<PAGE>
INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS SUBJECT TO
COMPLETION OR AMENDMENT. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE>
Filed to Rule 424(b)(3)
Registration No. 333-62661
PROSPECTUS SUPPLEMENT (SUBJECT TO COMPLETION DATED SEPTEMBER 10, 1998)
(TO PROSPECTUS DATED SEPTEMBER 10, 1998)
$300,000,000
INTERNATIONAL PAPER CAPITAL TRUST III
% CAPITAL SECURITIES
(LIQUIDATION AMOUNT $ PER CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, TO THE EXTENT DESCRIBED HEREIN, BY
[LOGO]
------------------------
THE % CAPITAL SECURITIES (THE "CAPITAL SECURITIES") OFFERED HEREBY WILL
REPRESENT UNDIVIDED BENEFICIAL OWNERSHIP INTERESTS IN THE ASSETS OF
INTERNATIONAL PAPER CAPITAL TRUST III, A STATUTORY BUSINESS TRUST CREATED UNDER
THE LAWS OF THE STATE OF DELAWARE (THE "ISSUER TRUST"). INTERNATIONAL PAPER
COMPANY, A NEW YORK CORPORATION ("INTERNATIONAL PAPER" OR THE "COMPANY"), WILL
INITIALLY BE THE OWNER, DIRECTLY OR INDIRECTLY, OF ALL THE BENEFICIAL INTERESTS
REPRESENTED BY COMMON SECURITIES OF THE ISSUER TRUST (THE "COMMON SECURITIES"
AND, TOGETHER WITH THE CAPITAL SECURITIES, THE "TRUST SECURITIES"). THE ISSUER
TRUST EXISTS FOR THE SOLE PURPOSE OF ISSUING THE TRUST SECURITIES AND INVESTING
THE PROCEEDS THEREOF IN % JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
DUE 2038 (THE "SUBORDINATED DEBENTURES," AND TOGETHER WITH THE TRUST SECURITIES,
THE "SECURITIES") TO BE ISSUED BY THE COMPANY. THE SUBORDINATED DEBENTURES WILL
MATURE ON SEPTEMBER , 2038 (SUCH DATE, AS IT MAY BE ADVANCED UNDER CERTAIN
CIRCUMSTANCES, AS HEREINAFTER DESCRIBED, THE "STATED MATURITY"), WHICH MAY BE
ADVANCED TO A DATE NOT EARLIER THAN SEPTEMBER , 2013.
(CONTINUED ON NEXT PAGE)
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN
INVESTMENT IN THE CAPITAL SECURITIES.
---------------------
APPLICATION WILL BE MADE TO LIST THE CAPITAL SECURITIES ON THE NEW YORK STOCK
EXCHANGE, INC. (THE "NYSE"). TRADING OF THE CAPITAL SECURITIES ON
THE NYSE IS EXPECTED TO COMMENCE WITHIN A 30-DAY PERIOD AFTER
THE INITIAL DELIVERY OF THE CAPITAL
SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND THE ISSUER
PUBLIC (1) COMMISSIONS (2) TRUST(3)(4)
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER CAPITAL SECURITY..................................... $25 (3) $
TOTAL (5)................................................ $300,000,000 (3) $
</TABLE>
- ------------------------------
(1) PLUS ACCUMULATED DISTRIBUTIONS IF ANY, FROM SEPTEMBER , 1998.
(2) THE COMPANY AND THE ISSUER TRUST HAVE EACH AGREED TO INDEMNIFY THE SEVERAL
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITERS" IN THIS PROSPECTUS
SUPPLEMENT.
(3) IN VIEW OF THE FACT THAT THE PROCEEDS OF THE SALE OF THE CAPITAL SECURITIES
WILL BE USED TO PURCHASE THE SUBORDINATED DEBENTURES, INTERNATIONAL PAPER
HAS AGREED TO PAY TO THE UNDERWRITERS, AS COMPENSATION FOR THEIR ARRANGING
THE INVESTMENT THEREIN OF SUCH PROCEEDS, $ PER CAPITAL SECURITY (OR
$ IN THE AGGREGATE). SEE "UNDERWRITERS" IN THIS PROSPECTUS
SUPPLEMENT.
(4) BEFORE DEDUCTING ESTIMATED EXPENSES OF $ PAYABLE BY THE COMPANY.
(5) THE ISSUER TRUST AND THE COMPANY HAVE GRANTED TO THE UNDERWRITERS AN OPTION,
EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN
AGGREGATE OF ADDITIONAL CAPITAL SECURITIES AT THE PRICE TO PUBLIC LESS
UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE SUCH OPTION IN FULL,
THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND
PROCEEDS TO THE ISSUER TRUST WILL BE $ , $ AND
$ , RESPECTIVELY. SEE "UNDERWRITERS".
------------------------------
THE CAPITAL SECURITIES ARE OFFERED SUBJECT TO PRIOR SALE, WHEN, AS AND IF
ISSUED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO APPROVAL OF CERTAIN
LEGAL MATTERS BY SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, COUNSEL FOR THE
UNDERWRITERS, AND TO CERTAIN OTHER CONDITIONS. IT IS EXPECTED THAT DELIVERY OF
THE CAPITAL SECURITIES WILL BE MADE IN BOOK-ENTRY FORM THROUGH THE BOOK-ENTRY
FACILITIES OF DTC ON OR ABOUT SEPTEMBER , 1998, AGAINST PAYMENT THEREFOR IN
IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES
INCORPORATED
SALOMON SMITH BARNEY
SEPTEMBER , 1998
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Capital Securities will have a preference under certain circumstances
with respect to cash distributions and amounts payable on liquidation,
redemption or otherwise over the Common Securities. See "Description of Capital
Securities--Subordination of Common Securities" in this Prospectus Supplement.
The Capital Securities will be represented by one or more global securities
in fully registered form, deposited with a custodian for and registered in the
name of a nominee of The Depository Trust Company (the "Depository" or "DTC").
Beneficial interests in such global Capital Securities will be shown on, and
transfers thereof will be effected only through, records maintained by DTC and
its participants. Except as described under "Description of Capital Securities"
in this Prospectus Supplement, Capital Securities in definitive form will not be
issued and owners of beneficial interests in the global Securities will not be
considered holders of the Capital Securities.
Holders of the Capital Securities will be entitled to receive cumulative
cash distributions accumulating from and including September , 1998 and
payable quarterly in arrears on March 1, June 1, September 1 and December 1 each
year (each, a "Payment Date"), commencing December 1, 1998, at the annual rate
of % of the liquidation amount of $25 per Capital Security ("Distributions").
The Company will have the right to defer payment of interest on the Subordinated
Debentures at any time or from time to time for a period not exceeding 20
consecutive quarterly periods with respect to each deferral period (each, an
"Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity or end on a day other than a Payment Date. No interest shall be
due and payable during any Extension Period, except at the end thereof. Upon the
termination of any Extension Period and the payment of all amounts then due, the
Company may elect to begin a new Extension Period subject to the requirements
described herein. If interest payments on the Subordinated Debentures are so
deferred, Distributions will also be deferred and the Company will not be
permitted, subject to certain exceptions described herein, to declare or pay any
cash distributions with respect to the Company's capital stock or with respect
to debt securities of the Company that rank pari passu in all respects with or
junior to the Subordinated Debentures. During an Extension Period, interest on
the Subordinated Debentures will continue to accrue (and the amount of
Distributions will accumulate) at the rate of % per annum, compounded
quarterly, and holders of Capital Securities will be required to accrue such
amounts as interest income for United States Federal income tax purposes. See
"Description of Subordinated Debentures--Option to Extend Interest Payment
Period" and "Certain United States Federal Income Tax Consequences--Interest
Income and Original Issue Discount," each in this Prospectus Supplement.
The Company will, through the Guarantee, the Declaration, the Subordinated
Debentures and the Subordinated Debt Indenture (each as defined herein), taken
together, fully, irrevocably and unconditionally guarantee all the Issuer
Trust's obligations under the Capital Securities as described below. See
"Relationship Among the Capital Securities, the Subordinated Debentures and the
Guarantee--Full and Unconditional Guarantee" in this Prospectus Supplement. The
Guarantee of the Company guarantees the payment of Distributions and payments on
liquidation or redemption of the Capital Securities, but in each case only to
the extent of funds held by the Issuer Trust, as described herein and in the
accompanying Prospectus (the "Guarantee"). See "Description of Guarantee" herein
and "Description of Trust Preferred Securities and Trust Guarantees" in the
accompanying Prospectus. If the Company does not make payments on the
Subordinated Debentures held by the Issuer Trust, the Issuer Trust will have
insufficient funds to pay Distributions on and other amounts payable under the
Capital Securities. In such event, a holder of Capital Securities may institute
a legal proceeding directly against the Company to enforce payment of such
Distributions to such holder. See "Description of Subordinated
Debentures--Enforcement of Certain Rights by Holders of Capital Securities" in
this Prospectus Supplement. The Guarantee does not cover payment of
Distributions when the Issuer Trust does not have sufficient funds to pay such
Distributions. The obligations of the Company under the Guarantee and the
Subordinated Debentures are subordinate and junior in right of payment to all
Senior Indebtedness (as defined herein) of the Company.
S-2
<PAGE>
As of June 30, 1998, there was approximately $8.8 billion of outstanding Senior
Indebtedness (as so defined) of the Company and its consolidated subsidiaries.
See "Capitalization" in this Prospectus Supplement.
The Capital Securities will be subject to mandatory redemption in whole, but
not in part, upon repayment of the Subordinated Debentures at Stated Maturity or
their earlier redemption. The Subordinated Debentures are redeemable prior to
the Stated Maturity at the option of the Company (i) on or after September ,
2003, in whole at any time or in part from time to time, and (ii) prior to
September , 2003, in whole (but not in part) at any time within 90 days
following the occurrence and continuation of a Tax Event or an Investment
Company Event (each as defined herein), in each case at a redemption price equal
to 100% of the principal amount of the Subordinated Debentures so redeemed plus
accrued and unpaid interest thereon to the date fixed for redemption. See
"Description of Subordinated Debentures-- Redemption" and "Description of
Capital Securities--Liquidation Distribution Upon Dissolution," each in this
Prospectus Supplement.
The holders of the outstanding Common Securities have the right at any time
to dissolve the Issuer Trust and, after satisfaction of liabilities to creditors
of the Issuer Trust as provided by applicable law, to cause the Subordinated
Debentures to be distributed to the holders of the Capital Securities and Common
Securities in liquidation of the Issuer Trust. See "Description of Capital
Securities--Liquidation Distribution Upon Dissolution" in this Prospectus
Supplement.
Application will be made to list the Capital Securities on the NYSE. If the
Subordinated Debentures are distributed to the holders of Capital Securities
upon the liquidation of the Issuer Trust, the Company will use all reasonable
efforts to list the Subordinated Debentures on the NYSE or such other securities
exchange or automated quotation system, if any, on which the Capital Securities
may then be listed or traded.
In the event of the dissolution of the Issuer Trust, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, the
holders of the Capital Securities will be entitled to receive a liquidation
amount of $25 per Capital Security plus accumulated and unpaid Distributions
thereon to the date of payment, subject to certain exceptions, which may be in
the form of a distribution of such amount in Subordinated Debentures. See
"Description of Capital Securities--Liquidation Distribution Upon Dissolution"
in this Prospectus Supplement.
The information in this Prospectus Supplement supplements, and should be
read in conjunction with, the information contained in the accompanying
Prospectus.
As used herein, (i) the "Subordinated Debt Indenture" means the Subordinated
Debt Indenture, as amended and supplemented from time to time, between the
Company and The Bank of New York, as trustee (the "Debt Securities Trustee"),
pursuant to which the Subordinated Debentures are issued, (ii) the "Declaration"
means the Amended and Restated Declaration of Trust relating to the Issuer
Trust, as amended and supplemented from time to time, among the Company, as
Depositor, The Bank of New York, as property trustee (the "Property Trustee"),
The Bank of New York (Delaware), as Delaware trustee (the "Delaware Trustee"),
three individuals, who are employees or officers of or who are affiliated with
the Company, selected by the holders of the Common Securities to act as regular
trustees with respect to the Issuer Trust (the "Regular Trustees")
(collectively, the "Issuer Trustees") and the holders, from time to time, of the
Trust Securities, (iii) the "Guarantee" means the Guarantee Agreement relating
to the Capital Securities, as amended and supplemented from time to time,
between the Company and The Bank of New York, as Guarantee trustee (the
"Guarantee Trustee"). Unless otherwise expressly stated, all information in this
Prospectus Supplement assumes that the over-allotment option granted to the
Underwriters is not exercised. See "Underwriters" in this Prospectus Supplement.
S-3
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITERS" IN THIS PROSPECTUS SUPPLEMENT.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE ISSUER TRUST OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the caption "Risk Factors" and
elsewhere in this Prospectus Supplement and under the caption "The Company" and
elsewhere in the accompanying Prospectus may constitute forward-looking
statements within the meaning of the Private Litigation Reform Act of 1995 and
as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. In addition to the
specific matters referred to herein, important factors which may cause actual
results to differ include: (i) overall demand and whether price increases for
various paper and packaging products can be realized in 1998; and (ii) whether
anticipated savings from restructuring, the business improvement program and
other initiatives are achieved.
S-4
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Risk Factors............................................................................................... S-6
International Paper Capital Trust III...................................................................... S-10
Recent Development......................................................................................... S-10
Capitalization............................................................................................. S-11
Accounting Treatment....................................................................................... S-11
Use of Proceeds............................................................................................ S-11
Selected Consolidated Financial Data....................................................................... S-12
Description of Capital Securities.......................................................................... S-13
Description of Subordinated Debentures..................................................................... S-23
Description of Guarantee................................................................................... S-30
Relationship Among the Capital Securities, the Subordinated Debentures and the Guarantee................... S-31
Certain United States Federal Income Tax Consequences...................................................... S-32
Certain ERISA Considerations............................................................................... S-35
Underwriters............................................................................................... S-36
Legal Matters.............................................................................................. S-38
Experts.................................................................................................... S-38
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information...................................................................................... 3
Incorporation of Certain Documents by Reference............................................................ 3
The Company................................................................................................ 4
Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends................................................................................................ 6
The IPC Trusts............................................................................................. 7
Use of Proceeds............................................................................................ 7
Description of Debt Securities............................................................................. 8
Description of Capital Stock............................................................................... 22
Description of Preferred Stock............................................................................. 23
Description of Depositary Shares........................................................................... 26
Description of Common Stock................................................................................ 28
Description of Warrants.................................................................................... 29
Limitations on Issuance of Bearer Securities............................................................... 30
Description of Trust Capital Securities and Trust Guarantees............................................... 32
Plan of Distribution....................................................................................... 35
Validity of Securities..................................................................................... 36
Experts.................................................................................................... 36
</TABLE>
S-5
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE CAPITAL SECURITIES SHOULD CAREFULLY REVIEW THE
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS AND SHOULD PARTICULARLY CONSIDER THE FOLLOWING MATTERS.
