-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RtT9MMcGmVi8nSPCF4EmOGeIMcwoSHlq6sc1EiXNPMN1YQh4HRPox36mFD6AG98B 1AAx3H+Lp30q+E9H5gI6uQ== 0000950134-04-019817.txt : 20050801 0000950134-04-019817.hdr.sgml : 20050801 20041223063901 ACCESSION NUMBER: 0000950134-04-019817 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20041223 DATE AS OF CHANGE: 20041229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL SHIPHOLDING CORP CENTRAL INDEX KEY: 0000278041 STANDARD INDUSTRIAL CLASSIFICATION: DEEP SEA FOREIGN TRANSPORTATION OF FREIGHT [4412] IRS NUMBER: 362989662 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-120161 FILM NUMBER: 041222342 BUSINESS ADDRESS: STREET 1: 650 POYDRAS ST STE 1700 CITY: NEW ORLEANS STATE: LA ZIP: 70130 BUSINESS PHONE: 5045295470 S-1/A 1 h19465a3sv1za.txt INTERNATIONAL SHIPHOLDING CORP.- AMEND.3 - REG NO.333-120161 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 2004 REGISTRATION NO. 333-120161 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- PRE-EFFECTIVE AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- INTERNATIONAL SHIPHOLDING CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 4412 36-2989662 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
650 POYDRAS STREET NEW ORLEANS, LOUISIANA 70130 (504) 529-5461 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) GARY L. FERGUSON VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 650 POYDRAS STREET NEW ORLEANS, LOUISIANA 70130 (504) 529-5461 (Names, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: L. RICHARDS MCMILLAN, II THOMAS D. WASHBURNE, JR. JONES, WALKER, WAECHTER, POITEVENT, MICHAEL W. CONRON CARRERE & DENEGRE, L.L.P. VENABLE LLP 201 ST. CHARLES AVENUE, 51ST FLOOR TWO HOPKINS PLAZA NEW ORLEANS, LOUISIANA 70170-5100 SUITE 1800 (504) 582-8188 BALTIMORE, MARYLAND 21201-2978 FAX: (504) 582-8012 (410) 244-7400 FAX: (410) 244-7742
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. --------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------------- Convertible Exchangeable Preferred Stock.................................. 880,000 $50.00 $44,000,000 $5,575(2) - --------------------------------------------------------------------------------------------------------------------------------- Convertible Subordinated Notes........... $44,000,000(3) --(4) --(4) --(4) - --------------------------------------------------------------------------------------------------------------------------------- Common Stock............................. (5) --(4) --(4) --(4) - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. (2) Registration fee of $5,575 paid on November 1, 2004. (3) This number represents a total of $44,000,000 aggregate principal amount of Convertible Subordinated Notes issuable if we elect to exchange all of the Convertible Exchangeable Preferred Stock for Convertible Subordinated Notes. For purposes of estimating the amount of notes to be included upon exchange of preferred stock, we calculated the amount of notes issuable upon exchange based on an exchange rate of $50 principal amount of the notes for each share of preferred stock. (4) No additional consideration will be received for the common stock or the Convertible Subordinated Notes, and, therefore, no additional registration fee is required pursuant to Rule 457(i). (5) This number represents shares of common stock issuable upon conversion of the Convertible Exchangeable Preferred Stock or the Convertible Subordinated Notes. In accordance with Rule 416 under the Securities Act of 1933, as amended, there are also being registered hereby such indeterminate number of additional shares of common stock as may become issuable pursuant to any stock split, stock dividend, recapitalization or similar transaction. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED DECEMBER 22, 2004 (ISC CORPORATION LOGO) 800,000 SHARES INTERNATIONAL SHIPHOLDING CORPORATION % CONVERTIBLE EXCHANGEABLE PREFERRED STOCK LIQUIDATION PREFERENCE $50 PER SHARE --------------------- International Shipholding Corporation is offering 800,000 shares of % convertible exchangeable preferred stock, which is referred to in this prospectus as the "preferred stock." Cash dividends will be cumulative from the date of issuance at the annual rate of % of the liquidation preference of the preferred stock, payable quarterly on each of , , , and , commencing , 2005. Any dividend must be declared by our board of directors and must come from funds that are legally available for dividend payments. Each share of the preferred stock will have a liquidation preference of $50 per share. You may convert each share of preferred stock into shares of our common stock based on the initial conversion price of $ , subject to adjustment upon the occurrence of certain events. We may elect to redeem the preferred stock, in whole or in part, for cash at any time on or after , 2006, provided that prior to , 2007, we may elect to redeem the preferred stock only if the closing price of our common stock has exceeded 150% of the conversion price of the preferred stock for at least 20 trading days during any 30-day trading period ending within five trading days prior to notice of redemption. We may also elect to redeem the preferred stock for cash upon a change in control of our company as further described in this prospectus. In addition, upon a change in control of our company and to the extent we have not exercised our change in control redemption option, you may require us to redeem for cash any or all of your shares of the preferred stock at the liquidation preference of the preferred stock, plus any accrued and unpaid cash dividends to, but not including, the date of redemption. You will have no other right to require us to redeem the preferred stock. At our option, we may exchange the preferred stock in whole, but not in part, on any dividend payment date beginning on , 2005 and prior to , 2014, for our % convertible subordinated notes due 2014, which are referred to in this prospectus as the "notes." If we elect to exchange the preferred stock for the notes, the exchange rate will be $50 principal amount of the notes for each share of preferred stock. The notes, if issued, will mature on , 2014 and will have terms substantially similar to those of the preferred stock. The preferred stock has no maturity date and no voting rights prior to conversion to common stock, except in the limited circumstances described in this prospectus. The notes, if issued, will have no voting rights prior to conversion to common stock. AN INVESTMENT IN THE SECURITIES OFFERED BY THIS PROSPECTUS INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS. ---------------------
PER SHARE TOTAL --------- ---------- Public Offering Price....................................... $ $ Underwriting Discount and Financial Advisory Fee............ $ $ Proceeds, Before Expenses, to International Shipholding Corporation............................................... $ $
We have granted the underwriter a 30-day option to purchase up to 80,000 additional shares of the preferred stock on the same terms and conditions as set forth above to cover over-allotments, if any. Shares of our common stock are traded on the New York Stock Exchange under the symbol "ISH." The last reported sale price of our common stock on December 22, 2004 was $14.77 per share. The preferred stock will be listed on the New York Stock Exchange under the symbol "ISH Pr." NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The underwriter expects to deliver the shares on or about . --------------------- FERRIS, BAKER WATTS Incorporated The date of this prospectus is , 2004 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE OFFERS ARE NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT COVER OF THIS PROSPECTUS. TABLE OF CONTENTS Cautionary Notice Regarding Forward-Looking Statements...... ii Industry and Other Information.............................. ii Prospectus Summary.......................................... 1 Risk Factors................................................ 14 Use of Proceeds............................................. 26 Dividend Policy............................................. 26 Price Range of Common Stock................................. 27 Capitalization.............................................. 28 Selected Historical Financial and Operating Data............ 29 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 31 Business.................................................... 45 Management.................................................. 60 Security Ownership of Management and Certain Beneficial Owners.................................................... 65 Certain Relationships and Transactions...................... 67 Description of the Preferred Stock.......................... 68 Description of the Notes.................................... 83 Description of Indebtedness................................. 94 Description of Common Stock................................. 96 Material U.S. Federal Income Tax Considerations............. 98 Underwriting................................................ 106 Legal Matters............................................... 107 Experts..................................................... 107 Where You Can Find More Information......................... 108 Glossary.................................................... G-1 Index to Financial Statements............................... F-1
--------------------- International Shipholding Corporation is a Delaware corporation. Our principal executive offices are located at 650 Poydras Street, New Orleans, Louisiana 70130 and our telephone number at that address is (504) 529-5461. Our website is located at www.intship.com. The information on our website is not part of this prospectus. In this prospectus, except as otherwise noted, "we," "us," "our," "ISH" and "the company" refer to International Shipholding Corporation and its consolidated subsidiaries. CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), both as amended. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including without limitation statements regarding (1) estimated fair values of capital assets, the recoverability of the cost of those assets, the estimated future cash flows attributable to those assets, and the appropriate discounts to be applied in determining the net present values of those estimated cash flows; (2) estimated scrap values of assets held for disposal; (3) estimated fair values of financial instruments, such as interest rate and commodity swap agreements; (4) estimated losses (including independent actuarial estimates) under self-insurance arrangements, as well as estimated losses on certain contracts, trade routes, lines of business or asset dispositions; (5) estimated losses attributable to asbestos claims; (6) estimated obligations, and the timing thereof, to the U.S. Customs Service relating to foreign repair work; (7) the adequacy of our capital resources and the availability of additional capital resources on commercially acceptable terms; (8) our ability to remain in compliance with our debt covenants; (9) anticipated trends in government sponsored cargoes; (10) our ability to maintain or increase our government subsidies; (11) the anticipated improvement in the results of our Mexican rail-ferry service; (12) the estimated effect on our results of operations of the American Jobs Creation Act of 2004; and (13) assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "will," "estimate," "intend," "continue," "believe," "expect," "plan" or "anticipate" and other similar words. Such forward-looking statements may be contained in the sections of this prospectus entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," among other places. Although we believe that the expectations expressed in our forward-looking statements are reasonable, actual results will differ from those projected or assumed in our forward-looking statements, and those variations could be material. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and are subject to inherent risks and uncertainties, such as those disclosed in the section of this prospectus entitled "Risk Factors" and elsewhere herein. All forward-looking statements contained in this prospectus are made as of the date of this prospectus. Except for our ongoing disclosure obligations under the federal securities laws, we do not intend, and we undertake no obligation, to update any forward-looking statement. We urge you to review carefully the section of this prospectus entitled "Risk Factors" for a more complete discussion of the risks of an investment in the preferred stock. --------------------- INDUSTRY AND OTHER INFORMATION Unless we indicate otherwise, the information about the shipping industry contained in this prospectus, including information about our market positions and market shares, is based on our general knowledge of, and expectations concerning, the industry, including estimates prepared by us using data from various industry sources, and on assumptions we made based on such data and knowledge. We believe that data regarding the shipping industry and our market positions and market shares within such industry provide generally reliable guidance, but such data is inherently imprecise because it is not gathered for each of the specific segments of our business. Further, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed in the "Risk Factors" section of this prospectus. We have not independently verified data from industry sources and cannot guarantee its accuracy or completeness, but we believe the data is generally accurate and we use it in evaluating our performance and planning our future activities. ii PROSPECTUS SUMMARY This summary highlights selected information appearing elsewhere in this prospectus. You should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before making an investment decision, and you should pay particular attention to the risks associated with our business and the risks of investing in the preferred stock, which we discuss under "Risk Factors" beginning on page 14, and to our financial statements and related notes beginning on page F-1. ABOUT THE COMPANY Through our subsidiaries, we operate a diversified fleet of U.S. and foreign flag vessels that provide international and domestic maritime transportation services to commercial and governmental customers primarily under medium- to long-term charters and contracts. At September 30, 2004, our fleet consisted of 35 ocean-going vessels, of which 11 were 100% owned by us, nine were 30% owned by us, two were 50% owned by us, seven were leased by us, and six were operated by us under operating contracts. We also own 917 LASH (Lighter Aboard SHip) barges and 32 over-the-road haul-away car carrying trucks that are leased to a company in which we have a 50% interest. Our fleet is deployed by our principal operating subsidiaries, Central Gulf Lines, Inc. ("Central Gulf"), LCI Shipholdings, Inc. ("LCI"), which includes a transatlantic liner service doing business as "Forest Lines," Waterman Steamship Corporation ("Waterman"), and CG Railway, Inc. ("CG Railway"). Other of our subsidiaries provide ship charter brokerage, agency and other specialized services primarily to our operating segments. We have five operating segments: Liner Services, Time Charter Contracts, Contracts of Affreightment ("COA"), Rail-Ferry Service, and Other. In addition to our five operating segments, we have investments in several unconsolidated entities of which we own 50% or less and do not exercise significant influence over operating and financial activities. For additional information about our operating segments, see note K of the notes to our consolidated financial statements included elsewhere in this prospectus. During the year ended December 31, 2003 and the nine months ended September 30, 2004, those segments made the following contributions to our revenues, gross voyage profit or loss and segment profit or loss:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 2004 DECEMBER 31, 2003 ---------------------------------------- ---------------------------------------- GROSS VOYAGE SEGMENT GROSS VOYAGE SEGMENT REVENUES PROFIT (LOSS) PROFIT (LOSS) REVENUES PROFIT (LOSS) PROFIT (LOSS) -------- ------------- ------------- -------- ------------- ------------- (IN THOUSANDS) (IN THOUSANDS) Liner Services............ $ 71,332 $ (429) $(1,043) $ 75,635 $(4,199) $(5,238) Time Charter Contracts.... 87,086 22,144 17,611 129,685 33,048 26,378 Contracts of Affreightment........... 12,048 3,737 2,597 16,189 5,495 3,695 Rail-Ferry Service........ 11,923 (3,382) (4,858) 15,537 (2,926) (5,248) Other..................... 17,094 923 757 20,767 2,422 3,132 -------- ------- ------- -------- ------- ------- Total................... $199,483 $22,993 $15,064 $257,813 $33,840 $22,719 ======== ======= ======= ======== ======= =======
Liner Services. In our liner services segment we operate four vessels, including one "dockship" that positions barges for pick-up and discharge, on established trade routes with regularly scheduled sailing dates. We receive revenues for the carriage of cargo within the established trading areas and pay the operating and voyage expenses incurred. Our liner services include a U.S. flag service between U.S. Gulf and East Coast ports and ports in the Red Sea and Middle East, and a foreign flag transatlantic service operating between U.S. Gulf and East Coast ports and ports in northern Europe. Time Charter Contracts. Time charters are contracts by which our charterer obtains the right for a specified period to direct the movements and utilization of the vessel in exchange for payment of a specified daily rate, but we retain operating control over the vessel. Typically, we fully equip the vessel and are responsible for normal operating expenses, repairs, crew wages, and insurance, while the charterer is 1 responsible for voyage expenses, such as fuel, port and stevedoring expenses. Our time charter contracts include charters of three Roll-On/Roll-Off ("RO/RO") vessels to the Military Sealift Command (the "MSC") for varying terms. Also included in this segment are contracts with car manufacturers for six Pure Car/Truck Carriers ("PCTCs"), with an electric utility for a conveyor-equipped, self-unloading coal carrier and with a mining company to provide transportation services at its mine in Papua, Indonesia. Contracts of Affreightment. COAs are contracts by which we undertake to provide space on our vessels for the carriage of specified goods or a specified quantity of goods on a single voyage or series of voyages over a given period of time between named ports or within certain geographical areas in return for the payment of an agreed amount per unit of cargo carried. Generally, we are responsible for all operating and voyage expenses. Our COA segment includes a molten sulphur transportation contract with a sulphur transporter. Rail-Ferry Service. In the beginning of 2001, we began a new service, through our subsidiary CG Railway, carrying loaded rail cars between the U.S. Gulf and Mexico. This service uses our two Special Purpose vessels, which were modified to enable them to carry standard size railroad cars. Each vessel has a capacity for 60 standard size rail cars. Other. This segment consists of operations that include more specialized services than the former four segments and subsidiaries that provide ship charter brokerage and agency services. Also included in this segment is our 50% ownership in a car transportation truck company. Unconsolidated Entities. We have a 30% interest in a company owning and operating nine Cement Carriers. We also have a 50% interest in a company owning two newly built Cape-Size Bulk Carriers, and a 50% interest in a company that operates a terminal in Coatzacoalcos, Mexico for our Rail-Ferry Service. Recent Losses. Our net losses in fiscal years 2002 and 2001 were due primarily to impairment losses incurred in 2001 in connection with our adoption of a plan to separate certain of our vessels from our operations and dispose of those vessels, and related expenses incurred in 2001 and 2002 related to the termination of services provided by those vessels. For further information, see the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and note B to our consolidated financial statements included elsewhere in this prospectus. --------------------- Our parent company is a Delaware corporation headquartered in New Orleans, Louisiana, with administrative and sales offices in New York, Nashville and Shanghai, and a network of marketing agents in other major cities around the world. Our principal executive offices are located at 650 Poydras Street, New Orleans, Louisiana 70130, and our telephone number at that address is (504) 529-5461. BUSINESS STRATEGY Our strategy is to - identify customers with high credit quality and marine transportation needs requiring specialized vessels or operating techniques; - seek medium- to long-term charters or contracts with those customers and, if necessary, modify, acquire or construct vessels to meet the requirements of those charters or contracts; and - provide our customers with reliable, high quality service at a reasonable cost. We believe that our strategy has produced relatively stable operating cash flows for an industry that tends to be cyclical and valuable long-term relationships with our customers. We plan to continue this strategy by expanding our relationships with existing customers, seeking new customers and selectively pursuing acquisitions. HISTORY The company was originally founded as Central Gulf Steamship Corporation in 1947 by the late Niels F. Johnsen and his sons, Niels W. Johnsen, a director of the company, and Erik F. Johnsen, our 2 Chairman and Chief Executive Officer. Central Gulf was privately held until 1971 when it merged with Trans Union Corporation ("Trans Union"). In 1978, International Shipholding Corporation was formed to act as a holding company for Central Gulf, LCI, and certain other affiliated companies in connection with the 1979 spin-off by Trans Union of our common stock to Trans Union's stockholders. In 1986, we acquired the assets of Forest Lines, and in 1989, we acquired Waterman. Since our spin-off from Trans Union, we have continued to act solely as a holding company, and our only significant assets are the capital stock of our subsidiaries. COMPETITIVE STRENGTHS Diversification. Our strategy for many years has been to seek and obtain contracts that contribute to a diversification of operations. These diverse operations vary from chartering vessels to the government, to chartering vessels for the transportation of automobiles and sport utility vehicles, transportation of paper, steel, wood and wood pulp products, carriage of supplies for a mining company, transporting molten sulphur, transporting coal for use in generating electricity, and transporting standard size railroad cars. In recent years we have upgraded our fleet and brought the average age of our vessels down to approximately 14.5 years as compared with approximately 17.7 years in 2000. As a result, our management believes that the outlook for fulfilling current contracts, obtaining extensions through the exercise of options by current customers, and obtaining new contracts is good. Stable Cash Flow. We believe that our historical cash flows have been relatively stable for an industry that tends to be cyclical, because of the length and structure of our contracts, the creditworthiness of our customers and our diversified customer and cargo bases. Our cash flow from operations was approximately $38.6 million, $18.4 million and $21.3 million for the years ended December 31, 2003, 2002 and 2001, respectively, and $14.5 million and $28.4 million for the nine-month periods ended September 30, 2004 and 2003, respectively. Our medium- to long-term time charters provide for a daily charter rate that is payable whether or not the charterer utilizes the vessel. These charters generally require the charterer to pay certain voyage operating costs, including fuel, port and stevedoring expenses, and often include cost escalation features covering certain of our expenses. In addition, our COAs guarantee a minimum amount of cargo for transportation, and our diversified cargo and customer bases have contributed to the stability of our operating cash flow. We also believe that the high credit quality of most of our customers and the length of our contracts help reduce the effects of the cyclical nature of the shipping industry. Longstanding Customer Relationships. We currently have medium- to long-term time charters with, or contracts to carry cargo for, the MSC (14% of our fiscal year 2003 revenues) and a variety of high credit quality commercial customers that include International Paper Company (2% of our fiscal year 2003 revenues), P.T. Freeport Indonesia (6% of our fiscal year 2003 revenues), Toyota Motor Corporation (6% of our fiscal year 2003 revenues) and Hyundai Motor Company (6% of our fiscal year 2003 revenues). Most of these companies have been customers of ours for over ten years. Substantially all of our current cargo contracts and charter agreements are renewals or extensions of previous agreements. In recent years, we have been successful in winning extensions or renewals of substantially all of the contracts rebid by our commercial customers, and we have been operating vessels for the MSC for more than 30 years. We believe that our longstanding customer relationships are in part due to our excellent reputation for providing quality specialized maritime service in terms of on-time performance, low cargo loss, minimal damage claims and reasonable rates. Experienced Management Team. Our management team has substantial experience in the shipping industry. Our Chairman has served the company in various management capacities since its founding in 1947. In addition, our President, Executive Vice President, and Chief Financial Officer have over 92 years of collective experience with the company. We believe that the experience of our management team is important to maintaining long-term relationships with our customers. 3 RECENT DEVELOPMENTS NEW TAX LEGISLATION Under current United States tax law, U.S. companies like us and their domestic subsidiaries generally are taxed on all income, whether derived in the United States or abroad. With respect to foreign subsidiaries in which we hold more than a 50 percent interest (referred to in the tax laws as controlled foreign corporations or "CFCs"), we are currently taxed on our pro rata share of foreign shipping income. The recently enacted American Jobs Creation Act of 2004 (the "Jobs Creation Act"), which becomes effective for our company on January 1, 2005, will change the United States tax treatment of our U.S. flag vessels in foreign operations and foreign flag shipping operations. We intend to make an election under the Jobs Creation Act to have most of our U.S. flag operations taxed under a new "tonnage tax" regime rather than under the usual U.S. corporate income tax regime. Once the election is effective, the only U.S. tax on the operation of those vessels will be based on their tonnage, rather than their contribution to our income or profits. Also under the Jobs Creation Act, the taxable income of our CFCs from foreign shipping operations will be deferred until repatriated. For further information regarding the Jobs Creation Act and its estimated effect on our results of operations, see the section of this prospectus entitled "Business -- New Tax Legislation." VESSEL PURCHASE AGREEMENT In November 2004, we entered into an agreement to purchase two used vessels for an aggregate purchase price of approximately $20.0 million. We took delivery of these vessels in early December 2004. These vessels will enable us to maintain two of our Maritime Security Program ("MSP") contracts. We drew on our new $50 million revolving credit facility (see "Description of Indebtedness") to purchase the vessels and intend to use a portion of the proceeds of this offering to repay the amounts drawn. See "Use of Proceeds." RAIL-FERRY SERVICE EXPANSION We also intend to use a portion of the proceeds of this offering to add a second cargo deck to each of the two vessels operating in our rail-ferry service between the U.S. Gulf and Mexico in order to essentially double their capacity. See "Use of Proceeds." We hope to conclude the necessary shipyard modification contracts shortly and expect the vessels to return to service in the second half of 2005. MARITIME SECURITY PROGRAM CONTRACTS In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships industry-wide eligible to participate in the program from 47 to 60, and increased MSP payments to companies in the program, all to be effective on October 1, 2005. Annual payments for each vessel in the new MSP program will be $2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012 to 2015. On October 15, 2004, Waterman and Central Gulf each filed applications to extend their MSP contracts for another 10 years (i.e., through September 30, 2015), all seven of which were effectively grandfathered in the MSP reauthorization. Simultaneously, we offered additional ships for participation in the MSP. The U.S. Maritime Administration ("MarAd") is expected to announce MSP contract awards on January 14, 2005, and we have no way of knowing at this time whether Waterman or Central Gulf will be awarded contracts for the additional ships. 4 THE OFFERING The following is a brief summary of selected terms of this offering. For a more complete description of the terms of the preferred stock and the notes, see the sections of this prospectus entitled "Description of the Preferred Stock" and "Description of the Notes." Issuer........................ International Shipholding Corporation, a Delaware corporation. Securities Offered............ 800,000 shares of our % convertible exchangeable preferred stock, $1.00 par value per share (880,000 shares if the underwriter exercises its over-allotment option in full). Liquidation Preference........ In the event of our voluntary or involuntary dissolution, liquidation or winding up, holders of the preferred stock will be entitled to a liquidation preference of $50 per share of preferred stock, plus accrued and unpaid dividends, before any distribution of assets may be made to holders of our capital stock ranking junior to the preferred stock. Dividends..................... Dividends will be cumulative from the date of issuance at the annual rate of % of the liquidation preference of the preferred stock, payable quarterly on the day of , , , and , commencing , 2005. The payment of dividends is at the discretion of our board of directors and must come from funds that are legally available for dividend payments. Our board of directors is not required to declare these dividends, and holders of the preferred stock cannot force it to do so. Accrued and unpaid dividends on the preferred stock will not bear interest. For so long as the preferred stock remains outstanding, (1) we will not declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any junior stock or parity stock and (2) neither we, nor any of our subsidiaries, will, subject to certain exceptions, redeem, purchase or otherwise acquire for consideration junior stock or parity stock through a sinking fund or otherwise, in each case unless we have paid or set apart funds for the payment of all accrued and unpaid dividends with respect to the preferred stock and any parity stock for all preceding dividend periods. In addition, prior to December 31, 2007 and regardless of whether we have paid or set apart for payment all accrued and unpaid dividends with respect to the preferred stock and any parity stock for all preceding dividend periods, we will not (1) declare, pay or set apart for payment any dividend or other distribution with respect to any junior stock or (2) redeem, purchase or otherwise acquire any junior stock. See "Description of the Preferred Stock -- Dividends." Conversion Rights............. Unless we redeem or exchange the preferred stock, the preferred stock can be converted at your option at any time into shares of our common stock at an initial conversion price of $ (equivalent to a conversion rate of approximately shares of common stock for each share of preferred stock). The initial conversion price of the preferred stock is subject to adjustment upon the occurrence of certain events, 5 including the payment of a cash dividend on our common stock that, when combined with all other cash dividends paid on our common stock in such calendar year, exceeds on a per-share basis the greater of $0.50 or 3% of the closing price of our common stock on the last trading day prior to the declaration date of such dividend. See "Description of the Preferred Stock -- Conversion." Optional Redemption........... We may redeem the preferred stock, in whole or in part, for cash at any time on or after , 2006 at the following redemption prices: - $ per share if the redemption date is on or after , 2006, provided that the closing price of our common stock has exceeded 150% of the conversion price of the preferred stock for at least 20 trading days during any 30-day trading period ending within five trading days prior to notice of redemption, - $ per share if the redemption date is on or after , 2007, and - $ per share if the redemption date is on or after , 2008, in each case together with accrued and unpaid dividends to, but not including, the date of redemption. See "Description of the Preferred Stock -- Optional Redemption." The preferred stock is not subject to any mandatory redemption (except upon a change in control) or sinking fund provision. Change in Control............. HOLDERS OF THE PREFERRED STOCK WILL NOT BE ENTITLED TO HAVE THE PREFERRED STOCK REDEEMED AT A PREMIUM PRICE IN THE EVENT OF A CHANGE IN CONTROL OF OUR COMPANY. Rather, in such event we may elect to redeem the preferred stock, in whole but not in part, for cash at the following redemption prices: - $ per share if the change in control occurs on or after , 2004 and prior to , 2005, - $ per share if the change in control occurs on or after , 2005 and prior to , 2006, - $ per share if the change in control occurs on or after , 2006 and prior to , 2007, - $ per share if the change in control occurs on or after , 2007 and prior to , 2008, and - $ per share if the change in control occurs on or after , 2008, in each case together with accrued and unpaid dividends to, but not including, the date of redemption. See "Description of the Preferred Stock -- Optional Redemption on Change in Control." In addition, upon a change in control of our company, a holder of the preferred stock may require us to redeem for cash any or all of such holder's shares of the preferred stock at the 6 liquidation preference of the preferred stock, plus any accrued and unpaid cash dividends to, but not including, the date of redemption. See "Description of the Preferred Stock -- Required Redemption on Change in Control." Voting Rights................. Except as provided by Delaware law or our certificate of incorporation, which will include the certificate of designations for the preferred stock, holders of the preferred stock will not be entitled to any voting rights. However, holders of the preferred stock will be entitled to vote as a separate class with the holders of any of our other parity stock having like voting rights to elect two directors if we have not paid the equivalent of six or more quarterly dividends, whether or not consecutive, on the preferred stock or such other parity stock. These voting rights will continue until we pay the full accrued and unpaid dividends on the preferred stock and any of our other parity stock having like voting rights. See "Description of the Preferred Stock -- Voting Rights." The affirmative consent of holders of at least 66 2/3% of the preferred stock and any of our other parity stock having like voting rights, voting separately as a class, will be required for (1) the issuance of any class or series of stock (or security convertible into stock) ranking senior to the preferred stock or such other parity stock as to dividend rights or rights upon our liquidation, winding-up or dissolution, (2) amendments to our certificate of incorporation or by-laws that would materially and adversely affect the terms of the preferred stock or such other parity stock, and (3) certain mergers, consolidations, or share exchanges or the sale of all or substantially all or our assets, unless certain conditions are satisfied as more fully described in the section of this prospectus entitled "Description of the Preferred Stock -- Voting Rights." Ranking....................... The preferred stock will be, with respect to dividend rights and rights upon our liquidation, winding up or dissolution: - junior to all of our existing and future debt obligations; - junior to any class or series of capital stock that we may issue in the future other than our common stock and any capital stock the terms of which provide that such class or series will rank on a parity with or junior to the preferred stock; - on a parity with any class or series of capital stock that we may issue in the future, the terms of which provide that such class or series will rank on a parity with the preferred stock; - senior to our common stock and any other class or series of capital stock that we may issue in the future, the terms of which provide that such class or series will rank junior to the preferred stock; and - effectively junior to all of our subsidiaries' (1) existing and future liabilities and (2) capital stock held by others. 7 Optional Exchange............. At our option, beginning on , 2005 and prior to , 2014, we may exchange the preferred stock in whole, but not in part, on any divided payment date, for our % convertible subordinated notes due 2014, provided (1) all accrued dividends on the preferred stock have been paid or set aside for payment, (2) the notes have been listed or approved for listing on the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, the American Stock Exchange or another similar national securities exchange or securities trading market, and (3) no event of default under the indenture governing the notes has occurred and is continuing or would occur upon the exchange of the preferred stock. If we elect to exchange the preferred stock for notes, the exchange rate will be $50 principal amount of the notes for each share of preferred stock. Convertible Subordinated Notes......................... The notes, if issued, will have the following terms: Denomination................ $50 per note. Interest Rate............... The notes will bear interest at % per year. Interest will be payable quarterly on , , and of each year, beginning on the first interest payment date after the exchange date. Maturity.................... The notes will mature on , 2014. Optional Redemption......... We may redeem the notes, in whole or in part, for cash at any time on or after , 2006 at the following redemption prices: - $ if the redemption date is on or after , 2006, provided that the closing price of our common stock has exceeded 150% of the conversion price of the notes for at least 20 trading days during any 30-day trading period ending within five trading days prior to notice of redemption, - $ if the redemption date is on or after , 2007, and - $ if the redemption date is on or after , 2008, in each case together with accrued and unpaid interest to, but not including, the date of redemption. See "Description of the Notes -- Optional Redemption." The notes are not subject to any mandatory redemption (except upon a change in control) or sinking fund provision. Change in Control........... HOLDERS OF THE NOTES WILL NOT BE ENTITLED TO HAVE THE NOTES REDEEMED AT A PREMIUM PRICE IN THE EVENT OF A CHANGE IN CONTROL OF OUR COMPANY. Rather, in such event we may elect to redeem the notes, in whole but not in part, for cash at the following redemption price: - $ if the change in control occurs on or after , 2004 and prior to , 2005, 8 - $ if the change in control occurs on or after , 2005 and prior to , 2006, - $ if the change in control occurs on or after , 2006 and prior to , 2007, - $ if the change in control occurs on or after , 2007 and prior to , 2008, and - $ if the change in control occurs on or after , 2008, in each case together with accrued and unpaid interest to, but not including, the date of redemption. See "Description of the Notes -- Optional Redemption on Change in Control." In addition, upon a change in control of our company, a holder of the notes may require us to redeem for cash any or all of such holder's notes at a price equal to the aggregate principal amount of such notes, plus any accrued and unpaid interest to, but not including, the date of redemption. See "Description of the Notes -- Required Redemption on Change in Control." Conversion.................. The notes may be converted by the holder at any time prior to maturity into shares of our common stock at the same conversion price applicable to shares of the preferred stock. See "Description of the Preferred Stock -- Conversion." Ranking..................... The notes will be unsecured and subordinated and: - will be subordinate to all of our existing and future senior and unsecured debt; - will rank on a parity with any of our future subordinated debt; - will be subordinate to our secured debt to the extent of the value of the assets securing such debt; and - will be effectively subordinate to all liabilities and preferred stock, if any, of our subsidiaries. Restriction on Dividends.... Prior to December 31, 2007, we will not (1) declare, pay or set apart for payment any dividend or other distribution with respect to our common stock, or (2) redeem, purchase or otherwise acquire any of our common stock. See "Description of the Notes -- Restriction on Dividends." Voting Rights............... Holders of the notes will not be entitled to any voting rights. Use of Proceeds............... We estimate that we will receive net proceeds from this offering of approximately $37.9 million, after deducting the underwriting discount and the financial advisory fee payable to the underwriter and our estimated offering expenses. We intend to use a portion of the proceeds of this offering to repay the amounts drawn on our new $50 million revolving credit facility in early December 2004 to purchase two used vessels (see "Prospectus Summary -- Recent Developments -- Vessel Purchase Agreement"). We also intend to use a portion of the proceeds of this offering to add a second deck to each of the two vessels operating in our rail-ferry service (see "Prospectus Summary -- Recent Developments -- 9 Rail-Ferry Service Expansion"). We will use any remaining proceeds of this offering and the proceeds from any exercise of the underwriter's over-allotment option to acquire additional new or used vessels, to satisfy our working capital requirements or for general corporate purposes. See "Use of Proceeds." Common Stock.................. Our common stock is listed on the New York Stock Exchange under the symbol "ISH." Listing of Preferred Stock.... The preferred stock will be listed on the New York Stock Exchange under the symbol "ISH Pr." Listing of Notes.............. It is a condition to our ability to exchange the preferred stock for notes that the notes be listed or approved for listing on one or more of the following markets: the New York Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange or another similar national securities exchange or securities trading market. Tax Consequences.............. United States federal income tax considerations relevant to the purchase, ownership and disposition of the preferred stock, the notes issuable upon our exchange of the preferred stock, and our common stock issuable upon the conversion of the preferred stock are described in the section of this prospectus entitled "Material U.S. Federal Income Tax Considerations." Prospective investors are advised to consult with their own tax advisors regarding the tax consequences of acquiring, holding or disposing of the preferred stock, the notes and our common stock. Tax consequences will vary depending on current tax laws, the particular circumstances of the stockholder, and the application of state, local and other tax laws. Risk Factors.................. An investment in the preferred stock involves significant risks. See the section of this prospectus entitled "Risk Factors" beginning on page 14 and the other information in this prospectus for a discussion of important factors that you should consider before deciding to invest in the preferred stock. 10 SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA The financial data presented below for the years ended December 31, 2003, 2002 and 2001 have been derived from our audited financial statements. The financial data presented below for the nine months ended September 30, 2004 and 2003 were derived from our unaudited interim financial statements. In our opinion, the financial data for the nine months ended September 30, 2004 and 2003 reflects all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of such data. The interim financial data have been prepared in accordance with the same accounting principles followed in the presentation of our audited financial statements for the fiscal year ended December 31, 2003. The historical results presented below are not necessarily indicative of results that you can expect for any future period. You should read the table in conjunction with the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and related notes and the other financial information included elsewhere in this prospectus.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ---------------------------- -------------------------------------------- 2004 2003 2003 2002 2001(1) ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT RATIOS, FLEET CAPACITY DATA AND PER SHARE AMOUNTS) INCOME STATEMENT DATA: Revenues....................... $ 199,483 $ 195,861 $ 257,813 $ 227,412 $ 304,370 Impairment Loss................ -- -- -- 66 (81,038) Gross Voyage Profit (Loss)..... 22,993 27,053 33,840 30,502 (53,808) Operating Income (Loss)........ 11,310 15,964 19,587 15,325 (73,885) Net Income (Loss).............. 4,945 3,840 5,491 (136) (64,419) Pro Forma Net Income Available to Common Stockholders(2)... Basic Income (Loss) From Continuing Operations Per Common Share................ 1.86 2.62 3.22 2.52 (12.15) Diluted Income (Loss) From Continuing Operations Per Common Share................ 1.86 2.62 3.22 2.52 (12.15) Basic Net Income (Loss) Per Common Share................ 0.81 0.63 0.90 (0.02) (10.59) Diluted Net Income (Loss) Per Common Share................ 0.81 0.63 0.90 (0.02) (10.59) Pro Forma Basic Net Income Per Common Share(2)............. Pro Forma Diluted Net Income Per Common Share(2)......... Average Common Shares Outstanding Basic....................... 6,082,887 6,082,887 6,082,887 6,082,887 6,082,887 Diluted..................... 6,092,536 6,082,887 6,082,887 6,082,887 6,082,887 Cash Dividends Declared Per Common Share................ -- -- -- -- 0.125 BALANCE SHEET DATA: Working Capital................ 14,526 7,398 10,248 1,849 25,631 Total Assets................... 367,912 391,483 382,451 406,752 461,722 Long-Term Debt, Less Current Maturities (including Capital Lease Obligations)................ 152,316 174,591 164,144 192,297 240,276 Stockholders' Investment....... 127,343 119,983 121,367 115,227 114,905
11
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ---------------------------- -------------------------------------------- 2004 2003 2003 2002 2001(1) ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT RATIOS, FLEET CAPACITY DATA AND PER SHARE AMOUNTS) OTHER FINANCIAL DATA: Cash Flow From Operations...... 14,473 28,409 38,616 18,439 21,318 Cash Flow From Investing Activities.................. 1,540 (687) 1,772 9,456 81,808 Cash Flow From Financing Activities.................. (12,963) (24,146) (35,926) (48,626) (93,169) Depreciation and Amortization Expense..................... 21,751 23,716 31,276 29,892 46,484 Capital Expenditures: Vessel Acquisition and Refurbishment Costs....... -- 2,300 2,361 6,905 39,390 Barge Refurbishment Costs... -- -- -- 428 -- Haul-Away Car Carrying Trucks Costs.............. 1,641 2,456 2,456 937 -- Other Assets................ 161 531 543 288 781 Drydocking, Positioning and Other Costs................. 5,819 1,333 3,264 3,170 7,784 Ratio of Earnings to Fixed Charges(3).................. 1.39x 1.33x 1.35x --(4) --(4) Pro Forma Ratio of Earnings to Fixed Charges and Preferred Stock Dividends(5).......... FLEET CAPACITY (at end of period): Vessels........................ 35 36 35 36 36 LASH Barges.................... 917 917 917 919 1,722 Other Barges and Towboats...... -- -- -- 14 37 Haul-Away Car Carrying Trucks...................... 32 22 22 7 -- Carrying Capacity (thousands of deadweight tons)............ 1,090 1,097 1,084 1,398 1,137
