all restrictions shall be immediately removed with respect to Shares issued as a continuity award. A Change of Control, for these purposes, shall not include a transaction initiated by management, such as a management led buyout or recapitalization except where such transaction (i) is in response to the acquisition of 10% or more of the Company's stock or the announcement of a tender offer for 20% or more of the Company's stock (other than by employee benefit plans sponsored by the Company); or (ii) is approved by the Board in accordance with the standards set forth in Section 717 of the New York Business Corporation Law or any successor provision. MISCELLANEOUS 17. Prior Awards Awards of stock options and Performance Shares made under the Plan prior to the amendments approved by shareholders at the 1994 annual meeting continued to be subject to the terms of the Plan and the instruments evidencing such awards prior to such amendments becoming effective. 18. Tax Withholding The Company shall have the right to deduct from any settlement of an award made under the Plan, including the delivery or vesting of Shares, 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. The Committee may permit or require Shares to be used to satisfy required tax withholding and such Shares shall be valued at the fair market value as of the settlement date of the applicable award. 10 EX-10.6 5 dex106.txt STOCK OPTION AGREEMENT Exhibit 10.6 INTERNATIONAL PAPER COMPANY NONQUALIFIED STOCK OPTION AWARD Identification Number: John Sample Any Address Any Apartment Any City, State 12354-5678 THIS CERTIFIES THAT the Management Development and Compensation Committee of the Board of Directors of International Paper Company, a New York corporation (the "Company"), has awarded NAME a Nonqualified Stock Option (this "Option") under the International Paper Company Long-Term Incentive Compensation Plan (as may be amended from time to time, the "Plan") to purchase NUMBER shares of common stock (par value $1.00) of the Company (the "Common Stock") at a price of $XX.XXXX. This Option is exercisable, subject to the provisions on the reverse side of this certificate. The details of this Option are as follows: NQSO Grant Number: Total Option Award: Option Price per Share: Grant Date: Expiration Date: Vesting Date: This Option is subject to the terms and conditions of the Plan. Terms not otherwise defined in this certificate have the meaning assigned to them in the Plan. In the event of any inconsistency between the terms hereof and the provisions of the Plan, the Plan shall govern. By accepting this Option, you acknowledge receipt of a copy of the Company's stock option award program prospectus, represent that you are familiar with the terms and provisions of the Plan and agree to accept this Option subject to all the terms and provisions of the Plan. IN WITNESS WHEREOF, the Company has caused this award to be executed by its duly authorized officers as of this __th day of __________, 20__. International Paper Company Chairman & Chief Executive Officer 1. Exercise of Options Subject to the Plan and this certificate, this Option shall become exercisable as set forth below, and thereafter may be exercised at any time, and from time to time, in whole or in part, until its expiration or other termination; provided that (a) this Option shall in no event be exercisable after the Expiration Date; and (b) you have continuously been an employee of the Company or a subsidiary of the Company since the Grant Date (except as provided in Paragraphs 3, 4 or 5). Exercise of this Option shall occur pursuant to appropriate notice, together with provision for payment of (x) the full Option Price of the shares of Common Stock for which this Option is exercised and (y) applicable withholding taxes. 2. Termination of This Option Any unexercised portion of this Option shall terminate, and shall not be exercisable, on and after the first to occur of the following dates: (a) the Expiration Date; or (b) the date you cease to be an employee of the Company or a subsidiary of the Company, unless the termination of employment results from disability (within the meaning of Paragraph 3), retirement (within the meaning of Paragraph 4) or death, or unless the Committee determines otherwise pursuant to Section 2 of the Plan. 3. Disability In the event you become totally disabled, this Option shall be immediately exercisable and you may exercise this Option for up to the shorter of (a) one year measured from the date of such total disability; or (b) the remaining term of this Option. For purposes of this Paragraph 3, the term "totally disabled" means the condition of total disability as defined in the Company's long-term disability plan. 4. Retirement In the event of your termination of employment because of retirement under a Company pension plan on or after attaining (a) age 61 with 20 years service; (b) age 62 with 10 years service; or (c) age 65 with 5 years service, this Option shall be immediately exercisable and you may exercise this Option during its remaining term. 5. Death In the event of your death, this Option shall be immediately exercisable and may be exercised for up to the shorter of (a) one year measured from the date of your death; or (b) the remaining term of this Option, in either case by the beneficiary or beneficiaries so designated (or if no beneficiary has been designated or survives you, by the person or persons who have acquired your rights by will or under the laws of descent and distribution). 6. Change of Control of the Company In the event a Change of Control of the Company occurs, this Option shall be immediately exercisable. 7. Waiver; Amendment; Termination Subject to the Plan and applicable law, the Committee may waive any conditions or rights under or change, amend or terminate this Option, prospectively or retroactively; provided that any such waiver, change, amendment or termination that would materially adversely affect your rights or your beneficiary or beneficiaries shall not, to that extent, be effective without your (or his, her or their) consent. 8. Other Terms and Conditions (a) This Option is not an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code. (b) Prior to the exercise of this Option and delivery of the stock represented thereby, you shall have no rights to any dividends nor be entitled to any voting rights on any stock represented by this Option. (c) This Option is not transferable or assignable by you otherwise than by will or the laws of descent and distribution, and during your lifetime is exercisable only by you or your guardian or legal representative. (d) Decisions of the Committee or its delegates on all matters relating to the Plan shall be in the Committee's sole discretion and shall be conclusive and binding on all parties, including the Company, the shareholders and you. (e) If at any time the Board of Directors or the Committee shall determine, in its discretion, that the listing, registration or qualification of any shares of Common Stock subject to this Option upon any securities exchange or under any state or federal law, or the consent or approval of any regulatory commission or agency having jurisdiction, is necessary or desirable as a condition of, or in connection with, the granting of this Option or the issue and sale of shares hereunder, this Option may not be exercised in whole or in part. Inability of the Company to obtain from any such regulatory commission or agency authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock to satisfy this Option shall relieve the Company from any liability for failure to issue and sell Common Stock to satisfy this Option pending the time when such authority is obtained or is obtainable, and any delay caused thereby shall in no way affect the date of termination of this Option. (f) All of the terms and conditions of this certificate shall be binding upon any surviving spouse, beneficiary, executor, administrator, heirs, successors or assigns of you. EX-10.8A 6 dex108a.txt FORM OF CHANGE OF CONTROL AGREEMENT JOHN T DILLON A Exhibit 10.8(a) Mr. ((First_Name)) ((MI)) ((Last_Name)) International Paper Company ((TITLE)) ((ADDRESS)) ((CITY)), ((STATE)) ((ZIP)) Dear ((First)): International Paper Company (the "Company") considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change of control may exist and that such possibility, and the uncertainty and questions which it may raise among senior management, may result in the departure or distraction of senior management personnel to the detriment of the Company and its shareholders. Accordingly, the Company's Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's senior management, including yourself, to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from the possibility of a change of control of the Company. In order to induce you to remain in the employ of the Company, and to continue to exercise your special skills and knowledge at the Company, this letter agreement (this "Agreement") sets forth the benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change of Control (as defined in Section 2 under the circumstances described below. 1. TERM This Agreement shall commence on the date hereof and, unless there is a Change of Control, shall continue until the earliest of (a) your termination of employment as a "full-time employee" of the Company, (b) the date when you attain the age of 65 years or (c) the date when this Agreement is terminated by the Company in accordance with the next sentence. If a Change of Control has not occurred, then the Company shall have the right at any time to terminate this Agreement by giving you 6 months prior written notice of termination of this Agreement. If a Change of Control occurs at any time prior to the termination of this Agreement pursuant to the preceding paragraph, then this Agreement shall terminate on the second anniversary of such Change of Control. 2. CHANGE OF CONTROL (a) For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any "person" (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended, other than employee benefit plans sponsored by the Company) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of 2 consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company (the "Board") cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election, by the Company's shareholders of each new director was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period; (iii) a reorganization, merger or consolidation of the Company is consummated, in each case, unless, immediately following such reorganization, merger or consolidation, (x) more than 50% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners of the Company's securities outstanding immediately prior to such reorganization, merger or consolidation, (y) no person (other than employee benefit plans sponsored by the Company) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (z) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; 2 (iv) the sale or other disposition of all or substantially all of the assets of the Company is consummated, other than to any corporation with respect to which, immediately following such sale or other disposition, (x) more than 50% of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners of the Company's securities outstanding immediately prior to such sale or other disposition, (y) no person (other than employee benefit plans sponsored by the Company) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (z) at least a majority of the members of the board of directors of such corporation were members of the Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition; or (v) the shareholders of the Company approve a complete liquidation or dissolution of the Company; provided that a "Change of Control", as it affects any award specified in the International Paper Company Long-Term Incentive Compensation Plan in effect immediately prior to a Change of Control ("the LTICP"), shall have the meaning for a "Change of Control of the Company" set forth in such plan and, as it affects any benefits pursuant to the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers then in effect (the "SERP"), shall have the meaning for a "Change of Control" set forth in the SERP. (b) Provided that you remain in the employment of the Company as of the date immediately preceding a Change of Control, then upon the occurrence of such Change of Control: (i) each stock option to purchase shares of the common stock of the Company (or such other securities of the Company that may be substituted for such stock of the Company) granted to you by the Company under any plan, arrangement or agreement before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you shall become fully (100%) vested and exercisable; (ii) any and all forfeiture provisions, transfer restrictions and any other restrictions applicable to each award of restricted stock of the Company (or such other securities of the Company that may be substituted for such stock of the Company) granted to you by the Company under any plan, arrangement or agreement before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you shall immediately lapse in their entirety; (iii) the performance goals applicable to any performance-based awards granted to you by the Company under any plan, 3 arrangement or agreement (other than any short-term annual incentive plan) before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you will be deemed to have been fully satisfied (i.e., achieved at 100% of target, or, if higher and determinable, achieved at the actual level) and all forfeiture provisions, transfer restrictions and any other restrictions applicable to any such performance-based awards shall immediately lapse in their entirety and all such awards shall be fully and immediately payable; and (iv) each executive continuity award and each other long-term award granted to you by the Company under any plan, arrangement or agreement before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you shall become fully (100%) vested and, if applicable, exercisable. 3. TERMINATION OF EMPLOYMENT FOLLOWING CHANGE IN CONTROL If a Change in Control shall have occurred and your employment is subsequently terminated by you or by the Company, you shall be entitled to the benefits provided in Section 4 for the respective reasons for termination set forth therein. Such reasons are defined as follows: (a) Disability. Termination by the Company or you of your employment ---------- based on "Disability" shall mean termination in accordance with the Company's long-term disability policy in effect immediately prior to the Change of Control or in accordance with any long-term disability arrangement established with your consent with respect to you (in either case, "Company Disability Policy"). (b) Retirement. Termination by the Company or you of your employment ---------- based on "Retirement" shall mean termination on or after age 65 in accordance with the Company's retirement policy in effect immediately prior to the Change of Control or in accordance with any retirement arrangement established with your consent with respect to you (in either case, "Company Retirement Policy"). (c) Cause. Termination by the Company of your employment for "Cause" ----- shall mean termination upon: (i) the willful and continued failure by you substantially to perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure resulting from termination by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties; or (ii) the willful engaging by you in gross misconduct which is demonstrably and materially injurious to the Company, monetarily or 4 otherwise, including but not limited to your conviction or guilty plea for any felony crime. For purposes of this Section 3(c), no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company, or, in the alternative, unless your act or failure to act has resulted in your conviction or guilty plea for any felony crime. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in Sections 3(c)(i) or 3(c)(ii) and specifying the particulars thereof in detail. (d) Voluntary Termination. You may terminate employment at any time --------------------- within a period of 18 months following a Change of Control. (e) Notice of Termination. Any termination of your employment by the --------------------- Company pursuant to Sections 3(a), 3(b) or 3(c) or by you pursuant to Section 3(d) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (f) Date of Termination. "Date of Termination" shall mean: (i) if ------------------- your employment is terminated for Disability or Retirement, the date of termination as a "full-time employee" under the Company Disability Policy or Company Retirement Policy, respectively, (ii) if your employment is terminated pursuant to Section 3(d), the date specified in the Notice of Termination and (iii) if your employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within 10 business days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning such termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefor having expired and no appeal having been perfected). 4. COMPENSATION UPON TERMINATION OR DURING DISABILITY (a) Disability. During any period that you fail to perform your ---------- duties under this Agreement as a result of incapacity due to physical or mental illness, you shall continue to receive your full base salary and benefits at the rate 5 and level then in effect until your employment is terminated pursuant to Section 3(a). Thereafter, your benefits shall be determined in accordance with the Company Disability Policy, and the Company shall have no further obligations to you under this Agreement. (b) Retirement. If your employment is terminated pursuant to Section ---------- 3(b), then your benefits shall be determined in accordance with the Retirement Plan for Salaried Employees of International Paper Company and the SERP (or, for each, the substitute plan then in effect), referred to collectively in this Agreement as the "Pension Plan", and the Company shall have no further obligations to you under this Agreement. (c) Cause. If you employment is terminated for Cause, then the ----- Company shall pay you your full base salary, plus normal benefits to which you would otherwise be entitled, through the Date of Termination at the rate and level in effect at the time Notice of Termination is given, and the Company shall have no further obligations to you under this Agreement. (d) Other Termination. Upon your termination of employment (other ----------------- than for death or pursuant to Sections 3(a), 3(b) or 3(c)), the Company shall pay to you the following amounts in cash in one lump-sum payment within 30 days of the Date of Termination: (i) your full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus an amount in cash equal to the value of any vacation earned but not taken (based upon such rate of base salary); (ii) to the extent not paid, your full prior-year short-term annual incentive compensation (in the amount determined prior to the Date of Termination, or if such amount has not been determined as of the Date of Termination, an amount not less than the higher of (x) your actual short-term annual incentive compensation amount for the year before such prior-year or (y) your target short-term annual incentive compensation amount for such prior-year); (iii) your short-term annual incentive compensation for the year in which the Date of Termination occurs (the "Termination Year"), as if the performance goals applicable to such amount have been fully satisfied (i.e., achieved at 100% of target, or, if higher and determinable, achieved at the actual level); provided that such compensation will be prorated to reflect the number of days that have elapsed as of the Date of Termination since the beginning of such Termination Year; (iv) the product of "3" times a "Base Amount" consisting of the sum of (I) your annualized base salary as of the Date of Termination and (II) the greater of (x) your target short-term annual incentive compensation amount for the year in which the Date of Termination occurs or (y) your average short-term annual incentive compensation amount during the 3 years preceding the Date of Termination (it being 6 understood that in the case of the most recent year preceding the Date of Termination, such amount may, if applicable, be the amount to which you have become entitled under Section 4(d)(ii) in respect of such year); provided that Base Amount shall exclude any compensation under long-term incentive compensation plans, performance share plans, stock option plans or executive continuity awards; (v) an amount equal to the unpaid amount of any deferred incentive award if you were the recipient of a deferred incentive award which was not fully paid at the Date of Termination; (vi) an amount equal to the following: (A) the value of the product of the Product Number times your average earned award (deferred and non-deferred) under the International Paper Company Performance Share Plan in effect as of the Date of Termination, or such successor plan (the "PSP"), for the 3 years preceding the Date of Termination (but excluding any special executive continuity award from that value); (B) the value of any common stock of the Company ("Company Common Stock") previously earned but deferred under the PSP or the former Performance Incentive Plan; provided that the value to be used in determining awards under this Section 4(d)(vi) shall be the average of the closing prices of Company Common Stock as reported for New York Stock Exchange Composite Transactions (or such other stock exchange where Company Common Stock is principally listed) for 30 consecutive trading days ending with the Date of Termination. (vii) stock options equal to the product of the Product Number times the average number of stock options awarded to you during the 3 years prior to the Termination Year (but excluding any special executive continuity award stock options); plus the extension of all stock options held by you for the period from the Date of Termination until the end of the normal terms of the options had your employment status not changed; plus (viii) in the event it shall be determined that any compensation by or benefit from the Company to you or for your benefit, whether pursuant to the terms of this Agreement or otherwise (collectively, the "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar provision or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are 7 hereinafter collectively referred to as the "Excise Tax"), an additional lump-sum payment (a "Gross-Up Payment") in an amount determined by the Company's outside auditors such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment; provided, however, that if the aggregate value of the Payment is less than 115% of the product of "3" times your "base amount" (as defined in Section 280G(b)(3) of the Code) (such product, the "Golden Parachute Threshold"), then you shall not be entitled to any Gross-Up Payment and, instead, the Payment shall be reduced to an amount equal to $1.00 less than the Golden Parachute Threshold; provided that such lump-sum payment under this Section 4(d) shall be deposited in a "rabbi trust" upon the execution of any merger, stock purchase, asset purchase or similar agreement that, upon the consummation of the transactions contemplated thereunder, would result in a Change of Control; and provided further that the payments made to you under this Section 4(d) shall be in lieu of any salary, severance or termination payments, or payments under compensation or deferred compensation plans (other than payments due from trusts) for periods prior to and subsequent to the Date of Termination. (e) Normal Benefits. Notwithstanding your termination of --------------- employment (other than for death or pursuant to Sections 3(a), 3(b) or 3(c)), the Company shall maintain in full force and effect for the continued benefit of you and your dependents until the date you reach the age of 65, all employee benefit plans and programs or arrangements in which you were entitled to participate immediately prior to the Date of Termination (including medical and dental insurance coverage for you and your dependents), except the Company's Salary Continuance Plan, Company Disability Policy, travel and accident insurance and the savings investment plans; provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans and programs except as otherwise provided in Section 4(f). At the end of the period of coverage, you shall have the option to have assigned to you at no cost and with no apportionment of prepaid premiums, any assignable insurance policy owned by the Company and relating specifically to you. Any portion of the payment set forth in Section 4(d) which constitutes "compensation" (as that term is defined under the Pension Plan) shall be included in determining your benefit entitlement under the terms of the Pension Plan. It is understood and agreed that you shall be entitled to any benefits in which you are vested as of termination pursuant to the terms of the respective benefit plans including but not limited to the Pension Plan. (f) Benefits Outside the Pension Plan. Notwithstanding your --------------------------------- termination of employment (other than for death or pursuant to Sections 3(a), 3(b) or 3(c)), you shall be entitled to a lump-sum payment in cash in addition to the payment set forth in Section 4(d) calculated as follows: 8 (i) your vested benefits under the terms of the Pension Plan will be paid to you pursuant to Section 4(e); in addition, you shall be paid under this Section 4(f) an amount equal to the difference between (A) the actuarial present value on the Date of Termination of your accrued vested benefits under the Pension Plan (payable as a life annuity from age 65) and (B) the actuarial present value on the Date of Termination of what your accrued benefits under the Pension Plan (payable as a life annuity from age 65) would have been if the period and payments referred to in Section 4(d)(iv) were recognized under the Pension Plan. (ii) in calculating the lump-sum payment referred to in this Section 4(f), the Company will use the applicable Pension Benefit Guaranty Corporation interest rate effective as of your Date of Termination and will make such payment no later than 30 days following the date of determination of the amount due. (g) Executive Financial Counseling Services. You shall be entitled to --------------------------------------- receive executive financial counseling services valued up to $20,000 in aggregate. (h) Non-Mitigation of Damages. You shall not be required to mitigate ------------------------- the amount of any payment provided for in this Section 4 (by seeking other employment or otherwise), nor shall the amount of any payment provided for in this Section 4 be reduced by any compensation earned by you as a result of employment by another employer after the Date of Termination. 5. SUCCESSORS; BINDING AGREEMENT (a) Successor Companies. The Company will require any successor ------------------- (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to you, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to terminate your employment and to receive compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you voluntarily terminated your employment following a Change of Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 5 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) Heirs; Representatives. This Agreement shall inure to the benefit ---------------------- of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 9 If you should die while any amounts would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee, or, if there be no such designee, to your estate. 6. NOTICE For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement; provided that all notices to the Company shall be directed to the attention of the Senior Vice President Human Resources of the Company with a copy to the Secretary of the Company, or to such address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 7. MISCELLANEOUS This Agreement constitutes the entire agreement on this subject matter between the parties and supersedes any prior oral or written agreements or understandings on the subject matter covered by this Agreement and shall not be amended or modified except by written agreement signed by both parties. No significant provisions of this Agreement may be waived or discharged, unless such waiver or discharge is in writing signed by the party who is making the waiver or discharge. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. In the event that this Agreement provides benefits upon termination of your employment which duplicate benefits contained in any employment arrangement with you, such arrangement shall automatically be amended in accordance with this Agreement so that your benefits under this Agreement shall be sole and exclusive to the extent to which they are duplicative. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 8. VALIDITY The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 9. ARBITRATION; LEGAL EXPENSES Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in New York, New York, in accordance with the rules of the American Arbitration Association then in effect. Notwithstanding the pendency of any such dispute or controversy, the Company will continue to pay you your base salary in effect when the notice giving rise to the dispute was given, and will continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved. 10 The Company shall also pay all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement), except such fees and expenses incurred in connection with any frivolous claim or suit. All amounts paid under this Section 9 are in addition to any other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 10. RELEASE. You will be required to execute and deliver a valid and irrevocable release of employment-related claims in the form provided by the Company in order to receive any of your compensation or benefits pursuant to the terms of this Agreement. 11 If this, letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, INTERNATIONAL PAPER COMPANY By: ----------------------------------------- J. N. Carter SVP, Human Resources Agreed: _________________________________________ (First_Name)(Last_Name) (TITLE) Social Security Number: _________________ EX-10.8B 7 dex108b.txt FORM OF CHANGE OF CONTROL AGREEMENT -TIER I Exhibit 10.8(b) A Mr.(First_Name)(MI)(Last_Name) International Paper Company (TITLE) (ADDRESS) (CITY),(STATE)(ZIP) Dear(First): International Paper Company (the "Company") considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change of control may exist and that such possibility, and the uncertainty and questions which it may raise among senior management, may result in the departure or distraction of senior management personnel to the detriment of the Company and its shareholders. Accordingly, the Company's Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's senior management, including yourself, to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from the possibility of a change of control of the Company. In order to induce you to remain in the employ of the Company, and to continue to exercise your special skills and knowledge at the Company, this letter agreement (this "Agreement") sets forth the benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change of Control (as defined in Section 2) under the circumstances described below. 1. TERM This Agreement shall commence on the date hereof and, unless there is a Change of Control, shall continue until the earliest of (a) your termination of employment as a "full-time employee" of the Company, (b) the date when you attain the age of 65 years or (c) the date when this Agreement is terminated by the Company in accordance with the next sentence. If a Change of Control has not occurred, then the Company shall have the right at any time to terminate this Agreement by giving you 6 months prior written notice of termination of this Agreement. If a Change of Control occurs at any time prior to the termination of this Agreement pursuant to the preceding paragraph, then this Agreement shall terminate on the second anniversary of such Change of Control. 2. CHANGE OF CONTROL (a) For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any "person" (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended, other than employee benefit plans sponsored by the Company) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of 2 consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company (the "Board") cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election, by the Company's shareholders of each new director was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period; (iii) a reorganization, merger or consolidation of the Company is consummated, in each case, unless, immediately following such reorganization, merger or consolidation, (x) more than 50% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners of the Company's securities outstanding immediately prior to such reorganization, merger or consolidation, (y) no person (other than employee benefit plans sponsored by the Company) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (z) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; (iv) the sale or other disposition of all or substantially all of the assets of the Company is consummated, other than to any corporation with respect to which, immediately following such sale or other disposition, (x) more than 50% of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the 2 election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners of the Company's securities outstanding immediately prior to such sale or other disposition, (y) no person (other than employee benefit plans sponsored by the Company) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (z) at least a majority of the members of the board of directors of such corporation were members of the Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition; or (v) the shareholders of the Company approve a complete liquidation or dissolution of the Company; provided that a "Change of Control", as it affects any award specified in the International Paper Company Long-Term Incentive Compensation Plan in effect immediately prior to a Change of Control ("the LTICP"), shall have the meaning for a "Change of Control of the Company" set forth in such plan and, as it affects any benefits pursuant to the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers in effect immediately prior to a Change of Control (the "SERP"), shall have the meaning for a "Change of Control" set forth in the SERP. (b) Provided that you remain in the employment of the Company as of the date immediately preceding a Change of Control, then upon the occurrence of such Change of Control: (i) each stock option to purchase shares of the common stock of the Company (or such other securities of the Company that may be substituted for such stock of the Company) granted to you by the Company under any plan, arrangement or agreement before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you shall become fully (100%) vested and exercisable; (ii) any and all forfeiture provisions, transfer restrictions and any other restrictions applicable to each award of restricted stock of the Company (or such other securities of the Company that may be substituted for such stock of the Company) granted to you by the Company under any plan, arrangement or agreement before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you shall immediately lapse in their entirety; (iii) the performance goals applicable to any performance-based awards granted to you by the Company under any plan, arrangement or agreement (other than any short-term annual incentive plan) before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you will be deemed to have been fully satisfied (i.e., achieved at 100% of target, or, if higher and determinable, achieved at the actual level) and all forfeiture provisions, transfer restrictions and any other restrictions applicable to any such 3 performance-based awards shall immediately lapse in their entirety and all such awards shall be fully and immediately payable; and (iv) each executive continuity award and each other long-term award granted to you by the Company under any plan, arrangement or agreement before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you shall become fully (100%) vested and, if applicable, exercisable. 3. TERMINATION OF EMPLOYMENT FOLLOWING CHANGE IN CONTROL If a Change of Control occurs, you shall be entitled to the benefits provided in Section 5 upon the subsequent termination of your employment during the term of this Agreement, unless such termination is (x) because of your death, Disability (as defined below) or Retirement (as defined below), (y) by the Company for Cause (as defined below) or (z) by you, other than for Good Reason (as defined below). (a) Disability; Retirement. If, as a result of your incapacity due to ---------------------- physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for 6 consecutive months, and within 30 days after written notice of termination is given you shall not have returned to the full-time performance of your duties, the Company may terminate your employment for "Disability". Termination based on "Retirement" shall mean voluntary termination after your becoming eligible for "normal retirement" under the Company's pension plan in effect immediately prior to a Change of Control. (b) Cause. Termination by the Company of your employment for "Cause" ----- shall mean termination upon: (i) the willful and continued failure by you substantially to perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure resulting from termination by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties; or (ii) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Section 3(b), no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution 4 duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in Sections 3(b)(i) or 3(b)(ii) and specifying the particulars thereof in detail. (c) Good Reason. You shall be entitled to terminate your ----------- employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, any of the following: (i) the assignment to you of any duties with the Company (or with a successor or affiliated company) inconsistent with your status as an executive, or a substantial adverse alteration in the nature or status of your responsibilities, from those in effect immediately prior to a Change of Control; (ii) a reduction in your annual base salary as in effect on the date hereof or as the same may be increased from time to time (except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any person in control of the Company); (iii) the failure by the Company to continue in effect any material compensation plan in which you participate (including but not limited to the Company's performance share plan, stock option plan and management incentive plan, each as in effect immediately prior to a Change of Control) or any substitute plans adopted prior to the Change of Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the Change of Control, or the failure by the Company to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed immediately prior to the Change of Control; (iv) except for across-the-board reductions similarly affecting all executives of the Company and all executives of any person in control of the Company: (A) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, life insurance, medical, health and accident or disability plans in which you were participating at the time of a Change of Control, (B) the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the Change of Control or (C) the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change of Control; 5 (v) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement; (vi) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(d) (and, if applicable, the requirements of Section 3(b((; for purposes of this Agreement, no such purported termination shall be an effective termination by the Company; (vii) the individual holding the position of Chief Executive Officer prior to the time of occurrence of the event constituting the Change of Control shall have ceased to hold such position (except when such cessation is the result of the person's Disability or Retirement or was for Cause); or (viii) the Company's requiring you to be based anywhere other than the Company's current principal executive offices, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations. Your right to terminate your employment pursuant to this Section 3(c) shall not be affected by your incapacity due to physical or mental illness. (d) Notice of Termination. Any termination of your employment by --------------------- the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated, and shall specify a date for termination of employment ("Date of Termination") which shall not be less than 30 days or more than 60 days after the date of delivery of the Notice of Termination. 4. DEATH, DISABILITY OR ELIGIBILITY FOR NORMAL RETIREMENT This Agreement shall not be applicable in the event of termination of your employment because of your death, Disability or Retirement. 5. COMPENSATION UPON TERMINATION If a Change of Control occurs and your employment is subsequently terminated during the term of this Agreement under the circumstances described in Section 3 (other than for Cause) which entitle you to benefits under this Agreement, then: (a) The Company will continue to provide medical and dental insurance coverage to you and your dependents which is comparable in benefits and in participant contributions, deductibles, co-payments and other terms, to the coverage which you had (i) immediately prior to the Change of Control or (ii) as 6 of the Date of Termination, whichever is better in your sole discretion, and this coverage will continue until such time as you become eligible to join a comparable plan sponsored by another employer, or attain age 65 and are eligible to enroll in the Medicare program. (b) After you attain age 65, the Company will provide retiree medical coverage for you and your dependents which is comparable in benefits and in participant contributions, deductibles, co-payments and other terms to the coverage provided by the Company's retiree medical plan in effect (i) immediately prior to the Change of Control or (ii) as of the Date of Termination, whichever is better in your sole discretion (with a coordination of benefits clause comparable to the clause used in connection with the relevant retiree medical plan). (c) The Company shall pay to you the following amounts in one lump-sum payment in cash within 30 days of the Date of Termination: (i) your full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus an amount in cash equal to the value of any vacation earned but not taken (based upon such rate of base salary); (ii) to the extent not paid, your full prior-year short-term annual incentive compensation (in the amount determined prior to the Date of Termination, or if such amount has not been determined as of the Date of Termination, an amount not less than the higher of (x) your actual short-term annual incentive compensation amount for the year before such prior-year or (y) your target short-term annual incentive compensation amount for such prior-year); (iii) your short-term annual incentive compensation for the year in which the Date of Termination occurs, as if the performance goals applicable to such amount have been fully satisfied (i.e., achieved at 100% of target, or, if higher and determinable, achieved at the actual level); provided that such compensation will be prorated to reflect the number of days that have elapsed as of the Date of Termination since the beginning of such year; plus (iv) a termination payment equal to the sum of: (A) the product of "3" times a "Base Amount" consisting of the sum of (I) your annualized base salary as of the Date of Termination and (II) the greater of (x) your target short-term annual incentive compensation amount for the year in which the Date of Termination occurs or (y) your average short-term annual incentive compensation amount during the 3 years preceding the Date of Termination (it being understood that in the case of the most recent year preceding the Date of Termination, such amount may, if applicable, be the amount to which you have become 7 entitled under Section 5(c)(ii) in respect of such year); provided that Base Amount shall exclude any compensation under long-term incentive compensation plans, performance share plans, stock option plans or executive continuity awards; plus (B) in the event it shall be determined that any compensation by or benefit from the Company to you or for your benefit, whether pursuant to the terms of this Agreement or otherwise (collectively, the "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar provision or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), an additional lump-sum payment (a "Gross-Up Payment") in an amount determined by the Company's outside auditors such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment; provided, however, that if the aggregate value of the Payment is less than 115% of the product of "3" times your "base amount" (as defined in Section 280G(b)(3) of the Code) (such product, the "Golden Parachute Threshold"), then you shall not be entitled to any Gross-Up Payment and, instead, the Payment shall be reduced to an amount equal to $1.00 less than the Golden Parachute Threshold; provided that such lump-sum payment under this Section 5(c) shall be deposited in a "rabbi trust" upon the execution of any merger, stock purchase, asset purchase or similar agreement that, upon the consummation of the transactions contemplated thereunder, would result in a Change of Control. (d) You shall be entitled to receive the highest, as determined by the Company's outside auditors, of: (i) your benefits pursuant to the SERP, as if there had been a Change of Control; (ii) your benefits pursuant to the SERP, as if there had not been a Change of Control and as if you were credited with 3 years of additional age and 3 years of additional service; or (iii) your benefits pursuant to the Retirement Plan of International Paper Company in effect immediately prior to the Change of Control, as if you were credited with 3 years of additional age and 3 years of additional service. 