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE SUBORDINATED
DEBENTURES
The obligations of the Company under the Guarantee issued by the Company for
the benefit of the holders of Capital Securities and under the Subordinated
Debentures are subordinate and junior in right of payment to all Senior
Indebtedness (as defined herein). As of June 30, 1998, there was approximately
$8.8 billion of outstanding Senior Indebtedness (as so defined) of the Company
and its consolidated subsidiaries. None of the Subordinated Debt Indenture, the
Guarantee or the Declaration places any limitation on the amount of secured or
unsecured debt, including such Senior Indebtedness, that may be incurred by the
Company. See "Description of Guarantee--Status of the Guarantee" and
"Description of Subordinated Debentures--Subordination," each in this Prospectus
Supplement.
The ability of the Issuer Trust to pay amounts due on the Capital Securities
is solely dependent upon the Company's making payments on the Subordinated
Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES
So long as no Event of Default (as defined in the Subordinated Debt
Indenture and herein referred to as a "Debenture Event of Default") has occurred
and is continuing with respect to the Subordinated Debentures, the Company will
have the right to defer the payment of interest on the Subordinated Debentures
at any time or from time to time for a period not exceeding 20 consecutive
quarterly periods with respect to each Extension Period, provided that no
Extension Period may extend beyond the Stated Maturity of the Subordinated
Debentures or end on a day other than a Payment Date for the Subordinated
Debentures. See "Description of Subordinated Debentures--Debenture Events of
Default" in this Prospectus Supplement. As a consequence of any such deferral,
quarterly Distributions on the Capital Securities by the Issuer Trust will be
deferred during any such Extension Period. During any Extension Period, interest
on the Subordinated Debentures will continue to accrue and, as a result,
Distributions to which holders of the Capital Securities are entitled will
accumulate additional Distributions thereon at the rate of % per annum,
compounded quarterly from the most recent Payment Date on which Distributions
were paid, computed on the basis of a 360-day year of twelve 30-day months and
the actual days elapsed in a partial month in such period. Additional
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by four. The term "Distribution" as used herein
shall include any such additional Distributions. During any such Extension
Period, the Company is subject to certain restrictions. See "Description of
Subordinated Debentures--Certain Covenants" in this Prospectus Supplement. Prior
to the termination of any such Extension Period, the Company may further defer
the payment of interest, provided that no Extension Period may exceed 20
consecutive quarterly periods or extend beyond the Stated Maturity of the
Subordinated Debentures or end on a day other than a Payment Date for the
Subordinated Debentures.
Upon the termination of any Extension Period and the payment of all interest
then accrued and unpaid (together with interest thereon at the annual rate of
%, compounded quarterly) on the Subordinated Debentures, the Company may
elect to begin a new Extension Period subject to the above conditions. No
interest shall be due and payable during an Extension Period, except at the end
thereof. The Company must give the Issuer Trustees and the Debt Securities
Trustee notice of its election of an Extension Period at least 30 calendar days
prior to the date the Distributions on the Capital Securities would have been
payable but for the election to begin such Extension Period. The Property
Trustee will give notice of the Company's election to begin an Extension Period
to the holders of the Capital Securities. Subject to the foregoing, there is no
limitation on the number of times that the Company may elect to begin an
Extension Period. See "Description of Capital Securities--Distributions" and
"Description of
S-6
<PAGE>
Subordinated Debentures--Option to Extend Interest Payment Period," each in this
Prospectus Supplement.
Should an Extension Period occur, a holder of Capital Securities will be
required to accrue income (in the form of original issue discount) in respect of
its pro rata share of the Subordinated Debentures held by the Issuer Trust for
United States Federal income tax purposes. As a result, a holder of Capital
Securities will include such income in gross income for United States Federal
income tax purposes in advance of the receipt of cash, and will not receive the
cash related to such income from the Issuer Trust if the holder disposes of the
Capital Securities prior to the record date for the payment of Distributions.
See "Certain United States Federal Income Tax Consequences--Potential Extension
of Interest Payment Period and Original Issue Discount" and "--Sale of Capital
Securities" in this Prospectus Supplement.
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Capital Securities is likely to be
affected. A holder that disposes of its Capital Securities during an Extension
Period, therefore, might not receive the same return on its investment as a
holder that continues to hold its Capital Securities. In addition, as a result
of the existence of the Company's right to defer interest payments, the market
price of the Capital Securities (which represent undivided beneficial ownership
interests in the assets of the Issuer Trust) may be more volatile than the
market prices of other securities on which original issue discount or interest
accrues that are not subject to such deferrals.
TAX EVENT OR INVESTMENT COMPANY EVENT REDEMPTION
Upon the occurrence and continuation of a Tax Event or an Investment Company
Event (in each case, as defined herein), the Company will have the right to
redeem the Subordinated Debentures in whole, but not in part, at any time within
90 days following the occurrence and continuation of such Tax Event or
Investment Company Event and thereby cause a mandatory redemption of the Capital
Securities. If the Company redeems the Subordinated Debentures, it will thereby
cause a mandatory redemption of the Capital Securities. Any such redemption will
be at a Redemption Price equal to 100% of the Liquidation Amount (as defined
herein) of such Capital Securities plus accumulated and unpaid Distributions to
but excluding the date fixed for redemption. See "Description of Subordinated
Debentures--Redemption" and "Description of Capital Securities--Redemption" and
"--Liquidation Distribution Upon Dissolution," each in this Prospectus
Supplement.
Recently, the Internal Revenue Service asserted that the interest payable on
a security with terms that are similar to the terms of the Subordinated
Debentures (but with a longer maturity than the Subordinated Debentures) was not
deductible for United States Federal income tax purposes. The taxpayer in that
case has filed a petition in the United States Tax Court challenging the
Internal Revenue Service's position on this matter. Although the Internal
Revenue Service's assertion does not constitute a Tax Event, if this matter were
to be litigated and the Tax Court were to sustain the Internal Revenue Service's
position on this matter, such judicial decision could constitute a Tax Event
which could result in an early redemption of the Subordinated Debentures.
CONDITIONAL RIGHT TO ADVANCE MATURITY
If a Tax Event occurs, then the Company will have the right, upon notice to
the Debt Securities Trustee, prior to the dissolution of the Issuer Trust, to
advance the Stated Maturity of the Subordinated Debentures to the minimum extent
required in order to allow for the payments of interest in respect of the
Subordinated Debentures to continue to be tax deductible, but in no event shall
the resulting maturity of the Subordinated Debentures be less than 15 years from
the date of original issuance thereof. The Stated Maturity may be advanced only
if, in the written opinion of independent tax counsel to the Company experienced
in such matters, delivered to the Debt Securities Trustee, (a) after advancing
the Stated Maturity, interest paid on the Subordinated Debentures will be
deductible for United States Federal
S-7
<PAGE>
income tax purposes and (b) advancing the Stated Maturity will not result in a
taxable event to holders of the Capital Securities.
EXCHANGE OF CAPITAL SECURITIES FOR SUBORDINATED DEBENTURES
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the
Subordinated Debentures to be distributed to the holders of the Capital
Securities and Common Securities in liquidation of the Issuer Trust. See
"Description of Capital Securities--Liquidation Distribution Upon Dissolution"
in this Prospectus Supplement.
Under current United States Federal income tax law and interpretations and
assuming, as expected, that the Issuer Trust will not be taxable as a
corporation, a distribution of the Subordinated Debentures upon a liquidation of
the Issuer Trust will not be a taxable event to holders of the Capital
Securities. However, if a Tax Event were to occur that would cause the Issuer
Trust to be subject to United States Federal income tax with respect to income
received or accrued on the Subordinated Debentures, a distribution of the
Subordinated Debentures by the Issuer Trust would likely constitute a taxable
event to the holders of the Capital Securities. See "Certain United States
Federal Income Tax Consequences" in this Prospectus Supplement.
RIGHTS UNDER THE GUARANTEE
The Bank of New York will act as the trustee under the Guarantee and will
hold the Guarantee for the benefit of the holders of the Capital Securities. The
Bank of New York will also act as Debt Securities Trustee for the Subordinated
Debentures and as Property Trustee under the Declaration. The Bank of New York
(Delaware) will act as Delaware Trustee under the Declaration. The Guarantee
guarantees to the holders of the Capital Securities the following payments, to
the extent not paid by or on behalf of the Issuer Trust: (i) any accumulated and
unpaid Distributions required to be paid on the Capital Securities, to the
extent that the Issuer Trust has funds legally available therefor at such time;
(ii) the applicable Redemption Price (as defined herein) with respect to any
Capital Securities called for redemption, to the extent that the Issuer Trust
has funds on hand available therefor at such time; and (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Issuer Trust (unless
the Subordinated Debentures are distributed to holders of the Capital
Securities), the lesser of (a) the aggregate of the Liquidation Amount of all
outstanding Capital Securities and all accumulated and unpaid Distributions to
the date of payment, and (b) the amount of assets of the Issuer Trust remaining
available for distribution to holders of the Capital Securities on liquidation
of the Issuer Trust.
The Guarantee is subordinated as described under "--Ranking of Subordinated
Obligations Under the Guarantee and the Subordinated Debentures" above and
"Description of Guarantee--Status of the Guarantee" in this Prospectus
Supplement. The holders of not less than a majority in aggregate Liquidation
Amount of the outstanding Capital Securities will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee in respect of the Guarantee or to direct the exercise of
any trust power conferred upon the Guarantee Trustee under the Guarantee.
If the Company were to default on its obligation to pay amounts payable
under the Subordinated Debentures, the Issuer Trust would lack funds for the
payment of Distributions or amounts payable on redemption of the Capital
Securities or otherwise, and, in such event, holders of the Capital Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, if a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Subordinated Debentures on the Payment Date on which such
payment is due and payable, then a holder of Capital Securities may institute a
legal proceeding directly against the Company for enforcement of payment to such
holder of any amounts payable in respect of such Subordinated Debentures having
a principal amount equal to the aggregate Liquidation Amount of the Capital
Securities of such holder (a "Direct Action").
S-8
<PAGE>
Except as described herein, holders of Capital Securities will not be able
to exercise directly any other remedy available to the holders of the
Subordinated Debentures or assert directly any other rights in respect of the
Subordinated Debentures. See "Description of Subordinated Debentures--Debenture
Events of Default" and "--Enforcement of Certain Rights by Holders of Capital
Securities" and "Description of Guarantee," each in this Prospectus Supplement.
The Declaration will provide that each holder of Capital Securities by
acceptance thereof agrees to the provisions of the Guarantee, the Subordinated
Debentures and the Subordinated Debt Indenture.
LIMITED VOTING RIGHTS
Holders of Capital Securities will have limited voting rights relating
generally to the modification of the Capital Securities and the Guarantee and
the exercise of the Issuer Trust's rights as holder of Subordinated Debentures.
Holders of Capital Securities will not be entitled to appoint, remove or replace
the Property Trustee or the Delaware Trustee except upon the occurrence of
certain events specified in the Declaration and described herein. The Property
Trustee and the holders of all the Common Securities may, subject to certain
conditions, amend the Declaration without the consent of holders of Capital
Securities to cure any ambiguity or make other provisions not inconsistent with
other provisions under the Declaration or to ensure that the Issuer Trust (i)
will not be taxable as a corporation for United States Federal income tax
purposes, or (ii) will not be required to register as an "investment company"
under the Investment Company Act. See "Description of Capital Securities--Voting
Rights" in this Prospectus Supplement.
MARKET PRICES
There can be no assurance as to the market prices for Capital Securities, or
the market prices for Subordinated Debentures that may be distributed in
exchange for Capital Securities if a liquidation of the Issuer Trust occurs.
Accordingly, the Capital Securities or the Subordinated Debentures that a holder
of Capital Securities may receive on liquidation of the Issuer Trust may trade
at a discount to the price that the investor paid to purchase the Capital
Securities offered hereby. As a result of the existence of the Company's right
to defer interest payments, the market price of the Capital Securities may be
more volatile than the market prices of other securities that are not subject to
such deferrals. Because holders of Capital Securities may receive Subordinated
Debentures on dissolution of the Issuer Trust, prospective purchasers of Capital
Securities are also making an investment decision with regard to the
Subordinated Debentures and should carefully review all the information
regarding the Subordinated Debentures contained herein. In addition, because the
Company has the right to advance the Stated Maturity of the Subordinated
Debentures, there can be no assurance that the Company will not exercise its
option to shorten the maturity of the Subordinated Debentures as permitted by
the terms thereof. If the Company does exercise such option, there can be no
assurance that advancing the Stated Maturity of the Subordinated Debentures will
not have an effect on the market price of the Capital Securities. See
"Description of Subordinated Debentures" in this Prospectus Supplement.
TRADING CHARACTERISTICS OF CAPITAL SECURITIES
Application will be made to list the Capital Securities on the NYSE. The
Capital Securities may trade at prices that do not fully reflect the value of
accrued but unpaid interest with respect to the underlying Subordinated
Debentures.
Application will be made to list the Capital Securities on the NYSE, subject
to official notice of issuance. If the Capital Securities are not listed on a
national securities exchange or the Nasdaq National Market and the Underwriters
do not make a market for the securities, the liquidity of the Capital Securities
would be adversely affected.
S-9
<PAGE>
INTERNATIONAL PAPER CAPITAL TRUST III
International Paper Capital Trust III (the "Issuer Trust") is a statutory
business trust formed under Delaware law pursuant to (i) a declaration of trust
(the "Declaration") executed by International Paper, as sponsor of the Issuer
Trust, and the trustees of the Issuer Trust (the "Issuer Trustees") and (ii) the
filing of a certificate of trust with the Secretary of State of the State of
Delaware. International Paper will directly or indirectly acquire Common
Securities in an aggregate liquidation amount equal to 3% of the total capital
of the Issuer Trust. The Common Securities will rank pari passu, and payment
will be made thereon pro rata, with the Capital Securities, except that, upon
the occurrence and during the continuance of an event of default under the
Declaration, the rights of the holders of the Common Securities to payment in
respect of Distributions and payments upon liquidation, redemption and otherwise
will be subordinated to the rights of the holders of the Capital Securities. The
assets of the Issuer Trust will consist principally of the Subordinated
Debentures. The Issuer Trust exists for the exclusive purpose of (i) issuing the
Trust Securities representing undivided beneficial interests in the assets of
the Issuer Trust, (ii) investing the gross proceeds of the Trust Securities in
the Subordinated Debentures and (iii) engaging in only those other activities
necessary or incidental thereto.
Pursuant to the Declaration, the number of Issuer Trustees will initially be
five. Three of the initial Issuer Trustees (the "Regular Trustees") will be
individuals who are employees or officers of or who are affiliated with
International Paper. A fourth trustee will be a financial institution that is
unaffiliated with International Paper (the "Property Trustee"). A fifth trustee
will be an entity which maintains its principal place of business in the State
of Delaware (the "Delaware Trustee"). Initially, The Bank of New York, a New
York banking corporation, will act as Property Trustee and its affiliate, The
Bank of New York (Delaware), a Delaware banking corporation, will act as
Delaware Trustee until, in each case, removed or replaced by the holder of the
Common Securities. The Bank of New York will also act as indenture trustee under
the Guarantee (the "Guarantee Trustee") and under the Subordinated Debt
Indenture (the "Debt Securities Trustee"). See "Description of Guarantee" and
"Description of Capital Securities," each in this Prospectus Supplement.