- --------------- (1) Results for 2001 reflect an impairment loss of approximately $81.0 million, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets." This non-cash charge was made to write down certain assets to estimated market value as part of the reclassification of our U.S. flag LASH Service, our Cape-Size Bulk Carrier and certain Special Purpose barges to "Assets Held for Disposal" and impairment charges recorded on our foreign flag LASH Liner Service. (2) Pro forma results assume this offering had been consummated as of the beginning of the period, assuming an annual dividend rate on the preferred stock offered hereby of % of the liquidation preference and no exercise of the underwriter's over-allotment option. (3) For the ratio of earnings to fixed charges calculation, earnings consist of income (loss) before provision (benefit) for income taxes and equity in net income of unconsolidated entities plus distributions received from unconsolidated entities. Fixed charges include interest, amortization of financing charges and that portion of rent deemed representative of interest. (4) Earnings were insufficient to cover fixed charges by $28.6 million and $132.9 million for the years ended December 31, 2002 and 2001, respectively. We sustained a net loss from continuing operations of $0.8 million for 2002, which included impairment losses of $0.5 million, and a net loss from continuing operations of $99.4 million for 2001, which included impairment losses of $81.0 million. 12 These losses were inadequate to cover our fixed charges of $27.8 million for 2002 and $33.5 million for 2001. (5) Reflects the ratio of earnings to fixed charges and preferred stock dividends, calculated in the manner set forth in Exhibit 12.1 to the registration statement of which this prospectus forms a part, as if this offering had been consummated as of the beginning of the period, assuming an annual dividend rate on the preferred stock offered hereby of % of the liquidation preference and no exercise of the underwriter's over-allotment option. See note 3 above for a description of the items constituting earnings and fixed charges. 13 RISK FACTORS You should carefully consider the risks described below in addition to the other information contained in this prospectus before making an investment decision. Realization of any of the following risks could have a material adverse effect on our business, financial condition, cash flow and results of operations. RISKS RELATED TO OUR BUSINESS WE ARE HIGHLY LEVERAGED. At September 30, 2004, after giving pro forma effect to this offering and the application of the net proceeds, we would have had outstanding aggregate long-term indebtedness of $181.7 million (including long-term guarantees of indebtedness of our subsidiaries of $29.4 million) and a debt-to-equity ratio of 1.20 to 1. See note 2 to the table set forth in the section of this prospectus entitled "Capitalization." Upon the consummation of this offering and the application of the net proceeds, we will continue to be highly leveraged and will continue to devote a substantial portion of our operating income to debt service. To date, we have been able to generate sufficient cash from operations to meet annual interest and principal payments on our indebtedness. However, following completion of this offering, our combined debt service and preferred stock dividend requirements will be greater than they have been in the past, and our ability to satisfy those obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control. If our cash flow and capital resources are insufficient to fund our debt service and preferred stock dividend requirements, we may be forced to reduce or delay capital expenditures, sell assets, obtain additional equity capital or restructure our debt. There can be no assurance that we will be able to generate sufficient operating cash flows to service our debt and meet our preferred stock dividend requirements. Subject to compliance with various financial and other covenants imposed by the agreements governing our existing indebtedness and that of our subsidiaries, we may incur additional indebtedness from time to time, thus increasing our leverage. The degree to which we are leveraged could have important adverse consequences to holders of the preferred stock. Among other things, high leverage may - impair our ability to obtain additional financing for working capital, capital expenditures, vessel and other acquisitions, and general corporate purposes; - require us to dedicate a substantial portion of our cash flows from operations to the payment of principal and interest; - limit the funds available to meet our preferred stock dividend requirements; - place us at a competitive disadvantage to less highly-leveraged competitors; and - make us more vulnerable to economic downturns and limit our ability to withstand competitive pressures. A DEFAULT UNDER ONE OF OUR DEBT AGREEMENTS MAY RESULT IN A DEFAULT UNDER ONE OR MORE OF OUR OTHER DEBT AGREEMENTS. Our debt obligations are represented by separate agreements with different lenders. A default under any agreement can result in the acceleration of principal and interest, and in some cases penalties, under that agreement. In some cases, a default under one agreement may create an event of default under other agreements, resulting in the acceleration of principal, interest and penalties under such other agreements even though we are otherwise in compliance with all payment and other obligations under those agreements. Thus, an event of default under a single agreement, including one that is technical in nature or otherwise not material, may create an event of default under multiple lending agreements, which could result in the acceleration of significant indebtedness under multiple agreements that we may not be able to pay or refinance at that time. If such a technical event of default occurs under any of our debt that is 14 senior indebtedness, we will be prohibited from making any payment on the notes issuable upon our exchange of the preferred stock until the default is cured or waived or until 179 days have elapsed. If an event of default under our senior indebtedness caused by the acceleration of the maturity date or our failure to make a scheduled interest payment occurs, we will be prohibited from making any payment on the notes until the default is cured or waived. THE AGREEMENTS GOVERNING CERTAIN OF OUR DEBT INSTRUMENTS IMPOSE RESTRICTIONS ON OUR BUSINESS. The agreements governing certain of our debt instruments contain a number of covenants imposing restrictions on our business. The restrictions these covenants place on us include limitations on our ability to: - redeem and pay dividends on our capital stock; - make investments; - engage in transactions with affiliates; and - create or permit to exist liens on our assets. These agreements also require us to meet a number of financial ratios. As a result of these covenants, our ability to respond to changes in business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that otherwise might be considered beneficial to the company. See "Description of Indebtedness." In addition, the breach of any of these covenants could result in a default under several other of these agreements. Upon the occurrence of an event of default under any such agreement, the lenders could elect to declare all amounts outstanding to be immediately due and payable. If we were unable to repay those amounts, such lenders could proceed against the collateral securing that indebtedness. If amounts outstanding under such agreements were to be accelerated, there can be no assurance that our assets would be sufficient to generate sufficient cash flow to repay the accelerated indebtedness. IF SUFFICIENT APPROPRIATIONS UNDER THE MARITIME SECURITY ACT OF 1996 ARE NOT MADE IN ANY FISCAL YEAR, WE MAY NOT CONTINUE TO RECEIVE ANNUAL SUBSIDY PAYMENTS WITH RESPECT TO CERTAIN OF OUR VESSELS. The Maritime Security Act of 1996 (the "MSA"), which provides a subsidy program for certain U.S. flag vessels, was signed into law in October of 1996. Under this program, each participating vessel is eligible to receive an annual subsidy payment of $2.1 million through the government's fiscal year 2005. In 2003, Congress authorized an extension of the program through 2015, increased the number of ships eligible industry-wide to participate in the program from 47 to 60, and increased subsidy payments to companies in the program, all to be effective on October 1, 2005. Annual payments for each vessel in the MSP are $2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012 to 2015. As of September 30, 2004, seven of our vessels operated under MSP contracts, the terms of which were extended in October 2004 through September 30, 2015. Also in October 2004, we offered additional vessels for participation in the program, although we have no way of predicting whether any of those vessels will be allowed to participate in the program. Payments under this program are subject to annual appropriation by Congress and are not guaranteed. Congress may not make sufficient appropriations under the program in one or more fiscal years and, as a result, we can provide no assurance as to our continued receipt, in full or in part, of the annual subsidy payments. OUR BUSINESS AND OPERATIONS ARE HIGHLY-REGULATED. Our business is materially affected by government regulation in the form of international conventions, national, state and local laws and regulations, and laws and regulations of the flag nations of our vessels, including laws relating to the discharge of materials into the environment. Because such conventions, laws and regulations are often revised, we are unable to predict the ultimate costs of compliance. In addition, 15 we are required by various governmental and quasi-governmental agencies to obtain and maintain certain permits, licenses and certificates with respect to our operations. In certain instances, the failure to obtain or maintain such permits, licenses or certificates could have a material adverse effect on our business. In the event of war or national emergency, our U.S. flag vessels are subject to requisition by the United States without any guarantee of compensation for lost profits, although the United States government has traditionally paid fair compensation in such circumstances. See "Business -- Regulation." AN INCREASE IN THE SUPPLY OF VESSELS WITHOUT A CORRESPONDING INCREASE IN DEMAND FOR VESSELS COULD CAUSE OUR CHARTER AND CARGO RATES TO DECLINE, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR REVENUES AND EARNINGS. Historically, the shipping industry has been cyclical. The profitability and asset values of companies in the industry have fluctuated in part because of changes in the supply and demand of vessels. The supply of vessels generally increases with deliveries of new vessels and decreases with the scrapping of older vessels. If the number of new vessels delivered exceeds the number of vessels being scrapped, vessel capacity will increase. If the supply of vessels increases and the demand for vessels does not, the charter and cargo rates for our vessels could decline significantly. A decline in our charter and cargo rates could have a material adverse effect on our revenues and earnings. THE REVENUES OF OUR LINER SERVICES SEGMENT ARE SUBJECT TO SEASONAL AND CYCLICAL VARIATIONS, WHICH MAY CAUSE MATERIAL FLUCTUATIONS IN OUR REPORTED EARNINGS. The demand for certain cargoes carried in our liner services, such as agricultural products, steel and forest products, and the corresponding demand for liner services to ship these cargoes, has historically exhibited seasonal and cyclical variations. As a result, the revenues of our liner services segment are subject to seasonal and cyclical variations, which may cause material fluctuations in our revenues and earnings on a quarterly or annual basis, or both. WE ARE DEPENDENT ON GOVERNMENT CHARTERS AND CONTRACTS. We have various charters or contracts with agencies of the United States government. Companies engaged in government contracting are subject to certain unique business risks, including dependence on congressional appropriations and administrative allotment of funds, and changing policies and regulations. Because government contracts are usually awarded for relatively short periods of time and are subject to renewal options in favor of the government, the stability and continuity of this type of business depends on the periodic exercise by the government of contract renewal options. Further, government contracting laws provide that the United States government is to do business only with responsible contractors. In this regard, federal agencies have the authority under certain circumstances to suspend or debar a contractor from further government contracting for periods of time in order to protect the government's interest. While we have never been suspended or debarred from government contracting, nor have we ever been the subject of any proceeding for such a purpose, there can be no assurance that we will not be suspended or debarred, or subject to such a proceeding, in the future. WE ARE SUBJECT TO THE RISK OF CONTINUING HIGH PRICES, AND INCREASING PRICES, OF THE FUEL WE CONSUME IN OUR LINER AND RAIL-FERRY OPERATIONS. We are exposed to price risks with respect to fuel consumption in our liner and rail-ferry operations, and we can give no assurance that we will be able to offset higher fuel costs due to the competitive nature of these operations. Moreover, while we entered into hedging arrangements with respect to a portion of our 2003 fuel requirements for our liner and rail-ferry segments to reduce our exposure to increases in fuel prices, we currently have no hedging arrangements in place with respect to our estimated 2004 fuel requirements. Accordingly, a material increase in fuel prices that we cannot recover through fuel cost surcharges could adversely affect our results of operations and financial condition. For an analysis of the effect on our operating costs and earnings per share of an increase in fuel prices, see the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Disclosures About Market Risk -- Commodity Price Risk." 16 WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY. The shipping industry is intensely competitive and can be influenced by economic and political events that are outside the control of shipping companies. There can be no assurance that we will be able to renew expiring charters on economically attractive terms, maintain attractive freight rates, pass cost increases through to our customers or otherwise successfully compete against our competitors. WE ARE SUBJECT TO THE CONTROL OF OUR PRINCIPAL STOCKHOLDERS. Four of our directors, Niels W. Johnsen, Erik F. Johnsen, Niels M. Johnsen and Erik L. Johnsen, and their family members and affiliated entities, beneficially owned an aggregate of 38.67% (including currently exercisable options to acquire 400,000 shares) of our common stock as of September 30, 2004. As a result, the Johnsen family has the power to determine many of our policies, the election of our directors and officers, and the outcome of various corporate actions requiring stockholder approval. OPERATING HAZARDS MAY INCREASE OUR OPERATING COSTS; OUR INSURANCE COVERAGE IS LIMITED. Our vessels are subject to operating risks such as: - catastrophic marine disaster; - adverse weather conditions; - mechanical failure; - collisions; - hazardous substance spills; - war, terrorism and piracy; and - navigation and other human errors. The occurrence of any of these events may result in damage to or loss of our vessels and our vessels' cargo or other property, and in injury to personnel. Such occurrences may also result in a significant increase in our operating costs or liability to third parties. In addition, such occurrences may result in our company being held strictly liable for pollution damages under the Oil Pollution Act of 1990 (the "OPA"), the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") or one of the international conventions to which our vessels operating in foreign waters may be subject. See "Business -- Regulation." We maintain insurance coverage against certain of these risks, which our management considers to be customary in the industry. We cannot assure you, however, that we will be able to renew our existing insurance coverage at commercially reasonable rates or that such coverage will be adequate to cover future claims that may arise. In addition, the terrorist attacks that occurred in the U.S. on September 11, 2001, as well as the potential for future attacks, compliance with recently enacted maritime security laws and other factors, have caused significant increases in the cost of our war risk insurance coverage, which covers damages to our vessels and liability to third parties arising from acts of terrorism. WE ARE SUBJECT TO RISKS ASSOCIATED WITH OPERATING INTERNATIONALLY. Our international shipping operations are subject to risks inherent in doing business in countries other than the United States. These risks include, among others: - economic, political and social instability; - potential vessel seizure, expropriation of assets and other governmental actions, which are not covered by our insurance; 17 - currency restrictions and exchange rate fluctuations; - potential submission to the jurisdiction of a foreign court or arbitration panel; and - import and export quotas, the imposition of increased environmental and safety regulations and other forms of public and governmental regulation. Many of these risks are beyond our control, and we cannot predict the nature or the likelihood of any such events. However, if such an event should occur, it could have a material adverse effect on our financial condition and results of operations. OUR VESSELS COULD BE SEIZED BY MARITIME CLAIMANTS, WHICH COULD RESULT IN A SIGNIFICANT LOSS OF EARNINGS AND CASH FLOW FOR THE RELATED OFF-HIRE PERIOD. Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts or claims for damages. In many jurisdictions, a maritime lienholder may enforce its lien by either arresting or attaching a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could result in a significant loss of earnings and cash flow for the related off-hire period. In addition, international vessel arrest conventions and certain national jurisdictions allow so-called "sister ship" arrests, that allow the arrest of vessels that are within the same legal ownership as the vessel which is subject to the claim or lien. Certain jurisdictions go further, permitting not only the arrest of vessels within the same legal ownership, but also any "associated" vessel. In nations with these laws, an "association" may be recognized when two vessels are owned by companies controlled by the same party. Consequently, a claim may be asserted against us, any of our subsidiaries or our vessels for the liability of one or more of the other vessels we own. ONE OF OUR TIME CHARTER CUSTOMERS HAS FILED FOR BANKRUPTCY, THE OUTCOME OF WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. We charter our Coal Carrier to US Generating New England, Inc. ("USGenNE"). In July of 2003, USGenNE filed a petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. USGenNE is current in all of its obligations to us under the time charter, except for approximately $850,000 of pre-petition invoices covering charter hire and related expenses. The $850,000 of pre-petition invoices owed to us is an unsecured claim in the bankruptcy proceeding. Under the federal bankruptcy laws, USGenNE has the right to accept or reject the time charter. If USGenNE accepts the time charter, it is then required to meet its financial obligations under the time charter, including the $850,000 of pre-petition invoices. If USGenNE rejects the time charter, then we would have a priority administrative claim with respect to all amounts due us under the time charter that are related to the post-petition period, but we would have no priority with respect to the pre-petition invoices. At this time we cannot predict whether the time charter will be accepted or rejected. Therefore, we have not provided an allowance for the pre-petition invoices in our financial statements as of September 30, 2004. In the event the time charter is ultimately rejected, we believe the vessel can be utilized in alternative employment without incurring a material impairment charge with respect to its carrying value, although we can give no assurance of such at this time. USGenNE utilized the vessel through the end of fiscal year 2003 and has continued to utilize the vessel in 2004 as of the date of this prospectus. However, we can give no assurance as to the extent of USGenNE's use of the vessel subsequent to the date of this prospectus. OUR RAIL-FERRY SERVICE HAS BEEN UNPROFITABLE TO DATE, AND WE CAN GIVE NO ASSURANCE AS TO ITS FUTURE PROFITABILITY. Our rail-ferry service began operating in February 2001. The introduction of this service in a competitive market contributed $7.5 million to our net loss in fiscal year 2001. The service's results of operations improved in fiscal years 2002 and 2003, but still contributed $3.7 million to our net loss in 2002 18 and reduced our net income by $2.9 million in 2003. Moreover, the service has continued to incur losses in fiscal year 2004, reducing our net income for the nine months ended September 30, 2004 by $3.4 million. We can give no assurance that the service will be profitable in 2005 or in any subsequent fiscal year. In addition, we intend to use a portion of the proceeds of this offering to add a second cargo deck to each of the two vessels operating in this service in order to essentially double their capacity. We believe that these additions will significantly reduce our cost per unit of cargo carried, but that will occur only if we are able to book substantially all of the additional capacity, and we can give no assurance at this time that we will be successful in doing so. A SUBSTANTIAL NUMBER OF OUR EMPLOYEES ARE UNIONIZED; IN THE EVENT OF A STRIKE OR OTHER WORK STOPPAGE OUR BUSINESS AND OPERATIONS MAY BE ADVERSELY AFFECTED. As of September 30, 2004, all of our shipboard personnel and certain of our shoreside personnel were covered by collective bargaining agreements. While we have experienced no strikes, work stoppages or other significant labor problems during the last ten years, we cannot assure you that such events will not occur in the future. In the event we experience one or more strikes, work stoppages or other labor problems, our business and operations and, in turn, our results of operations, may be materially and adversely affected. WE MAY NOT BE ABLE TO RENEW OUR TIME CHARTERS AND CONTRACTS WHEN THEY EXPIRE. There can be no assurance that any of our existing time or bareboat charters or contracts of affreightment will be renewed or, if renewed, that they will be renewed at favorable rates. If upon expiration of our existing charters and contracts, we are unable to obtain new charters or contracts at rates comparable to those received under the expired charters or contracts, our revenues and earnings may be adversely affected. OLDER VESSELS HAVE HIGHER OPERATING COSTS AND ARE LESS DESIRABLE TO CHARTERERS. The average age of the vessels in our fleet is approximately 14.5 years. In general, capital expenditures and other costs necessary for maintaining a vessel in good operating condition increase as the age of the vessel increases. Accordingly, it is likely that the operating costs of our older vessels will increase. In addition, changes in governmental regulations and compliance with classification society standards may require us to make expenditures for new equipment. In order to add such equipment, we may be required to take our vessels out of service, thereby reducing our revenues. Moreover, customers generally prefer modern vessels over older vessels, which places the older vessels at a competitive disadvantage, especially in weak markets. There can be no assurance that market conditions will justify the expenditures necessary to maintain our older vessels in good operating condition or enable us to operate our older vessels profitably during the remainder of their estimated useful lives. For more specific information on the age of each of our vessels, see the table in the section of this prospectus entitled "Business -- Vessel Deployment." WE FACE PERIODIC DRYDOCKING COSTS FOR OUR VESSELS WHICH CAN BE SUBSTANTIAL. Vessels must be drydocked periodically. The cost of repairs and renewals required at each drydock are difficult to predict with certainty and can be substantial and our insurance does not cover these costs. RISKS RELATED TO THE PREFERRED STOCK OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR BUSINESS AND LIMIT OUR ABILITY TO PAY DIVIDENDS ON THE PREFERRED STOCK. We have substantial indebtedness and, as a result, significant debt service obligations. As of September 30, 2004, our total indebtedness was approximately $197.9 million (including guarantees of 19 indebtedness of our subsidiaries of $31.8 million), representing approximately 64 percent of our total capitalization. For the year ended December 31, 2003, our ratio of earnings to fixed charges was 1.35 to 1. Our substantial debt could have important consequences to you. For example, it could: - make it more difficult for us to pay dividends on the preferred stock (see "Dividend Policy"); - require us to dedicate a substantial portion of our cash flow to payments on our indebtedness, which would reduce the amount of cash flow available to fund working capital, capital expenditures and other corporate requirements; - increase our vulnerability to general adverse economic and industry conditions; - limit our ability to respond to business opportunities; - limit our ability to borrow additional funds; and - subject us to financial and other restrictive covenants that, if violated by us under circumstances that are not waived by our lenders or cured by us, could result in an event of default under one or more of our debt instruments. THERE IS NO CURRENT MARKET FOR THE PREFERRED STOCK, AND AN ACTIVE TRADING MARKET FOR THE PREFERRED STOCK MAY NOT DEVELOP. The preferred stock is a new issue of securities with no established trading market, and we cannot assure you that a market for the preferred stock will develop. An inactive or illiquid trading market could adversely affect the trading price of shares of the preferred stock, and you may not be able to sell your shares quickly or at the market price if the trading market for the preferred stock is inactive. Moreover, the public offering price of the preferred stock as set forth on the cover page of this prospectus may not be indicative of prices that will prevail in the trading market. While the preferred stock will be listed on the New York Stock Exchange, our ability to continue to list the preferred stock on the New York Stock Exchange will depend on our ability to continue to meet the New York Stock Exchange's listing requirements for both the preferred stock and our common stock. WE MAY NOT BE PERMITTED TO PAY CASH DIVIDENDS ON THE PREFERRED STOCK AND STOCKHOLDERS CANNOT COMPEL US TO PAY THEM. IN ADDITION, UNPAID DIVIDENDS ON THE PREFERRED STOCK WILL NOT EARN INTEREST. Any decision to pay a cash dividend on the preferred stock, and the amount of any dividend to be paid, will be made at the discretion of our board of directors, subject to funds being legally available for the payment of dividends and subject to the restrictions imposed by certain of our debt agreements, including the indenture governing our 7 3/4% senior notes due 2007 (see "Dividend Policy" and "Description of Indebtedness"). Moreover, our ability to pay cash dividends may depend on criteria set forth in future credit agreements. If there is a default under a current or future credit agreement, we may not be able to pay dividends on the preferred stock. Even if our credit agreements permit us to pay cash dividends, we can make those payments only from our surplus (the excess of the fair value of our total assets over the sum of our liabilities plus our total paid-in share capital). In addition, we can pay cash dividends only if after paying those dividends we would be able to pay our liabilities as they become due. Holders cannot force us to pay accumulated dividends, but we must pay them before we pay dividends on any junior stock, and we must pay them on an equal basis with any dividends that we pay on any stock with equal rights. In addition, unpaid dividends on the preferred stock will not earn interest. THE PREFERRED STOCK IS SUBORDINATE TO ALL OF OUR EXISTING LIABILITIES AND DOES NOT LIMIT OUR ABILITY TO INCUR FUTURE INDEBTEDNESS THAT WILL RANK SENIOR TO THE PREFERRED STOCK. The rights of holders of the preferred stock to the payment of dividends and amounts distributable upon our dissolution, liquidation or winding up will rank junior to the rights of all of our creditors to have our obligations paid to them. In addition, the preferred stock will effectively rank junior to all existing and 20 future liabilities of our subsidiaries and any capital stock of our subsidiaries held by others We and our subsidiaries may incur substantial amounts of additional debt and other obligations that will rank senior to the preferred stock, and the terms of the preferred stock will not limit the amount of the debt and other obligations that we may incur. UPON A CHANGE IN CONTROL OF OUR COMPANY, WE MAY NOT HAVE SUFFICIENT FUNDS WITH WHICH TO REDEEM THE SHARES OF PREFERRED STOCK TENDERED TO US. Upon a change in control of our company, each holder of the preferred stock will have the right to require us to redeem for cash all or a portion of such holder's shares of the preferred stock at a price equal to the liquidation preference of the shares, together with accrued and unpaid dividends to, but not including, the date of redemption. Even if the terms of the instruments governing our indebtedness allow us to redeem the shares, there can be no assurance that sufficient funds will be available to us at the time of a change in control to make any required redemption of the preferred stock. See "Description of the Preferred Stock -- Required Redemption on Change in Control." OUR ABILITY TO ISSUE PREFERRED STOCK IN THE FUTURE COULD ADVERSELY AFFECT THE RIGHTS OF HOLDERS OF THE PREFERRED STOCK AND OUR COMMON STOCK. Although our certificate of incorporation authorizes us to issue only 1,000,000 shares of preferred stock in one or more series on terms determined by our board of directors, 800,000 shares of which are being offered hereby (plus any shares issuable upon exercise of the underwriter's over-allotment option), we expect to seek stockholder approval at our annual stockholders meeting in 2005 to increase the number of shares of preferred stock that we may issue. Such approval can be given by our common stockholders without the consent of the holders of the preferred stock. In such event, our board of directors would be able to issue one or more series of preferred stock that would rank senior to the preferred stock as to dividend rights or rights upon our liquidation, winding-up or dissolution, although we would need the affirmative vote or consent of the holders of at least 66 2/3% of the outstanding shares of the preferred stock to do so. We would not need that vote or consent to authorize, increase the authorized amount of, or issue any series of preferred stock that ranks equal or junior to the preferred stock as to such rights. Our future issuance of preferred stock could therefore effectively diminish or supersede dividends on, and the liquidation preference of, the preferred stock and adversely affect the value of the preferred stock and our common stock. SALES, OR THE AVAILABILITY FOR SALE, OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK COULD ADVERSELY AFFECT THE VALUE OF OUR COMMON STOCK AND, IN TURN, THE VALUE OF THE PREFERRED STOCK, AND IMPAIR OUR ABILITY TO RAISE EQUITY CAPITAL. Sales of substantial amounts of our common stock in the public market or the perception of the market that such sales may occur, as well as the availability of shares of our common stock for future sale (including our common stock issuable upon the conversion of shares of the preferred stock or upon exercise of outstanding options to acquire shares of our common stock) could adversely affect the market price of our common stock. This could also adversely affect the market value of the preferred stock and impair our future ability to raise capital through an offering of our equity securities. As of September 30, 2004, we had outstanding 6,082,887 shares of our common stock and options to purchase 475,000 shares of our common stock, all of which had an exercise price of $14.125 per share. UPON THE EXPIRATION OF 60-DAY LOCK-UP AGREEMENTS, A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK WILL BECOME AVAILABLE FOR SALE IN THE PUBLIC MARKET, WHICH MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK AND THE PREFERRED STOCK TO DECLINE. On , 2005, which is 60 days after the commencement of this offering, lock-up agreements covering approximately 2.4 million shares of our common stock (approximately 36.4% of our common stock outstanding as of September 30, 2004, including currently exercisable stock options) beneficially owned by our directors and executive officers will expire and those shares will become available for sale. If 21 our directors and executive officers sell substantial amounts of our common stock in the public market at concentrated times, the market price of our common and, in turn, the preferred stock, could fall. These sales also might make it more difficult for us to sell equity securities in the future at a time and price acceptable to us. While we do not anticipate that any such sales will be made, we can give no assurances that they will not. THE TRADING PRICES FOR THE PREFERRED STOCK WILL BE DIRECTLY AFFECTED BY THE TRADING PRICES FOR OUR COMMON STOCK. The public offering price for shares of the preferred stock, the conversion price and the exchange rate set forth on the cover page of this prospectus were determined by our board of directors and the underwriter after considering the likely cost of capital from other sources, comparable transactions, and historic and current trading prices for our common stock. We believe that the trading prices of the preferred stock will be directly affected by the trading prices of our common stock. OUR COMMON STOCK HAS EXPERIENCED, AND MAY CONTINUE TO EXPERIENCE, PRICE VOLATILITY AND A LOW TRADING VOLUME. Price volatility may adversely affect the trading price of our common stock regardless of our operating performance. In addition, our common stock has experienced low trading volume in the past. Our average daily trading volume was less than one percent of our outstanding common stock over the past six-month period. Therefore, the trading price of our common stock has been and may continue to be subject to large fluctuations, which may result in losses to investors. Coupled with the low trading volume, the trading price of our common stock may increase or decrease significantly in response to a number of events and factors, including: - trends in our industry and the markets in which we operate; - changes in the profitability of our individual charters and contracts; - changes in financial estimates and recommendations by securities analysts; - acquisitions and financings; - quarterly variations in our operating results; - the addition of key personnel or the loss of any of our current key personnel; - changes in accounting principles; - changes in tax laws affecting us; - the operating and stock price performance of other companies that investors may deem comparable to us; and - purchases or sales of blocks of our common stock. WE HAVE NOT RECENTLY PAID DIVIDENDS ON OUR COMMON STOCK AND WE DO NOT ANTICIPATE DOING SO IN THE FORESEEABLE FUTURE. Any decision to pay a cash dividend on our common stock, and the amount of any dividend to be paid, will be made at the discretion of our board of directors, subject to funds being legally available for the payment of dividends and the restrictions imposed by certain of our debt agreements, including the indenture governing our 7 3/4% senior notes due 2007. In connection with this offering, we will further restrict our ability to pay dividends on our common stock. See "Dividend Policy." We have not paid cash dividends on our common stock since 2001 and do not anticipate paying cash dividends on our common stock in the foreseeable future. 22 THE HOLDERS OF THE PREFERRED STOCK AND THE NOTES WILL HAVE CERTAIN CHANGE IN CONTROL REPURCHASE RIGHTS WHICH MAY DISCOURAGE A CHANGE IN CONTROL OF OUR COMPANY AND THE REMOVAL OF OUR INCUMBENT MANAGEMENT. Upon a change in control of our company, each holder of the preferred stock will have the right to require us to redeem for cash all or a portion of such holder's shares of the preferred stock. See "Description of the Preferred Stock -- Required Redemption on Change in Control." Similarly, each holder of notes issuable upon our exchange of the preferred stock will have, upon a change in control of our company, the right to require us to redeem for cash all or a portion of such holder's notes. See "Description of the Notes -- Required Redemption on Change in Control." These rights could make more difficult a merger, tender offer or proxy contest involving us, and could impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders and might provide our stockholders with the opportunity to sell their shares of our capital stock at a premium over prevailing market prices. AN EXCHANGE OF THE PREFERRED STOCK FOR NOTES MAY ADVERSELY AFFECT THE AFTER-TAX YIELD ON YOUR INVESTMENT IN OUR SECURITIES. If we exchange the preferred stock for notes, holders of the preferred stock will no longer be entitled to receive quarterly dividend payments on the preferred stock, but instead will be entitled to receive quarterly interest payments on the notes. For most taxpayers, the U.S. federal income tax rate on interest income is higher than the rate on dividend income. As a result, our election to exchange the preferred stock for notes may reduce the after-tax yield of your investment in our securities. OUR CERTIFICATE OF INCORPORATION PERMITS OUR BOARD OF DIRECTORS TO RESTRICT THE ACQUISITION OF OUR CAPITAL STOCK BY NON-U.S. CITIZENS AND ENTITIES, WHICH MAY PREVENT OR DISCOURAGE A CHANGE IN CONTROL OF OUR COMPANY AND THE REMOVAL OF OUR INCUMBENT MANAGEMENT. Our certificate of incorporation contains provisions that permit our board of directors to restrict the acquisition of our capital stock by non-U.S. citizens (including corporations and other entities controlled by non-U.S. citizens). See "Description of Common Stock -- Other Provisions -- Restrictions on Foreign Ownership." These provisions could prevent or discourage a merger, tender offer or proxy contest involving us and a non-U.S. citizen, or could impede an attempt by a non-U.S. citizen to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders and might provide our stockholders with the opportunity to sell their shares of our capital stock at a premium over prevailing market prices. RISKS RELATED TO THE NOTES THE NOTES ISSUABLE UPON OUR EXCHANGE OF THE PREFERRED STOCK WILL BE UNSECURED AND SUBORDINATED TO OUR EXISTING AND FUTURE SECURED INDEBTEDNESS AND SENIOR INDEBTEDNESS, AND WILL BE EFFECTIVELY SUBORDINATED TO ALL LIABILITIES AND PREFERRED STOCK, IF ANY, OF OUR SUBSIDIARIES. The notes issuable upon our exchange of the preferred stock will be unsecured obligations and, as such, - will be subordinate to all of our existing and future secured indebtedness to the extent of the value of the assets securing such debt; - will be subordinate to all of our existing and future senior and unsecured debt; and - will be effectively subordinated to all liabilities and preferred stock, if any, of our subsidiaries. As of September 30, 2004, after giving pro forma effect to this offering and the application of the net proceeds, we would have had $95.2 million of secured indebtedness (all of which was indebtedness of our subsidiaries), $102.7 million of unsecured indebtedness (including guarantees of indebtedness of our 23 subsidiaries of $31.8 million) and 800,000 outstanding shares of preferred stock (plus any shares of preferred stock purchased by the underwriter pursuant to its over-allotment option). WE ARE A HOLDING COMPANY WHOSE ONLY SIGNIFICANT ASSETS ARE THE CAPITAL STOCK OF OUR SUBSIDIARIES. We conduct substantially all of our business through our subsidiaries. Accordingly, the notes issuable upon our exchange of the preferred stock will be effectively subordinated to all existing and future liabilities and preferred stock, if any, of our subsidiaries. Any right of the company to participate in any distribution of the assets of any of our subsidiaries upon the liquidation, reorganization or insolvency of such subsidiary (and the consequent right of the holders of the notes to participate in the distribution of those assets) will be subject to the prior claims of the subsidiary's creditors and preferred stockholders, if any, except to the extent that we otherwise have a claim against such subsidiary as a creditor of such subsidiary. UPON A CHANGE IN CONTROL OF OUR COMPANY, WE MAY NOT HAVE SUFFICIENT FUNDS WITH WHICH TO REDEEM THE NOTES TENDERED TO US. Upon a change in control of our company, each holder of notes issuable upon our exchange of the preferred stock will have the right to require us to redeem for cash all or a portion of such holder's notes at a price equal to 100% of the principal amount of such notes, together with accrued and unpaid interest to, but not including, the date of redemption. Even if the terms of the instruments governing our other indebtedness allow us to redeem the notes, there can be no assurance that sufficient funds will be available to us at the time of a change in control to make any required redemption of notes. See "Description of the Notes -- Required Redemption on Change in Control." THERE IS NO CURRENT MARKET FOR THE NOTES ISSUABLE UPON OUR EXCHANGE OF THE PREFERRED STOCK, AND AN ACTIVE TRADING MARKET FOR THE NOTES MAY NOT DEVELOP. The notes issuable upon our exchange of the preferred stock will be a new issue of securities with no established trading market. While it is a condition to our ability to exchange the preferred stock for notes that the notes be listed or approved for listing on one or more of the New York Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange or another similar securities exchange or securities trading market, we cannot assure you that a market for the notes will develop. An inactive or illiquid trading market could adversely affect the trading price of the notes, and you may not be able to sell the notes quickly or at the market price if the trading market for the notes is inactive. Moreover, our ability to continue to list the notes, if and when issued, on a securities exchange or securities trading market will depend on our ability to meet such exchange or trading market's listing requirements. A FINANCIAL FAILURE BY ONE OR MORE ENTITIES IN WHICH WE HAVE AN INTEREST MAY HINDER THE PAYMENT OF THE NOTES ISSUABLE UPON OUR EXCHANGE OF THE PREFERRED STOCK AND MAY RESULT IN THE ASSETS OF ANY OR ALL OF THOSE ENTITIES BECOMING SUBJECT TO THE CLAIMS OF ALL CREDITORS OF THOSE ENTITIES. A financial failure by one or more entities in which we have an interest could affect payment of the notes issuable upon our exchange of the preferred stock if a bankruptcy court were to "substantively consolidate" us and other subsidiaries with such entities. If a bankruptcy court substantively consolidated us and our subsidiaries with an entity in which we have an interest but whose financial statements are not consolidated with ours, the assets of each entity would be subject to the claims of creditors of all entities. This would expose our creditors, including holders of the notes, to potential dilution of the amount ultimately recoverable because of the larger creditor base. The indenture governing the notes will not limit the ability of entities whose financial statements are not consolidated with ours to incur debt, which could increase this risk. Furthermore, forced restructuring of the notes could occur through the "cram-down" provisions of the U.S. bankruptcy code. Under those provisions, the notes could be restructured over the noteholders' objections as to their general terms, primarily interest rate and maturity. 24 IF WE EXCHANGE THE PREFERRED STOCK FOR NOTES, THE EXCHANGE WILL BE TAXABLE BUT WE WILL NOT PROVIDE ANY CASH TO YOU TO PAY ANY TAX LIABILITY YOU MAY INCUR. An exchange of the preferred stock for notes will be a taxable event for U.S. federal income tax purposes, which may result in tax liability for the holder of the preferred stock without any corresponding receipt of cash by the holder. In addition, the notes may be treated as having original issue discount, a portion of which would generally be required to be included in the holder's gross income over the term of the note even though the cash to which such income is attributable would not be received until the maturity or redemption of the note. We will not distribute any cash to you to pay these potential tax liabilities. See "Material U.S. Federal Income Tax Considerations." OTHER RISKS THE TERRORIST ATTACKS IN THE UNITED STATES ON SEPTEMBER 11, 2001 AND THE POTENTIAL FOR ADDITIONAL FUTURE TERRORIST ACTS HAVE CREATED ECONOMIC AND POLITICAL UNCERTAINTIES THAT COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND PROFITABILITY. The terrorist attacks that took place on September 11, 2001 in the U.S. have created many economic and political uncertainties, some of which may materially impact our business. The long-term effects of those attacks on our business are unknown. It is possible that further acts of terrorism may be directed against the United States domestically or abroad and such acts of terrorism could be directed against properties and personnel of U.S. companies such as ours. The potential for future terrorist attacks, the national and international response to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties and uncertainties in the world's financial and insurance markets, which could materially and adversely affect our business for the short or long term in ways that cannot presently be predicted. ARTHUR ANDERSEN LLP, OUR FORMER AUDITORS, AUDITED CERTAIN FINANCIAL INFORMATION INCLUDED IN THIS PROSPECTUS. IN THE EVENT SUCH FINANCIAL INFORMATION IS LATER DETERMINED TO CONTAIN FALSE STATEMENTS, YOU MAY BE UNABLE TO RECOVER DAMAGES FROM ARTHUR ANDERSEN LLP. Arthur Andersen LLP completed its audit of our financial statements for the year ended December 31, 2001 and issued its report with respect to such financial statements on January 11, 2002. Subsequently, Arthur Andersen was convicted of obstruction of justice for activities relating to its previous work for Enron Corp. In June 2002, our board of directors, at the recommendation of our audit committee, approved the appointment of Ernst & Young LLP as our independent public accountants to audit our financial statements for fiscal year 2002. Ernst & Young replaced Arthur Andersen, which had served as our independent auditors since our formation as International Shipholding Corporation in 1978. We had no disagreements with Arthur Andersen on any matter of accounting principle or practice, financial statement disclosure or auditing scope or procedure. Arthur Andersen audited the financial statements as of and for the year ended December 31, 2001 that we incorporate by reference in this prospectus. We incorporate these financial statements in reliance on the authority of Arthur Andersen as experts in giving its reports. Arthur Andersen has stopped conducting business before the SEC and has limited assets available to satisfy the claims of creditors. As a result, you may be limited in your ability to recover damages from Arthur Andersen under federal or state law if it is later determined that there are false statements contained in this prospectus relating to or contained in financial data audited by Arthur Andersen. 25 USE OF PROCEEDS We estimate that we will receive net proceeds from this offering of approximately $37.9 million, after deducting the underwriting discount and the financial advisory fee payable to the underwriter and our estimated offering expenses, or $41.7 million if the underwriter exercises its over-allotment option in full. We intend to use approximately $20.0 million of the proceeds of this offering to repay the $20.0 million drawn on our new $50 million revolving credit facility in early December 2004 to purchase two used vessels (see "Prospectus Summary -- Recent Developments -- Vessel Purchase Agreement"). Once those amounts are repaid, they will be available for future borrowing under the facility. We expect to use the remaining proceeds of this offering to pay most of the estimated $20.0 million cost of adding a second deck to each of the two vessels operating in our rail-ferry service (see "Prospectus Summary -- Recent Developments -- Rail-Ferry Service Expansion"). To the extent that the cost of adding the second decks exceeds the remaining proceeds, we will draw on our new credit facility. We will use any remaining proceeds of this offering and the proceeds from any exercise of the underwriter's over-allotment option to acquire additional new or used vessels, to satisfy our working capital requirements or for general corporate purposes. DIVIDEND POLICY Any decision to pay a cash dividend on our common stock or the preferred stock, and the amount of any dividend to be paid, will be made at the discretion of our board of directors, subject to funds being legally available for the payment of dividends and the restrictions imposed by the certificate of designations that will govern the preferred stock, the indenture that will govern the notes and certain of our debt agreements. The indenture governing our 7 3/4% senior notes due 2007 is the most restrictive of our debt agreements and provides that we may pay cash dividends on our capital stock only to the extent that we have a positive balance in our "restricted payments basket;" that is, the proposed dividends, when aggregated with all other dividend payments and other distributions made by us since January 1998, do not exceed the restricted payments basket as determined under the indenture. For a more detailed discussion of how we calculate the balance in our restricted payments basket and, in turn, our capacity to pay dividends on our capital stock, see the section of this prospectus entitled "Description of Indebtedness." As of September 30, 2004, our restricted payments basket had a deficit balance of approximately $2.9 million. Thus we were, and are currently, prohibited by the indenture governing our 7 3/4% notes from paying cash dividends on our capital stock. Pursuant to the indenture, the net proceeds from the sale of capital stock, which would include the net proceeds of this offering, are added to our restricted payments basket. As a result, upon the completion of this offering (assuming the receipt of approximately $37.9 million in net proceeds from this offering and no exercise of the underwriter's over-allotment option), we estimate that our restricted payments basket will have a positive balance of approximately $35.0 million. However, notwithstanding any positive balance that may exist in our restricted payments basket from time to time, the certificate of designations that will govern the preferred stock and the indenture that will govern the notes will each provide that we will not, prior to December 31, 2007, declare or pay any dividend on our common stock. This prohibition will not apply to our payment of dividends on the preferred stock. On and after December 31, 2007, we will no longer be prohibited from paying dividends on our common stock, and the payment of dividends on our common stock will again be made at the discretion of our board of directors, subject to funds being legally available for the payment of dividends, the other restrictions in the certificate of designations and any restrictions in our then-existing debt agreements. We have not paid cash dividends on our common stock since 2001 and do not anticipate paying cash dividends on our common stock in the foreseeable future, although we will consider paying cash dividends on our common stock once our credit agreements, the certificate of designations that will govern the preferred stock and the indenture that will govern the notes allow us to do so. 26 PRICE RANGE OF COMMON STOCK Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol "ISH." The following table sets forth the quarterly high and low sale prices for our common stock as reported by NYSE for the periods indicated.