8 You shall be entitled to receive the benefits under this Section 5(d) as a lump-sum payment within 30 days of the Date of Termination and you shall not be required to receive any consent or other approval from the Company to receive such benefits. (e) You shall be entitled to receive executive financial counseling services valued up to $20,000 in aggregate. You shall not be required to mitigate the amount of any payment provided for in this Section 5 (by seeking other employment or otherwise), nor shall the amount of any payment provided for in this Section 5 be reduced by any compensation earned by you as a result of employment by another employer after the Date of Termination. The compensation set forth above shall be in lieu of any severance or termination payments which might otherwise be payable under any other severance programs or policy or practice of the Company, other than those set out as part of any of the Company's long-term incentive plans, performance share plans, stock option plans, executive continuity awards and retirement or supplemental retirement plans. In addition to the payments under this Agreement, you shall continue to be eligible to receive all of your vested accrued benefits under employee pension and welfare benefit plans sponsored by the Company. 6. SUCCESSORS; BINDING AGREEMENT (a) Successor Companies. The Company will require any successor ------------------- (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to you, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to terminate your employment and to receive compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminated your employment for Good Reason, except that the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) Heirs; Representatives. This Agreement shall inure to the benefit ---------------------- of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amounts would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee, or, if there be no such designee, to your estate. 9 7. NOTICE For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement; provided that all notices to the Company shall be directed to the attention of the Senior Vice President Human Resources of the Company with a copy to the Secretary of the Company, or to such address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 8. MISCELLANEOUS This Agreement constitutes the entire agreement on this subject matter between the parties and supersedes any prior oral or written agreements or understandings on the subject matter covered by this Agreement and shall not be amended or modified except by written agreement signed by both parties. No significant provisions of this Agreement may be waived or discharged, unless such waiver or discharge is in writing signed by the party who is making the waiver or discharge. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. In the event that this Agreement provides benefits upon termination of your employment which duplicate benefits contained in any employment arrangement with you, such arrangement shall automatically be amended in accordance with this Agreement so that your benefits under this Agreement shall be sole and exclusive to the extent to which they are duplicative. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 9. VALIDITY The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 10. ARBITRATION; LEGAL EXPENSES Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in New York, New York, in accordance with the rules of the American Arbitration Association then in effect. Notwithstanding the pendency of any such dispute or controversy, the Company will continue to pay you your base salary in effect when the notice giving rise to the dispute was given, and will continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved. The Company shall also pay all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement), except such fees and expenses incurred in 10 connection with any frivolous claim or suit. All amounts paid under this Section 10 are in addition to any other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 11. RELEASE. You will be required to execute and deliver a valid and irrevocable release of employment-related claims in the form provided by the Company in order to receive any of your compensation or benefits pursuant to the terms of this Agreement. 11 If this, letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, INTERNATIONAL PAPER COMPANY By:_________________________________ J. N. Carter SVP, Human Resources Agreed: ________________________________________ ((First_Name))((Last_Name)) ((TITLE)) Social Security Number: ________________ EX-10.8C 8 dex108c.txt FORM OF CHANGE OF CONTROL AGREEMENT - TIER II Exhibit 10.8(C) INTERNATIONAL PAPER Mr./Ms. [Full Name] International Paper Company President & Chief Executive Officer 400 Atlantic Street Stamford, CT 06921 Dear [First Name]: International Paper Company (the "Company") considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change of control may exist and that such possibility, and the uncertainty and questions which it may raise among senior management, may result in the departure or distraction of senior management personnel to the detriment of the Company and its shareholders. Accordingly, the Company's Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's senior management, including yourself, to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from the possibility of a change of control of the Company. In order to induce you to remain in the employ of the Company, and to continue to exercise your special skills and knowledge at the Company, this letter agreement (this "Agreement") sets forth the benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change of Control (as defined in Section 2) under the circumstances described below. 1. TERM This Agreement shall commence on the date hereof and, unless there is a Change of Control, shall continue until the earliest of (a) your termination of employment as a "full-time employee" of the Company, (b) the date when you attain the age of 65 years or (c) the date when this Agreement is terminated by the Company in accordance with the next sentence. If a Change of Control has not occurred, then the Company shall have the right at any time to terminate this Agreement by giving you 6 months prior written notice of termination of this Agreement. If a Change of Control occurs at any time prior to the termination of this Agreement pursuant to the preceding paragraph, then this Agreement shall terminate on the first anniversary of such Change of Control. 2. CHANGE OF CONTROL (a) For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any "person" (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended, other than employee benefit plans sponsored by the Company) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of 2 consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company (the "Board") cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election, by the Company's shareholders of each new director was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period; (iii) a reorganization, merger or consolidation of the Company is consummated, in each case, unless, immediately following such reorganization, merger or consolidation, (x) more than 50% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners of the Company's securities outstanding immediately prior to such reorganization, merger or consolidation, (y) no person (other than employee benefit plans sponsored by the Company) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (z) at least a majority of the members of the board of directors 2 of the corporation resulting from such reorganization, merger or consolidation were members of the Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; (iv) the sale or other disposition of all or substantially all of the assets of the Company is consummated, other than to any corporation with respect to which, immediately following such sale or other disposition, (x) more than 50% of the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners of the Company's securities outstanding immediately prior to such sale or other disposition, (y) no person (other than employee benefit plans sponsored by the Company) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (z) at least a majority of the members of the board of directors of such corporation were members of the Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition; or (v) the shareholders of the Company approve a complete liquidation or dissolution of the Company; provided that a "Change of Control", as it affects any award specified in the International Paper Company Long-Term Incentive Compensation Plan in effect immediately prior to a Change of Control ("the LTICP"), shall have the meaning for a "Change of Control of the Company" set forth in such plan and, as it affects any benefits pursuant to the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers in effect immediately prior to a Change of Control (the "SERP"), shall have the meaning for a "Change of Control" set forth in the SERP. (b) Provided that you remain in the employment of the Company as of the date immediately preceding a Change of Control, then upon the occurrence of such Change of Control: (i) each stock option to purchase shares of the common stock of the Company (or such other securities of the Company that may be substituted for such stock of the Company) granted to you by the Company under any plan, arrangement or agreement before or after the date hereof (but prior to the Change of Control), 3 including the LTICP, and then held by you shall become fully (100%) vested and exercisable; (ii) any and all forfeiture provisions, transfer restrictions and any other restrictions applicable to each award of restricted stock of the Company (or such other securities of the Company that may be substituted for such stock of the Company) granted to you by the Company under any plan, arrangement or agreement before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you shall immediately lapse in their entirety; (iii) the performance goals applicable to any performance-based awards granted to you by the Company under any plan, arrangement or agreement (other than any short-term annual incentive plan) before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you will be deemed to have been fully satisfied (i.e., achieved at 100% of target, or, if higher and determinable, achieved at the actual level) and all forfeiture provisions, transfer restrictions and any other restrictions applicable to any such performance-based awards shall immediately lapse in their entirety and all such awards shall be fully and immediately payable; and (iv) each executive continuity award and each other long-term award granted to you by the Company under any plan, arrangement or agreement before or after the date hereof (but prior to the Change of Control), including the LTICP, and then held by you shall become fully (100%) vested and, if applicable, exercisable. 3. TERMINATION OF EMPLOYMENT FOLLOWING CHANGE IN CONTROL If a Change of Control occurs, you shall be entitled to the benefits provided in Section 5 upon the subsequent termination of your employment during the term of this Agreement, unless such termination is (x) because of your death, Disability (as defined below) or Retirement (as defined below), (y) by the Company for Cause (as defined below) or (z) by you, other than for Good Reason (as defined below). (a) Disability; Retirement. If, as a result of your incapacity due to ---------------------- physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for 6 consecutive months, and within 30 days after written notice of termination is given you shall not have returned to the full-time performance of your duties, the Company may terminate your employment for "Disability". Termination 4 based on "Retirement" shall mean voluntary termination after your becoming eligible for "normal retirement" under the Company's pension plan in effect immediately prior to a Change of Control. (b) Cause. Termination by the Company of your employment for "Cause" ----- shall mean termination upon: (i) the willful and continued failure by you substantially to perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure resulting from termination by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties; or (ii) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Section 3(b), no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in Sections 3(b)(i) or 3(b)(ii), and specifying the particulars thereof in detail. (c) Good Reason. You shall be entitled to terminate your employment ----------- for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, any of the following: (i) the assignment to you of any duties with the Company (or with a successor or affiliated company) inconsistent with your status as an executive, or a substantial adverse alteration in the nature or status of your responsibilities, from those in effect immediately prior to a Change of Control; 5 (ii) a reduction in your annual base salary as in effect on the date hereof or as the same may be increased from time to time (except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any person in control of the Company); (iii) the failure by the Company to continue in effect any material compensation plan in which you participate (including but not limited to the Company's performance share plan, stock option plan and management incentive plan, each as in effect immediately prior to a Change of Control) or any substitute plans adopted prior to the Change of Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the Change of Control, or the failure by the Company to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed immediately prior to the Change of Control; (iv) except for across-the-board reductions similarly affecting all executives of the Company and all executives of any person in control of the Company: (A) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, life insurance, medical, health and accident or disability plans in which you were participating at the time of a Change of Control, (B) the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the Change of Control or (C) the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change of Control; (v) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement; (vi) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(d) (and, if applicable, the requirements of Section 3(b)); for purposes of this Agreement, no such purported termination shall be an effective termination by the Company; or 6 (vii) the Company's requiring you to be based anywhere other than the Company's current principal executive offices, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations. Your right to terminate your employment pursuant to this Section 3(c) shall not be affected by your incapacity due to physical or mental illness. (d) Notice of Termination. Any termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated, and shall specify a date for termination of employment ("Date of Termination") which shall not be less than 30 days or more than 60 days after the date of delivery of the Notice of Termination. 4. DEATH, DISABILITY OR ELIGIBILITY FOR NORMAL RETIREMENT This Agreement shall not be applicable in the event of termination of your employment because of your death, Disability or Retirement. 5. COMPENSATION UPON TERMINATION If a Change of Control occurs and your employment is subsequently terminated during the term of this Agreement under the circumstances described in Section 3 (other than for Cause) which entitle you to benefits under this Agreement, then: (a) The Company will continue to provide medical, dental and life insurance coverage to you and your dependents which is comparable in benefits to the coverage which you had (i) immediately prior to the Change of Control or (ii) as of the Date of Termination, whichever is better in your sole discretion, and such coverage will continue for 24 months following such Date of Termination. (b) After the cessation of benefits pursuant to Section 5(a), the Company will provide retiree medical coverage and life insurance for you and your dependents which is comparable in benefits and in participant contributions, deductibles, co-payments and other terms to the coverage and insurance provided by the Company's retiree medical and life insurance plans in effect (i) immediately prior to the Change of Control or 7 (ii) as of the Date of Termination, whichever is better in your sole discretion (with a coordination of benefits clause comparable to the clause used in connection with the relevant retiree medical plan); provided that such coverage and insurance will be provided as if you were credited with an aggregate 6 years of additional age or additional service (such crediting of age or service being permitted in any combination of your election, including 6 years of additional age only or 6 years of additional service only). (c) The Company shall pay to you the following amounts in one lump-sum payment in cash within 30 days of the Date of Termination: (i) your full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus an amount in cash equal to the value of any vacation earned but not taken (based upon such rate of base salary); (ii) to the extent not paid, your full prior-year short-term annual incentive compensation (in the amount determined prior to the Date of Termination, or if such amount has not been determined as of the Date of Termination, an amount not less than the higher of (x) your actual short-term annual incentive compensation amount for the year before such prior-year or (y) your target short-term annual incentive compensation amount for such prior-year); (iii) your short-term annual incentive compensation for the year in which the Date of Termination occurs, as if the performance goals applicable to such amount have been fully satisfied (i.e., achieved at 100% of target, or, if higher and determinable, achieved at the actual level); provided that such compensation will be prorated to reflect the number of days that have elapsed as of the Date of Termination since the beginning of such year; plus (iv) a termination payment equal to the sum of: (A) the product of "2" times a "Base Amount" consisting of the sum of (I) your annualized base salary as of the Date of Termination and (II) the greater of (x) your target short-term annual incentive compensation amount for the year in which the Date of Termination occurs or (y) your average short-term annual incentive compensation amount during the 3 years preceding the Date of Termination (it being understood that in the case of the most recent year 8 preceding the Date of Termination, such amount may, if applicable, be the amount to which you have become entitled under Section 5(c)(ii) in respect of such year); provided that Base Amount shall exclude any compensation under long-term incentive compensation plans, performance share plans, stock option plans or executive continuity awards; plus (B) in the event it shall be determined that any compensation by or benefit from the Company to you or for your benefit, whether pursuant to the terms of this Agreement or otherwise (collectively, the "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar provision or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), an additional lump-sum payment (a "Gross-Up Payment") in an amount determined by the Company's outside auditors such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment; provided, however, that if the aggregate value of the Payment is less than 115% of the product of "3" times your "base amount" (as defined in Section 280G(b)(3) of the Code) (such product, the "Golden Parachute Threshold"), then you shall not be entitled to any Gross-Up Payment and, instead, the Payment shall be reduced to an amount equal to $1.00 less than the Golden Parachute Threshold; provided that such lump-sum payment under this Section 5(c) shall be deposited in a "rabbi trust" upon the execution of any merger, stock purchase, asset purchase or similar agreement that, upon the consummation of the transactions contemplated thereunder, would result in a Change of Control. (d) You shall be entitled to receive the highest, as determined by the Company's outside auditors, of: 9 (i) your benefits pursuant to the SERP, as if there had been a Change of Control; (ii) your benefits pursuant to the SERP, as if there had not been a Change of Control and as if you were credited with 3 years of additional age and 3 years of additional service; or (iii) your benefits pursuant to the Retirement Plan of International Paper Company in effect immediately prior to the Change of Control, as if you were credited with 3 years of additional age and 3 years of additional service. You shall be entitled to receive the benefits under this Section 5(d) as a lump-sum payment within 30 days of the Date of Termination and you shall not be required to receive any consent or other approval from the Company to receive such benefits. (e) You shall be entitled to receive executive financial counseling services valued up to $10,000 in aggregate. You shall not be required to mitigate the amount of any payment provided for in this Section 5 (by seeking other employment or otherwise), nor shall the amount of any payment provided for in this Section 5 be reduced by any compensation earned by you as a result of employment by another employer after the Date of Termination. The compensation set forth above shall be in lieu of any severance or termination payments which might otherwise be payable under any other severance programs or policy or practice of the Company, other than those set out as part of any of the Company's long-term incentive plans, performance share plans, stock option plans, executive continuity awards and retirement or supplemental retirement plans. In addition to the payments under this Agreement, you shall continue to be eligible to receive all of your vested accrued benefits under employee pension and welfare benefit plans sponsored by the Company. 6. SUCCESSORS; BINDING AGREEMENT (a) Successor Companies. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to you, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such agreement prior to the effectiveness of any such succession 10 shall be a breach of this Agreement and shall entitle you to terminate your employment and to receive compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminated your employment for Good Reason, except that the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section Error! Reference source not found. or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) Heirs; Representatives. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amounts would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee, or, if there be no such designee, to your estate. 7. NOTICE For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement; provided that all notices to the Company shall be directed to the attention of the Senior Vice President Human Resources of the Company with a copy to the Secretary of the Company, or to such address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 8. MISCELLANEOUS This Agreement constitutes the entire agreement on this subject matter between the parties and supersedes any prior oral or written agreements or understandings on the subject matter covered by this Agreement and shall not be amended or modified except by written agreement signed by both parties. No significant provisions of this Agreement may be waived or discharged, unless such waiver or discharge is in writing signed by the party who is making the waiver or discharge. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. In the event that this Agreement provides benefits upon termination of your employment which duplicate benefits contained in any employment arrangement with you, such arrangement shall automatically be 11 amended in accordance with this Agreement so that your benefits under this Agreement shall be sole and exclusive to the extent to which they are duplicative. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 9. VALIDITY The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 10. ARBITRATION; LEGAL EXPENSES Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in New York, New York, in accordance with the rules of the American Arbitration Association then in effect. Notwithstanding the pendency of any such dispute or controversy, the Company will continue to pay you your base salary in effect when the notice giving rise to the dispute was given, and will continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved. The Company shall also pay all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement), except such fees and expenses incurred in connection with any frivolous claim or suit. All amounts paid under this Section 10 are in addition to any other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 11. RELEASE. You will be required to execute and deliver a valid and irrevocable release of employment-related claims in the form provided by the Company in order to receive any of your compensation or benefits pursuant to the terms of this Agreement. 12 If this, letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. INTERNATIONAL PAPER COMPANY By: ------------------------------- Agreed: - ---------------------------------------- Social Security Number: --------------------------------- EX-10.9 9 dex109.txt UNFUNDED SUPPLEMENTAL RETIREMENT PLAN Exhibit 10.9 INTERNATIONAL PAPER COMPANY UNFUNDED SUPPLEMENTAL RETIREMENT PLAN FOR SENIOR MANAGERS As Amended and Restated Through January 1, 2002 PREAMBLE This Plan was originally established as the International Paper Company Unfunded Excess-Benefit Plan for Senior Managers and became effective as of November 1, 1983, pursuant to a resolution of the Board of Directors of International Paper Company ("the Company") dated October 11, 1983. Effective as of November 12, 1985, the name of the Plan was changed to the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers, and additional benefit provisions were added to the Plan as set forth herein. The Plan was amended effective as of April 1, 1991, to delete the statutory limitation excess benefit provision from the Plan, because the Company has established a separate plan to provide statutory limitation excess benefits to salaried employees of the Company and its United States subsidiaries. The Plan was amended effective September 8, 1992, to change the calculation of the Supplemental Benefit payable under the Plan. The Plan was amended effective July 1, 1993, to change the definition of Compensation under the Plan. The Plan was amended effective December 1, 1993, to specify the optional forms of benefit payment and death benefits. The Plan was amended effective January 1, 2000, to change the definition of Compensation under the Plan, establish a pensionable pay minimum for purposes of the Plan, clarify the vesting provisions applicable to participants, change certain provisions relating to the commencement of the Supplemental Benefit payable under the Plan, clarify the calculation of the pre-retirement death benefit, clarify that benefits under the Plan continue to accrue during disability and to conform the non-competition provisions under the Plan with the terms of the Eligible Employee's Confidentiality and Non-Competition Agreement (the "Confidentiality and Non-Competition Agreement"). The Plan was amended effective January 1, 2001, and amended effective October 9, 2001, to change the definition of Compensation under the Plan. 1. Name and Purpose. ----------------- This Plan shall be known as the International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers (the "Plan"). The Plan is an unfunded plan maintained by the Company for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of the exemption provisions of Parts 2, 3 and 4 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended (and related regulations and provisions of the Internal Revenue Code of 1986, as amended). The Plan is maintained for the purpose of providing for the payment of a supplemental retirement benefit to an Eligible Employee which is in addition to the amount of the retirement benefits payable - 1 - to such person under the standard 1.67% benefit formula provisions for salaried employees of the Retirement Plan of International Paper Company (as amended from time to time, the "Retirement Plan") and any statutory limitation excess pension benefits payable to such person under any other plan maintained by the Company or its subsidiaries. 2. Funding of Benefits. -------------------- The benefits payable under the Plan will be paid from the Company's general assets as payments become due under the Plan, and will not be funded in advance through an Internal Revenue Service qualified trust arrangement or through insurance annuity contracts. From time to time the Company may arrange for insurance annuity contracts on the lives of Eligible Employees (the proceeds of which are payable to the Company) in order to insure the Company for part or all of the payments which the Company will make under the Plan. All Eligible Employees participating in the Plan agree to authorize the Company to purchase such insurance contracts. Eligible Employees participating in the Plan (and their beneficiaries) will not have any beneficial interest in such insurance contracts or in the proceeds of such insurance contracts. With respect to claims for benefits under the Plan, Eligible Employees and their beneficiaries shall be general unsecured creditors of the Company. 3. Eligible Employees. ------------------- The persons who are eligible to receive benefits under the Plan ("Eligible Employees") are persons who are (A) salaried employees of the Company and its subsidiaries on or after the effective date of the Plan, (B) designated by the Chief Executive Officer of the Company as eligible to participate in the Plan and (C) participants in the Retirement Plan. All of the terms and conditions of the Plan shall be binding upon any surviving spouse, beneficiaries, executor, administrator, heirs or successors of an Eligible Employee. 4. Vesting. -------- An Eligible Employee who has attained his or her Vesting Date while employed shall be fully vested in his or benefits under the Plan. For purposes of the Plan, "Vesting Date", with respect to any Eligible Employee, shall mean the earliest of: (A) this or her attainment of age 62 with five years of Vesting Service (as defined in the Retirement Plan); (B) his or her attainment of age 61 with 20 years of Vesting Service; or (C) his or her attainment of age 65. Notwithstanding the foregoing, such vesting with respect to any Eligible Employee may occur prior to the age 62 with the consent of the Management Development and Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"); provided that such Eligible Person has five years of Vesting Service. - 2 - 5. Amount and Time of Payment of Supplemental Benefit. --------------------------------------------------- The amount of the monthly supplemental retirement benefit payable to an Eligible Employee under the Plan (the "Supplemental Benefit") is an amount (in the form of a monthly benefit payable as a single-life annuity on an unreduced basis starting at age 62) determined as set forth below: (A) Calculation of the Amount of the Supplemental Benefit. The Supplemental Benefit is calculated in the manner set forth for determining an "Accrued Benefit" under the standard 1.67% salaried benefit formula of the Retirement Plan, using the terms "Credited Service" and "Primary Social Security Benefit" (as such terms are defined in the Retirement Plan), except that: (x) the term "Credited Service", with respect to an Eligible Employee, may also include service by such Eligible Employee with an acquired company, to the extent granted by the Plan Administrator, and shall include any period prior to such Eligible Employee's attainment of age 65 during which such he is entitled to benefits under the Company's long-term disability plan applicable to him; and (y) the formula shall be the greater of Sections 5(A)(i) or 5(A)(ii) below. (i) An amount equal to the lesser of (a) or (b), reduced by (c) below: (a) 3.25% of the Eligible Employee's Compensation (as defined in Section 5(B) below) multiplied by the number of years of his or her Credited Service. (b) Fifty percent (50%) of the Eligible Employee's Compensation. (c) The product of: (1) 3.25% of the Eligible Employee's Primary Social Security Benefit multiplied by the number of years of his or her Credited Service projected to age 65, subject to a maximum of 50% of the Eligible Employee's Primary Social Security Benefit; and (2) The ratio of years of the Eligible Employee's Credited Service at the determination date to his or her Credited Service projected to age 65. (ii) Twenty-five percent (25%) of the Eligible Employee's Compensation. and the amount calculated under the formula set forth above shall be reduced by all of the following amounts: ---------------------------- - 3 - I. the actual amount of the Eligible Employee's vested benefit under the Retirement Plan or any other qualified pension benefit plan maintained by the Company or its subsidiaries (converted to a single-life annuity); and II. the single-life annuity actuarial equivalent of any retirement benefit paid or payable directly from the Company or any of its subsidiaries under a similar contractual-type arrangement (but not payments made pursuant to the International Paper Company Salaried Savings Plan or any other defined contribution or non-qualified savings plan). (B) Compensation. For purposes of the formula set forth in Section 5(A) above: The term "Compensation", with respect to any Eligible Employee and any determination date, shall equal the sum of: (i) such Eligible Employee's highest annual base salary during the three consecutive calendar years prior to such date of determination; plus (ii) the Eligible Employee's target award (whether or not deferred) under the Company's Management Incentive Plan for the year in which the Eligible Employee terminates or retires; plus (iii) any incentive award paid under the Champion Integration Chief Executive Officer Performance Incentive Plan; provided, however, that Compensation shall not include any awards or income described in Section 1.142 of the Retirement Plan (except as expressly included in this Section 5(B)); and provided further, however, that in the case of any Eligible Employee who is entitled to benefits under the Company's long-term disability plan applicable to him or her, Sections 5(B)(i) and 5(B)(ii) shall be replaced as follows: (i) such Eligible Employee's annual base salary in effect as of the last day of active employment prior to becoming entitled to benefits under the Company's long-term disability plan applicable to him or her (ii) the average of the awards, if any, earned by such Eligible Employee (whether or not deferred) under the company's Management Incentive Plan in respect of the three consecutive calendar years prior to becoming entitled to benefits under the Company's long-term disability plan applicable to him. (C) Time of Payment of the Supplemental Benefit. - 4 - As specified in Section 6 below, payment of the Supplemental Benefit to an Eligible Employee may commence on the first day of any month on or after his Benefit Commencement Date. "Benefit Commencement Date", with respect to any Eligible Employee, shall mean the earliest of: (i) his attainment of age 62 with 10 years of Vesting Service; (ii) his attainment of age 61 with 20 years of Vesting Service; or (iii) his attainment of age 65. Notwithstanding the foregoing, payment of the Supplemental Benefit to an Eligible Employee may commence prior to such Eligible Employee's Benefit Commencement Date with the consent of the Committee; provided that such Eligible Employee has attained age 55 and has 10 years of Vesting Service; and provided further that such Eligible Employee's Supplemental Benefit shall be reduced by 4% for each year that commencement precedes age 62. 6. Forms of Benefit Payment. ------------------------- (A) The forms of benefit payment available under the Plan (including joint and survivor annuity benefit options) shall be the same as under the provisions of the Retirement Plan. Any election as to form of benefit payment and time of benefit payment made by an Eligible Employee under the provisions of the Retirement Plan shall be deemed also to have been made with respect to his or her Supplemental Benefit payable under the Plan, and any early retirement or actuarial reduction factors applied to the benefit elected under the Retirement Plan shall be similarly applied to his or her Supplemental Benefit. Payment of the Supplemental Benefit to an Eligible Employee shall commence on January 1 of the year following such Eligible Employee's retirement date; provided that solely at the Plan Administrator's discretion and direction, payment of such Supplemental Benefit may commence on a date beginning on or after such Eligible Employee's retirement date. (B) Notwithstanding the foregoing, with the consent of the Plan Administrator, an Eligible Employee may elect payment of his or her Supplemental Benefit in the form of a lump-sum distribution or annual installments payable over a designated period ranging from two to 15 years. An Eligible Employee may make this election at any time beginning with the calendar year in which he or she attains age 61, but must make an election before his or her retirement date. Payment of the lump-sum distribution or installments so elected shall commence on January 1 of the year following his or her retirement date. This election may be made only once during the applicable election period and is irrevocable, except as provided in Section 6(D) below. Prior to the commencement of benefit payment under this election, a portion of an Eligible Employee's Supplemental Benefit may be paid to him or her in accordance with Section 6(A) above, solely at the Plan Administrator's discretion and direction, on a single life annuity basis with no reductions, beginning on or after the Eligible Employee's retirement date. - 5 - (C) Both the lump-sum distribution and installment payment amounts under Section 6(B) above shall be computed on a cost-neutral basis to the Company, using a discount rate as recommended by the Company's Chief Financial Officer with the advice of the Company's actuary. An Eligible Employee has the choice of having the discount rate determined at the time of his or her election or on the December 31 preceding the January 1 payment commencement date described in Section 6(B) above. The availability of the lump-sum distribution and installment forms of payment shall be subject to the Company's financial requirements. (D) An Eligible Employee's election under Section 6(B) above may be revoked, with the consent of the Plan Administrator, in the event such Eligible Employee suffers a significant life change following such election, but prior to his or her retirement date. The marriage or divorce of an Eligible Employee or death of an Eligible Employee's spouse shall constitute a "significant life change". Upon revocation of the election under Section 6(B) above, the Eligible Employee shall make a new election, prior to his or her retirement date, as to payment of the Supplemental Benefit in a form available under Sections 6(A) or 6(B) above. (E) In the event an Eligible Employee dies on or after attainment of age 62, but prior to his or her retirement date, the Supplemental Benefit shall be payable to his or her surviving spouse, if any, in the form of a pre-retirement surviving spouse's benefit, based on the provisions of the Retirement Plan. With the consent of the Committee, a pre-retirement surviving spouse's benefit may be provided in the event of an Eligible Employee's death prior to his or her attainment of age 62. Any such pre-retirement surviving spouse's benefit shall be paid in the manner set forth for determining a "Qualified Joint and Survivor Annuity" under the Retirement Plan (providing 50% of the Eligible Employee's reduced benefit to his or her spouse). (F) In the event an Eligible Employee dies on or after his or her retirement date, but prior to the January 1 on which an annuity under Section 6(A) is to commence, the Eligible Employee's named annuitant or beneficiary, if any, shall receive the payments due under the annuity option elected. In the event an Eligible Employee dies on or after his or her retirement date but prior to the January 1 on which a lump-sum distribution elected under Section 6(B) is to be paid, the Eligible Employee's beneficiary shall be paid the value of the Supplemental Benefit which was to have been paid on such January 1, in a lump-sum. In the event an Eligible Employee who has elected installment payments under Section 6(B) above dies on or after his or her retirement date but prior to having received the full number of installment payments, the Eligible Employee's beneficiary shall receive the remaining installment payments, provided that the Plan Administrator has the discretion to convert the remaining installment payments into a lump-sum payable to the beneficiary. The provisions of this Section 6(F) shall apply regardless of whether, at the direction of the Plan Administrator as provided in Sections 6(A) and 6(B) above, - 6 - a portion of the Supplemental Benefit was paid to the Eligible Employee during the calendar year which includes his or her retirement date. (G) In the event an Eligible Employee who has made an election under Section 6(B) above with respect to the payment of his or her Supplemental Benefit under the Plan is also entitled to a benefit under the International Paper Company Pension Restoration Plan for Salaried Employees (as amended from time to time, the "Restoration Plan"), the benefit under such other plan shall be paid in the same form as that elected under Section 6(B) above for benefits payable under the Plan. At the time benefit payment is to commence, the benefit payable under the Restoration Plan shall be transferred to the Plan for Payment. 7. Benefit Not Assignable. ----------------------- An Eligible Employee's rights under the Plan shall not be subject to assignment, encumbrance, garnishment, attachment or charge, whether voluntary or involuntary, and in the event of any such assignment, action or proceeding, any benefit otherwise payable under the Plan shall be deemed terminated or forfeited. 8. Termination of Benefit/Repayment of Benefit. -------------------------------------------- (A) Eligibility of a person to participate in the Plan, or to receive payment of any benefit under the Plan, shall be subject to being terminated by the Committee, in the Committee's sole discretion, if the person: (i) shall, without the consent of the Committee or without "good reason" (as defined below), voluntarily terminate employment with the Company (or retire from the Company) prior to age 62; for purposes of this subparagraph "good reason" for voluntary termination prior to his or her attainment of age 62 shall mean any of the following: (a) the assignment of any duties inconsistent with the person's status as a senior manager of the Company or a substantial alteration in the nature or status of the person's responsibilities; (b) a reduction in the person's base salary (except for across-the-board salary reductions similarly affecting all managers of the Company); (c) the failure of the Company to continue in effect any vacation plan or any material compensation plan in which the person participates, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the person's participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of participation, relative to other participants; or - 7 - (d) the failure by the Company, except as necessary to comply with applicable laws, to continue to provide the person with benefits substantially similar to those enjoyed under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the person previously participated, or the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the person of any material fringe benefit previously enjoyed by the person; (ii) shall, without the consent of the Committee, breach any of the terms of his or her Confidentiality and Non-Competition Agreement; or (iii) shall have been involuntarily terminated by the Company for "good cause" (as defined below), or shall have been found by the Committee to have engaged in any action inimical to the interests of the Company, dishonesty or other serious misconduct in connection with the person's employment by the Company or a subsidiary; for purposes of this subparagraph "good cause" for involuntary termination shall mean termination upon: (a) the willful and continued failure substantially to perform properly assigned duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand is delivered by the Board which specifically identifies the manner in which the Board believes that properly assigned duties have not been substantially performed; or (b) the willful engaging in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; for purposes of this Section 8(A)(iii), no act, or failure to act, shall be deemed "willful" unless done (or omitted to be done) not in good faith and without reasonable belief that the action or omission was in the best interest of the Company; notwithstanding the foregoing, a person shall not be deemed to have been terminated for good cause unless and until there shall have been delivered a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board (after reasonable notice to the person and an opportunity, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, the person was guilty of conduct set forth in Sections 8(A)(iii)(a) or 8(A)(iii)(b) above and specifying the particulars thereof in detail. (B) In the event an Eligible Employee who has retired and received payment of the Supplemental Benefit in the form of a lump-sum distribution or installments breaches any of the terms of his or her Confidentiality and Non-Competition Agreement, as set forth in Section 8(A)(ii) above, he or she shall repay to the Company a portion of the Supplemental Benefit received. The amount which shall be repaid is the difference between: - 8 - (a) the amount of Supplemental Benefit the Eligible Employee has received from the Company by the time the Committee notifies the Eligible Employee of its objection to such competition; and (b) the amount the eligible Employee would have received by the time of such notification had the Supplemental Benefit been paid on a single-life annuity basis; plus reasonable interest as recommended by the Company's Chief Financial Officer. 9. Amendment or Termination of Plan. --------------------------------- The Company reserves the right to amend, modify or terminate the Plan at any time by action of the Board; provided that such action shall not adversely affect any Eligible Employee's right to a benefit which accrued pursuant to the provisions of the Plan prior to such action. 10. Administration of Plan. The Company's Senior Vice President of Human Resources shall be the Plan Administrator of the Plan. The Plan Administrator shall have discretion to interpret the Plan, to determine eligibility and amounts of benefits under the Plan and to decide any questions or disputes under the Plan (except for any necessary decisions by the Board or by the Committee pursuant to Section 8 above). All decisions which are made by the Board or by the Committee or by the Plan Administrator with respect to the Plan shall be final and binding on the Company and the Eligible Employees (and their heirs or beneficiaries). 11. Change of Control of International Paper Company. ------------------------------------------------- (A) If a "Change of Control" of the Company (as defined in Section 11(B) below) occurs, then: (i) the minimum amount under the formula set forth in Section 5(A)(ii) above shall be increased from 25% to 50% of the Eligible Employee's Compensation; and (ii) the Eligible Employee's Supplemental Benefit under the Plan shall become vested and nonforfeitable, and shall not be subject to termination pursuant to any of the provisions of Section 8 above. (B) For purposes of this Section 11, the term "Change of Control" of the Company shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 as amended ("Exchange Act"); provided that, without limitation, a Change of Control shall be deemed to have occurred if: - 9 - (i) any "person" as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act (other than employee benefit plans sponsored by the Company) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election, by the Company's shareholders of each new director was approved by a vote of at least two-thirds (2/3) of the directors still in office who were directors at the beginning of the period. - 10 - EX-11 10 dex11.txt STATEMENT OF COMPUTATION OF PER SHARE EARNINGS Exhibit 11 INTERNATIONAL PAPER COMPANY STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (In millions, except per share amounts)