The Property Trustee will hold title to the Subordinated Debentures for the
benefit of the holders of the Trust Securities and the Property Trustee will
have the power to exercise all rights, powers and privileges under the
Subordinated Debt Indenture (as defined herein) as the holder of the
Subordinated Debentures. In addition, the Property Trustee will maintain
exclusive control of a segregated non-interest bearing bank account (the
"Property Account") to hold all payments made in respect of the Subordinated
Debentures for the benefit of the holders of the Trust Securities. The Guarantee
Trustee will hold the Guarantee for the benefit of the holders of the Capital
Securities. International Paper, as the direct or indirect holder of all the
Common Securities, will have the right to appoint, remove or replace any of the
Issuer Trustees and to increase or decrease the number of trustees, PROVIDED
that the number of trustees shall be at least three, a majority of which shall
be Regular Trustees. International Paper will pay all fees and expenses related
to the Trust and the offering of the Capital Securities. See "Description of
Subordinated Debentures" in this Prospectus Supplement.
The rights of the holders of the Capital Securities, including economic
rights, rights to information and voting rights, are as set forth in the
Declaration and the Delaware Business Trust Act, as amended (the "Trust Act").
See "Description of Capital Securities." The Declaration, the Subordinated Debt
Indenture and the Guarantee also incorporate by reference the terms of the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act").
The place of business and the telephone number of the Issuer Trust are the
principal executive offices and telephone number of International Paper. See
"Incorporation of Certain Documents by Reference" in the accompanying
Prospectus.
RECENT DEVELOPMENT
In the third quarter of 1998, the Company's Veratec Nonwovens business was
sold for approximately $282 million.
S-10
<PAGE>
CAPITALIZATION
(UNAUDITED)
The following table sets forth the capitalization of International Paper and
its consolidated subsidiaries as of June 30, 1998, and as adjusted to give
effect to the sale of the Capital Securities and the application of the
estimated gross proceeds from such sale to repay short-term indebtedness of the
Company. The table should be read in conjunction with International Paper's
consolidated financial statements and notes thereto and other financial data
incorporated herein by reference.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
INDEBTEDNESS:
Short-Term Indebtedness.................................................. $ 1,541 $ 1,241
Current Maturities of Long-Term Indebtedness............................. 250 250
--------- -----------
Total Short-Term Indebtedness........................................ 1,791 1,491
Long-Term Indebtedness, excluding Current Maturities..................... 7,045 7,045
--------- -----------
Total Indebtedness................................................. 8,836 8,536
International Paper-obligated mandatorily redeemable capital securities
of Subsidiary Trust holding solely International Paper subordinated
debentures(1).......................................................... -- 300
International Paper-obligated mandatorily redeemable preferred securities
of subsidiaries holding International Paper debentures(2).............. 1,000 1,000
COMMON SHAREHOLDERS' EQUITY:
Common Stock, par value $1 per share; 400 million shares authorized;
307.7 million shares issued and outstanding............................ 308 308
Paid-in capital.......................................................... 3,872 3,872
Retained earnings........................................................ 5,195 5,195
Accumulated other comprehensive income (loss)............................ (350) (350)
--------- -----------
9,025 9,025
Less: Common Stock held in treasury, at cost,
0.3 million shares................................................. 12 12
--------- -----------
Total Common Shareholders' Equity.................................. 9,013 9,013
--------- -----------
Total Capitalization............................................. $ 18,849 $ 18,849
--------- -----------
--------- -----------
</TABLE>
- --------------------------
(1) As described herein, the sole assets of the Issuer Trust will be the %
Junior Subordinated Deferrable Interest Debentures Due 2038 of the Company
with a principal amount of $ , and upon redemption of such debt, the
Capital Securities will be mandatorily redeemable.
(2) Includes the following preferred securities issuances: (i) IP Finance
(Barbados) Limited issued $550 of mandatorily redeemable preferred
securities with a dividend payment based on LIBOR. These preferred
securities will be mandatorily redeemable on June 30, 2008; and (ii)
International Paper Capital Trust ("Trust I") issued $450 of mandatorily
redeemable preferred securities which are convertible into International
Paper common stock and are fully and unconditionally guaranteed by
International Paper. The sole assets of Trust I are the 5 1/4% Convertible
Junior Subordinated Deferrable Interest Debentures Due 2025 of the Company.
ACCOUNTING TREATMENT
The financial statements of the Issuer Trust will be consolidated with
International Paper's financial statements. It is expected that the Capital
Securities will be shown on International Paper's consolidated financial
statements as International Paper-obligated mandatorily redeemable capital
securities of a subsidiary trust holding solely International Paper subordinated
debentures.
USE OF PROCEEDS
All of the proceeds from the sale of the Capital Securities will be invested
by the Issuer Trust in Subordinated Debentures of International Paper and
ultimately will be used by International Paper to repay indebtedness or for
other general corporate purposes.
S-11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical financial information
with respect to the Company for the periods indicated. This information should
be read in conjunction with the Company's consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, and the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998, which are incorporated by reference in this
Prospectus Supplement. See "Incorporation of Certain Documents by Reference" in
the accompanying Prospectus. The selected historical financial information for
each of the five years in the period ended December 31, 1997, has been derived
from the consolidated financial statements of the Company, which have been
audited by Arthur Andersen LLP, independent public accountants. See "Experts."
The data as of and for the six months ended June 30, 1997 and June 30, 1998,
have been derived from the unaudited consolidated financial statements of the
Company for such periods and, in the opinion of management, includes all
adjustments (consisting only of normal recurring adjustments) necessary to state
fairly the information included therein in accordance with generally accepted
accounting principles for interim financial information. Results for the six
months ended June 30, 1998, are not necessarily indicative of results for any
other interim period or for the year as a whole.
In April 1995, the Company increased its ownership in Carter Holt Harvey to
approximately 50.1%. See "The Company" in the accompanying Prospectus. As a
result, the financial statements of Carter Holt Harvey were consolidated with
those of the Company beginning in 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996
------------ ------------ ------- ------------
<S> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Net Sales...................................................... $ 13,685 $ 14,966 $19,797 $ 20,143
Costs and Expenses, Excluding Interest......................... 12,837 13,902 17,276 19,403
Earnings (Loss) Before Interest, Income Taxes, Minority
Interest and Cumulative Effect of Accounting Change.......... 848 1,064(2) 2,521 1,332(3)
Earnings (Loss) Before Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change....................... 538 (2715) 2,028 (3802)
Earnings (Loss) Before Cumulative Effect of Accounting
Change....................................................... (1289) (2432) 1,153 (3303)
Cumulative Effect of Accounting Change......................... -- ) (75 -- --
Net Earnings (Loss)............................................ (1289) (2357) 1,153 (3303)
EARNINGS PER COMMON SHARE:
Earnings (Loss) Before Cumulative Effect of Accounting
Change....................................................... $ (1.171) $ (1.732) $ 4.50 $ (1.043)
Cumulative Effect of Accounting Change......................... -- (0.30) -- --
Earnings (Loss) per Common Share............................... (1.171) (1.432) 4.50 (1.043)
BALANCE SHEET DATA:
Working Capital................................................ $ 472 $ 796 $ 1,010 $ 104
Plants, Properties and Equipment, Net.......................... 8,872 9,139 10,997 13,217
Forestlands.................................................... 786 802 2,803 3,342
Total Assets................................................... 16,631 17,836 23,977 28,252
Total Debt..................................................... 5,690 6,547 8,229 9,987
Common Shareholders' Equity.................................... 6,225 6,514 7,797 9,344
CASH FLOW DATA:
Cash Provided by Operations.................................... $ 928 $ 1,243 $ 2,248 $ 1,739
Capital Expenditures, Excluding Acquisitions................... 954 1,114 1,518 1,394
Cash Dividends per Common Share................................ 0.84 0.84 0.92 1.00
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------------------
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
INCOME STATEMENT DATA:
Net Sales...................................................... $ 20,096 $ 9,896 $ 9,575
Costs and Expenses, Excluding Interest......................... 19,760 10,090 9,039
Earnings (Loss) Before Interest, Income Taxes, Minority
Interest and Cumulative Effect of Accounting Change.......... (5064)(5 )(194 (4) (6536)
Earnings (Loss) Before Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change....................... (416)(5 )(449 (4) (6281)
Earnings (Loss) Before Cumulative Effect of Accounting
Change....................................................... )(151(4)(5) )(385 (4) (6161)
Cumulative Effect of Accounting Change......................... -- -- --
Net Earnings (Loss)............................................ )(151(4)(5) )(385 (4) (6161)
EARNINGS PER COMMON SHARE:
Earnings (Loss) Before Cumulative Effect of Accounting
Change....................................................... $ (0.50)(4)(5) (1.28) (4) (0.536)
Cumulative Effect of Accounting Change......................... -- -- --
Earnings (Loss) per Common Share............................... (0.50)(4)(5) (1.28) (4) (0.536)
BALANCE SHEET DATA:
Working Capital................................................ $ 1,065 $ ) (27 $ 2,030
Plants, Properties and Equipment, Net.......................... 12,369 12,570 12,177
Forestlands.................................................... 2,969 3,324 2,752
Total Assets................................................... 26,754 27,753 26,541
Total Debt..................................................... 9,366 9,854 8,836
Common Shareholders' Equity.................................... 8,710 8,793 9,013
CASH FLOW DATA:
Cash Provided by Operations.................................... $ 1,242 $ 497 $ 533
Capital Expenditures, Excluding Acquisitions................... 1,111 460 472
Cash Dividends per Common Share................................ 1.00 0.50 0.50
</TABLE>
- --------------------------
(1) Includes $25 ($0.10 per share) of additional income tax expense to revalue
deferred tax balances to reflect the increase in the U.S. statutory Federal
income tax rate.
(2) Includes $17 ($10 after taxes or $0.04 per share) of additional earnings
related to the change in accounting for start-up costs.
(3) Includes a pre-tax restructuring and asset impairment charge of $515 ($362
after taxes or $1.35 per share), a $592 pre-tax gain on the sale of a west
coast partnership interest ($336 after taxes and minority interest expense
or $1.25 per share) and a $165 pre-tax charge ($105 after taxes or $0.35 per
share) for the write-down of the investment in Scitex.
(4) Includes a pre-tax business improvement charge of $535 ($385 after taxes or
$1.28 per share) and a $150 pre-tax provision for legal reserve ($93 after
taxes or $0.31 per share).
(5) Includes a pre-tax charge of $125 ($80 after taxes or $0.26 per share) for
anticipated losses associated with the sale of the imaging businesses, and a
pre-tax gain of $170 ($97 after taxes and minority interest expense or $0.32
per share) from the redemption of certain retained west coast partnership
interests and the release of a related debt guaranty.
(6) Includes a pre-tax charge of $6 ($4 after taxes or $.01 per share) to write
off in-process research and development costs related to an acquisition by
an investee company.
S-12
<PAGE>
DESCRIPTION OF CAPITAL SECURITIES
The following summary of certain terms and provisions of the Capital
Securities supplements the information set forth in the accompanying Prospectus
under the heading "Description of Trust Preferred Securities and Trust
Guarantees ," to which description reference is hereby made. This summary of
certain terms and provisions of the Capital Securities does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
Declaration, to which reference is hereby made. A copy of the form of the
Declaration is available upon request from the Issuer Trustees.
GENERAL
The Capital Securities will be limited to $300,000,000 aggregate Liquidation
Amount (as defined herein), subject to the Underwriters' over-allotment option,
at any one time outstanding. The Capital Securities will rank pari passu, and
payments will be made thereon pro rata, with the Common Securities except as
described below under "--Subordination of Common Securities." The Subordinated
Debentures will be registered in the name of the Issuer Trust and held by the
Property Trustee in trust for the benefit of the holders of the Capital
Securities and the Common Securities. The Guarantee will be a guarantee on a
subordinated basis with respect to the Capital Securities but will not guarantee
payment of Distributions or amounts payable on redemption or liquidation of such
Capital Securities when the Issuer Trust does not have funds on hand available
to make such payments. See "Description of Guarantee" in this Prospectus
Supplement.
DISTRIBUTIONS
The Capital Securities represent undivided beneficial ownership interests in
the assets of the Issuer Trust, and Distributions on each Capital Security will
be payable at the annual rate of % of the stated Liquidation Amount of $25,
payable quarterly in arrears on March 1, June 1, September 1 and December 1 of
each year (each, a "Payment Date"), to the holders of the Capital Securities at
the close of business on the 15th calendar day (whether or not a Business Day
(as defined herein)) next preceding the relevant Payment Date. Distributions on
the Capital Securities will be cumulative. Distributions will accumulate from
and including September , 1998. The first Payment Date for the Capital
Securities will be December 1, 1998. The amount of Distributions payable for any
period less than a full Distribution period will be computed on the basis of a
360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period. Distributions payable for each full Distribution period
will be computed by dividing the rate per annum by four. If any date on which
Distributions are payable on the Capital Securities is not a Business Day, then
payment of the Distributions payable on such date will be made on the next
succeeding day that is a Business Day (without any additional Distributions or
other payment in respect of any such delay), with the same force and effect as
if made on the date such payment was originally payable.
So long as no Debenture Event of Default has occurred and is continuing, the
Company will have the right under the Subordinated Debt Indenture to defer the
payment of interest on the Subordinated Debentures at any time and from time to
time for a period not exceeding 20 consecutive quarterly periods with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Subordinated Debentures or end on a day other than a
Payment Date for the Subordinated Debentures. As a consequence of any such
deferral, quarterly Distributions on the Capital Securities by the Issuer Trust
will be deferred during an Extension Period. During an Extension Period,
interest on the Subordinated Debentures will continue to accrue and, as a
result, Distributions to which holders of the Capital Securities are entitled
will accumulate additional distributions thereon at the rate of % per annum,
compounded quarterly from the most recent date on which Distributions were paid,
computed on the basis of a 360-day year of twelve 30-day months and the actual
days elapsed in a partial month in such period. Additional Distributions payable
for each full Distribution period will be computed by dividing the
S-13
<PAGE>
rate per annum by four. The term "Distributions" as used herein shall include
any such additional distributions.
During an Extension Period, the Company (a) shall not declare or pay
dividends on, make distributions with respect to, or redeem, purchase or
acquire, or make a liquidation payment with respect to, any of its capital stock
(other than stock dividends paid by International Paper which consist of stock
of the same class as that on which the dividend is being paid), (b) shall not
make any payment of interest, principal or premium, if any, on or repay,
repurchase or redeem any debt securities issued by International paper that rank
pari passu with or junior to the Subordinated Debentures, and (c) shall not make
any guarantee payments with respect to the foregoing (other than pursuant to the
Guarantee). Prior to the termination of an Extension Period, the Company may
further defer the payment of interest, provided that no Extension Period may
exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity of
the Subordinated Debentures or end on a day other than a Payment Date for the
Subordinated Debentures.