HIGH LOW ------ ------ FISCAL YEAR 2002 First Quarter............................................. $ 7.05 $ 6.37 Second Quarter............................................ 6.80 5.70 Third Quarter............................................. 7.05 6.40 Fourth Quarter............................................ 6.85 5.57 FISCAL YEAR 2003 First Quarter............................................. 6.70 5.80 Second Quarter............................................ 10.91 6.75 Third Quarter............................................. 12.95 9.70 Fourth Quarter............................................ 15.37 9.25 FISCAL YEAR 2004 First Quarter............................................. 15.59 13.60 Second Quarter............................................ 17.10 14.10 Third Quarter............................................. 16.90 13.40 Fourth Quarter (through December 22, 2004)................ 16.40 13.01
27 CAPITALIZATION The following table sets forth our capitalization as of September 30, 2004: - on an actual basis; and - as adjusted to give effect to the sale of the preferred stock, assuming no exercise of the underwriter's over-allotment option, and the application of the estimated net proceeds as described in the section of this prospectus entitled "Use of Proceeds." You should read this table in conjunction with the sections of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Indebtedness," and the consolidated financial statements and related notes included elsewhere in this prospectus.
SEPTEMBER 30, 2004 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Cash and Cash Equivalents(1)................................ $ 11,931 $ 11,931 -------- -------- Current Maturities of Long-Term Debt........................ 13,815 13,815 Long-Term Debt: 7 3/4% Senior Notes Due 2007.............................. 70,916 70,916 Title XI Guaranteed Ship Financing Bonds.................. 1,336 1,336 Variable Rate Notes Payable Due 2013............................................. 76,064 76,064 Due 2007............................................. 4,000 4,000 -------- -------- Total Long-Term Debt(2)................................ 152,316 152,316 -------- -------- Total Debt.................................................. 166,131 166,131 % Convertible Exchangeable Preferred Stock, Par Value $1.00 Per Share; No Shares Issued and Outstanding; 800,000 Shares Issued and Outstanding As Adjusted for the Preferred Stock Offering and the Estimated Net Offering Proceeds...... 0 37,915 Stockholders' Investment: Common Stock, Par Value $1.00 Per Share, 10,000,000 Shares Authorized; 6,082,887 Shares Issued and Outstanding.... 6,756 6,756 Additional Paid-In Capital................................ 54,450 54,450 Retained Earnings......................................... 74,875 74,875 Treasury Stock............................................ (8,704) (8,704) Accumulated Other Comprehensive Loss...................... (34) (34) -------- -------- Total Stockholders' Investment....................... 127,343 127,343 -------- -------- Total Capitalization........................................ $293,474 $331,389 ======== ========
- --------------- (1) The amounts indicated do not include any restricted cash. (2) Our long-term indebtedness as of September 30, 2004 of $181.7 million as reflected elsewhere in this prospectus includes our total long-term debt as of September 30, 2004 of $152.3 million and the long-term portion of our guarantees as of September 30, 2004 of $29.4 million which are not reflected on our balance sheet in accordance with generally accepted accounting principles. 28 SELECTED HISTORICAL FINANCIAL AND OPERATING DATA The following table sets forth financial data for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, which have been derived from our audited financial statements, and for the nine months ended September 30, 2004 and 2003, which have been derived from our unaudited interim financial statements. The financial data for the nine months ended September 30, 2004 and 2003, in our opinion, reflects all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of such data and have been prepared in accordance with the same accounting principles followed in the presentation of our audited financial statements for the fiscal year ended December 31, 2003. The historical results presented below are not necessarily indicative of results that you can expect for any future period. You should read the table in conjunction with the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and related notes and the other financial information included elsewhere in this prospectus.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------------- -------------------------------------------------------------------------- 2004 2003 2003 2002 2001(1) 2000 1999(2) ---------- ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT RATIOS, FLEET CAPACITY DATA AND PER SHARE AMOUNTS) INCOME STATEMENT DATA: Revenues................. $ 199,483 $ 195,861 $ 257,813 $ 227,412 $ 304,370 $ 357,105 $ 373,209 Impairment Loss.......... -- -- -- 66 (81,038) -- -- Gross Voyage Profit (Loss)................. 22,993 27,053 33,840 30,502 (53,808) 49,475 66,681 Operating Income (Loss)................. 11,310 15,964 19,587 15,325 (73,885) 32,515 53,972 Net Income (Loss)........ 4,945 3,840 5,491 (136) (64,419) 836 14,623 Pro Forma Net Income Available to Common Stockholders(3)........ Basic Income (Loss) From Continuing Operations Per Common Share....... 1.86 2.62 3.22 2.52 (12.15) 5.35 8.40 Diluted Income (Loss) From Continuing Operations Per Common Share.................. 1.86 2.62 3.22 2.52 (12.15) 5.35 8.40 Basic Net Income (Loss) Per Common Share....... 0.81 0.63 0.90 (0.02) (10.59) 0.14 2.28 Diluted Net Income (Loss) Per Common Share....... 0.81 0.63 0.90 (0.02) (10.59) 0.14 2.28 Pro Forma Basic Net Income Per Common Share(3)............... Pro Forma Diluted Net Income Per Common Share(3)............... Average Common Shares Outstanding Basic.................. 6,082,887 6,082,887 6,082,887 6,082,887 6,082,887 6,082,954 6,424,193 Diluted................ 6,092,536 6,082,887 6,082,887 6,082,887 6,082,887 6,082,954 6,424,193 Cash Dividends Declared Per Common Share....... -- -- -- -- 0.125 0.250 0.250 BALANCE SHEET DATA: Working Capital.......... 14,526 7,398 10,248 1,849 25,631 28,183 35,571 Total Assets............. 367,912 391,483 382,451 406,752 461,722 695,176 735,003 Long-Term Debt, Less Current Maturities (including Capital Lease Obligations)..... 152,316 174,591 164,144 192,297 240,276 359,864 400,442 Stockholders' Investment............. 127,343 119,983 121,367 115,227 114,905 181,532 182,484 OTHER FINANCIAL DATA: Cash Flow From Operations............. 14,473 28,409 38,616 18,439 21,318 41,059 33,083 Cash Flow From Investing Activities............. 1,540 (687) 1,772 9,456 81,808 (5,664) (82,302) Cash Flow From Financing Activities............. (12,963) (24,146) (35,926) (48,626) (93,169) (37,150) 35,872 Depreciation and Amortization Expense... 21,751 23,716 31,276 29,892 46,484 63,028 62,438
29
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------------- -------------------------------------------------------------------------- 2004 2003 2003 2002 2001(1) 2000 1999(2) ---------- ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT RATIOS, FLEET CAPACITY DATA AND PER SHARE AMOUNTS) Capital Expenditures: Vessel Acquisition and Refurbishment Costs................ -- 2,300 2,361 6,905 39,390 33,268 51,012 Barge Refurbishment Costs................ -- -- -- 428 -- -- 1,372 Haul-Away Car Carrying Trucks Costs......... 1,641 2,456 2,456 937 -- -- -- Other Assets........... 161 531 543 288 781 734 796 Drydocking, Positioning and Other Costs........ 5,819 1,333 3,264 3,170 7,784 9,049 15,069 Ratio of Earnings to Fixed Charges(4)....... 1.39x 1.33x 1.35x --(5) --(5) 1.02x 1.69x Pro Forma Ratio of Earnings to Fixed Charges and Preferred Stock Dividends(6)..... FLEET CAPACITY (at end of period): Vessels.................. 35 36 35 36 36 34 35 LASH Barges.............. 917 917 917 919 1,722 1,849 1,864 Other Barges and Towboats............... -- -- -- 14 37 46 48 Haul-Away Car Carrying Trucks................. 32 22 22 7 -- -- -- Carrying Capacity (thousands of deadweight tons)....... 1,090 1,097 1,084 1,398 1,137 1,021 1,094
- --------------- (1) Results for 2001 reflect an impairment loss of approximately $81.0 million, in accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets." This non-cash charge was made to write down certain assets to estimated market value as part of the reclassification of our U.S. flag LASH Service, our Cape-Size Bulk Carrier and certain Special Purpose barges to "Assets Held for Disposal" and impairment charges recorded on our foreign flag LASH Liner Service. (2) Results for 1999 include the proceeds from a settlement with Seminole Electric Cooperative, Inc. resulting from its early termination of our coal transportation contract. The reported gain from the settlement of approximately $20.6 million was net of related expenses of approximately $1.8 million. (3) Pro forma results assume this offering had been consummated as of the beginning of the period, assuming an annual dividend rate on the preferred stock offered hereby of % of the liquidation preference and no exercise of the underwriter's over-allotment option. (4) For the ratio of earnings to fixed charges calculation, earnings consist of income (loss) before provision (benefit) for income taxes and equity in net income of unconsolidated entities plus distributions received from unconsolidated entities. Fixed charges include interest, amortization of financing charges and that portion of rent deemed representative of interest. (5) Earnings were insufficient to cover fixed charges by $28.6 million and $132.9 million for the years ended December 31, 2002 and 2001, respectively. We sustained a net loss from continuing operations of $0.8 million for 2002, which included impairment losses of $0.5 million, and a net loss from continuing operations of $99.4 million for 2001, which included impairment losses of $81.0 million. These losses were inadequate to cover our fixed charges of $27.8 million for 2002 and $33.5 million for 2001. (6) Reflects the ratio of earnings to fixed charges and preferred stock dividends, calculated in the manner set forth in Exhibit 12.1 to the registration statement of which this prospectus forms a part, as if this offering had been consummated as of the beginning of the period, assuming an annual dividend rate on the preferred stock offered hereby of % of the liquidation preference and no exercise of the underwriter's over-allotment option. See note 4 above for a description of the items constituting earnings and fixed charges. 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the section of this prospectus entitled "Selected Historical Financial and Operating Data" and the consolidated financial statements and related notes included elsewhere in this prospectus. GENERAL Our vessels are operated under a variety of charters and contracts. The nature of these arrangements is such that, without a material variation in gross voyage profits (total revenues less voyage expenses and vessel and barge depreciation), the revenues and expenses attributable to a vessel deployed under one type of charter or contract can differ substantially from those attributable to the same vessel if deployed under a different type of charter or contract. Accordingly, depending on the mix of charters or contracts in place during a particular accounting period, our revenues and expenses can fluctuate substantially from one period to another even though the number of vessels deployed, the number of voyages completed, the amount of cargo carried, and the gross voyage profit derived from the vessels remain relatively constant. As a result, fluctuations in voyage revenues and expenses are not necessarily indicative of trends in profitability, and our management believes that gross voyage profit is a more appropriate measure of operating performance than revenues. Accordingly, the discussion below addresses variations in gross voyage profits rather than variations in revenues. CRITICAL ACCOUNTING ESTIMATES Set forth below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and which require complex management judgments, uncertainties and/or estimates. Information regarding our other accounting policies is included in the notes to our consolidated financial statements included elsewhere in this prospectus. VOYAGE REVENUE AND EXPENSE RECOGNITION Revenues and expenses relating to our liner and rail-ferry segments' voyages are recorded over the duration of the voyage. Revenues and expenses relating to our other segments' voyages are recorded when earned or incurred during the reporting period. These segments require no estimates or assumptions when reporting revenues and expenses. On our liner services, the voyage revenues are known at the beginning of the vessel's voyage and are reported through the date of the financial statements based on the relative transit time, which is the time between the vessel's loading port to the vessel's discharge port. Variances from initial revenue estimates are generally not material. Voyage expenditures are estimated at the beginning of the vessel's voyage based on historical cost standards and current estimates received from our vendors and port agents. During the course of the vessel's voyage, typically 30 to 60 days, actual costs replace the original estimates and become part of the historical cost standards. Because of our on-going voyage review process, all variances from our original revenue and expense estimates are reported timely and generally are not material or recurring. DEPRECIATION Provisions for depreciation are computed on the straight-line method based on estimated useful lives of our depreciable assets. Various methods are used to estimate the useful lives and salvage values of our depreciable assets and due to the capital intensive nature of our business and our large base of depreciable assets, changes in such estimates could have a material effect on our results of operations. DRYDOCKING COSTS We defer certain costs related to the drydocking of our vessels. Deferred drydocking costs are capitalized as incurred and amortized on a straight-line basis over the period between drydockings 31 (generally two to five years). Because drydocking charges can be material in any one period, we believe that the acceptable deferred method provides a better matching for the amortization of those costs over future revenue periods benefiting from the drydocking of our vessel. INCOME TAXES Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." Provisions for income taxes include deferred income taxes that are provided on items of income and expense, which affect taxable income in one period and financial income in another. Certain foreign operations are not subject to income taxation under pertinent provisions of the laws of the country of incorporation or operation. However, pursuant to U.S. tax laws existing prior to the changes effected by the Jobs Creation Act, earnings from certain foreign operations are subject to U.S. income taxes. We had approximately $33 million of unused foreign deficit carryforwards as of December 31, 2003. The evaluation of the recoverability of these deferred tax assets requires management to make estimates and assumptions with respect to our expected future taxable income. While we expect to be able to utilize these net operating loss carryforwards even after the effectiveness of the Jobs Creation Act, actual future taxable income may differ from our estimates and as such we may be required to record additional valuation allowances against these assets. SELF-RETENTION INSURANCE We maintain provisions for estimated losses under our self-retention insurance based on estimates of the eventual claims settlement costs. Our policy is to establish self-insurance provisions for each policy year based on independent actuarial estimates, and to maintain the provisions at those levels for the estimated run-off period, approximately two years from the inception of that period. We believe most claims will be reported, or estimates for existing claims will be revised, within this two-year period. Subsequent to this two-year period, self-insurance provisions are adjusted to reflect our current estimate of loss exposure for the policy year. Our estimates are determined based on various factors, such as (1) severity of the injury (for personal injuries) and estimated potential liability based on past judgments and settlements, (2) advice from legal counsel based on its assessment of the facts of the case and its experience in other cases, (3) probability of pre-trial settlement which would mitigate legal costs, (4) historical experience on claims for each specific type of cargo (for cargo damage claims), and (5) whether our seamen are employed in permanent positions or temporary revolving positions. It is reasonably possible that changes in our estimated exposure may occur from time to time. However, if during this two-year period our estimate of loss exposure exceeds the actuarial estimate, then additional loss provisions are recorded to increase the self-insurance provisions to our estimate of the eventual claims' settlement cost. The measurement of our exposure for self-insurance liability requires management to make estimates and assumptions that affect the amount of loss provisions recorded during the reporting period. Actual results could differ materially from those estimates. ASBESTOS CLAIMS We maintain provisions for our estimated losses for asbestos claims based on estimates of eventual claims settlement costs. Our policy is to establish provisions based on a range of estimated exposure. We estimate this potential range of exposure using input from legal counsel and internal estimates based on the individual deductible levels for each policy year. We are also indemnified for certain of these claims by the previous owner of one of our wholly-owned subsidiaries. The measurement of our exposure for asbestos liability requires management to make estimates and assumptions that affect the amount of the loss provisions recorded during the period. Our estimates and assumptions are formed from variables such as the maximum deductible levels in a claim year, the amount of the indemnification recovery and the claimant's employment history with the company. Actual results could differ from those estimates. 32 PENSION AND POSTRETIREMENT BENEFITS Our pension and postretirement benefit costs are calculated using various actuarial assumptions and methodologies as prescribed by SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." These assumptions include discount rates, health care cost trend rates, inflation, rate of compensation increases, expected return on plan assets, mortality rates, and other factors. We believe that the assumptions utilized in recording the obligations under our plans are reasonable based on input from our outside actuary and information as to historical experience and performance. Differences in actual experience or changes in assumptions may affect our pension and postretirement obligations and future expense. RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003 EXECUTIVE SUMMARY Our net income for the third quarter of 2004 was $220,000 as compared to a net loss of $1.6 million for the third quarter of 2003. For the first nine months of 2004, our net income was $4.9 million as compared to net income of $3.8 million for the same period of 2003. During the third quarter of 2004, our liner and rail-ferry services operating out of the Gulf of Mexico experienced weather delays as a result of hurricanes. These delays, along with higher than anticipated operating costs, primarily from machinery deficiencies, caused the results of our rail-ferry segment for the third quarter of 2004 to drop below the comparable 2003 period. Our liner services segment managed to offset the impact of the weather delays with increased cargo volumes in comparison to third quarter 2003 levels. While the increased operating costs incurred by our liner services and rail-ferry service segments during the first nine months of 2004 were not anticipated, such costs were not extraordinary in nature. The equipment utilized by the vessels in our liner services and rail-ferry service segments require ordinary preventive and recurring maintenance. During the first nine months of 2004, some of the recurring maintenance anticipated to be done on the equipment at a later date was accelerated in order to take advantage of vessel downtime. Although we expect the cost of repairing the equipment utilized by our vessels to increase as our vessels age, we expect that the maintenance performed during the first nine months of 2004 will help offset this expected increase. Our investments in a fleet of Cement Carriers and two Cape-Size Bulk Carriers in the third quarter of 2004 showed improvements from the same quarter of 2003 as a result of an increase in our investment in the two Cape-Size Bulk Carriers, which currently represent a 50% interest in each ship versus our 12.5% interest in four vessels in 2003, and continued firmness in the charter market for these vessels. For the first nine months of 2004, income from our liner services segment improved over the comparable period of 2003 primarily as a result of improved cargo volume in our foreign flag LASH service and in spite of higher fuel costs and weather delays. However, during the same period we experienced a reduction in the results of our time charter vessels, as our U.S. flag PCTCs carried lower volumes of supplemental cargoes, which provide revenues in addition to those provided by the time charter agreements. The results of our U.S. flag PCTCs were further impacted by a casualty on one vessel resulting in 26 unplanned out-of-service days during the first nine months of 2004. The results of our U.S. flag Coal Carrier were impacted by an accelerated drydocking and other repair work and upgrading which resulted in the vessel being out of service 43 days in 2004 versus full employment in 2003. Results for the first nine months of 2004 for our rail-ferry segment were down from the first nine months of 2003 primarily as a result of higher operating costs due to unanticipated maintenance problems, higher fuel costs, added rail hire, and weather delays. Also contributing to our improved results for the 2004 nine month period was the loss we incurred during the third quarter of 2003 on the early extinguishment of debt. This resulted from a "make-whole" prepayment penalty and a write-off of deferred financing charges associated with the prepayment of a loan 33 on our U.S. flag Coal Carrier in order to correct a technical default, as reported in our previous SEC filings. Under current United States tax law, U.S. companies like us and their domestic subsidiaries generally are taxed on all income, whether derived in the United States or abroad. With respect to foreign subsidiaries in which we hold more than a 50 percent interest (referred to in the tax laws as controlled foreign corporations or "CFCs"), we are currently taxed on our pro rata share of foreign shipping income. The recently enacted Jobs Creation Act, which becomes effective for us on January 1, 2005, will change the United States tax treatment of our domestic and foreign shipping operations. We intend to make an election under the Jobs Creation Act to have most of our U.S. flag operations taxed under a new "tonnage tax" regime rather than under the usual U.S. corporate income tax regime. Once the election is effective, the only federal income tax on the operations of those vessels will be based on their tonnage, rather than their contribution to our income or profits. Also under the Jobs Creation Act, the taxable income of our CFCs from foreign shipping operations will be deferred until repatriated. For further information regarding the Jobs Creation Act and its estimated effect on our results of operations, see the section of this prospectus entitled "Business -- New Tax Legislation." GROSS VOYAGE PROFIT Gross voyage profit decreased 15% from $27.1 million in the first nine months of 2003 to $23 million in the first nine months of 2004. The changes associated with each of our segments are discussed below. Liner Services. Gross voyage loss for this segment improved from a loss of $1.7 million in the first nine months of 2003 to a loss of $429,000 in the first nine months of 2004. The improvement was primarily due to higher cargo volumes in the first nine months of 2004 compared to 2003 for both our U.S. flag LASH Liner service and foreign flag LASH Liner service resulting primarily from the repeal of steel tariffs which increased inbound steel tonnage, although our U.S. flag LASH Liner service experienced a less profitable cargo mix in the third quarter of 2004 as compared to the same period of 2003. Time Charter Contracts. The decrease in this segment's gross voyage profit from $25.5 million in the first nine months of 2003 to $22.1 million in the first nine months of 2004 was attributable primarily to our U.S. flag PCTCs carrying lower volumes of supplemental cargoes, which provide revenues in addition to the revenues provided by the time charter agreements, during the first nine months of 2004 as compared to the same period of 2003. Our U.S. flag PCTCs carried lower volumes of supplemental cargoes during the first nine months of 2004 because their voyages in 2004 did not place them in a position to participate in the supplemental cargo market. The gross voyage profit from our U.S. flag PCTCs declined by approximately $0.1 million from the comparable prior period because of a casualty on one vessel that resulted in 26 unplanned out-of-service days in the second quarter of 2004. The gross voyage profit from our U.S. flag Coal Carrier was reduced approximately $1.2 million by an accelerated drydocking due to required repair work and upgrading work resulting in 43 out-of-service days during the second and third quarters of 2004. Additionally, our Multi-Purpose vessel completed its charter with the MSC in early 2003 and was sold shortly thereafter. Contracts of Affreightment. The decrease in this segment's gross voyage profit from $4.1 million in the first nine months of 2003 to $3.7 million in the first nine months of 2004 was primarily due to higher operating costs as a result of machinery deficiencies, which contributed approximately $100,000 to the segment's operating costs, and weather delays resulting from hurricanes in the Gulf of Mexico, which contributed approximately $314,000 to the segment's operating costs. Rail-Ferry Service. Gross voyage loss for this segment increased from a loss of $2 million in the first nine months of 2003 to a loss of $3.4 million in the first nine months of 2004. This segment experienced higher operating costs due to unanticipated maintenance problems (which contributed approximately $790,000 to the segment's operating costs), higher fuel costs (which contributed approximately $400,000 to the segment's operating costs), weather delays as a result of hurricanes in the Gulf of Mexico (which contributed approximately $160,000 to the segment's operating costs), and higher rail car lease costs 34 related to such delays on northbound and southbound rail cargoes (which contributed approximately $90,000 to the segment's operating costs). Other. Gross voyage profit for this segment decreased from $1.2 million in the first nine months of 2003 to $923,000 in the first nine months of 2004. The decrease resulted primarily from our 50% owned car transportation truck company, which has operated at a loss, as well as a casualty on one of our vessels that our insurance subsidiary covered for the policy year ended June 26, 2004. OTHER INCOME AND EXPENSE Interest expense decreased 17.6% from $9.6 million in the first nine months of 2003 to $7.9 million in the first nine months of 2004. Decreases due to regularly scheduled payments on outstanding debt and lower interest rates accounted for $1 million of the difference. Reduced cost from the early repayment of our 7 3/4% senior notes due 2007, as well as early debt retirements, accounted for approximately $700,000 of the decrease. Loss on early extinguishment of debt of $46,000 reported in the first nine months of 2004 was due to the early retirement of debt associated with our Molten Sulphur Carrier, as well as the retirement at a premium of $410,000 of our 7 3/4% senior notes due 2007. The loss of $1.3 million in the first nine months of 2003 resulted from a "make-whole" prepayment penalty and write-off of deferred financing charges associated with the prepayment of the Coal Carrier loan to cure a technical default as described in note 7 to our unaudited financial statements included elsewhere in this prospectus. This was partially offset by the retirement at a discount of approximately $10.7 million of our 7 3/4% senior notes due 2007. INCOME TAXES We had a tax provision of $1.3 million in the first nine months of 2004 and $2.1 million for the first nine months of 2003 at the statutory rate of 35% for both periods. The recently-enacted Jobs Creation Act, which becomes effective for our company on January 1, 2005, will change the United States tax treatment of our U.S. flag vessels in foreign operations and foreign flag shipping operations. For a discussion of the Jobs Creation Act and its estimated effect on our results of operations, see the section of this prospectus entitled "Business -- New Tax Legislation." EQUITY IN NET INCOME OF UNCONSOLIDATED ENTITIES Equity in net income of unconsolidated entities, net of taxes, increased from $260,000 in the first nine months of 2003 to $3 million in the first nine months of 2004. The improvement was primarily related to our 50% investment in a company owning two newly built Cape-Size Bulk Carriers and our minority interest in companies owning and operating Cement Carriers. Our 50% investment in the Cape-Size Bulk Carrier company, which was acquired in November of 2003, contributed $2.3 million net of taxes in 2004. Our 30% investment in the Cement Carrier company contributed $693,000 net of taxes in the first nine months of 2004 compared to $260,000 net of taxes in the first nine months of 2003. RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 GROSS VOYAGE PROFIT Gross voyage profit increased 10.9% from $30.5 million in 2002 to $33.8 million in 2003. The changes associated with each of our segments are discussed below. Liner Service. Gross voyage loss for this segment improved from a loss of $4.9 million in 2002 to a loss of $4.2 million in 2003. Our U.S. flag LASH Liner Service's gross voyage loss improved from a loss of $3.6 million in 2002 to a profit of $131,000 in 2003 primarily due to expenses, included in 2002, associated with winding down the four-vessel service, while 2003 results reflect the current one-vessel operation. As a partial offset, our foreign flag LASH Liner Service's gross voyage profit decreased from $2.7 million in 2002 to $1 million in 2003 primarily due to lower cargo volume and higher than anticipated 35 operating costs in 2003. Additionally, depreciation on this segment's assets and operating lease expense increased from $3.7 million in 2002 to $5.4 million in 2003 due to upgrade work performed in late 2002 on one of our LASH vessels. Time Charter Contracts. This segment's gross voyage profit decreased from $34.5 million in 2002 to $33 million in 2003. Unanticipated vessel repairs resulting from machinery deficiencies on one of our Multi-Purpose vessels in the third quarter contributed to the decrease in gross voyage profit. The cost of the repairs and resulting vessel downtime impacted this segment by approximately $1.1 million. Additionally, vessel and barge depreciation increased resulting from a reduction in the estimated useful life of one of our Multi-Purpose vessels, which was sold during the fourth quarter of 2003. Partially offsetting this decrease was our Coal Carrier operating on time charter to USGenNE, which experienced higher results due to the vessel being utilized for all but two days during 2003 under its basic time charter contract as compared to 2002 when it was out of service thirty-three days for repairs and during which it operated 91 days in the spot market at lower rates as compared to its basic charter. Contracts of Affreightment. Gross voyage profit decreased from $6 million in 2002 to $5.5 million in 2003 primarily due to higher operating costs in 2003 and from a payment received in 2002 for loss of hire from an insurance claim relating to pre-existing damages identified during a scheduled drydocking. Rail-Ferry Service. Gross voyage loss for this segment improved from a loss of $3.7 million in 2002 to a loss of $2.9 million in 2003. The improvement was a result of higher cargo volume during 2003. Other. This segment's gross voyage profit improved from a loss of $1.3 million in 2002 to a profit of $2.4 million in 2003. Contributing to the improved results was the closing of our Singapore office, which operated at a loss during 2002, and the improved results of our insurance subsidiary, which operates solely to cover self-retained insurance risks. The results of 2003 benefited from a full year's operation of our 50% owned car transportation truck company as well as the results of two chartered vessels that we are operating under MSP contracts, which only operated for half of 2002. OTHER INCOME AND EXPENSES Gain on Sale of Vessels and Other Assets of $1.4 million in 2003 primarily related to the sale of our Multi-Purpose vessel, which completed its commitment under charter with the MSC and was no longer needed for operations, and the sale of Special Purpose Barges no longer needed for current operations. The net gain of $557,000 in 2002 primarily related to the sale of certain contract rights that were no longer beneficial to us and the sale of certain assets no longer needed for operations. Interest expense decreased 29.3% from $17.7 million in 2002 to $12.5 million in 2003. Decreases due to lower outstanding debt balances and lower interest rates accounted for $1.7 million of the total difference. Approximately $3.5 million of the decrease resulted from the early repayment of our 9% senior notes and repurchases of our 7 3/4% senior notes due 2007, which was partially offset by the cost of new financings used to repurchase some of the notes. Investment income increased 235.4% from $656,000 in 2002 to $2.2 million in 2003 primarily as a result of higher dividend income received in 2003 from our investment in certain bulk carrier companies accounted for under the cost method, and interest earned on a receivable which resulted from the fourth quarter 2002 sale and leaseback of one of our foreign flag LASH vessels. This was partially offset by lower invested balances and lower interest rates earned on invested funds in the current period. Other Income of $1.5 million in 2002 was a result of interest collected in 2002 on foreign tax refunds. Loss on early extinguishment of debt of $1.3 million in 2003 resulted from a "make-whole" prepayment penalty and write-off of deferred financing charges associated with the necessary prepayment of our Coal Carrier loan to cure a technical default (see the subsection entitled "USGenNE Bankruptcy Filing" in "Liquidity and Capital Resources" below). This was partially offset by a discount on the retirement of approximately $10.7 million of our 7 3/4% senior notes due 2007. For further information, see note A to our consolidated financial statements located elsewhere in this prospectus. 36 INCOME TAXES We had a tax provision for federal income taxes of $2.8 million in 2003 and a tax benefit of $170,000 in 2002. The statutory rate was 35% for both years. EQUITY IN NET INCOME OF UNCONSOLIDATED ENTITIES Equity in net income of unconsolidated entities, net of taxes, of $422,000 for 2003 and $555,000 for 2002, was primarily related to our investment in companies owning and operating cement-carrying vessels. The decrease in the equity in net income of 2003 was primarily due to a write off of an uncollectable charterhire receivable by one of these companies. RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 GROSS VOYAGE PROFIT Gross voyage profit improved from a loss of $53.8 million in 2001 to a profit of $30.5 million in 2002. The changes associated with each of our segments are discussed below. Liner Service. Gross voyage loss for this segment improved from a loss of $90.3 million in 2001 to a loss of $4.9 million in 2002. In 2001, an impairment loss of $78.7 million was recognized as a result of our plan to separate certain of our vessels from our operations and dispose of these assets. Also contributing to the improved results of this segment was an improvement of $4.8 million from the elimination of the four-vessel U.S. flag LASH Liner service. Expenses associated with winding down the service were offset by the reduction of loss provisions for insurance and other accruals during the year which are discussed in more detail in the paragraphs below. Additionally, the commencement of the renewed U.S. flag LASH service in November of 2002 contributed gross voyage profit of approximately $800,000. Offsetting this improvement was lower gross voyage profit from our foreign flag LASH Liner service of $5.9 million resulting from lower rates for eastbound cargo and higher than normal towage expenses for LASH barges as a result of high water on the Mississippi River and higher interstate towage expenses. Additionally, in 2002, this service experienced a drop in cargo volume as a result of lower westbound cargo volumes due to sanctions imposed by the President on steel imports. We reduced our insurance provisions during 2002 resulting from a review of our current estimate of our loss exposure for the policy year that reached the end of its two-year period as well as from a reduction in the estimated total remaining loss exposure related to the U.S. flag LASH Liner service. We determined that the provisions for this policy year, which were based on actuarial estimates, exceeded our loss exposure estimate, mainly as related to personal injury claims. We routinely review our self-retention loss provisions and make adjustments as we believe they are warranted. During 2002, we reduced the estimated provision by approximately $3 million, of which $2.3 million was related to the liner services segment. We maintain accruals for amounts due to U.S. Customs related to repair work performed on U.S. flag ships at foreign shipyards. U.S. Customs advised us during the second quarter of 2002 that several claims related to the U.S. flag LASH Liner service would be settled and would require payment within a year. As a result, the portion of accruals associated with our settlement estimate was reclassified from long-term to current liabilities as of December 31, 2002. Additionally in 2002, as a result of recent settlements, we revised our estimates of amounts due to U.S. Customs, which resulted in an increase in gross voyage profit of the liner services segment of approximately $1.5 million. As a result of the discontinuation of the U.S. flag LASH Liner service, we recognized expenses associated with the winding down of the service of $4 million during 2002. Time Charter Contracts. This segment's gross voyage profit decreased from $37.2 million in 2001 to $34.5 million in 2002. In 2001, an impairment loss of $2.4 million was recognized on one of our LASH vessels that was sold while held for disposal. The decrease in gross voyage profit resulted from the sale and 37 leaseback of two of our PCTCs during the second half of 2001, renegotiated lease terms on another PCTC that resulted in different accounting treatment, and offhire time for repair work on our Coal Carrier. The contracts under which the three PCTCs operate were not affected by the aforementioned lease transactions. However, because the leases now qualify for treatment as operating leases, the lease payments of $14.1 million were included in voyage expenses during 2002. The resulting increase in voyage expenses approximates the depreciation and interest charges recorded on these vessels during 2001, which were eliminated by the lease transactions. Also contributing to the decrease was the sale of our Cape-Size Bulk Carrier in 2001. The decrease was partially offset by an increase of approximately $2.2 million in revenue earned by our PCTCs due to carrying more supplemental cargoes during 2002 and by $862,000 related to the reduction of loss provisions for insurance and other accruals during the year discussed previously. One of our Multi-Purpose vessels, which is included in this segment, operated under charter to the MSC re-supplying scientific projects in the Arctic and Antarctic. Gross voyage profit associated with this contract was comparable to the prior year. The contract with the MSC was extended in December of 2002 through the first quarter of 2003. The vessel was sold during the fourth quarter of 2003. Contracts of Affreightment. Gross voyage profit decreased slightly from $6.3 million in 2001 to $6 million in 2002. The transportation contract under which our Molten Sulphur Carrier operates was assigned by Freeport-McMoRan Sulphur LLC to Gulf Sulphur Services Ltd., LLP during the second quarter of 2002. The terms of the contract were not affected by the assignment. Rail-Ferry Service. This segment's gross voyage loss of approximately $3.7 million in 2002 improved from a loss of $7.5 million in 2001. The improvement resulted primarily from an increase in rail cars shipped in 2002 compared with 2001. Other. This segment's gross voyage profit decreased from a profit of $449,000 in 2001 to a loss of $1.3 million in 2002 as a result of the discontinuation of the previous four-vessel U.S. flag LASH Liner Service, which decreased the results of certain of our specialized subsidiaries in 2002. OTHER INCOME AND EXPENSES Administrative and general expenses decreased 33.3% from $23.6 million in 2001 to $15.7 million in 2002 primarily due to savings resulting from staff reductions, slightly offset by related severance payments. Additionally, we retained an unrelated third party during 2001 to provide ship management services that were previously provided by one of our wholly-owned subsidiaries. The costs for these services of approximately $1.4 million were included in voyage expenses in 2002, while the expenses of the subsidiary were included in administrative and general expenses in 2001. Gain on Sale of Vessels and Other Assets of $557,000 in 2002 primarily related to the sale of certain contract rights that were no longer beneficial to us and the sale of other assets no longer needed for operations. The net gain of $3.5 million in 2001 was related to gains on the sale of one of our PCTCs, which was replaced by a newer PCTC, and the sale of additional contract rights no longer required by us, partially offset by a loss on the sale of two of our LASH vessels, which completed their commitment under charter with the MSC and were no longer needed for operations. Interest expense decreased 33.8% from $26.7 million in 2001 to $17.7 million in 2002. The early repayment of the debt associated with the two PCTCs sold and leased back during 2001 under operating leases, and the reclassification of another PCTC lease from a capital lease to an operating lease due to a change in lease terms accounted for approximately $4.9 million of the decrease. Regularly scheduled payments on outstanding debt and lower interest rates contributed $2.2 million to the decrease. Additionally, interest expense decreased because our line of credit had a lower balance drawn throughout 2002 as compared to 2001, and we repurchased $39.1 million of our 9% senior notes and $1.1 million of our 7 3/4% senior notes due 2007 during 2002. These decreases were partially offset by interest incurred during 2002 on the financing of a new PCTC purchased in the second half of 2001, additional financing on 38 our Molten Sulphur Carrier in July of 2002, and new financing on two of our LASH vessels in November of 2002. Other Income of $1.5 million in 2002 resulted from interest earned by us on overpayments of foreign taxes made in prior years that were previously refunded. INCOME TAXES Our tax benefit for federal income taxes was $170,000 in 2002 and $34.6 million in 2001. The statutory rate was 35% for both years. EQUITY IN NET INCOME OF UNCONSOLIDATED ENTITIES Equity in net income of unconsolidated entities, net of taxes, of $555,000 for 2002 and $463,000 for 2001, was primarily related to our investment in companies owning and operating cement-carrying vessels. LIQUIDITY AND CAPITAL RESOURCES The dividends that will accrue on the preferred stock being offered hereby will affect our liquidity on a quarterly basis. We anticipate funding the preferred stock dividends with operating cash flow. However, we may not be permitted to pay cash dividends on the preferred stock and holders of the preferred stock will not be able to compel us to pay them. See "Description of the Preferred Stock -- Dividends." For further information regarding the pro forma effect of the preferred stock dividends on our historical earnings, see the section of this prospectus entitled "Selected Historical Financial and Operating Data." The following discussion should be read in conjunction with the more detailed consolidated balance sheets and consolidated statements of cash flows included elsewhere in this prospectus. AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 Our working capital increased from $10.2 million at December 31, 2003 to $14.5 million at September 30, 2004. Of the $43.3 million in current liabilities at September 30, 2004, $13.8 million related to current maturities of long-term debt. Cash and cash equivalents increased during the first nine months of 2004 by $3 million from $8.9 million at December 31, 2003 to $11.9 million at September 30, 2004. The increase was due to cash provided by operating activities of $14.5 million and investing activities of $1.5 million, partially offset by cash used for financing activities of $13 million. Operating activities generated positive cash flow after adjusting net income of $4.9 million for non-cash provisions such as depreciation and amortization. Cash provided by operating activities also included a decrease in accounts receivable of $6.9 million primarily due to the timing of collections of receivables from the MSC and U.S. Department of Transportation, slightly offset by a decrease in accounts payable and accrued liabilities of $6.2 million primarily due to the timing of payments to U.S. Customs in 2004. Also included was cash used of $5.8 million primarily to cover payments for vessel drydocking costs in 2004. Cash provided by investing activities of $1.5 million was primarily related to cash distributions received from our investments in unconsolidated entities, partially offset by purchases of non-vessel related assets used by our car transportation truck company and purchases of short-term investments. Cash used for financing activities of $13 million included $8.9 million used for regularly scheduled payments of debt, $1 million used to repay draws on our line of credit made during the same period, $2.5 million used for early repayment of one of our debt obligations, and $1.5 million used for an additional payment on our Title XI loan, which was partially offset by draws on our line of credit of $1 million. As of September 30, 2004, $14.7 million was available on our $15 million revolving credit facility which was to expire in April of 2006. In early December 2004, we replaced this facility with a new $50 million revolving credit facility. See "Description of Indebtedness." This new credit facility, which we 39 drew $20.0 million on in early December 2004 to purchase two used vessels (see "Prospectus Summary -- Recent Developments -- Vessel Purchase Agreement"), will give us additional flexibility to make capital investments and to prepay debt if market conditions warrant, among other options. Debt and Lease Obligations. We have several vessels under operating leases, including three PCTCs, a LASH vessel, a Breakbulk/Multi-Purpose vessel, a Container vessel and a Tanker vessel. We also conduct certain of our operations from leased office facilities and use certain transportation and other equipment under operating leases. Our obligations associated with these leases are summarized in the table below. The following is a summary of the scheduled maturities by period of our outstanding debt and lease obligations as of September 30, 2004:
FOURTH QUARTER OF 2004 2005 2006 2007 2008 THEREAFTER ----------------- ------- ------- ------- ------- ---------- (IN THOUSANDS) Long-Term Debt (including Current Maturities)........ $ 5,265 $12,366 $10,804 $80,001 $ 7,468 $ 51,793 Operating Leases..... 6,119 19,060 19,073 18,948 16,893 91,558 ------- ------- ------- ------- ------- -------- Total by Period.... $11,384 $31,426 $29,877 $98,949 $24,361 $143,351 ======= ======= ======= ======= ======= ========
Debt Covenant Compliance Status. As of September 30, 2004, we met all of the financial covenants under our various debt agreements, the most restrictive of which include the working capital, leverage ratio, minimum net worth and interest coverage ratios, and believe we will continue to meet them throughout 2004, although we can give no assurance to that effect. If our cash flow and capital resources are not sufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, obtain additional equity capital, enter into additional financings of our unencumbered vessels or restructure debt. Mexican Rail-Ferry Service Results. Our rail-ferry service provides a unique combination of rail and water ferry service between the U.S. Gulf and Mexico. As with any innovative venture, we expected and have experienced an adjustment period for the market to embrace our alternative service. However, since the inception of the service in 2001, it has experienced an overall improvement in gross revenues and operating cash flows. Low operating profit margins are inherent in the rail-ferry business. Accordingly, high cargo volumes are necessary to achieve meaningful levels of cash flow and profitability. The capacity of the vessels operating in our rail-ferry service has limited the revenues and, in turn, the cash flow and gross profits that can be generated by our rail-ferry service segment. We intend to use a portion of the proceeds of this offering to add a second deck to each of the two vessels operating in our rail-ferry service in order to essentially double their capacity. We believe that these additions will significantly reduce our cost per unit of cargo carried and significantly increase our cash flow, but only if we are able to book substantially all of the additional capacity, and we can give no assurance at this time that we will be successful in doing so. If market conditions adversely affect those expectations, we believe we could find alternative placement for the two vessels supporting the service. We hope to conclude the necessary shipyard modification contracts shortly and expect the vessels to begin shipyard work in mid-2005 and return to service in the second half of 2005. Vessel Purchase Agreement. In November 2004, we entered into an agreement to purchase two used vessels. We took delivery of these vessels in early December 2004. These vessels will enable us to maintain two of our MSP contracts. We drew on our new $50 million revolving credit facility (see "Description of Indebtedness") to purchase the vessels and intend to use a portion of the proceeds of this offering to repay the amounts drawn. See "Prospectus Summary -- Recent Developments -- Vessel Purchase Agreement." Maritime Security Program Contracts. In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships industry-wide eligible to participate in the program from 47 40 to 60, and increased MSP payments to companies in the program, all to be effective on October 1, 2005. Annual payments for each vessel in the new MSP program will be $2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012 to 2015. On October 15, 2004, we filed applications to extend our seven MSP contracts for another 10 years, all of which were effectively grandfathered in the MSP reauthorization. Simultaneously, we offered additional ships for participation in the MSP. MarAd is expected to announce MSP contract awards on January 14, 2005, and we have no way of knowing at this time whether we will be awarded contracts for the additional ships. Dividend Payments. In order to comply with certain financial covenants under our debt agreements, the suspension of quarterly cash dividend payments on our common stock remains in effect. See "Description of Indebtedness." Environmental Issues. We have not been notified that we are a potentially responsible party in connection with any environmental matters, and we have determined that we have no known risks for which assertion of a claim is probable that are not covered by third party insurance, provided for in our self-retention insurance reserves or otherwise indemnified. Our environmental risks primarily relate to oil pollution from the operation of our vessels. We have pollution liability insurance coverage with a limit of $1 billion per each occurrence, with a deductible amount of $25,000 for each incident. AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2003 Our working capital increased from $1.8 million at December 31, 2002, to $10.2 million at December 31, 2003. Of the $50.6 million in current liabilities at December 31, 2003, $14.9 million related to the current maturities of long-term debt. Cash and cash equivalents increased during 2003 by $4.5 million to a total of $8.9 million. This increase was due to cash provided by operating activities of $38.6 million and by investing activities of $1.8 million, partially offset by cash used for financing activities of $35.9 million. Operating activities generated a positive cash flow after adjusting the net income of $5.5 million for non-cash provisions such as depreciation and amortization. Cash provided by operating activities also included an increase in accounts receivable of $7.4 million primarily due to the timing of collections of receivables from the MSC and U.S. Department of Transportation, offset by an increase in accounts payable and accrued liabilities of $3.5 million primarily due to U.S. Customs accruals recorded in late 2003. Also included was cash used of $2.2 million primarily to cover payments for vessel drydocking costs in 2003. Cash used for financing activities of $35.9 million included $9.1 million used to repurchase $10.7 million of our 7 3/4% senior notes due 2007 at a discount, $18.6 million used for regularly scheduled payments of debt, $16.7 million used for prepayment of the Coal Carrier loan (see the subsection entitled "USGenNE Bankruptcy Filing" below), $6.0 million for an additional payment on our Sulphur Carrier loan, $83.6 million used for prepayments of outstanding debt obligations on three of our vessels that were consolidated into one loan, and $39 million used to repay draws on our line of credit. These uses were partially offset by proceeds of $38 million from draws on our line of credit, the financing of $10 million used for the prepayment of the aforementioned Coal Carrier loan, and $91 million in secured financing used for the prepayment and consolidation of the aforementioned debt on three of our vessels. At December 31, 2003, $14.3 million was available on our $15 million revolving credit facility, which expires in April of 2006. Debt and Lease Obligations. We have several vessels under operating leases, including three PCTCs, one LASH vessel, one Ice Strengthened Breakbulk/Multi Purpose vessel, a Container vessel and a Tanker vessel. We also conduct certain of our operations from leased office facilities and use certain transportation and other equipment under operating leases. Our obligations associated with these leases are disclosed in the table below. 41 The following is a summary of the scheduled maturities by period of our outstanding debt and lease obligations as of December 31, 2003:
2004 2005 2006 2007 2008 THEREAFTER ------- ------- ------- ------- ------- ---------- (IN THOUSANDS) Long-Term Debt (including Current Maturities)...... $14,866 $12,366 $12,253 $80,411 $ 7,468 $ 51,793 Operating Leases........... 24,477 19,060 19,073 18,948 16,893 91,558 ------- ------- ------- ------- ------- -------- Total by Period.......... $39,343 $31,426 $31,326 $99,359 $24,161 $143,351 ======= ======= ======= ======= ======= ========
Debt Covenant Compliance Status. We have met all of the financial covenants under our various debt agreements, the most restrictive of which include the working capital, leverage ratio, minimum net worth, and interest coverage ratio, among others, after these were amended for the full year 2002. We also met, as of December 31, 2003, the more restrictive financial covenants that became effective in 2003, and believe we will continue to meet them throughout 2004, although we can give no assurance to that effect. If our cash flow and capital resources are not sufficient to fund our debt service obligations or if we are unable to meet covenant requirements, we may be forced to reduce or delay capital expenditures, sell assets, obtain additional equity capital, enter into additional financings of our unencumbered vessels or restructure debt. Mexican Service Results. We expect the results of the Mexican Service to continue to improve and contribute to our cash flows. If market conditions adversely impact those projections, we believe we could find alternative placement for the two vessels supporting the service. USGenNE Bankruptcy Filing. As previously discussed, we charter our Coal Carrier to USGenNE, an indirect subsidiary of PG&E. On July 8, 2003, USGenNE filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and subsequently requested an extension of time to submit its bankruptcy plan until March 4, 2004, and an extension until May 3, 2004, to solicit acceptance to its plan. Upon the acquisition of our vessel, we had issued $50 million in notes, which had an outstanding balance of approximately $17 million at the time of the bankruptcy filing. Although the notes were non-recourse to the Company, the indenture under which they were issued provided that USGenNE's bankruptcy filing was an event of default on the notes as well as a cross-default on certain of our other credit facilities. We secured alternative financing, which was used to pay the notes in full in addition to a "make-whole" prepayment penalty. The payment of the notes cured the cross-defaults under the other credit facilities. Therefore, we are no longer in default under any of our credit facilities. Dividend Payments. As a result of the impairment loss recognized on certain of our assets during 2001, and its impact on certain financial covenants under our debt agreements, the suspension of quarterly dividend payments on our common shares of stock remains in effect. Environmental Issues. We have not been notified that we are a potentially responsible party in connection with any environmental matters, and we have determined that we have no known risks for which assertion of a claim is probable that are not covered by third party insurance, provided for in our self-retention insurance reserves or otherwise indemnified. Our environmental risks primarily relate to oil pollution from the operation of our vessels. We carry pollution liability insurance coverage with a limit of $1 billion per each occurrence, with a deductible amount of $25,000 for each incident. DISCLOSURES ABOUT MARKET RISK In the ordinary course of our business, we are exposed to foreign currency, interest rate, and commodity price risks. We utilize derivative financial instruments including forward exchange contracts, interest rate swap agreements, and commodity swap agreements to manage certain of these exposures. We hedge only firm commitments or anticipated transactions and do not use derivatives for speculation. We neither hold nor issue financial instruments for trading purposes. 42 INTEREST RATE RISK The fair value of our cash and short-term investment portfolio at September 30, 2004 approximated carrying value due to its short-term duration. The potential decrease in fair value resulting from a hypothetical 10% increase in interest rates at September 30, 2004 for our investment portfolio is not material. The fair value of our long-term debt at September 30, 2004, including current maturities, was estimated to be $169.0 million compared to a carrying value of $166.1 million. The potential increase in fair value resulting from a hypothetical 10% decrease in the average interest rates applicable to our long- term debt at September 30, 2004 would be approximately $1.5 million or 0.9% of the carrying value. COMMODITY PRICE RISK During 2003, we hedged a portion of our 2003 fuel requirements for our liner services and rail-ferry service segments. These commodity swap agreements contributed a net positive adjustment to voyage expense of $2.2 million in 2003. As of September 30, 2004, we have no commodity swap agreements to manage our exposure to price risk related to the purchase of the estimated 2004 fuel requirements for our liner services or rail-ferry service segment. We are exposed to price risks with respect to the fuel we consume in our liner and rail-ferry operations. A 20% increase in the price of fuel for the period October 1, 2003 through September 30, 2004 would have resulted in an increase of approximately $2.7 million in our fuel costs for the same period, and in a corresponding decrease of approximately $0.44 in our earnings per share based on the shares of our common stock outstanding as of September 30, 2004, assuming that none of the price increase could have been passed on to our customers through fuel cost surcharges during the same period. FOREIGN EXCHANGE RATE RISK We have entered into foreign exchange contracts to hedge certain firm purchase and sale commitments with varying maturities. The potential fair value of these contracts that would have resulted from a hypothetical 10% adverse change in the exchange rates applicable to these contracts as of December 31, 2003 was a liability of approximately $295,000. As of September 30, 2004, there had been no material changes in our market risk exposure relating to these contracts. NEW ACCOUNTING PRONOUNCEMENTS In January of 2003, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Series Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by the primary beneficiary of the entity, where the company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (1) does not have equity investors with voting rights or (2) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. We have investments in certain unconsolidated entities in which we have less than 100% ownership. We have evaluated these investments and determined that we do not have any investments in variable interest entities. Therefore, the adoption of FIN 46 as of January 1, 2004 did not have an impact on our financial statements. In December of 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The revised statement retains the disclosure requirements of the original statement and requires additional annual disclosures including information describing the types of plan assets, investment strategy, measurement dates, plan obligations, and cash flows. In addition to expanded annual disclosures, the revised statement requires the components of net periodic benefit cost to be 43 disclosed in interim periods. This statement is effective for financial statements with fiscal years ended after December 15, 2003, and the interim period disclosures are effective for interim periods beginning after December 15, 2003. The additional annual disclosures required by the revised statement are included in the notes to our consolidated financial statements included elsewhere in this prospectus. Also in December of 2003, the Medicare Prescription Drug, Improvements, and Modernization Act of 2003 (the "Act") was signed into law. In addition to including numerous other provisions that have potential effects on an employer's retiree health plan, the Medicare law included a special subsidy for employers that sponsor retiree health plans with prescription drug benefits that are at least as favorable as the new Medicare Part D benefit. In May of 2004, the FASB issued FASB Staff Position 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvements, and Modernization Act of 2003" ("FSP 106-2"), that provides guidance on the accounting for the effects of the Act for employers that sponsor postretirement health care plans that provide drug benefits. We are still evaluating whether our plan is actuarially equivalent, although its impact on our financial position and results of operations is not material. 44 BUSINESS COMPANY OVERVIEW The company was originally founded as Central Gulf Steamship Corporation in 1947 by the late Niels F. Johnsen and his sons, Niels W. Johnsen, a director of the company, and Erik F. Johnsen, our Chairman and Chief Executive Officer. Central Gulf was privately held until 1971 when it merged with Trans Union. In 1978, International Shipholding Corporation was formed to act as a holding company for Central Gulf, LCI, and certain other affiliated companies in connection with the 1979 spin-off by Trans Union of our common stock to Trans Union's stockholders. In 1986 we acquired the assets of Forest Lines, and in 1989 we acquired the ownership of Waterman. Since our spin-off from Trans Union, we have continued to act solely as a holding company, and our only significant assets are the capital stock of our subsidiaries. Through our subsidiaries, we operate a diversified fleet of U.S. and foreign flag vessels that provide international and domestic maritime transportation services to commercial and governmental customers primarily under medium- to long-term charters and contracts. At September 30, 2004, our fleet consisted of 35 ocean-going vessels, of which 11 were 100% owned by us, nine were 30% owned by us, two were 50% owned by us, seven were leased by us, and six were operated by us under operating contracts. We also own 917 LASH barges and 32 over-the-road haul-away car carrying trucks that are leased to a company in which we have a 50% interest. Our fleet includes the following: - four U.S. flag PCTCs specifically designed to transport fully assembled automobiles, trucks and larger vehicles; and two foreign flag PCTCs with the capability of transporting heavy weight and large dimension trucks and buses, as well as automobiles; - one Breakbulk/Multi-Purpose vessel, two Container vessels and one Tanker vessel, which are used to transport supplies for the Indonesian operations of a mining company; - one U.S. flag Molten Sulphur Carrier and a Tanker, which are used to carry molten sulphur from Louisiana and Texas to a processing plant on the Florida Gulf Coast; - two Special Purpose vessels modified as RO/ROs to transport loaded rail cars between the U.S. Gulf and Mexico; - one U.S. flag conveyer-equipped self-unloading Coal Carrier, which carries coal in the coastwise and near-sea trade; - three RO/RO vessels that permit rapid deployment of rolling stock, munitions, and other military cargoes requiring special handling; - two container vessels we bareboat charter; - two Cape-Size Bulk Carriers in which we own a 50% interest; and - nine Cement Carriers in which we own a 30% interest. Our fleet also includes three LASH vessels, one Dockship, and 917 LASH barges. In our transoceanic liner services, we use the LASH system primarily to gather cargo on rivers, in island chains, and in harbors that are too shallow for traditional vessels. Our fleet is deployed by our principal operating subsidiaries, Central Gulf, LCI (including a transatlantic liner service doing business as "Forest Lines"), Waterman, and CG Railway. Other of our subsidiaries provide ship charter brokerage, agency and other specialized services primarily to our operating segments. We have five operating segments: Liner Services, Time Charter Contracts, COAs, Rail-Ferry Service, and Other. In addition to our five operating segments, we have investments in several unconsolidated entities of which we own 50% or less and do not exercise significant influence over operating and financial 45 activities. For additional information about our operating segments, see note K of the notes to our consolidated financial statements included elsewhere in this prospectus. During the year ended December 31, 2003 and the nine months ended September 30, 2004, those segments made the following contributions to our revenues, gross voyage profit or loss and segment profit or loss:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 2004 DECEMBER 31, 2003 ---------------------------------------- ---------------------------------------- GROSS VOYAGE SEGMENT GROSS VOYAGE SEGMENT REVENUES PROFIT (LOSS) PROFIT (LOSS) REVENUES PROFIT (LOSS) PROFIT (LOSS) -------- ------------- ------------- -------- ------------- ------------- (IN THOUSANDS) (IN THOUSANDS) Liner Services............ $ 71,332 $ (429) $(1,043) $ 75,635 $(4,199) $(5,238) Time Charter Contracts.... 87,086 22,144 17,611 129,685 33,048 26,378 Contracts of Affreightment........... 12,048 3,737 2,597 16,189 5,495 3,695 Rail-Ferry Service........ 11,923 (3,382) (4,858) 15,537 (2,926) (5,248) Other..................... 17,094 923 757 20,767 2,422 3,132 -------- ------- ------- -------- ------- ------- Total................... $199,483 $22,993 $15,064 $257,813 $33,840 $22,719 ======== ======= ======= ======== ======= =======
Liner Services. In our liner services segment we operate four vessels, including one "dockship" that positions barges for pick-up and discharge, on established trade routes with regularly scheduled sailing dates. We receive revenues for the carriage of cargo within the established trading areas and pay the operating and voyage expenses incurred. Our liner services include a U.S. flag service between U.S. Gulf and East Coast ports and ports in the Red Sea and Middle East, and a foreign flag transatlantic service operating between U.S. Gulf and East Coast ports and ports in northern Europe. Time Charter Contracts. Time charters are contracts by which our charterer obtains the right for a specified period to direct the movements and utilization of the vessel in exchange for payment of a specified daily rate, but we retain operating control over the vessel. Typically, we fully equip the vessel and are responsible for normal operating expenses, repairs, crew wages, and insurance, while the charterer is responsible for voyage expenses, such as fuel, port and stevedoring expenses. Our time charter contracts include charters of three Roll-On/Roll-Off vessels to the MSC for varying terms. Also included in this segment are contracts with car manufacturers for six PCTCs, with an electric utility for a conveyor-equipped, self-unloading coal carrier and with a mining company to provide transportation services at its mine in Papua, Indonesia. Contracts of Affreightment. COAs are contracts by which we undertake to provide space on our vessels for the carriage of specified goods or a specified quantity of goods on a single voyage or series of voyages over a given period of time between named ports or within certain geographical areas in return for the payment of an agreed amount per unit of cargo carried. Generally, we are responsible for all operating and voyage expenses. Our COA segment includes a molten sulphur transportation contract with a sulphur transporter. Rail-Ferry Service. In the beginning of 2001, we began a new service, through our subsidiary CG Railway, carrying loaded rail cars between the U.S. Gulf and Mexico. This service uses our two Special Purpose vessels, which were modified to enable them to carry standard size railroad cars. Each vessel has a capacity for 60 standard size rail cars. Other. This segment consists of operations that include more specialized services than the former four segments and subsidiaries that provide ship charter brokerage and agency services. Also included in this segment is our 50% ownership in a car transportation truck company. Unconsolidated Entities. We have a 30% interest in a company owning and operating nine Cement Carriers. We also have a 50% interest in a company owning two newly built Cape-Size Bulk Carriers and a 50% interest in a company that operates a terminal in Coatzacoalcos, Mexico for our Rail-Ferry Service. 46 BUSINESS STRATEGY Our strategy is to - identify customers with high credit quality and marine transportation needs requiring specialized vessels or operating techniques; - seek medium- to long-term charters or contracts with those customers and, if necessary, modify, acquire or construct vessels to meet the requirements of those charters or contracts; and - provide our customers with reliable, high quality service at a reasonable cost. Because our strategy is to seek medium- to long-term contracts and because we have diversified customer and cargo bases, we are generally insulated from the cyclical nature of the shipping industry. However, of our five operating segments, our liner service and rail-ferry service segments are the most susceptible to the shipping industry's cyclical nature and are impacted by, among other things, fluctuations in the worldwide supply of and demand for vessel capacity and the seasonal demands for certain cargoes that we ship. We believe that our strategy has produced relatively stable operating cash flows for an industry that tends to be cyclical and valuable long-term relationships with our customers. We plan to continue this strategy by expanding our relationships with existing customers, seeking new customers and selectively pursuing acquisitions. TYPES OF SERVICE Through our principal operating subsidiaries, we provide specialized maritime transportation services to our customers primarily under medium- to long-term contracts. Our five operating segments, Liner Services, Time Charter Contracts, Contracts of Affreightment, Rail-Ferry Service, and Other are described below: LINER SERVICES LASH Vessels Foreign Flag. We operate two foreign flag LASH vessels and a self-propelled, semi-submersible feeder vessel on a scheduled transatlantic liner service under the name "Forest Lines." One of the two foreign flag LASH vessels is under an operating lease through 2007. Each Forest Lines LASH vessel normally makes 10 round trip sailings per year between U.S. Gulf and East Coast ports and ports in northern Europe. Prior to 2001, approximately one-half of the aggregate eastbound cargo space had historically been reserved for International Paper Company under a long-term contract. The remaining space was provided on a voyage affreightment basis to various commercial shippers. Over the last three years, we have continued to diversify our eastbound cargo among various commercial shippers and now carry significant quantities of rice and petroleum coke as well as paper products. We have had ocean transportation contracts with International Paper Company since 1969 when we had two LASH ships built to accommodate International Paper Company's trade. Our contract with International Paper is for the carriage of wood pulp, liner board, and other forest products, the characteristics of which are well suited for transportation by LASH vessels. Our current contract with International Paper Company was for a ten-year term ending in 2002, and was extended for an additional three-year period ending in 2005 with mutual options to extend on a year-to-year basis. Over the years, we have established a base of commercial shippers to which we provide space on the westbound Forest Lines service. The principal westbound cargoes are steel and other metal products, high-grade paper and wood products, and other general cargo. Over the last five years, the westbound utilization rate for these vessels averaged approximately 85% per year. U.S. Flag. Waterman previously operated a U.S. flag liner service between U.S. Gulf and East Coast ports and ports in South Asia using four U.S. flag LASH vessels, as well as one FLASH vessel that was 47 used as a feeder vessel in Southeast Asia. In June of 2001, we adopted a plan to separate this service from the balance of our operations and dispose of these assets. All of these vessels were sold by the end of 2002. During 2002, we reactivated a U.S. flag liner service between the U.S. Gulf and East Coast ports and ports in the Red Sea and Middle East due to several changes in circumstances that occurred after our decision in 2001 to suspend the previous service. We concluded that there would be adequate cargo volume for shipment on U.S. flag vessels to the service area to justify maintaining the service. As a result, we recommissioned one of our foreign flag LASH vessels, which had been idle and scheduled for disposal, together with a number of LASH barges. After its upgrade, the foreign flag vessel entered our Forest Lines service in November of 2002, replacing one of the vessels operating in that service. The replaced vessel transferred to U.S. flag for use in the renewed U.S. flag liner service, which commenced operation in November of 2002. The MSA, which provides a subsidy program for certain U.S. flag vessels, was signed into law in October of 1996. Under this MSP, each participating vessel is eligible to receive an annual payment of $2.1 million, which is subject to annual appropriation and not guaranteed. In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships eligible to participate in the program from 47 to 60, and increased the annual payment per vessel, all to be effective on October 1, 2005. Annual payments for each vessel in the new program are $2.6 million in years 2006 through 2008, $2.9 million in years 2009 through 2011, and $3.1 million in years 2012 through 2015. As of December 31, 2003, our Waterman U.S. flag LASH vessel mentioned earlier and four PCTCs included in our time charter contracts segment had qualified for participation. During 2003, we bareboat chartered two vessels under a time charter arrangement, allowing us to qualify for two additional MSP contracts. As a result, as of September 30, 2004, we had MSP contracts with respect to seven of our vessels, the terms of which were extended in October 2004 through September 30, 2015. Also in October 2004, we offered additional vessels for participation in the program, although we have no way of predicting whether any of those vessels will be allowed to participate in the program. TIME CHARTER CONTRACTS Military Sealift Command Charters We have had contracts with the MSC (or its predecessor) almost continuously for over 30 years. In 1983, Waterman was awarded a contract to operate three U.S. flag RO/RO vessels under time charters to the MSC for use by the United States Navy in its maritime prepositioning ship ("MPS") program. These vessels represent three of the sixteen MPS vessels currently in the MSC's worldwide fleet providing support to the U.S. Marine Corps. These ships are designed primarily to carry rolling stock and containers, and each can carry support equipment for 17,000 military personnel. Waterman sold the three vessels to unaffiliated corporations shortly after being awarded the contract but retained the right to operate the vessels under operating agreements. The MSC time charters commenced in late 1984 and early 1985 for initial five-year periods and were renewable at the MSC's option for additional five-year periods up to a maximum of twenty-five years. In 1993, we reached an agreement with the MSC to make certain reductions in future charter hire payments in consideration of fixing the period of these charters for the full 25 years. The charters and related operating agreements will expire in 2009 and 2010. Pure Car/Truck Carriers U.S. Flag. We currently operate four U.S. flag PCTCs. In 1986, we entered into multi-year charters to carry Toyota and Honda automobiles from Japan to the United States. To service these charters, we had constructed two car carriers that were specially designed to carry 4,000 and 4,660 fully assembled automobiles, respectively. Both vessels were built in Japan and were registered under the U.S. flag. In 2000 and 2001, we replaced these two vessels with larger PCTCs, which are under their initial contracts through 2010 and 2011 with the same Japanese shipping company. Both of these contracts may be extended beyond the initial term at the option of the shipping company. 48 In 1998, we acquired a 1994-built U.S. flag PCTC. Immediately after being delivered to us in April of 1998, this vessel entered a long-term charter through 2008 with a Japanese shipping company. In 1999, we acquired the fourth vessel, a newly built U.S. flag PCTC, which immediately after being delivered to us in September of 1999 entered a long-term charter through 2011 with the same Japanese shipping company. Both of these contracts may be extended beyond the initial term at the option of the shipping company. These last two PCTCs were subsequently sold to unaffiliated parties and leased back under operating leases expiring in 2009 and 2013, respectively. Foreign Flag. In 1988, we had two new car carriers constructed by a shipyard affiliated with Hyundai, each with a carrying capacity of 4,800 fully assembled automobiles, to transport Hyundai automobiles from South Korea primarily to the United States and Europe under two long-term charters. In 1998 and 1999, we sold these car carriers and replaced them with two newly built PCTCs, each with the capacity to carry heavy and large size rolling stock in addition to automobiles and trucks. We immediately entered into a long-term charter of these vessels through 2018 and 2019 to a Far Eastern company. One of these PCTCs was subsequently sold to an unaffiliated party and leased back under an operating lease through 2016, and we have an option to purchase the vessel thereafter. Under each of our PCTC charters, the charterers are responsible for voyage operating costs such as fuel, port, and stevedoring expenses, while we are responsible for other operating expenses including crew wages, repairs, and insurance. During the terms of these charters, we are entitled to our full fee irrespective of the number of voyages completed or the number of cars carried per voyage. In the fourth quarter of 2002, Hyundai Merchant Marine Co. LTD, the charterer of our foreign flag PCTCs, sold its Car Carrier division to a joint venture controlled by Wallenis Lines AB and Willhelm Willhelmsen ASA. We were not impacted by the transaction as all terms and conditions of the charter parties remain in effect. Coal Carrier In late 1995, we purchased an existing U.S. flag conveyor-equipped, self-unloading Coal Carrier that was chartered to a New England electric utility under a 15-year time charter expiring in 2010 to carry coal in the coastwise and near-sea trade. Since the base charter provides approximately 60% utilization, the ship may also be used, from time to time during this charter period, to carry coal and other bulk commodities in the spot market for the account of other charterers. The utility company filed for bankruptcy protection in July 2003. For information regarding the bankruptcy proceeding and its effect on this charter, please see the section of this prospectus entitled "Risk Factors -- Risks Related to Our Business -- One of our time charter customers has filed for bankruptcy, the outcome of which could adversely affect our results of operations." Southeast Asia Transportation Contract The contract to transport supplies for a mining company in Indonesia is serviced by an Ice Strengthened Breakbulk/Multi-Purpose vessel, a small Tanker, and two Container vessels. CONTRACTS OF AFFREIGHTMENT In 1994, we entered into a 15-year transportation contract with Freeport-McMoRan Sulphur LLC, a sulphur transporter for which we had built a 28,000 DWT Molten Sulphur Carrier that carries molten sulphur from Louisiana and Texas to a fertilizer plant on the Florida Gulf Coast. Under the terms of this contract, we are guaranteed the transportation of a minimum of 1.8 million tons of sulphur per year. The contract also gives the charterer three five-year renewal options. The vessel was delivered and began service during late 1994. During the second quarter of 2002, the contract was assigned by Freeport- McMoRan Sulphur LLC to Gulf Sulphur Services Ltd. The terms of the contract were not affected by the assignment. 49 RAIL-FERRY SERVICE Commencing in 2001, we began a new service, through our subsidiary CG Railway, carrying loaded rail cars between the U.S. Gulf and Mexico. This new service uses our two Special Purpose vessels, which were modified to enable them to carry standard size railroad cars. Each vessel has a capacity of 60 standard size rail cars. With departures every four days from Coatzacoalcos, Mexico and Mobile, Alabama, respectively, it offers with each vessel a three-day transit between these ports and provides approximately 90 trips per year in each direction. OTHER We lease a cargo transfer facility at the river port of Memphis, Tennessee, and several of our subsidiaries provide ship charter brokerage, agency, and other specialized services to our operating subsidiaries and, in the case of ship charter brokerage and agency services, to unaffiliated companies. The income produced by these services substantially covers the related overhead expenses. These services facilitate our operations by allowing us to avoid reliance on third parties to provide these essential shipping services. Also included in this segment is our 50% ownership in a car transportation truck company. CUSTOMERS AND CARGO Historically, our cash flow has been relatively stable, considering the cyclical nature of the shipping industry, principally due to the structure and length of our medium- to long-term contracts with creditworthy customers, as well as our diversified customer and cargo bases. We define contracts and charters with a duration of three to five years as medium-term contracts and those with a duration in excess of five years as long-term contracts. Most of our medium- to long-term charters provide for a daily charter rate that is payable whether or not the charterer utilizes the vessel. In addition, most of these medium- to long-term contracts guarantee a minimum amount of cargo for transportation and require the charterer to pay certain voyage operating costs, including fuel, port and stevedoring expenses, and often include cost escalation features covering certain of our expenses. Substantially all of our current cargo contracts and charter agreements with commercial customers are renewals or extensions of previous agreements. In recent years, we have been successful in winning extensions or renewals of substantially all of the contracts rebid by our commercial customers, and we have been operating vessels for the MSC under charters or contracts for more than 30 years. Moreover, our contracts with the MSC contributed approximately 14%, 15% and 12% of our total revenues for fiscal years 2003, 2002 and 2001, respectively. In addition, our four U.S. flag PCTCs under charter to Nippon Yusen Kaisha, a Japanese shipping company, contributed approximately 15%, 17% and 12% of our total revenues for fiscal years 2003, 2002 and 2001, respectively. Japanese automakers, including Toyota Motor Corporation, are the end users of these four vessels; in none of fiscal years 2003, 2002 or 2001 did any of these automakers account for 10% or more of our total revenues. Other than the MSC and Nippon Yusen Kaisha, none of our customers accounted for 10% or more of our fiscal year 2003, 2002 or 2001 total revenues. As a result of the length of our contracts and charter agreements, at September 30, 2004, 62% of our aggregate vessel capacity was firmly committed for fiscal year 2005, and approximately 50% of our aggregate vessel capacity was firmly committed for all periods through 2009. As of September 30, 2004, seven of our vessels operated under MSP contracts, the terms of which were extended in October 2004 through September 30, 2015. Each participating vessel is eligible to receive an annual subsidy payment of $2.1 million through the government's fiscal year 2005. Annual payments for each vessel in the MSP are $2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012 to 2015. However, payments under this program are subject to annual appropriation by Congress and are not guaranteed. See "Risk Factors -- Risks Related to Our Business -- If sufficient appropriations under the Maritime Security Act of 1996 are not made in any fiscal year, we may not continue to receive annual subsidy payments with respect to certain of our vessels." 50 We believe that the high credit quality of our customers and the length of our contracts help reduce competitive pressures and the effects of cyclical market conditions. We believe that our longstanding customer relationships are in part due to our reputation for providing specialized quality service in terms of ontime performance, low cargo loss, minimal damage claims and reasonable rates. In addition, we believe our customers' diversified cargoes have further insulated us from cyclical market conditions and contributed to our relatively stable historical cash flow. The following table sets forth the percentage of our total revenues by cargo type for the nine months ended September 30, 2004 and each of the years ended December 31, 2003 and December 31, 2002.
% OF TOTAL % OF TOTAL % OF TOTAL REVENUES REVENUES REVENUES FOR THE NINE FOR THE YEAR FOR THE YEAR MONTHS ENDED ENDED ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, CARGO TYPE 2004 2003 2002 - ---------- ------------- ------------ ------------ General Cargo.................................. 34% 35% 29% Automobiles.................................... 17% 18% 20% Military Cargo................................. 15% 19% 19% Iron and Steel Products........................ 13% 2% 9% Coal........................................... 6% 6% 8% Agricultural Products.......................... 5% 9% 4% Forest Products................................ 4% 5% 4% Sulphur........................................ 6% 6% 7% ----- ----- ----- Total.......................................... 100.0% 100.0% 100.0% ===== ===== =====
51 VESSEL DEPLOYMENT The following table sets forth information about each of the ocean-going vessels owned (or bareboat chartered) or operated by us as of September 30, 2004.