For the Years Ended December 31, ------------------------------- 1999 2000 2001 ------ ------ ------- Net earnings (loss)......................... $ 183 $ 142 $(1,204) Effect of dilutive securities............... -- -- -- ------ ------ ------- Net earnings (loss) assuming dilution....... $ 183 $ 142 $(1,204) ====== ====== ======= Average common shares outstanding........... 413.0 449.6 482.6 Effect of dilutive securities Long-term incentive plan deferred compensation........................... -- -- (1.0) Stock options............................ 3.1 0.4 -- ------ ------ ------- Average common shares outstanding--assuming dilution.................................. 416.1 450.0 481.6 ====== ====== ======= Earnings (loss) per common share............ $ 0.44 $ 0.32 $ (2.50) ====== ====== ======= Earnings (loss) per common share--assuming dilution.................................. $ 0.44 $ 0.32 $ (2.50) ====== ====== =======
Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. EX-12 11 dex12.txt CUMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 INTERNATIONAL PAPER COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in millions) (Unaudited)
For the Years Ended December 31, ---------------------------------------------------------- Title 1996 1997 1998 1999 2000 2001 ----- -------- ------- -------- -------- -------- --------- A) Earnings (loss) before income taxes, minority interest, extraordinary items and accounting change............... $ 939.0 $ 143.0 $ 429.0 $ 448.0 $ 723.0 $(1,265.0) B) Minority interest expense, net of taxes.................. (180.0) (140.0) (87.0) (163.0) (238.0) (147.0) C) Fixed charges excluding capitalized interest............. 802.1 826.6 866.7 820.9 1,151.5 1,256.0 D) Amortization of previously capitalized interest................................................ 34.2 37.0 38.8 17.0 23.5 31.8 E) Equity in undistributed earnings of affiliates........... 6.2 (40.4) 23.7 (41.6) 5.6 13.5 -------- ------- -------- -------- -------- --------- F) Earnings (loss) before income taxes, extraordinary items, accounting change and fixed charges..................... $1,601.5 $ 826.2 $1,271.2 $1,081.3 $1,665.6 $ (110.7) ======== ======= ======== ======== ======== ========= Fixed Charges G) Interest and amortization of debt expense................ $ 699.5 $ 720.0 $ 716.9 $ 611.5 $ 938.1 $ 1,050.3 H) Interest factor attributable to rentals.................. 79.0 83.0 80.7 76.3 72.8 76.7 I) Preferred dividends of subsidiaries...................... 23.6 23.6 69.1 133.1 140.6 129.0 J) Capitalized interest.................................... 71.2 71.6 53.4 29.3 25.2 13.2 -------- ------- -------- -------- -------- --------- K) Total fixed charges...................................... $ 873.3 $ 898.2 $ 920.1 $ 850.2 $1,176.7 $ 1,269.2 ======== ======= ======== ======== ======== ========= L) Ratio of earnings to fixed charges....................... 1.83 1.38 1.27 1.42 ======== ======== ======== ======== M) Deficiency in earnings necessary to cover fixed charges.. $ (72.0) $(1,379.9) ======= =========
EX-13 12 dex13.txt 2001 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 This illustration shows a figure using paper to create a staircase to the stars. REVOLUTION [GRAPHIC] 2001 Annual Report | [LOGO] INTERNATIONAL PAPER INTERNATIONAL PAPER is revolutionizing the way we do business. By developing innovative product solutions, listening to our employees and customers, having exceptional operations, managing valued resources and engaging our people, we know there is no limit to how far we can go or what we can achieve. [GRAPHIC] THE ILLUSTRATED FIGURES IN THIS ANNUAL REPORT ARE NEITHER MALE NOR FEMALE. THEY REPRESENT THE HUMAN SPIRIT THAT DETERMINES OUR DECISIONS AND UNDERSCORES OUR ACHIEVEMENTS. WE PROUDLY DEDICATE THIS BOOK TO THE MEN AND WOMEN OF INTERNATIONAL PAPER. 1 Financial Highlights 2 To Our Shareowners 6 Developing 8 Listening 10 Managing 12 Delivering 14 Enhancing 16 Conclusion 17 Financial Review FINANCIAL HIGHLIGHTS
Dollar amounts and shares in millions, except per share amounts 2001 2000 - ------------------------------------------------------------------------------------------------------------------- FINANCIAL SUMMARY Net Sales $ 26,363 $ 28,180 Operating Profit 1,787(a) 2,685(a) Earnings (Loss) Before Income Taxes, Minority Interest, Extraordinary Items and Cumulative Effect of Accounting Change (1,265)(b) 723(d) Net Earnings (Loss) (1,204)(b,c) 142(d,e) Earnings Before Special and Extraordinary Items and Cumulative Effect of Accounting Change 214(b) 969(d) Total Assets 37,158 42,109 Common Shareholders' Equity 10,291 12,034 Return on Investment Before Extraordinary Items and Cumulative Effect of Accounting Change (.7)%(b) 3.3%(d) Return on Investment Before Special and Extraordinary Items and Cumulative Effect of Accounting Change 2.9%(b) 5.3%(d) - ------------------------------------------------------------------------------------------------------------------- PER SHARE OF COMMON STOCK Earnings (Loss) Before Extraordinary Items and Cumulative Effect of Accounting Change $ (2.37) $ 0.82 Net Earnings (Loss) - Assuming Dilution (2.50)(b) 0.32(d) Earnings Before Special and Extraordinary Items and Cumulative Effect of Accounting Change 0.44(b,c) 2.16(d,e) Cash Dividends 1.00(b) 1.00(d) Common Shareholders' Equity 21.25 24.85 - ------------------------------------------------------------------------------------------------------------------- SHAREHOLDER PROFILE Shareholders of Record at December 31 40,115 39,486 Shares Outstanding at December 31 484.3 484.2 Average Shares Outstanding 482.6 449.6 - -------------------------------------------------------------------------------------------------------------------
(a) See the operating profit table on page 38 for details of operating profit by industry segment. (b) Includes a gain of $215 million before taxes ($137 million after taxes) on the sale of Curtis-Palmer, an $844 million pre-tax charge ($724 million after taxes) related to dispositions and asset impairments of businesses held for sale, 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, a $225 million pre-tax charge ($146 million after taxes) for additional Masonite legal reserves, 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. (c) 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 oil and gas properties. (d) Includes a charge before taxes and minority interest of $824 million ($509 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $125 million pre-tax charge ($80 million after taxes) for additions to existing Masonite legal reserves, a $54 million pre-tax charge ($33 million after taxes) for merger-related expenses and a $34 million pre-tax credit ($21 million after taxes) for the reversals of reserves no longer required. (e) Includes an extraordinary gain of $385 million before taxes and minority interest ($134 million after taxes and minority interest) on the sale of our investment in Scitex and Carter Holt Harvey's sale of its share of COPEC, an extraordinary loss of $460 million before taxes ($310 million after taxes) related to the impairment of the Zanders and Masonite businesses, an extraordinary pre-tax gain of $368 million ($183 million after taxes and minority interest) related to the sale of Bush Boake Allen, an extraordinary loss of $5 million before taxes and minority interest ($2 million after taxes and minority interest) related to Carter Holt Harvey's sale of its Plastics division, and an extraordinary pre-tax charge of $373 million ($231 million after taxes) related to impairments of the Argentine investments, the Chemical Cellulose Pulp and the Fine Papers businesses. 1 [PHOTO] This photo shows John Dillon, Chairman & Chief Executive Officer of International Paper. TO OUR SHARE OWNERS Continuing Our Focus As we look back on 2001, International Paper continued the focus that we began several years ago. We concentrated on core businesses in which we can win and in which we can help our customers win - Paper, Packaging and Forest Products. Since 1998, we have increased in size as a result of our mergers with Union Camp and Champion International. Yet, at the same time, we've reduced the number of businesses in which we're involved. This results in International Paper becoming a more focused company, and one that can leverage common processes across our businesses. It is our view that we can deliver the best results by doing fewer things, and by doing them better than our competition. As a consequence, we're better able to serve our customers and provide greater reward for our shareowners. This past year was a tough year. International Paper dealt with many challenges: a slowing world economy, a strong dollar and high energy prices. We also faced a world dramatically altered by the September 11 terrorist attacks. Nonetheless, none of these factors deterred us from vigorously pursuing our agenda to change the company, and in so doing, improving our competitive position. 2 Performing on Our Promises Our improvement effort continues to be centered around our three success drivers - - People, Customers and Operational Excellence. When we see our success drivers in action - when we engage our employees, partner with our customers, and run our operations well - we are better able to deliver on our promises to our shareowners, customers, employees and communities. We remain dedicated to improving shareowner value at a rate faster than our competition. We do this by working with our customers to understand their businesses and finding solutions to help them succeed; by focusing our efforts on building a more diverse community of highly engaged employees at International Paper; and by building on our tradition of being a good citizen and by being active in the communities in which we live and work. I am very excited about the things we've been doing and what can be achieved as we continue on this course. Financial Performance In 2001, our earnings were $214 million or 44 cents per share before special and extraordinary items, compared with 2000 net earnings of $969 million or $2.16 per share before these items. After special items, we reported a net loss of $1.2 billion or $2.50 per share compared with 2000 earnings of $142 million or 32 cents per share. Sales for 2001 were $26.4 billion compared to 2000 annual sales of $28.2 billion. Financial Discipline International Paper remains committed to financial discipline, especially in terms of capital spending and paying down debt. In 2001, we held capital spending to approximately 50 percent of depreciation and amortization. We are aggressively reducing costs through efficiencies gained from our mergers with Union Camp and Champion International, internal improvement programs, major changes to our corporate overhead and best practice sharing. Production Management, Closures and Divestitures At International Paper, we manage our capacity to meet our customers' demands without building inventory. Last year, due to depressed markets, we took about 1.7 million tons of lack of order downtime to keep our production in line with our demand. When the market rebounds, we will adjust our production to match our customers' increased demands. 3 Three charts show International Paper's 2001 Sales, 2001 Operating Profit and 2001 Geographic Sales. [CHART] 2001 Sales: Papers 28% Distribution 25% Packaging 23% Forest Products 10% Other Businesses 8% Carter Holt Harvey 6% [CHART] 2001 Operating Profit: Forest Products 37% Papers 30% Packaging 28% All Others 5% [CHART] 2001 Geographic Sales: United States 78% Europe 10% Pacific Rim 7% Other 5% In 2001, we announced major capacity changes involving shutting down machines, realigning production and closing less efficient production facilities. These closures account for significant capacity changes in each of our core businesses. Since fall 2000, we have reduced our capacity by 2.3 million tons. While it is always a wrenching decision to close manufacturing sites because of the jobs lost, by doing so, we are able to concentrate our resources on very competitive facilities. In short, these actions ensure a more profitable company. Our divestiture program remained on track in 2001. Since the Champion acquisition in June 2000, we have completed divestitures totaling $2.7 billion. These decisions improved our asset mix, helped pay down debt and supported our strategy of focusing on our core businesses. Looking Ahead When I visit with shareowners and others in the business community, I am often asked what we do; what is International Paper all about? I answer that question by saying our goal is to be among the best and most respected companies in the world - in the eyes of our employees, our customers, our communities and our shareowners. I also say International Paper is dedicated to making people's lives better. We use renewable resources to make products people need every day. We make our customers' businesses more 4 successful. We are good neighbors in our communities. We keep our promises to our shareowners. And, finally, I say our success comes from engaging our people, delighting our customers and having exceptional operations. As we move forward, 2002 is all about bringing results to the bottom line. We've made a number of strategic acquisitions during recent years in order to be more competitive. We've made internal changes - better engaged our employees, enhanced our service to customers and improved our operations. Our plan is working. We are improving our position relative to our competition. Clearly, given all the uncertainties in the world, it's difficult to predict what this year is going to hold in terms of the economy. But, we are absolutely committed to improving our profitability and increasing our return to shareowners. I want to thank you for the confidence and trust you have placed in this company and our employees. We appreciate that support and will do everything possible to earn your continued respect. /s/ John T. Dillon John T. Dillon Chairman & Chief Executive Officer March 1, 2002 International Paper wishes to acknowledge the contributions of its retiring director and executive vice president, C. Wesley Smith. He is a highly regarded leader and during many years of service, he distinguished himself in our company and our industry. 5 This illustration shows a figure hanging a frame with a tree breaking out of the top to illustrate developing creative ideas. [GRAPHIC] INTERNATIONAL PAPER BREAKS OUT OF THE BOX TO DEVELOP INNOVATIVE IDEAS. OUR CUSTOMERS KNOW WE ARE CREATIVE PARTNERS WHEN NEW CHALLENGES ARISE. Hewlett-Packard and International Paper had a successful venture providing HP-branded general purpose printing papers to customers in North America, South America and Europe. We leveraged our global marketing, sales and manufacturing capabilities to accelerate the success of HP's Every Day Papers. Our European system of mills - in the United Kingdom, France, Poland and Russia - is supporting strong growth in Europe. Two of these mills already manufacture high-value color inkjet and laser HP paper. Our experience in global printing and packaging markets was critical to the December launch of HP Papers in China, Hong Kong, Taiwan and Singapore. In 2002 and beyond, HP and IP will serve Australia, New Zealand, Japan, Korea, India and Southeast Asia. HP EVERY DAY PAPERS - -------------------------------------------------------------------------------- [PHOTO] This photo shows cartons and reams of Hewlett-Packard Every Day Paper. DEVELOPING We are more innovative and creative than ever before. Thinking outside the box means establishing close relationships with our customers and creating unique, innovative solutions to help them win. We know that to be more successful, we must help our customers be more successful. A good example of this is how we are developing solutions to support the increasing number of home office and business customers. With millions of people buying through retail office superstores and mass merchandisers, it's the perfect opportunity to increase sales of our home and office papers. Since the appearance of every ream and carton plays a role in whether consumers will purchase the products, we give special attention to making the right first impression. We make tons of paper for these customers, but it is sold one ream or carton at a time. To meet the needs of our retail customers, we restructured a part of our paper business to form the home and office papers group. The group operates with cross-functional teams to satisfy superstore customers such as Staples and OfficeMax, as well as contract stationers such as Corporate Express and giant retail merchandisers Wal*Mart, Target and Kmart. With our customers' strategies in mind, our teams work with them on forecasting, promotional planning and packaging. In many cases, our team members analyze store sales and recommend space allotments for key customers. IP sales, logistics, customer service and information technology representatives work with their retail counterparts to put the right products in the right stores at the right time. We are developing into a customer-driven solutions provider. 7 This illustration shows a figure holding a rolled piece to paper to its ear to illustrate listening. [GRAPHIC] AT INTERNATIONAL PAPER, KEEN LISTENING IS AN ENGINE FOR REVOLUTIONARY CHANGE. THE COMPANY ENCOURAGES INTERACTION WITH OUR EMPLOYEES AND OUR CUSTOMERS. This photo shows cups and sub sandwich boxes from Quiznos. [PHOTO] QUIZNO'S - -------------------------------------------------------------------------------- When one of the fastest growing quick service restaurant chains in America wanted to distinguish itself from its competitors, it called International Paper's foodservice team for help. The IP team gathered creative minds from across the company to design bags, sandwich paper, cartons, cups and lids, and offered information on flavor profiles to sell more Quizno's subs, salads and soups. As part of its value-added service, IP also designed the box Quizno's uses for catering three-foot sub sandwiches. Founded in Denver, Colo., Quizno's has grown from 18 restaurants in 1991 to more than 1,500 today. Located throughout the United States, Puerto Rico and in eight international locations, the chain opens a new restaurant on average every 20 hours. LISTENING People throughout IP spent much of the last year developing more focused relationships with our customers and working to meet their expectations. By listening to our customers and producing what they need, we create more demand for our products. When it comes to meeting unique customer needs, IP's Shorewood Packaging group listens and delivers to a variety of markets. As DreamWorks Home Entertainment prepared to launch its hit movie "Shrek" in the video market, the company wanted distinctive packaging. DreamWorks envisioned a package that conveyed the movie's broad demographic appeal. In response, Shorewood, in conjunction with DreamWorks, developed a first-of-its-kind package marketable to all ages. We listened to Nike when it told Shorewood it needed unique packaging for its new Power Distance golf ball line. We responded by developing innovative package embossing for the new product. Our creative packaging supported the customer's focused marketing effort, which increased Nike's golf ball business more than three-fold. We also provide premium packaging for candy manufacturers such as Lindt & Sprungli, which are increasingly emphasizing the packaging and merchandising of their products. For the music industry, IP produced packaging that was recently recognized with two Grammy nominations for Harry Belafonte's "The Long Road to Freedom: An Anthology of Black Music" (Buddha Records/BMG Heritage). We are listening to our customers to ensure that we meet their needs. 9 This illustration shows a figure holding a board that balances trees with wood products to illustrate managing. [GRAPHIC] INTERNATIONAL PAPER IS ENHANCING THE WAY WE MANAGE OUR BUSINESS. THE NEEDS OF THE CUSTOMER BALANCED WITH CONSERVATION OF VALUED RESOURCES DRIVE OUR DECISION MAKING AND DETERMINE OUR COURSE. This photo shows colored envelopes from Carlton Cards with roses and cards in the background. [PHOTO] CARLTON CARDS - -------------------------------------------------------------------------------- Carlton Cards came to International Paper and its Inverurie, Scotland, mill with a specific need. The company, which is part of American Greetings, wanted to buy its envelope paper in Europe instead of the United States to save shipping time. To meet this need, the mill worked with Carlton to develop supply chain solutions that produced the required paper. To further serve the customer, Inverurie is working with Carlton on other supply chain management improvements in areas such as inventory and distribution. MANAGING Forestry is at the core of all we do, and managing our resources starts with trees. As one of the largest private forest landowners in the world, IP responsibly manages its forests under the principles of the Sustainable Forestry Initiative (SFI )(sm). We use no wood from endangered old growth or rainforests. All of our U.S. lands are now third-party certified to both the SFI and ISO 14001 standards. The SFI program stresses the continual planting, growing and harvesting of trees while protecting wildlife, plants, soil, air and water quality for current and future generations. We are the world's largest seedling grower, producing almost 425 million seedlings a year. We have produced in excess of 7.5 billion seedlings in the United States alone, and we have planted six million acres of forestland. Several organizations partner with IP to educate our communities and help protect our environment. For example, we work with the North Carolina Love-A-Tree program to teach fifth-graders about their role in the environment. We also work with The Nature Conservancy to protect plant and animal habitats. The group presented IP with the 2001 Corporate Partnership Award for enhancing red-cockaded woodpecker populations on forestlands in the U.S. Southeast. Our dedication to responsibly managing our forests is matched by our commitment to managing our company and our resources successfully. On a regular basis, we identify ways to cut costs and improve productivity. One way we do this is with a computerized information network that lets employees share solutions and best practices with their colleagues around the world. Through this network, teams of employees have found ways to reduce transportation costs, create more cost-effective products, increase recycling, and reduce machine downtime. Some of these ideas were so innovative they were submitted for patents and all of them enabled our company to save millions of dollars while doing a better job of managing resources and serving our customers. We take pride in managing our forests and operations responsibly, and we are looking for ways to continuously improve our performance. 11 INTERNATIONAL PAPER DELIVERS PRODUCTS TO CUSTOMERS AROUND THE GLOBE, BUT THE FINAL JUDGES OF OUR PERFORMANCE ARE THE MILLIONS OF INDIVIDUALS WHO USE OUR PRODUCTS ON A DAILY BASIS. [GRAPHIC] This illustration shows a figure receiving a sheet of paper from a large hook to illustrate delivering. This photo shows a globe and copies of National Geographic and National Geographic for Kids magazines. [PHOTO] NATIONAL GEOGRAPHIC - -------------------------------------------------------------------------------- International Paper's relationship with the National Geographic Society began with developing and providing paper for its world-famous magazines. We worked with National Geographic, the world's largest non-profit scientific and educational organization, to develop lighter-weight paper that provides the superior quality its magazines require. The International Paper Company Foundation also collaborated with National Geographic to achieve its mission of sharing geographic knowledge and protecting our planet's resources. In 2001, the Foundation partnered with National Geographic to underwrite National Geographic for Kids, a classroom-based publication for students in grades three through six. The publication is designed to improve students' literacy skills and provide high-quality science and social studies content. We are honored that the Foundation is collaborating with National Geographic on this successful and rewarding endeavor. DELIVERING At IP, we pride ourselves on delivering value for our customers by producing on-time, quality products that meet the needs of our customers around the world. Delivering innovative packaging solutions is one way IP meets customers' expectations. When the world's largest dairy store wanted to improve its packaging, Stew Leonard's called IP for help. The solution? A SPOUT-PAK/TM/ carton to preserve nutrients and milk quality. Since going to this carton with a resealable screw cap, like many juice companies use, Stew Leonard's experienced an almost 10 percent increase in milk sales. Today, it uses about six million cartons a year. In 2002, Stew Leonard's plans to package its private label orange juice in SPOUT-PAK, as well. Our container business fulfills the needs of Gold Kist Inc., the second-largest U.S. poultry producer, by providing a superior packaging option -- the ClassicPak(R) container. As well as developing a stronger box, we delivered substantial savings to Gold Kist by improving its inventory management system. By consolidating and standardizing its poultry boxes, we reduced the number of boxes required and decreased inventory and warehouse space. We also helped Gold Kist serve its customers, the supermarket retailers who benefit from the stronger packaging and the fully recyclable, wax-free container. IP teams are targeting strategic product and customer segments to create financial value. The industrial packaging group has significantly increased its BriteTop/TM/ liner-board sales by identifying and serving areas of growing demand, such as corrugated packaging for retail warehouse club merchandise. This strategy has resulted in a 20 percent increase in BriteTop business during a year when the U.S. industrial packaging industry was down 6 percent. Delivering the right product at the right time leads to success for International Paper and our customers. 13 This illustration shows a figure using a rolled piece of paper to look into the distance to illustrate enhancing. [GRAPHIC] OF ALL OUR RESOURCES, NONE ARE MORE VALUED THAN THE PEOPLE OF INTERNATIONAL PAPER. WE ARE COMMITTED TO OFFERING OPPORTUNITIES FOR THEIR DEVELOPMENT SO THAT NOT ONLY THE COMPANY-- BUT EACH INDIVIDUAL-- GROWS STRONGER. In 2001, the beverage packaging Taiwan team rallied around a vision to be the preferred gable top supplier to targeted customers in Taiwan, Hong Kong and Southeast Asia. To accomplish this goal, the team developed specific plans for prospects in the region. Team members were empowered to do whatever was necessary to solve customers' problems. As a result, the Taiwan team significantly increased its business and delivered a very positive return on investment. BEVERAGE PACKAGING TAIWAN - -------------------------------------------------------------------------------- [PHOTO] This photo shows a variety of beverage packaging products from Taiwan. ENHANCING From all corners of the globe, our men and women are our greatest competitive advantage and most valuable resource. A passion for winning and positive attitudes are what distinguish the people of International Paper. By encouraging them to be fully involved, we want to be among the best and most respected companies in the world. We're creating a culture of winners. We are proud of a peer recognition awards program in the printing & communications papers group. This program rewards those employees with a passion to win and positive attitudes. By recognizing these behaviors, we encourage other employees to become winners in their businesses. Our employees contribute every day to company initiatives ranging from diversity to safety. The Mansfield, La., containerboard mill used the power of teamwork to ensure a safer workplace. Hundreds of mill employees are involved in improving safety performance at the facility. They participate in safety teams, conduct training and provide feedback to workers in the form of behavior-based safety observations. The Mansfield mill achieved the safest year in its history in 2001. Likewise, team members at our Guangzhou, China, container plant set a goal of zero safety incidents in 2001. Guangzhou began by increasing both management and employee participation in safety. The facility celebrated its first anniversary without a recordable safety incident on Oct. 12, 2001 -- a significant advancement. To meet our goals, we are enhancing the skills of all of our employees. 15 AT INTERNATIONAL PAPER, 2001 has been marked by continuing changes that are improving our company's performance. We embarked upon this mission several years ago and it has resulted in our fundamentally changing the way we manage our company. We have changed the way we manage our asset mix, capital spending and corporate overhead. It has meant focusing more closely on our customers and our employees. We have spent much of the last year developing closer customer relationships by listening to their needs and meeting their expectations. We have developed value for our customers by matching our capabilities to their needs. We have managed our resources to deliver greater value by producing on-time, quality products and, ultimately, improved financial results. As we have done this, we have enhanced our people's creativity and commitment, and more fully engaged their passion for winning. These efforts have improved our cost structure and made our customer relationships stronger. While we have accomplished much this year, we will continue our campaign in 2002 and beyond. We are committed to doing everything we can to improve our profitability, increase our return to shareowners, position ourselves to take advantage of economic recovery and achieve our vision of being among the best and most respected companies in the world. 16 FINANCIAL REVIEW - -------------------------------------------------------------------------------- 18 Management's Discussion and Analysis 18 Corporate Overview 19 Description of Industry Segments 21 Industry Segment Results 21 Printing Papers 22 Industrial and Consumer Packaging 23 Distribution 23 Forest Products 24 Carter Holt Harvey 24 Other Businesses 25 Liquidity and Capital Resources 38 Financial Information by Industry Segment 39 Financial Information by Geographic Area 40 Report of Management on Financial Statements 40 Report of Independent Public Accountants 41 Consolidated Statement of Earnings 42 Consolidated Balance Sheet 43 Consolidated Statement of Cash Flows 44 Consolidated Statement of Common Shareholders' Equity 45 Notes to Consolidated Financial Statements 74 Six-Year Financial Summary 77 Interim Financial Results 17 Management's Discussion and Analysis CORPORATE OVERVIEW - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS International Paper's consolidated results of operations include Champion International Corporation (Champion) from the date of acquisition, June 20, 2000. After special and extraordinary items, a net loss of $1.2 billion, or $2.50 per share, was recorded in 2001. This compares to net earnings after special and extraordinary items of $142 million, or $.32 per share in 2000, and $183 million, or $.44 per share, in 1999. Special charges in 2001 of $1.8 billion before taxes and minority interest ($1.4 billion after taxes and minority interest, or $2.81 per share) consisted of charges for restructuring, an increase in litigation reserves, merger integration costs, a net loss related to dispositions and asset impairments of businesses held for sale, and a credit for the reversal of reserves no longer required. Additionally in 2001, we recorded 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 impact of an accounting change. In 2000, special charges totaled $969 million before taxes and minority interest ($601 million after taxes and minority interest, or $1.34 per share). This included charges for restructuring, an increase in litigation reserves, merger integration costs, and a credit for the reversal of reserves no longer required. Extraordinary items in 2000 were a loss of $85 million before taxes and minority interest ($226 million after taxes and minority interest, or $.50 per share) for net disposition losses and asset impairments of businesses held for sale. Special charges in 1999 totaled $557 million before taxes and minority interest ($352 million after taxes and minority interest, or $.85 per share) and we reported an extraordinary pre-tax loss of $26 million ($16 million after taxes, or $.04 per share). Earnings Before Special and Extraordinary Items Earnings before special and extraordinary items in 2001 were $214 million, or $.44 per share, compared with earnings before special and extraordinary items of $969 million, or $2.16 per share, in 2000 and $551 million, or $1.33 per share, in 1999. Earnings in 2001 were adversely impacted by the slowing worldwide economy and the strong U.S. dollar, resulting in increased imports into the U.S. and a decline in export revenues. Product prices in 2001 were lower in varying degrees across almost all of our product lines and were a major factor in the reduced earnings year-to-year. Although energy prices moderated during 2001, they had a negative impact on our manufacturing costs. Operational efficiencies and declining wood costs in 2001 were positive factors, helping to offset the effects of the weaker business environment. The policy of balancing International Paper production with customer demand resulted in taking approximately 1.7 million tons of market-related downtime across the mill system. Additionally in 2001, the closure of paper mills in Erie, Pennsylvania, and Moss Point, Mississippi, four wood products manufacturing operations and certain consumer packaging facilities, and the down-sizing of the Savannah, Georgia mill and the Hudson River mill located in Corinth, New York were announced. In January 2002, the closure of the Oswego, New York containerboard mill and the Morton, Mississippi lumber mill were also announced. These actions will permanently remove about one million tons of capacity per year from our mill system and 490 million board feet from our wood products facilities. International Paper continues to focus on three core businesses - paper, packaging and forest products. In 2000, we announced a program to exit those businesses that are considered to be non-core or do not meet our return on investment criteria (ROI), and sell certain other non-strategic assets. During 2001, the dispositions of our interests in Zanders Feinpapiere AG (Zanders), Masonite Corporation (Masonite), our oil and gas assets, the Flexible Packaging business, the Retail Packaging business, the Curtis/Palmer hydroelectric generating project, the Argentine packaging assets, the former Champion Hamilton, Ohio mill, and certain non-strategic timberlands, primarily in Washington and east Texas were completed. During 2000, the sales of Bush Boake Allen and the former Champion headquarters building were completed. Since the Champion acquisition in June 2000, International Paper has completed divestitures totaling $2.7 billion. Other businesses in the divestiture program being marketed at December 31, 2001 included Arizona Chemical, Decorative Products, Industrial Papers and other smaller businesses and non-strategic assets. Net sales in 2001 totaled $26.4 billion, and were below 2000 net sales of $28.2 billion, but 7% higher than 1999 net sales of $24.6 billion, despite having Champion included in our 2001 results for a full year. The decrease from 2000 was primarily due to the weaker U.S. economy, the impact of our divested businesses, and lower average prices across most of our business segments. International net sales (including U.S. exports) totaled $7.1 billion, or 27% of total sales in 2001. This compares to sales of $7.6 billion in 2000 and $6.9 billion in 1999. Inclusion of the Brazilian and Canadian operations 18 for the 2001 full year partly offset the revenue reduction due to the sale of non-U.S. businesses in 2001 and 2000, mainly Zanders and Bush Boake Allen. Export sales of $1.3 billion in 2001 were down from the $1.6 billion and $1.5 billion in 2000 and 1999, respectively, primarily due to the strong U.S. dollar. Segment operating profit of $1.8 billion in 2001 was down $900 million from the $2.7 billion in 2000 and even with 1999. Deteriorating prices accounted for about $600 million of the decrease from 2000, with lower volumes and market-related downtime contributing about $300 million and $200 million, respectively. Operating profit was lower in 2001 by about $100 million due to businesses divested in comparison to 2000. All these reductions were partially offset by about $300 million of year-to-year benefits from the inclusion of Champion for a full year, merger benefits and other cost reduction programs, net of higher energy costs and general inflation. ROI was enhanced by improved capital employed utilization as a result of divestitures, working capital reductions and other facility rationalizations. Excluding special and extraordinary items, ROI was 2.9% in 2001, 5.3% in 2000, and 4.0% in 1999. The integration of International Paper and Champion was essentially completed in 2001. International Paper continues to take actions designed to improve our ROI. We plan to maintain 2002 capital spending at approximately the $1 billion level incurred in 2001. DESCRIPTION OF INDUSTRY SEGMENTS - -------------------------------------------------------------------------------- PRINTING PAPERS International Paper is the world's leading producer 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, Champion, Beckett and Rey. The mills producing uncoated papers are located in the U.S., Scotland, France, Poland and Russia. These mills have uncoated paper production capacity of 5.7 million tons annually. Coated Papers: 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 U.S. amounts to 2.2 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 pulp. These products are produced in the U.S., Canada, France, Poland and Russia, and are sold around the world. International Paper facilities have annual 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 is 670,000 tons of coated and uncoated papers. INDUSTRIAL AND CONSUMER PACKAGING Industrial Packaging: With production capacity of about 4.3 million tons annually, International Paper is the second largest manufacturer of containerboard in the U.S. Over one-third of our production is specialty grades, such as PineLiner, Sunliner, Polarboard, Coastliner, BriteTop and Spra White. About 65% 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 22 container plants in France, Ireland, Italy, Spain and the United Kingdom. Our global presence also includes operations in Puerto Rico, Chile, Turkey and China. Our container plants are supported by regional design centers, which offer total packaging solutions and supply chain initiatives. We have the capacity to produce over 600,000 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 2 million tons. Our Everest and Starcote brands are used in packaging applications for juice, milk, food, cosmetics, pharmaceuticals, computer software and tobacco products. Approximately 40% of our bleached board production is converted into packaging products in our own plants. Our Beverage Packaging business has 16 plants worldwide offering complete packaging systems, from paper to filling machines, using proprietary technologies including Tru-Taste brand barrier board technology for premium long- 19 Management's Discussion and Analysis life juices. Shorewood Packaging Corporation (Shorewood) operates 20 plants worldwide, producing packaging with high-impact graphics for a variety of consumer markets, including tobacco, cosmetics and home entertainment. The Foodservice business offers cups, lids, cartons, bags, containers, beverage carriers, trays and plates from six domestic plants and through six 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. During 2001, the Consumer Packaging business implemented a plan to exit the Aseptic Packaging business which includes the shutdown or sale of various Aseptic Packaging facilities. DISTRIBUTION Through xpedx, our North American merchant distribution business, we supply industry wholesalers and end users with a vast array of printing, packaging, graphic arts, maintenance and industrial products. xpedx operates 115 warehouses and 155 retail stores in the U.S. 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 21% of our worldwide distribution sales. FOREST PRODUCTS Forest Resources: International Paper owns or manages about 10.4 million acres of forestlands in the U.S., mostly in the South. In 2001, these forestlands supplied about 28% of our wood requirements. Wood Products: International Paper owns and operates 32 U.S. plants producing southern pine lumber, oriented strand board (OSB), plywood and engineered wood products. The majority of these plants are located in the South near our forestlands. We can produce about 2.5 billion board feet of lumber, 1.6 billion square feet of plywood and 980 million square feet of OSB annually. Canadian Wood Products: Weldwood of Canada 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 timberlands in Canada. CARTER HOLT HARVEY Carter Holt Harvey is approximately 50.4% owned by International Paper. It is one of the largest forest products companies in the Southern Hemisphere, with operations mainly in New Zealand and Australia. The Australasian region accounts for about 80% of its sales. Asian markets are important outlets for its logs, pulp and linerboard products. Carter Holt Harvey's major businesses include: Forest Operations, including ownership of 810 thousand acres of predominantly radiata pine plantations that yield over 7 million tons of logs annually. Wood Products, including over 600 million board feet of lumber capacity and about 800 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 1.1 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 about 190 thousand tons of annual production capacity from two mills and six 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. It also has a significant share of the Australian cup market, and distribution businesses in New Zealand and Australia. OTHER BUSINESSES Chemicals: Arizona Chemical is a leading processor of crude tall oil and crude sulfate turpentine, natural by-products of the papermaking process. Products include specialty resins used in adhesives and inks made at 15 plants in the U.S. and Europe. In addition, through our Chemical Cellulose Pulp business, we produce chemical specialty pulp, primarily utilized in cigarette filters and fabrics. 20 Decorative Products: We produce high- and low-pressure laminates, particleboard and graphic arts products from 13 facilities. Our customers include residential and commercial construction, furniture, store fixtures and graphic arts businesses as well as specialty niche applications. Industrial Papers: We can produce 350,000 tons of specialty industrial papers annually used in applications such as pressure-sensitive labels, food and industrial packaging, industrial sealants and tapes and consumer hygiene products. Petroleum: International Paper conveyed its oil and gas properties and royalty interests to a third party in January 2001. We have retained management of other mineral rights on company-owned and leased lands. Masonite: During the third quarter of 2001, International Paper sold Masonite to Premdor Inc. of Toronto, Canada. Prior to the sale, Masonite had locations in North America, Europe, South Africa and South Korea, and manufactured and marketed CraftMaster door facings and other molded products for residential and commercial construction, as well as a broad line of hardboard exterior siding, industrial hardboard and a wide range of softboard products for the home and office. INDUSTRY SEGMENT RESULTS - -------------------------------------------------------------------------------- PRINTING PAPERS Printing Papers posted sales of $7.8 billion in 2001 compared with $7.2 billion in 2000 and $5.2 billion in 1999. Operating profit in 2001 was $538 million compared with $930 million in 2000 and $232 million in 1999. The decline in 2001 reflects weaker demand and lower prices in the United States. Market Pulp accounted for about half of this decline. Printing Papers' operations continued to align production with customer demand, resulting in approximately 700,000 tons of market-related downtime globally due to the economic slowdown as well as permanent capacity reduction of about 350,000 tons. During 2001, this business implemented plans to reduce direct and indirect manufacturing costs and to improve machine efficiency which benefited the performance of the business in the third and fourth quarters.