Upon the termination of an Extension Period and the payment of all amounts
then due, the Company may elect to begin a new Extension Period. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Company must give the Issuer Trustees and the Debt Securities Trustee notice
of its election of an Extension Period at least 30 calendar days prior to the
date the Distributions on the Capital Securities would have been payable but for
the election to begin such Extension Period. The Property Trustee will give
notice of the Company's election to begin an Extension Period to the holders of
the Capital Securities. Subject to the foregoing, there is no limitation on the
number of times that the Company may elect to begin an Extension Period. See
"Description of Subordinated Debentures--Option To Extend Interest Payment
Period" and "Certain United States Federal Income Tax Consequences--Potential
Extension of Interest Payment Period and Original Issue Discount," each in this
Prospectus Supplement.
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures.
The revenue of the Issuer Trust available for distribution to holders of the
Capital Securities will be limited to payments under the Subordinated Debentures
in which the Issuer Trust will invest the proceeds from the issuance and sale of
the Capital Securities. See "Description of Subordinated Debentures" in this
Prospectus Supplement. If the Company does not make payments on the Subordinated
Debentures, the Issuer Trust will not have funds available to pay Distributions
or other amounts payable on the Capital Securities. The payment of Distributions
and other amounts payable on the Capital Securities (if and to the extent the
Issuer Trust has funds legally available for and cash sufficient to make such
payments) is guaranteed by the Company on a subordinated basis as described
under "Description of Guarantee" in this Prospectus Supplement.
REDEMPTION
Upon the repayment or redemption, in whole or in part, of the Subordinated
Debentures, whether at Stated Maturity or upon earlier redemption as provided in
the Subordinated Debentures, the proceeds from such repayment or redemption
shall be applied by the Property Trustee to redeem a Like Amount (as defined
below) of the Trust Securities, upon not less than 30 nor more than 60 days'
notice prior to the date fixed for repayment or redemption, at a redemption
price (the "Redemption Price") equal to 100% of the aggregate Liquidation Amount
of such Trust Securities plus accumulated and unpaid Distributions thereon to
the date of redemption (the "Redemption Date"). See "Description of Subordinated
Debentures--Redemption" in this Prospectus Supplement. If less than all the
Subordinated Debentures are to be repaid or redeemed on a Redemption Date, then
the proceeds from such repayment or redemption shall be allocated to the
redemption pro rata of the Capital Securities and the Common Securities.
S-14
<PAGE>
The Company will have the right to redeem the Subordinated Debentures (i) on
or after September , 2003, in whole at any time or in part from time to time,
or (ii) prior to September , 2003, in whole (but not in part) at any time
within 90 days following the occurrence and continuation of a Tax Event or an
Investment Company Event (each as defined below). See "--Liquidation
Distribution Upon Dissolution" below. A redemption of the Subordinated
Debentures would cause a mandatory redemption of the Capital Securities and the
Common Securities.
"Business Day" means a day other than (a) a Saturday or Sunday, or (b) a day
on which banking institutions in The City of New York are authorized or required
by law or executive order to remain closed.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to that portion of the
principal amount of Subordinated Debentures to be contemporaneously redeemed in
accordance with the Subordinated Debt Indenture, allocated to the Common
Securities and to the Capital Securities based upon the relative Liquidation
Amounts of such classes and (ii) with respect to a distribution of Subordinated
Debentures to holders of Trust Securities in connection with a dissolution or
liquidation of the Issuer Trust, Subordinated Debentures having a principal
amount equal to the Liquidation Amount of the Trust Securities of the holder to
whom such Subordinated Debentures are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
The term "Tax Event" means the receipt by the Issuer Trust of an opinion of
tax counsel to the Company experienced in such matters, who shall not be an
officer or employee of the Company or any of its affiliates, to the effect that,
as a result of any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, or as a result of
any official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement, action or decision is announced on or after
the date of issuance of the Capital Securities, there is more than an
insubstantial risk that (i) the Issuer Trust is, or will be within 90 days of
the delivery of such opinion, subject to United States Federal income tax with
respect to income received or accrued on the Subordinated Debentures, (ii)
interest payable by the Company on the Subordinated Debentures is not, or within
90 days of the delivery of such opinion will not be, deductible by the Company,
in whole or in part, for United States Federal income tax purposes or (iii) the
Issuer Trust is, or will be within 90 days of the delivery of the opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters, who shall not be
an officer or employee of the Company or any of its affiliates, to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), which change or prospective change becomes
effective or would become effective, as the case may be, on or after the date of
the issuance of the Capital Securities.
If an event described in clause (i) or (iii) of the definition of Tax Event
has occurred and is continuing and the Issuer Trust is the holder of all the
Subordinated Debentures pursuant to the Subordinated Debt Indenture, the
Company, as borrower, will pay any additional taxes, duties and other
governmental charges (other than United States withholding taxes) to which the
Issuer Trust has become subject as a result of a Tax Event ("Additional Sums").
See "Description of Subordinated Debentures--Expenses and Taxes" in this
Prospectus Supplement.
S-15
<PAGE>
REDEMPTION PROCEDURES
Capital Securities redeemed on each Redemption Date shall be redeemed at the
Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Subordinated Debentures. Redemptions of the Capital Securities
shall be made and the Redemption Price shall be payable on each Redemption Date
only to the extent that the Issuer Trust has funds then on hand and legally
available for the payment of such Redemption Price.
If the Issuer Trust gives a notice of redemption in respect of the Capital
Securities, then, by 10:00 a.m., New York City time, on the Redemption Date, the
Issuer Trust shall deposit sufficient funds with the Property Trustee to pay the
Redemption Price. If such deposit has been made, by 12:00 noon, New York City
time, on the Redemption Date, to the extent funds are available, in the case of
Capital Securities held in global form, the Property Trustee will irrevocably
deposit with DTC funds sufficient to pay the applicable Redemption Price and
will give DTC irrevocable instructions and authority to pay the Redemption Price
to the holders of the Capital Securities. With respect to Capital Securities not
held in global form, the Property Trustee, to the extent funds are available,
will irrevocably deposit with the paying agent for the Capital Securities funds
sufficient to pay the applicable Redemption Price and will give such paying
agent irrevocable instructions and authority to pay the Redemption Price to the
holders thereof upon surrender of their certificates evidencing the Capital
Securities. Notwithstanding the foregoing, Distributions payable on or prior to
the Redemption Date for any Capital Securities called for redemption shall be
payable to the holders of the Capital Securities on the relevant record dates
for the related Payment Dates. If notice of redemption shall have been given and
funds deposited as required, then upon the date of such deposit all rights of
the holders of such Capital Securities so called for redemption will cease,
except the right of the holders of such Capital Securities to receive the
Redemption Price, but without interest on such Redemption Price, and such
Capital Securities will cease to be outstanding. If any date fixed for
redemption of Capital Securities is not a Business Day, then payment of the
Redemption Price payable on such date will be made on the next succeeding day
which is a Business Day (without any interest or other payment in respect of any
such delay), with the same force and effect as if made on the date such payment
was originally payable. In the event that payment of the Redemption Price in
respect of Capital Securities called for redemption is improperly withheld or
refused and not paid either by the Issuer Trust or by the Company pursuant to
the Guarantee, Distributions on such Capital Securities will continue to
accumulate at the then applicable rate, from the Redemption Date originally
established by the Issuer Trust for such Capital Securities to the date such
Redemption Price is actually paid, in which case the actual Payment Date will be
the date fixed for redemption for purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
Federal securities laws), the Company or its affiliates may at any time and from
time to time purchase outstanding Capital Securities by tender, in the open
market or by private agreement, and may resell such securities.
If less than all the Capital Securities and Common Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of such
Capital Securities and Common Securities to be redeemed shall be allocated pro
rata to the Capital Securities and the Common Securities based upon the relative
Liquidation Amounts of such classes. The particular Capital Securities to be
redeemed shall be selected by the Property Trustee on a pro rata basis not more
than 60 days prior to the Redemption Date from the outstanding Capital
Securities not previously called for redemption, or, if the Capital Securities
are then held in the form of a global Capital Security, by DTC on a pro rata
basis based on their respective Liquidation Amounts in accordance with DTC's
customary procedures. The Property Trustee shall promptly notify the securities
registrar for the Trust Securities in writing of the Capital Securities selected
for redemption and, in the case of any Capital Securities selected for partial
redemption, the Liquidation Amount thereof to be redeemed. For purposes of the
Declaration, unless the context otherwise requires, all provisions relating to
the redemption of Capital Securities shall relate, in the case of any Capital
Securities redeemed or to be redeemed only in part, to the portion of the
aggregate Liquidation Amount of Capital Securities which has been or is to be
redeemed.
S-16
<PAGE>
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each registered holder of Capital
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless the Company defaults in payment of the
Redemption Price on the Subordinated Debentures, on and after the Redemption
Date interest will cease to accrue on the Subordinated Debentures or portions
thereof called for redemption and, unless payment of the Redemption Price in
respect of the Capital Securities is withheld or refused and not paid either by
the Issuer Trust or the Company pursuant to the Guarantee, Distributions will
cease to accumulate on the Capital Securities or portions thereof called for
redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the amount payable upon redemption of, the
Trust Securities, as applicable, shall be made pro rata based on the liquidation
preference of the Trust Securities; provided, however, that, if on any
distribution date or redemption date a Declaration Event of Default (as defined
below under "--Declaration Events of Default") under the Declaration shall have
occurred and be continuing, no payment of any distribution on, or amount payable
upon redemption of, any Common Security, and no other payment on account of the
redemption, liquidation or other acquisition of Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid distributions on
all outstanding Capital Securities for all distribution periods terminating on
or prior thereto, or in the case of payment of the amount payable upon
redemption of the Capital Securities, the full amount of such amount in respect
of all outstanding Capital Securities shall have been made or provided for, and
all funds available to the Property Trustee shall first be applied to the
payment in full in cash of all distributions on, or the amount payable upon
redemption of, Capital Securities then due and payable.
In the case of any Declaration Event of Default, the holder of Common
Securities will be deemed to have waived any such Declaration Event of Default
until all such Declaration Events of Default with respect to the Capital
Securities have been cured, waived or otherwise eliminated. Until any such
Declaration Events of Default with respect to the Capital Securities have been
so cured, waived or otherwise eliminated, the Property Trustee shall act solely
on behalf of the holders of the Capital Securities and not the holder of the
Common Securities, and only the holders of the Capital Securities will have the
right to direct the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The amount payable on the Capital Securities in the event of any liquidation
of the Issuer Trust is $25 per Capital Security plus accumulated and unpaid
Distributions, subject to certain exceptions, which may be paid in the form of a
distribution of such amount in Subordinated Debentures.
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the
Subordinated Debentures to be distributed to the holders of the Capital
Securities and Common Securities in liquidation of the Issuer Trust.
Pursuant to the Declaration, the Issuer Trust will automatically dissolve
upon expiration of its term or, if earlier, will dissolve on the first to occur
of: (i) certain events of bankruptcy, dissolution or liquidation of the Company;
(ii) the distribution of a Like Amount of the Subordinated Debentures to the
holders of the Trust Securities, if the holders of Common Securities have given
written direction to the Property Trustee to dissolve the Issuer Trust (which
direction, subject to the foregoing restrictions, is optional and wholly within
the discretion of the holders of Common Securities); (iii) the repayment of all
the Capital Securities in connection with the redemption of all the Trust
Securities as described above under "--Redemption;" and (iv) the entry of an
order for the dissolution of the Issuer Trust by a court of competent
jurisdiction.
If dissolution of the Issuer Trust occurs as described in clause (i), (ii)
or (iv) above, the Issuer Trust will be liquidated by the Property Trustee as
expeditiously as the Property Trustee determines to be
S-17
<PAGE>
possible by distributing, after satisfaction of liabilities to creditors of the
Issuer Trust as provided by applicable law, to the holders of such Trust
Securities a Like Amount of the Subordinated Debentures, unless such
distribution is not practical, in which event such holders will be entitled to
receive out of the assets of the Issuer Trust available for distribution to
holders, after satisfaction of liabilities to creditors of the Issuer Trust as
provided by applicable law, an amount equal to, in the case of holders of
Capital Securities, the aggregate Liquidation Amount plus accumulated and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Issuer Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Issuer Trust on its Capital Securities shall be paid on a pro rata basis. The
holders of the Common Securities will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Capital Securities, except
that if a Debenture Event of Default has occurred and is continuing as a result
of any failure by the Company to pay any amounts in respect of the Subordinated
Debentures when due, the Capital Securities shall have a priority over the
Common Securities. See "--Subordination of Common Securities."
After the liquidation date is fixed for any distribution of Subordinated
Debentures (i) the Capital Securities will no longer be deemed to be
outstanding, (ii) DTC or its nominee, as the registered holder of Capital
Securities, will receive a registered global certificate or certificates
representing the Subordinated Debentures to be delivered upon such distribution
with respect to Capital Securities held by DTC or its nominee and (iii) any
certificates representing the Capital Securities not held by DTC or its nominee
will be deemed to represent the Subordinated Debentures having a principal
amount equal to the stated Liquidation Amount of the Capital Securities and
bearing accrued and unpaid interest in an amount equal to the accumulated and
unpaid Distributions on the Capital Securities until such certificates are
presented to the security registrar for the Trust Securities for transfer or
reissuance.
If the Company does not redeem the Subordinated Debentures prior to the
Stated Maturity and the Issuer Trust is not liquidated and the Subordinated
Debentures are not distributed to holders of the Capital Securities, the Capital
Securities will remain outstanding until the repayment of the Subordinated
Debentures and the distribution of the Liquidation Distribution to the holders
of the Capital Securities.
There can be no assurance as to the market prices for the Capital Securities
or the Subordinated Debentures that may be distributed in exchange for Capital
Securities if a dissolution and liquidation of the Issuer Trust were to occur.
Accordingly, the Capital Securities that an investor may purchase, or the
Subordinated Debentures that the investor may receive on dissolution and
liquidation of the Issuer Trust, may trade at a discount to the price that the
investor paid to purchase the Capital Securities offered hereby.