CONSTRUCTION/ SERVICE TYPE AND VESSEL LIFE EXTENSION CARRYING VESSEL NAME TYPE FLAG COMPLETION DATE CAPACITY - ---------------- ------ ---- --------------- -------- LINER SERVICES Atlantic Forest........ LASH U.S. 1984 82 LASH Barges Rhine Forest........... LASH Marshall Islands 1972/1990/1996 83 LASH Barges Hickory................ LASH Panama 1989 82 LASH Barges Spruce................. Dockship Marshall Islands 1975/1978 15 LASH Barges MILITARY SEALIFT COMMAND Pfc. E. A. Obregon..... Roll On/Roll Off U.S. 1985 25,476 DWT Sgt. Matej Kocak....... Roll On/Roll Off U.S. 1985 25,476 DWT Maj. Stephen W. Roll On/Roll Off U.S. 1985 25,476 DWT Pless................ PURE CAR/TRUCK CARRIERS Green Lake............. PCTC U.S. 1998 5055 Autos Green Point............ PCTC U.S. 1994 5120 Autos Green Cove............. PCTC U.S. 1994 4148 Autos Green Dale............. PCTC U.S. 1999 4148 Autos Asian King............. PCTC Panama 1998 6402 Autos Asian Emperor.......... PCTC Panama 1999 6402 Autos SPECIAL PURPOSE VESSELS Bali Sea............... Float On/Float Off Singapore 1982/1995 22,000 DWT Banda Sea.............. Float On/Float Off Singapore 1982/1995 22,000 DWT Java Sea............... Container/ Singapore 1988 5,000 Containers Breakbulk DOMESTIC SERVICES Sulphur Enterprise..... Molten Sulphur U.S. 1994 24,000 DWT Energy Enterprise...... Coal Carrier U.S. 1983 38,000 DWT
MARKETING We maintain marketing staffs in New York and New Orleans, and a network of marketing agents in major cities around the world who market our liner, charter, and contract services. We market our transatlantic LASH liner service under the trade name "Forest Lines," and our U.S. flag LASH liner service between the U.S. Gulf and East Coast ports and ports in the Red Sea and Middle East under the Waterman house flag. We market our Rail-Ferry Service under the name "CG Railway." We advertise our services in trade publications in the United States and abroad. 52 INSURANCE We maintain protection and indemnity ("P&I") insurance to cover liabilities arising out of our ownership and operation of vessels with the Standard Steamship Owners' Protection & Indemnity Association (Bermuda) Ltd., which is a mutual shipowners' insurance organization commonly referred to as a P&I club. The club is a participant in and subject to the rules of its respective international group of P&I associations. The premium terms and conditions of the P&I coverage provided to us are governed by the rules of the club. We maintain hull and machinery insurance policies on each of our vessels in amounts related to the value of each vessel. This insurance coverage, which includes increased value, freight, and time charter hire, is maintained with a syndicate of hull underwriters from the U.S., British, and French insurance markets. We maintain war risk insurance on each of our vessels in an amount equal to each vessel's total insured hull value. War risk insurance is placed through U.S., British, and French insurance markets and covers physical damage to the vessels and P&I risks for which coverage would be excluded by reason of war exclusions under either the hull policies or the rules of the P&I club. Our war risk insurance also covers liability to third parties caused by war or terrorism and damages to our land-based assets caused by war, but does not cover damage to our land-based assets caused by terrorism. The P&I insurance also covers our vessels against liabilities arising from the discharge of oil or hazardous substances in U.S., international, and foreign waters. We also maintain loss of hire insurance with U.S., British, and French insurance markets to cover our loss of revenue in the event that a vessel is unable to operate for a certain period of time due to loss or damage arising from the perils covered by the hull and machinery policy and war risk policy. Insurance coverage for shoreside property, shipboard consumables and inventory, spare parts, workers' compensation, office contents, and general liability risks is maintained with underwriters in U.S. and British markets. Insurance premiums for the coverage described above vary from year to year depending upon our loss record and market conditions. In order to reduce premiums, we maintain certain deductible and co-insurance provisions that we believe are prudent and generally consistent with those maintained by other shipping companies (see note D to our consolidated financial statements located elsewhere in this prospectus). NEW TAX LEGISLATION Under current United States tax law, U.S. companies like us and their domestic subsidiaries generally are taxed on all income, including in our case income from shipping operations, whether derived in the United States or abroad. With respect to any foreign subsidiary in which we hold more than a 50 percent interest (referred to in the tax laws as a controlled foreign corporation, or "CFC"), we are treated as having received a current taxable distribution of our pro rata share of income derived from foreign shipping operations. The recently-enacted Jobs Creation Act, which becomes effective for our company on January 1, 2005, will change the United States tax treatment of our U.S. flag vessels in foreign operations and foreign flag shipping operations. We intend to make an election under the Jobs Creation Act to have our U.S. flag operations (other than those of two ineligible vessels used exclusively in United States coastwise commerce) taxed under a new "tonnage tax" regime rather than under the usual U.S. corporate income tax regime. As a result of that election, our gross income for United States income tax purposes with respect to our eligible U.S. flag vessels will not include (1) income from qualifying shipping activities in U.S. foreign trade (i.e., transportation between the U.S. and foreign ports or between foreign ports), (2) income from cash, bank deposits and other temporary investments that are reasonably necessary to meet the working capital 53 requirements of our qualifying shipping activities, and (3) income from cash or other intangible assets accumulated pursuant to a plan to purchase qualifying shipping assets. Under the tonnage tax regime, our taxable income with respect to the operations of our eligible U.S. flag vessels will be based on a "daily notional taxable income," which will be taxed at the highest corporate income tax rate. The daily notional taxable income from the operation of a qualifying vessel will be 40 cents per 100 tons of the net tonnage of the vessel (up to 25,000 net tons), and 20 cents per 100 tons of the net tonnage of the vessel in excess of 25,000 net tons. The taxable income of each qualifying vessel will be the product of its daily notional taxable income and the number of days during the taxable year that the vessel operates in United States foreign trade. Under the Jobs Creation Act, the taxable income from the shipping operations of our CFCs will generally no longer be subject to current United States income tax but will be deferred until repatriated. Although we are still analyzing the Jobs Creation Act, we currently estimate that it will result in a $11.5 million reduction of our deferred tax provision which will be recorded and reflected in our results of operations for the period in which our election under the Jobs Creation Act is made. We are awaiting guidance from the Internal Revenue Service as to the earliest time this election can be made for our 2005 taxable year. In addition, we project that, as a result of the Jobs Creation Act, our effective tax rate will be reduced to approximately 25% in fiscal years 2005 and 2006 with a further reduction to approximately 8% in fiscal years thereafter so long as the Jobs Creation Act remains in effect. REGULATION Our operations between the United States and foreign countries are subject to the Shipping Act of 1984 (the "Shipping Act"), which is administered by the Federal Maritime Commission, and certain provisions of the Federal Water Pollution Control Act, the OPA, the Act to Prevent Pollution from Ships, and CERCLA, all of which are administered by the U.S. Coast Guard and other federal agencies, and certain other international, federal, state, and local laws and regulations, including international conventions and laws and regulations of the flag nations of our vessels. Pursuant to the requirements of the Shipping Act, we have on file with the Federal Maritime Commission tariffs reflecting the outbound and inbound rates currently charged by us to transport cargo between the United States and foreign countries as a common carrier in connection with our liner services. These tariffs are filed by us either individually or in connection with our participation as a member of rate or conference agreements, which are agreements that (upon becoming effective following filing with the Federal Maritime Commission) permit the members to agree concertedly upon rates and practices relating to the carriage of goods in U.S. and foreign ocean commerce. Tariffs filed by a company unilaterally or collectively under rate or conference agreements are subject to Federal Maritime Commission approval. Once a rate or conference agreement is filed, rates may be changed in response to market conditions on 30 days' notice, with respect to a rate increase, and one day's notice, with respect to a rate decrease. On October 16, 1998, the Ocean Shipping Reform Act of 1998 was enacted, and it amended the Shipping Act of 1984 to promote the growth and development of United States exports through certain reforms in the regulation of ocean transportation. This legislation, in part, repeals the requirement that a common carrier or conference file tariffs with the Federal Maritime Commission, replacing it with a requirement that tariffs be open to public inspection in an electronically available, automated tariff system. Furthermore, the legislation requires that only the essential terms of service contracts be published and made available to the public. On October 8, 1996, Congress adopted the MSA, which created the MSP and authorized the payment of $2.1 million per year per ship for 47 U.S. flag ships through fiscal year 2005. This program eliminates the trade route restrictions imposed by the previous federal program and provides flexibility to operate freely in the competitive market. On December 20, 1996, Waterman entered into four MSP contracts with MarAd, and Central Gulf entered into three MSP contracts with MarAd. By law, the MSP is subject to annual appropriations. In the event that sufficient appropriations are not made for the MSP by Congress in any fiscal year, the MSA permits MSP contractors, such as Waterman and Central Gulf, to re-flag their vessels under foreign registry expeditiously. In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships industry-wide eligible to participate in the program 54 from 47 to 60, and increased MSP payments to companies in the program, all to be effective on October 1, 2005. Annual payments for each vessel in the new MSP program will be $2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012 to 2015. On October 15, 2004, Waterman and Central Gulf each filed applications to extend their MSP contracts for another 10 years (i.e., through September 30, 2015), all seven of which were effectively grandfathered in the MSP reauthorization. Simultaneously, we offered additional ships for participation in the MSP. MarAd is expected to announce MSP contract awards on January 14, 2005, and we have no way of knowing at this time whether Waterman or Central Gulf will be awarded contracts for the additional ships. Our Molten Sulphur Carrier was constructed with the aid of Title XI loan guarantees administered by MarAd, the receipt of which obligates us to comply with various dividend and other financial restrictions. Recipients of Title XI loan guarantees must pay an annual fee of up to 1% of the loan amount. Under the Merchant Marine Act, U.S. flag vessels are subject to requisition or charter by the United States whenever the President declares that the national security requires such action. The owners of any such vessels must receive just compensation as provided in the Merchant Marine Act, but there is no assurance that lost profits, if any, will be fully recovered. In addition, during any extension period under each MSC charter or contract, the MSC has the right to terminate the charter or contract on 30 days' notice. However, terms of our RO/RO operating contract call for significant early termination penalties. Certain laws governing our operations, as well as our molten sulphur transportation contract and our Title XI financing arrangements, require us to be as much as 75% owned by U.S. citizens. We monitor our stock ownership to verify our continuing compliance with these requirements and have never had more than 1% of our capital stock held of record by non-U.S. citizens (including corporations or other entities controlled by non-U.S. citizens). In April of 1996, we amended our certificate of incorporation to allow our board of directors to restrict the acquisition of our capital stock by non-U.S. citizens. Under our certificate of incorporation, our board of directors may, in the event of a transfer of our capital stock that would result in non-U.S. citizens owning more than 23% (the "permitted amount") of our total voting power, declare such transfer to be void and ineffective. In addition, our board of directors may, in its sole discretion, deny voting rights and withhold dividends with respect to any shares of our capital stock owned by non-U.S. citizens in excess of the permitted amount. Furthermore, our board of directors is entitled under our certificate of incorporation to redeem shares owned by non-U.S. citizens in excess of the permitted amount in order to reduce the ownership of our capital stock by non-U.S. citizens to the permitted amount. We are required by various governmental and quasi-governmental agencies to obtain permits, licenses, and certificates with respect to our vessels. The kinds of permits, licenses, and certificates required depend upon such factors as the country of registry, the commodity transported, the waters in which the vessel operates, the nationality of the vessel's crew, the age of the vessel, and the status of the Company as owner or charterer. We believe that we have, or can readily obtain, all permits, licenses, and certificates necessary to permit our vessels to operate. The International Maritime Organization ("IMO") amended the International Convention for the Safety of Life at Sea ("SOLAS"), to which the United States is a party, to require nations that are parties to SOLAS to implement the International Safety Management ("ISM") Code. The ISM Code requires that responsible companies, including owners and/or operators of vessels engaged on foreign voyages, develop and implement a safety management system to address safety and environmental protection in the management and operation of vessels. Companies and vessels to which the ISM Code applies are required to receive certification and documentation of compliance. Vessels operating without such certification and documentation in the U.S. and ports of other nations that are parties to SOLAS may be denied entry into ports, detained in ports or fined. We implemented a comprehensive safety management system and obtained timely IMO certification and documentation for our companies and all of our vessels. In addition, our ship management subsidiary, LMS Shipmanagement, Inc., received certification in January 1998 under the ISO 9002 Quality Standard. 55 More recently, in 2003, SOLAS was again amended to require parties to the convention to implement the International Ship and Port Facility Security ("ISPS") Code. The ISPS Code requires owners and operators of vessels engaged on foreign voyages to conduct vulnerability assessments and to develop and implement company and vessel security plans, as well as other measures, to protect vessels, ports and waterways from terrorist and criminal acts. In the U.S., these provisions were implemented through the Maritime Transportation Security Act of 2002 ("MTSA"). These provisions became effective on July 1, 2004. As with the ISM Code, companies and vessels to which the ISPS Code applies must be certificated and documented. Vessels operating without such certification and documentation in the U.S. and ports of other nations that are parties to SOLAS may be denied entry into ports, detained in ports or fined. Vessels subject to fines in the U.S. are liable in rem, which means vessels may be subject to arrest by the U.S. government. For U.S. flag vessels, company and vessel security plans must be reviewed and approved by the U.S. Coast Guard. We have conducted the required security assessments and submitted plans for review and approval as required, and we believe that we are in compliance in all material respects with all ISPS Code and MTSA security requirements. The Coast Guard and Maritime Transportation Act of 2004, signed into law on August 9, 2004, amended the Oil Pollution Act of 1990 to require owners or operators of all non-tank vessels of 400 gross tons or greater to develop and submit plans for responding, to the maximum extent practicable, to worst case discharges and substantial threats of discharges of oil from these vessels. This statute extends to all types of vessels of 400 gross tons or greater the vessel response planning requirements of the Oil Pollution Act that had previously only applied to tank vessels. The statute requires plans to be submitted by August 9, 2005. We are awaiting regulations implementing this requirement, and expect to comply in all respects. Also, under the OPA, vessel owners, operators and bareboat charterers are responsible parties that are jointly, severally and strictly liable for all response costs and other damages arising from oil spills from their vessels in waters subject to U.S. jurisdiction, with certain limited exceptions. Other damages include, but are not limited to, natural resource damages, real and personal property damages, and other economic damages such as net loss of taxes, royalties, rents, profits or earning capacity, and loss of subsistence use of natural resources. For non-tank vessels, the OPA limits the liability of responsible parties to the greater of $600 per gross ton or $500,000. The limits of liability do not apply if it is shown that the discharge was proximately caused by the gross negligence or willful misconduct of, or a violation of a federal safety, construction or operating regulation by, the responsible party, an agent of the responsible party or a person acting pursuant to a contractual relationship with the responsible party. Further, the limits do not apply if the responsible party fails or refuses to report the incident, or to cooperate and assist in oil spill removal activities. Additionally, the OPA specifically permits individual states to impose their own liability regimes with regard to oil discharges occurring within state waters, and some states have implemented such regimes. CERCLA also applies to owners and operators of vessels, and contains a similar liability regime for cleanup and removal of hazardous substances and natural resource damages. Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million. Under the OPA, vessels are required to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet the highest limit of their potential liability under the act. Under Coast Guard regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance or guaranty. An owner or operator of more than one vessel must demonstrate financial responsibility for the entire fleet in an amount equal to the financial responsibility of the vessel having greatest maximum liability under the OPA and CERCLA. We insure each of our vessels with pollution liability insurance in the amounts required by law. A catastrophic spill could exceed the insurance coverage available, in which event our financial condition and results of operations could be adversely affected. While the U.S. is not a party, for our vessels operating in foreign waters, many countries have ratified and follow the liability plan adopted by the IMO as set out in the International Convention on Civil 56 Liability for Oil Pollution Damage of 1969 (the "1969 Convention") and the Convention for the Establishment of an International Fund for Oil Pollution of 1971. Under these conventions, the registered owner of a vessel is strictly liable for pollution damage caused in the territorial seas of a state party by the discharge of persistent oil, subject to certain complete defenses. Liability is limited to approximately $183 per gross registered ton (a unit of measurement of the total enclosed spaces in a vessel) or approximately $19.3 million, whichever is less. If a country is a party to the 1992 Protocol to the International Convention on Civil Liability for Oil Pollution Damage (the "1992 Protocol"), the maximum liability limit is $82.7 million. The limit of liability is tied to a unit of account that varies according to a basket of currencies. The right to limit liability is forfeited under the 1969 Convention when the discharge is caused by the owner's actual fault, and under the 1992 Protocol, when the spill is caused by the owner's intentional or reckless misconduct. Vessels operating in waters of states that are parties to these conventions must provide evidence of insurance covering the liability of the owner. In jurisdictions that are not parties to these conventions, various legislative schemes or common law govern. We believe that our pollution insurance policy covers the liability under the IMO regimes. COMPETITION The shipping industry is intensely competitive and is influenced by events largely outside the control of shipping companies. Varying economic factors can cause wide swings in freight rates and sudden shifts in traffic patterns. Vessel redeployments and new vessel construction can lead to an overcapacity of vessels offering the same service or operating in the same market. Changes in the political or regulatory environment can also create competition that is not necessarily based on normal considerations of profit and loss. Our strategy is to reduce competitive pressures and the effects of cyclical market conditions by operating specialized vessels in niche market segments and deploying a substantial number of our vessels under medium- to long-term charters or contracts with creditworthy customers and on trade routes where we have established market share. We also seek to compete effectively in the traditional areas of price, reliability, and timeliness of service. Competition principally comes from numerous break bulk vessels and, occasionally, container ships. Approximately 16% of our revenue is generated by contracts with the Military Sealift Command and contracts to transport Public Law-480 U.S. government-sponsored cargo, a cargo preference program requiring that 75% of all foreign aid "Food for Peace" cargo must be transported on U.S. flag vessels, if they are available at reasonable rates. We compete with all U.S. flag companies, including P&O Nedlloyd, APL Limited, and Maersk Sealand Service, Inc. for the MSC work and the Public Law-480 cargo. Additionally, our principal foreign competitors include Hoegh Lines, Star Shipping AS, Wilhelmsen Lines, and the Shipping Corporation of India. Our LASH liner services face competition from foreign flag liner operators and, to a lesser degree, from U.S. flag liner operators. In addition, during periods in which we participate in conference agreements or rate agreements, competition includes other participants with whom we may agree to charge the same rates and non-participants charging lower rates. Because our LASH barges are used primarily to transport large unit size items, such as forest products, natural rubber, and steel that cannot be transported as efficiently in container ships, our LASH fleet often has a competitive advantage over these vessels for this type of cargo. In addition, we believe that the ability of our LASH system to operate in shallow harbors and river systems and our specialized knowledge of these harbors and river systems give us a competitive advantage over operators of container ships and break bulk vessels that are too large to operate in these areas. Our PCTCs operate worldwide in markets where foreign flag vessels with foreign crews predominate. We believe that our U.S. flag PCTCs can continue to compete effectively if we continue to receive the cooperation of our seamen's unions in controlling costs and if we continue to receive subsidy payments on these ships. 57 PROPERTIES VESSELS AND BARGES Of the 35 ocean-going vessels in our fleet at September 30, 2004, 11 were 100% owned by us, nine were 30% owned by us, two were 50% owned by us, seven were leased by us, and six were operated by us under operating contracts. Of the 917 LASH barges we own, 856 are operated in conjunction with our LASH vessels. The remaining 61 barges are not required for current vessel operations. All of our LASH barges are registered under the U.S. flag. Also included in our fleet are 32 over-the-road haul-away car carrying trucks that are leased to a company in which we have a 50% interest. All of the vessels owned, operated, or leased by us are in good condition except for the 61 LASH barges not required for current vessel operations. Under governmental regulations, insurance policies, and certain of our financing agreements and charters, we are required to maintain our vessels in accordance with standards of seaworthiness, safety, and health prescribed by governmental regulations or promulgated by certain vessel classification societies. We have implemented the quality and safety management program mandated by the IMO and have obtained certification of all vessels currently required to have a Safety Management Certificate. Vessels in the fleet are maintained in accordance with governmental regulations and the highest classification standards of the American Bureau of Shipping, Norwegian Veritas, or Lloyd's Register classification societies. Certain of the vessels and barges owned by our subsidiaries are mortgaged to various lenders to secure such subsidiaries' long-term debt. For further information, see note C to our consolidated financial statements located elsewhere in this prospectus. OTHER PROPERTIES We lease our corporate headquarters in New Orleans, our administrative and sales office in New York, and office space in Nashville and Shanghai. Additionally, we lease a totally enclosed multi-modal cargo transfer terminal in Memphis, Tennessee, under a lease that expires in May 2008. In 2003, the aggregate annual rental payments under these operating leases totaled approximately $1.7 million. We own a facility in Jefferson Parish, Louisiana that is used primarily for the maintenance and repair of barges. EMPLOYEES As of September 30, 2004, we employed 177 shoreside personnel and had approximately 410 shipboard personnel employed on our vessels. We consider relations with our employees to be excellent. All of our shipboard personnel and certain of our shoreside personnel are covered by collective bargaining agreements. Some of these agreements relate to particular vessels and have terms corresponding with the terms of their respective vessel's charter, including agreements relating to two of our vessels that are up for renewal in mid-2005. Moreover, the collective bargaining agreements covering seven of our vessels operated under MSP contracts will be subject to renegotiation in 2006. In addition, Central Gulf, Waterman, and other U.S. shipping companies are subject to collective bargaining agreements for shipboard personnel in which the shipping companies servicing U.S. Gulf and East Coast ports also must make contributions to pension plans for dockside workers. We have experienced no strikes or other significant labor problems during the last ten years. LEGAL PROCEEDINGS We have been named as a defendant in numerous lawsuits claiming damages related to occupational diseases, primarily related to asbestos and hearing loss. We believe that most of these claims are without merit, and that insurance and the indemnification of a previous owner of one of our subsidiaries should mitigate our exposure. 58 In the normal course of our operations, we become involved in various litigation matters including, among other things, claims by third parties for alleged property damage, personal injuries and other matters. While the outcome of such claims cannot be predicted with certainty, we believe that our insurance coverage and reserves with respect to such claims are adequate and that such claims should not have a material adverse effect on our business or financial condition. For further information, see note H of the notes to our consolidated financial statements included elsewhere in this prospectus. 59 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information about our executive officers and directors as of September 30, 2004. Our executive officers and directors will hold office until their successors are duly elected and qualified, or until their earlier death or removal or resignation from office. Unless otherwise indicated, each of our directors has been engaged in the principal occupation shown for the past five years.
NAME AGE TITLE - ---- --- ----- Erik F. Johnsen........................... 79 Chairman of the Board, Director and Chief Executive Officer Niels M. Johnsen.......................... 59 President and Director Erik L. Johnsen........................... 47 Executive Vice President and Director Gary L. Ferguson.......................... 64 Vice President and Chief Financial Officer Niels W. Johnsen.......................... 82 Director Harold S. Grehan, Jr...................... 76 Director Raymond V. O'Brien, Jr.................... 77 Director Edwin Lupberger........................... 68 Director Edward K. Trowbridge...................... 75 Director H. Merritt Lane, III...................... 42 Director
Erik F. Johnsen is our Chairman and Chief Executive Officer. He served as our President, Chief Operating Officer, and a director from the commencement of operations in 1979 until April 2003 when he assumed his current position. Until April 1997, Mr. Johnsen also served as the President and Chief Operating Officer of each of our principal subsidiaries, except Waterman, for which he served as Chairman of the Executive Committee. Along with his brother, Niels W. Johnsen, he was one of the founders of Central Gulf in 1947 and served as its President from 1966 until April 1997. Niels M. Johnsen is our President. Mr. Johnsen has served as a director of the company since April 1988. He joined Central Gulf on a full time basis in 1970 and held various positions with the company until April 1997, when he was named Executive Vice President of the company and Chairman and Chief Executive Officer of each of the company's principal subsidiaries, except Waterman, where he served as President. He was named President of the company in April 2003. In 2002, he became a director of Atlantic Mutual Companies. He is the son of Niels W. Johnsen. Erik L. Johnsen is our Executive Vice President. He joined Central Gulf in 1979 and held various positions with the company before being named Executive Vice President in April 1997. He has served as a director of the company since 1994. He has also served as the President of each of our principal subsidiaries, except Waterman, since April 1997, and as Executive Vice President of Waterman since September 1989. He is responsible for all operations of our vessel fleet and leads our Ship Management Group. He is the son of Erik F. Johnsen. Gary L. Ferguson is our Vice President and Chief Financial Officer. He joined Central Gulf in 1968 where he held various positions prior to being named Controller in 1977, and Vice President and Chief Financial Officer of the company in 1989. Niels W. Johnsen is a director of the company. He served as our Chairman and Chief Executive Officer from its commencement of operations in 1979 until April 2003, and served as Chairman and Chief Executive Officer of each of our principal subsidiaries until April 1997. He previously served as Chairman of Trans Union's ocean shipping group of companies from December 1971 through May 1979. He was one of the founders of Central Gulf in 1947 and held various positions with Central Gulf until Trans Union acquired Central Gulf in 1971. He is also a former director of Reserve Fund, Inc., a money market fund, and a former Trustee of Atlantic Mutual Companies, an insurance company. He is the brother of Erik F. Johnsen. 60 Harold S. Grehan, Jr. is a director of the company. He joined Central Gulf in 1958 and became Vice President in 1959, Senior Vice President in 1973 and Executive Vice President and a director in 1979. Mr. Grehan retired from the company at the end of 1997, and has continued to serve as a director of the company since that time. Raymond V. O'Brien, Jr. has served as a director of the company since 1979, and in early 2003 was named Chairman of the Compensation Committee of our Board of Directors. He is a former director of Emigrant Savings Bank. He served as Chairman of the Board and Chief Executive Officer of the Emigrant Savings Bank from January 1978 through December 1992. Edwin Lupberger has served as a director of the company since April 1988, and in early 2003 was named Chairman of the Audit Committee of our Board of Directors. He is the President of Nesher Investments, LLC. Mr. Lupberger served as the Chairman of the Board and Chief Executive Officer of Entergy Corporation from 1985 to 1998. Edward K. Trowbridge has served as a director of the company since April 1994, and in early 2003 was named Chairman of the Nominating and Governance Committee of our Board of Directors. He served as Chairman of the Board and Chief Executive Officer of the Atlantic Mutual Companies from July of 1988 through November 1993. H. Merritt Lane, III was appointed as a director of the company by the Board of Directors in March 2004. He has served as President and Chief Executive Officer of Canal Barge Company, Inc. since January 1994 and as director of that company since 1988. NYSE DIRECTOR INDEPENDENCE RULES In November 2003, the New York Stock Exchange adopted a requirement that a majority of the members of the boards of directors, and all members of the audit, compensation and nominating and corporate governance committees, of companies, like us, with securities listed on the NYSE satisfy certain independence requirements. For the period from effectiveness of the new NYSE rule until November 4, 2004, the rule required that a company apply the independence criteria over a one-year "look-back" period. Using this one-year look-back period, our board of directors determined that our board and board committees satisfied the NYSE independence requirements. However, beginning November 4, 2004, the NYSE rules impose a three-year look-back period to determine independence, rather than the one-year look-back that was previously applicable. Using the three-year look-back period, one of our directors, H. Merritt Lane III, as of November 4, 2004, no longer qualified as an "independent" director because he is an executive officer and director of a company with which our company conducted business and to which we made payments in 2001 in excess of the threshold amount stated in the NYSE independence criteria. All of our other independent directors who were independent for purposes of the one-year look-back period continue to be independent under the three-year look-back period. We have notified the NYSE of our temporary non-compliance with the requirement that a majority of our directors be independent and that we expect that Mr. Lane will again qualify as independent beginning January 1, 2005. While Mr. Lane continues as a member of our board of directors, he resigned from our compensation, audit and nominating and corporate governance committees effective November 3, 2004. We have discussed this matter with representatives of the NYSE and we expect that our non-compliance will be cured without further action within a period of less than two months. In addition, we filed a Current Report on Form 8-K with the SEC on November 4, 2004 to report our temporary non- compliance. 61 EXECUTIVE COMPENSATION The following table sets forth for the fiscal years ended December 31, 2003, 2002, and 2001, the compensation paid to our Chief Executive Officer and the three other executive officers employed at the end of fiscal year 2003. Additionally, one former executive officer is included who was no longer employed by us at December 31, 2003, but who otherwise would have been included in the table. The five individuals included in the table represent all of our executive officers during 2003. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION - --------------------------- ---- -------- ------- ------------ Erik F. Johnsen.............................. 2003 330,000 -- 17,132(2) Chairman of the Board and Chief Executive 2002 330,000 -- 17,132(2) Officer of the Corporation 2001 442,500(1) -- 17,132(2) Niels M. Johnsen............................. 2003 272,950 20,996 1,000(3) President of the Corporation 2002 265,000 -- 1,000(3) 2001 265,000 -- 1,000(3) Erik L. Johnsen.............................. 2003 221,450 17,350 1,000(3) Executive Vice President of the Corporation 2002 215,000 -- 1,000(3) 2001 215,000 -- 1,000(3) Gary L. Ferguson............................. 2003 164,800 12,677 1,000(3) Vice President and Chief Financial Officer 2002 160,000 -- 1,000(3) of the Corporation 2001 160,000 -- 1,000(3) Niels W. Johnsen............................. 2003 165,000 -- 50,000(5) Formerly Chairman of the Board and Chief 2002 330,000 -- -- Executive Officer of the Corporation(4) 2001 442,500(1) -- --
- --------------- (1) The annual salary was $330,000; however, a one-time payment made pursuant to a commitment entered into in prior years applicable to year 2000 in the amount of $112,500 was made in January 2001. (2) We have an agreement with Erik F. Johnsen whereby his estate will be paid approximately $626,000 upon his death. To fund this death benefit, we maintain a life insurance policy at an annual cost of $17,132. (3) Consists of our contributions to our 401(k) plan on behalf of the employee. (4) We have an agreement with Niels W. Johnsen whereby his estate will be paid approximately $822,000 upon his death. We have reserved amounts sufficient to fund this death benefit. (5) Niels W. Johnsen has served as a consultant for our company since his retirement on June 30, 2003, for an annual fee of $100,000. He earned consulting fees of $50,000 for the period from July 1, 2003 through December 31, 2003. 62 STOCK INCENTIVE PLAN The following table presents information with respect to stock option exercises and values under our Stock Incentive Plan. No stock option grants occurred in 2003. The two individuals named in the Summary Compensation Table that are not listed below, Niels W. Johnsen and Erik F. Johnsen, have never been granted options under the Stock Incentive Plan. AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 2003 AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF NUMBER OF UNDERLYING UNEXERCISED UNEXERCISED SHARES OPTIONS AT IN-THE-MONEY ACQUIRED ON VALUE DECEMBER 31, 2003 OPTIONS AT NAME EXERCISE REALIZED EXERCISABLE/ UNEXERCISABLE DECEMBER 31, 2003 - ---- ----------- -------- -------------------------- ----------------- Niels M. Johnsen........... 0 0 200,000/0 $125,000 Erik L. Johnsen............ 0 0 200,000/0 $125,000 Gary L. Ferguson........... 0 0 75,000/0 $ 46,875
PENSION PLAN We have in effect a defined benefit pension plan, in which all of our employees and employees of our domestic subsidiaries who are not covered by union sponsored plans may participate after one year of service. Computation of benefits payable under the plan is based on years of service, up to thirty years, and the employee's highest sixty consecutive months of compensation, which is defined as a participant's base salary plus overtime, excluding incentive pay, bonuses or other extra compensation, in whatever form. The following table reflects the estimated annual retirement benefits (assuming payment in the form of a straight life annuity) an executive officer can expect to receive upon retirement at age 65 under the plan, assuming the years of service and compensation levels indicated below:
YEARS OF SERVICE ------------------------------------------ EARNINGS 15 20 25 30 OR MORE - -------- ------- -------- -------- ---------- $100,000................................... $20,237 $ 26,983 $ 33,729 $ 40,475 150,000................................... 32,612 43,483 54,354 65,225 200,000................................... 44,987 59,983 74,979 89,975 250,000................................... 57,362 76,483 95,604 114,725 300,000................................... 69,737 92,983 116,229 139,475 350,000................................... 82,112 109,483 136,854 164,225
This table does not reflect the fact that the benefit provided by our retirement plan's formula is subject to certain constraints under the Internal Revenue Code. For 2004, the maximum annual benefit generally is $165,000 under Code Section 415. Furthermore, under Code Section 401(a)(17), the maximum annual compensation that may be used to calculate benefits in 2004 is $205,000. These dollar limits are subject to cost of living increases in future years. Each of the individuals named in the Summary Compensation Table set forth above is a participant in the plan and, for purposes of the plan, was credited during 2003 with a salary of $200,000, except that Mr. Ferguson and Mr. Niels W. Johnsen were credited with their actual salaries. At December 31, 2003, such individuals had 51, 33, 24, 35, and 56 credited years of service, respectively, under the plan. The plan benefits shown in the above table are not subject to deduction or offset by Social Security benefits. COMPENSATION OF DIRECTORS Each non-officer director receives fees of $16,000 per year plus $1,000 for each meeting of our board of directors or a committee thereof attended. 63 Upon his retirement as Chairman of the Board and Chief Executive Officer, Niels W. Johnsen entered into a consulting arrangement with our company for a term of one year to be automatically extended on a month-by-month basis thereafter for which he will be paid an annual fee of $100,000 for providing services in the areas of vessel chartering and finance. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Our board of directors has delegated the power to set the salaries of the executive officers, other than himself, to Erik F. Johnsen. The members of our compensation committee, meeting in executive session, participate in discussions concerning the compensation of Erik F. Johnsen. The members of our compensation committee for fiscal year 2003 were Raymond V. O'Brien, Jr. (Chair), Edwin Lupberger and Edward K. Trowbridge. None of our executive officers served during the last fiscal year as a director, or member of the compensation committee of another entity, one of whose executive officers served as a director of our company. 64 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS This table shows the shares of our common stock beneficially owned as of September 30, 2004 by our directors and named executive officers (as defined in the Exchange Act) as well as the owners of more than 5 percent of our outstanding common stock based on filings with the SEC and information available to us. Unless otherwise indicated, all shares shown below are held with sole voting and investment power.