Printing Papers - -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Sales $7,815 $7,210 $5,215 Operating Profit $ 538 $ 930 $ 232
Uncoated Papers sales were $4.9 billion in 2001, up from $4.8 billion in 2000 and $4.1 billion in 1999. Sales were up slightly in 2001 compared with 2000, while overall shipments increased approximately 5%. Paper prices on average declined 2% year-over-year. Operating profit was down 15% from 2000 and was about double the 1999 level. Cost reduction initiatives, the realization of Champion merger benefits and the reorganization of our U.S. office papers business all had a positive impact on 2001 profitability. However, our domestic operations were negatively impacted by lower prices, higher energy costs, and poor performance from manufacturing operations in the first half of the year. Successful marketing and cost reduction initiatives, in particular at our Kwidzyn facility in Poland and Svetogorsk in Russia, were key factors contributing to improved performance in our European uncoated business. The increases in Uncoated Papers sales and earnings from 1999 were primarily the result of the Champion acquisition in June 2000 and improved operations in Europe. Coated Papers sales were $1.6 billion in 2001, compared with $1.2 billion in 2000 and $590 million in 1999. Operating profit in 2001 was down approximately 47% compared with 2000 due to poor economic conditions in the United States as well as higher raw material and energy prices. Compared with 1999, sales and operating profit were up in 2001 due to the Champion acquisition in 2000. A 7% decrease in average U.S. pricing was the major factor in lower 2001 operating profits. Market Pulp sales from our U.S., European and Canadian facilities were $815 million in 2001 compared with $925 million and $535 million in 2000 and 1999, respectively. Pulp markets declined sharply during the year and did not show signs of stabilizing until late in the fourth quarter. Pulp reported an operating loss in 2001 compared with earnings in 2000, principally due to a significant decline in pricing, and a loss in 1999. Operating cost management and production curtailments aided in curbing the operating losses. Brazilian Paper sales were $460 million in 2001 compared with $270 million in 2000. The increase in sales and the 72% increase in operating profit were due to the full year's results included in 2001 versus six months in 2000 as our Brazilian operations were acquired in the Champion acquisition in June 2000. Looking ahead, we expect 2002 to be a challenging year for our Printing Papers segment as there are currently no clear indications of a U.S. economic recovery that would improve the external environment. The business is focused on 21 Management's Discussion and Analysis improving costs and efficiencies in order to strengthen its financial performance. We expect to continue to benefit from our profit improvement initiatives and prior-year operational restructurings, and will continue to balance our production to our customers' orders. INDUSTRIAL AND CONSUMER PACKAGING Industrial and Consumer Packaging sales totaled $6.3 billion in 2001, 5% below 2000's sales of $6.6 billion. Operating profit of $508 million in 2001 declined from the $741 million reported for 2000, reflecting weaker demand for virtually all product lines. The domestic economic slowdown, coupled with a strong U.S. dollar, adversely affected demand for this sector's products for most of the year. Our mills have continued to curtail production as necessary to balance supply with the soft demand throughout the year. Sales were $6.0 billion in 1999 and operating profit was $520 million.
Industrial and Consumer Packaging - -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Sales $6,280 $6,625 $6,020 Operating Profit $ 508 $ 741 $ 520
Industrial Packaging revenues were $3.7 billion in 2001, down from $4.0 billion the previous year and $3.8 billion in 1999. Profits in 2001 declined 35% from 2000, after substantial improvement from 1999. Focused customer programs and internal productivity initiatives were unable to fully offset the poor market conditions encountered during the year. Overall, 2001 shipments declined 7% due to soft domestic markets for containerboard and boxes, driven by the slowing U.S. economy and weaker exports caused by the strong U.S. dollar. The rate of decline in domestic box shipments paralleled the decline in industrial production. Soft market conditions continued to exert pressure on prices during most of the year. Average domestic containerboard prices were down 7% compared with 2000. Markets for our European converting operations remained relatively steady before softening during the fourth quarter. European results were significantly better than in 2000 despite devaluation losses incurred in connection with our Turkish joint venture. Our Kraft Papers business also had a strong year, benefiting from increased orders from selected customers and steady demand for both bleached and unbleached products. Prices for kraft papers were steady throughout the year. During 2001, the Industrial Packaging business continued its policy of adjusting production to maintain inventories in line with customer demand, curtailing production of 800,000 tons during the year, or 18% of capacity. Three Savannah, Georgia paper machines were shut down during the year to further balance the system. We subsequently announced the shutdown of the one-machine Oswego, New York mill in January 2002. Industrial Packaging will continue to focus efforts to further improve its cost position to help offset the weak market conditions entering 2002. Consumer Packaging sales were $2.6 billion for both 2001 and 2000 and $2.2 billion in 1999. Weaker overall demand in 2001 was offset by a full year of operations for Shorewood, acquired in March 2000. Consumer Packaging's 2001 operating profit declined 24% from 2000 due mainly to weak market conditions, after a 5% improvement over 1999. Cost reduction programs, facility rationalizations and operational initiatives helped improve overall results for these businesses. However, weak market conditions during the first nine months, coupled with high first-quarter energy costs, negated these positive factors. Similar economic and foreign exchange issues as those affecting the Industrial Packaging business also impacted the Consumer Packaging business. Overall shipments, after adjusting for the Shorewood acquisition, were down 7% versus 2000. In addition, the Consumer Packaging business took approximately 100,000 tons of market-related downtime in the bleached board mill system to balance the supply/demand equation. Average bleached board pricing was down for the year versus 2000. 2001 was a period of accelerated change for the Industrial and Consumer Packaging businesses. The Pacific Millennium joint venture, which further expands this segment's operations in the Pacific basin, was announced during the first quarter. Additionally, we closed the Moss Point, Mississippi mill, and combined the operations of two Shorewood locations and one Foodservice facility with other locations. Specific overhead reduction programs were implemented, and we announced the downsizing of Beverage Packaging's worldwide aseptic operations. These initiatives are expected to have a favorable impact on future operating results. Looking ahead as we enter 2002, we expect market conditions to continue to put pressure on both demand and pricing. The future success of these businesses will be driven by continuing our customer-focused market initiatives and by completing the realignment and cost control programs. 22 DISTRIBUTION North American and European distribution sales totaled $6.8 billion in 2001 compared to $7.3 billion in 2000 and $6.9 billion in 1999. Operating profit in 2001 was $21 million compared with $120 million in 2000 and $105 million in 1999. Market conditions weakened considerably in all segments of the business, particularly during the latter half of the year.
Distribution - -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Sales $6,790 $7,255 $6,850 Operating Profit $ 21 $ 120 $ 105
xpedx, our North American distribution operation, posted sales of $6.4 billion, down 6% from 2000 and 1% from 1999. The decline in sales with the economic downturn in 2001 that began early in the year had an adverse affect on our two primary customer segments: paper and supplies for the commercial printing segment and packaging supplies for the industrial segment. Prices on many product lines were lower as a result of the slowing demand. The significant impact of the general economic downturn on sales was partially mitigated by additional sales from acquisitions in 1999 and 2000. During 2001, xpedx successfully completed the integration of Nationwide, acquired as part of the Champion acquisition in 2000. This represents the third major acquisition for xpedx, which has followed a strategy of consolidating operations and eliminating duplicate facilities, leveraging shared expenses and focusing on profitable customer segments. Over the three-year period, in addition to Nationwide, xpedx completed the integration of Alling and Cory, acquired with Union Camp, and Zellerbach, a stand-alone distribution business acquisition. Operating profits in 2001 declined about 80% from 2000 and 1999 largely reflecting lower sales. In addition, the slowing economy and weak demand resulted in an increase in customer bankruptcies, with a more than 80% increase in bad debt expense. Throughout the year, an aggressive expense management program helped to mitigate the impact of the significant sales decline on operating profits. Headcount was reduced in 2001 by over 1,100, or 11%, and operating expenses were cut to parallel the lower level of sales activity. Additionally, xpedx generated cash flows in excess of $200 million from added focus on working capital and asset management programs. Our European distribution operations - Papeteries de France, Scaldia in the Netherlands and Impap in Poland - posted sales of $350 million, down 5% from 2000 but even with 1999. European sales were also affected by an economic downturn, but to a lesser extent than the U.S. The European businesses recorded a slight loss in 2001 due to weak economic conditions following several years of profit growth. For 2002, we expect that general market conditions will remain difficult in most segments resulting in weak demand and continued pressure on prices. Consequently, earnings improvement in 2002 will come largely from focused profit improvement initiatives as well as increased emphasis on those customer segments where we can create the most value for customers and shareholders. FOREST PRODUCTS Forest Products sales were $2.9 billion, up from $2.4 billion in 2000 and $2.1 billion in 1999. Operating profit in 2001 of $655 million was up from $564 million in 2000 and $653 million in 1999. This increase was attributable to improved results in Forest Resources, partially offset by lower average building materials prices and sales volumes and the full-year inclusion of the Forest Products operations of Champion.
Forest Products - -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Sales $2,855 $2,380 $2,070 Operating Profit $ 655 $ 564 $ 653
Forest Resources sales in 2001 were $960 million compared with $848 million in 2000 and $653 million in 1999. Operating profit was 10% higher than 2000 and 37% higher than 1999 primarily due to the inclusion of a full year of Champion results and higher sales of non-strategic forest assets, partially offset by lower harvest volumes and prices. 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. In 2001, large sales of non-strategic timber assets increased earnings by approximately $75 million from 2000 and $150 million from 1999, reflecting in part the larger land base after the Champion acquisition. Harvest volumes in 2001 were lower than 2000 due to weaker demand, but higher than 1999 as a result of the Champion acquisition. Average 2001 prices declined from both 2000 and 1999, with southern pine sawtimber and pulpwood prices declining about 19% and 12%, respectively, versus 2000 averages. Stumpage prices entering 2002 are below comparable prices at the beginning of 2001, which were lower than 1999. We 23 Management's Discussion and Analysis do not anticipate any significant price improvement in early 2002, but expect that 2002 full-year prices will average about the same as 2001, well below 2000. Harvest volumes in 2002 are also projected to be lower than the volumes in 2001. Wood Products sales in 2001 of $1.4 billion were slightly better than the $1.3 billion in 2000, and equal with 1999 sales. This business reported a loss for both 2001 and 2000 following a strong performance in 1999. The loss in 2001 was due to significant pricing pressure and weak demand, partially offset by improved operations and lower costs, primarily for logs. Prices in 2001, compared with 2000, were off 5% for lumber, and about 7% for panels. We expect market conditions to improve in early 2002, with a continued strengthening later in the year as economic conditions in the U.S. improve. We intend to continue aggressively managing capacity to keep inventories in line with customer demand. Canadian Wood Products, a former Champion business operated through Weldwood of Canada, reported sales of $480 million for a full year in 2001 versus $190 million from the second half of 2000, which included six months of operations after the acquisition date. By year end, lumber prices had dropped significantly versus 2000. The outlook for 2002 is the same as for domestic U.S. wood products - - gradual strengthening with a stronger second half. A final resolution of the softwood lumber trade dispute between the United States and Canada, that impacts both U.S. Wood Products and Weldwood, would be a net positive factor to International Paper. CARTER HOLT HARVEY International Paper's results for this segment differ from those reported by Carter Holt Harvey in New Zealand in three major respects: 1. Carter Holt Harvey 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 .41 in 2001, .46 in 2000 and .52 in 1999. 3. Carter Holt Harvey reports under New Zealand accounting standards, but our segment results comply with U.S. generally accepted accounting principles. The major differences relate to cost of timber harvested (COTH), land sales, financial instruments and start-up costs. These differences reduced segment earnings by $30 million in 2001, about $20 million in 2000 and $50 million in 1999.
Carter Holt Harvey - -------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------- Sales $1,710 $1,675 $1,605 Operating Profit $ 13 $ 71 $ 39
Carter Holt Harvey's segment sales were $1.7 billion in both 2001 and 2000, and $1.6 billion in 1999. The significant fall in operating profit was principally due to low export prices for logs, pulp and linerboard, together with a decline in residential construction in Australia. Forests experienced falling prices in both its export and domestic markets. A decline in construction activity in the New Zealand and Australian markets reduced the demand for sawlogs from sawmills, while recession conditions in Japan also led to reduced demand for logs. Additionally, high inventory levels due to the adverse conditions in its major markets resulted in the sale of stock at low prices. Wood Products also experienced adverse market conditions in Australia and New Zealand due to low levels of residential construction. However, declining interest rates as the year progressed resulted in some recovery in both markets later in the year. Pulp and Paper also experienced falling pulp and linerboard prices in its main Asian markets. In addition, higher electricity charges also lowered the business' earnings. Tissue experienced an increase in earnings due to lower pulp input costs and an increase in sales volumes. Higher earnings in the Packaging business were the result of operational business improvements. In April 2001, the Tasman pulp mill in New Zealand was acquired for $130 million. This acquisition is expected to contribute further to earnings in 2002. Operating results for the first half of 2002 will be dependent on changes in global economic conditions. Pulp and linerboard pricing can be expected to remain near cyclical lows through mid-2002. Some improvement in export log pricing is expected from improving demand in Korean and Chinese markets. The Australian and New Zealand construction markets are expected to remain relatively strong through the first half of the year before easing in the second half as demand levels ease and interest rates rise. OTHER BUSINESSES Other businesses include those that have been identified in our divestiture program, and the Chemical Cellulose Pulp business. 24
Other Businesses - ----------------------------------------------------------- In millions 2001 2000 1999 - ----------------------------------------------------------- Sales $2,325 $4,230 $4,245 Operating Profit $ 52 $ 233 $ 259
Chemicals sales were $741 million in 2001, compared with $845 million and $885 million in 2000 and 1999, respectively. Primarily due to losses in the Chemical Cellulose Pulp business, Chemicals reported a loss in 2001 following declining profits in 2000 and 1999. Operating profit in the Chemical Cellulose Pulp business declined from 2000 to 2001 as a result of increased costs and lower volumes. Arizona Chemical's U.S. volume in the Oleo, Inks and Adhesives business units was down 15% due to reduced customer demand and lower primary raw material supply due to the shutdown of mills and downtime taken in 2001. European volume was strong for the year. Decorative Products sales were $527 million, down 15% from 2000 sales of $619 million and 1999 sales of $624 million. The decline in sales in 2001 was due to lower global market demand for high- and low-pressure laminates and particleboard. Earnings in 2001 declined from prior years due to significantly lower sales volumes and higher raw material and energy costs, which were partially offset by reductions in administrative expenses. Industrial Papers sales were $451 million in 2001 compared with sales of $498 million and $506 million for 2000 and 1999, respectively. Operating profit in 2001 was down approximately 30% from both 2000 and 1999. Lower average sales margins, partially offset by cost improvement initiatives, contributed to the decline in operating profits in 2001. Petroleum sales were $20 million in 2001 prior to its disposition compared with $125 million in 2000 and $70 million in 1999. International Paper conveyed its oil and gas properties and royalty interests to a third party in January 2001. We retained management of other mineral rights on company-owned and leased lands. Masonite was sold during the third quarter of 2001 to Premdor Inc. of Toronto, Canada. Masonite sales were $278 million in 2001 prior to its disposition compared with $465 million in 2000 and $512 million in 1999. Other businesses not discussed above are businesses that have been sold. The businesses that are no longer part of International Paper include Zanders, Flexible Packaging, Retail Packaging, Bush Boake Allen, the former Champion Hamilton Mill, and the Curtis/Palmer hydroelectric assets. Sales for these businesses were approximately $300 million in 2001 compared with $1.7 billion in 2000 and $1.6 billion in 1999. LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS Cash provided by operations totaled $1.7 billion for 2001, compared with $2.4 billion in 2000 and $1.7 billion in 1999. The decrease in operating cash flow in 2001 reflects lower earnings before special and extraordinary items and the cumulative effect of an accounting change. Excluding special and extraordinary items and the cumulative effect of accounting change, after taxes and minority interest, net earnings for 2001 decreased $755 million from 2000. The increase in operating cash flow in 2000 reflects higher earnings before special and extraordinary items. Excluding special and extraordinary items, after taxes and minority interest, net earnings for 2000 increased $418 million from 1999. A decrease in working capital increased 2001 operating cash flow by $280 million. Working capital changes decreased 2000 and 1999 operating cash flow by $146 and $32 million, respectively. Depreciation and amortization expense was $1.9 billion in 2001 and 2000, and $1.7 billion in 1999. INVESTMENT ACTIVITIES Capital spending was $1.0 billion in 2001, or 56% of depreciation and amortization (52% for ongoing businesses) as compared to $1.4 billion, or 71% of depreciation and amortization in 2000, and $1.1 billion, or 68% of depreciation and amortization in 1999. The increase in spending in 2000 was principally the result of capital projects for Champion. We plan to continue to hold annual capital spending well below annual depreciation and amortization expense. Discretionary capital spending will be primarily for reducing costs, stabilizing processes and improving services. The following table presents capital spending by each of our business segments.
- ------------------------------------------------------------------- In millions 2001 2000 1999 - ------------------------------------------------------------------- Printing Papers $ 374 $ 447 $ 382 Industrial and Consumer Packaging 246 296 246 Distribution 16 24 16 Forest Products 175 217 134 Carter Holt Harvey 85 100 99 Other Businesses 82 172 199 ------ ------ ------ Subtotal 978 1,256 1,076 Corporate and other 71 96 63 ------ ------ ------ Total $1,049 $1,352 $1,139 ====== ====== ======
25 Management's Discussion and Analysis Mergers and Acquisitions 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 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. The merger with Union Camp was completed on April 30, 1999. Union Camp shareholders received 1.4852 International Paper common shares for each Union Camp share held. The total value of the transaction, including the assumption of debt, was approximately $7.9 billion. International Paper issued 110 million shares for 74 million Union Camp shares, including options. The merger was accounted for as a pooling-of-interests. Also in April 1999, Carter Holt Harvey acquired the corrugated packaging business of Stone Australia, a subsidiary of Smurfit-Stone Container Corporation. The business consists of two sites in Melbourne and Sydney, which serve industrial and primary produce customers. All of the above acquisitions were accounted for using the purchase method, with the exception of the Union Camp acquisition, which was accounted for as a pooling-of-interests. The operating results of those mergers and acquisitions accounted for under the purchase method have been included in the consolidated statement of earnings from the dates of acquisition. In March 2001, International Paper and Carter Holt Harvey acquired a combined 37.5% interest in International Paper Pacific Millennium Limited for approximately $34 million. This investment is accounted for under the equity method and is included in Investments in the accompanying consolidated balance sheet. 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, 2001, approximately $2.7 billion has been realized under the program, including cash and notes received plus debt assumed by the buyers. Cash Transactions In October 2001, International Paper sold its Mobile, Alabama Retail Packaging facility to Ampac, resulting in a pre-tax loss of $9 million. In September 2001, International Paper sold Masonite to Premdor Inc. of Toronto, Canada for approximately $300 million in cash and a note receivable with a face value of $113 million, resulting in a pre-tax loss of $87 million. In August 2001, International Paper sold its Flexible Packaging business to Exo-Tech Packaging, LLC, a company sponsored by the Sterling Group, L.P., for approximately $85 million in cash and a $25 million note, resulting in a pre-tax loss of $31 million. In July 2001, International Paper sold its Curtis/Palmer hydroelectric generating project in Corinth, New York to TransCanada Pipelines Limited for approximately $285 million, resulting in a pre-tax gain of $215 million. The net pre-tax gain of $88 million ($24 million after taxes) resulting from the above transactions is netted with impairment charges of $717 million (see Note 7) in Net losses on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. In January 2001, International Paper also 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 an extraordinary loss of $245 million after taxes, which was recorded in the third quarter of 2000 when the decision was made to sell this business. In November 2000, 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. In January 2000, International Paper sold its equity interest in Scitex for $79 million, and Carter Holt Harvey sold its equity interest in Compania de Petroleos de Chile (COPEC) for just over $1.2 billion. These sales resulted in a combined extraordinary gain of $134 million after taxes and minority interest. 26 The gains on the sales in 2000 and the impairments of Zanders, Masonite, Fine Papers, the Chemical Cellulose Pulp business and the Flexible Packaging business in Argentina were recorded in the accompanying consolidated statement of earnings as extraordinary items pursuant to the pooling-of-interests rules. See Note 7 for additional information related to these divestitures. Structured Transactions - Right of Offset In March 2001, International Paper sold approximately 265,000 acres of forestlands in the state of Washington for notes receivable (the Notes) that had a value of approximately $480 million on the date of sale. The Notes, which do not require principal payments prior to their March 2011 maturity, are extendable at International Paper's option in five-year increments to March 2031, and are supported by irrevocable letters of credit obtained by the buyer and issued by a money-center bank. The sale resulted in no profit or loss as the timberlands, which were acquired in the Champion acquisition, had a carrying value equal to fair value on the date of sale. During 2001, International Paper transferred the Notes to an unconsolidated entity that it does not control in exchange for a preferred interest in the 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 has offset, for financial reporting purposes, the $480 million preferred interest in the entity against $480 million of International Paper debt obligations held by the entity since International Paper has, and intends to effect, a legal right to net settle these two amounts. In January 2001, International Paper sold its oil and gas properties and fee mineral and royalty interests valued at $234 million to an unconsolidated partnership for a non-controlling preferred limited partnership interest, and recognized an extraordinary loss on this transfer of $8 million after taxes, which is included as an extraordinary item in the accompanying consolidated statement of earnings. Also in 2001, the unconsolidated partnership loaned $244 million to International Paper. At December 31, 2001, International Paper has offset, for financial reporting purposes, its preferred interest in the partnership against the note payable to the partnership since International Paper has, and intends to effect, a legal right to net settle these two amounts. FINANCING ACTIVITIES Financing activities during 2001 included a net debt reduction of $1.4 billion, primarily from proceeds from divestitures. Debt issuances in 2001 included $1 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 (see Note 13). 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 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. Financing activities during 1999 included an early extinguishment of $275 million of high interest debt that was assumed in the acquisition of Union Camp, at an after tax cost of $16 million, which is reflected as an extraordinary item in the 1999 statement of earnings. Other debt, primarily short-term, was reduced by $540 million. Dividend payments were $482 million, $447 million and $418 million in 2001, 2000 and 1999, respectively. On a per share basis, dividend payments were $1.00 in 2001, $1.00 in 2000 and $1.01 in 1999. The International Paper dividend remained at $1.00 per share during the three-year period. However, dividend payments on a per share basis for 1999 have been restated to include dividends paid by Union Camp. At December 31, cash and temporary investments totaled $1.2 billion in both 2001 and 2000. CAPITAL RESOURCES OUTLOOK FOR 2002 International Paper has the ability to fund capital expenditures, service and reduce existing debt, and meet working capital and dividend requirements during 2002 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 from Standard & Poors and Moody's Investors Services of A-2 and P-2, respectively. In the event of a ratings downgrade, our ability to issue commercial paper under this program would be substantially diminished. However, the commercial paper 27 Management's Discussion and Analysis program is also backed by committed revolving credit facilities in excess of $2 billion that could also be utilized for these purposes. In addition, International Paper has the ability to issue up to $500 million of commercial paper on a committed basis through an asset-backed accounts receivable securitization program established in December 2001. At December 31, 2001, these facilities were unused. Furthermore, at December 31, 2001, $2.9 billion of contractually committed bank credit agreements were unused. International Paper believes that these sources will be adequate to fund working capital requirements in 2002. International Paper has approximately $1.7 billion of debt scheduled for repayment in 2002, including an $800 million bank term loan due in June 2002. We anticipate using cash from operations, supplemented by existing cash balances and proceeds from sales of businesses previously identified for divestiture, and sales of non-strategic assets to repay maturing balances. Contractual obligations for future payments under existing debt and lease commitments at December 31, 2001 were as follows in millions:
- -------------------------------------------------------------------------------- In millions 2002 2003 2004 2005 2006 Thereafter - -------------------------------------------------------------------------------- Long-term debt $ 957 $1,477 $2,035 $1,249 $617 $7,079 Lease obligations 169 147 129 113 93 286 ------ ------ ------ ------ ---- ------ Total $1,126 $1,624 $2,164 $1,362 $710 $7,365 ====== ====== ====== ====== ==== ======
The majority of International Paper's debt is accessed through global public capital markets where we have a wide base of investors. OTHER FINANCIAL STATEMENT ITEMS Net interest expense increased to $929 million in 2001 compared with $816 million in 2000 and $541 million in 1999. The increase was reflective of a full year of debt in 2001 and half-year in 2000 related to the Champion acquisition. Proceeds received from the sale of assets in 2001, 2000 and 1999, as well as proceeds from the issuance of preferred securities, were used to reduce debt and for other general corporate purposes. Minority interest decreased to $147 million of expense in 2001, compared with $238 million in 2000 and $163 million in 1999. The decrease was a reflection of lower earnings and divestitures in 2001. The increase in minority interest expense from 1999 to 2000 was mainly due to the minority shareholders' portion of the gain on the sale of Carter Holt Harvey's investment in COPEC in January 2000. Net periodic pension and postretirement plan income included in operating results was as follows:
- -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Pension income - U.S. plans (non-cash) $(141) $(101) $(49) Pension expense - non-U.S. plans 19 24 16 Postretirement benefit cost - U.S. plans 56 45 31 ----- ----- ---- Net Income $ (66) $ (32) $ (2) ===== ===== ====
The increase was primarily due to the inclusion of the return on Champion plan assets that were added to the plans after the acquisition date. Pension income in 2002 is expected to decline by approximately $60 million with a decrease in the expected long-term return on plan assets from 10% to 9.25%. Actual rates of return earned on plan assets for each of the last 10 years were:
- -------------------------------------------------------------------------------- Year Return Year Return - -------------------------------------------------------------------------------- 2001 (2.4)% 1996 13.3% 2000 (1.4)% 1995 19.9% 1999 21.4% 1994 0.7% 1998 10.0% 1993 11.8% 1997 17.2% 1992 5.6%
At December 31, 2001, a prepaid pension cost asset of $1.6 billion related to International Paper's U.S. qualified pension plans was included in Deferred charges and other assets in the consolidated balance sheet. If the fair value of plan assets ($6.5 billion at December 31, 2001) were to fall below the plans' accumulated benefit obligation ($5.9 billion at December 31, 2001), this asset would be charged off, net of taxes, directly to equity, resulting in a reduction in equity of about $1 billion with no impact on earnings per share or cash. The most significant variable that could cause this charge is actual return on plan assets. In the event that this actual return was negative in 2002 and International Paper chose to not make up the differential through cash contributions, such a reduction could occur. This would not, however, result in a violation of existing debt covenants. CRITICAL ACCOUNTING POLICIES AND JUDGMENTAL MATTERS 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. 121, "Accounting for the Impairment of Long-Lived Assets and for 28 Long-Lived Assets to Be Disposed Of," and SFAS No. 87, "Employers' Accounting for Pensions," as amended by SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 5 requires management judgments regarding the probability and estimated amount of possible future contingent liabilities, including legal and environmental matters (see Note 11). SFAS No. 121 requires judgments regarding future operating or disposition plans for marginally performing assets and estimates of expected realizable values for assets to be sold (see Notes 6 and 7). The application of both of these policies has affected the amount and timing of charges to operating results that have been significant in recent years. The application of SFAS No. 87 requires judgments regarding certain actuarial assumptions that affect the amounts recorded for estimated plan obligations and related income and expense. The primary assumptions are the expected long-term rate of return on plan assets, the rate of increase in future compensation costs and the discount rate used to calculate the present value of the pension obligation. These assumptions, discussed in Note 16, are evaluated annually by management based on recommendations from our consulting actuary. Other accounting policies that are significant to the Forest Products industry include those relating to estimated charges for cost of timber harvested (COTH), depreciation of plants, properties and equipment, and inventory valuation. International Paper's policies for these matters, which are described in Note 1, are in accordance with generally accepted accounting principles. Management believes that their application results in a fair presentation in the consolidated financial statements of International Paper's annual operating results and financial position. SPECIAL ITEMS INCLUDING RESTRUCTURING AND BUSINESS IMPROVEMENT ACTIONS International Paper continually evaluates its operations for opportunities for improvement. These evaluations are targeted to (a) focus our portfolio on our core businesses of paper, packaging and forest products, (b) operate fewer facilities with the same revenue capability, (c) reduce costs, and (d) rationalize and realign capacity. Annually, operating plans are developed by each of our businesses to ensure that 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 operating plan will not be achieved, a decision is then made to either (a) shut down the facility and record the corresponding charge, or (b) evaluate the expected recovery of the carrying value of the facility to determine if an impairment of the asset value of the facility has occurred under SFAS No. 121. 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. Special items reduced 2001 net earnings by $1.4 billion, 2000 net earnings by $601 million and 1999 net earnings by $352 million. 2001: The following table and discussion presents the impact of special items for 2001:
- ------------------------------------------------------------------------------------- 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 Merger-related expenses (42) (28) 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 (Notes 5 and 7) (629) (587) ------- ------- After special items $(1,265) $(1,142) ======= =======
During 2001, special charges before taxes and minority interest of $1.8 billion ($1.4 billion after taxes and minority interest) were recorded. These special items included net losses on sales and impairments of businesses held for sale of $629 million before taxes ($587 million after taxes) discussed in Notes 5 and 7, a $42 million pre-tax charge ($28 million after taxes) for merger-related expenses, 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, a $225 million pre-tax charge ($146 million after taxes) for additional Masonite legal reserves and a $17 million pre-tax credit ($11 million after taxes) for the reversal of reserves no longer required. A further discussion of the Masonite legal reserves can be found in Note 11. 29 Management's Discussion and Analysis The merger-related expenses of $42 million consisted primarily of systems integration, employee retention, travel, and other one-time cash costs related to the Champion acquisition. 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 of $171 million consisted of $84 million of asset write-downs and $87 million of severance and other charges. The third-quarter charge of $256 million consisted of $183 million of asset write-downs and $73 million of severance and other charges. The second-quarter charge of $465 million consisted of $240 million of asset write-downs and $225 million of severance and other charges. The $17 million reversal of reserves no longer required consisted of excess 1999, and 2000 second and fourth-quarter, restructuring reserves. 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) ----- Balance, December 31, 2001 $ 254 =====
The severance charges recorded in the second, third and fourth quarters of 2001 related to 6,089 employees. As of December 31, 2001, 3,383 employees had been terminated. 2000: The following table and discussion presents the impact of special items for 2000:
- -------------------------------------------------------------------------------- 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 Merger-related expenses (54) (33) Restructuring and other charges (824) (509) Provision for legal reserves (125) (80) Reversal of reserves no longer required 34 21 ------ ----- After special items $ 723 $ 368 ====== =====
During 2000, special charges before taxes and minority interest of $969 million ($601 million after taxes and minority interest) were recorded. These special items included a $54 million pre-tax charge ($33 million after taxes) for merger-related expenses, an $824 million charge before taxes and minority interest ($509 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $125 million pre-tax charge ($80 million after taxes) for additional Masonite legal reserves and a $34 million pre-tax credit ($21 million after taxes) for the reversal of reserves no longer required. A further discussion of the Masonite legal reserves can be found in Note 11. The merger-related expenses of $54 million consisted primarily of systems integration, employee retention, travel, and other one-time cash costs related to the Champion acquisition and Union Camp merger. The $824 million charge for the asset shutdowns of excess internal capacity and cost reduction actions consisted of a $753 million charge in the fourth quarter of 2000 and a $71 million charge in the second quarter of 2000. The fourth-quarter charge of $753 million consisted of $536 million of asset write-downs and $217 million of severance and other charges. The second-quarter charge of $71 million consisted of $40 million of asset write-downs and $31 million of severance and other charges. The $34 million reversal of reserves no longer required included a pre-tax credit of $28 million for excess 1999 second and fourth-quarter restructuring reserves and a pre-tax credit of $6 million for excess Union Camp merger-related termination benefits reserves. The following table presents a roll forward of the severance and other costs included in the 2000 restructuring plans:
- -------------------------------------------------------------------------------- In millions Severance 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) ----- Balance, December 31, 2001 $ 67 =====
The severance charges recorded in the second and fourth quarters of 2000 related to 4,243 employees. As of December 31, 2001, 3,777 employees had been terminated. Reserves of $14 million were determined to no longer be required and reversed to income in the fourth quarter of 2001. 30 1999: The following table and discussion presents the impact of special items for 1999:
- ---------------------------------------------------------------------------------- In millions 1999 - ---------------------------------------------------------------------------------- Earnings (Loss) Earnings (Loss) Before Income After Income Taxes and Taxes and Minority Interest Minority Interest - ---------------------------------------------------------------------------------- Before special and extraordinary items $1,005 $551 Union Camp merger-related termination benefits (148) (97) Merger-related expenses (107) (78) Restructuring and other charges (298) (180) Environmental remediation charge (10) (6) Provision for legal reserves (30) (18) Reversal of reserves no longer required 36 27 ------ ---- After special items $ 448 $199 ====== ====
During 1999, special charges before taxes and minority interest of $557 million ($352 million after taxes and minority interest) were recorded. These special items included a $148 million pre-tax charge ($97 million after taxes) for Union Camp merger-related termination benefits, a $107 million pre-tax charge ($78 million after taxes) for merger-related expenses, a $298 million 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 that were no longer required. The Union Camp merger-related termination benefits charge of $148 million related to employees terminating after the effective date of the merger under an integration benefits program. Under this program, 1,218 employees of the combined company were originally identified for termination. An additional 346 employees left the company after the merger was announced, but were not eligible for benefits under the integration benefits program completed in the third quarter of 2000. Benefits payable under this program for certain senior executives and managers were paid from the general assets of International Paper. Benefits for remaining employees were primarily paid from plan assets of our qualified pension plan. In total, 1,062 employees were terminated. Related cash payments approximated $71 million (including payments related to our nonqualified pension plans). The remainder of the costs incurred primarily represented an increase in the projected benefit obligation of our qualified pension plan. Upon termination of the program in the third quarter of 2000, $6 million of the original reserve of $148 million was reversed to income. The following table is a roll forward of the Union Camp merger-related termination benefit charge:
- ------------------------------------------------------------------------------- Termination Dollars in millions Benefits - ------------------------------------------------------------------------------- Special charge (1,218 employees) $ 148 1999 incurred costs (787 employees) (116) 2000 incurred costs ( 275 employees) (26) Reversal of reserves no longer required (6) ----- Balance, December 31, 2000 $ - =====
Note: Benefit costs are treated as incurred on the termination date of the employee. The merger-related expenses of $107 million consisted of $49 million of merger costs and $58 million of post-merger expenses. The merger costs were primarily investment banker, consulting, legal and accounting fees. Post-merger integration expenses included costs related to employee retention, such as stay bonuses, and other cash costs related to the integration of Union Camp. The $298 million charge for asset shutdowns of excess internal capacity consisted of a $185 million charge in the fourth quarter of 1999 and a $113 million charge in the second quarter of 1999. The $185 million fourth-quarter charge for shutdowns of excess internal capacity and cost reduction actions included $92 million of asset write-downs and $93 million of severance and other charges. The second-quarter $113 million charge for the asset shutdowns of excess internal capacity and cost reduction actions included $57 million of asset write-downs and $56 million of severance and other charges. The $30 million pre-tax charge to increase existing legal reserves included $25 million added to our reserve for hard-board siding claims. A further discussion of this charge can be found in Note 11. The $36 million pre-tax credit for reserves no longer required consisted of $30 million related to a retained exposure at the Lancey mill in France and $6 million of excess severance reserves previously established by Union Camp. 31 Management's Discussion and Analysis The following table presents a roll forward of severance and other costs included in the 1999 restructuring plans:
- ------------------------------------------------------------------------------- Severance In millions and Other - ------------------------------------------------------------------------------- Opening Balance (second quarter 1999) $ 56 Additions (fourth quarter 1999) 93 1999 Activity Cash charges (34) 2000 Activity Cash charges (75) Other charges (13) Reversal of reserves no longer required (14) 2001 Activity Cash charges (10) Reversal of reserves no longer required (3) ---- Balance, December 31, 2001 $ - ====
The severance reserves recorded in the second and fourth quarters of 1999 related to 3,163 employees. At December 31, 2001, all 3,163 employees had been terminated. Reserves of $3 million and $14 million were determined to no longer be required and reversed to income in the fourth quarter of 2001 and 2000, respectively. See Note 6 on pages 49 to 58 for a more detailed discussion of these charges including the effects on the reporting segments. INCOME TAXES Before special and extraordinary items and cumulative effect of accounting change, the 2001, 2000 and 1999 effective income tax rates were 28% of pre-tax earnings. 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 21%, 16% and 19% for 2001, 2000 and 1999, respectively. We estimate that the 2002 effective income tax rate will be approximately 30% 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 the three years. Taxes on special charges were provided at statutory rates except for those charges that represent tax deductions that management does not believe will be realized.