MERGER, CONSOLIDATION OR AMALGAMATION OF THE ISSUER TRUST
The Issuer Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other entity or person,
except as described below. The Issuer Trust may, without the consent of the
holders of the Capital Securities, consolidate, amalgamate, merge with or into,
or be replaced by, a trust organized as such under the laws of any state of the
United States of America or of the District of Columbia; provided that (i) if
the Issuer Trust is not the survivor, such successor entity either (x) expressly
assumes all of the obligations of the Issuer Trust under the Capital Securities
or (y) substitutes for the Capital Securities other securities having
substantially the same terms as the Capital Securities (the "Successor
Securities") as long as the Successor Securities rank, with respect to
participation in the profits and distributions or in the assets of the successor
entity, at least as high as the Capital Securities rank with respect to
participation in the profits and dividends or in the assets of the Issuer Trust,
(ii) International Paper expressly acknowledges such successor entity as the
holder of the Subordinated Debentures, (iii) the Capital Securities or any
Successor Securities are listed, or any Successor Securities will be listed upon
notification of issuance, on any national securities exchange or other
organization on which the Capital Securities are then listed,
S-18
<PAGE>
(iv) such merger, consolidation, amalgamation or replacement does not cause the
Capital Securities (including any Successor Securities) to be downgraded by any
nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation or replacement does not adversely affect the powers,
preferences and other special rights of the holders of the Capital Securities
(including any Successor Securities) in any material respect, (vi) such
successor entity has a purpose substantially identical to that of the Issuer
Trust, (vii) International Paper has provided a guarantee to the holders of the
Successor Securities with respect to such successor entity having substantially
the same terms as the Guarantee and (viii) prior to such merger, consolidation,
amalgamation or replacement, International Paper has received an opinion of
nationally recognized independent counsel (reasonably acceptable to the Property
Trustee) to the Issuer Trust experienced in such matters to the effect that (x)
such successor entity will be treated as a grantor trust for United States
Federal income tax purposes, (y) following such merger, consolidation,
amalgamation or replacement, neither International Paper nor such successor
entity will be required to register as an investment company under the
Investment Company Act and (z) such merger, consolidation, amalgamation or
replacement will not adversely affect the limited liability of the holders of
the Capital Securities. Notwithstanding the foregoing, the Issuer Trust shall
not, except with the consent of holders of 100% in liquidation amount of the
Common Securities, consolidate, amalgamate, merge with or into, or be replaced
by any other entity or permit any other entity to consolidate, amalgamate, merge
with or into, or replace it, if such consolidation, amalgamation, merger or
replacement would cause the Issuer Trust or the successor entity to be
classified as other than a grantor trust for United States Federal income tax
purposes.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Event of Default") or a default
by International Paper under the Guarantee constitutes an event of default under
the Declaration with respect to the Trust Securities (a "Declaration Event of
Default"); provided that, pursuant to the Declaration, the holder of the Common
Securities will be deemed to have waived any Declaration Event of Default with
respect to the Common Securities until all Declaration Events of Default with
respect to the Capital Securities have been cured, waived or otherwise
eliminated. Until such Declaration Events of Default with respect to the Capital
Securities have been so cured, waived or otherwise eliminated, the Property
Trustee will be deemed to be acting solely on behalf of the holders of the
Capital Securities and only the holders of the Capital Securities will have the
right to direct the Property Trustee with respect to certain matters under the
Declaration and, therefore, the Subordinated Debt Indenture.
As long as the Capital Securities are outstanding, upon the occurrence of a
Declaration Event of Default, the Property Trustee as the sole holder of the
Subordinated Debentures will have the right under the Subordinated Debt
Indenture to declare the principal of and interest on the Subordinated
Debentures to be immediately due and payable. International Paper and the Issuer
Trust are each required to file annually with the Property Trustee an officers'
certificate as to its compliance with all conditions and covenants under the
Declaration.
VOTING RIGHTS
Except as described herein, under the Trust Act and under "Description of
Guarantee--Amendments and Assignment", and as otherwise required by law and the
Declaration, the holders of the Capital Securities will have no voting rights.
Subject to the requirement of the Property Trustee obtaining a tax opinion
in certain circumstances set forth in the last sentence of this paragraph, the
holders of a majority in aggregate liquidation preference of the Capital
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration including the right to direct the Property Trustee, as holder of the
Subordinated Debentures, to (i) exercise the remedies available under the
Subordinated Debt
S-19
<PAGE>
Indenture with respect to the Subordinated Debentures, (ii) waive any past Event
of Default that is waiveable under the Subordinated Debt Indenture or (iii)
exercise any right to rescind or annul a declaration that the principal of all
the Subordinated Debentures shall be due and payable; provided, however, that,
where a consent or action under the Subordinated Debt Indenture would require
the consent or act of the holders of more than a majority of the aggregate
principal amount of Subordinated Debentures affected thereby, only the holders
of the percentage of the aggregate stated liquidation preference of the Capital
Securities which is at least equal to the percentage required under the
Subordinated Debt Indenture may direct the Issuer Trustee to give such consent
or take such action. If the Property Trustee fails to enforce its rights under
the Subordinated Debentures, a holder of record of Capital Securities may, after
such holder's having made a written request to the Property Trustee to enforce
such rights, institute a legal proceeding directly against International Paper
to enforce the Property Trustee's rights under the Subordinated Debentures
without first instituting any legal proceeding against the Property Trustee or
any other person or entity. Notwithstanding the foregoing, in the event
International Paper shall fail to make any payment on the Subordinated
Debentures when due, holders of the Capital Securities shall have the right to
institute a direct action against International Paper for payment of such
amounts. The Issuer Trustee shall notify all holders of the Capital Securities
of any notice of default received from the Debt Securities Trustee with respect
to the Subordinated Debentures. Such notice shall state that such Event of
Default also constitutes a Declaration Event of Default. Except with respect to
directing the time, method and place of conducting a proceeding for a remedy,
the Trustee shall not take any of the actions described in clause (i), (ii) or
(iii) above unless the Property Trustee has obtained an opinion of tax counsel
to the effect that, as a result of such action, the Issuer Trust will not fail
to be classified as a grantor trust or a partnership for United States Federal
income tax purposes.
In the event the consent of the Property Trustee, as the holder of the
Subordinated Debentures, is required under the Subordinated Debt Indenture with
respect to any amendment, modification or termination of the Subordinated Debt
Indenture, the Property Trustee shall request the direction of the holders of
the Trust Securities with respect to such amendment, modification or termination
and shall vote with respect to such amendment, modification or termination as
directed by a majority in liquidation amount of the Trust Securities voting
together as a single class; provided, however, that, where a consent under the
Subordinated Debt Indenture would require the consent of the holders of more
than a majority of the aggregate principal amount of the Subordinated
Debentures, the Property Trustee may only give such consent at the direction of
the holders of at least the same proportion in aggregate stated liquidation
preference of the Trust Securities. The Property Trustee shall not take any such
action in accordance with the directions of the holders of the Trust Securities
unless the Property Trustee has obtained an opinion of tax counsel to the effect
that for the purposes of United States Federal income tax the Issuer Trust will
not be classified as other than a grantor trust or a partnership.
A waiver of an Event of Default under the Subordinated Debt Indenture will
constitute a waiver of the corresponding Declaration Event of Default.
Any required approval or direction of holders of Capital Securities may be
given at a separate meeting of holders of Capital Securities convened for such
purpose, at a meeting of all of the holders of Trust Securities or pursuant to
written consent. The Regular Trustees will cause a notice of any meeting at
which holders of Capital Securities are entitled to vote, or of any matter upon
which action by written consent of such holders is to be taken, to be mailed to
each holder of record of Capital Securities. Each such notice will include a
statement setting forth the following information: (i) the date of such meeting
or the date by which such action is to be taken; (ii) a description of any
resolution proposed for adoption at such meeting on which such holders are
entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents. No vote or consent
of the holders of Capital Securities will be required for the Issuer Trust to
redeem and cancel Capital Securities or distribute Subordinated Debentures in
accordance with the Declaration.
S-20
<PAGE>
Notwithstanding that holders of Capital Securities are entitled to vote or
consent under any of the circumstances described above, any of the Capital
Securities that are owned at such time by International Paper or any entity
directly or indirectly controlling or controlled by, or under direct or indirect
common control with, International Paper, shall not be entitled to vote or
consent and shall, for purposes of such vote or consent, be treated as if such
Capital Securities were not outstanding.
The procedures by which holders of Capital Securities may exercise their
voting rights are described below. See "--Book-Entry Procedures, Delivery and
Form" below.
Holders of the Capital Securities will have no rights to appoint or remove
the Issuer Trustees, who may be appointed, removed or replaced solely by
International Paper as the indirect or direct holder of all of the Common
Securities.
BOOK-ENTRY PROCEDURES, DELIVERY AND FORM
The Capital Securities will be issued in the form of one or more fully
registered global securities which will be deposited with, or on behalf of, the
Depository and registered in the name of the Depository's nominee. Unless and
until it is exchangeable in whole or in part for Capital Securities in
definitive form, a global security may not be transferred except as a whole by
the Depository to a nominee of the Depository or by a nominee of the Depository
to the Depository or another nominee of the Depository or by the Depository or
any such nominee to a successor of such Depository or a nominee of such
successor.
Ownership of beneficial interests in a global security will be limited to
persons that have accounts with the Depository or its nominee ("Participants")
or persons that may hold interests through Participants. The Company expects
that, upon the issuance of a global security, the Depository will credit, on its
book-entry registration and transfer system, the Participants' accounts with
their respective principal amounts of the Capital Securities represented by such
global security. Ownership of beneficial interests in such global security will
be shown on, and the transfer of such ownership interests will be effected only
through, records maintained by the Depository (with respect to interests of
Participants) and on the records of Participants (with respect to interests of
persons holding through Participants). Beneficial owners who hold through
Participants will not receive written confirmation from the Depository of their
purchase, but are expected to receive written confirmations from the
Participants through which the beneficial owners entered into the transaction.
Transfers of such ownership interests will be accomplished by entries on the
books of Participants acting on behalf of the beneficial owners.
So long as the Depository, or its nominee, is the registered owner of a
global security, the Depository or such nominee, as the case may be, will be
considered the sole owner or holder of the Capital Securities represented by
such global security for all purposes under the Declaration. Except as provided
below, owners of beneficial interests in a global security will not be entitled
to receive physical delivery of the Capital Securities in definitive form and
will not be considered the owners or holders thereof under the Declaration.
Accordingly, each person owning a beneficial interest in such a global security
must rely on the procedures of the Depository and, if such person is not a
Participant, on the procedures of the Participant through which such person owns
its interest, to exercise any rights of a holder under the Declaration or the
Subordinated Debentures. The Company understands that, under the Depository's
existing practices, in the event that the Company requests any action of
holders, or an owner of a beneficial interest in such a global security desires
to take any action which a holder is entitled to take under the Declaration or
the Subordinated Debentures, the Depository would authorize the Participants
holding the relevant beneficial interests to take such action, and such
Participants would authorize beneficial owners owning through such Participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them. Redemption notices will also be sent to the
Depository.
Distributions on the Capital Securities registered in the name of the
Depository or its nominee will be made to the Depository or its nominee, as the
case may be, as the registered owner of the global security representing such
Capital Securities. None of the Company, the Issuer Trust, the Issuer Trustees,
any
S-21
<PAGE>
Paying Agent, the Regular Trustees or any other agent of the Company or the
Issuer Trust will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the global security for such Capital Securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests. Payment of Distributions to Participants shall be the responsibility
of the Depository. The Depository's practice is to credit Participants' accounts
on a payable date in accordance with their respective holdings shown on the
Depository's records unless the Depository has reason to believe that it will
not receive payment on such payable date. Payments by Participants to beneficial
owners will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such Participant
and not of the Depository, the Company, the Issuer Trust, the Issuer Trustees,
the Paying Agent or any other agent of the Company or the Issuer Trust, subject
to any statutory or regulatory requirements as may be in effect from time to
time.
The Depository may discontinue providing its services as securities
depository with respect to the Capital Securities at any time by giving
reasonable notice to the Property Trustee. If the Depository notifies the
Company that it is unwilling to continue as such, or if it is unable to continue
or ceases to be a clearing agency registered under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and a successor depository is not
appointed by the Company within 90 days after receiving such notice or becoming
aware that the Depository is no longer so registered, the Company will issue the
Capital Securities in definitive form, at its expense, upon registration of
transfer of, or in exchange for, such global security. In addition, the Company
or the Issuer Trust may at any time and in its sole discretion determine not to
have the Capital Securities represented by one or more global securities and, in
such event, will issue Capital Securities in definitive form, at its expense, in
exchange for all of the global securities representing such Capital Securities.
DTC has advised the Company and the Issuer Trust as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations such as the Underwriters. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship, with a Participant, either directly or indirectly.
PAYMENT AND PAYING AGENCY
Payments in respect of the Capital Securities will be made to DTC, which
will credit the relevant accounts at DTC on the applicable Payment Dates, or if
the Capital Securities are not held by DTC, such payments will be made by check
mailed to the address of the holder entitled thereto as such address appears on
the securities register for the Trust Securities. However, a holder of $1
million or more in aggregate Liquidation Amount of Capital Securities may
receive Distribution payments (other than Distributions payable at the Stated
Maturity) by wire transfer of immediately available funds upon written request
to the Property Trustee not later than 15 calendar days prior to the date on
which the Distribution is payable. The paying agent (the "Paying Agent") will
initially be the Property Trustee and any co-paying agent chosen by the Property
Trustee and acceptable to the Regular Trustees. The Paying Agent will be
permitted to resign as Paying Agent upon 30 days' written notice to the Property
Trustee and the Regular Trustees. If the Property Trustee is no longer the
Paying Agent, the Property Trustee will appoint a
S-22
<PAGE>
successor (which must be a bank or trust company reasonably acceptable to the
Regular Trustees) to act as Paying Agent.
DESCRIPTION OF SUBORDINATED DEBENTURES
The Subordinated Debentures are a series of Debt Securities to be issued
pursuant to the Subordinated Debt Indenture and the following summary of certain
terms and provisions of the Subordinated Debentures and the Subordinated Debt
Indenture supplements the description of the terms and provisions of such Debt
Securities and such Subordinated Debt Indenture set forth in the accompanying
Prospectus under the heading "Description of Debt Securities," to which
description reference is hereby made. The summary of certain terms and
provisions of the Subordinated Debentures set forth below does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
Subordinated Debentures and the Subordinated Debt Indenture, to which reference
is hereby made. Copies of the forms of Subordinated Debentures and the
Subordinated Debt Indenture are available from the Debt Securities Trustee upon
request.
GENERAL
Concurrently with the issuance of the Capital Securities, the Issuer Trust
will invest the proceeds thereof, together with the consideration paid by the
Company for the Common Securities, in the Subordinated Debentures issued by the
Company. The Subordinated Debentures will bear interest, accruing from and
including September , 1998, at the annual rate of % of the principal amount
thereof, payable quarterly in arrears on March 1, June 1, September 1 and
December 1 of each year (each, a "Payment Date"), commencing December 1, 1998,
to the person in whose name each Subordinated Debenture is registered at the
close of business on the 15th calendar day (whether or not a Business Day) next
preceding such Payment Date. It is anticipated that, until the liquidation, if
any, of the Issuer Trust, each Subordinated Debenture will be registered in the
name of the Issuer Trust and held by the Property Trustee in trust for the
benefit of the holders of the Trust Securities. The amount of interest payable
for any period less than a full interest period will be computed on the basis of
a 360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period. The amount of interest payable for any full interest
period will be computed by dividing the rate per annum by four. If any date on
which interest is payable on the Subordinated Debentures is not a Business Day,
then payment of the interest payable on such date will be made on the next
succeeding day that is a Business Day (without any interest or other payment in
respect of any such delay) with the same force and effect as if made on the date
such payment was originally payable. Accrued interest that is not paid on the
applicable Payment Date will bear additional interest on the amount thereof at
the rate per annum of %, compounded quarterly and computed on the basis of a
360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period. The amount of additional interest payable for any full
interest period will be computed by dividing the rate per annum by four. The
term "interest" as used herein includes quarterly interest payments, interest on
quarterly interest payments not paid on the applicable Payment Date and
Additional Sums, as applicable.