NUMBER OF SHARES BENEFICIALLY PERCENT OF NAME AND ADDRESS OF PERSON OWNED CLASS(1) - -------------------------- ------------ ---------- DIRECTORS AND NAMED EXECUTIVE OFFICERS Niels W. Johnsen............................................ 920,107(2) 15.13% One Whitehall Street New York, New York 10004 Erik F. Johnsen............................................. 644,753(3) 10.60% 650 Poydras Street New Orleans, Louisiana 70130 Niels M. Johnsen............................................ 561,353(4) 8.93% One Whitehall Street New York, New York 10004 Erik L. Johnsen............................................. 311,540(5) 4.96% Harold S. Grehan, Jr........................................ 95,518 1.57% Gary L. Ferguson............................................ 75,012(6) 1.22% Edwin Lupberger............................................. 1,728 * Raymond V. O'Brien, Jr...................................... 1,000 * Edward K. Trowbridge........................................ 625(7) * H. Merritt Lane III......................................... 0 * Directors and Named Executive Officers as a Group (10 persons).................................................. 2,386,974 36.40% OTHER BENEFICIAL OWNERS T. Rowe Price Associates, Inc............................... 887,062(8) 14.58% 100 E. Pratt Street Baltimore, Maryland 21202 Franklin Resources, Inc..................................... 480,000(9) 7.89% One Franklin Parkway San Mateo, California 94403 Dimensional Fund Advisors Inc............................... 315,524(10) 5.19% 1299 Ocean Avenue, 11th Floor Santa Monica, California 90401
- --------------- * Ownership is less than 1%. (1) Based on 6,082,887 shares of our common stock outstanding as of September 30, 2004. Shares subject to currently exercisable options are deemed to be outstanding for purposes of computing the percentage of outstanding common stock owned by the person holding such options and by all directors and executive officers as a group but are not deemed to be outstanding for the purpose of computing the individual ownership percentage of any other person. (2) Includes 224,622 shares owned by a corporation of which Niels W. Johnsen is the controlling shareholder, President, and a director. (3) Includes 133,908 shares held by the Erik F. Johnsen Family Limited Partnership of which Mr. Johnsen is General Partner and 8,875 shares owned by the estate of Erik F. Johnsen's deceased wife. Also includes 43,812 shares owned by the Erik F. Johnsen Family Foundation of which he claims no beneficial ownership, but maintains voting and disposition rights. 65 (4) Includes 2,968 shares held in trust for Niels M. Johnsen's child of which he is a trustee, 224,622 shares owned by a corporation of which Mr. Johnsen is a Vice President and director, and 200,000 shares that Mr. Johnsen has the right to acquire pursuant to currently exercisable stock options. (5) Includes 11,500 shares held in trust for Mr. Johnsen's children of which he is a trustee, and 200,000 shares that Mr. Johnsen has the right to acquire pursuant to currently exercisable stock options. (6) Includes 75,000 shares Mr. Ferguson has the right to acquire upon the exercise of currently exercisable stock options. (7) Mr. Trowbridge's shares are owned jointly with his spouse. (8) Based on information contained in a Schedule 13G/A filed with the SEC on February 5, 2004, filed jointly with T. Rowe Price Small-Cap Value Fund, Inc. (which holds sole voting power with respect to 695,000 shares, representing 11.43% of the shares outstanding). T. Rowe Price Associates, Inc. ("Price Associates") serves as investment advisor with power to direct investments with respect to all reported shares and also holds sole voting power with respect to 40,100 shares. For purposes of the reporting requirements of the Exchange Act, Price Associates is deemed to be a beneficial owner of such securities; however, Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. (9) Based on information contained in a joint Schedule 13G/A filed with the SEC on February 9, 2004, by Franklin Resources, Inc. ("FRI"), Charles B. Johnson, Rupert H. Johnson, Jr., and Franklin Advisory Services, LLC. Franklin Advisory Services, LLC, has sole voting and dispositive power with respect to all 480,000 shares. FRI is the parent holding company of Franklin Advisory Services, LLC, an investment advisor. Charles B. Johnson and Rupert H. Johnson, Jr., are principal shareholders of FRI. FRI, Charles B. Johnson, Rupert H. Johnson, Jr. and Franklin Advisory Services, LLC disclaim any economic interest or beneficial ownership in any of the shares. (10) Based on information contained in a Schedule 13G/A filed with the SEC on February 6, 2004. Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment advisor, furnishes investment advice to four registered investment companies, and serves as investment manager to certain other investment vehicles, including commingled group trusts and separate accounts. Dimensional disclaims beneficial ownership of the securities. 66 CERTAIN RELATIONSHIPS AND TRANSACTIONS R. Christian Johnsen, a son of Erik F. Johnsen, our Chairman of the Board, serves as our Secretary and is a partner in the law firm of Jones, Walker, Waechter, Poitevent, Carrere and Denegre, which has represented the company since its inception. H. Hughes Grehan, a son of Harold S. Grehan, Jr., a director of the company, serves as an Assistant Secretary of the company and is a partner in the same law firm. Fees paid to the firm for legal services rendered to the company during 2003 were $1,030,000. We believe that these services are provided on terms at least as favorable to the company as could be obtained from unaffiliated third parties. James M. Baldwin, a son-in-law of Erik F. Johnsen, our Chairman of the Board, and brother-in-law of Erik L. Johnsen, our Executive Vice President, is employed by the company in a non-executive officer position and received compensation for the year ended December 31, 2003, of $138,700. Brooke Y. Grehan, a son of Harold S. Grehan, Jr., a director of the company, is also employed by the company in a non-executive officer position and received compensation for the year ended December 31, 2003, of $85,400. Compensation includes annual salaries and bonuses earned during 2003. 67 DESCRIPTION OF THE PREFERRED STOCK The following description is a summary of the material terms of the preferred stock. It does not purport to be complete. The complete terms of the preferred stock will be set forth in the certificate of designations to be filed with the Secretary of State of the State of Delaware on or about , 2004, a form of which is filed as an exhibit to the registration statement of which this prospectus forms a part. We urge you to read the certificate of designations because it, and not this description, defines your rights as a holder of shares of the preferred stock. As used in this description, the words "we," "us," "our," "the company" or "ISH" do not include any current or future subsidiary of ISH. GENERAL Our board of directors has the authority, without stockholder approval, to issue up to 1,000,000 shares of preferred stock, $1.00 par value per share, in one or more series and to determine the rights, privileges and limitations of the preferred stock. At our next annual meeting of stockholders, we intend to request stockholder approval of an amendment to our restated certificate of incorporation to authorize additional shares of preferred stock. The rights, preferences, powers and limitations of different series of our preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. Pursuant to its authority, our board of directors has designated the 800,000 shares that we are offering for sale pursuant to this prospectus, plus an additional 80,000 shares of the preferred stock which the underwriter may purchase, in full or in part, pursuant to its over-allotment option, as the % convertible exchangeable preferred stock (the "preferred stock"). The shares of the preferred stock, when issued and sold in the manner contemplated by this prospectus, will be duly authorized, validly issued, fully paid and nonassessable. As a holder of the preferred stock, you will not have any preemptive rights if we issue other series of preferred stock or other capital stock. The preferred stock has a perpetual maturity and may remain outstanding indefinitely, subject to your right to convert the preferred stock or require our redemption of the preferred stock and our right to exchange or redeem the preferred stock, as discussed in further detail below. Any of the preferred stock converted, exchanged, redeemed, purchased or acquired by us will, upon cancellation, have the status of authorized but unissued shares of preferred stock. We will be able to reissue these cancelled shares of preferred stock. Immediately prior to this offering, no shares of the preferred stock were outstanding. No "sinking fund" will be provided for the preferred stock, which means that we will not be required to set aside funds for the redemption or retirement of the preferred stock, nor will we be required to redeem or retire the preferred stock periodically. RANKING The preferred stock, with respect to dividend rights and rights upon our liquidation, winding up and dissolution, ranks: - junior to all of our existing and future debt obligations; - junior to our "senior stock," which is each class or series of our capital stock other than: - our common stock, - any other class or series of our capital stock, the terms of which provide that such class or series will rank junior to the preferred stock, and - any other class or series of our capital stock, the terms of which provide that such class or series will rank on a parity with the preferred stock; - on a parity with our "parity stock," which is any class or series of our capital stock, the terms of which provide that such class or series will rank on a parity with the preferred stock; 68 - senior to our "junior stock," which is our common stock and each class or series of our capital stock, the terms of which provide that such class or series will rank junior to the preferred stock; and - effectively junior to all of our subsidiaries' existing and future liabilities and capital stock, if any, held by others. The terms "senior stock," "parity stock" and "junior stock," include, respectively, warrants, rights, calls, options and other securities exercisable or exchangeable for, or convertible into, that type of stock. We have no senior stock or parity stock outstanding. DIVIDENDS When, as and if declared by our board of directors out of legally available funds, you will be entitled to receive cash dividends at an annual rate of % of the $50 liquidation preference of the preferred stock. Dividends will be payable quarterly on , , and , beginning , 2005. If any dividends are not declared, they will accrue and be paid at such later date, if any, as determined by our board of directors. Dividends on the preferred stock will be cumulative from the most recent date as to which dividends will have been paid or, if no dividends have been paid, from the date of issuance. Dividends will be payable to holders of record as they appear on our stock books at the close of business on , , and of each year or on a record date that may be fixed by our board of directors and that will be not more than 60 days nor less than 10 days preceding the payment date. Dividends payable on the preferred stock for any period greater or less than a full dividend period will be computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends on the shares of the preferred stock will be payable in cash. Accrued and unpaid dividends will not bear interest. If we do not pay or set aside cumulative dividends in full on the preferred stock and any other of our capital stock ranking equally as to dividends or liquidation rights, all dividends declared upon shares of the preferred stock and any such other capital stock will be declared on a pro rata basis until all accrued dividends are paid in full. For these purposes, "pro rata" means that the ratio of the amount of dividends declared per share on the preferred stock to the amount of dividends declared per share on any such other capital stock ranking equally as to dividends or liquidation rights shall equal the ratio of the amount of accrued and unpaid dividends per share of the preferred stock to the amount of accrued and unpaid dividends per share of such other capital stock. We will not be able to pay or set aside dividends on, or redeem, purchase or otherwise acquire, any of our capital stock ranking equally as to dividends or liquidation rights to the preferred stock unless we have paid or set aside for payment full cumulative dividends, if any, accrued and unpaid on all outstanding shares of the preferred stock. Prior to December 31, 2007, we may not: - declare, pay or set aside for payment dividends (excluding dividends or distributions of shares, options, warrants or rights to purchase our common stock or other capital stock ranking junior to the preferred stock as to dividends) or other distributions on our common stock or any other of our capital stock ranking junior to the preferred stock as to dividends or liquidation rights; or - redeem, purchase or otherwise acquire any of our common stock or other capital stock ranking junior to the preferred stock as to dividends or liquidation rights, except in limited circumstances. On and after December 31, 2007, we may declare, pay or set aside for payment dividends or other distributions on our common stock or any of our other capital stock ranking junior to the preferred stock as to dividends or liquidation rights and redeem, purchase or otherwise acquire any of our common stock or other capital stock ranking junior to the preferred stock as to dividends or liquidation rights so long as we have paid, or set aside for payment, full cumulative dividends, if any, accrued and unpaid on the preferred stock and any other of our capital stock ranking equally as to dividends or liquidation rights. 69 Under Delaware law, we may only make dividends or distributions to our stockholders from: - our surplus; or - the net profits for the current fiscal year or the fiscal year before which the dividend or distribution is declared under certain circumstances. Our ability to pay dividends and make other distributions will depend upon our financial results, liquidity and financial condition. As a holder of the preferred stock, you will not be entitled to participate in any dividends or other distributions that may be paid on any other class of our capital stock, including our common stock. CONVERSION CONVERSION RIGHTS Unless earlier redeemed by us, you may convert your shares of the preferred stock (or a portion thereof) at any time into a number of shares of our common stock determined by dividing the $50 liquidation preference by the initial conversion price of $ , subject to adjustment as described below. This initial conversion price represents an initial conversion rate of approximately shares of our common stock for each share of preferred stock. We will not make any adjustment to the conversion price for accrued and unpaid dividends upon conversion, and we will not issue fractional shares of our common stock upon conversion. Instead, we will pay cash for each fractional share based upon the closing price of our common stock on the last trading day prior to the conversion date. If we call the preferred stock for redemption in whole or in part as described below under the captions "-- Optional Redemption" and "-- Optional Redemption on Change in Control," your right to convert such shares of preferred stock called for redemption will expire at the close of business on the business day immediately preceding the redemption date, unless we default in the payment of the redemption price together with accrued and unpaid dividends to (but not including) the redemption date, in which case you will be permitted to convert the preferred stock until we pay the redemption price and accrued and unpaid dividends to (but not including) the redemption date. If you accept a change in control offer with respect to all or part of your shares of the preferred stock, as discussed in further detail below under the caption "-- Required Redemption on Change in Control," such shares may not be converted unless you have validly withdrawn your acceptance of the change in control offer. In order to convert your shares of the preferred stock, you must either: - deliver your preferred stock certificate to the transfer agent along with a duly signed and completed notice of conversion; or - if the preferred stock is held in global form, comply with the procedures established by The Depository Trust Company ("DTC") for conversion, which you may obtain from your broker or another DTC participant. The conversion date will be the date you deliver your preferred stock certificate and the duly signed and completed notice of conversion to the transfer agent or, if your shares of the preferred stock are held in global form, the date your shares are surrendered for conversion in accordance with the procedures established by DTC. You will not be required to pay any U.S. federal, state or local issuance taxes, or duties or costs incurred by us, in connection with the conversion of the preferred stock or the issuance of the common stock issuable upon conversion. You will, however, be required to pay any tax or other governmental charge payable as a result of the common stock issuable upon conversion being issued other than in your name, and we will not issue the common stock unless all such taxes and charges, if any, have been paid by the holder of the converted preferred stock. If you convert your shares of the preferred stock after a dividend record date and prior to the next dividend payment date, you will receive the dividend payable on your shares of the preferred stock on the next dividend payment date notwithstanding the conversion. However, if you convert your shares of the 70 preferred stock after a dividend record date and prior to the next dividend payment date, you will have to pay us, upon conversion of your shares of the preferred stock, an amount equal to the dividend to be paid on such dividend payment date unless the preferred stock has been called for redemption, as described below under the captions "-- Optional Redemption" and "-- Optional Redemption on Change in Control." We will at all times reserve and keep available, free from preemptive rights, out of our authorized but unissued shares or treasury shares, for issuance upon the conversion of shares of the preferred stock, a number of shares of our authorized but unissued common stock that will from time to time be sufficient to permit the conversion of all outstanding shares of the preferred stock. Before the delivery of any securities that we will be obligated to deliver upon conversion of the preferred stock, we will comply with all applicable federal and state laws and regulations that require action to be taken by us. All of our common stock delivered upon conversion of the preferred stock will upon delivery be duly authorized, validly issued, fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights. CONVERSION PRICE ADJUSTMENT The conversion price of $ will be adjusted if: (1) we pay a dividend in shares of our common stock or make a distribution of shares of our common stock to all holders of our common stock; (2) we subdivide our common stock into a greater number of shares of common stock or combine our common stock into a smaller number of shares of common stock; (3) we issue to all holders of our common stock certain rights or warrants to purchase our common stock at less than the then-current market price of our common stock; (4) we dividend or distribute to all holders of our common stock shares of our capital stock or evidences of indebtedness, cash or other assets, excluding: - those rights, warrants, dividends and distributions referred to in (1) and (3) above, or - dividends and distributions paid exclusively in cash; (5) we pay a dividend or make a distribution consisting exclusively of cash to all holders of our common stock (excluding any dividend or distribution in connection with our liquidation, dissolution or winding up, a dividend or distribution referred to in clause (4) above or a dividend or distribution in connection with certain mergers or consolidations) that, when combined with all such other cash dividends paid and cash distributions made during such calendar year, exceeds on a per-share basis the greater of $0.50 or three percent (3%) of the closing price of our common stock on the last trading day prior to the declaration date of such dividend or distribution; (6) we, or one of our subsidiaries, purchase our common stock pursuant to a tender offer, except to the extent that the purchase price per share is equal to or less than the then-current market price per share of our common stock; or (7) a person other than us or any of our subsidiaries makes a tender offer or exchange offer and, as of the closing of the offer, our board of directors is not recommending rejection of the offer. We will only make this adjustment if the tender or exchange offer increases a person's ownership to more than 25% of our outstanding common stock and only if the purchase price per share exceeds the then-current market price of our common stock. We will not make this adjustment if the offering documents disclose our plan to engage in any consolidation, merger, or transfer of all or substantially all of our properties and if certain conditions are met. We do not currently have a stockholder rights plan. If we implement a stockholder rights plan, this new rights plan must provide that, upon conversion of the preferred stock, unless prior to conversion the 71 rights have expired, terminated or been redeemed, the holders will receive, in addition to the common stock issuable upon such conversion, the rights under such rights plan regardless of whether the rights have separated from the common stock on or before the time of conversion. The distribution of rights or warrants pursuant to a stockholder rights plan will not result in an adjustment to the conversion price of the preferred stock until a specified triggering event under such plan occurs. The occurrence and magnitude of certain of the adjustments described above is dependent upon the then-current market price of our common stock. For these purposes, "current market price" generally means the lesser of: - the closing sale price of our common stock on the date in question; and - the average of the closing sale prices of our common stock for the ten trading day period immediately prior to the date in question. In the event of: - any reclassification or change of our common stock; - a consolidation, merger or combination involving us as a result of which holders of our common stock will be entitled to receive stock, other securities, other property, assets or cash for their common stock; or - a sale or conveyance to another person or entity of all or substantially all of our assets as a result of which holders of our common stock will be entitled to receive stock, other securities, other property, assets or cash for their common stock; you will be entitled to receive, upon conversion of the preferred stock, the same type of consideration that you would have been entitled to receive if you had converted the preferred stock into our common stock immediately prior to any of these events. We may not become a party to any such transaction unless its terms are consistent with the foregoing. You may in certain situations be deemed to have received a distribution subject to United States federal income tax as a dividend in the event of any taxable distribution to holders of our common stock or in certain other situations requiring a conversion rate adjustment. See "Material U.S. Federal Income Tax Considerations." We may, from time to time, decrease the conversion price (which has the effect of increasing the conversion rate) if our board of directors has made a determination that this decrease would be in our best interests. Any such determination by our board will be conclusive. In addition, we may decrease the conversion price (which has the effect of increasing the conversion rate) if our board of directors deems it advisable to avoid or diminish any income tax to holders of our common stock resulting from any stock or rights distribution. See "Material U.S. Federal Income Tax Considerations." We will not be required to make an adjustment in the conversion price unless the adjustment would require a change of at least 1% in the conversion price. However, we will carry forward any adjustments that are less than 1% of the conversion price. Except as described above in this section, we will not adjust the conversion price for any issuance of our common stock or any securities or any rights convertible, exchangeable or exercisable for shares of our common stock. LIQUIDATION RIGHTS In the event of our voluntary or involuntary dissolution, liquidation, or winding up, you shall receive a liquidation preference of $50 per share plus all accrued and unpaid dividends with respect to your shares through the distribution date. Holders of any class or series of our capital stock ranking equally to the preferred stock as to liquidation rights or dividends shall also be entitled to receive the full respective liquidation preferences and any accrued and unpaid dividends through the distribution date. Only after the preferred stock holders and the holders of any other class or series of our capital stock ranking equally as to liquidation rights or dividends have received their liquidation preference and any accrued and unpaid 72 dividends will we distribute assets to our common stock holders and the holders of any of our other capital stock ranking junior to the preferred stock as to liquidation rights or dividends. If upon such dissolution, liquidation or winding up, we do not have enough assets to pay in full the amounts due on the preferred stock and any other capital stock ranking equally as to liquidation rights or dividends, you and the holders of such other capital stock will share ratably in any such distributions of our assets: - first in proportion to your respective liquidation preferences until the preferences are paid in full; and - then in proportion to your respective amounts of accrued and unpaid dividends. After we pay the liquidation preference of your shares of the preferred stock and any accrued and unpaid dividends, you will not be entitled to participate as a holder of the preferred stock any further in the distribution of our assets. The following events will not be deemed to be a dissolution, liquidation or winding up of ISH: - the sale of all or substantially all of our assets; - our merger or consolidation into or with any other corporation; or - our liquidation, dissolution, winding up or reorganization immediately followed by a reincorporation or reorganization as another corporation or other entity. We are not required to set aside any funds to protect the liquidation preference of the shares of the preferred stock. OPTIONAL REDEMPTION The preferred stock is not redeemable at our option prior to , 2006 except in the event of a change in control as described under "-- Optional Redemption on Change in Control." On or after that date, we may redeem the preferred stock out of legally available funds, at our option, in whole or in part from time to time, for cash at the redemption prices listed below together with accrued and unpaid dividends to, but not including, the date of redemption, provided that prior to , 2007, we may redeem the preferred stock only if the closing price of our common stock has exceeded 150% of the conversion price of the preferred stock for at least 20 trading days during any 30-day trading period ending within five trading days prior to notice of redemption.
REDEMPTION YEAR PRICE - ---- ---------- Beginning on , 2006 and ending on , 2007.... $ Beginning on , 2007 and ending on , 2008.... Beginning on , 2008 and thereafter..................
In the case of any partial redemption, we will select the shares to be redeemed by lot, on a pro rata basis or by another method we deem fair and appropriate in our sole discretion. If a portion of a holder's shares of the preferred stock is selected for partial redemption and such holder converts a portion of its shares prior to the redemption date, such converted portion shall be deemed to be taken from the portion selected for redemption. OPTIONAL REDEMPTION ON CHANGE IN CONTROL A "change in control" shall be deemed to have occurred at the time, after the original issuance of the preferred stock: - that any person or group of persons (within the meaning of Sections 13(d) or 14(a) of the Exchange Act) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the SEC under the Exchange Act) of 50% or more of the voting capital stock of ISH; or 73 - within a period of twelve (12) consecutive calendar months, that individuals who were directors of ISH on the first day of such period (together with any new directors whose election to our board of directors or whose nomination for election, was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) shall cease to constitute a majority of our board of directors. Holders of the preferred stock will not be entitled to have the preferred stock redeemed at a premium price in the event of a change in control of our company. Rather, upon the occurrence of a change in control, we will have the right, by way of notice to the holders of the preferred stock mailed at least 30 days and not more than 60 days prior to the date fixed for redemption (which redemption date shall not be later than 60 days following the effective date of the event or circumstance resulting in the change in control) and in preference to the redemption rights of the holders of the preferred stock as described below under the caption "-- Required Redemption on Change in Control," to redeem the preferred stock, in whole but not in part, for cash at the redemption prices set forth below, together with accrued and unpaid dividends, if any, to, but excluding, the redemption date.
IF THE CHANGE IN CONTROL OCCURS WITHIN THE TWELVE MONTHS PRECEDING , REDEMPTION PRICE - ------------------------------------------ ---------------- 2005................................................ 2006................................................ 2007................................................ 2008................................................ 2009................................................
MECHANICS OF OPTIONAL REDEMPTION In the event of an optional redemption, we will: - send a written notice of such redemption by first class mail to each holder of record of the preferred stock at such holder's registered address, not fewer than 30 nor more than 60 days prior to the redemption date, stating, among other things: - in the case of an optional redemption on change in control, that a change in control has occurred or may occur, and describing the event or circumstance that has or may result in a change in control and, in any case, that we have exercised our right to redeem the outstanding shares of preferred stock; - the number of shares to be redeemed; - the redemption date; - the redemption price; - that on the redemption date, dividends shall cease to accrue with respect to shares of the preferred stock that are redeemed; - the conversion price then in effect and the date on which the right to convert the preferred stock into our common stock will expire; and - certain other information and the procedures that a holder of the preferred stock must follow to effect the redemption; - issue a press release announcing the redemption; - publish such information once in a daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, New York; and - publish such information on our website on the World Wide Web. 74 If we give notice of redemption, then we shall, on the redemption date, before 12:00 p.m., New York City time, to the extent funds are legally available, with respect to: - shares of the preferred stock to be redeemed held by DTC or its nominees, deposit or cause to be deposited, irrevocably with the transfer agent or DTC, cash sufficient to pay the redemption price and accrued and unpaid dividends to (but not including) the redemption date, and give the transfer agent or DTC irrevocable instructions and authority to pay such amounts to holders of such shares of the preferred stock upon book-entry delivery of such shares; and - shares of the preferred stock to be redeemed held in certificated form, deposit or cause to be deposited, irrevocably with the transfer agent, cash sufficient to pay the redemption price and accrued and unpaid dividends to (but not including) the redemption date, and give the transfer agent irrevocable instructions and authority to pay such amounts to holders of such shares of the preferred stock upon surrender of their certificates evidencing their shares of the preferred stock. If on the redemption date, DTC and the transfer agent hold cash sufficient to pay the redemption price for the shares of the preferred stock delivered for redemption, together with accrued and unpaid dividends to (but not including) the redemption date, in accordance with the terms of the certificate of designations, dividends will cease to accrue on those shares of the preferred stock called for redemption and all rights of holders of such shares will terminate except for the right to receive the redemption price and accrued and unpaid dividends to (but not including) the redemption date without interest thereon. Payment of the redemption price for the shares of the preferred stock is conditioned upon book-entry transfer of or physical delivery of certificates representing the preferred stock, together with any necessary endorsements, to the transfer agent, or to the transfer agent's account at DTC, at any time after delivery of the redemption notice. Payment of the redemption price for the preferred stock will be made: - if book-entry transfer of or physical delivery of the preferred stock has been made by or on the redemption date, on the redemption date; or - if book-entry transfer of or physical delivery of the preferred stock has not been made by or on such date, at the time of book-entry transfer of or physical delivery of the preferred stock. If the redemption date falls after a dividend record date and on or before the related dividend payment date, holders of the shares of preferred stock to be redeemed at the close of business on that dividend record date will be entitled to receive the dividend payable on those shares on the corresponding dividend payment date. The redemption price payable on such redemption date will not include any amount in respect of dividends declared and payable on such dividend payment date. REQUIRED REDEMPTION ON CHANGE IN CONTROL To the extent we do not elect to redeem all of the outstanding shares of the preferred stock upon a change in control as described above under the caption "-- Optional Redemption on Change in Control" and to the extent we have funds legally available therefor, as a holder of the preferred stock, you will have the right, subject to the certificate of designations, to require us to redeem your shares of the preferred stock, in whole or in part, at a redemption price in cash equal to 100% of the liquidation price thereof, together with accrued and unpaid dividends to, but not including, the date fixed for redemption, pursuant to an offer (a "change in control offer") made in accordance with the procedures described below and the other provisions in the certificate of designations. If the change in control redemption date falls after a dividend record date and on or before the related dividend payment date, holders of shares of the preferred stock to be redeemed at the close of business on that dividend record date will be entitled to receive the dividend payable on those shares on the corresponding dividend payment date. The redemption price payable on such redemption date will not include any amount in respect of dividends declared and payable on such dividend payment date. 75 Within 30 days following the effective date of the event or circumstance resulting in a change in control, we shall send to each holder of the preferred stock, by first-class mail, postage prepaid, at such holder's address appearing in the records of ISH, a notice stating, among other things: - that a change in control has occurred or may occur and that, as a result, the holders of shares of the preferred stock have certain redemption rights; - the redemption date, which shall be 45 days from the date such notice is mailed (or if such day is not a business day then the next succeeding business day); - the date by which the redemption right must be exercised; - the redemption price; - that on the redemption date, if the redemption right is timely exercised, the redemption price and accrued and unpaid dividends (if any) to (but not including) the redemption date will become due and payable and that dividends shall cease to accrue with respect to shares of the preferred stock that are redeemed; - the conversion price then in effect and that shares of the preferred stock for which written notice requesting redemption has been received may be converted into common stock only to the extent that such notice has been withdrawn; and - certain other information and the procedures that a holder of the preferred stock must follow to accept a change in control offer or to withdraw such acceptance. In addition, we will: - issue a press release announcing the change in control; - publish such information once in a daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, New York; and - publish such information on our website on the World Wide Web. We shall, before 12:00 p.m., New York City time on the change in control redemption date, to the extent funds are legally available, with respect to: - shares of the preferred stock to be redeemed held by DTC or its nominees, deposit or cause to be deposited, irrevocably with the transfer agent or DTC, cash sufficient to pay the redemption price and accrued and unpaid dividends to (but not including) the change in control redemption date, and give the transfer agent or DTC irrevocable instructions and authority to pay such amounts to holders of such shares of the preferred stock upon book-entry delivery of such shares; and - shares of the preferred stock to be redeemed held in certificated form, deposit or cause to be deposited, irrevocably with the transfer agent, cash sufficient to pay the redemption price and accrued and unpaid dividends to (but not including) the change in control redemption date, and give the transfer agent irrevocable instructions and authority to pay such amounts to holders of such shares of the preferred stock upon surrender of their certificates evidencing their shares of the preferred stock. To exercise your right to require us to redeem your shares of the preferred stock, you must deliver a written notice to the transfer agent prior to the close of business on the business day immediately before the redemption date. The notice must state: - if certificated shares of preferred stock have been issued, the preferred stock certificate numbers, or if not, such information as may be required under applicable DTC procedures; - the number of preferred shares to be redeemed; and - that we are to redeem such preferred stock pursuant to the applicable provisions of the certificate of designations. 76 You may withdraw any change in control redemption notice by a written notice of withdrawal delivered to the transfer agent prior to the close of business on the business day before the change in control redemption date. The notice of withdrawal must state: - the number of the withdrawn shares of the preferred stock; - if certificated shares of the preferred stock have been issued, the preferred stock certificate numbers, or if not, such information as may be required under applicable DTC procedures; and - the number, if any, of shares of the preferred stock that remain subject to your change in control redemption notice. A holder must either effect book-entry transfer or deliver certificates representing the preferred stock to be redeemed, together with any necessary endorsements, to the transfer agent after delivery of the change in control redemption notice to receive payment of the change in control redemption price and accrued and unpaid dividends to (but not including) the change in control redemption date. You will receive payment in cash on the later of the change in control redemption date or the time of book-entry transfer or physical delivery of the preferred stock. If on the change in control redemption date DTC and the transfer agent hold cash sufficient to pay the change in control redemption price of the preferred stock to be redeemed, together with accrued and unpaid dividends to (but not including) the change in control redemption date, in accordance with the terms of the certificate of designations, dividends will cease to accrue on those shares of the preferred stock to be redeemed and all rights of holders of such shares will terminate except for the right to receive the redemption price and accrued and unpaid dividends to (but not including) the change in control redemption date without interest thereon. We will comply, to the extent applicable, with the requirements of Rule 13e-4 and Rule 14e-1 promulgated under the Exchange Act and other securities laws or regulations in connection with the redemption of the preferred stock as described above. The change in control provisions may in certain circumstances make more difficult or discourage a takeover of us and the removal of our incumbent management. See "Risk Factors." The change in control redemption provisions, however, are not the result of our knowledge of any specific effort: - to accumulate shares of our common stock; - to obtain control of ISH by means of a merger, tender offer, solicitation or otherwise; or - by management to adopt a series of anti-takeover provisions. Our indebtedness imposes limitations on our ability to enter into certain transactions which may constitute a change in control. Moreover, the exercise by the holders of the preferred stock of their right to require us to redeem their shares of the preferred stock could cause a default under such indebtedness, even if the change in control itself does not, due to the financial effect of such redemption on us. In addition, our ability to pay cash to redeem the preferred stock upon a change in control may be limited by our then-existing financial resources, the amount of funds we have legally available for redemptions, the terms of our debt agreements and, since we are a holding company, our ability to obtain funds through dividends from our subsidiaries. Any future credit agreements or other agreements relating to our indebtedness may contain provisions prohibiting the redemption of the preferred stock under certain circumstances, or expressly prohibit our redemption of the preferred stock upon a change in control or may provide that a change in control constitutes an event of default under that agreement. If a change in control occurs at a time when we are prohibited by our debt agreements from redeeming shares of the preferred stock for cash, we could seek the consent of our lenders to redeem the preferred stock or attempt to refinance such debt. If we do not obtain such consent, we would not be permitted to redeem the preferred stock. 77 We will not be required to redeem shares of the preferred stock upon the occurrence of a change in control if: - a third party agrees to purchase the shares of the preferred stock upon the occurrence of a change in control in the manner, at the times and otherwise in compliance with the requirements set forth in the certificate of designations applicable to a redemption of shares of the preferred stock upon the occurrence of a change in control; and - the third party purchases the shares of the preferred stock on such basis. If we have insufficient funds to redeem all of the shares of the preferred stock tendered to us, we will select the shares to be redeemed from those tendered for redemption by lot, on a pro rata basis or by another method we deem fair and appropriate in our sole discretion. There can be no assurance that sufficient funds will be available when necessary to make any required redemption. See "Risk Factors." Notwithstanding the occurrence of a change in control, we will not be required to redeem shares of the preferred stock pursuant to a change in control offer in the event we have exercised our right to redeem all of the shares of the preferred stock pursuant to our optional redemption rights as described above under the captions "-- Optional Redemption" and "-- Optional Redemption on Change in Control." EXCHANGE We may exchange the preferred stock in whole, but not in part, for the notes on any dividend payment date, beginning on , 2005 and prior to , 2014, at the rate of $50 principal amount of the notes for each outstanding share of the preferred stock. We refer to the date fixed for exchange of the preferred stock for notes as the "exchange date." On the exchange date, your rights as a stockholder of ISH will cease. Your shares of the preferred stock will no longer be outstanding, and will only represent the right to receive the notes and any accrued and unpaid dividends to, but not including, the exchange date, without interest. We may not exercise our option to exchange the preferred stock for the notes if: - full cumulative dividends on the preferred stock to the exchange date have not been paid or set aside for payment; - an event of default under the indenture would occur on exchange, or has occurred and is continuing; and - the notes shall not be listed or approved for listing upon issuance on the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, the American Stock Exchange or another similar national securities exchange or securities trading market. We will need to give you notice that we are exercising our exchange right before we can determine whether the conditions to exercise set forth above are satisfied. Accordingly, if any of the conditions to exercise are not satisfied as of the exchange date, we will be prohibited from making the exchange and will not consummate the exchange. In such case, we will issue a press release announcing that such conditions have not been satisfied and that the exchange will not be consummated, and will publish such information on our website on the World Wide Web. Thereafter, we again will have the right to exercise the exchange right in accordance with the certificate of designations. 78 If we exercise our exchange right, we will provide notice to the trustee, the transfer agent and each holder of record of the preferred stock not less than 30 nor more than 60 days preceding the exchange date providing: - our election to exercise the exchange right; - a description of the notes and the amount thereof to be delivered in respect of the preferred stock, the place or places where certificates for shares of preferred stock are to be surrendered for exchange, including any procedures applicable to exchanges to be accomplished through book-entry transfers; - the exchange date; and - that dividends on the preferred stock will cease to accrue on the exchange date whether or not shares of the preferred stock are surrendered for exchange on the exchange date. In addition, we will: - issue a press release announcing the exchange; - publish such information once in a daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, New York; and - publish such information on our website on the World Wide Web. We will cause the notes to be delivered to the trustee in preparation for the exchange no later than five business days prior to the exchange date. If we exercise the exchange right, delivery of the notes to the holders of the preferred stock to be exchanged, together with payment of any accrued and unpaid dividends to (but not including) the exchange date, will be conditioned upon physical delivery of certificates representing such preferred stock or book-entry transfer of such preferred stock (together with any necessary endorsements) to the trustee at any time (whether prior to, on or after the exchange date) after notice of the exercise of the exchange right is given. In such event, such notes will be delivered to each holder of the preferred stock to be exchanged no later than the later of: - the exchange date; or - the time of physical delivery or book-entry transfer of such holder's shares of the preferred stock to the trustee. If, following any exercise of the exchange right, the trustee holds notes in respect of all the outstanding preferred stock, then at the close of business on such exchange date, whether or not the certificates representing, or other indicia of ownership of, the preferred stock are delivered to the trustee: - we will become the owner and record holder of such preferred stock; - the holders of such preferred stock shall have no further rights with respect to the preferred stock other than the right to receive the notes upon delivery of the certificates representing, or other indicia of ownership of, the preferred stock, together with accrued and unpaid dividends to (but not including) the exchange date without interest thereon; - dividends on the preferred stock to be exchanged shall cease to accrue whether or not certificates for shares of the preferred stock are surrendered for exchange on the exchange date; and - DTC, as the record holder of the preferred stock held in global form, will exchange the global certificate or certificates representing the preferred stock for a global certificate or certificates representing the notes to be delivered upon such exchange. If you deliver a notice of conversion to us with respect to all or a part of your shares of the preferred stock prior to the close of business on the exchange date along with book-entry transfer or physical delivery of such shares, then the exchange will not become effective as to such shares, but rather the 79 conversion of such shares of the preferred stock into shares of our common stock will become effective in accordance with the certificate of designations. Dividends with respect to the preferred stock which are due on the dividend payment date which is the exchange date will be payable to the holders of the preferred stock on the corresponding dividend record date, and the amount payable to holders of the preferred stock on the exchange date will not include any amount in respect of dividends declared and payable on such dividend payment date. The aggregate principal amount of the notes will be limited to the aggregate liquidation preference of the preferred stock outstanding on the effective date of the exchange. Notes will be issuable in denominations of $50 and integral multiples of $50. See the section of this prospectus entitled "Description of the Notes" below. If the exchange results in an amount of notes that is not an integral multiple of $50, we will pay in cash the amount in excess of the closest integral multiple of $50. The exchange of the preferred stock for the notes will be a taxable event, since holders will be exchanging their preferred stock for debt and we will not make any related cash payment to the holder. See the section of this prospectus entitled "Material U.S. Federal Income Tax Considerations" below. VOTING RIGHTS You will have no voting rights as a holder of the preferred stock except as described below or as required by law. Shares of the preferred stock held by us or any entity controlled by us will not have any voting rights. If we have not paid dividends on the preferred stock or on any outstanding shares of our capital stock ranking equally as to dividends or liquidation rights with the preferred stock in an aggregate amount equal to at least six quarterly dividends whether or not consecutive, we will increase the size of our board of directors by two additional directors and holders of the preferred stock, voting separately as a class with the holders of our capital stock ranking equally as to dividends or liquidation rights and having like voting rights, will be entitled to elect two additional directors at any meeting of our stockholders at which directors are to be elected. These voting rights will terminate when we have declared and either paid or set aside for payment all accrued and unpaid dividends on the preferred stock and any other outstanding shares of our capital stock ranking equally as to dividends or liquidation rights with the preferred stock. The terms of office of all directors so elected will terminate immediately upon the termination of these voting rights. Without the vote or consent of the holders of at least 66 2/3% of the outstanding shares of the preferred stock and any of our other capital stock ranking equally with the preferred stock as to dividends or liquidation rights and having like voting rights, voting separately as a class, we may not: - adversely change the rights, preferences and limitations of the preferred stock by modifying our certificate of incorporation or bylaws; or - create, authorize, issue, reclassify any of our authorized capital stock into, increase the authorized amount of, or authorize or issue any convertible obligation or security or right to purchase, any class of stock that ranks senior to the preferred stock as to dividends or liquidation rights. In addition, without the vote or consent of the holders of at least 66 2/3% of the outstanding shares of the preferred stock and any of our other capital stock ranking equally with the preferred stock as to dividends or liquidation rights and having like voting rights, voting separately as a class, we may not: - enter into a share exchange pursuant to which the preferred stock would be exchanged for any other securities; - consolidate with or merge into another entity; - permit another entity to consolidate with or merge into us; or 80 - enter into any sale, lease, conveyance or transfer of all or substantially all of our assets to another person or group of affiliated persons; unless either: - in the case of a consolidation or merger, we are the resulting or surviving entity and the preferred stock remains outstanding and unaffected; or - the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and the preferred stock is converted into or exchanged for convertible exchangeable preferred stock of the corporation formed by the consolidation, or into which we have been merged, or of the corporation that has acquired or leased all or substantially all of our assets, having powers, preferences and relative, participating, optional and other rights and qualifications, limitations and restrictions substantially similar to, but no less favorable than, the preferred stock. No vote of holders of the preferred stock will be required (except as otherwise required by law or resolution of our board of directors) in connection with the authorization, issuance or increase in the authorized amount of any shares of capital stock ranking equally with or junior to the preferred stock both as to the payment of dividends and as to distribution of assets upon our liquidation, dissolution or winding up, whether voluntary or involuntary, including our common stock. If a record date for a meeting of our stockholders to be held after you elect to convert your shares of the preferred stock has been fixed and falls prior to your conversion date (see "-- Conversion -- Conversion Rights" above), you will not have any voting rights at that meeting with respect to your common stock issuable upon conversion of the preferred stock. BOOK-ENTRY ISSUANCE The preferred stock will only be issued in the form of global securities held in book-entry form. DTC or its nominee will be the sole registered holder of the preferred stock. Owners of beneficial interests in the preferred stock represented by the global securities will hold their interests pursuant to the procedures and practices of DTC. As a result, beneficial interests in any such securities will be shown on, and transfers will be effected only through, records maintained by DTC and its direct and indirect participants and any such interest may not be exchanged for certificated securities, except in the limited circumstances described below. Owners of beneficial interests must exercise any rights in respect of their interests, including any right to convert or require redemption of their interests in the preferred stock, in accordance with the procedures and practices of DTC. Beneficial owners will not be holders and will not be entitled to any rights provided to the holders of the preferred stock under the global securities or the certificate of designations. Our company and any of our agents may treat DTC as the sole holder and registered owner of the global securities. DTC has advised us as follows: DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC facilitates the settlement of transactions among its participants through electronic computerized book-entry changes in participants' accounts, eliminating the need for physical movement of securities certificates. DTC's participants include securities brokers and dealers, including the underwriters, banks, trust companies, clearing corporations and other organizations, some of whom and/or their representatives own DTC. Access to DTC's book-entry system is also 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. 