- ---------------------------------------------------------------------------------------- In millions 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% Merger-related expenses (42) (14) 33% Restructuring and other charges (892) (283) 32% Provision for legal reserves (225) (79) 35% Net losses on sales and impairments of businesses held for sale (629) (42) 7% Reversal of reserves no longer required 17 6 35% ------- ----- 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% Merger-related expenses (54) (21) 39% Restructuring and other charges (824) (310) 38% Provision for legal reserves (125) (45) 36% Reversal of reserves no longer required 34 13 38% ------ ----- After special items $ 723 $ 117 16% ====== =====
- ---------------------------------------------------------------------------------------- In millions 1999 - ---------------------------------------------------------------------------------------- Earnings (Loss) Before Income Income Taxes Tax Effective and Minority Provision Tax Interest (Benefit) Rate - ---------------------------------------------------------------------------------------- Before special and extraordinary items $1,005 $ 281 28% Union Camp merger-related termination benefits (148) (51) 34% Merger-related expenses (107) (29) 27% Restructuring and other charges (298) (108) 36% Environmental remediation charge (10) (4) 40% Provision for legal reserves (30) (12) 40% Reversal of reserves no longer required 36 9 25% ------ ----- After special items $ 448 $ 86 19% ====== =====
32 RECENT ACCOUNTING DEVELOPMENTS Impairment and Disposal of Long-Lived Assets In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets." It is effective in 2002 on a prospective basis. 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 believes that the adoption of SFAS No. 144 will not have a material impact on its consolidated financial position or results of operations. 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. International Paper has not yet evaluated the impact of adopting SFAS No. 143 on its consolidated financial position or results of operations. Goodwill In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." It changes the accounting for goodwill by eliminating goodwill amortization beginning in 2002. It will also require at least an annual assessment of goodwill for impairment. The initial test for impairment must be completed by June 30, 2002, but any impairment charges would be reflected as an accounting change recorded retroactively in the first quarter of 2002. International Paper is currently evaluating the impact of adopting SFAS No. 142. Goodwill amortization will no longer be an expense in 2002, thus increasing earnings. Goodwill amortization in 2002 would have been approximately $185 million. International Paper has not completed the impairment testing and therefore cannot quantify the statement's impact on its consolidated financial statements. It is possible that some goodwill will be required to be written off in 2002. Neither a write-off nor the cessation of goodwill amortization will impact cash flows. Business Combinations In June 2001, the FASB issued SFAS No. 141, "Business Combinations." It requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method, eliminating the use of the pooling-of-interests method. It also specifies that the purchase price must first be allocated to specific tangible and intangible assets before determining any residual goodwill. 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 to 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 to 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 pollutants discharged into the air, water and groundwater to avoid adverse impacts on the environment, (2) make continual improvements in environmental performance, and (3) maintain 100% compliance with applicable laws and regulations. A total of $128 million was spent in 2001 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 $82 million in 2002 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 2003 is approximately $138 million and during the year 2004 is approximately $123 million. 33 Management's Discussion and Analysis 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 2002 through 2003 are $85 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 2004 through 2006 are in the range of $175 million to $190 million. We estimate that annual operating costs, excluding depreciation, will increase approximately $22 million when these regulations are fully implemented. Additional regulatory requirements that may affect future spending include the EPA's requirements for states to assess current surface water loading from industrial and area sources. This process, called Total Maximum Daily Load (TMDL) allocation, could result in reduced allowable treated effluent discharges from our manufacturing sites. To date there have been no significant impacts due to the TMDL process, as the majority of our manufacturing sites operate at levels significantly below allowable waste loadings. In recent years, the EPA has undertaken significant air quality initiatives associated with nitrogen oxide emissions, regional haze, and national ambient air quality standards. When regulatory requirements for new and changing standards are finalized, we will add any resulting future cost projections to our expenditure forecast. International Paper has been named as a potentially liable party in a number of environmental remediation actions under various federal and state laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Related costs are recorded in the financial statements when they are probable and reasonably estimable. As of December 31, 2001, CERCLA liabilities totaled approximately $55 million. In addition, other remediation costs recorded in the financial statements are approximately $103 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 under "Other Environmental." Masonite 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. See Note 11 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 have been filed in the Supreme Court for the State of New York, New York County. Each of the suits purports to be a class action filed on behalf of Champion shareholders and alleges that the defendants breached their fiduciary duties in connection with the proposed merger with UPM-Kymmene Corporation and the merger proposal from International Paper. Champion has filed a motion to dismiss, which as of February 28, 2002 has not been decided. 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 promptly filed a petition appealing the certification order, which the Court of Appeals for the Third Circuit, in its discretion, granted. The appeal is currently pending, with briefing scheduled for the spring of 2002. 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 (now 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 action 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 has 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. 34 Other Environmental: On December 30, 1999, Champion entered into a Consent Order with the Florida Department of Environmental Protection relating to alleged violations of the wastewater discharge permit at the Pensacola, Florida mill. The Consent Order required Champion to take additional steps to control the discharge of suspended solids, nutrients and oxygen-consuming material in the mill's wastewater and to pay a civil penalty of $137,730. The Consent Order became effective in April 2001, when an administrative challenge of the Consent Order was resolved. In April 1999, the Franklin, Virginia mill received a Notice of Violation (NOV) from the EPA, Region 3 in Philadelphia, and an NOV from the Commonwealth of Virginia alleging that the Mill violated the Prevention of Significant Deterioration (PSD) regulations. The Franklin mill was owned by Union Camp at the time of the alleged violations and was one of seven paper mills in Region 3 owned by different companies that received similar NOVs. On May 11, 2001, the Commonwealth of Virginia informed International Paper that it does not intend to pursue the allegations identified in the NOV, and we do not anticipate further enforcement action from the EPA. The Franklin mill's NOVs were issued in connection with the EPA's well-publicized PSD air permit enforcement initiative against the paper industry. The EPA has also issued requests for information related to air permit compliance to five other International Paper mills. These administrative reviews are still pending. On June 19, 2000, before International Paper completed the acquisition of Champion, Champion entered into a Consent Order with the Maine Department of Environment Protection that resolved allegations of past wastewater and reporting deficiencies at Champion's lumber mills in Milford and Passadumkeag, Maine. The U.S. EPA and the U.S. Attorney's Office in Maine commenced a grand jury investigation of the same allegations. On August 15, 2001, the U.S. Attorney's Office in Maine noticed International Paper that it would not prosecute the matters earlier resolved with the Maine Department of Environmental Protection. As of February 28, 2002, 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 114 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 potentially responsible parties. Based upon previous experience with respect to the cleanup of hazardous substances and upon presently available information, International Paper believes the potential liability associated with all of the CERCLA proceedings is approximately $55 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 been trading on world currency exchanges since 1999 and is used by our businesses in transactions. On January 2, 2002, new euro-denominated bills and coins were issued and legacy currencies were withdrawn from circulation. The introduction of the euro has increased price transparency for our products and reduced the complexity and cost of managing our business. Over the three-year transition period, our computer systems have been updated to ensure euro compliance. Also, we have 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 are likely to become somewhat more international, with some leveling of prices that is not expected to significantly impact our operations. Total costs in connection with the euro conversion have not been material. Further, we do not anticipate that the conversion from the legacy currencies to the euro will have a material adverse effect on our consolidated financial position or results of operations. EFFECT OF INFLATION General inflation has had minimal impact on our operating results in the last three years. Sales prices and volumes are more strongly influenced by supply and demand factors in specific markets and by exchange rate fluctuations than by inflationary factors. 35 Management's Discussion and Analysis 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. Our exposure to market risk for changes in interest rates relates primarily to investments in marketable securities, and short- and long-term debt obligations. We invest in investment grade securities of financial institutions and industrial companies and limit exposure to any one issuer. Our investments in marketable securities at December 31, 2001 were not significant. Our debt obligations outstanding as of December 31, 2001, expressed in U.S. dollar equivalents, are summarized as to their principal cash flows and related weighted average interest rates by year of maturity in the following table.
- ---------------------------------------------------------------------------------------------------------------------------------- U.S. dollars in millions 2002 2003 2004 2005 2006 Thereafter Total Fair Value - ---------------------------------------------------------------------------------------------------------------------------------- U.S. commercial paper and bank notes - 2.7% average interest rate $ - $ - $ 100 $ - $ - $ - $ 100 $ 100 Chinese renminbi bank notes - 5.8% average interest rate - - 15 - - - 15 15 Euro fixed rate notes - 5 3/8% average interest rate - - - - 225 - 225 225 Fixed rate debt - 6.8% average interest rate 157 1,432 910 1,178 333 4,922 8,932 8,598 Medium term notes - 8.1% average interest rate - 30 89 - 13 30 162 170 Environmental and industrial development bonds - 6.2% average interest rate - 5 285 71 41 2,018 2,420 2,476 Floating rate notes - 2.9% average interest rate 800 - 528 - - - 1,328 1,324 Other - 10 108 - 5 109 232 249 ---- ------ ------ ------ ---- ------ ------- ------- Total Debt $957 $1,477 $2,035 $1,249 $617 $7,079 $13,414 $13,157 ==== ====== ====== ====== ==== ====== ======= =======
For debt obligations, the table above presents principal cash flows and related weighted average interest rates by year of maturity. Variable interest rates disclosed represent the weighted average rates at the end of the period. For financial statement classification, $750 million of tenderable bonds, commercial paper and bank notes, and current maturities of long-term debt have been classified as long-term pursuant to line of credit agreements maturing beyond 2002. International Paper uses cross-currency and interest rate swap transactions to manage the composition of our domestic and foreign, fixed and floating rate debt portfolio. Some of our cross-currency swaps are used as hedges of certain of our foreign net investments and others are used to hedge foreign debt. See Note 14 for additional information. Our cross-currency and interest rate swap agreements outstanding at December 31, 2001, expressed in U.S. dollar equivalents, by year of maturity, are presented in the following table.
- ----------------------------------------------------------------------------------------------------------------------------- U.S. dollars in millions 2002 2003 2004 2005 2006 Thereafter Total Fair Value - ----------------------------------------------------------------------------------------------------------------------------- U.S. dollar variable to fixed rate swaps Average pay rate 7.7% /Average receive rate 2.1% $ 45 $200 $300 $ - $150 $363 $1,058 $(141) U.S. dollar fixed to variable rate swaps Average pay rate 2.2%/Average receive rate 5.9% 45 550 700 650 300 500 2,745 145 U.S. dollar to New Zealand dollar cross-currency swaps 404 - - - - - 404 - New Zealand dollar to Australian dollar cross-currency swaps 150 - 254 - - - 404 32 U.S. dollar to European euro cross-currency swaps - 450 - - - - 450 3
36 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. We address these risks through a risk management program that involves financing a portion of our investments in overseas operations with borrowings denominated in the same currency as the investment or by entering into foreign currency exchange contracts, including forwards and options. See Note 14 for additional information. The following table presents information about our foreign currency forward contracts outstanding as of December 31, 2001, expressed in U.S. dollar equivalents. The contracts mature in 5 years or less.
- ------------------------------------------------------------------------- Weighted Net Average Unrealized Contract Exchange Gain U.S. dollars in millions Amount Rate (Loss) - -------------------------------------------------------------------------- Receive Canadian dollars/ Pay U.S. dollars $312 1.58 $ 4 Receive European euros/ Pay British pounds 114 1.60 - Receive European euros/ Pay Polish zloty 45 0.26 (2) Receive New Zealand dollars/ Pay Australian dollars 216 1.22 (2) Receive New Zealand dollars/ Pay U.S. dollars 464 2.48 (2) Receive U.S. dollars/ Pay European euros 112 0.89 (1) Receive U.S. dollars/ Pay New Zealand dollars 400 0.42 4 Receive U.S. dollars/ Pay Swedish kronas 28 0.10 -
Note: International Paper has an additional $82 million in a number of smaller forward contracts to purchase or sell other currencies with a related net immaterial unrealized gain. Foreign currency option contracts outstanding at December 31, 2001 amounted to approximately $150 million with a fair value of $5 million. The majority of the contract terms are 12 months or less. International Paper is exposed to changes in the price of commodities used in its operations. Swap contracts are currently used to manage risks associated with market fluctuations in energy prices, primarily natural gas. At December 31, 2001, the net fair value liability of such contracts was $29 million. The potential loss in fair value resulting from a 10% adverse change in the underlying commodity prices would be approximately $5 million. This amount excludes the offsetting impact of the price risk inherent in the physical purchase of the underlying commodities. See Note 14 for additional information. FORWARD-LOOKING STATEMENTS Certain statements in this 2001 Annual Report to Shareholders, and in particular, statements found in Management's Discussion and Analysis, that are not historical in nature may constitute forward-looking statements. These statements are often identified by the words, "believe," "expect," "plan," "appear," "project," "estimate," "intend," and words of similar import. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements. Factors which could cause actual results to differ include, among other things, the timing and magnitude of the expected economic recovery, fluctuations in foreign currency exchange rates against the U.S. dollar, fluctuations in interest rates, changes in overall demand, whether our initiatives relating to balancing our supply with customer demand will be successful, changes in domestic or foreign competition, changes in the cost or availability of raw materials, the cost of compliance with environmental laws and regulations, and whether anticipated savings from restructuring activities and facility rationalizations can be achieved. In view of such uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. International Paper does not assume any obligation to update these forward-looking statements. 37 Financial Information by Industry Segment and Geographic Area For information about our industry segments, see the "Description of Industry Segments" included in management's discussion and analysis of financial condition and results of operations. For management purposes, we report the operating performance of each business based on earnings before interest and income taxes ("EBIT") excluding special and extraordinary items and gains or losses on sales of businesses. Our Carter Holt Harvey segment includes our share, about half, of their operating earnings adjusted for U.S. generally accepted accounting principles. The remaining half is included in the minority interest adjustment. Intersegment sales and transfers are recorded at current market prices. 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 25 of management's discussion and analysis of financial condition and results of operations. INFORMATION BY INDUSTRY SEGMENT(a) - -------------------------------------------------------------------------------- Net Sales
- ------------------------------------------------------------------------------------------- In millions 2001 2000 1999 - ------------------------------------------------------------------------------------------- Printing Papers $ 7,815 $ 7,210 $ 5,215 Industrial and Consumer Packaging 6,280 6,625 6,020 Distribution 6,790 7,255 6,850 Forest Products 2,855 2,380 2,070 Carter Holt Harvey 1,710 1,675 1,605 Other Businesses(b) 2,325 4,230 4,245 Corporate and Intersegment Sales(c) (1,412) (1,195) (1,432) ------- ------- ------- Net Sales $26,363 $28,180 $24,573 ======= ======= ======= Assets - ------------------------------------------------------------------------------------------- In millions 2001 2000 1999 - ------------------------------------------------------------------------------------------- Printing Papers $ 9,742 $10,580 $7,181 Industrial and Consumer Packaging 7,338 7,437 6,647 Distribution 1,662 1,986 1,893 Forest Products 5,106 6,610 2,662 Carter Holt Harvey(d) 3,295 3,141 4,183 Other Businesses(b) 657 2,579 4,143 Corporate 9,358 9,776 3,559 ------- ------- ------- Assets $37,158 $42,109 $30,268 ======= ======= ======= Operating Profit - ------------------------------------------------------------------------------------------- In millions 2001 2000 1999 - ------------------------------------------------------------------------------------------- Printing Papers $ 538 $ 930 $ 232 Industrial and Consumer Packaging 508 741 520 Distribution 21 120 105 Forest Products 655 564 653 Carter Holt Harvey(e) 13 71 39 Other Businesses(b) 52 233 259 Corporate(c) - 26 - ------- ------- ------- Operating Profit 1,787 2,685 1,808 Interest expense, net (929) (816) (541) Minority interest adjustment(e) 17 108 74 Corporate items, net (369) (285) (336) Merger integration costs (42) (54) (255) Restructuring and other charges (1,117) (949) (338) Reversals of reserves no longer required 17 34 36 Net losses on sales and impairments of businesses held for sale (629) - - ------- ------- ------- Earnings Before Income Taxes, Minority Interest, Extraordinary Items and Cumulative Effect of Accounting Change $(1,265) $ 723 $ 448 ======= ======= =======
38 Restructuring and Other Charges
- -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Printing Papers $ 185 $425 $ 48 Industrial and Consumer Packaging 534 255 87 Distribution 46 22 23 Forest Products 34 35 - Carter Holt Harvey 10 10 27 Other Businesses (b) 8 69 113 Corporate 300 133 40 ------ ---- ---- Restructuring and Other Charges $1,117 $949 $338 ====== ==== ==== Depreciation and Amortization (f) - -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Printing Papers $ 716 $ 623 $ 506 Industrial and Consumer Packaging 424 447 421 Distribution 31 35 32 Forest Products 214 216 126 Carter Holt Harvey 194 177 201 Other Businesses (b) 39 224 255 Corporate 252 194 124 ------ ------ ------ Depreciation and Amortization $1,870 $1,916 $1,665 ====== ====== ====== External Sales by Major Product - -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Printing Papers $ 7,042 $ 7,169 $ 5,039 Industrial and Consumer Packaging 7,263 8,052 7,361 Distribution 6,961 7,275 6,926 Forest Products 4,297 4,243 3,759 Other (b,g) 800 1,441 1,488 ------- ------- ------- Net Sales $26,363 $28,180 $24,573 ======= ======= =======
(a) Certain reclassifications and adjustments have been made to conform with current presentation. (b) Principally includes businesses identified in our divestiture program. (c) Includes results from operations of Champion from date of acquisition, June 20, 2000 through June 30, 2000. (d) Includes equity investments (in millions) of $29 in 2001, $16 in 2000 and $876 in 1999. (e) Includes equity earnings (in millions) of $1 in 2001, $11 in 2000 and $54 in 1999. Half of these equity earnings amounts are in the Carter Holt Harvey segment and half are in the minority interest adjustment. (f) Includes cost of timber harvested. (g) Includes sales of products not included in our major product lines.