The Subordinated Debentures will mature on September , 2038 (such date, as
it may be advanced as hereinafter described, the "Stated Maturity"). If a Tax
Event occurs, then the Company will have the right, upon notice to the Debt
Securities Trustee prior to the termination of the Issuer Trust, to advance the
Stated Maturity of the Subordinated Debentures to the minimum extent required in
order to allow for the payments of interest in respect of the Subordinated
Debentures to continue to be tax deductible, but in no event shall the resulting
maturity of the Subordinated Debentures be less than 15 years from the date of
original issuance thereof. The Stated Maturity may be advanced only if, in the
written opinion of independent tax counsel to the Company experienced in such
matters, delivered to the Debt Securities Trustee, (a) after advancing the
Stated Maturity, interest paid on the Subordinated Debentures will be
S-23
<PAGE>
deductible for United States Federal income tax purposes and (b) advancing the
Stated Maturity will not result in a taxable event to holders of the Capital
Securities.
If the Company elects to advance the Stated Maturity of the Subordinated
Debentures, it will give notice to the Debt Securities Trustee, and the Debt
Securities Trustee will give notice of such change to the holders of the
Subordinated Debentures not less than 30 and not more than 60 days prior to the
effectiveness thereof.
The provisions of the Subordinated Debt Indenture described in the
accompanying Prospectus relating to discharge and defeasance will not apply to
the Subordinated Debentures. See "Description of Debt Securities--Defeasance" in
the accompanying Prospectus.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing, the
Company will have the right at any time during the term of the Subordinated
Debentures to defer the payment of interest at any time or from time to time for
a period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Subordinated Debentures. At the end of an Extension Period, the
Company must pay all interest then accrued and unpaid (together with interest
thereon at the annual rate of %, compounded quarterly and computed on the
basis of a 360-day year of twelve 30-day months and the actual days elapsed in a
partial month in such period). The amount of additional interest payable for any
full interest period will be computed by dividing the rate per annum by four.
During an Extension Period, interest will continue to accrue and holders of
Subordinated Debentures (or holders of Capital Securities while outstanding)
will be required to accrue interest income for United States Federal income tax
purposes. See "Certain United States Federal Income Tax Consequences--Potential
Extension of Interest Payment Period and Original Issue Discount" in this
Prospectus Supplement. During an Extension Period, the Company is subject to
certain restrictions. See "--Certain Covenants" below. Prior to the termination
of an Extension Period, the Company may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarterly periods or
extend beyond the Stated Maturity of the Subordinated Debentures or, except as
provided below, end on a day other than a Payment Date. In the event that the
Stated Maturity is advanced to a date prior to the end of an Extension Period,
such Extension Period shall be deemed to end on such date or such earlier date
as may be determined by the Company. In the event that any Subordinated
Debentures are called for redemption on a date prior to the end of an Extension
Period, with respect to such Subordinated Debentures, such Extension Period
shall be deemed to end on such date or such earlier date as may be determined by
the Company. Upon the termination of an Extension Period and the payment of all
amounts then due, the Company may elect to begin a new Extension Period subject
to the above conditions. No interest shall be due and payable during an
Extension Period, except at the end thereof. The Company must give the Issuer
Trustees and the Debt Securities Trustee notice of its election of such
Extension Period at least 30 calendar days prior to the date the Distributions
on the Capital Securities would have been payable but for the election to begin
such Extension Period. If the Property Trustee is not the only holder, or is not
itself the holder, of the Subordinated Debentures at the time the Company
selects an Extension Period, the Company shall give the holders of the
Subordinated Debentures and the Property Trustee written notice of its selection
of such Extension Period at least 10 Business Days before the earlier of the
next succeeding Payment Date or the date the Company is required to give notice
of the record date or Payment Date of such interest payment to holders of the
Subordinated Debentures. The Property Trustee will give notice of the Company's
election to begin an Extension Period to the holders of the Capital Securities.
There is no limitation on the number of times that the Company may elect to
begin an Extension Period.
S-24
<PAGE>
REDEMPTION
The Subordinated Debentures are redeemable prior to the Stated Maturity at
the option of the Company (i) on or after September , 2003, in whole at any
time or in part from time to time, and (ii) prior to September , 2003, in
whole (but not in part) at any time within 90 days following the occurrence and
continuation of a Tax Event or an Investment Company Event (each as defined
under "Description of Capital Securities--Redemption" in this Prospectus
Supplement) (the "90-Day Period"), in each case at a Redemption Price equal to
the accrued and unpaid interest on the Subordinated Debentures so redeemed to
the date fixed for redemption, plus 100% of the principal amount thereof. See
"Description of Capital Securities--Redemption" in this Prospectus Supplement.
The Company's right to redeem the Subordinated Debentures under the
preceding paragraph shall be subject to the condition that if at the time there
is available to the Company or the Issuer Trust the opportunity to eliminate,
within the 90-Day Period, the Tax Event or Investment Company Event by taking
some ministerial action ("Ministerial Action"), such as filing a form or making
an election, or pursuing some other similar reasonable measure that will have no
adverse effect on the Company, the Issuer Trust or the holders of the Trust
Securities and will involve no material cost, the Company shall pursue such
measures in lieu of redemption; provided further, that the Company shall have no
right to redeem the Subordinated Debentures while the Issuer Trust is pursuing
any Ministerial Action pursuant to the Declaration.
SUBORDINATION
The Subordinated Debt Indenture provides that the Subordinated Debentures
are subordinate and junior in right of payment to all Senior Indebtedness of
International Paper as provided in the Subordinated Debt Indenture. No payment
of principal of (including redemption payments), or interest on, the
Subordinated Debentures may be made (i) if any Senior Indebtedness is not paid
when due, any applicable grace period with respect to such default has ended and
such default has not been cured or waived, or (ii) if the maturity of any Senior
Indebtedness has been accelerated because of a default. Upon any distribution of
assets of International Paper to creditors upon any dissolution, winding up,
liquidation or reorganization, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all principal of, and
premium, if any, and interest due or to become due on, all Senior Indebtedness
must be paid in full before the holders of the Subordinated Debentures are
entitled to receive or retain any payment. In the event that, notwithstanding
the foregoing, any payment or distribution of cash, property or securities shall
be received or collected by a holder of the Subordinated Debentures in
contravention of the foregoing provisions, such payment or distribution shall be
held for the benefit of and shall be paid over to the holders of Senior
Indebtedness or their representative or representatives or to the trustee or
trustees under any indenture under which any instrument evidencing Senior
Indebtedness may have been issued, as their respective interests may appear, to
the extent necessary to pay in full all Senior Indebtedness then due, after
giving effect to any concurrent payment to the holders of Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the rights of the
holders of the Subordinated Debentures will be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions applicable
to Senior Indebtedness until all amounts owing on the Subordinated Debentures
are paid in full.
The term "Senior Indebtedness" shall mean in respect of International Paper
(i) the principal, premium, if any, and interest in respect of (A) indebtedness
of such obligor for money borrowed and (B) indebtedness evidenced by securities,
debentures, bonds or other similar instruments issued by such obligor, (ii) all
capital lease obligations of such obligor, (iii) all obligations of such obligor
issued or assumed as the deferred purchase price of property, all conditional
sale obligations of such obligor and all obligations of such obligor under any
title retention agreement (but excluding trade accounts payable arising in the
ordinary course of business), (iv) all obligations of such obligor for the
reimbursement of any letter of credit, banker's acceptance, security purchase
facility or similar credit transaction, (v) all
S-25
<PAGE>
obligations of the type referred to in clauses (i) through (iv) above of other
persons for the payment of which such obligor is responsible or liable as
obligor, guarantor or otherwise, and (vi) all obligations of the type referred
to in clauses (i) through (v) above of other persons secured by any lien on any
property or asset of such obligor (whether or not such obligation is assumed by
such obligor), except for (1) any such indebtedness that is by its terms
subordinated to or pari passu with the Subordinated Debentures (including the
5 1/4% Convertible Junior Subordinated Deferrable Interest Debentures Due 2025
of the Company which are pari passu with the Subordinated Debentures) and (2)
any indebtedness (including all other debt securities and guarantees in respect
of those debt securities) initially issued to any other trust, or a trustee of
such trust, partnership or other entity affiliated with International Paper that
is, directly or indirectly, a financing vehicle of International Paper (a
"Financing Entity") in connection with the issuance by such Financing Entity of
preferred securities or other similar securities. Such Senior Indebtedness shall
continue to be Senior Indebtedness and entitled to the benefits of the
subordination provisions irrespective of any amendment, modification or waiver
of any term of such Senior Indebtedness.
The Subordinated Debt Indenture does not limit the aggregate amount of
Senior Indebtedness International Paper may issue. At June 30, 1998, Senior
Indebtedness of International Paper and its consolidated subsidiaries aggregated
approximately $8.8 billion. See "Capitalization" in this Prospectus Supplement.
REGISTRATION, DENOMINATION AND TRANSFER
The Subordinated Debentures will initially be registered in the name of the
Issuer Trust. The Subordinated Debentures will be issued in denominations of $25
and integral multiples thereof. If the Subordinated Debentures are distributed
to holders of Capital Securities, it is anticipated that the depository
arrangements for the Subordinated Debentures will be substantially identical to
those in effect for the Capital Securities. See "Description of Capital
Securities--Book-Entry Procedures, Delivery and Form" in this Prospectus
Supplement.
Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Subordinated Debentures to be issued in definitive form.
Payments on Subordinated Debentures represented by a global security will be
made to Cede & Co., the nominee for DTC, as the registered holder of the
Subordinated Debentures, as described under "Description of Capital
Securities--Book-Entry Procedures, Delivery and Form" in this Prospectus
Supplement. If Subordinated Debentures are issued in certificated form,
principal and interest will be payable, the transfer of the Subordinated
Debentures will be registrable, and Subordinated Debentures will be exchangeable
for Subordinated Debentures of other authorized denominations of a like
aggregate principal amount, at the principal corporate trust office of the Debt
Securities Trustee in New York, New York or at the offices of any Paying Agent
or transfer agent appointed by the Company, provided that payment of interest
may be made at the option of the Company by check mailed to the address of the
persons entitled thereto. However, a holder of $1 million or more in aggregate
principal amount of Subordinated Debentures may receive payments of interest
(other than interest payable at the Stated Maturity) by wire transfer of
immediately available funds upon written request to the Debt Securities Trustee
not later than 15 calendar days prior to the date on which the interest is
payable.
Subordinated Debentures will be exchangeable for other Subordinated
Debentures of like tenor, of any authorized denominations, and of a like
aggregate principal amount. Subordinated Debentures may be presented for
exchange as provided above, and may be presented for registration of transfer
(with the form of transfer endorsed thereon, or a satisfactory written
instrument of transfer, duly executed), at the office of the securities
registrar appointed under the Subordinated Debt Indenture or at the office of
any transfer
S-26
<PAGE>
agent designated by the Company for such purpose without service charge and upon
payment of any taxes and other governmental charges as described in the
Subordinated Debt Indenture. The Company will appoint the Debt Securities
Trustee as securities registrar under the Subordinated Debt Indenture. The
Company may at any time designate additional transfer agents with respect to the
Subordinated Debentures.
In the event of any redemption, neither the Company nor the Debt Securities
Trustee shall be required to (i) issue, register the transfer of or exchange
Subordinated Debentures during a period beginning 15 days next preceding the day
of selection for redemption of Capital Securities and ending on the close of
business on the day of mailing of the relevant notice of redemption or (ii)
transfer or exchange any Subordinated Debentures so selected for redemption,
except, in the case of any Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Any monies deposited with the Debt Securities Trustee or any paying agent,
or then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Subordinated Debenture shall thereafter look,
as a general unsecured creditor, only to the Company for payment thereof.
CERTAIN COVENANTS
If (i) there shall have occurred any event that would constitute an Event of
Default, (ii) International Paper shall be in default with respect to its
payment of any obligations under the Guarantee, or (iii) International Paper
shall have given notice of its election to defer payments of interest on the
Subordinated Debentures by extending the interest payment period as provided in
the Subordinated Debt Indenture and such period, or any extension thereof, shall
be continuing, then International Paper (a) shall not declare or pay dividends
on, make distributions with respect to, or redeem, purchase or acquire, or make
a liquidation payment with respect to, any of its capital stock (other than
stock dividends paid by International Paper which consist of stock of the same
class as that on which the dividend is being paid), (b) shall not make any
payment of interest, principal or premium, if any, on or repay, repurchase or
redeem any debt securities issued by International paper that rank pari passu
with or junior to the Subordinated Debentures, and (c) shall not make any
guarantee payments with respect to the foregoing (other than pursuant to the
Guarantee).
International Paper will covenant (i) to directly or indirectly maintain
100% ownership of the Common Securities of the Issuer Trust; provided, however,
that any permitted successor of International Paper under the Subordinated Debt
Indenture may succeed to International Paper's ownership of such Common
Securities and (ii) to use its reasonable efforts to cause the Issuer Trust (x)
to remain a statutory business trust, except in connection with distribution of
Subordinated Debentures to the holders of Trust Securities in liquidation of the
Issuer Trust, the redemption of all of the Trust Securities of the Issuer Trust,
or certain mergers, consolidations or amalgamations, each as permitted by the
Declaration, and (y) to otherwise continue to be classified as a grantor trust
for United States Federal income tax purposes.
EXPENSES AND TAXES
The Company, as borrower, will agree to pay all debts and other obligations
(other than with respect to the Capital Securities and Common Securities issued
by the Issuer Trust) and all costs and expenses of the Issuer Trust (including
costs and expenses relating to the organization of the Issuer Trust, the fees
and expenses of the Issuer Trustees for the Issuer Trust and the costs and
expenses relating to the operation of the Issuer Trust) and to pay any and all
taxes, duties, assessments or other governmental charges of whatever nature and
all costs and expenses with respect thereto (other than United States
withholding taxes) to which the Issuer Trust might become subject so that the
net amounts received and retained by the
S-27
<PAGE>
Issuer Trust after paying such debts, obligations, costs, expenses, taxes,
duties, assessments or other governmental charges will be equal to the amounts
that the Issuer Trust would have received and retained had such debts,
obligations, costs, expenses, taxes, duties, assessments or other governmental
charges not been incurred by or imposed on the Issuer Trust. The foregoing
obligations of the Company under the Debt Securities owned by the Issuer Trust
are for the benefit of, and shall be enforceable by, any person to whom any such
debts, obligations, costs, expenses and taxes are owed (a "Creditor") whether or
not such Creditor has received notice thereof. Any such Creditor may enforce
such obligations of the Company directly against the Company, and the Company
will irrevocably waive any right or remedy to require that any such Creditor
take any action against the Issuer Trust or any other person before proceeding
against the Company. The Company will also agree in the Debt Securities owned by
the Issuer Trust to execute such additional agreements as may be necessary or
desirable to give full effect to the foregoing.
MODIFICATION OF SUBORDINATED DEBT INDENTURE
The provisions for modifying the Subordinated Debt Indenture and the Debt
Securities issued thereunder, including the Subordinated Debentures, are
summarized under the heading "Description of Debt Securities--Meetings,
Modification and Waiver" in the accompanying Prospectus. In addition, so long as
any of the Capital Securities remain outstanding, no such modification may be
made that adversely affects the holders of such Capital Securities in any
material respect, and no termination of the Subordinated Debt Indenture may
occur, and no waiver of any Debenture Event of Default may be effective, without
the prior consent of the holders of at least 66 2/3% of the aggregate
Liquidation Amount of the outstanding Capital Securities unless and until the
principal of (and premium, if any, on) the Subordinated Debentures and all
accrued and unpaid interest thereon have been paid in full and certain other
conditions are satisfied. In addition, the Company may not amend the
Subordinated Debt Indenture to remove the rights of holders of Capital
Securities of the Issuer Trust to institute a Direct Action without the prior
written consent of all the holders of Capital Securities or to remove the
obligation to obtain the consent of holders of Capital Securities as provided
for, or without the consent of the required percentage of holders of the Capital
Securities of the Issuer Trust. So long as the Company acts in accordance with
the terms of the Subordinated Debentures and the Subordinated Debt Indenture,
the Company may advance the Stated Maturity of and defer interest payable on the
Subordinated Debentures, in each case without the consent of the Issuer Trust or
the holders of the Capital Securities.