81 EXCHANGE OF GLOBAL SECURITIES The preferred stock, represented by the global security, will be exchangeable for certificated securities with the same terms only if: - DTC is unwilling or unable to continue as depositary or if DTC ceases to be a clearing agency registered under the Exchange Act and a successor depositary is not appointed by us within 90 days; or - we decide to discontinue use of the system of book-entry transfer through DTC (or any successor depositary). LISTING OF PREFERRED STOCK The preferred stock will be listed on the New York Stock Exchange under the symbol "ISH Pr." TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Company will act as transfer agent and registrar for the preferred stock. Its address is 59 Maiden Lane, Plaza Level, New York, NY 10038, and its telephone number is (212) 936-5100. 82 DESCRIPTION OF THE NOTES If we elect to issue the notes in exchange for the preferred stock, we will issue the notes under an indenture between us and The Bank of New York, as trustee, to be dated on or about , 2004. The following description is a summary of the material provisions of the indenture and the form of note attached thereto. It does not purport to be complete. The complete terms of the indenture and the notes are set forth in the form of indenture and the form of note attached thereto filed as an exhibit to the registration statement of which this prospectus forms a part. We urge you to read the indenture, including the form of note attached thereto, because it, and not this description, defines your rights as a holder of the notes. If we elect to exchange the preferred stock, the issuance of the notes will not be subject to the registration requirements of the Securities Act. As used in this description, the words "we," "us," "our," "the company" or "ISH" do not include any current or future subsidiary of ISH. GENERAL If we elect to issue the notes in exchange for the preferred stock, we will issue the notes at a rate of $50 principal amount of notes for each share of preferred stock that we exchange. The notes will be general, unsecured, subordinated obligations of ISH, and will be convertible into shares of our common stock as described under "-- Conversion Rights" below. The notes will be limited to an aggregate principal amount equal to the aggregate liquidation value of the outstanding preferred stock, excluding any accrued and unpaid dividends payable upon liquidation. The notes will mature on , 2014, regardless of the date of issuance, unless earlier converted by a holder or redeemed by us at our option beginning on , 2006, at our option upon the occurrence of a change in control, or at the option of the holder upon the occurrence of a change in control, as discussed in further detail below. Upon exchange, the notes will be issued in denominations of $50 and any integral multiple of $50 equal to the number of shares of the preferred stock for which the notes are exchanged. You will not be required to pay a service charge for registration of transfer or exchange of the notes. We may, however, require you to pay any tax or other governmental charge payable as a result of the common stock issued upon conversion being issued other than in your name. Principal will be payable, and the notes may be presented for conversion, redemption, registration of transfer or exchange, without service charge, at our office or agency in New York City, which shall initially be the office or agency of the trustee in New York, New York. No "sinking fund" will be provided for the notes, which means that the indenture will not require us to set aside funds for the redemption or retirement of the notes, nor will we be required to redeem or retire the notes periodically. We may not redeem the notes if there is a default under the indenture. See "-- Events of Default and Remedies" below. We are not restricted by the indenture from incurring additional indebtedness or repurchasing our capital stock, and we are not subject to any financial covenants under the indenture. We are, however, restricted by the indenture from paying dividends on our common stock under certain circumstances as described above in the sections of this prospectus entitled "Description of the Preferred Stock -- Dividends" and "Dividend Policy." INTEREST The notes will bear interest from the date of issuance at the rate of % per year. Interest will be paid on , , and of each year to the record holder on the preceding , , , and , respectively, beginning on the first interest payment date after the issuance of the notes, and on the maturity date of , 2014 to the holder to whom we pay the principal amount of the notes. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. We may, at our option, pay interest on the notes by check mailed to the holders of the notes. However, holders of more than $2,000,000 in principal amount of notes may be paid by wire transfer in immediately available funds at the holder's election. Interest will cease to accrue on a note 83 upon its maturity, conversion, optional redemption by us, or required redemption by us upon a change in control of our company. We will not have the right to defer interest payments or to accrete the principal amount of the notes. MATURITY Unless earlier redeemed or converted, the notes will mature on , 2014. CONVERSION RIGHTS Unless earlier redeemed by us, at any time prior to the close of business on , 2014, holders of notes may convert their notes (or portions thereof) into a number of shares of our common stock determined by dividing each $50 principal amount of the notes by the initial conversion price of $ , subject to adjustment as described in the section of this prospectus entitled "Description of the Preferred Stock -- Conversion -- Conversion Price Adjustment." This initial conversion price represents an initial conversion rate of approximately shares of our common stock for each $50 principal amount of the notes. Holders may convert notes only in denominations of $50 and multiples of $50. We will not issue fractional shares of our common stock upon conversion of notes. Instead, we will pay a cash adjustment based upon the closing price of our common stock on the last trading day prior to the date of conversion. We will not make any adjustment to the conversion price upon conversion for accrued and unpaid interest on the notes. Our delivery to the holder of the full number of shares of our common stock into which a note is convertible, together with any cash payment for such holder's fractional shares, will be deemed to satisfy our obligation to pay the principal amount of the note and any accrued and unpaid interest. Any accrued and unpaid interest will be deemed paid in full rather than canceled, extinguished or forfeited. If you convert notes after an interest record date and prior to the next interest payment date, the holder of such notes on such interest record date will receive the interest payable on such notes on the next interest payment date, notwithstanding the conversion. However, upon surrender of your notes for conversion, you will have to pay us an amount equal to the amount of interest payable on the next interest payment date in respect of the notes that were surrendered for conversion unless: - the notes have been called for redemption, as described below under the captions "-- Optional Redemption" and "-- Optional Redemption on Change in Control;" or - at the time of conversion, there exists a default in the payment of interest on the notes. In order to convert your notes, you must either: - deliver the note to the specified office of a conversion agent, along with a duly signed and completed notice of conversion and any interest payment that may be required as described in the preceding paragraph; or - if the note is held in global form, comply with the procedures established by DTC for conversion, which you may obtain from your broker or another DTC participant. The conversion date shall be the date on which you deliver your notes, a duly signed and completed notice of conversion and any required interest payment to the conversion agent or, if your notes are held in global form, the date your notes are surrendered for conversion in accordance with the procedures established by DTC. If the notes are called for redemption in whole or in part, as discussed in further detail below, your conversion rights with respect to such notes called for redemption will expire at the close of business on the business day immediately preceding the redemption date, unless we default in the payment of the redemption price together with accrued and unpaid interest to (but not including) the redemption date, in which case you will be permitted to convert the notes until we pay the redemption price and accrued and unpaid interest to (but not including) the redemption date. If you accept a change in control offer with 84 respect to all or part of your notes, as discussed in further detail below under the caption "-- Required Redemption on Change in Control," such notes may not be converted unless you have validly withdrawn your acceptance of the change in control offer. You will not be required to pay any U.S. federal, state or local issuance taxes, or duties or costs incurred by us, in connection with the conversion of the notes or the issuance of the common stock issuable upon conversion. You will, however, be required to pay any tax or other governmental charge payable as a result of the common stock issuable upon conversion being issued in a name other than your name. We will not issue or deliver the common stock unless all such taxes and charges, if any, have been paid by the holder of the converted note. We will at all times reserve and keep available, free from preemptive rights, out of our authorized but unissued shares or treasury shares, for issuance upon the conversion of the notes, a number of shares of our authorized but unissued common stock that will from time to time be sufficient to permit the conversion of all outstanding notes. Before the delivery of any securities that we will be obligated to deliver upon conversion of the notes, we will comply with all applicable federal and state laws and regulations that require action to be taken by us. All of our common stock delivered upon conversion of the notes will upon delivery be duly authorized, validly issued, fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights. Except as described in this section, the conversion provisions of the notes will be substantially similar to the conversion provisions of the preferred stock. See the section of this prospectus entitled "Description of the Preferred Stock -- Conversion -- Conversion Rights" above for more information. SUBORDINATION The notes will be our unsecured and subordinated obligations. The notes will rank on a parity in right of payment with all of our existing and future unsecured and subordinated indebtedness. The notes will be subordinate to all of our existing and future senior and unsecured indebtedness, and subordinate to our secured debt to the extent of the value of our assets securing such debt. In addition, the notes will be effectively subordinate to all existing and future liabilities and preferred stock, if any, of our subsidiaries. If payment of the notes is accelerated as a result of an event of default, holders of all of our senior indebtedness will be entitled to payment in full in cash before the holders of the notes will be entitled to receive any payment on the notes. We are required to promptly notify holders of our senior indebtedness if payment of the notes is accelerated because of an event of default. We may not make any payment on the notes if a default in the payment of senior indebtedness occurs and is continuing beyond any grace period. We may resume making payments on the notes: - in the case of a payment default, upon the date on which such default is cured or waived or ceases to exist; and - in the case of any other default, the earlier of the date on which such other default is cured or waived or ceases to exist or 179 days after receipt of the payment blockage notice, unless the maturity of any senior indebtedness is accelerated. No new period of payment blockage arising due to a default other than a payment default may be commenced unless: - 365 days have elapsed since the effectiveness of the immediately prior payment blockage notice; and - all scheduled payments on the notes have been paid in full in cash. 85 No default other than a payment default that existed or was continuing on the date of delivery of any payment blockage notice to the trustee shall be the basis for a subsequent payment blockage notice. By reason of the subordination provisions, in the event of our bankruptcy, dissolution or reorganization, holders of senior indebtedness may receive more, and holders of the notes may receive less, than our other creditors. These subordination provisions will not prevent the occurrence of any event of default under the indenture. "Senior indebtedness" means the principal, premium, if any, and interest on any indebtedness of ISH, including bankruptcy interest, or any other payment on indebtedness, whether outstanding on the date of the indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by us, including all deferrals, renewals, extensions, refundings, amendments, modifications or supplements thereto. However, senior indebtedness does not include indebtedness evidenced by the notes, any liability for federal, state, local or other taxes owed or owing by us, our indebtedness to any of our subsidiaries, any of our trade payables incurred in the ordinary course of business, and any indebtedness in which the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such indebtedness shall not be senior in right of payment to, or is on the same basis with, or is subordinated or junior to, the notes. Included in "senior indebtedness" are our currently outstanding 7 3/4% senior notes due 2007. "Indebtedness" means: (1) all obligations, whether or not contingent: - for borrowed money, whether or not evidenced by a note, debenture, bond, or other written instrument, - evidenced by a note, debenture, bond or other written instrument, - under a lease required to be capitalized on the balance sheet of the lessee under generally accepted accounting principles or under any lease or related document (including a purchase agreement) that provides that we are contractually obligated to purchase or cause a third party to purchase and thereby guarantee a minimum residual value of the leased property to the lessor, and our obligations under such lease or related document to purchase or to cause a third party to purchase such leased property, - in respect of letters of credit, bank guarantees or bankers' acceptances (including reimbursement obligations with respect to any of the foregoing), - with respect to indebtedness secured by a mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or an encumbrance to which our property or assets are subject, whether or not the obligation secured thereby shall have been assumed by, or shall otherwise be, our legal liability, - in respect of the balance of the deferred and unpaid purchase price of any property or assets, and - under interest rate or currency swap agreements, cap, floor and collar agreements, spot and forward contracts and similar agreements and arrangements; (2) with respect to any obligation of others of the type described in clause (1) above or under clause (3) below assumed by or guaranteed in any manner by us or in effect guaranteed by us through an agreement to purchase, contingent or otherwise, and our obligations under any such assumptions, guarantees or other such arrangements; and (3) any and all indebtedness constituting deferrals, renewals, extensions, refinancings and refundings of, or amendments, modifications or supplements to, any of the foregoing. If the trustee or any holder of notes receives any payment or distribution of our assets of any kind in contravention of the indenture, then this payment or distribution will be held by the recipient in trust for 86 the benefit of the holders of senior indebtedness and will be immediately paid or delivered to the holders of senior indebtedness or their representatives. The notes are exclusively our obligations. The payment of dividends and the making of loans and advances to us by any of our current or future subsidiaries may be subject to statutory or contractual restrictions, will depend upon the earnings of those subsidiaries and are subject to various business considerations. Our operations are conducted primarily through our subsidiaries. Our right to receive the assets of any of our subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of the notes to participate in those assets) is effectively subordinated to the claims of that subsidiary's creditors (including trade creditors) and the holders of that subsidiary's preferred stock, if any, except to the extent that we are recognized as a creditor of that subsidiary, in which case our claims would still be subordinate to any security interests in the assets of that subsidiary and any indebtedness of that subsidiary senior to that held by us. As of September 30, 2004, we had approximately $70.9 million of indebtedness outstanding that would have constituted senior indebtedness, including our currently outstanding 7 3/4% senior notes due 2007, and approximately $201.4 million of indebtedness and other liabilities outstanding to which the notes would have been effectively subordinated (including trade and other payables). The indenture will not limit the amount of additional indebtedness, including senior indebtedness, which we can create, incur, assume or guarantee, nor will the indenture limit the amount of indebtedness or other liabilities that any subsidiary can create, incur, assume or guarantee. OPTIONAL REDEMPTION The notes are not redeemable at our option prior to , 2006 except in the event of a change in control as described in the section of this prospectus entitled "Description of the Preferred Stock -- Optional Redemption on Change in Control." On or after that date, we may redeem the notes, at our option, in whole or in part from time to time, for cash at the redemption prices listed below together with accrued and unpaid interest to, but not including, the date fixed for redemption, provided that prior to , 2007, we may redeem the notes only if the closing price of our common stock has exceeded 150% of the conversion price of the notes for at least 20 trading days during any 30-day trading period ending within five trading days prior to notice of redemption.
REDEMPTION YEAR PRICE - ---- ---------- Beginning on , 2006 and ending on , 2007.... $ Beginning on , 2007 and ending on , 2008.... Beginning on , 2008 and thereafter..................
If fewer than all the notes are to be redeemed, the trustee will select the notes or portions thereof to be redeemed in principal amounts of $50 or integral multiples thereof by lot, on a pro rata basis or by another method the trustee deems fair and appropriate. If a portion of a holder's notes is selected for partial redemption and such holder converts a portion of its notes prior to the redemption date, such converted portion shall be deemed to be taken from the portion selected for redemption. If any note is to be redeemed in part only, a new note or notes in a principal amount equal to the unredeemed principal portion will be issued. OPTIONAL REDEMPTION ON CHANGE IN CONTROL Holders of the notes will not be entitled to have the notes redeemed at a premium price in the event of a change in control of our company. Rather, upon the occurrence of a change in control as described in the section of this prospectus entitled "Description of the Preferred Stock -- Optional Redemption on Change in Control," we will have the right, in preference to the repurchase rights of the holders of the notes as described in the subsection entitled "-- Required Redemption on Change in Control" below, to 87 redeem the notes, in whole but not in part, by notice to the holders of the notes mailed at least 30 days and not more than 60 days prior to the date fixed for redemption (which redemption date shall not be later than 60 days following the effective date of the event or circumstance resulting in the change in control), for cash at the redemption prices set forth below, together with accrued and unpaid interest, if any, to, but excluding, the redemption date.
IF THE CHANGE IN CONTROL OCCURS WITHIN THE TWELVE MONTHS PRECEDING , REDEMPTION PRICE - ------------------------------------------ ---------------- 2005................................................. 2006................................................. 2007................................................. 2008................................................. 2009.................................................
MECHANICS OF OPTIONAL REDEMPTION The mechanics of an optional redemption of the notes will be substantially similar to the mechanics of an optional redemption of the preferred stock. See "Description of the Preferred Stock -- Mechanics of Optional Redemption." REQUIRED REDEMPTION ON CHANGE IN CONTROL To the extent we do not elect to redeem all of the outstanding notes upon a change in control as described in the subsection entitled "-- Optional Redemption on Change in Control" above, each holder of notes shall have the right to require us to redeem such holder's notes, in whole or in part, in integral multiples of $50, at a redemption price in cash equal to 100% of the aggregate principal amount thereof, together with accrued and unpaid interest to, but not including, the date fixed for redemption, pursuant to an offer (a "change in control offer") made in accordance with the procedures described below and the other provisions in the indenture. If the change in control redemption date falls after an interest record date and on or before the related interest payment date, holders of the notes to be redeemed at the close of business on that interest record date will be entitled to receive the interest payable on the notes on the corresponding interest payment date. The redemption price payable on such redemption date will not include any amount in respect of interest payable on such interest payment date. The mechanics of a required redemption of the notes upon a change in control will be substantially similar to the mechanics of a required redemption of the preferred stock upon a change in control. For a description of these mechanics and for a discussion of other considerations relevant to a required redemption of the notes upon a change in control, see the section of this prospectus entitled "Description of the Preferred Stock -- Required Redemption on Change in Control." The change in control provisions may in certain circumstances make more difficult or discourage a takeover of us and the removal of our incumbent management. See "Risk Factors." The change in control redemption provisions, however, are not the result of our knowledge of any specific effort: - to accumulate shares of our common stock; - to obtain control of ISH by means of a merger, tender offer, solicitation or otherwise; or - by management to adopt a series of anti-takeover provisions. Our indebtedness imposes limitations on our ability to enter into certain transactions which may constitute a change in control. Moreover, the exercise by the holders of the notes of their right to require us to redeem their notes could cause a default under such indebtedness, even if the change in control itself does not, due to the financial effect of such redemption on us. 88 In addition, our ability to pay cash to redeem the notes upon a change in control may be limited by our then-existing financial resources, the terms of our debt agreements and, since we are a holding company, our ability to obtain funds through dividends from our subsidiaries. Any future credit agreements or other agreements relating to our indebtedness may contain provisions prohibiting the redemption of the notes under certain circumstances, or expressly prohibit our redemption of the notes upon a change in control or may provide that a change in control constitutes an event of default under that agreement. If a change in control occurs at a time when we are prohibited by our debt agreements from redeeming the notes for cash, we could seek the consent of our lenders to redeem the notes or attempt to refinance such debt. If we do not obtain such consent, we would not be permitted to redeem the notes. We will not be required to redeem the notes upon the occurrence of a change in control if: - a third party agrees to purchase the notes upon the occurrence of a change in control in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a redemption of the notes upon the occurrence of a change in control; and - the third party purchases the notes on such basis. If we have insufficient funds to redeem all of the notes tendered to us, the trustee will select the notes to be redeemed in principal amounts of $50 or integral multiples thereof from those tendered for redemption by lot, on a pro rata basis or by another method the trustee deems fair and appropriate in its sole discretion. There can be no assurance that sufficient funds will be available when necessary to make any required redemption. See "Risk Factors." Notwithstanding the occurrence of a change in control, we will not be required to redeem the notes pursuant to a change in control offer in the event we have exercised our right to redeem all of the notes pursuant to our optional redemption rights as described above under the captions "-- Optional Redemption" and "-- Optional Redemption on Change in Control." RESTRICTION ON DIVIDENDS Prior to December 31, 2007, we will not (1) declare, pay or set apart for payment any dividend (excluding dividends or distributions of shares, options, warrants or rights to purchase our common stock) or other distribution with respect to our common stock, or (2) redeem, purchase or otherwise acquire any of our common stock, except in limited circumstances. VOTING RIGHTS Holders of the preferred stock have limited voting rights under certain circumstances as described above in the section of this prospectus entitled "Description of the Preferred Stock -- Voting Rights." As a holder of the notes you will not have the right to vote in the election of our directors or on other matters presented to our stockholders prior to your receipt of our common stock upon conversion of the notes. If a record date for a meeting of our stockholders to be held after you elect to convert your notes has been fixed and falls prior to your conversion date (see "-- Conversion Rights" above), you will not have any voting rights at that meeting with respect to your common stock issuable upon conversion of the notes. EVENTS OF DEFAULT AND REMEDIES The following events are "events of default" under the indenture: - we fail to pay the principal or premium, if any, on the notes when due; - we fail to pay interest on the notes when due and such failure continues for 30 days; - we fail to provide timely notice of a change in control; - we fail to deliver our common stock, together with cash in lieu of any fractional shares, when such common stock and cash is required to be delivered upon conversion of notes and such failure continues for 10 business days; 89 - we fail to perform any covenant in the indenture and such failure continues for 45 days after notice is given in accordance with the indenture; - we, or any of our current or future subsidiaries, fails to pay at maturity, including any applicable grace period, an amount of indebtedness in excess of $5.0 million and such failure continues for 30 days after notice given in accordance with the indenture; - a default by us, or any of our current or future subsidiaries, on any indebtedness that results in the acceleration of indebtedness in an amount in excess of $5.0 million, without the indebtedness being discharged or the acceleration being rescinded or annulled for 30 days after notice given in accordance with the indenture; or - events involving the bankruptcy, insolvency or reorganization of us or any of our current or future subsidiaries, as described in the indenture. The trustee is required to give notice to holders of the notes of all uncured defaults known to the trustee within 90 days after the occurrence of the default. However, the trustee may withhold this notice if it determines in good faith that it is in the best interest of holders of the notes, except notice of a default in the payment of the principal or premium, if any, or interest on the notes, either at maturity, in connection with any redemption or purchase, by acceleration or otherwise. ACCELERATION If an event of default has occurred and is continuing, the trustee or the holders of not less than 25% in aggregate principal amount of the outstanding notes may declare the principal and premium, if any, on the notes and accrued and unpaid interest on the notes to be immediately due and payable. However, if we cure all defaults, except payment defaults on the notes as a result of the acceleration, and we meet certain conditions, this acceleration declaration may be canceled and past defaults may be waived by the holders of a majority of the aggregate principal amount of the outstanding notes. If an event of default resulting from events of bankruptcy, insolvency or reorganization were to occur, all unpaid principal and accrued and unpaid interest on the outstanding notes will become due and payable immediately without any declaration or other act on the part of the trustee or any holders of notes, subject to certain limitations. Holders of a majority of the aggregate principal amount of the outstanding notes may, subject to certain limitations, direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee. The trustee shall be entitled to receive from holders reasonable security or indemnity against any costs, expenses and liabilities incurred by the trustee. Before you may institute a proceeding which respect to the indenture, each of the following must occur: - you must have given the trustee written notice of a continuing event of default; - the holders of at least 25% of the aggregate principal amount of the outstanding notes must make a written request of the trustee to take action because of the default; - holders of the notes must have offered reasonable indemnification to the trustee against the cost, expenses and liabilities of taking action; - the trustee must not have received, from the holders of a majority of the aggregate principal amount of the outstanding notes, a direction inconsistent with such written request; and - the trustee must not have taken action for 60 days after the receipt of such notice and offer of indemnification. These limitations do not apply to a suit for the enforcement of payment of the principal of or premium, if any, or interest on a note, or the right to convert the note into shares of our common stock in accordance with the indenture. 90 Generally, the holders of not less than a majority of the aggregate principal amount of the outstanding notes may waive any default or event of default, except if: - we fail to pay the principal, premium or interest on any note when due; - we fail to convert any note delivered for conversion into our common stock in accordance with the indenture; or - we fail to comply with any of the provisions of the indenture that would require the consent of the holder of each outstanding note affected. We will send the trustee annually a statement as to whether we are in default and the nature of any default under the indenture. LIMITATION ON MERGER, SALE OR CONSOLIDATION We may not consolidate with or merge with or into another person or sell, lease, convey or transfer all or substantially all of our assets on a consolidated basis, whether in a single or series of related transactions, to another person or group of affiliated persons, unless: - either (1) we are the surviving entity or (2) the resulting entity is a U.S. corporation and expressly assumes in writing all of our obligations under the notes and the indenture; - no default or event of default exists or shall occur immediately after giving effect to the transaction; and - other conditions specified in the indenture are satisfied. MODIFICATIONS OF THE INDENTURE Modification Without Consent of Holders. We and the trustee may enter into supplemental indentures without the consent of the holders of the notes to, among other things: - make provision with respect to the conversion rights of the holders of the notes upon the occurrence of an event involving our common stock or the matters described in the section of this prospectus entitled "-- Limitation on Merger, Sale or Consolidation;" - secure the notes; - evidence the assumption by a successor entity of our obligations; - add covenants for the protection of the holders of the notes; - provide for the issuance under the indenture of notes in coupon form and provide for the exchange of such notes with the notes issued under the indenture in fully registered form; - cure any ambiguity or correct any defect or inconsistency; - evidence the acceptance of appointment by a successor trustee; and - modify, eliminate or add to provisions of the indenture to the extent necessary to effect the qualification of the indenture under the Trust Indenture Act of 1939. Modification With Consent of Holders. We and the trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the outstanding notes, may add any provisions to, or change in any manner or eliminate any of the provisions of, the indenture or modify in any manner the rights of the holders of the notes. However, we and the trustee may not make any of the following changes to the notes without the consent of each holder that would be affected by such change: - extend the maturity date of any note; - reduce the rate or extend the time for payment of interest on any note; 91 - reduce the principal amount or any premium of any note; - reduce any amount payable upon redemption of any note; - change our obligation to redeem any note on a redemption date in a manner adverse to the holders of the notes; - adversely change our obligation to redeem any note upon a change in control; - impair or adversely affect a holder's right to institute suit for the payment of principal, premium or interest on any note; - change the currency in which the notes are payable; - impair or adversely change the right to convert the notes into shares of our common stock; - reduce the number of shares of our common stock or other property receivable by a holder of a note upon conversion; - adversely modify the subordination provisions of the notes; or - reduce the percentage required to consent to modifications, amendments and waivers of defaults. Up to and prior to the close of business on the date of our exchange of the preferred stock for the notes, only the holders of shares of the preferred stock shall be entitled to approve any amendments or supplements to the indenture. Any such vote of the holders of shares of the preferred stock shall require the affirmative vote or consent of the holders of at least 66 2/3% (unless a higher percentage shall then be required by applicable law, the certificate of designations or the indenture) of all outstanding shares of the preferred stock voting separately as a class. SATISFACTION AND DISCHARGE OF THE INDENTURE The indenture will generally cease to be of any further effect with respect to the notes if: - we have delivered to the trustee for cancellation all outstanding notes (with certain limited exceptions); or - all outstanding notes have become due and payable or are by their terms to become due and payable within one year, or all outstanding notes are to be called for redemption within one year, and, in either case, we have deposited with the trustee, in trust, funds sufficient to pay at maturity or upon redemption all of the notes not previously delivered to the trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption, as the case may be; provided that we shall remain obligated (1) until the maturity date of the notes, to issue shares of our common stock upon conversion as described above in the section of this prospectus entitled "-- Conversion Rights," and (2) to pay or cause to be paid all other sums payable under the indenture by us. BOOK-ENTRY ISSUANCE The notes, if and when issued, will be represented by one or more global notes registered in the name of DTC or its nominee as described in the section of this prospectus entitled "Description of the Preferred Stock -- Book-Entry System." The owner of a beneficial interest in a note shall be entitled to exchange any notes represented by the global certificate registered in the name of DTC or its nominee for certificated securities with the same terms only (1) if an event of default with respect to such notes has occurred and is continuing or (2) under other limited circumstances set forth in the indenture. 92 TAXATION OF NOTES You should read the section of this prospectus entitled "Material U.S. Federal Income Tax Considerations" below for a discussion of the U.S. federal income tax consequences that may apply to you as a note holder. GOVERNING LAW The indenture and the notes will be governed by the laws of the State of New York. LISTING OF NOTES It is a condition to our ability to exchange the preferred stock for notes that the notes be listed or approved for listing on one of the following markets: the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange, the New York Stock Exchange or another similar national securities exchange or securities trading market. TRUSTEE We have accepted The Bank of New York as the trustee, paying agent, conversion agent, registrar and custodian for the notes. We may maintain deposit accounts and conduct other banking transactions with the trustee or its affiliates in the ordinary course of business. In addition, the trustee and its affiliates have provided, and may in the future provide, banking and other services to us in the ordinary course of their business. If there is an event of default under the indenture, the trustee will: - exercise the rights and powers given to the trustee under the indenture; and - use the same degree of care and skill in its exercise of such rights and powers as a prudent person would exercise under the circumstances in the conduct of the person's own affairs. If the trustee becomes one of our creditors, the indenture and the Trust Indenture Act of 1939 may limit the trustee from obtaining payment of claims in certain cases or realizing on certain property received by the trustee. 93 DESCRIPTION OF INDEBTEDNESS At September 30, 2004, our consolidated outstanding indebtedness aggregated $197.9 million (including guarantees of indebtedness of our subsidiaries of $31.8 million). Such amount included (1) $70.9 million of our 7 3/4% senior notes; (2) $5.7 million in Title XI loans guaranteed by the U.S. government bearing interest at fixed rate of 8.30% per annum; and (3) $89.5 million in loans bearing interest at variable rates ranging from 3.00% to 3.09% per annum and averaging 3.08% per annum. Six vessels with an aggregate net book value of $161.6 million as of September 30, 2004, and 550 of our LASH barges having an aggregate net book value of $3.8 million as of September 30, 2004, are mortgaged as security for certain of our debt agreements. Additional collateral includes a security interest in certain of our operating contracts and receivables, which accounted for approximately 30.7% of our total revenues in 2003. Our remaining indebtedness is unsecured. Most of our debt agreements impose defined minimum working capital and net worth requirements, leverage requirements, and prohibit us from incurring, without prior written consent, additional debt or lease obligations, subject to certain exceptions. The indenture governing our 7 3/4% senior notes prohibits various categories of restricted payments, including, without limitation, the declaration or payment of dividends, unless (1) no default of event of default has occurred and is continuing, (2) immediately before and after giving effect to such payment, on a pro forma basis, we could incur $1.00 of additional indebtedness under the provisions of the indenture (other than permitted indebtedness), and (3) the aggregate amount of all restricted payments declared or made after January 22, 1998, may not exceed the sum of (a) 50% (or, in case of a loss, minus 100%) of our consolidated net income during the period from January 1, 1998 through the last day of the fiscal quarter ending prior to the date of the proposed payment, plus (b) the aggregate net proceeds received after January 22, 1998 by us as capital contributions, plus (c) the aggregate net proceeds received after January 22, 1998 by us from the issuance or sale of shares of capital stock or options or warrants to purchase shares of capital stock, plus (d) the aggregate net proceeds received after January 22, 1998 by us upon the exercise of any options or warrants to purchase shares of capital stock, plus (e) the aggregate net proceeds received after January 22, 1998 by us from debt securities that have been converted into or exchanged for capital stock, plus (f) $10,000,000. Certain of our loan agreements also restrict the ability of our subsidiaries to pay dividends or make loans or advances to us. The most restrictive of those agreements is the agreement governing our Title XI loan to Sulphur Carriers, Inc. That agreement prohibits Sulphur Carriers, Inc., our wholly-owned subsidiary, from paying dividends or making loans or advances to us, unless certain financial conditions are met and certain financial ratios are maintained. As long as these conditions are met and ratios are maintained, there is no restriction on loans or advances to us from that subsidiary, but dividends are restricted to 40% of undistributed earnings. However, because we will repay the loan prior to the end of 2004, those restrictions will be eliminated at the time of repayment. Certain other loan agreements restrict the ability of our subsidiaries to dispose of collateralized assets or any other asset which is substantial in relation to our assets taken as a whole without the approval from the lender. For further information, see note C to our consolidated financial statements included elsewhere in this prospectus. At September 30, 2004, we had a $15 million line of credit available to meet short-term requirements when fluctuations occur in our working capital. As of September 30, 2004, we had $14.7 million available on this line of credit. On December 6, 2004, we replaced this facility with a new $50 million revolving credit facility, which we drew $20.0 million on in early December 2004 to purchase two used vessels (see "Prospectus Summary -- Recent Developments -- Vessel Purchase Agreement"). Whitney National Bank and Hibernia National Bank are the lenders under our new credit facility, which is currently secured by one of our vessels, its earnings and insurances, and a pledge of the stock of a company of which we own 30%. A second vessel and its earnings and insurances will be pledged to secure the credit facility in early 2005. Interest on all borrowings under the credit facility is based upon the one-month London Interbank 94 Offered Rate (LIBOR) plus 1.5% or 2.0% per annum (determined based upon a financial ratio). Our new credit facility, which will expire on December 6, 2009, contains affirmative and negative covenants customary for a secured credit facility, as well as customary financial maintenance covenants and events of default. Upon the occurrence of an event of default under our new credit facility, all amounts payable under the facility may be accelerated and/or the lenders' commitments may be terminated. As of the date of this prospectus, we had $30.0 million available under our new credit facility. A copy of our new credit facility is filed as an exhibit to the registration statement of which this prospectus forms a part. Under certain of the loan agreements described above, deposits were made into bank retention accounts to meet the requirements of the applicable agreements. Amounts deposited at September 30, 2004 totaled $202,265. Additionally, under certain operating lease agreements of one of our subsidiaries, deposits were made into bank reserve accounts to meet the requirements of the lease agreements. The owners of the vessels have the ability to draw on these amounts to cover operating lease payments if such payments become overdue. The amounts in the reserve accounts totaled $6,340,561 at September 30, 2004. We had no commodity swap agreements in place at September 30, 2004. 95 DESCRIPTION OF COMMON STOCK GENERAL As of the date of this prospectus, our certificate of incorporation authorized us to issue up to 10,000,000 shares of common stock, par value $1.00 per share, and up to 1,000,000 shares of preferred stock, par value $1.00 per share. As of September 30, 2004, 6,082,887 shares of our common stock and no shares of preferred stock were outstanding. In addition, as of September 30, 2004, options to purchase an aggregate 475,000 shares of our common stock were outstanding, all of which had an exercise price of $14.125 per share. Our common stock is listed on the New York Stock Exchange under the symbol "ISH." VOTING RIGHTS Each holder of our common stock is entitled to one vote for each share of common stock held of record on all matters as to which stockholders are entitled to vote. Holders of our common stock may not cumulate votes for the election of directors. DIVIDENDS Subject to the preferences accorded to the holders of any series of preferred stock if and when issued by our board of directors, including the preferred stock being offered hereby, holders of our common stock are entitled to dividends at such times and in such amounts as our board of directors may determine, subject to funds being legally available for the payment of dividends and the restrictions imposed by certain of our debt agreements, including the indenture governing our 7 3/4% senior notes due 2007. In addition, the certificate of designations that will govern the preferred stock and the indenture that will govern the notes will prohibit us from declaring or paying dividends on our common stock prior to December 31, 2007. See "Dividend Policy." We have not paid cash dividends on our common stock since 2001 and do not anticipate paying cash dividends on our common stock in the foreseeable future, although we will consider paying cash dividends on our common stock once the certificate of designations governing the preferred stock, the indenture governing the notes, our credit agreements and our earnings levels allow us to do so. OTHER RIGHTS In the event of a voluntary or involuntary liquidation, dissolution or winding up of our company, prior to any distributions to the holders of our common stock, our creditors and the holders of the preferred stock being offered hereby and the holders of any additional series of our preferred stock that may be outstanding at the time, will receive any payments to which they are entitled in preference to any payments with respect to our common stock. Subsequent to those payments, the holders of our common stock will share ratably, according to the number of shares held by them, in our remaining assets, if any. Shares of our common stock are not redeemable and have no subscription, conversion or preemptive rights. OTHER PROVISIONS Restrictions on Foreign Ownership. Our certificate of incorporation contains provisions that permit our board of directors to restrict the acquisition of our capital stock by non-U.S. citizens (including corporations and other entities controlled by non-U.S. citizens). The purpose of these provisions is to ensure our continued compliance with certain laws governing our operations, our molten sulphur transportation contract and our Title XI financing arrangements, which require us to be as much as 75% owned by U.S. citizens. Under these provisions, our board of directors may, in the event of a transfer of our capital stock that would result in non-U.S. citizens owning more than 23% (the "permitted amount") of our total voting power, declare such transfer to be void and ineffective. In addition, our board of directors may, in its sole discretion, deny voting rights and withhold dividends with respect to any shares of 96 our capital stock owned by non-U.S. citizens in excess of the permitted amount. Furthermore, our board of directors is entitled under our certificate of incorporation to redeem shares owned by non-U.S. citizens in excess of the permitted amount in order to reduce the ownership of our capital stock by non-U.S. citizens to the permitted amount. These provisions could prevent or discourage a merger, tender offer or proxy contest involving us and a non-U.S. citizen, and could impede an attempt by a non-U.S. citizen to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders and might provide our stockholders with the opportunity to sell their shares of our capital stock at a premium over prevailing market prices. Delaware Section 203. We are subject to Section 203 of the Delaware General Corporation Law, which imposes a three-year moratorium on the ability of Delaware corporations to engage in a wide range of specified transactions with any interested stockholder. An interested stockholder includes, among other things, any person other than the corporation and its majority-owned subsidiaries who owns 15 percent or more of any class or series of stock entitled to vote generally in the election of directors. However, the moratorium will not apply if, among other things, the transaction is approved by: - the corporation's board of directors prior to the date the interested stockholder became an interested stockholder; or - the holders of two-thirds of the outstanding shares of each class or series of stock entitled to vote generally in the election of directors, not including those shares owned by the interested stockholder. Special Meetings of the Stockholders. Our bylaws provide that special meetings of stockholders may be called only by either (1) the Chairman of our board of directors, (2) our President, (3) our Secretary or (4) by a vote of the majority of our board of directors. Our stockholders do not have the power to call a special meeting. Limitation of Directors' Liability. Our certificate of incorporation contains provisions eliminating the personal liability of our directors to our company and our stockholders for monetary damages for breaches of their fiduciary duties as directors to the fullest extent permitted by Delaware law. Under Delaware law and our certificate of incorporation, our directors will not be liable for a breach of his or her duty except for liability for: - a breach of his or her duty of loyalty to our company or our stockholders; - acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - dividends or stock repurchases or redemptions that are unlawful under Delaware law; and - any transaction from which he or she receives an improper personal benefit. These provisions pertain only to breaches of duty by directors as directors and not in any other corporate capacity, such as officers. In addition, these provisions limit liability only for breaches of fiduciary duties under Delaware corporate law and not for violations of other laws such as the federal securities laws. As a result of these provisions in our certificate of incorporation, our stockholders may be unable to recover monetary damages against directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties. However, our stockholders may obtain injunctive or other equitable relief for these actions. These provisions also reduce the likelihood of derivative litigation against directors that might have benefited our company. We believe that these provisions are necessary to attract and retain qualified individuals to serve as our directors. In addition, these provisions will allow directors to perform their duties in good faith without concern for monetary liability if a court determines that their conduct was negligent or grossly negligent. 