INFORMATION BY GEOGRAPHIC AREA(a) ================================================================================ Net Sales (h) - -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- United States (i) $20,555 $22,131 $19,152 Europe (j) 2,630 3,353 3,257 Pacific Rim (j,k) 1,888 1,923 1,865 Americas, other than U.S. (m) 1,290 773 299 ------- ------- ------- Net Sales $26,363 $28,180 $24,573 ======= ======= ======= European Sales by Industry Segment - -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Printing Papers $1,110 $1,047 $ 979 Industrial and Consumer Packaging 694 709 723 Distribution 353 370 347 Other Businesses (b) 473 1,227 1,208 ------ ------ ------ European Sales $2,630 $3,353 $3,257 ====== ====== ====== Long-Lived Assets(l) - -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- United States (j) $13,472 $16,493 $12,325 Europe 1,179 1,217 1,888 Pacific Rim (k) 2,325 2,324 2,625 Americas, other than U.S. (m) 1,447 1,612 77 Corporate 235 452 387 ------- ------- ------- Long-Lived Assets $18,658 $22,098 $17,302 ======= ======= =======
(h) Net sales are attributed to countries based on location of seller. (i) Export sales to unaffiliated customers (in billions) were $1.3 in 2001, $1.6 in 2000 and $1.5 in 1999. (j) Decrease in 2001 primarily due to divestitures. (k) Operations in New Zealand and Australia account for most of the Pacific Rim amounts. (l) Long-Lived Assets includes Forestlands and Plants, Properties and Equipment, net. (m) Increases in 2001 and 2000 reflect operations in Brazil and Canada acquired with Champion. 39 REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS The management of International Paper Company is responsible for the fair presentation of the information contained in the financial statements in this annual report. The statements are prepared in accordance with U.S. generally accepted accounting principles and reflect management's best judgment as to our financial position, results of operations and cash flows. International Paper maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are properly recorded and summarized so that reliable financial records and reports can be prepared and assets safeguarded. An important part of the internal controls system is our ethics program which includes: our long-standing policy on Ethical Business Conduct, which requires employees to maintain the highest ethical and legal standards in their conduct of International Paper business; a toll-free telephone help line whereby any employee may report suspected violations of law or International Paper's policy; and an office of ethics and business practices. 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 public accountants provide an objective, independent review of management's discharge of its responsibility for the fairness of our financial statements. They review our internal accounting controls and conduct tests of procedures and accounting records to enable them to form the opinion set forth in their report. The Board of Directors monitors management's administration of International Paper's financial and accounting policies and practices, and the preparation of these financial statements. The Audit and Finance Committee (Committee), which consists of five non-employee directors, meets regularly with representatives of management, the independent public accountants and the Internal Auditor to review their activities. The Committee has reviewed and discussed the consolidated financial statements for the year ended December 31, 2001 with management and the independent public accountants. The Committee's report recommending the inclusion of such financial statements in this Annual Report is set forth in our Proxy Statement. The independent public accountants and the Internal Auditor both have free access to the Committee and meet regularly with the Committee, with and without management representatives in attendance. /s/ John V. Faraci John V. Faraci Executive Vice President and Chief Financial Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of International Paper Company: We have audited the accompanying consolidated balance sheets of International Paper Company (a New York corporation) and subsidiaries as of December 31, 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 International Paper's 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. 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. /s/ Arthur Anderson LLP New York, N.Y. February 12, 2002 40 International Paper Consolidated Statement of Earnings
- ------------------------------------------------------------------------------------------------------------------- In millions, except per share amounts, for the years ended December 31 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Net Sales $26,363 $28,180 $24,573 ------- ------- ------- Costs and Expenses Cost of products sold 19,409 20,082 17,960 Selling and administrative expenses 2,279 2,283 2,083 Depreciation and amortization 1,870 1,916 1,665 Distribution expenses 1,105 1,104 1,098 Taxes other than payroll and income taxes 265 287 226 Equity earnings from investment in Scitex - - (5) Merger integration costs 42 54 255 Restructuring and other charges 1,117 949 338 Net losses on sales and impairments of businesses held for sale 629 - - ------- ------- ------- Total Costs and Expenses 26,716 26,675 23,620 Reversals of reserves no longer required 17 34 36 ------- ------- ------- Earnings (Loss) Before Interest, Income Taxes, Minority Interest, Extraordinary Items and Cumulative Effect of Accounting Change (336) 1,539 989 Interest expense, net 929 816 541 ------- ------- ------- Earnings (Loss) Before Income Taxes, Minority Interest, Extraordinary Items and Cumulative Effect of Accounting Change (1,265) 723 448 Income tax provision (benefit) (270) 117 86 Minority interest expense, net of taxes 147 238 163 ------- ------- ------- Earnings (Loss) Before Extraordinary Items and Cumulative Effect of Accounting Change (1,142) 368 199 Net losses on sales and impairments of investments and businesses held for sale, net of taxes and minority interest (46) (226) - Loss on extinguishment of debt, net of taxes - - (16) Cumulative effect of change in accounting for derivatives and hedging activities, net of taxes and minority interest (16) - - ------- ------- ------- Net Earnings (Loss) $(1,204) $ 142 $ 183 ======= ======= ======= Basic and Diluted Earnings Per Common Share Earnings (loss) before extraordinary items and accounting change $ (2.37) $ 0.82 $ 0.48 Extraordinary items (0.10) (0.50) (0.04) Cumulative effect of accounting change (0.03) - - ------- ------- ------- Net earnings (loss) $ (2.50) $ 0.32 $ 0.44 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 41 Consolidated Balance Sheet International Paper
- ----------------------------------------------------------------------------------------------------------- In millions at December 31 2001 2000 - ----------------------------------------------------------------------------------------------------------- Assets Current Assets Cash and temporary investments $ 1,224 $ 1,198 Accounts and notes receivable, less allowances of $179 in 2001 and $128 in 2000 2,650 3,456 Inventories 2,733 3,294 Assets of businesses held for sale 648 1,566 Other current assets 1,057 752 ------- ------- Total Current Assets 8,312 10,266 ------- ------- Plants, Properties and Equipment, net 14,461 16,132 Forestlands 4,197 5,966 Investments 239 269 Goodwill 6,543 6,310 Deferred Charges and Other Assets 3,406 3,166 ------- ------- Total Assets $37,158 $42,109 ======= ======= Liabilities and Common Shareholders' Equity Current Liabilities Notes payable and current maturities of long-term debt $ 957 $ 2,115 Accounts payable 1,719 2,145 Accrued payroll and benefits 423 518 Liabilities of businesses held for sale 215 475 Other accrued liabilities 2,060 2,133 ------- ------- Total Current Liabilities 5,374 7,386 ------- ------- Long-Term Debt 12,457 12,648 Deferred Income Taxes 3,977 4,699 Other Liabilities 1,980 2,182 Minority Interest 1,274 1,355 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, 2001 - 484.3 shares, 2000 - 484.2 shares 484 484 Paid-in capital 6,465 6,501 Retained earnings 4,622 6,308 Accumulated other comprehensive income (loss) (1,175) (1,142) ------- ------- 10,396 12,151 Less: Common stock held in treasury, at cost, 2001 - 2.7 shares, 2000 - 2.7 shares 105 117 ------- ------- Total Common Shareholders' Equity 10,291 12,034 ------- ------- Total Liabilities and Common Shareholders' Equity $37,158 $42,109 ======= =======
The accompanying notes are an integral part of these financial statements. 42
International Paper Consolidated Statement of Cash Flows - ------------------------------------------------------------------------------- In millions for the years ended December 31 2001 2000 1999 - ------------------------------------------------------------------------------- Operating Activities Net earnings (loss) $(1,204) $ 142 $ 183 Cumulative effect of accounting change 16 - - Depreciation and amortization 1,870 1,916 1,665 Deferred income tax benefit (584) (323) (208) Payments related to restructuring reserves, legal reserves and merger integration costs (431) (291) (363) Merger integration costs 42 54 255 Restructuring and other charges 1,117 949 338 Reversal of reserves no longer required (17) (34) (36) Gains on sales of investments and businesses, net (16) (748) - Loss on extinguishment of debt - - 26 Impairment losses on businesses held for sale 717 833 - Other, net (76) 78 (100) Changes in current assets and liabilities Accounts and notes receivable 417 (59) (361) Inventories 300 (143) (121) Accounts payable (289) (147) 75 Accrued liabilities (56) 166 374 Other (92) 37 1 ------- ------- ------- Cash Provided By Operations 1,714 2,430 1,728 ------- ------- ------- Investment Activities Invested in capital projects Ongoing businesses (975) (1,194) (950) Businesses sold and held for sale (74) (158) (189) Mergers and acquisitions, net of cash acquired (150) (5,677) (54) Proceeds from divestitures 1,552 2,116 119 Other 106 (1) (11) ------- ------- ------- Cash Provided By (Used For) Investment Activities 459 (4,914) (1,085) ------- ------- ------- Financing Activities Issuance of common stock 25 25 246 Issuance of debt 2,889 6,328 1,023 Reduction of debt (4,268) (2,770) (1,563) Change in bank overdrafts (171) 118 102 Dividends paid (482) (447) (418) Other (91) 140 (96) ------- ------- ------- Cash (Used For) Provided By Financing Activities (2,098) 3,394 (706) ------- ------- ------- Effect of Exchange Rate Changes on Cash (49) (165) (17) ------- ------- ------- Change In Cash and Temporary Investments 26 745 (80) Cash and Temporary Investments Beginning of the year 1,198 453 533 ------- ------- ------- End of the year $ 1,224 $ 1,198 $ 453 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 43 Consolidated Statement of Common Shareholders' Equity International Paper
- ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Total Common Stock Issued Other Treasury Stock Common In millions, except per ------------------- Paid-In Retained Comprehensive -------------- Shareholders' share amounts in thousands Shares Amount Capital Earnings Income (Loss) Shares Amount Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1999 413,185 $413 $3,896 $6,848 $ (395) 552 $ 24 $10,738 Issuance of stock for various plans 1,399 2 182 - - (1,866) (87) 271 Repurchase of stock - - - - - 2,530 126 (126) Cash dividends - Common stock ($1.01 per share) - - - (418) - - - (418) Comprehensive income (loss): Net earnings - - - 183 - - - 183 Minimum pension liability adjustment (less tax expense of $1) - - - - 2 - - 2 Change in cumulative foreign currency translation adjustment (less tax expense of $31) - - - - (346) - - (346) ------- Total comprehensive loss (161) ------- ---- ------ ------ ------- ------ ---- ------- Balance, December 31, 1999 414,584 415 4,078 6,613 (739) 1,216 63 10,304 Issuance of stock for merger 68,706 69 2,360 - - - - 2,429 Issuance of stock for various plans 870 - 63 - - (236) (12) 75 Repurchase of stock - - - - - 1,710 66 (66) Cash dividends - Common stock ($1.00 per share) - - - (447) - - - (447) Comprehensive income (loss): Net earnings - - - 142 - - - 142 Minimum pension liability adjustment (less tax benefit of $13) - - - - (23) - - (23) Change in cumulative foreign currency translation adjustment (less tax expense of $123) - - - - (380) - - (380) ------- Total comprehensive loss (261) ------- ---- ------ ------ ------- ------ ---- ------- Balance, December 31, 2000 484,160 484 6,501 6,308 (1,142) 2,690 117 12,034 Issuance of stock for various plans 121 - (36) - - (1,727) (76) 40 Repurchase of stock - - - - - 1,730 64 (64) Cash dividends - Common stock ($1.00 per share) - - - (482) - - - (482) Comprehensive income (loss): Net loss - - - (1,204) - - - (1,204) Minimum pension liability adjustment (less tax benefit of $4) - - - - (6) - - (6) Change in cumulative foreign currency translation adjustment (less tax benefit of $23) - - - - 71 - - 71 Realized foreign currency translation adjustments related to businesses sold (less tax benefit of $36) - - - - (81) - - (81) Net losses on cash flow hedging derivatives - - - - (17) - - (17) ------- Total comprehensive loss (1,237) ------- ---- ------ ------ ------- ------ ---- ------- Balance, December 31, 2001 484,281 $484 $6,465 $4,622 $(1,175) 2,693 $105 $10,291 ======= ==== ====== ====== ======= ====== ==== =======
The cumulative foreign currency translation adjustment (in millions) was $(1,119), $(1,113) and $(733) at December 31, 2001, 2000 and 1999, respectively, and is included as a component of accumulated other comprehensive income (loss). The accompanying notes are an integral part of these financial statements. 44 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 U.S., Canada, Europe, the Pacific Rim and South America. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to available industry capacity and general economic conditions. For a further discussion of our business, see pages 18 through 37 of management's discussion and analysis of financial condition and results of operations. FINANCIAL STATEMENTS The preparation of these financial statements in conformity with U.S. generally accepted accounting principles requires the use of management's estimates. For a further discussion of significant estimates and assumptions that affect the reported amounts of assets and liabilities, results of operations, and disclosure of contingent assets and liabilities, see the legal and environmental issues section beginning on page 33. Actual future results could differ from management's estimates. See pages 28, 29 and 37 for a description of factors that could cause future results to differ from management's estimates. On June 20, 2000, International Paper acquired Champion International Corporation (Champion) in a transaction accounted for as a purchase. The accompanying financial statements include Champion's results of operations from the date of acquisition. On April 30, 1999, International Paper completed the merger with Union Camp Corporation (Union Camp) in a transaction accounted for as a pooling-of-interests. The accompanying financial statements include the financial position and results of operations for both Union Camp and International Paper for all periods presented. REVENUE RECOGNITION Revenues are recognized when goods are shipped, except for export and timberland sales. Export sales revenue is recognized at the point title passes, generally at the destination port. Timberland sales revenue is recognized when title and risk of loss pass to the buyer. SHIPPING AND HANDLING COSTS Shipping and handling costs, such as freight to our customers' destinations, are included in distribution expenses in the consolidated statement of earnings. These costs, when included in the sales price charged for our products, are recognized in net sales. CONSOLIDATION The consolidated financial statements include the accounts of International Paper and its subsidiaries. Minority interest represents minority shareholders' proportionate share of the equity in several of our consolidated subsidiaries, primarily Carter Holt Harvey Limited, 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% and our 13% investment in Scitex Corporation, Ltd. prior to its sale in 2000. International Paper's share of affiliates' earnings is included in the consolidated statement of earnings. TEMPORARY INVESTMENTS Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost, which approximates market. INVENTORIES Inventory values include all costs directly associated with manufacturing products: materials, labor and manufacturing overhead. These values are presented at cost or market, if it is lower. In the U.S., costs of raw materials and finished pulp and paper products are generally determined using the last-in, first-out method. Other inventories are primarily stated using the first-in, first-out or average cost method. PLANTS, PROPERTIES AND EQUIPMENT Plants, properties and equipment are stated at cost, less accumulated depreciation. Expenditures for betterments are capitalized whereas normal repairs and maintenance are expensed as incurred. For financial reporting purposes, the units-of-production method of depreciation is used for major pulp and 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, 45 Notes to Consolidated Financial Statements 2 1/2% to 8 1/2%, and, for machinery and equipment, 5% to 33%. For tax purposes, depreciation is computed using accelerated methods. Interest costs related to the development of certain long-term assets are capitalized and amortized over the related assets' estimated useful lives. Capitalized net interest costs were $13 million in 2001, $25 million in 2000 and $29 million in 1999. Interest payments made during 2001, 2000 and 1999 were $986 million, $816 million and $594 million, respectively. Total interest expense was $1.1 billion in 2001, $938 million in 2000 and $611 million in 1999. FORESTLANDS At December 31, 2001, International Paper and its subsidiaries controlled about 10.4 million acres of forestlands in the U.S., 1.5 million acres in Brazil, 810,000 acres in New Zealand, and had, through licenses and forest management agreements, harvesting rights on government-owned 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 costs to estimated current volume. Cost of timber harvested is included in depreciation and amortization in the consolidated statement of earnings. GOODWILL Goodwill is amortized over its estimated period of benefit on a straight-line basis, not to exceed 40 years. Accumulated amortization was $702 million and $574 million at December 31, 2001 and 2000, respectively. Goodwill amortization is included in depreciation and amortization in the consolidated statement of earnings. Effective January 1, 2002, International Paper will adopt Statement of Financial Accounting Standards (SFAS) No. 142, eliminating the periodic charge to earnings for goodwill amortization for 2002 and future years. See Note 4 for additional disclosures related to SFAS No. 142. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, including allocated goodwill, are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate 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 the lesser of their carrying value or fair market value. Enterprise-level goodwill is periodically reviewed for impairment by comparing expected undiscounted cash flows to the carrying value of goodwill. Enterprise-level goodwill would be written down to fair market value if it were impaired. STOCK-BASED COMPENSATION Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. ENVIRONMENTAL REMEDIATION COSTS Costs associated with environmental remediation obligations are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are discounted to their present value when the expected cash flows are reliably determinable. TRANSLATION OF FINANCIAL STATEMENTS Balance sheets of international operations are translated into U.S. dollars at year-end exchange rates, while statements of earnings are translated at average rates. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in Accumulated Other Comprehensive Income (Loss). 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 per common share before extraordinary items and cumulative effect of accounting change are computed by dividing earnings before extraordinary items and cumulative effect of accounting change by the weighted average number of common shares outstanding. Earnings per common share before extraordinary items and cumulative effect of accounting 46 change, assuming dilution, are computed assuming that all potentially dilutive securities were converted into common shares at the beginning of each year. A reconciliation of the amounts included in the computation of earnings per common share before extraordinary items and cumulative effect of accounting change, and earnings per common share before extraordinary items and cumulative effect of accounting change, assuming dilution, is as follows:
- -------------------------------------------------------------------------------- In millions, except per share amounts 2001 2000 1999 - -------------------------------------------------------------------------------- Earnings (loss) before extraordinary items and cumulative effect of accounting change $(1,142) $ 368 $ 199 Effect of dilutive securities - - - ------- ------ ------ Earnings (loss) before extraordinary items and cumulative effect of accounting change - assuming dilution $(1,142) $ 368 $ 199 ======= ====== ====== Average common shares outstanding 482.6 449.6 413.0 Effect of dilutive securities Long-term incentive plan deferred compensation (1.0) - - Stock options - 0.4 3.1 ------- ------ ------ Average common shares outstanding - assuming dilution 481.6 450.0 416.1 ======= ====== ====== Earnings (loss) per common share before extraordinary items and cumulative effect of accounting change $ (2.37) $ 0.82 $ 0.48 ======= ====== ====== Earnings (loss) per common share before extraordinary items and cumulative effect of accounting change - assuming dilution $ (2.37) $ 0.82 $ 0.48 ======= ====== ======
Note: If an amount does not appear in the above table, the security was antidilutive for the period presented. NOTE 3 INDUSTRY SEGMENT INFORMATION ================================================================================ Financial information by industry segment and geographic area for 2001, 2000 and 1999 is presented on pages 38 and 39. NOTE 4 RECENT ACCOUNTING DEVELOPMENTS ================================================================================ IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets." It is effective in 2002 on a prospective basis. 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 believes that the adoption of SFAS No. 144 will not have a material impact on its consolidated financial position or results of operations. 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. International Paper has not yet evaluated the impact of adopting SFAS No. 143 on its consolidated financial position or results of operations. GOODWILL In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." It changes the accounting for goodwill by eliminating goodwill amortization beginning in 2002. It will also require at least an annual assessment of goodwill for impairment. The initial test for impairment must be completed by June 30, 2002, but any impairment charges would be reflected as an accounting change recorded retroactively in the first quarter of 2002. International Paper is currently evaluating the impact of adopting SFAS No. 142. Goodwill amortization will no longer be an expense in 2002, thus increasing earnings. Goodwill amortization in 2002 would have been approximately $185 million. International Paper has not completed the impairment testing and therefore cannot quantify the statement's impact on its consolidated financial statements. It is possible that some goodwill will be required to be written off in 2002. Neither a write-off nor the cessation of goodwill amortization will impact cash flows. BUSINESS COMBINATIONS In June 2001, the FASB issued SFAS No. 141, "Business Combinations." It requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method, eliminating the use of the pooling-of-interests method. It also specifies that the purchase price must first be allocated to specific tangible and intangible assets before determining any residual goodwill. 47 Notes to Consolidated Financial Statements 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 to 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 to OCI primarily resulted from adjusting the foreign currency contracts used as hedges of net investments in foreign operations to fair value. NOTE 5 MERGERS, ACQUISITIONS AND DIVESTITURES ================================================================================ MERGERS AND ACQUISITIONS 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 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 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. The merger with Union Camp was completed on April 30, 1999. Union Camp shareholders received 1.4852 International Paper common shares for each Union Camp share held. The total value of the transaction, including the assumption of debt, was approximately $7.9 billion. International Paper issued 110 million shares for 74 million Union Camp shares, including options. The merger was accounted for as a pooling-of-interests. Also in April 1999, Carter Holt Harvey acquired the corrugated packaging business of Stone Australia, a subsidiary of Smurfit-Stone Container Corporation. The business consists of two sites in Melbourne and Sydney, which serve industrial and primary produce customers. All of the above acquisitions were accounted for using the purchase method, with the exception of the Union Camp acquisition, which was accounted for as a pooling-of-interests. The operating results of those mergers and acquisitions accounted for under the purchase method have been included in the consolidated statement of earnings from the dates of acquisition. In March 2001, International Paper and Carter Holt Harvey acquired a combined 37.5 % interest in International Paper Pacific Millennium Limited for approximately $34 million. This investment is accounted for under the equity method and is included in Investments in the accompanying consolidated balance sheet. 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, 2001, approximately $2.7 billion has been realized under the program, including cash and notes received plus debt assumed by the buyers. Cash Transactions In October 2001, International Paper sold its Mobile, Alabama Retail Packaging facility to Ampac, resulting in a pre-tax loss of $9 million. In September 2001, International Paper sold Masonite Corporation (Masonite) to Premdor Inc. of Toronto, Canada for approximately $300 million in cash and a note receivable with a face value of $113 million, resulting in a pre-tax loss of $87 million. In August 2001, International Paper sold its Flexible Packaging business to Exo-Tech Packaging, LLC, a company sponsored by the Sterling Group, L.P., for approximately $85 million in cash and a $25 million note, resulting in a pre-tax loss of $31 million. In July 2001, International Paper sold its Curtis/Palmer hydroelectric generating project in Corinth, New York to TransCanada Pipelines Limited for approximately $285 million, resulting in a pre-tax gain of $215 million. The net pre-tax gain of $88 million ($24 million after taxes) resulting from the above transactions is netted with impairment charges of $717 million (see Note 7) in Net losses on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. 48 In January 2001, International Paper also 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 an extraordinary loss of $245 million after taxes and minority interest, which was recorded in the third quarter of 2000 when the decision was made to sell this business. In November 2000, 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. In January 2000, International Paper sold its equity interest in Scitex for $79 million, and Carter Holt Harvey sold its equity interest in Compania de Petroleos de Chile (COPEC) for just over $1.2 billion. These sales resulted in a combined extraordinary gain of $134 million after taxes and minority interest. The gains on the sales in 2000 and the impairments of Zanders, Masonite, Fine Papers, the Chemical Cellulose Pulp business and the Flexible Packaging business in Argentina were recorded in the accompanying consolidated statement of earnings as extraordinary items pursuant to the pooling-of-interests rules. See Note 7 for additional information related to these divestitures. Structured Transactions - Right of Offset In March 2001, International Paper sold approximately 265,000 acres of forestlands in the state of Washington for notes receivable (the Notes) that had a value of approximately $480 million on the date of sale. The Notes, which do not require principal payments prior to their March 2011 maturity, are extendable at International Paper's option in five-year increments to March 2031, and are supported by irrevocable letters of credit obtained by the buyer and issued by a money-center bank. The sale resulted in no profit or loss as the timberlands, which were acquired in the Champion acquisition, had a carrying value equal to fair value on the date of sale. During 2001, International Paper transferred the Notes to an unconsolidated entity that it does not control in exchange for a preferred interest in the 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 has offset, for financial reporting purposes, the $480 million preferred interest in the entity against $480 million of International Paper debt obligations held by the entity since International Paper has, and intends to effect, a legal right to net settle these two amounts. In January 2001, International Paper sold its oil and gas properties and fee mineral and royalty interests valued at $234 million to an unconsolidated partnership for a non-controlling preferred limited partnership interest, and recognized an extraordinary loss on this transfer of $8 million after taxes, which is included as an extraordinary item in the accompanying consolidated statement of earnings. Also in 2001, the unconsolidated partnership loaned $244 million to International Paper. At December 31, 2001, International Paper has offset, for financial reporting purposes, its preferred interest in the partnership against the note payable to the partnership since International Paper has, and intends to effect, a legal right to net settle these two amounts. NOTE 6 SPECIAL ITEMS INCLUDING RESTRUCTURING AND BUSINESS IMPROVEMENT ACTIONS ================================================================================ 2001: Special items reduced 2001 net earnings by $1.4 billion, 2000 net earnings by $601 million and 1999 net earnings by $352 million. The following table and discussion presents the impact of special items for 2001:
- -------------------------------------------------------------------------------- In millions 2001 - -------------------------------------------------------------------------------- Earnings (Loss) Earnings (Loss) After Income Before Income Taxes and Taxes and Minority Minority Interest Interest - -------------------------------------------------------------------------------- Before special and extraordinary items and cumulative effect of accounting change $ 506 $ 214 Merger-related expenses (42) (28) 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 (Notes 5 and 7) (629) (587) ------- ------- After special items $(1,265) $(1,142) ======= =======
During 2001, special charges before taxes and minority interest of $1.8 billion ($1.4 billion after taxes and minority interest) were recorded. These special items included net losses on sales and impairments of businesses held for sale of $629 million before taxes ($587 million after taxes) discussed in Notes 5 and 7, a $42 million pre-tax charge ($28 million after taxes) for merger-related expenses, 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, a $225 million pre-tax charge ($146 million after taxes) for additional Masonite legal reserves and a $17 million pre-tax credit ($11 million after taxes) for the reversal of reserves no longer 49 Notes to Consolidated Financial Statements required. A further discussion of the Masonite legal reserves can be found in Note 11. The merger-related expenses of $42 million consisted primarily of systems integration, employee retention, travel, and other one-time cash costs related to the Champion acquisition. The $17 million reversal of reserves no longer required represents excess 1999, and 2000 second and fourth-quarter, 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 of $171 million consisted of $84 million of asset write-downs and $87 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- -------------------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - -------------------------------------------------------------------------------- Printing Papers (a) $ - $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 to cover severance costs related to the reorganization of its Riegelwood, North Carolina mill, and an $8 million charge to cover additional severance costs related to the Erie, Pennsylvania mill shutdown. The total charge covers the termination of 108 employees. (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. (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. 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 involving the shutdown of several boilers and washers. 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 cash costs of $1 million. 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. (e) xpedx implemented a plan to consolidate duplicate facilities and eliminate excess internal capacity. 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. The third-quarter charge of $256 million consisted of $183 million of asset write-downs and $73 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- -------------------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - -------------------------------------------------------------------------------- Printing Papers (a) $ 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 50 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, 2001, 183 employees had been terminated. (b) The Consumer Packaging business implemented a plan to exit the Aseptic Packaging business. The plan includes 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, 2001, 105 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, 2001, 4 employees had been terminated. The second-quarter charge of $465 million consisted of $240 million of asset write-downs and $225 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- -------------------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - -------------------------------------------------------------------------------- Printing Papers (a) $ 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, 2001, 207 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 December 31, 2001, 360 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, 2001, 302 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, $15 million of severance costs covering the termination of 402 employees, and other cash costs of $3 million. At December 31, 2001, 390 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 51 Notes to Consolidated Financial Statements internal capacity and streamline administrative functions at several of its locations. Charges associated with this plan included asset write-downs of $3 million and severance costs of $5 million covering the termination of 123 employees. At December 31, 2001, 105 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, $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, $14 million of severance costs covering the termination of 394 employees, and other cash costs of $7 million. At December 31, 2001, 291 employees had been terminated. (g) The Carter Holt Harvey 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, 2001, 788 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) ---- Balance, December 31, 2001 $254 ====
The severance charges recorded in the second, third and fourth quarters of 2001 related to 6,089 employees. As of December 31, 2001, 3,383 employees had been terminated. 2000: The following table and discussion presents the impact of special items for 2000:
- -------------------------------------------------------------------------------- In millions 2000 - -------------------------------------------------------------------------------- Earning (Loss) Earnings (Loss) Before Income After Income Taxes and Taxes and Minority Interest Minority Interest - -------------------------------------------------------------------------------- Before special and extraordinary items $1,692 $ 969 Merger-related expenses (54) (33) Restructuring and other charges (824) (509) Provision for legal reserves (125) (80) Reversal of reserves no longer required 34 21 ------ ----- After special items $ 723 $ 368 ====== =====
During 2000, special charges before taxes and minority interest of $969 million ($601 million after taxes and minority interest) were recorded. These special items included a $54 million pre-tax charge ($33 million after taxes) for merger-related expenses, an $824 million charge before taxes and minority interest ($509 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $125 million pre-tax charge ($80 million after taxes) for additional Masonite legal reserves and a $34 million pre-tax credit ($21 million after taxes) for the reversal of reserves no longer required. A further discussion of the Masonite legal reserves can be found in Note 11. The merger-related expenses of $54 million consisted primarily of systems integration, employee retention, travel, and other one-time cash costs related to the Champion acquisition and Union Camp merger. The $34 million reversal of reserves no longer required included a pre-tax credit of $28 million for excess 1999 second and fourth-quarter restructuring reserves and a pre-tax credit of $6 million for excess Union Camp merger-related termination benefits 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. 52 The fourth-quarter charge of $753 million consisted of $536 million of asset write-downs and $217 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- -------------------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - -------------------------------------------------------------------------------- Printing Papers (a) $293 $103 $396 Consumer Packaging (b) 86 7 93 Industrial Packaging (c) 114 46 160 Chemicals and Petroleum (d) 16 18 34 Forest Products (e) 15 20 35 Distribution (f) 3 19 22 Carter Holt Harvey (g) 1 4 5 Other (h) 8 - 8 ---- ---- ---- $536 $217 $753 ==== ==== ====
(a) The Printing Papers business announced the 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, 2001, 327 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, $5 million of severance costs covering the termination of 239 employees, and other exit costs of $2 million. At December 31, 2001, 237 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, $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 is part of the business's Asset Rationalization Program to increase earnings, improve plant efficiencies and reduce excess internal capacity. A portion of the facility was shut down at the end of 2000, with the remainder to be closed 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, 2001, 23 employees had been terminated. (e) The Forest Products business charge of $35 million was primarily related to the announced shutdown of the 53 Notes to Consolidated Financial Statements 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 total Forest Products business charge included $15 million of asset write-downs, $7 million of severance costs covering the termination of 264 employees, and $13 million of other exit costs. At December 31, 2001, 208 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, $15 million of severance costs covering the termination of 433 employees, and $4 million of other cash costs. At December 31, 2001, 325 employees had been terminated. (g) The Carter Holt Harvey charge of $5 million is related to cost reduction actions primarily associated with the tissue and packaging businesses. This charge included $1 million of asset write-downs and $4 million of severance 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 second-quarter charge of $71 million consisted of $40 million of asset write-downs and $31 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- -------------------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - -------------------------------------------------------------------------------- Printing Papers (a) $22 $ 7 $29 Consumer Packaging (b) 7 9 16 Industrial Papers (c) 9 4 13 Other (d) 2 11 13 --- --- --- $40 $31 $71 === === ===
(a) The Printing Papers business shut down the Millers Falls, Massachusetts mill in August 2000 due to excess internal capacity. Charges associated with the shutdown included $22 million to write down the assets to their estimated fair market value of zero, $2 million of severance costs covering the termination of 119 employees, and other exit costs of $3 million. The Millers Falls mill had revenues of $33 million 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 will allow the Retail Packaging business to better focus its resources for further profit improvement. Related charges included $1 million of asset write-downs, $3 million of severance costs covering the termination of 187 employees, and $2 million of other exit costs. At December 31, 2001, all 187 employees had been terminated. A severance reserve of $1 million was also established to streamline the Consumer Packaging business. This reserve covers the termination of 17 employees. At December 31, 2000, all 17 employees had been terminated. (c) Industrial Papers shut down the Knoxville, Tennessee converting facility in December 2000 to reduce excess internal capacity. Assets were written down $9 million to their estimated fair market value and a severance charge of $1 million was recorded to terminate 120 employees. Other exit costs totaled $3 million. The Knoxville facility had revenues of $46 million 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 54 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 Carter Holt Harvey's Mataura paper mill. This charge included $3 million of severance costs covering the termination of 158 employees and $2 million of other cash costs. At December 31, 2000, all 158 employees had been terminated. The 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) ----- Balance, December 31, 2001 $ 67 =====
The severance charges recorded in the second and fourth quarters of 2000 related to 4,243 employees. As of December 31, 2001, 3,777 employees had been terminated. Reserves of $14 million were determined to no longer be required and reversed to income in the fourth quarter of 2001. 1999: The following table and discussion presents the impact of special items for 1999:
- -------------------------------------------------------------------------------- In millions 1999 - -------------------------------------------------------------------------------- Earnings (Loss) Earnings (Loss) Before Income After Income Taxes and Taxes and Minority Interest Minority Interest - -------------------------------------------------------------------------------- Before special and extraordinary items $1,005 $ 551 Union Camp merger-related termination benefits (148) (97) Merger-related expenses (107) (78) Restructuring and other charges (298) (180) Environmental remediation charge (10) (6) Provision for legal reserves (30) (18) Reversal of reserves no longer required 36 27 ------ ----- After special items $ 448 $ 199 ====== =====
During 1999, special charges before taxes and minority interest of $557 million ($352 million after taxes and minority interest) were recorded. These special items included a $148 million pre-tax charge ($97 million after taxes) for Union Camp merger-related termination benefits, a $107 million pre-tax charge ($78 million after taxes) for merger-related expenses, a $298 million 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 that were no longer required. The Union Camp merger-related termination benefits charge of $148 million related to employees terminating after the effective date of the merger under an integration benefits program. Under this program, 1,218 employees of the combined company were originally identified for termination. An additional 346 employees left the company after the merger was announced, but were not eligible for benefits under the integration benefits program completed in the third quarter of 2000. Benefits payable under this program for certain senior executives and managers were paid from the general assets of International Paper. Benefits for remaining employees were primarily paid from plan assets of our qualified pension plan. In total, 1,062 employees were terminated. Related cash payments approximated $71 million (including payments related to our nonqualified pension plans). The remainder of the costs incurred primarily represented an increase in the projected benefit obligation of our qualified pension plan. Upon termination of the program in the third quarter of 2000, $6 million of the original reserve of $148 million was reversed to income. The following table is a roll forward of the Union Camp merger-related termination benefit charge:
- -------------------------------------------------------------------------------- Termination Dollars in millions Benefits - -------------------------------------------------------------------------------- Special charge (1,218 employees) $ 148 1999 incurred costs (787 employees) (116) 2000 incurred costs (275 employees) (26) Reversal of reserves no longer required (6) ----- Balance, December 31, 2000 $ - =====
Note: Benefit costs are treated as incurred on the termination date of the employee. The merger-related expenses of $107 million consisted of $49 million of merger costs and $58 million of post-merger expenses. The merger costs were primarily investment banker, consulting, legal and accounting fees. Post-merger integration expenses included costs related to employee retention, such as stay bonuses, and other cash costs related to the integration of Union Camp. 55 Notes to Consolidated Financial Statements The $30 million pre-tax charge to increase existing legal reserves included $25 million added to our reserve for hard-board siding claims. A further discussion of this charge can be found in Note 11. The $36 million reversal of reserves no longer required consisted of $30 million related to a retained exposure at the Lancey mill in France and $6 million of excess severance reserves previously established by Union Camp. The $298 million charge for asset shutdowns of excess internal capacity consisted of a $185 million charge in the fourth quarter of 1999 and a $113 million charge in the second quarter of 1999. The $185 million fourth-quarter charge for shutdowns of excess internal capacity and cost reduction actions included $92 million of asset write-downs and $93 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- --------------------------------------------------------------------- Asset Severance In millions Write-downs and Other Total - --------------------------------------------------------------------- Printing Papers (a) $ 7 $ 5 $ 12 Consumer Packaging (b) 14 22 36 Industrial Packaging (c) 7 14 21 Chemicals and Petroleum (d) 30 20 50 Building Materials (e) 10 6 16 Distribution (f) 6 17 23 Carter Holt Harvey (g) 18 9 27 --- --- ---- $92 $93 $185 === === ====