DEBENTURE EVENTS OF DEFAULT
The Subordinated Debt Indenture provides that any one or more of the events
described under "Description of Debt Securities--Events of Default" in the
accompanying Prospectus constitutes an "Event of Default" with respect to the
Subordinated Debentures. Deferral of any due date for the payment of interest in
connection with an Extension Period does not constitute an Event of Default. For
purposes of the Declaration and this Prospectus Supplement, each such Event of
Default under the Subordinated Debenture is referred to as a "Debenture Event of
Default." As described in "Description of Capital Securities--Declaration Events
of Default" in this Prospectus Supplement, the occurrence of a Debenture Event
of Default will also constitute an Event of Default in respect of the Capital
Securities.
The holders of at least a majority in aggregate principal amount of
outstanding Subordinated Debentures have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Debt
Securities Trustee. The Debt Securities Trustee or the holders of not less than
25% in aggregate principal amount of outstanding Subordinated Debentures may
declare the principal due and payable immediately upon a Debenture Event of
Default, and, should the Debt Securities Trustee or such holders of Subordinated
Debentures fail to make such declaration, the holders of at least 25% in
aggregate Liquidation Amount of the outstanding Capital Securities shall have
such right. The holders of a majority in aggregate principal amount of
outstanding Subordinated Debentures, with the consent of a majority in aggregate
Liquidation Amount of the outstanding Capital Securities, if such Subordinated
S-28
<PAGE>
Debentures are held by the Issuer Trust, may annul such declaration and waive
the default if all defaults (other than the non-payment of the principal of
Subordinated Debentures which has become due solely by such acceleration) have
been cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the Debt
Securities Trustee. Should the holders of Subordinated Debentures fail to annul
such declaration and waive such default, the holders of a majority in aggregate
Liquidation Amount of the outstanding Capital Securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding Subordinated Debentures affected thereby may, on behalf of the
holders of all the Subordinated Debentures, waive any past default, except a
default in the payment of principal (or premium, if any) or interest (unless
such default has been cured and a sum sufficient to pay all matured installments
of interest and principal due otherwise than by acceleration has been deposited
with the Debt Securities Trustee) or a default in respect of a covenant or
provision which under the Subordinated Debt Indenture cannot be modified or
amended without the consent of the holder of each outstanding Subordinated
Debenture affected thereby, provided, that if the Subordinated Debentures are
held by the Issuer Trust or an Issuer Trustee, such waiver shall not be
effective as to the Subordinated Debentures unless the holders of at least a
majority in aggregate liquidation amount of the Capital Securities shall have
consented to such waiver; provided further, that if the consent of the Holder of
each outstanding Subordinated Debenture is required, such waiver shall not be
effective unless each holder of the Capital Securities shall have consented to
such waiver. See "Description of Debt Securities--Meetings, Modification and
Waiver" in the accompanying Prospectus. The Company is required to file annually
with the Debt Securities Trustee a certificate as to whether or not the Company
is in compliance with all the conditions and covenants applicable to it under
the Subordinated Debt Indenture.
If a Debenture Event of Default occurs and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Subordinated Debentures, and any other amounts payable under the Subordinated
Debentures and the Subordinated Debt Indenture, to be forthwith due and payable
and to enforce its other rights as a creditor with respect to the Subordinated
Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Subordinated Debentures on the date such amounts are otherwise
payable, a registered holder of Capital Securities may institute a legal
proceeding directly against the Company for enforcement of payment to such
holder of an amount equal to the amount payable in respect of Subordinated
Debentures having a principal amount equal to the aggregate Liquidation Amount
of the Capital Securities held by such holder. The Company may not amend the
Subordinated Debentures to remove the foregoing right to bring a Direct Action
without the prior written consent of the holders of all the Capital Securities.
The holders of the Capital Securities would not be able to exercise directly
any remedies available to the holders of the Subordinated Debentures except
under the circumstances described in the preceding paragraph. See "Description
of Capital Securities--Declaration Events of Default" in this Prospectus
Supplement.
S-29
<PAGE>
DESCRIPTION OF GUARANTEE
The following summary of certain terms and provisions of the Guarantee
supplements the information set forth in the accompanying Prospectus under the
heading "Description of Trust Preferred Securities and Trust Guarantees." The
Guarantee will be executed and delivered by the Company concurrently with the
issuance of Capital Securities by the Issuer Trust for the benefit of the
holders from time to time of the Capital Securities. This summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all the provisions of the
Guarantee. including the definitions therein of certain terms. A copy of the
form of the Guarantee is available upon request from the Guarantee Trustee.
GENERAL
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Capital Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that the Issuer Trust may have or assert other
than the defense of payment. The following payments with respect to the Capital
Securities, to the extent not paid by or on behalf of the Issuer Trust (the
"Guarantee Payments"), will be subject to the Guarantee: (i) any accumulated and
unpaid Distributions required to be paid on such Capital Securities, to the
extent that the Issuer Trust has funds on hand available therefor at such time,
(ii) the Redemption Price with respect to any Capital Securities called for
redemption, to the extent that the Issuer Trust has funds on hand available
therefor at such time, and (iii) upon a voluntary or involuntary dissolution,
winding-up or liquidation of the Issuer Trust (unless the Subordinated
Debentures are distributed to holders of the Capital Securities), the lesser of
(a) the aggregate of the Liquidation Amount of all outstanding Capital
Securities and all accumulated and unpaid Distributions to the date of payment,
and (b) the amount of assets of the Issuer Trust remaining available for
distribution to holders of the Capital Securities on liquidation of the Issuer
Trust. The Company's obligation to make a Guarantee Payment may be satisfied by
direct payment of the required amounts by the Company to the holders of the
Capital Securities or by causing the Issuer Trust to pay such amounts to such
holders.
The Company will, through the Guarantee, the Declaration, the Subordinated
Debentures and the Subordinated Debt Indenture, taken together, fully,
irrevocably and unconditionally guarantee all the Issuer Trust's obligations
under the Capital Securities. No single document standing alone or operating in
conjunction with fewer than all the other documents constitutes such guarantee.
It is only the combined operation of these documents that has the effect of
providing a full, irrevocable and unconditional guarantee of the Issuer Trust's
obligations in respect of the Capital Securities. See "Relationship Among the
Capital Securities, the Subordinated Debentures and the Guarantee" in this
Prospectus Supplement.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Indebtedness
(as defined in the Subordinated Debt Indenture) of the Company in the same
manner as the Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Capital Securities. The Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Issuer
Trust or distribution to the holders of the Capital Securities of the
Subordinated Debentures.
S-30
<PAGE>
RELATIONSHIP AMONG THE CAPITAL SECURITIES,
THE SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Capital Securities
(to the extent the Issuer Trust has funds available for such payment) are
irrevocably guaranteed by the Company as and to the extent described under
"Description of Guarantee" in this Prospectus Supplement. Taken together, the
Company's obligations under the Subordinated Debentures, the Subordinated Debt
Indenture, the Declaration and the Guarantee provide, in the aggregate, a full,
irrevocable and unconditional guarantee of payments of Distributions and other
amounts due on the Capital Securities. No single document standing alone or
operating in conjunction with fewer than all the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Issuer Trust's obligations in respect of the Capital Securities. If and to the
extent that the Company does not make payments on the Subordinated Debentures,
the Issuer Trust will not have sufficient funds to pay Distributions or other
amounts due on the Capital Securities. The Guarantee does not cover payment of
amounts payable with respect to the Capital Securities when the Issuer Trust
does not have sufficient funds to pay such amounts. In such event, one remedy of
a holder of the Capital Securities would be to institute a legal proceeding
directly against the Company for enforcement of payment of the Company's
obligations under Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Capital Securities held by such holder.
The obligations of the Company under the Subordinated Debentures and the
Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness (as defined in the Subordinated Debt Indenture).
SUFFICIENCY OF PAYMENTS
As long as payments are made when due on the Subordinated Debentures, such
payments will be sufficient to cover Distributions and other payments
distributable on the Capital Securities, primarily because (i) the aggregate
principal amount of the Subordinated Debentures will be equal to the sum of the
aggregate stated Liquidation Amount of the Capital Securities and Common
Securities; (ii) the interest rate, Payment Dates and other payment dates on the
Subordinated Debentures will match the Distribution rate, Payment Dates and
other payment dates for the Capital Securities; (iii) the Company will pay for
all and any costs, expenses and liabilities of the Issuer Trust except United
States withholding taxes and the Issuer Trust's obligations to holders of the
Trust Securities; and (iv) the Declaration further provides that the Issuer
Trust will not engage in any activity that is not consistent with the limited
purposes of the Issuer Trust.
Notwithstanding anything to the contrary in the Subordinated Debt Indenture,
the Company has the right to set-off any payment it is otherwise required to
make thereunder against and to the extent the Company has theretofore made, or
is concurrently on the date of such payment making, a payment under the
Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
A holder of any Capital Security may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Issuer Trust
or any other person or entity. See "Description of Guarantee" in this Prospectus
Supplement.
A default or event of default under any Senior Indebtedness (as defined in
the Subordinated Debt Indenture) of the Company would not necessarily constitute
a default or Event of Default in respect of the Capital Securities. However, in
the event of payment defaults under, or acceleration of, Senior Indebtedness (as
so defined) of the Company, the subordination provisions of the Subordinated
Debt Indenture
S-31
<PAGE>
provide that no payments may be made in respect of the Subordinated Debentures
until such Senior Indebtedness has been paid in full or any payment default
thereunder has been cured or waived. See "Description of Subordinated
Debentures--Subordination" in this Prospectus Supplement.
LIMITED PURPOSE OF THE ISSUER TRUST
The Capital Securities represent undivided beneficial ownership interests in
the assets of the Issuer Trust, and the Issuer Trust exists for the sole purpose
of issuing its Capital Securities and Common Securities, investing the proceeds
thereof in Subordinated Debentures and engaging in only those other activities
necessary, the proceeds thereof in Subordinated Debentures and engaging in only
those other activities necessary, convenient or incidental thereto (such as
registering the transfer of the Trust Securities). A principal difference
between the rights of a holder of a Capital Security and a holder of a
Subordinated Debenture is that a holder of a Subordinated Debenture is entitled
to receive from the Company payments on Subordinated Debentures held, while a
holder of Capital Securities is entitled to receive Distributions or other
amounts distributable with respect to the Capital Securities from the Issuer
Trust (or from the Company under the Guarantee) only if and to the extent the
Issuer Trust has funds available for the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the Issuer Trust, other than any such dissolution, winding-up or liquidation
involving the distribution of the Subordinated Debentures, after satisfaction of
liabilities to creditors of the Issuer Trust as required by applicable law, the
holders of the Capital Securities will be entitled to receive, out of assets
held by the Issuer Trust, the Liquidation Distribution in cash. See "Description
of Capital Securities--Liquidation Distribution Upon Dissolution" in this
Prospectus Supplement. Upon any voluntary or involuntary liquidation or
bankruptcy of the Company, the Issuer Trust, as registered holder of the
Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated and junior in right of payment to all Senior Indebtedness (as
defined herein) as set forth in the Subordinated Debt Indenture, but entitled to
receive payment in full of all amounts payable with respect to the Subordinated
Debentures before any stockholders Of the Company receive payments or
distributions. Since the Company is the guarantor under the Guarantee and has
agreed under the Subordinated Debt Indenture to pay for all costs, expenses and
liabilities of the Issuer Trust (other than United States withholding taxes and
the Issuer Trust's obligations to the holders of the Trust Securities), the
positions of a holder of the Capital Securities and a holder of such
Subordinated Debentures relative to other creditors and to stockholders of the
Company in the event of liquidation or bankruptcy of the Company are expected to
be substantially the same.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of certain of the material United States Federal
income tax consequences of the purchase, ownership and disposition of Capital
Securities. Unless otherwise stated, this summary deals only with Capital
Securities held as capital assets by holders who purchase the Capital Securities
upon original issuance. It does not deal with special classes of holders such as
banks, thrifts, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, tax-exempt investors,
or persons that will hold the Capital Securities as other than a capital asset.
This summary also does not address the tax consequences to persons that have a
functional currency other than the U.S. Dollar or the tax consequences to
shareholders, partners or beneficiaries of a holder of Capital Securities.
Further, it does not include any description of any alternative minimum tax
consequences or the tax laws of any state or local government or of any foreign
government that may be applicable to the Capital Securities. This summary is
based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
regulations thereunder and administrative and judicial interpretations thereof,
as of the date hereof, all of which are subject to change, possibly on a
retroactive basis.
S-32
<PAGE>
CLASSIFICATION OF THE SUBORDINATED DEBENTURES
In connection with the issuance of the Subordinated Debentures, Skadden,
Arps, Slate, Meagher & Flom LLP, special tax counsel to the Company and the
Issuer Trust ("Tax Counsel"), will render an opinion generally to the effect
that under current law and assuming full compliance with the terms of the
Subordinated Debt Indenture and certain other documents, and based on certain
facts and assumptions contained in such opinion, the Subordinated Debentures to
be held by the Issuer Trust will be classified, for United States Federal income
tax purposes, as indebtedness of the Company.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Capital Securities, Tax Counsel will
render an opinion generally to the effect that, under current law and assuming
full compliance with the terms of the Declaration, the Subordinated Debt
Indenture, and certain other documents, and based on certain facts and
assumptions contained in such opinion, the Issuer Trust will be classified for
United States Federal income tax purposes, as a grantor trust and not as an
association taxable as a corporation. Accordingly, for United States Federal
income tax purposes, each holder of Capital Securities will generally be treated
as the owner of an undivided interest in the Subordinated Debentures, and as
further discussed below, each holder will be required to include in ordinary
income his allocable share of interest (or original issue discount ("OID"), if
any) paid or accrued on the Subordinated Debentures.
POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Under recently issued Treasury regulations (the "Regulations"), a debt
instrument will be deemed to be issued with OID if there is more than a "remote"
contingency that periodic stated interest payments due on the instrument will
not be timely paid. Because the exercise by the Company of its option to defer
the payment of stated interest on the Subordinated Debentures would prevent the
Company from declaring dividends on any class of equity, the Company believes
that the likelihood of its exercising the option is "remote" within the meaning
of the Regulations. As a result, the Company intends to take the position, based
on the advice of Tax Counsel, that the Subordinated Debentures will not be
deemed to be issued with OID. Accordingly, based on this position, stated
interest payments on the Subordinated Debentures will be includible in the
ordinary income of a holder at the time that such payments are paid or accrued
in accordance with the holder's regular method of accounting. Because the
Regulations have not yet been addressed in any published rulings or other
published interpretations issued by the Internal Revenue Service, it is possible
that the Internal Revenue Service could take a position contrary to the position
taken by the Company.
EXERCISE OF DEFERRAL OPTION. If the Company were to exercise its option to
defer the payment of stated interest on the Subordinated Debentures, the
Subordinated Debentures would be treated, solely for purpose of the OID rules,
as being "re-issued" at such time with OID. Under these rules a holder of the
Subordinated Debentures would be required to include OID in ordinary income, on
a current basis, over the period that the instrument is held even though the
Company would not be making any actual cash payments during the extended
interest payment period. The amount of interest income includible in the taxable
income of a holder of the Subordinated Debentures would be determined on the
basis of a constant yield method over the remaining term of the instrument and
the actual receipt of future payments of stated interest on the Subordinated
Debentures would no longer be separately reported as taxable income. The amount
of OID that would accrue, in the aggregate, during the extended interest payment
period would be approximately equal to the amount of the cash payment due at the
end of such period. Any OID included in income would increase the holder's
adjusted tax basis in the Subordinated Debentures and the holder's actual
receipt of interest payments would reduce such basis.
Because income on the Capital Securities will constitute interest income for
United States Federal income tax purposes, corporate holders of Capital
Securities will not be entitled to claim a dividends received deduction in
respect of such income.
S-33
<PAGE>
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
If the Company liquidates the Issuer Trust and causes the Subordinated
Debentures to be distributed on a pro rata basis to the holders of the Capital
Securities, such distribution would be treated as a nontaxable event to the
holders. In such event, each holder of Capital Securities would have an adjusted
tax basis in the Subordinated Debentures received in the liquidation equal to
the adjusted tax basis in his Capital Securities surrendered therefor and the
holding period of the Subordinated Debentures would include the period during
which the holder had held the Capital Securities. If, however, the Issuer Trust
is characterized, for United States Federal income tax purposes, as an
association taxable as a corporation at the time of such liquidation, the
distribution of the Subordinated Debentures would constitute a taxable event to
the holders of Capital Securities.
If the Subordinated Debentures are redeemed for cash and the proceeds of
such redemption are distributed to holders in redemption of their Capital
Securities, the redemption would be treated as a sale of the Capital Securities,
in which gain or loss would be recognized, as described immediately below.
SALE OF CAPITAL SECURITIES
Upon the sale of the Capital Securities, a holder will recognize gain or
loss in an amount equal to the difference between his adjusted tax basis in the
Capital Securities and the amount realized in the sale (except to the extent of
any amount received in respect of accrued but unpaid interest not previously
included in income). Subject to the market discount rules described above, such
gain or loss will be a capital gain or loss and will be a long term capital gain
or loss if the Capital Securities have been held for more than one year.
The Capital Securities may trade at a price that does not accurately reflect
the value of accrued but unpaid interest (or OID if the Subordinated Debentures
are treated as having been issued, or reissued, with OID) with respect to the
underlying Subordinated Debentures. A holder who disposes of his Capital
Securities will be required to include in ordinary income (i) any portion of the
amount realized that is attributable to such accrued but unpaid interest to the
extent not previously included in income or (ii) any amount of OID, in either
case, that has accrued on his pro rata share of the underlying Subordinated
Debentures during the taxable year of sale through the date of disposition. Any
such income inclusion will increase the holder's adjusted tax basis in his
Capital Securities disposed of. To the extent that the amount realized in the
sale is less than the holder's adjusted tax basis, a holder will recognize a
capital loss. Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States Federal income tax purposes.
NON-U.S. HOLDERS
For purposes of this discussion, a "Non-U.S. Holder" is any corporation,
individual, partnership, estate or trust that is, as to the United States, a
foreign corporation, a nonresident alien individual, a foreign partnership, or a
nonresident fiduciary of a foreign estate or trust.
Payments made to a holder of Capital Securities who is a Non-U.S. Holder
will not be subject to withholding of United States Federal income tax, provided
that (a) the beneficial owner of the Capital Securities does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote, (b) the beneficial owner of the
Capital Securities is not a controlled foreign corporation that is related to
the Company through stock ownership, and (c) either (A) the beneficial owner of
the Capital Securities certifies to the Issuer Trust or its agent, under the
penalty of perjury, that it is not a United States holder and provides his name
and address or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business (a "Financial Institution"), and holds the Capital Securities in
such capacity, certifies to the Trust or its agent, under the penalty of
perjury, that such statement has been received from the beneficial owner by it
or by a Financial Institution between it and the beneficial owner and furnishes
the Issuer Trust or its agent with a copy thereof. In addition, a Non-U.S.
Holder of Capital
S-34
<PAGE>
Securities will not be subject to withholding of United States Federal income
tax on any gain realized upon the sale or other disposition of a Capital
Security.
INFORMATION REPORTING
Generally, income on the Capital Securities will be reported to holders on
Forms 1099, which forms should be mailed to holders of Capital Securities by
January 31 following each calendar year.
CERTAIN ERISA CONSIDERATIONS
Before authorizing an investment in the Capital Securities, fiduciaries of
pension, profit sharing or other employee benefit plans subject to ERISA
("Plans") should consider, among other matters, (a) ERISA's fiduciary standards
(including its prudence and diversification requirements), (b) whether such
fiduciaries have authority to make such investment in the Capital Securities
under the applicable Plan investment policies and governing instruments, and (c)
rules under ERISA and the Code that prohibit Plan fiduciaries from causing a
Plan to engage in a "prohibited transaction."
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well as
individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from, among other things, engaging in certain transactions
involving "plan assets" with persons who are "parties in interest" under ERISA
or "disqualified persons" under the Code (collectively, "Parties in Interest")
with respect to such Plan. A violation of these "prohibited transaction" rules
may result in an excise tax or other liabilities under ERISA and/or Section 4975
of the Code for such persons, unless exemptive relief is available under an
applicable statutory or administrative exemption. Such administrative exemptions
include prohibited transaction class exemptions ("PTCE"). PTCE 96-23 (for
certain transactions determined by in-house asset managers), PTCE 91-38 (for
certain transactions involving bank collective investment funds), PTCE 95-60
(for certain transactions involving insurance company general accounts), PTCE
90-1 (for certain transactions involving insurance company pooled separate
accounts), and PTCE 84-14 (for certain transactions determined by independent
qualified asset managers).
The Department of Labor has issued a regulation (29 C.F.R. section
2510.3-101) (the "Plan Assets Regulation") concerning the definition of what
constitutes the assets of a Plan. The Plan Assets Regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment will be deemed, for purposes of ERISA, to be assets of the
investing Plan unless certain exceptions apply. If the underlying assets of the
Issuer Trust were deemed to include "plan assets" of investing Plans, the
Property Trustee and the Company could be treated as fiduciaries under ERISA
with respect to such Plans by virtue of their exercise of authority or control
respecting the management or disposition of the assets of the Issuer Trust.
Under such circumstances, there may have been an improper delegation by the
investing Plans of the responsibility to manage Plan assets and the Company's
redemption of the Subordinated Debentures could constitute a prohibited
transaction under Section 406(a) of ERISA or Section 4975 of the Code.
Pursuant to an exception contained in the Plan Assets Regulation, the assets
of the Issuer Trust would not be deemed to be "plan assets" of investing Plans
if the equity interests acquired by employee benefit plans are "publicly-offered
securities"--that is, they are (1) widely held (i.e., owned by more than 100
investors independent of the issuer and of each other), (2) freely transferable
and (3) sold as part of an offering to the public pursuant to an effective
registration statement under the Securities Act and then timely registered under
the Exchange Act. The Underwriters expect that the Capital Securities will be
held by at least 100 independent investors at the conclusion of the offering,
and that the Capital Securities will be sold as part of an offering pursuant to
an effective registration statement under the Securities Act, and it is
anticipated that the Capital Securities will be timely registered under the
Exchange Act. While no significant restrictions have been imposed on the
transfer of the Capital Securities and, therefore, it is anticipated that the
Capital Securities will be "freely tradeable" for purposes of the Plan Asset
regulations,
S-35
<PAGE>
whether a security is "freely transferable" for purposes of the Plan Assets
Regulation is a factual question to be determined on the basis of all relevant
facts and circumstances.
Although it is expected that the Capital Securities will meet the criteria
of "publicly offered securities" described above and that, therefore, the assets
of the Issuer Trust should not be deemed to be "plan assets" of an investing
Plan, if the Company or the Issuer Trust is a Party in Interest with respect to
the Plan, in the absence of an applicable exemption, the Plan's purchase of the
Capital Securities from the Company would likely constitute a prohibited
transaction under Section 406(a)(1)(A) of ERISA and Section 4975(c)(1)(A) of the
Code. In addition, in the absence of an applicable exemption, certain other
transactions coincident to the Capital Securities may involve a prohibited
transaction, such as a distribution of the Subordinated Debentures from the
Issuer Trust to a Plan investor.
Any plans or other entities whose assets include Plan assets subject to
ERISA or Section 4975 of the Code proposing to acquire Capital Securities should
consult with their own counsel to confirm that such investment will not result
in a prohibited transaction that is not subject to an exemption and will satisfy
any other applicable requirements of ERISA and the Code. Each purchaser using
assets of a Plan to acquire Capital Securities will be deemed to have
represented that its purchase and holding of such Capital Securities will not
result in a nonexempt prohibited transaction under ERISA or the Code and will be
covered by the exemptive relief provided by PTCE 96-23, 95-60, 91-38, 90-1 or
84-14 or another applicable exemption.
Governmental Plans and certain church plans are not subject to ERISA, and
are also not subject to the prohibited transaction provisions of Section 4975 of
the Code. However, state laws or regulations governing the investment and
management of the assets of such plans may contain fiduciary and prohibited
transaction provisions similar to those under ERISA and the Code discussed
above. Accordingly, fiduciaries of governmental and church plans, in
consultation with their advisers, should consider the impact of their respective
state laws on investments in the Capital Securities and the considerations
discussed above to the extent applicable.
UNDERWRITERS
Subject to the terms and conditions set forth in the Underwriting Agreement
dated September , 1998 (the "Underwriting Agreement") among the Company, the
Issuer Trust, and each of the underwriters named therein (the "Underwriters"),
the Issuer Trust has agreed to sell to the Underwriters, and the Underwriters
have agreed to purchase, severally but not jointly, the respective number of the
Capital Securities set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
CAPITAL
NAME SECURITIES
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated...........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........................
A.G. Edwards & Sons, Inc....................................................
PaineWebber Incorporated....................................................
Prudential Securities Incorporated..........................................
Salomon Smith Barney Inc....................................................
----------------
Total................................................................... 12,000,000
----------------
----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Capital Securities are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are committed to take and pay for all the
Capital Securities if any are taken.
The initial purchase price for the Capital Securities will be the initial
offering price set forth on the cover page of this Prospectus Supplement (the
"Capital Securities Offering Price"). The Underwriters
S-36
<PAGE>
propose to offer the Capital Securities at the Capital Securities Offering
Price, and all or part to certain dealers at a price that represents a
concession not in excess of $ per Capital Security. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
Capital Security to certain other dealers. After the initial public offering,
the public offering price, concession and discount may be changed by the
Underwriters named on the cover page hereof.
In view of the fact that the proceeds from the sale of the Capital
Securities will be used to purchase the Subordinated Debentures issued by the
Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriters arranging the investment therein of such
proceeds an amount of $ per Capital Security (or $ in the
aggregate) for the accounts of the Underwriters.
Pursuant to the Underwriting Agreement, the Issuer Trust and the Company
have granted to the Underwriters an option, exercisable for 30 days from the
date hereof, to purchase up to an aggregate of additional Capital
Securities at the public offering price set forth on the cover page hereof less
underwriting discounts and commissions. The Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the Capital Securities. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional Capital Securities as the number of Capital Securities set forth
opposite such Underwriter's name in the preceding table bears to the total
number of Capital Securities offered by the Underwriters hereby.
Prior to this offering, there has been no public market for the Capital
Securities. Application will be made to list the Capital Securities on the NYSE.
Trading of the Capital Securities on the NYSE is expected to commence within a
30-day period after the initial delivery of the Capital Securities.
The Underwriters have advised the Company that they intend to make a market
in the Capital Securities prior to commencement of trading on the NYSE, but they
are not obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Capital Securities.
In order to meet one of the requirements for listing the Capital Securities
on the NYSE, the Underwriters will undertake to sell lots of 100 or more Capital
Securities to a minimum of 400 beneficial holders.
The Company and the Issuer Trust have agreed that, during the period
beginning on the date of the Underwriting Agreement and continuing to and
including the closing under the Underwriting Agreement, neither will offer,
sell, contract to sell or otherwise dispose of any securities of the Company or
the Issuer Trust that are substantially similar to the Capital Securities, or
that are convertible into or exchangeable for, or otherwise represent a right to
acquire, any such securities, except in the offering or with the prior written
consent of the Underwriters.
The Company and the Issuer Trust have agreed to indemnify the Underwriters
and certain other persons against certain liabilities, including liabilities
under the Securities Act and to contribute to payments the Underwriters may be
required to make in respect thereof.
In connection with the offering of the Capital Securities, the Underwriters
and any selling group members and their respective affiliates may engage in
transactions to stabilize, maintain or otherwise affect the market price of the
Capital Securities. Specifically, the Underwriters may overallot by selling more
Capital Securities than they are committed to purchase from the Issuer Trust. In
such a case, to cover all or part of the short position, the Underwriters may
purchase Capital Securities in the open market following completion of the
initial offering of the Capital Securities. The Underwriters also may engage in
stabilizing transactions in which they bid for, and purchase, Capital Securities
at a level above that which might otherwise prevail in the open market for the
purpose of preventing or retarding a decline in the market price of the Capital
Securities. The Underwriters also may reclaim any selling concessions allowed to
an
S-37
<PAGE>
Underwriter or a dealer if the Underwriters repurchase Capital Securities
distributed by that Underwriter or dealer. Any of the foregoing transactions may
result in the maintenance of a price for the Capital Securities at a level above
that which might otherwise prevail in the open market. Neither the Company nor
any Underwriter makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Capital Securities. The Underwriters are not required to engage in
any of the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or financial services to
the Company, for which such Underwriters or their affiliates have received or
will receive customary fees and commissions.
LEGAL MATTERS
The validity of the Capital Securities, the Subordinated Debentures and the
Guarantee will be passed upon for International Paper and the Issuer Trust by
James W. Guedry, Associate General Counsel of International Paper, and by
Skadden, Arps, Slate, Meagher & Flom LLP, and certain matters will be passed
upon on behalf of the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP.
Mr. Guedry does not own a material or significant amount of the outstanding
shares of International Paper common stock. He participates in International
Paper's Stock Option Plan and in its Salaried Savings Plan, having an interest
in a fund under that plan which invests in International Paper common stock.
EXPERTS
THIS SECTION REPLACES THE SECTION ENTITLED "EXPERTS" IN THE ACCOMPANYING
PROSPECTUS.
The audited financial statements and schedules incorporated by reference in
this Prospectus Supplement and elsewhere in the Registration Statement of which
this Prospectus Supplement forms a part have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in accounting and auditing in giving said reports.
S-38