(a) The Printing Papers charge encompassed a $2 million severance charge related to a production curtailment at the Erie, Pennsylvania mill due to lower demand, a $3 million write-off of deferred software costs as the result of a decision to discontinue the installation of a Union Camp order entry system, and a $7 million impairment of our investment in the Otis Hydroelectric plant. In November 1999, the Erie mill changed from a seven-day, four-crew schedule to a three-crew schedule in order to balance operating capacity with sales demand. This production curtailment resulted in the termination of 99 employees. At December 31, 2000, all 99 employees had been terminated. We wrote down our investment in the Otis Hydroelectric partnership to the approximate fair market value of the investment based upon our offer to acquire the other partner's interest. (b) The Consumer Packaging charge of $36 million was related to the shutdown of facilities, capacity optimization and a deferred software write-off. The Philadelphia, Pennsylvania plant was shut down in June 2000 and the Edmonton, Alberta plant was shut down in April 2000. Charges associated with these shutdowns included $7 million of asset write-downs, $1 million of severance costs covering the termination of 194 employees, and other exit costs of $5 million. At December 31, 2000, all 194 employees had been terminated. Charges related to eliminating excess internal capacity included $7 million of asset write-downs and a severance charge of $11 million for the termination of 512 employees. The capacity reductions related to the Aseptic and Flexible Packaging businesses. At December 31, 2001, all 512 employees had been terminated. The business also discontinued the implementation of a Union Camp order management system. The write-off of deferred software costs related to this system was $5 million. (c) The Industrial Packaging business shut down the following plants and shifted production to other facilities: the Terre Haute, Indiana box plant; the Northlake, Illinois box plant; the Columbia, Tennessee sheet plant; and the Montgomery, Alabama sheet plant. The design center in Spartanburg, South Carolina was also closed. The functions performed in Spartanburg will continue in Memphis, Tennessee. Charges associated with the consolidation and improvement of the Industrial Packaging business totaled $21 million and included $7 million of asset write-downs, a $12 million severance charge covering the termination of 426 employees, and other exit costs of $2 million. At December 31, 2001, all 426 employees had been terminated. (d) The Chemicals and Petroleum charge of $50 million related to the partial shutdown of the Chester-le-Street plant located in northeast England and additional costs related to the 1998 shutdown of the Springhill, Louisiana plant. The Chester-le-Street plant was a fully integrated site comprising a crude tall oil fractionation plant, a rosin resin upgrading plant and a dimer plant. The crude tall oil and rosin resin upgrading facilities at the site were closed and production shifted to other Arizona Chemical facilities. Asset write-downs for this plant totaled $30 million. A severance charge of $3 million covered the termination of 83 employees. Other costs of $12 million included demolition and contract cancellations. At December 31, 2000, all 83 employees had been terminated. We also recorded an additional charge of $5 million related to the 1998 closure of the Springhill plant, covering other exit costs including demolition and cleanup. (e) The Building Materials charge of $16 million included $3 million for a program to improve the profitability of the decorative surfaces business and $13 million for the shutdown of the Pilot Rock, Oregon mill. The Decorative Products business developed an improvement plan to consolidate certain manufacturing activities and streamline administrative functions. As a result, a reserve was established to cover asset write-offs totaling 56 $2 million, and severance charges of $1 million were recorded related to the reduction of 65 employees. At December 31, 2001, all 65 employees had been terminated. International Paper announced in October 1999 that it would shut down the Pilot Rock, Oregon mill due to excess capacity within the Masonite manufacturing system. Softboard production was moved to our Ukiah, California and Lisbon Falls, Maine facilities. The related charge included $8 million of asset write-downs, a $2 million severance charge covering the termination of 155 employees, and $3 million of other exit costs. At December 31, 2001, all 155 employees had been terminated. (f) xpedx implemented a plan to consolidate duplicate facilities and eliminate excess internal capacity. The $23 million charge associated with this plan included $6 million of asset write-downs, a severance charge of $5 million for the termination of 211 employees, and other costs of $12 million. Other costs consisted primarily of lease cancellations. At December 31, 2001, all 211 employees had been terminated. (g) This charge related to the shutdown of the No. 5 paper machine at Carter Holt Harvey's Kinleith mill. The machine had been idled due to a reconfiguration project at the mill. Plans for alternative uses for the machine were reexamined and it was determined that based on current competitive conditions it would not provide adequate returns on the capital required and that it would be scrapped. Accordingly, the machine was written down by $18 million to its estimated salvage value. Also, severance costs of $9 million were recorded to cover the costs of terminating 300 employees. At December 31, 2000, all 300 employees had been terminated. The second-quarter $113 million charge for the asset shutdowns of excess internal capacity and cost reduction actions included $57 million of asset write-downs and $56 million of severance and other charges. The following table and discussion presents additional detail related to this charge:
- ---------------------------------------------------------------------- Asset Severance In millions Write-down and Other Total - ---------------------------------------------------------------------- Printing Papers (a) $ 6 $27 $ 33 European Papers (b) 3 7 10 Consumer Packaging (c) 19 12 31 Industrial Packaging (d) 12 - 12 Chemicals and Petroleum (e) 10 3 13 Industrial Papers (f) 7 7 14 --- --- ---- $57 $56 $113 === === ====
(a) International Paper recorded a charge of $24 million for severance related to the second phase of the Printing Papers business plan to improve the cost position of its mills. The charge, pursuant to an ongoing severance program, covered a reduction of approximately 289 employees at several mills in the U.S. At December 31, 2001, all 289 employees had been terminated. Also, management approved a decision to shut down the Hudson River mill No. 4 paper machine located in Corinth, New York and the No. 2 paper machine at the Franklin, Virginia mill due to excess internal capacity. Both machines have now been shut down. The machines were written down by $6 million to their estimated fair market value of zero. Severance costs of $3 million were recorded to cover the termination of 147 employees. At December 31, 2001, all 147 employees had been terminated. (b) The charge for European Papers, which covered the shutdown of two mills, consisted of $3 million in asset write-downs, $6 million in severance costs and $1 million of other exit costs. The Lana mill in Docelles, France was shut down due to excess internal capacity. The Lana mill produced uncoated specialty paper which was shifted to the La Robertsau mill in Strasbourg, France. The mill's fixed assets were written down $3 million to their estimated fair market value of zero. Costs of $1 million related to the site closure and severance of $4 million related to the termination of 42 employees were also recorded. The Lana mill had revenues of $12 million and an operating loss of $2 million for the year ended December 31, 1999. At December 31, 2000, all 42 employees had been terminated. The Corimex coating plant in Clermont-Ferrand, France was shut down in April 1999. The assets at this plant had been considered to be impaired in 1997 and were written down at that time because of a decline in the market for thermal fax paper. A $2 million severance charge was recorded during the second quarter of 1999 to cover the costs of terminating 81 employees. Corimex had revenues of $6 million and an operating loss of $3 million for the year ended December 31, 1999. At December 31, 2000, all 81 employees had been terminated. (c) The Consumer Packaging business implemented a plan to improve the overall performance of the Moss Point, Mississippi mill. Included in this plan was the shutdown of the No. 3 paper machine which produced labels. This production was transferred to the Hudson River mill. The machine was written down $6 million to its estimated fair market value of zero. Severance costs including, but not limited to, employees associated with the No. 3 machine totaled $10 million and cover the elimination of 360 positions. At December 31, 2001, all 360 employees had been terminated. 57 Notes to Consolidated Financial Statements Consumer Packaging also shut down the Beverage Packaging facility in Itu, Brazil in an effort to reduce excess internal capacity in Latin America. The related assets were written down $13 million to their estimated fair market value of zero, and a severance charge of $1 million covering the elimination of 29 positions was recorded. Other exit costs totaled $1 million. At December 31, 2001, all 29 employees had been terminated. (d) With the merger of Union Camp, we negotiated the resolution of contractual commitments related to an Industrial Packaging investment in Turkey. As a result of these negotiations and evaluation of this entity, it was determined that the investment was impaired. A $12 million charge was recorded to reflect this impairment and the related costs of resolving the contractual commitments. (e) As a result of an overall reduction in demand for dissolving pulp, a decision was made to downsize the Natchez, Mississippi mill. Charges associated with capacity reduction totaled $10 million and included the shutdown of several pieces of equipment. A severance charge of $3 million was recorded to eliminate 89 positions. At December 31, 2000, all 89 employees had been terminated. (f) The Industrial Papers business implemented a plan to reduce excess internal capacity at several of its locations. The Toronto, Canada plant was closed. Equipment at the Kaukauna, Wisconsin; Knoxville, Tennessee; and Menasha, Wisconsin facilities was taken out of service. The total amount related to the write-down of these assets was $7 million. Severance costs related to these shutdowns were $5 million, based on a personnel reduction of 81 employees. Other exit costs totaled $2 million. At December 31, 2001, all 81 employees had been terminated. The following table presents a roll forward of severance and other costs included in the 1999 restructuring plans:
- --------------------------------------------------------------------- Severance In millions and Other - --------------------------------------------------------------------- Opening Balance (second quarter 1999) $ 56 Additions (fourth quarter 1999) 93 1999 Activity Cash charges (34) 2000 Activity Cash charges (75) Other charges (13) Reversal of reserves no longer required (14) 2001 Activity Cash charges (10) Reversal of reserves no longer required (3) ---- Balance, December 31, 2001 $ - ====
The severance reserves recorded in the second and fourth quarters of 1999 related to 3,163 employees. At December 31, 2001, all 3,163 employees had been terminated. Reserves of $3 million and $14 million were determined to no longer be required and reversed to income in the fourth quarter of 2001 and 2000, respectively. NOTE 7 BUSINESSES HELD FOR SALE ================================================================================ During 2000, International Paper announced a divestment program to sell certain businesses and assets that are not strategic to its core businesses. The decision to sell these businesses and certain other assets resulted from International Paper's acquisition of Champion and the completion of a strategic analysis to focus on its core businesses of paper, packaging and forest products. Businesses in the divestment program at December 31, 2001 being marketed for sale in 2002 included Arizona Chemical, Decorative Products, Industrial Papers and other smaller businesses as well as certain other non-strategic forestlands. Sales and operating earnings for each of the three years ended December 31, 2001, 2000 and 1999 for these businesses, as well as for businesses sold as part of International Paper's divestiture program (see Note 5), were:
- -------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------- Sales $2,151 $4,016 $4,036 Operating Earnings $ 94 $ 247 $ 250
The sales and operating earnings for these businesses are shown in "Other Businesses" in management's discussion and analysis. The assets of businesses held for sale, totaling $648 million at December 31, 2001 and $1.6 billion at December 31, 2000, 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 $215 million at December 31, 2001 and $475 million at December 31, 2000, 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, 2000 reflect divestitures and impairment charges recorded in 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. In the third quarter 58 of 2001, 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. These charges, totaling $717 million, are included in Net losses on sales and impairments of businesses held for sale in the accompanying consolidated statement of earnings. During the first quarter of 2001, an extraordinary pre-tax charge of $60 million ($38 million after taxes) was recorded for impairment losses to reduce the assets of Masonite to their estimated realizable value based on offers received. 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). 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. These charges are presented as extraordinary items, net of taxes, in the consolidated statement of earnings in accordance with the pooling-of-interests rules. During the second quarter of 2001, a decision was made to continue to operate the Fine Papers business that was previously held for sale. Accordingly, industry segment information for prior periods has been restated to include this business in the Printing Papers segment. See Note 5 for additional information on the divestiture sales that have closed. 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 $129 million, $141 million and $134 million in 2001, 2000 and 1999, respectively. The expense related to these preferred securities is shown in minority interest expense in the consolidated statement of earnings. 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 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. 59 Notes to Consolidated Financial Statements At December 31, 2001, International Paper held aggregate general and limited partner interests totaling 66% in Georgetown Equipment Leasing Associates, L.P. and 62% in Trout Creek Equipment Leasing, L.P. NOTE 10 INCOME TAXES ================================================================================ International Paper uses the asset and liability method of accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are revalued to reflect new tax rates in the periods rate changes are enacted. The components of earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of accounting change by taxing jurisdiction were:
- -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Earnings (loss) U.S. $(1,683) $202 $237 Non-U.S. 418 521 211 ------- ---- ---- Earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of accounting change $(1,265) $723 $448 ======= ==== ====
The provision (benefit) for income taxes by taxing jurisdiction was:
- -------------------------------------------------------------------------------- In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Current tax provision U.S. federal $ 186 $ 130 $ 259 U.S. state and local 3 41 27 Non-U.S. 100 102 8 ----- ----- ----- $ 289 $ 273 $ 294 ===== ===== ===== Deferred tax provision (benefit) U.S. federal $(455) $ (31) $(108) U.S. state and local (116) (65) (103) Non-U.S. 12 (60) 3 ----- ----- ----- $(559) $(156) $(208) ===== ===== ===== Income tax provision (benefit) $(270) $ 117 $ 86 ===== ===== =====
International Paper made income tax payments, net of refunds, of $333 million, $298 million and $68 million in 2001, 2000 and 1999, 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 2001 2000 1999 - -------------------------------------------------------------------------------- Earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of accounting change $(1,265) $723 $448 Statutory U.S. income tax rate 35% 35% 35% ------- ---- ---- Tax expense (benefit) using statutory U.S. income tax rate $ (443) $253 $157 State and local income taxes (73) (15) (20) Non-U.S. tax rate differences (19) (80) (52) Permanent differences on sales of non-strategic assets 180 - (2) Nondeductible business expenses 12 10 30 Tax benefit on export sales (4) (18) (9) Minority interest (70) (82) (56) Goodwill amortization 55 39 21 Net U.S. tax on non-U.S. dividends 108 28 15 Tax credits - - (12) Other, net (16) (18) 14 ------- ---- ---- Income tax provision (benefit) $ (270) $117 $ 86 ======= ==== ==== Effective income tax rate 21% 16% 19% ======= ==== ====
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 2001 and 2000 were as follows:
- -------------------------------------------------------------------------------- In millions 2001 2000 - -------------------------------------------------------------------------------- Deferred tax assets: Postretirement benefit accruals $ 394 $ 199 Alternative minimum and other tax credits 508 432 Net operating loss carryforwards 648 264 Other 675 825 ------- ------- Total deferred tax assets $ 2,225 $ 1,720 ======= ======= Deferred tax liabilities: Plants, properties, and equipment $(2,832) $(3,344) Prepaid pension costs (579) (326) Forestlands (1,575) (1,686) Other (199) (190) ------- ------- Total deferred tax liabilities $(5,185) $(5,546) ======= ======= Net deferred tax liability $(2,960) $(3,826) ======= =======
International Paper has net operating loss carryforwards that expire as follows: years 2002 through 2008 - $112 million, years 2019 through 2021 - $1.3 billion, and indefinite carryforward - $461 million. International Paper also has federal and state tax credit carryforwards that expire as follows: years 2002 through 2021 - $144 million, and indefinite carryforward - $364 million. 60 Deferred taxes are not provided for temporary differences of approximately $1.8 billion, $1.7 billion and $1.2 billion as of December 31, 2001, 2000 and 1999, 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, 2001, total future minimum rental commitments under non-cancelable leases were $937 million, due as follows: 2002 - - $169 million, 2003 - $147 million, 2004 - $129 million, 2005 - $113 million, 2006 - $93 million and thereafter - $286 million. Rent expense was $230 million, $218 million and $229 million for 2001, 2000 and 1999, respectively. International Paper has entered into an agreement to guarantee, for a fee, a contractual credit agreement of an unrelated third party. The maximum amount of the guarantee is $110 million and expires in 2008. The guaranty fees are payable to International Paper at the time the borrowings under the agreement are repaid to the third party lenders. Three nationwide class action lawsuits relating to products manufactured by Masonite that were filed against International Paper have been settled in recent years. The first suit, entitled Judy Naef v. Masonite and International Paper, was filed in December 1994 (Hardboard Lawsuit). The plaintiffs alleged that hardboard siding manufactured by Masonite fails prematurely, allowing moisture intrusion that in turn causes damage to the structure underneath the siding. The class consisted of all U.S. property owners having Masonite hardboard siding installed on and incorporated into buildings between January 1, 1980 and January 15, 1998. The Court granted final approval of the settlement on January 15, 1998. The settlement provides for monetary compensation to class members meeting the settlement requirements on a claims-made basis, which requires a class member to individually submit proof of damage to, or caused by, Masonite product, proof of square footage involved, and proofs of various other matters in order to qualify for payment with respect to a claim. It also provides for the payment of attorneys' fees equaling 15% of the settlement amounts paid to class members, with a non-refundable advance of $47.5 million plus $2.5 million in costs. For siding that was installed between January 1, 1980 and December 31, 1989, claims must be made by January 15, 2005, and for siding installed between January 1, 1990 through January 15, 1998, claims must be made by January 15, 2008. The second suit, entitled Cosby, et. al. v. Masonite Corporation, et. al., was filed in 1997 (Omniwood Lawsuit). The plaintiffs made allegations with regard to Omniwood siding manufactured by Masonite which were similar to those alleged in the Hardboard Lawsuit. The class consisted of all U.S. property owners having Omniwood siding installed on and incorporated into buildings from January 1, 1992 to January 6, 1999. The settlement relating to the Omniwood Lawsuit provides that qualified claims must be made by January 6, 2009 for Omniwood siding that was installed between January 1, 1992 and January 6, 1999. The third suit, entitled Smith, et. al. v. Masonite Corporation, et. al., was filed in 1995 (Woodruf Lawsuit). The plaintiffs alleged that Woodruf roofing manufactured by Masonite is defective and causes damage to the structure underneath the roofing. The class consisted of all U.S. property owners who had incorporated and installed Masonite Woodruf roofing from January 1, 1980 to January 6, 1999. The settlement relating to the Woodruf Lawsuit provides that for product installed between January 1, 1980 and December 31, 1989, claims must be made by January 6, 2006, and for product installed between January 1, 1990 and January 6, 1999, claims must be made by January 6, 2009. The Court granted final approval of the settlements of the Omniwood and Woodruf Lawsuits on January 6, 1999. The settlements provide for monetary compensation to class members meeting the settlement requirements on a claims-made basis, which requires a class member to individually submit proof of damage to, or caused by, Masonite product, proof of square footage involved, and proofs of various other matters. The settlements also provide for payment of attorneys' fees equaling 13% of the settlement amounts paid to class members with a non-refundable advance of $1.7 million plus $75,000 in costs for each of the two cases. Once a claim is determined to be valid under the respective settlement agreement covering the claim, the amount of the claim is determined by reference to a negotiated compensation formula established under the settlement agreement designed to compensate the homeowner for all damage to the structure. The compensation formula is based on (1) the average cost per square foot for product replacement, including material and labor as calculated by industry standards, in the area in which the structure is located, adjusted for inflation, or (2) the cost of appropriate refinishing as determined by industry standards in such area, adjusted for inflation. Persons receiving compensation pursuant to this formula also agree to release International Paper and Masonite from all other property damage claims relating to the product in question. 61 Notes to Consolidated Financial Statements In connection with the products involved in the lawsuits described above, where there is damage, the process of degradation begins almost immediately after installation and continues until repairs are made. International Paper estimates that approximately 4 million structures have installed products that are the subject of the Hardboard Lawsuit, 300,000 structures have installed products that are subject to the Omniwood Lawsuit and 86,000 structures have installed products that are the subject of the Woodruf Lawsuit. Masonite stopped selling the hardboard siding in May 2001, the products involved in the Woodruf Lawsuit in May 1996, and the products involved in the Omniwood Lawsuit in September 1996. Persons who are class members under the Hardboard, Omniwood and Woodruf Lawsuits who do not pursue remedies under the respective settlement agreement pertaining to such suits, may have recourse to warranties, if any, in existence at the expiration of the respective terms established under the settlement agreements for making claims. The warranty period generally extends for 25 years following the installation of the product in question and, although the warranties vary from product to product, they generally provide for a payment of up to two times the purchase price. The following table presents an analysis of the net reserve activity related to the Hardboard, Omniwood and Woodruf Lawsuits for the years ended December 31, 2001, 2000 and 1999. Reserve Analysis
- -------------------------------------------------------------------------------- In millions Hardboard Omniwood Woodruf Total - -------------------------------------------------------------------------------- Balance, December 31, 1998 $ 86 $ 31 $ 12 $ 129 Additional provision 20 3 2 25 Payments (76) (9) (7) (92) Insurance collections 8 - - 8 Other (6) 10 2 6 ------ ----- ---- ----- Balance, December 31, 1999 32 35 9 76 Additional provision 110 10 5 125 Payments (117) (13) (12) (142) Financial collar reimbursement 48 - - 48 Other (7) (10) 2 (15) ------ ----- ---- ----- Balance, December 31, 2000 66 22 4 92 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 ====== ===== ==== =====
In the fourth quarter of 1999, $25 million was added to the existing reserve balance. During the third quarter of 2000, a determination was made that an additional $125 million provision was required to cover an expected shortfall, resulting primarily from a higher than anticipated number of claims relating to the Hardboard Lawsuit. This trend started in the second half of 1999 and continued into 2000. The $125 million increase was based on an independent third party statistical study of future costs, which analyzed trends in the claims experience through May 30, 2000. Four statistical outcomes described below, developed by the independent third party, were reviewed as the basis for the determination of the amount of the reserve as of the third quarter of 2000, resulting in incremental future claims projections for the Hardboard Lawsuit ranging from $95 million to $175 million. Statistical Outcome 1 - This outcome was based on the assumption that there is a return to the originally estimated claim decline curves, which equated to a 45% annual decline in all areas of the settlement. This analysis resulted in projected future costs for claims relating to the Hardboard Lawsuit of $95 million. Statistical Outcome 2 - This outcome was based on the assumption that the claims rate continues at the same level for one more year in areas that had experienced a growth in the claims rate in the second year of the settlement, and then declines at the rate of 45% per year. In other areas, it was assumed that claims would decline at a 45% rate. This analysis resulted in projected future costs for claims relating to the Hardboard Lawsuit of $115 million. Statistical Outcome 3 - This outcome was based on the assumption that the claims rate (a) grows moderately for one year in areas where growth was observed in the second quarter of 2000, (b) then levels off for one year, and (c) then declines at the rate of 45% per year. Additionally, it was assumed that the claims rate remains level for one year in areas where growth in the claims rate was observed in the second year and then declines by 45% per year. Finally, it was assumed that the claims rate declines by 45% per year in areas where the claims rate declined in the second year of settlement. This analysis resulted in projected future costs for claims relating to the Hardboard Lawsuit of $145 million. Statistical Outcome 4 - This outcome was based on the assumption that the claims rate (a) doubles in one state for one additional year, levels off for two years and then declines by 45% per year, (b) remains level in another state for two years and then declines by 45% per year, and (c) in all other areas, declines by 45% per year. This analysis resulted in projected future costs for claims relating to the Hardboard Lawsuit of $175 million. 62 The assumptions made in the statistical outcomes presented above were based on projected claims rates frequency, including geographic patterns of claims rates, and historical information related to the growth (or decline) of claims rates. In addition, assumptions related to the cost of claims, including forecasts relating to the rate of inflation, were taken into consideration. Average claim costs were calculated from historical claims records, taking into consideration structure type, location and source of the claim. After reviewing the statistical outcomes, management concluded that, based on the recent claims history, Statistical Outcome 4, which projected incremental future claims of $175 million and approximately 55,000 future claims (35,000 single family and 20,000 multifamily), represented the most probable outcome. After deducting existing reserves and considering the impact of the financial collar discussed below, a provision of $125 million was recorded in the third quarter of 2000. Following the $125 million additional provision, net reserves for these matters totaled $92 million at December 31, 2000 ($66 million for claims relating to the Hardboard Lawsuit, $22 million for claims relating to the Omniwood Lawsuit and $4 million for claims relating to the Woodruf Lawsuit). The reserve balance at December 31, 2000 for claims relating to the Hardboard Lawsuit was net of $43 million of expected insurance recoveries as discussed in detail below. During the third quarter of 2001, a determination was made that an additional provision would be required to cover an expected shortfall which 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 ($187 million for claims relating to the Hardboard Lawsuit, $16 million for claims relating to the Woodruf Lawsuit and $22 million for claims relating to the Omniwood Lawsuit). This $225 million increase was based on an independent third party statistical study of future costs, which analyzed trends in the claims experience through August 31, 2001. Three statistical outcomes developed by the independent third party statistician were reviewed as the basis for the determination of the amount of the reserve, resulting in total projected costs for these settlements ranging from $655 million to $933 million. Statistical Outcome 1 - This outcome was based on the assumption that Hardboard and Omniwood claims growth continues through mid-2002, remains stable through mid-2003 and then declines by 45% and 50%, respectively, 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. This analysis resulted in total projected costs of $933 million. Statistical Outcome 2 - This outcome was based on the assumption that Hardboard claims growth continues through mid-2002 and then declines by 55% per year thereafter. Omniwood claims were assumed to follow the same pattern described in Outcome 1 above. Woodruf claims were assumed to decline at a rate of 50% per year. Unit costs per claim were assumed to decline by 50% between 2001 and 2002 and remain stable thereafter. This analysis resulted in total projected costs of $655 million. Statistical Outcome 3 - This outcome was based on the assumption that Hardboard claims growth continues through mid-2002, then declines 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. This analysis resulted in total projected costs of $755 million. The assumptions made in the statistical outcomes presented above were based on projected claims rates frequency, including geographic patterns of claims rates, and historical information related to the growth (or decline) of claims rates. In addition, assumptions related to the cost of claims, including forecasts relating to the rate of inflation, were taken into consideration. Average claim costs were calculated from historical claims records, taking into consideration structure type, location and source of the claim. While management believes that the assumptions used in developing the outcomes represent the most probable scenario, factors which could reasonably be expected to 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. After discussion with the independent statistician and considering the recent claims history and all available evidence, management concluded that Statistical Outcome 3, with total projected costs of $755 million and approximately 95,000 future claims (85,000 single family and 10,000 multifamily), represented the most probable outcome. After deducting payments made to date and existing reserve balances, and considering the impact of the financial collar discussed below, a provision of $225 million was recorded in the third quarter of 2001 ($187 million for the Hardboard Lawsuit, $22 million for the Omniwood Lawsuit and $16 million for the Woodruf Lawsuit). 63 Notes to Consolidated Financial Statements Following the $225 million additional provision, net reserves for these matters totaled $208 million at December 31, 2001, including $179 million for the Hardboard Lawsuit, $9 million for the Woodruf Lawsuit and $20 million for the Omniwood Lawsuit. The reserve balance for claims relating to the Hardboard Lawsuit is net of $43 million of expected insurance recoveries remaining from an initial estimate of insurance recoveries of $70 million, which was estimated for purposes of establishing the initial 1997 reserve for the claims related to the Hardboard Lawsuit. 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 case against Wausau - based on a finding that Wausau had acted in bad faith; and an additional $68 million in punitive damages. As of February 15, 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. As of February 15, 2002, the trial court has not scheduled a date for the trial of the claims for indemnification. Because of the uncertainties inherent in the litigation, International Paper is unable to estimate the amount which it will recover against those insurance carriers, but it does not expect the recovery to be less than the amount initially projected. Under a financial collar arrangement, International Paper contracted with a third party for payment in an amount up to $100 million for certain costs relating to the Hardboard Lawsuit if payments by International Paper with respect thereto exceeded $165 million. The arrangement with the third party is in excess of insurance otherwise available to International Paper, which is the subject of the separate litigation referred to above. Accordingly, International Paper believes that the obligation of the third party with respect to this financial collar does not constitute "other valid and collectible insurance" that would either eliminate or otherwise affect its right to collect insurance coverage available to it and Masonite under the insurance policies, which are the subject of this separate litigation. As of December 31, 2001, International Paper had received the $100 million. At December 31, 2001, there were $50 million of costs associated with claims inspected and not paid ($43 million for Hardboard siding, $4 million for Omniwood and $3 million for Woodruf) and $23 million of costs associated with claims in process and not yet inspected ($20 million for claims relating to the Hardboard Lawsuit, $2 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, 2001 amounted to $251 million as reflected in the table in the following paragraph. The estimated claims reserve includes $178 million for unasserted claims that are probable of assertion. At December 31, 2001, the components of the required reserve and the classification of such amounts in the consolidated balance sheet are summarized as follows: Balance Sheet Summary
- -------------------------------------------------------------------------------- In millions - -------------------------------------------------------------------------------- Aggregate reserve (in Other accrued liabilities) $251 Insurance receivable (in Deferred charges and other assets) (43) ---- Reserve required $208 ====
The average settlement cost per claim for the years ended December 31, 2001, 2000, and 1999 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, 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 December 31, 1999 $4.1 $8.9 $5.6 $2.2 $5.7 $3.6
The above information is calculated by dividing the amount of claims paid by the number of claims paid. Through December 31, 2001, net settlement payments totaled $403 million ($323 million for claims relating to the Hardboard Lawsuit, $48 million for claims relating to the Omniwood Lawsuit and $32 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 $6 million have been made to the attorneys for the plaintiffs in the Omniwood and Woodruf Lawsuits. In addition, 64 International Paper has received $27 million related to these matters (all related to the Hardboard Lawsuit) from our insurance carriers through December 31, 2001. 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, 2001, 2000 and 1999. Claims Statistics
- ------------------------------------------------------------------------------------------------------------------- Hardboard Omniwood Woodruf Total In thousands Single Multi- Single Multi- Single Multi- Single Multi- Number of Claims Pending Family Family Famiy Family Family Family Family Family Total - ------------------------------------------------------------------------------------------------------------------- December 31, 1998 13.1 1.0 - - - - 13.1 1.0 14.1 No. of Claims Filed 16.6 4.3 2.5 0.1 2.9 0.2 22.0 4.6 26.6 No. of Claims Paid (14.4) (1.6) (1.0) - (1.0) (0.1) (16.4) (1.7) (18.1) No. of Claims Dismissed (4.0) (1.0) (0.3) - (0.1) - (4.4) (1.0) (5.4) December 31, 1999 11.3 2.7 1.2 0.1 1.8 0.1 14.3 2.9 17.2 No. of Claims Filed 25.5 9.4 2.2 0.2 2.5 0.1 30.2 9.7 39.9 No. of Claims Paid (15.6) (5.6) (1.9) (0.1) (2.4) - (19.9) (5.7) (25.6) No. of Claims Dismissed (5.3) (2.0) (0.5) - (0.7) - (6.5) (2.0) (8.5) December 31, 2000 15.9 4.5 1.0 0.2 1.2 0.2 18.1 4.9 23.0 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
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, 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 2001 2000 - -------------------------------------------------------------------------------- Raw materials $ 442 $ 438 Finished pulp, paper and packaging products 1,582 1,992 Finished lumber and panel products 175 261 Operating supplies 489 498 Other 45 105 ------ ------ Inventories $2,733 $3,294 ====== ======
The last-in, first-out inventory method is used to value most of International Paper's U.S. inventories. Approximately 72% 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 $219 million and $264 million at December 31, 2001 and 2000, respectively. 65 Notes to Consolidated Financial Statements Plants, properties and equipment by major classification were:
- -------------------------------------------------------------------------------- In millions at December 31 2001 2000 - -------------------------------------------------------------------------------- Pulp, paper and packaging facilities Mills $23,247 $22,538 Packaging plants 2,248 3,266 Wood products facilities 2,720 2,343 Other plants, properties and equipment 1,707 2,028 ------- ------- Gross cost 29,922 30,175 Less: Accumulated depreciation 15,461 14,043 ------- ------- Plants, properties and equipment, net $14,461 $16,132 ======= =======
NOTE 13 DEBT AND LINES OF CREDIT ================================================================================ A summary of long-term debt follows:
- -------------------------------------------------------------------------------- In millions at December 31 2001 2000 - -------------------------------------------------------------------------------- 8 7/8% to 10.5% notes - due 2002 - 2012 $ 477 $ 522 8 7/8% to 9.7% notes - due 2002 - 2004 450 564 9 1/4% sinking fund debentures - 8 8.5% to 9.5% debentures - due 2002 - 2022 247 246 8 3/8 to 9 1/2% debentures - due 2015 - 2024 300 300 8% to 8 1/8% notes - due 2003 - 2005 2,198 2,197 7% to 7 7/8% notes - due 2002 - 2007 1,095 1,343 6 7/8 to 8 1/8% notes - due 2023 - 2029 742 742 6.65% notes - due 2037 93 92 6.5% notes - due 2007 148 148 6.4% to 7.75% debentures - due 2023 - 2027 871 865 6 1/8% notes - due 2003 200 200 5 7/8% Swiss franc debentures - 67 5 3/8% euro notes - due 2006 225 223 12% to 16% Brazilian real notes - 194 5 1/8% debentures - due 2012 93 90 6.75% notes, due 2011 1,000 - Zero-coupon convertible debentures, due 2021 1,018 - Medium-term notes - due 2002 - 2009 (a) 162 307 Floating rate notes - due 2002 - 2004 (b) 1,328 2,100 Environmental and industrial development bonds - due 2002 - 2033(c, d) 2,420 2,334 Commercial paper and bank notes (e) 156 637 Other (f) 191 157 ------- ------- Total(g) 13,414 13,336 Less: Current maturities 957 688 ------- ------- Long-term debt $12,457 $12,648 ======= =======
(a) The weighted average interest rate on these notes was 8.1% in 2001 and 8.2% in 2000. (b) The weighted average interest rate on these notes was 2.9% in 2001 and 7.9% in 2000. (c) The weighted average interest rate on these bonds was 6.2% in 2001 and 6.3% in 2000. (d) Includes $111 million of bonds at December 31, 2001 and $130 million of bonds at December 31, 2000, which may be tendered at various dates and/or under certain circumstances. (e) The weighted average interest rate was 3.4% in 2001 and 7.2% in 2000. Includes $33 million in 2001 of non-U.S. dollar denominated borrowings with a weighted average interest rate of 5.5%. (f) Includes $10 million in 2001 and $19 million in 2000 of French franc borrowings with a weighted average interest rate of 7.4% in 2001 and 2.2% in 2000, and $4 million in 2001 and $5 million in 2000 of Canadian dollar borrowings with an interest rate of 2.5% in 2001 and 9.0% in 2000. (g) The fair market value was approximately $13.2 billion and $13.5 billion at December 31, 2001 and 2000, respectively. Total maturities of long-term debt over the next five years are 2002 - $957 million, 2003 - $1.5 billion, 2004 - $2.0 billion, 2005 - $1.2 billion and 2006 - - $617 million. At December 31, 2001 and 2000, International Paper classified $750 million 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 through 2002 and into future periods. At December 31, 2001, unused contractually committed bank credit agreements amounted to $2.9 billion. The agreements generally provide for interest rates at a floating rate index plus a predetermined margin dependent upon International Paper's credit rating. The principal $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 $1.1 billion of credit through March 2002 and has a facility fee of 0.10% that is payable quarterly. Additionally, International Paper has a $900 million 364-day facility that provides credit through June 2002, and has a facility fee of 0.10% paid quarterly. Carter Holt Harvey also has one principal line of credit that supports its commercial paper programs. A $192 million line of credit matures in April 2002 and has a 0.15% facility fee that is payable quarterly. In addition, International Paper has up to $500 million of commercial paper financings available under a receivables securitization program established in December 2001. The program extends through December 2002 with a facility fee of 0.15%. At December 31, 2001, outstanding debt included approximately $156 million of commercial paper and bank notes with interest rates that fluctuate based on market conditions and our credit rating. In August 2001, under a previously filed shelf registration statement, International Paper issued $1 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 semi-annually on March 1 and September 1 of each year, commencing on March 1, 2002. Most of the proceeds of this issuance were used to retire $800 million of money market notes due in 2002. 66 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. In 1999, International Paper recorded an extraordinary loss of $16 million after taxes for the extinguishment of high interest rate debt that was assumed in connection with the merger with Union Camp. International Paper extinguished approximately $275 million of long-term debt with interest rates ranging from 8.5% to 10%. International Paper's long-term debt is rated BBB by Standard & Poors and Baa2 by Moody's Investor Services, both with a stable outlook. 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 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. INTEREST RATE RISK Interest rate swaps may be used to manage interest rate risks associated with International Paper's fixed rate 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 billion and maturities ranging from one to 23 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, 2001, 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. A series of fixed-to-floating interest rate swap agreements with a notional amount of approximately $1.5 billion were entered into during the year ended December 31, 2001. The objective of these transactions, all of which qualify for hedge accounting, was to take advantage of favorable interest rates. COMMODITY RISK To manage risks associated with future variability in cash flows attributable to certain commodity purchases, International Paper primarily uses natural gas swap contracts with maturities of 12 months or less. Such cash flow hedges 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, 2001, International Paper reclassified after-tax losses of $48 million from OCI. This amount represents the after-tax cash settlements on the maturing natural gas hedge contracts. Unrealized after-tax losses of $69 million were charged to OCI during the year ended December 31, 2001. After-tax 67 Notes to Consolidated Financial Statements losses of $21 million as of December 31, 2001 are expected to be reclassified into earnings in 2002. The net fair value of the swap contracts as of December 31, 2001 is a $29 million liability. 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, 2001, net gains included in the cumulative translation adjustment on derivative and debt instruments hedging foreign net investments amounted to $23 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. Some of these hedges have been designated as fair value hedges and others have not. As of December 31, 2001, the fair value of these derivatives not designated as hedges was immaterial. 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, 2001. For the year ended December 31, 2001, net credits totaling $2 million after taxes and minority interest were recorded in OCI, net of reclassifications to earnings of $2 million expense after taxes and minority interest. As of December 31, 2001, gains of $3 million after taxes and minority interest are expected to be reclassified to earnings in 2002. Other 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 non-functional 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, 2001 and 2000 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). 68 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). 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 2001 2000 1999 - -------------------------------------------------------------------------- Service cost $(101) $(98) $(101) Interest cost (459) (397) (303) Expected return on plan assets 727 615 469 Amortization of net transition obligation - (2) - Actuarial loss (6) (5) (6) Amortization of prior service cost (20) (19) (16) Curtailment gain (loss) - (2) 6 Settlement gain - 9 - ----- ---- ----- Net periodic pension income $ 141(a) $101 $ 49 ===== ==== =====
(a) Excludes $75 million of expense for curtailment and settlement charges relating to divestitures that were recorded in Restructuring and other charges and Net losses on sales and impairments of businesses held for sale in the consolidated statement of earnings. The increase in pension income in 2001 and 2000 was largely due to the inclusion of the expected return on the Champion plan assets that were included in the plan subsequent to the acquisition date. Pension income in 2002 is expected to decline by approximately $60 million with a decrease in the expected long-term return on plan assets from 10% to 9.25%. The following table presents the changes in benefit obligation and plan assets for 2001 and 2000 and the plans' funded status and amounts recognized in the consolidated balance sheet as of December 31, 2001 and 2000. Benefit obligations during 2001 increased by $100 million, principally as a result of service costs, and interest on the discounted obligation, less benefits paid and the impact of divestitures. Plan assets decreased $750 million principally as a result of benefits paid and a negative return on plan assets.
- -------------------------------------------------------------------- In millions 2001 2000 - -------------------------------------------------------------------- Change in projected benefit obligation: Benefit obligation, January 1 $6,319 $4,323 Service cost 101 98 Interest cost 459 397 Actuarial loss 47 171 Benefits paid (432) (451) Acquisitions(a) 23 1,796 Divestitures(b) (90) (42) Restructuring(c) (33) - Curtailment gain - (2) Special termination benefits(d) 4 10 Plan amendments 21 19 ------ ------ Benefit obligation, December 31(e) $6,419 $6,319 ====== ====== Change in plan assets: Fair value of plan assets, January 1 $7,253 $5,612 Actual return on plan assets (229) (106) Company and participants' contributions 14 83 Benefits paid (432) (451) Acquisitions 2 2,144 Divestitures(b) (106) (29) ------ ------ Fair value of plan assets, December 31 $6,502 $7,253 ====== ====== Funded status(e) $ 83 $ 934 Unrecognized actuarial loss(b) 1,228 292 Unamortized prior service cost(b,c) 144 170 ------ ------ Prepaid benefit cost $1,455 $1,396 ====== ====== Amounts recognized in the consolidated balance sheet consist of: Prepaid benefit cost $1,580 $1,515 Accrued benefit liability (182) (168) Intangible asset 1 3 Minimum pension liability adjustment included in accumulated other comprehensive income 56 46 ------ ------ Net amount recognized $1,455 $1,396 ====== ======
(a) Includes $23.3 million and $76.5 million for 2001 and 2000, respectively, in 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 acquisition of Champion. Also included was a curtailment gain of $1.1 million and $17.9 million for 2001 and 2000, respectively. (b) Included in Net losses on sales and impairments of businesses held for sale in the consolidated statement of earnings is $14.5 million in curtailment losses and $44.6 million in settlement losses in 2001 related to the divestitures of Masonite, Petroleum and Minerals, Flexible Packaging and other smaller businesses. (c) Included in Restructuring and other charges for 2001 was $11.8 million in curtailment losses relating to a cost reduction program and facility rationalizations. 69 Notes to Consolidated Financial Statements (d) Included in Restructuring and other charges for 2001 was $3.6 million for special termination benefits attributable to the elimination of approximately 284 positions in connection with a facility rationalization program. Included in Restructuring and other charges for 2000 was $10 million for special termination benefits attributable to the elimination of approximately 268 positions in connection with a facility rationalization program. (e) Includes nonqualified unfunded plans with projected benefit obligations of $221 million and $212 million at December 31, 2001 and 2000, respectively. Plan assets are held in master trust accounts and include investments in International Paper common stock in the amounts of $219 million (3%) and $467 million (6%) at December 31, 2001 and 2000, respectively. Weighted average assumptions as of December 31, 2001, 2000 and 1999 were as follows:
- ------------------------------------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------- Discount rate 7.25% 7.50% 7.75% Expected long-term return on plan assets 10.00% 10.00% 10.00% Rate of compensation increase 4.50% 4.75% 5.00%
Note: In determining net periodic pension income for the year 2002, an expected long-term return on plan assets of 9.25% will be used. The following illustrates the effect on pension income for 2002 of a 25 basis point decrease in these assumptions:
- ------------------------------------------------------------------------------- In millions (Income)/Expense 2002 - ------------------------------------------------------------------------------- Discount rate $ 4 Expected long-term return on plan assets 19 Rate of compensation increase (4)
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 $19 million for 2001, $24 million for 2000 and $16 million for 1999. The non-U.S. plans' projected benefit obligation in excess of plan assets at fair market value at December 31, 2001 and 2000 was $43 million and $87 million, respectively. Plan assets are composed principally of common stocks and fixed income securities. The increase in the funded status for the non-U.S. plans results from the sale of Zanders, which had an unfunded plan. Related to this sale is a settlement and curtailment gain of $46 million included in Net losses on sales and impairments of investments and businesses held for sale in 2000. OTHER PLANS International Paper sponsors several defined contribution plans to provide substantially all U.S. salaried and certain hourly employees of International Paper an opportunity to accumulate personal funds for their retirement. Contributions may be made on a before-tax basis to substantially all of these plans. As determined by the provisions of each plan, International Paper matches the employees' basic voluntary contributions. Such matching contributions to the plans were approximately $78 million, $65 million and $67 million for the plan years ending in 2001, 2000 and 1999, respectively. The net assets of these plans approximated $3.7 billion as of the 2001 plan year-end including approximately $979 million (26%) 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 2001, 2000 and 1999 were as follows:
- ------------------------------------------------------------------------------- In millions 2001 2000 1999 - ------------------------------------------------------------------------------- Service cost $10 $10 $11 Interest cost 56 45 30 Actuarial loss - - 2 Amortization of prior service cost (10) (6) (12) Curtailment gain - (2) - Settlement gain - (2) - --- --- --- Net postretirement benefit cost $56 $45 $31 === === ===
70 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 2001 and 2000.
- ----------------------------------------------------------------------------- In millions 2001 2000 - ----------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation, January 1 $ 822 $ 446 Service cost 10 10 Interest cost 56 45 Participants' contributions 26 21 Actuarial (gain) loss 88 (5) Benefits paid (102) (73) Plan amendments (43) (8) Acquisitions(a) 5 385 Divestitures(b) (6) (1) Curtailment gain(c) (5) - Special termination benefits(d) 5 2 ----- ----- Benefit obligation, December 31 $ 856 $ 822 ===== ===== Change in plan assets: Fair value of plan assets, January 1 $ - $ - Company contributions 76 52 Participants' contributions 26 21 Benefits paid (102) (73) ----- ----- Fair value of plan assets, December 31 $ - $ - ===== ===== Funded status $(856) $(822) Unamortized prior service cost (72) (45) Unrecognized actuarial (gain) loss 84 (2) ----- ----- Accrued benefit cost $(844) $(869) ===== =====
(a) Includes $4.0 million and $9.5 million in 2001 and 2000, respectively, 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. Also included in 2000 was a curtailment gain of $2.1 million. (b) Included in Net losses on sales and impairments of businesses held for sale in 2001 were curtailment charges of $5.6 million related to the sales of Masonite and Flexible Packaging. (c) Includes $3.4 million of curtailment gains related to the elimination of 4,311 positions in connection with a cost reduction program and facility rationalizations. (d) Includes $5 million in 2001 and $2 million in 2000 for special termination benefits attributable to the elimination of approximately 515 positions in connection with a facility rationalization program. 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, 2001 by $53 million. A 1% decrease in the annual trend rate would have decreased the accumulated postretirement benefit obligation at December 31, 2001 by $49 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, 2001 was 7.25% compared with 7.50% at December 31, 2000. In addition to the U.S. plan, certain Canadian employees are eligible for retiree health care and life insurance. Costs and obligations for this plan were not significant. 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. The LTICP allows stock appreciation rights to be awarded. Although none were outstanding at December 31, 2000, 14,961 awards were issued in 2001 to employees of a subsidiary. We also have other performance-based restricted share/unit programs available to senior executives and directors. We apply the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our plans and the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the Stock Option Program. STOCK OPTION PROGRAM 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. 71 Notes to Consolidated Financial Statements For purposes of the pro forma disclosure, 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 2001, 2000 and 1999, respectively:
- -------------------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- Initial Options (a) Risk-Free Interest Rate 3.91% 6.17% 4.78% Price Volatility 41.02% 45.00% 33.00% Dividend Yield 2.61% 2.50% 2.08% Expected Term in Years 3.00 2.50(c) 4.39 Replacement Options(b) Risk-Free Interest Rate 4.40% 6.45% 5.47% Price Volatility 39.51% 45.00% 33.00% Dividend Yield 2.64% 2.50% 2.05% Expected Term in Years 2.10 2.10 2.09
(a) The average fair market values of initial option grants during 2001, 2000 and 1999 were $9.45, $11.86 and $13.14, respectively. (b) The average fair market values of replacement option grants during 2001, 2000 and 1999 were $9.02, $13.44 and $10.14, 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, 2001, 2000 and 1999 and changes during the years ended on those dates is presented below:
- -------------------------------------------------------------------------------- Weighted Average Exercise Options (a,b) Price - -------------------------------------------------------------------------------- Outstanding at January 1, 1999 18,685,906 $ 39.39 Granted 4,521,627 49.76 Exercised (6,531,818) 36.56 Forfeited (522,214) 42.91 Expired (354,566) 51.41 ---------- ----- Outstanding at December 31, 1999 15,798,935 43.14 Granted 9,527,442 43.29 Exercised (1,052,107) 41.84 Forfeited (233,724) 51.96 Expired (177,568) 49.97 ---------- ----- Outstanding at December 31, 2000 23,862,978 43.12 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 ==========
(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 does include options outstanding under two acquired company plans under which options may no longer be granted. The following table summarizes information about stock options outstanding at December 31, 2001:
- -------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------- -------------------- Weighted Weighted Weighted Options Average Average Options Average Range of Outstanding Remaining Exercise Outstanding Exercise Exercise Prices as of 12/31/01 Life Price as of 12/31/01 Price - --------------------------------------------------------------------------------------------- $29.31-$34.50 7,196,408 6.9 $30.37 2,612,573 $32.17 $35.00-$35.05 6,463,564 9.5 $35.02 1,126 $35.04 $36.00-$42.94 5,902,705 5.1 $40.86 5,824,261 $40.90 $43.00-$58.06 5,598,138 3.9 $50.32 5,598,138 $50.32 $58.05-$69.63 3,949,310 7.5 $59.34 531,510 $59.28 ---------- --- ------ ---------- ------ 29,110,125 6.6 $41.28 14,567,608 $43.58 ========== ==========
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 covering a three-year period were granted. The following summarizes the activity of all performance-based programs for the three years ending December 31, 2001:
- ------------------------------------------------------------------------------ Shares - ------------------------------------------------------------------------------ Outstanding at January 1, 1999 1,284,690 Granted 95,035 Issued (227,553) Forfeited (a) (1,067,153) ---------- Outstanding at December 31, 1999 85,019 Granted - Issued (26,537) Forfeited (58,482) ---------- Outstanding at December 31, 2000 - Granted 1,283,100 Issued (9,243) Forfeited (59,757) ---------- Outstanding at December 31, 2001 1,214,100 ==========
(a) Includes 974,734 shares cancelled under the Restricted Performance Share Program in 1999. 72 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, 2001:
- ------------------------------------------------------------------------------- Shares - ------------------------------------------------------------------------------- Outstanding at January 1, 1999 593,758 Granted 71,900 Issued (65,412) Forfeited(a) (89,390) -------- Outstanding at December 31, 1999 510,856 Granted 76,165 Issued (18,303) Forfeited(a) (112,000) -------- Outstanding at December 31, 2000 456,718 Granted 22,350 Issued (70,970) Forfeited(a) (64,000) -------- Outstanding at December 31, 2001 344,098 ========
(a) Also includes restricted shares cancelled when tandem stock options were awarded. 200,000, 560,000 and 440,000 tandem options were awarded in 2001, 2000 and 1999, respectively. At December 31, 2001 and 2000, a total of 17.6 million and 22.5 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 2001 or 2000. A total of 3.0 million shares and 4.2 million shares were available for the granting of restricted stock as of December 31, 2001 and 2000, respectively. The compensation cost charged to earnings for all the incentive plans was $38 million, $28 million and $3 million for 2001, 2000 and 1999, respectively. Earnings in 1999 included income of $20 million recognized upon cancellation of a majority of the awards under the Restricted Performance Share Program in effect at the beginning of 1999. 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 2001 2000 1999 - ------------------------------------------------------------------------- Net Earnings (Loss) As reported $(1,204) $ 142 $ 183 Pro forma (1,257) 104 152 Earnings (Loss) Per Common Share As reported $ (2.50) $0.32 $0.44 Pro forma (2.60) 0.23 0.37 Earnings (Loss) Per Common Share - assuming dilution As reported $ (2.50) $0.32 $0.44 Pro forma (2.60) 0.23 0.37
The effect on 2001, 2000 and 1999 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 February 2002, International Paper announced that it was discontinuing efforts to divest the Chemical Cellulose Pulp business and planned to operate it as an ongoing business in 2002. Accordingly, asset and liability balances for the business have been removed from Assets (Liabilities) of businesses held for sale and are included in the respective balance sheet captions in the accompanying consolidated balance sheet. Operating results for this business, which are not material to International Paper's results of operations, are included in Other Businesses in the accompanying Financial Information by Industry Segment on pages 38 and 39. Also in February 2002, International Paper announced that it had begun negotiations for the possible sale of its oriented strand board operations. Operating results for this business are included with other Wood Products businesses in the Forest Products segment in the accompanying Financial Information by Industry Segment on pages 38 and 39. 73 Six-Year Financial Summary
- ------------------------------------------------------------------------------------------------------------------------------- Dollar amounts in millions, except per share amounts and stock prices 2001 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Results of Operations Net sales $ 26,363 $ 28,180 $24,573 $23,979 $ 24,556 $ 24,182 Costs and expenses, excluding interest 26,716 26,675 23,620 23,039 23,976 23,193 Earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of accounting change (1,265)(a) 723 (c) 448 (e) 429(g) 143 (h) 939(i) Minority interest expense, net of taxes 147 (a) 238 (c) 163 (e) 87(g) 140 (h) 180(i) Extraordinary items (46)(b) (226)(d) (16)(f) - - - Cumulative effect of accounting change (16) - - - - - Net earnings (loss) (1,204)(a,b) 142 (c,d) 183 (e,f) 247(g) (80)(h) 379(i) Earnings (loss) applicable to common shares (1,204)(a,b) 142 (c,d) 183 (e,f) 247(g) (80)(h) 379(i) -------- -------- ------- ------- -------- -------- Financial Position Working capital $ 2,938 $ 2,880 $ 2,859 $ 2,675 $ 1,476 $ 454 Plants, properties and equipment, net 14,461 16,132 14,381 15,320 15,707 16,570 Forestlands 4,197 5,966 2,921 3,093 3,273 3,637 Total assets 37,158 42,109 30,268 31,466 31,971 33,357 Long-term debt 12,457 12,648 7,520 7,697 8,521 7,943 Common shareholders' equity 10,291 12,034 10,304 10,738 10,647 11,349 -------- -------- ------- ------- -------- -------- Per Share of Common Stock - Assuming No Dilution(k) Earnings (loss) before extraordinary items and cumulative effect of accounting change $ (2.37) $ 0.82 $ 0.48 $ 0.60 $ (0.20) $0.95 Extraordinary items (0.10) (0.50) (0.04) - - - Cumulative effect of accounting change (0.03) - - - - - Net Earnings (loss) (2.50) 0.32 0.44 0.60 (0.20) 0.95 Cash dividends 1.00 1.00 1.01 1.05 1.05 1.05 Common shareholders' equity 21.25 24.85 24.85 25.99 26.10 27.95 -------- -------- ------- ------- -------- -------- Common Stock Prices(k) High $ 43.25 $ 60.00 $ 59.50 $ 55.25 $ 61.00 $ 44.63 Low 30.70 26.31 39.50 35.50 38.63 35.63 Year-end 40.35 40.81 56.44 44.81 43.13 40.50 -------- -------- ------- ------- -------- -------- Financial Ratios Current ratio 1.6 1.4 1.7 1.6 1.3 1.1 Total debt to capital ratio 50.1 49.3 38.1 39.0 46.1 45.6 Return on equity (10.6)(a,b,j) 1.2 (c,d,j) 1.7 (e,f,j) 2.3(g,j) (0.7)(h,j) 3.4(i,j) Return on investment before extraordinary items and cumulative effect of accounting change (0.7)(a,b,j) 3.3 (c,d,j) 2.6 (e,f,j) 2.5(g,j) 1.5 (h,j) 3.3(i,j) -------- -------- ------- ------- -------- -------- Capital Expenditures $ 1,049 $ 1,352 $ 1,139 $ 1,322 $ 1,448 $ 1,780 -------- -------- ------- ------- -------- -------- Number of Employees 100,100 112,900 98,700 98,300 100,900 106,300 ======== ======== ======= ======= ======== ========
74 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, income taxes, minority interest, extraordinary items and cumulative effect of accounting change" 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 net pre-tax charge of $629 million ($587 million after taxes) related to dispositions and asset impairments of businesses held for sale, a $1,117 million 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 Masonite legal reserves, 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. (b) 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. (c) Includes a $54 million pre-tax charge ($33 million after taxes) for merger-related expenses, a $125 million pre-tax charge ($80 million after taxes) for additional Masonite legal reserves, an $824 million charge before taxes and minority interest ($509 million after taxes and minority interest) for asset shutdowns and a $34 million pre-tax credit ($21 million after taxes) for the reversal of reserves no longer required. (d) Includes an extraordinary gain of $385 million before taxes and minority interest ($134 million after taxes and minority interest) on the sale of International Paper's investment in Scitex and Carter Holt Harvey's sale of its share of COPEC, an extraordinary loss of $460 million before taxes ($310 million after taxes) related to the impairment of the Zanders and Masonite businesses, 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, the Chemical Cellulose Pulp and the Fine Papers businesses. (e) 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 that were no longer required. (f) 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. (g) Includes a $20 million pre-tax gain ($12 million after taxes) on the sale of the Veratec nonwovens business, an $83 million pre-tax credit ($50 million after taxes) from the reversals of previously established reserves that were no longer required, a $111 million pre-tax charge ($68 million after taxes) for the impairment of oil and gas reserves due to low prices, a $145 million pre-tax restructuring and asset impairment charge ($82 million after taxes and minority interest) 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. 75 Six-Year Financial Summary (h) 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 pre-tax gain of $170 million ($97 million after taxes and minority interest) from the redemption of certain retained West Coast partnership interests and the release of a related debt guaranty. (i) Includes a pre-tax restructuring and asset impairment charge of $554 million ($386 million after taxes), a $592 million pre-tax gain on the sale of a West Coast partnership interest ($336 million after taxes and minority interest), a $155 million pre-tax charge ($99 million after taxes) for the write-down of the investment in Scitex and a $10 million pre-tax charge ($6 million after taxes) for International Paper's share of a restructuring charge announced by Scitex in November 1996. (j) Return on equity was 1.8% and return on investment was 2.9% in 2001 before special and extraordinary items and cumulative effect of 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. Return on equity was 4.7% and return on investment was 3.8% in 1996 before special items. (k) All per share amounts are computed before the effects of dilutive securities. 76 Interim Financial Results (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------ In millions, except per share amounts and stock prices 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year - ------------------------------------------------------------------------------------------------------------------------------------ 2001 Net Sales $6,894 $6,686 $6,529 $6,254 $26,363 Gross Margin(a) 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(b) (432)(d) (287)(e) (633)(f) (1,265)(b,d-f) Net Earnings (Loss) (44)(b,c) (313)(d) (275)(e) (572)(f) (1,204)(b-f) Per Share of Common Stock Earnings (Loss) $(0.09) $(0.65) $(0.57) $(1.19) $ (2.50) Earnings (Loss) - Assuming Dilution (0.09) (0.65) (0.57) (1.19) (2.50) 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 2000 Net Sales $6,371 $6,780 $7,801 $7,228 $28,180 Gross Margin(a) 1,850 2,044 2,253 1,951 8,098 Earnings (Loss) Before Income Taxes, Minority Interest and Extraordinary Items 435(g) 480(i) 311(j) (503)(m) 723(g,i,j,m) Net Earnings (Loss) 378(g,h) 270(i) (135)(j,k) (371)(m,n) 142(g-k,m,n) Per Share of Common Stock Earnings (Loss) $ 0.91 $ 0.64 $(0.38)(l) $(0.85)(o) $ 0.32 Earnings (Loss) - Assuming Dilution 0.91 0.64 (0.38)(l) (0.85)(o) 0.32 Dividends 0.25 0.25 0.25 0.25 1.00 Common Stock Prices High $60.00 $45.94 $36.81 $43.00 $ 60.00 Low 32.88 29.56 27.00 26.31 26.31
77 Interim Financial Results (Unaudited) FOOTNOTES TO INTERIM FINANCIAL RESULTS ================================================================================ (a) Gross margin represents net sales less cost of products sold. (b) Includes $10 million of pre-tax charges ($6 million after taxes) for Champion merger integration costs. (c) 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. (d) 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 shutdowns, 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. (e) Includes a net gain of $47 million before taxes (net loss of $2 million after taxes) related to 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. (f) 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. (g) Includes an $8 million pre-tax charge ($5 million after taxes) for Union Camp merger integration costs. (h) Includes an extraordinary gain of $385 million before taxes and minority interest ($134 million after taxes and minority interest) on the sale of International Paper's investment in Scitex and Carter Holt Harvey's sale of its share of COPEC. (i) Includes a $4 million pre-tax charge ($3 million after taxes) for merger-related costs and a $71 million pre-tax charge ($42 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions. (j) Includes a $15 million pre-tax charge ($9 million after taxes) for merger-related expenses, a $6 million pre-tax credit ($4 million after taxes) for the reversal of merger-related termination benefits reserves no longer required, and a $125 million pre-tax charge ($80 million after taxes) for additional Masonite legal reserves. (k) Includes an extraordinary loss of $460 million before taxes ($310 million after taxes) related to the impairment of Zanders and Masonite. (l) In order for the 2000 third-quarter earnings per share to add up to the year-to-date earnings per share, a loss of $.38 per share is required. On the basis of the weighted-average number of shares outstanding for the third quarter, the loss per share was $.28. The difference between the two calculations relates to the 68.7 million shares that were issued in connection with the Champion acquisition. (m) Includes a $27 million pre-tax charge ($16 million after taxes) for Union Camp and Champion merger-related items, a charge of $753 million before taxes and minority interest ($467 million after taxes and minority interest) for shutdown and restructuring reserves, and a $28 million pre-tax credit ($17 million after taxes) for the reversal of reserves no longer required. (n) Includes an extraordinary pre-tax gain of $368 million ($183 million after taxes) related to the sale of Bush Boake Allen. Also included is an extraordinary loss of $5 million before taxes and minority interest ($2 million after taxes and minority interest) related to Carter Holt Harvey's sale of its Plastics division, and an extraordinary pre-tax charge of $373 million ($231 million after taxes) related to impairments of the Argentine investments, the Chemical Cellulose Pulp and the Fine Papers businesses. (o) In order for the year-to-date earnings per share to equal the sum of the quarters, a loss of $.85 is required in the fourth quarter. On the basis of the weighted-average shares outstanding for the fourth quarter, the loss per share was $.77. The difference between the two calculations relates to the 68.7 million shares that were issued in connection with the Champion acquisition. 78 Shareholder Information Corporate Headquarters International Paper Company 400 Atlantic Street Stamford, CT 06921 1-203-541-8000 Annual Meeting The next annual meeting of shareholders will be held at 8:30 a.m., Tuesday, May 7, 2002 at the Manhattanville College, Purchase, New York. Transfer Agent For services regarding your account such as change of address, lost certificates or dividend checks, change in registered ownership, or the dividend reinvestment program, write or call: Mellon Investor Services, LLC Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 1-800-678-8715 Stock Exchange Listings Common shares (symbol: IP) are traded on the following exchanges: New York, Montreal, Swiss and Amsterdam. International Paper options are traded on the Chicago Board of Options Exchange. Direct Purchase Plan Under our plan you may invest all or a portion of your dividends, and you may purchase up to $20,000 of additional shares each year. International Paper pays most of the brokerage commissions and fees. You may also deposit your certificates with the transfer agent for safekeeping. For a copy of the plan prospectus, call or write to the corporate secretary at corporate headquarters. Independent Public Accountants Arthur Andersen LLP 1345 Avenue of the Americas New York, NY 10105 Reports and Publications Additional copies of this annual report, SEC filings and other publications are available by calling 1-800-332-8146 or writing to the investor relations department at corporate headquarters. Copies of our most recent environment, health and safety report are available by calling 901-763-7311. Additional information is also available on our Web site, http://www.internationalpaper.com Investor Relations Investors desiring further information about International Paper should contact the investor relations department at corporate headquarters, 203-541-8625. Credits Papers used in this annual report: Cover: Beckett Expression, 100 lb. Cover, Snow. Pages 1 - 16: Beckett Expression, 70 lb. Text, Snow. Pages 17 - 80: Via, Neutrals, Natural, Vellum finish, 60 lb., Text. Design: Joseph Rattan Design, Dallas, Texas Photography: Jack Kenner, Memphis, Tenn. Illustration: Craig Fazier, Mill Valley, Calif. Printing: Sandy Alexander, Clifton, N.J. Products and brand designations appearing in italics are trademarks of International Paper or a related company. (C)2002 International Paper Company. All rights reserved. 79 Senior Leadership John T. Dillon Chairman and Chief Executive Officer Robert M. Amen Executive Vice President John V. Faraci Executive Vice President & Chief Financial Officer James P. Melican Executive Vice President David W. Oskin Executive Vice President Marianne M. Parrs Executive Vice President - ----------------------------------- Michael J. Balduino Senior Vice President Sales and Marketing Jerome N. Carter Senior Vice President Human Resources Thomas E. Costello Senior Vice President Distribution Thomas E. Gestrich Senior Vice President Consumer Packaging Charles H. Greiner Senior Vice President Printing & Communications Papers Paul Herbert President IP Europe Newland A. Lesko Senior Vice President Industrial Packaging William B. Lytton Senior Vice President & General Counsel George A. O'Brien Senior Vice President Forest Resources & Wood Products Richard B. Phillips Senior Vice President Technology LH Puckett Senior Vice President Coated and SC Papers J. Chris Scalet Senior Vice President and Chief Information Officer W. Dennis Thomas Senior Vice President Public Affairs and Communications - ----------------------------------- David A. Bailey Vice President European Papers John N. Balboni Vice President e-Business H. Wayne Brafford Vice President Converting, Specialty & Pulp Dennis J. Colley Vice President Industrial Packaging William P. Crawford Vice President Logistics Hans-Peter Daroczi Vice President International Container Arthur Douville Vice President xpedx C. Cato Ealy Vice President Corporate Development Odair Garcia President & Executive Director IP Brazil Jeffrey A. Hearn President & Chief Executive Officer Weldwood of Canada Limited Evans A. Heath Vice President Global Supply Chain Barry Hentz Vice President and General Manager Foodservice Business William P. Hoel Vice President Panels & Engineered Wood Newell E. Holt Vice President Bleached Board Robert M. Hunkeler Vice President Investments Ernest S. James Vice President Corporate Sales Thomas C. Jorling Vice President Environmental Affairs Thomas Kadien Vice President Commercial Printing & Imaging Papers Paul Karre Vice President Human Resources Timothy P. Keneally Vice President Industrial Packaging Walter Klein Vice President Corporate Planning Austin Lance Vice President Coated and SC Papers Operations Peter F. Lee Vice President Research & Development Andrew R. Lessin Vice President & Chief Accounting Officer Arthur W. McGowen Vice President Lumber Products Gerald C. Marterer Vice President Industrial Papers Matthew Mitchell Corporate Auditor Jean-Phillippe Montel Chairman IP S.A., France John L. Moorhead Vice President Home & Office Papers J. Scott Murchison Vice President Beverage Packaging Maximo Pacheco President International Paper Latin America Deborah Parr Vice President People Development Carol L. Roberts Vice President Industrial Packaging Ethel A. Scully Vice President Corporate Marketing Marc Shore President Shorewood Packaging Barbara L. Smithers Vice President and Corporate Secretary Peter M. Springford President International Paper Asia Larry J. Stowell Vice President Arizona Chemical Robert A. Taylor Vice President Manufacturing Systems Printing & Communications Papers Tobin J. Treichel Vice President Finance Carol S. Tutundgy Vice President Investor Relations Lyn M. Withey Vice President Public Affairs 80 DIRECTORS John T. Dillon Chairman and Chief Executive Officer International Paper Robert J. Eaton Retired Chairman of the Board of Management DaimlerChrysler AG Samir G. Gibara Chairman and Chief Executive Officer The Goodyear Tire & Rubber Company James A. Henderson Retired Chairman and Chief Executive Officer Cummins Engine Company John R. Kennedy Retired President and Chief Executive Officer Federal Paper Board Company Robert D. Kennedy Retired Chairman and Chief Executive Officer Union Carbide Corporation W. Craig McClelland Retired Chairman and Chief Executive Officer Union Camp Corporation Donald F. McHenry Distinguished Professor of Diplomacy Georgetown University Patrick F. Noonan Chairman and Chief Executive Officer The Conservation Fund Jane C. Pfeiffer Management Consultant Jeremiah J. Sheehan Retired Chairman and Chief Executive Officer Reynolds Metals Company Charles R. Shoemate Retired Chairman, President and Chief Executive Officer Bestfoods BOARD COMMITTEES Audit and Finance Committee Charles R. Shoemate, Chair Robert J. Eaton Samir G. Gibara James A. Henderson Robert D. Kennedy Management Development and Compensation Committee Robert J. Eaton, Chair James A. Henderson Robert D. Kennedy Donald F. McHenry Charles R. Shoemate Governance Committee Donald F. McHenry, Chair Samir G. Gibara John R. Kennedy Patrick F. Noonan Jane C. Pfeiffer Jeremiah J. Sheehan Public Policy and Environment Committee Patrick F. Noonan, Chair John R. Kennedy W. Craig McClelland Jane C. Pfeiffer Jeremiah J. Sheehan Executive Committee John T. Dillon, Chair Donald F. McHenry Charles R. Shoemate Offices Corporate Headquarters 400 Atlantic Street, Stamford, CT 06921 1-203-541-8000 Operational Headquarters 6400 Poplar Avenue, Memphis, TN 38197 1-901-763-6000 1-901-419-9000 Belgian Coordination Center International Paper Chaussee de la Hulpe, 166, 1170 Brussels, Belgium 32-2-774-1211 International Paper Asia 1201-1203 Central Plaza 18 Harbour Road, Wanchai, Hong Kong 852-2824-3000 International Paper Latin America Miraflores 222, Piso 13 Santiago, Chile 56-2638-3585 Forest Products 1201 West Lathrop Avenue, Savannah, GA 31415 1-912-238-6000 xpedx-Distribution 50 East River Center Boulevard, Suite 700, Covington, KY 41011 1-859-655-2000 Ace Packaging 7986 N. Telegraph Road, Newport, MI 48166 1-734-586-9800 Shorewood Packaging 277 Park Avenue, 30th Fl, New York, NY 10172 1-212-508-5693 Weldwood of Canada Limited 1055 West Hastings Street, Vancouver, British Columbia 1-604-687-7366 Carter Holt Harvey 640 Great South Road, Manukau City, Auckland, New Zealand 64-9-262-6000 www.internationalpaper.com (for more information, see the investor relations page) [LOGO] International Paper 400 Atlantic Street Stamford, CT 06921 203-541-8000 www.internationalpaper.com Equal Opportunity Employer (M/F/D/V) EX-21 13 dex21.txt LIST OF SUBSIDIARIES OF REGISTRANT Exhibit 21 INTERNATIONAL PAPER COMPANY SUBSIDIARIES AS OF DECEMBER 31, 2001 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, 2001.
State or Jurisdiction of U.S. Subsidiaries Incorporation - ----------------- ------------- 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 New Zealand Weldwood of Canada Limited Canada International Paper Do Brasil LTDA Brazil
EX-23.1 14 dex231.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 12, 2002, included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-11117, 33-32527, 33-41374, 33-50438, 33-51447, 33-61335, 33-62283, 333-01667, 333-02137, 333-24869, 333-47583, 333-62661, 333-75235, 333-85051, 333-48434, 333-37390, 333-00843, 333-85133 and 333-69082. /S/ ARTHUR ANDERSEN LLP -------------------------------------- ARTHUR ANDERSEN LLP New York, N.Y. March 13, 2002 EX-24 15 dex24.txt POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY Know all Men by these Presents that the undersigned hereby constitutes and appoints BARBARA L. SMITHERS, WILLIAM B. LYTTON 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 12th day of March, 2002, at Stamford, Connecticut. NAME TITLE - ---- ----- /s/ JOHN T. DILLON - ---------------------------- John T. Dillon Director and Chairman of the Board (Chief Executive Officer) /s/ ROBERT J. EATON - ---------------------------- Robert J. Eaton Director /s/ SAMIR G. GIBARA - ----------------------------- Samir G. Gibara Director /s/ JAMES A. HENDERSON - ----------------------------- James A. Henderson Director Exhibit 24 NAME TITLE - ---- ----- /s/ JOHN R. KENNEDY - --------------------------- John R. Kennedy Director /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/ JEREMIAH J. SHEEHAN - --------------------------- Jeremiah J. Sheehan Director /s/ CHARLES R. SHOEMATE - --------------------------- Charles R. Shoemate Director -----END PRIVACY-ENHANCED MESSAGE-----