97 MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS The following summary of the material U.S. federal income tax consequences of acquiring, owning and disposing of the preferred stock, the notes and our common stock is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations, court decisions, and Internal Revenue Service ("IRS") rulings and pronouncements now in effect, all of which are subject to differing interpretations and which are subject to change, possibly on a retroactive basis. This summary assumes that the preferred stock is acquired at its original offering at its original issue price and that the preferred stock, the notes and our common stock are held as capital assets, within the meaning of section 1221 of the Code. This summary does not address all of the tax consequences that may be relevant to particular holders in light of their personal circumstances, or to certain types of holders (such as banks, financial institutions, dealers in securities or commodities, traders in securities that elect to use a mark to market method of accounting for their holdings, insurance companies, regulated investment companies, personal holding companies, corporations subject to the alternative minimum tax, tax-exempt organizations, pension funds, certain U.S. expatriates, partnerships or other entities classified as partnerships for U.S. federal income tax purposes, certain hybrid entities and their owners, U.S. holders who have a "functional currency" other than the U.S. dollar, persons who own 10% or more of our voting stock, or persons who hold the preferred stock, the notes or our common stock as positions in a "straddle" or as part of a "hedging," "conversion" or "constructive sale" transaction for United States federal income tax purposes). Also not addressed are the consequences under estate, state, local and foreign tax laws or the tax consequences to subsequent holders of the preferred stock, the notes or our common stock. We have not sought and will not seek any rulings from the IRS concerning the tax consequences of the acquisition, ownership or disposition of the preferred stock, the notes or the common stock. Accordingly, the IRS may successfully challenge the tax consequences described below. Prospective purchasers are advised to consult their own tax advisors regarding the tax consequences of acquiring, holding, or disposing of the preferred stock, the notes or our common stock in light of their own investment circumstances. CHARACTERIZATION OF THE PREFERRED STOCK AND THE NOTES Under section 385(c) of the Code, our characterization of the preferred stock as "stock" and the notes as "debt" is binding upon us and all holders of the preferred stock and the notes, other than holders who disclose on their tax returns that they are treating the preferred stock and/or the notes in a manner inconsistent with such characterization. Although our characterization of the preferred stock and the notes is not binding upon the IRS or any court, this summary assumes that the preferred stock and the notes will be treated in a manner consistent with our characterization. Holders should be aware that if the preferred stock is treated as "debt" for federal income tax purposes, the tax consequences of acquiring, holding and disposing of the preferred stock will differ materially from the tax consequences described in this prospectus. Similarly, if the notes are treated as "stock" for federal income tax purposes, the tax consequences of acquiring, holding and disposing of the notes will differ materially from the tax consequences described in this prospectus. DISTRIBUTIONS ON THE PREFERRED STOCK AND OUR COMMON STOCK Distributions with respect to the preferred stock and our common stock will constitute dividends, to the extent that we have current or accumulated earnings and profits for federal income tax purposes as of the end of the tax year of the distribution. Dividends paid to non-corporate U.S. holders in taxable years beginning prior to January 1, 2009, will be subject to tax as net capital gain at the maximum rate of 15% if the holder has held the shares of stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and other requirements applicable to "qualified dividend income" are satisfied. Dividends paid to corporations will generally be eligible for the 70% dividends-received deduction under section 243 of the Code, subject to the limitations contained in sections 246 and 246A of the Code. 98 In general, the dividends-received deduction is available only if the stock in respect of which a dividend is paid has been held for at least 46 days during the 90-day period beginning on the date which is 45 days before the ex-dividend date, or at least 91 days during the 180-day period beginning on the date which is 90 days before the ex-dividend date in the case of a dividend paid with respect to preferred stock and which is attributable to a period or periods aggregating more than 366 days. A taxpayer's holding period for these purposes is reduced by periods during which the taxpayer's risk of loss with respect to the stock is considered diminished by reason of the existence of options, contracts to sell or other similar transactions. The dividends-received deduction will not be available to the extent that the taxpayer is under an obligation to make related payments with respect to positions in substantially similar or related property. The dividends-received deduction is limited to specified percentages of the holder's taxable income and may be reduced or eliminated if the holder has indebtedness "directly attributable to [its] investment" in the stock. Prospective corporate purchasers of the preferred stock should consult their own tax advisors to determine whether these limitations might apply to them. No assurance can be given that we will have sufficient earnings and profits for federal income tax purposes to cause all or even any distributions from ISH to be taxable as dividends. As a result, no assurance can be given that any distribution on the preferred stock or our common stock will be treated as a dividend for which the dividends-received deduction will be available. If distributions with respect to the preferred stock or our common stock exceed our current and accumulated earnings and profits, the excess will be applied against and reduce the holder's basis in the preferred stock or our common stock, as applicable. Any amount in excess of the amount of the dividend and the amount applied against basis will be treated as capital gain. EXTRAORDINARY DIVIDENDS If a corporate holder of the preferred or our common stock receives an "extraordinary dividend" from ISH with respect to stock which it has not held for more than two years before the dividend announcement date, the basis of the stock will be reduced (but not below zero) by the portion of the dividend which is not taxable because of the dividends-received deduction. If, because of the limitation on reducing basis below zero, any amount of the non-taxable portion of an extraordinary dividend has not been applied to reduce basis, such amount will be treated as gain from the sale or exchange of stock in the taxable year in which the extraordinary dividend is received. An "extraordinary dividend" on the preferred or our common stock would include a dividend that (1) equals or exceeds 5%, in the case of the preferred stock, or 10%, in the case of the common stock, of the holder's adjusted basis in the stock, treating all dividends having ex-dividend dates within an 85-day period as one dividend, or (2) exceeds 20% of the holder's adjusted basis in the stock, treating all dividends having ex-dividend dates within a 365-day period as one dividend. A holder may elect to use the fair market value of the stock rather than its adjusted basis for purposes of applying the 5%, 10% or 20% limitation if the holder is able to establish such fair market value to the satisfaction of the IRS. An "extraordinary dividend" also includes any amount treated as a dividend in the case of a redemption of the preferred stock or our common stock that is not pro rata to all shareholders, irrespective of the holder's holding period of the stock. Special rules apply with respect to "qualified preferred dividends." A qualified preferred dividend is any fixed dividend payable with respect to stock which (1) provides for fixed preferred dividends payable no less often than annually and (2) is not in arrears as to dividends when acquired, provided the actual rate of return on such stock does not exceed 15%. For this purpose, the actual rate of return is determined solely by taking into account dividends during such holding period and by using the lesser of the adjusted basis or the liquidation preference in respect of such preferred stock. Where a qualified preferred dividend exceeds the 5% or 20% limitation described above, the extraordinary dividend rules will not apply if the taxpayer holds the stock for more than five years. If the taxpayer disposes of the stock before it has been held for more than five years, the aggregate reduction in basis will not exceed the excess of the qualified preferred dividends paid on such stock during the period held by the taxpayer over the qualified preferred dividends that would have been paid during such period on the basis of the stated rate of return as determined under section 1059(e)(3) of the Code. The length of time that a taxpayer is deemed to have 99 held stock for this purpose is determined under principles similar to those applicable for purposes of the dividends-received deduction discussed above. Any loss on the sale or exchange of stock with respect to which an individual holder receives an extraordinary dividend that is also qualified dividend income (see "-- Distributions on the Preferred Stock and our Common Stock" above) will be treated as long-term capital loss to the extent of the dividend. The deductibility of capital losses is limited. REDEMPTION PREMIUM If (1) preferred stock is, like the preferred stock, redeemable at the issuer's option, (2) the facts and circumstances on the issue date indicate that redemption is more likely than not to occur, and (3) the redemption price of the preferred stock as of the most likely redemption date exceeds the issue price (so that there is a "redemption premium"), then the redemption premium may be taxable as a constructive dividend to the extent of the issuing corporation's current or accumulated earnings and profits over the period from issuance to the most likely redemption date. If a redemption premium is subject to the foregoing treatment, a holder of the preferred stock would take the amount of the premium into income under an economic accrual method similar to the method described under "Original Issue Discount and Premiums on the Notes," below. Under applicable Treasury regulations, a redemption premium is not subject to the foregoing treatment if it will be paid "as a result of changes in economic or market conditions over which neither the issuer nor the holder has legal or practical control" and is "solely in the nature of a penalty for premature redemption." The Treasury regulations also provide a "safe harbor," pursuant to which a redemption will not be treated as more likely than not to occur, as to a given holder, if (1) the issuer and the holder are not "related" under certain tests prescribed by the Code, (2) the issuer is not effectively required or compelled by any plan, arrangement, or agreement to redeem the stock, and (3) redemption would not reduce the yield of the stock. Because the foregoing tests are based upon an evaluation of all facts and circumstances surrounding the issuance and redemption of preferred stock, the conclusion cannot be entirely certain; however, it is ISH's belief that no part of the premium payable upon redemption of the preferred stock will be treated as a constructive dividend to the holders of the preferred stock. It is also possible that upon an actual redemption, the redemption premium would, together with the other redemption proceeds, be treated as a dividend for federal income tax purposes. See "-- Redemption of the Preferred Stock for Cash" below. REDEMPTION OF THE PREFERRED STOCK FOR CASH A redemption of shares of the preferred stock by ISH for cash will be treated as a distribution taxable as a dividend (and, possibly, an "extraordinary dividend") (see "-- Distributions on the Preferred Stock and our Common Stock" and "-- Extraordinary Dividends" above) to redeeming shareholders to the extent of ISH's current or accumulated earnings and profits unless the redemption: - results in a complete termination of the shareholder's interest in ISH (within the meaning of section 302(b)(3) of the Code); - is "substantially disproportionate" (within the meaning of section 302(b)(2) of the Code) with respect to the holder; or - is "not essentially equivalent to a dividend" (within the meaning of section 302(b)(1) of the Code). In determining whether any of these tests has been met, shares considered to be owned by the holder by reason of the constructive ownership rules set forth in section 318 of the Code, as well as shares actually owned, will be taken into account. If any of the foregoing tests is met, the redemption of shares of the preferred stock for cash will result in taxable gain or loss equal to the difference between the amount of cash received (except cash attributable to accrued, unpaid, declared dividends, which will be taxable as a dividend described above), and the holder's basis in the redeemed shares. Any such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the holding period exceeds one year. 100 Long-term capital gains are taxable at a maximum rate of 15% in the case of individuals and 35% in the case of corporations. The deductibility of capital losses is subject to limitations. EXCHANGE FOR THE NOTES An exchange of shares of the preferred stock for notes will also be subject to the rules of section 302 of the Code described in "-- Redemption of the Preferred Stock for Cash" above. Since a holder of notes will be treated under the constructive ownership rules as owning our common stock into which the notes are convertible, the exchange would not by itself satisfy the "complete termination" test or the "substantially disproportionate" test described above. The "not essentially equivalent to a dividend" test could be met only if the exchange were regarded as resulting in a meaningful reduction in the holder's proportionate interest in ISH. If none of these tests is met, the fair market value of the notes received upon the exchange will be taxable as a dividend (and, in the case of a corporate holder, as an "extraordinary dividend" -- see above) to the extent of ISH's current or accumulated earnings and profits and then would be treated as a return of capital to the extent of the holder's basis in the preferred stock. If the fair market value of the notes exceeds the amounts treated as a dividend and as a return of capital, any such excess would be treated as capital gain. In the event that receipt of the notes is taxable as a dividend, the basis of the notes will be equal to their fair market value as of the date of the exchange. If the holder retains any stock in ISH, the remaining basis in the preferred stock will be transferred to such retained stock. If the holder retains no stock in ISH, it is unclear whether the remaining basis in the preferred stock would be transferred to the notes or would be lost. Under Proposed Treasury regulations, the remaining basis would be treated as a loss recognized on a disposition of the redeemed stock on the date of the redemption, which loss might be taken into account at a later date. These proposed Treasury regulations would only apply to transactions occurring after the date these regulations are finalized and published. For purposes of determining the recognition of gain under the extraordinary dividend basis reduction rules described above, only the basis of the shares of the preferred stock exchanged for the notes would be taken into account. Prospective purchasers should consult their own tax advisors regarding satisfaction of the section 302 tests in their particular circumstances, including the possibility that a sale of a part of the holder's shares of the preferred stock or the notes received might be regarded as reducing the holder's interest in ISH, thereby satisfying one of the tests of section 302(b); in such a case, the shareholder would recognize capital gain or loss on the exchange. For purposes of determining gain or loss, the amount realized by a shareholder would be the issue price of the notes received (see "Original Issue Discount and Premium on the Notes"). Any such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the holding period exceeds one year. Long-term capital gains are taxable at a maximum rate of 15% in the case of individuals and 35% in the case of corporations. The deductibility of capital losses is subject to limitations. The installment method will not be available for reporting such gain in the event that the preferred stock, the notes, or our common stock into which the notes are convertible are traded or readily tradable on an established securities market. ORIGINAL ISSUE DISCOUNT AND PREMIUM ON THE NOTES Stated interest on the notes will be includable in income in accordance with the holder's method of accounting. There is also a risk that the notes will be treated as having original issue discount taxable as interest income as discussed below. If the preferred stock is exchanged for notes at a time when the stated redemption price at maturity of the notes exceeds their issue price by an amount equal to or greater than one-fourth of one percent of the stated redemption price at maturity multiplied by the number of complete years to maturity, the notes will be treated as having original issue discount equal to the entire amount of such excess. Whether or not the exchange of the preferred stock for notes is treated as a dividend under the section 302 tests, the issue price of the notes will depend upon whether the preferred stock or the notes are or will be traded on an established securities market. If the notes are listed on an exchange or are 101 otherwise considered, under Treasury regulations issued under section 1273 of the Code, to be traded on an established securities market at any time during the 60-day period ending 30 days after the date of the exchange, the issue price of the notes will be their fair market value as determined as of the date of the exchange. If the notes are not listed on an exchange or otherwise considered to be traded on an established securities market within such time period, but the preferred stock is so listed or traded, the issue price of the notes will be the fair market value of the preferred stock as of the date of the exchange. If neither the preferred stock nor the notes are listed on an exchange or otherwise considered to be traded on an established securities market within the requisite time period, the issue price of the notes will be their stated principal amount, assuming that the notes bear "adequate stated interest" within the meaning of section 1274 of the Code. If the notes do not bear adequate stated interest, the issue price will be equal to their "imputed principal amount" as determined under section 1274 of the Code. A holder of a note would generally be required to include in gross income (irrespective of the holder's method of accounting) a portion of the original issue discount for each year during which it holds the note even though the cash to which such income is attributable would not be received until maturity or redemption of the note. The amount of any original issue discount included in income for each year would be calculated under a constant yield to maturity formula that would result in the allocation of less original issue discount to the early years of the term of the note and more original issue discount to later years. If the preferred stock is exchanged for notes whose issue price exceeds the amount payable at maturity (or earlier call date, if appropriate), such excess (excluding the amount thereof attributable to the conversion feature) will be deductible by the holder of the notes as amortizable bond premium over the term of the notes (taking into account earlier call dates, as appropriate), under a yield to maturity formula, if an election by the taxpayer under section 171 of the Code is in effect or is made. Such election would apply to all obligations owned or subsequently acquired by the taxpayer during or after the taxable year in which the election is made. The amortizable bond premium will be treated as an offset to stated interest on the notes to the extent thereof and any excess will be allowable as a deduction subject to the following limitation. The amount of any amortized bond premium deduction will be limited to the excess of the holder's interest income inclusions on the note in prior accrual periods over bond premium deductions allowed the holder in such prior periods, and any amount in excess of such limitation will be carried forward as additional bond premium in the next accrual period. If the exchange of the preferred stock for notes is treated as a dividend under the section 302 tests, the basis of the notes will equal their fair market value as of the date of the exchange. If this basis is less than its stated redemption price at maturity, it would appear that a holder will recognize capital gain upon satisfaction of the note at maturity. If the basis of a note exceeds the amounts payable at maturity, a holder should be able to elect to amortize bond premium under the rules discussed above. REDEMPTION OR SALE OF THE NOTES Generally a redemption or sale of the notes will result in taxable gain or loss equal to the difference between the amount of cash and fair market value of other property received and the holder's basis in the notes. To the extent that the amount received is attributable to accrued interest, however, that amount will be taxed as ordinary income. The basis of a holder who received the notes in exchange for shares of the preferred stock will generally be equal to the fair market value of the notes at the time of exchange plus any original issue discount included in the holder's income or minus any premium previously allowed as an offset to interest income on the notes. Such gain or loss will be capital gain or loss and will be long-term gain or loss if the holding period for the notes exceeds one year. Long-term capital gains are taxable at a maximum rate of 15% in the case of individuals and 35% in the case of corporations. The deductibility of capital losses is subject to limitations. If the notes are issued with original issue discount and ISH were found to have had an intention at the time the notes were issued to call them before maturity, any gain realized on a sale, exchange or redemption of notes prior to the maturity would be considered ordinary income to the extent of any unamortized original issue discount for the period remaining to the stated maturity of the notes. ISH 102 cannot predict whether it would have an intention, when and if the notes are issued, to call the notes before their maturity. CONVERSION OF THE PREFERRED STOCK OR THE NOTES INTO OUR COMMON STOCK No gain or loss will generally be recognized upon conversion of shares of the preferred stock or notes into shares of our common stock, except that (1) gain or loss will be recognized to the extent of the difference between the cash paid in lieu of fractional shares of our common stock and the basis of the preferred stock or notes allocable to such fractional shares, (2) ordinary income will be recognized on the conversion of notes to the extent of the shares of our common stock attributable to accrued interest, and (3) if the conversion of the preferred stock takes place when there is a dividend arrearage on the preferred stock and the fair market value of our common stock exceeds the issue price of the preferred stock, a portion of our common stock received might be taxable as a dividend, return of capital or capital gain (see "-- Distributions on the Preferred Stock and our Common Stock" and "-- Extraordinary Dividends" above). Assuming the conversion is not treated as resulting in the payment of a dividend, the basis of our common stock received upon conversion will be equal to the basis of the shares of the preferred stock or the notes converted (less the amount of basis allocable to any fractional share of our common stock for which cash is received), and the holding period of our common stock will include the holding period of the shares of the preferred stock or the notes converted. The basis of any common stock treated as a dividend will be equal to its fair market value on the date of the distribution and its holding period will begin on the day after the conversion. ADJUSTMENT OF CONVERSION PRICE Holders of the preferred stock, the notes or our common stock may be deemed to have received constructive distributions where the conversion ratio or conversion price is adjusted to reflect property distributions with respect to our common stock into which such preferred stock or notes are convertible. Adjustments to the conversion ratio or conversion price made pursuant to a bona fide reasonable adjustment formula which has the effect of preventing the dilution of the interest of the holders of the preferred stock or notes, however, will generally not be considered to result in a constructive distribution of stock. Certain of the possible adjustments provided in the preferred stock and the notes may not qualify as being pursuant to a bona fide reasonable adjustment formula. If such adjustments were made, the holders of the preferred stock or notes might be deemed to have received constructive distributions taxable as a dividend, return of capital or capital gain in accordance with the general rules for the income tax treatment of distributions discussed above in "-- Distributions on the Preferred Stock and our Common Stock" and "-- Extraordinary Dividends." BACKUP WITHHOLDING Under the backup withholding provisions of the Code and applicable Treasury regulations, a holder of the preferred stock, the notes or our common stock may be subject to backup withholding at the rate of 28% with respect to dividends or interest (including original issue discount) paid on, or the proceeds of a sale, exchange or redemption of, the preferred stock, the notes or our common stock, unless (1) such holder is a corporation or comes within certain other exempt categories and when required demonstrates this fact or (2) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding for interest and dividends and otherwise complies with applicable requirements of the backup withholding rules. The amount of any backup withholding from a payment to a holder will be allowed as a credit against the holder's federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS. SPECIAL TAX RULES APPLICABLE TO FOREIGN HOLDERS For purposes of the following discussion, a "Foreign Holder" is any holder who is not (1) a citizen or resident of the United States, (2) a corporation or partnership (including any entity treated as a corporation or partnership for U.S. federal income tax purposes) created or organized in or under the laws 103 of the United States, any State or any political subdivision thereof, (3) an estate the income of which is subject to United States federal income taxation regardless of source, or (4) a trust if such trust elects to be treated as a U.S. person for U.S. federal income tax purposes, or a trust (a) over the administration of which a court within the United States is able to exercise primary supervision and (b) all substantial decisions of which one or more United States persons have the authority to control. Income received by a Foreign Holder in the form of dividends on the preferred stock or our common stock or interest and original issue discount on the notes will be subject to a United States federal withholding tax at a 30% rate upon the actual payment of the dividends, interest or principal representing original issue discount except as described below and except where an applicable tax treaty provides for the reduction or elimination of such withholding tax. Dividends paid to Foreign Holders outside the United States that are subject to the withholding tax described above will generally be exempt from United States backup withholding tax but will be subject to United States information reporting requirements. Pursuant to a tax treaty or other agreement, this information may also be made available to the tax authorities in the country in which the Foreign Holder resides. A Foreign Holder generally will be taxable in the same manner as a United States person with respect to dividend, interest and original issue discount income if such income is effectively connected with the conduct of a trade or business in the United States, and if provided in a tax treaty, attributable to a permanent establishment in the United States. Such effectively connected income received by a Foreign Holder that is a corporation may in certain circumstances be subject to an additional "branch profits tax" at a 30% rate, or if applicable, a lower treaty rate. In order to claim the benefit of a tax treaty or to claim exemption from withholding because the income is effectively connected with the conduct of a trade or business in the U.S., a Foreign Holder must provide a properly executed IRS Form W-8BEN for treaty benefits or W-8ECI for effectively connected income (or such successor form as the IRS designates), prior to the payment of dividends. These forms must be periodically updated. Foreign Holders may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund. If a Foreign Holder holds the preferred stock or our common stock through a foreign partnership or a foreign intermediary, the foreign partnership or foreign intermediary will also be required to comply with certain certification requirements. The rules regarding withholding are complex, are subject to change, and vary depending on your particular situation. We suggest that you consult with your tax advisor regarding the application of such rules to your situation. Payments of interest and principal representing original issue discount on the notes received by a Foreign Holder will not be subject to United States federal withholding tax provided that (1) the Foreign Holder does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of ISH entitled to vote, and (2) the holder is not a controlled foreign corporation that is related to ISH through stock ownership, and in general, either (a) ISH or its paying agent can reliably associate the payment with documentation upon which it can rely to treat the payment as made to a foreign beneficial owner under Treasury regulations issued under section 1441 of the Code; (b) ISH or its paying agent can reliably associate the payment with a withholding certificate from a person claiming to be a withholding foreign partnership and the foreign partnership can reliably associate the payment with documentation upon which it can rely to treat the payment as made to a foreign beneficial owner in accordance with such Treasury regulations; (c) ISH or its paying agent can reliably associate the payment with a withholding certificate from a person representing to be a "qualified intermediary" that has assumed primary withholding responsibility under such Treasury regulations and the qualified intermediary can reliably associate the payment with documentation upon which it can rely to treat the payment as made to a foreign beneficial owner in accordance with its agreement with the IRS; or (d) ISH or its paying agent receives a statement, under penalties of perjury from an authorized representative of a financial institution stating that the financial institution has received from the beneficial owner a withholding certificate described in such Treasury regulations or that it has received from another financial institution a similar statement that it, or another financial institution acting on behalf of the beneficial owner, has received such a withholding certificate from the beneficial owner. In general, it will not be necessary for a Foreign Holder to obtain or furnish a United States taxpayer identification number to ISH or its paying agent in order to claim the foregoing exemption from United States withholding tax on payments of interest and original issue discount. 104 Provided that ISH is not, and has not been, a "United States real property holding corporation" within the meaning of section 897(c) of the Code, a Foreign Holder generally will not be subject to United States federal income or withholding tax on gain realized on the sale or exchange of the preferred stock, our common stock, or the notes unless (1) the holder is an individual who is present in the United States for 183 days or more during the taxable year and as to whom such gain is from United States sources or (2) the gain is effectively connected with a United States trade or business of the holder, and if required by a tax treaty, attributable to a permanent establishment in the United States. Upon a redemption of the preferred stock for cash or an exchange of the preferred stock for notes, ISH may be required to withhold tax on the entire amount of the proceeds at a 30% rate or lower treaty rate applicable to dividends unless a Foreign Holder is able to demonstrate to the satisfaction of ISH that such redemption or exchange satisfies the section 302 tests discussed above with respect to such Foreign Holder (see "Redemption of the Preferred Stock for Cash" and "Exchange for the Notes" above). In the case of an exchange of the preferred stock for the notes, this would result in a Foreign Holder receiving a reduced principal amount of the notes. The payment of the proceeds of the sale of the preferred stock, our common stock or the notes to or through the United States office of a broker will be subject to information reporting and possible backup withholding at a rate of 28% unless the owner certifies its non-United States status under penalties of perjury or otherwise establishes an exemption in accordance with applicable Treasury regulations. The payment of the proceeds of the sale of the preferred stock, our common stock or the notes to or through the foreign office of a foreign broker generally will not be subject to information reporting or backup withholding. In the case of the payment of proceeds from the disposition of the preferred stock, our common stock or the notes through a foreign office of a broker that is a United States person or a "United States related person," the applicable Treasury regulations require information reporting, but not backup withholding, on the payment unless the broker has documentary evidence in its files that the owner is a non-United States person and the broker has no actual knowledge to the contrary. For this purpose, a "United States related person" is (1) a "controlled foreign corporation" for United States federal income tax purposes, (2) a foreign person 50% or more of whose gross income from all sources for a specified period is derived from activities that are effectively connected with the conduct of a United States trade or business or (3) a foreign partnership that, at any time during its taxable year, is more than 50% owned by United States persons or is engaged in the conduct of a United States trade or business. Any amounts withheld under the backup withholding rules from a payment to a Foreign Holder will be allowed as a refund or a credit against such Foreign Holder's United States federal income tax, provided that the required information is timely furnished to the IRS. 105 UNDERWRITING We have entered into an underwriting agreement with Ferris, Baker Watts, Incorporated, which is referred to in this section and elsewhere in this prospectus as "the underwriter." Subject to the terms and conditions contained in the underwriting agreement between us and the underwriter, we have agreed to sell to the underwriter, and the underwriter has agreed to purchase from us, all of the 800,000 shares of the preferred stock being offered pursuant to this prospectus. This offering will be underwritten on a firm commitment basis. The underwriter proposes to offer shares of the preferred stock directly to the public at the public offering price set forth on the cover page of this prospectus. Any shares sold by the underwriter to securities dealers will be sold at the public offering price less a selling concession not in excess of $ per share. The underwriter may allow, and these selected dealers may re-allow, a concession of not more than $ per share to other brokers and dealers. After the shares of the preferred stock are released for sale to the public, the offering price and other selling terms may, from time to time, be changed by the underwriter. The underwriter's obligations to purchase shares of the preferred stock are subject to conditions contained in the underwriting agreement. The underwriter is obligated to purchase all of the shares of the preferred stock that it has agreed to purchase under the underwriting agreement, other than those covered by the over-allotment option, if it purchases any shares. The offering of the shares of the preferred stock is made for delivery when, as and if accepted by the underwriter and subject to prior sale and to withdrawal, cancellation and modification of the offering without notice. The underwriter reserves the right to reject any order for the purchase of shares of the preferred stock. Except for this offering and the related financial advisory services described below, the underwriter has not engaged in any investment banking or other commercial dealings with us. UNDERWRITING DISCOUNT AND FINANCIAL ADVISORY FEE The following table summarizes the underwriting discount and financial advisory fee to be paid to the underwriter by us:
TOTAL, WITHOUT TOTAL, WITH OVER-ALLOTMENT OVER-ALLOTMENT PER SHARE EXERCISE EXERCISE --------- -------------- -------------- Underwriting Discount.......................... $ $ $ Financial Advisory Fee......................... $ $ $
We have agreed to pay the financial advisory fee to the underwriter for services provided to us in connection with evaluating financing alternatives and consulting regarding our capital structure. OVER-ALLOTMENT OPTION We have granted to the underwriter an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to an aggregate of 80,000 additional shares of the preferred stock at the public offering price, less the underwriting discount and financial advisory fee payable to the underwriter, listed on the cover page of this prospectus solely to cover over-allotments, if any. To the extent that the underwriter exercises the option, the underwriter will become obligated, as long as the conditions of the underwriting agreement are satisfied, to purchase such additional shares of the preferred stock. We will be obligated, pursuant to the option, to sell such additional shares of the preferred stock to the underwriter to the extent the option is exercised. If any additional shares of the preferred stock are purchased pursuant to the option, the underwriter will offer the additional shares on the same terms as those on which the other shares are being offered hereby. LOCK-UP AGREEMENTS We and our directors and executive officers have agreed that, for a period of 60 days from the date of this prospectus, we and they will not, without the prior written consent of the underwriter, dispose of or 106 hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock. The underwriter in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice. INDEMNIFICATION We have agreed to indemnify the underwriter against certain civil liabilities, including certain civil liabilities under the Securities Act of 1933, or to contribute to payments the underwriter may be required to make in respect of any of these liabilities. STABILIZATION, SHORT POSITIONS AND PENALTY BIDS In connection with the offering, the underwriter may engage in over-allotment, syndicate-covering transactions, stabilizing transactions and penalty bids or purchases for the purpose of stabilizing, maintaining or otherwise affecting the price of the preferred stock. These syndicate-covering transactions, stabilizing transactions and penalty bids may have the effect of raising or maintaining the market price of the preferred stock above that which might otherwise prevail in the open market or preventing or retarding a decline in the market price of the preferred stock. The imposition of a penalty bid may also affect the price of the preferred stock to the extent that it discourages resales. These transactions may be effected on the New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time. Neither we nor the underwriter make any representation or prediction as to the magnitude or effect of any such transaction. In addition, neither we nor the underwriter make any representation that the underwriter will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice. LEGAL MATTERS Certain legal matters with respect to the preferred stock, the notes and our common stock will be passed upon for us by Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P., New Orleans, Louisiana. Certain legal matters in connection with this offering will be passed upon for the underwriter by Venable LLP, Baltimore, Maryland. EXPERTS Our consolidated financial statements as of December 31, 2003 and 2002, and for each of the two years in the period ended December 31, 2003, appearing in this prospectus and the registration statement of which this prospectus forms a part have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. Our consolidated financial statements as of and for the year ended December 31, 2001 have been audited by Arthur Andersen LLP, independent public accountants, as stated in their report appearing herein. In June 2002, our board of directors, at the recommendation of our audit committee, approved the appointment of Ernst & Young LLP as our independent registered public accounting firm to audit our financial statements for fiscal year 2002. Ernst & Young LLP replaced Arthur Andersen, which served as our independent auditors since our formation as International Shipholding Corporation in 1978. The decision to change auditors was not the result of any disagreement between Arthur Andersen and us on any matter of accounting principle or practice, financial statement disclosure or auditing scope or procedure. For a discussion of certain risks associated with Arthur Andersen's audit of our consolidated financial statements, see the section of this prospectus entitled "Risk Factors -- Other Risks." 107 WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. You can read and copy that information at the public reference room of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for more information about the public reference room. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding registrants, like us, that file reports with the SEC electronically. The SEC's Internet address is http://www.sec.gov. Our website is located at www.intship.com. The information on our website is not part of this prospectus. 108 GLOSSARY Aggregate Vessel Capacity -- The aggregate gross tonnage carrying capacity of our fleet, excluding its LASH barges and its towboats. Bareboat Charter -- A "net lease" in which the charterer takes full operational control over the vessel for a specified period of time (usually medium- to long-term) for a specified daily rate that is generally paid monthly to the vessel owner. The bareboat charterer is solely responsible for the operation and management of the vessel and must provide its own crew and pay all operating and voyage expenses. Breakbulk Vessel -- An ocean-going vessel that transports general cargo in its hold without first loading such cargo in separate containers. Loading and unloading of a breakbulk vessel requires shoreside assistance. Bulk Cargo -- Cargo stowed unpackaged in a vessel's hold, not enclosed in any container such as a box, bale, bag or cask and not subject to mark or count. Cape-Size Bulk Carrier -- A vessel defined as having a moulded breadth (beam) in excess of 32.2 meters and a size exceeding 80,000 DWT. A vessel that exceeds those size limitations cannot make use of the Panama Canal and therefore may cross South America only by rounding Cape Horn. Container Ships -- Vessels that are designed to transport multi-purpose standard sized cargo containers that can also be transported by trucks or rail cars. Contract of Affreightment -- A contract by which the vessel owner undertakes to provide space on a vessel for the carriage of specified goods or a specified quantity of goods on a single voyage or series of voyages over a given period of time between named ports (or within certain geographical areas) in return for the payment of an agreed amount per unit of cargo carried. Generally, the vessel owner is responsible for all operating and voyage expenses. Drydock -- A large, submersible dock in the form of a basin from which the water can be emptied, into which a ship is taken for cleaning and repair of underwater surfaces. DWT -- Deadweight tons; the aggregate weight of the cargo, fuel and ballast that a vessel may legally carry. FLASH Vessel -- A non-self propelled LASH vessel used to move LASH barges between a large LASH vessel and locations other than the main loading and unloading ports. Gross Voyage Profit -- Total revenues less voyage expenses and vessel and barge depreciation. Jobs Creation Act -- The American Jobs Creation Act of 2004. LASH Vessel -- An ocean-going vessel that can pick up and drop off barges (or lighters) with its own gantry crane and without assistance from shoreside facilities. Liner Service -- Operation of a vessel on an established trade route with regularly scheduled sailing dates. The vessel owner receives revenue for the carriage of cargo within the established trading area and pays the operating and voyage expenses incurred. Long-Term Charter/Long-Term Contract -- A charter or contract with a duration of more than five years. MarAd -- U.S. Maritime Administration, an agency of the U.S. Department of Transportation. Medium-Term Charter/Medium-Term Contract -- A charter or contract with a duration of three to five years. MSA -- The Maritime Security Act of 1996. MSC -- Military Sealift Command, a branch of the U.S. Department of Defense that awards contracts for the transportation of military supplies. G-1 MSP -- Maritime Security Program; a subsidy program for U.S. flag vessels pursuant to the Maritime Security Act of 1996. Multi-Purpose Vessel -- A vessel capable of transporting both containerized and bulk cargo. Pure Car/Truck Carrier (or PCTC) -- A vessel specially designed to carry automobiles, trucks and other rolling stock. Roll-On/Roll-Off Vessel (or RO/RO) -- An ocean-going vessel designed to load and unload vehicles by driving them on and off the vessel. Generally a roll-on/roll-off vessel can also carry containers. SPVs -- Special purpose vessels. Time Charter -- A contract in which the charterer obtains the right for a specified period to direct the movements and utilization of the vessel in exchange for payment of a specified daily rate, generally paid semi-monthly, but the vessel owner retains operational control over the vessel. Typically, the owner fully equips the vessel and is responsible for normal operating expenses, repairs, wages and insurance, while the charterer is responsible for voyage expenses, such as fuel, port and stevedoring expenses. Title XI Guaranteed Loan -- A loan for the purchase or construction of marine equipment, the repayment of which is guaranteed by the United States government in return for a small fee. Such guarantee is secured by vessel mortgages in favor of the government. Because of the government guarantee, such loans are issued at lower interest rates than would otherwise be available. G-2 INDEX TO FINANCIAL STATEMENTS
PAGE ---- UNAUDITED FINANCIAL STATEMENTS Consolidated Condensed Statements of Income for the Three Months Ended September 30, 2004 and September 30, 2003 and Nine Months Ended September 30, 2004 and September 30, 2003...................................................... F-2 Consolidated Condensed Balance Sheets as of September 30, 2004 and December 31, 2003................................ F-3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and September 30, 2003........... F-5 Notes to Consolidated Condensed Financial Statements........ F-6 AUDITED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm..... F-13 Report of Independent Public Accountants.................... F-14 Consolidated Statements of Income for the Years Ended December 31, 2003, December 31, 2002 and December 31, 2001...................................................... F-15 Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002......................................... F-16 Consolidated Statements of Changes in Stockholders' Investment for the Years Ended December 31, 2003, December 31, 2002 and December 31, 2001............................ F-18 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, December 31, 2002 and December 31, 2001...................................................... F-19 Notes to Consolidated Financial Statements.................. F-20
F-1 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- (ALL AMOUNTS IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED) Revenues..................................... $ 68,797 $ 63,550 $ 199,483 $ 195,861 Operating Expenses: Voyage Expenses............................ 58,675 51,905 162,436 153,729 Vessel and Barge Depreciation.............. 4,731 5,287 14,054 15,079 ---------- ---------- ---------- ---------- Gross Voyage Profit.......................... 5,391 6,358 22,993 27,053 ---------- ---------- ---------- ---------- Administrative and General Expenses.......... 3,903 3,561 11,676 11,379 (Gain) Loss on Sale of Other Assets.......... -- (247) 7 (290) ---------- ---------- ---------- ---------- Operating Income............................. 1,488 3,044 11,310 15,964 ---------- ---------- ---------- ---------- Interest and Other: Interest Expense........................... 2,574 2,962 7,922 9,614 Loss on Sale of Investment................. -- -- 623 -- Investment Income.......................... (177) (119) (506) (649) Other Loss................................. -- 103 -- -- Loss on Early Extinguishment of Debt....... -- 2,570 46 1,310 ---------- ---------- ---------- ---------- 2,397 5,516 8,085 10,275 ---------- ---------- ---------- ---------- (Loss) Income Before (Benefit) Provision for Income Taxes and Equity in Net Income of Unconsolidated Entities.................... (909) (2,472) 3,225 5,689 ---------- ---------- ---------- ---------- (Benefit) Provision for Income Taxes: Current.................................... (79) (164) 131 -- Deferred................................... (189) (661) 1,158 2,011 State...................................... 8 30 21 98 ---------- ---------- ---------- ---------- (260) (795) 1,310 2,109 ---------- ---------- ---------- ---------- Equity in Net Income of Unconsolidated Entities (Net of Applicable Taxes)......... 869 33 3,030 260 ---------- ---------- ---------- ---------- Net Income (Loss)............................ $ 220 $ (1,644) $ 4,945 $ 3,840 ========== ========== ========== ========== Basic and Diluted Earnings Per Share: Net Income (Loss).......................... $ 0.04 $ (0.27) $ 0.81 $ 0.63 ========== ========== ========== ========== Weighted Average Shares of Common Stock Outstanding: Basic...................................... 6,082,887 6,082,887 6,082,887 6,082,887 Diluted.................................... 6,088,036 6,082,887 6,092,536 6,082,887
The accompanying notes are an integral part of these statements. F-2 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------- ------------ (ALL AMOUNTS IN THOUSANDS) (UNAUDITED) ASSETS Current Assets: Cash and Cash Equivalents................................. $ 11,931 $ 8,881 Restricted Cash........................................... -- 816 Marketable Securities..................................... 4,837 2,650 Accounts Receivable, Net of Allowance for Doubtful Accounts of $288 and $327 in 2004 and 2003, Respectively: Traffic................................................ 18,463 23,070 Agents................................................. 5,935 4,119 Claims and Other....................................... 5,367 9,438 Federal Income Taxes Receivable........................... 327 -- Deferred Income Tax....................................... 144 144 Net Investment in Direct Financing Lease.................. 2,284 2,128 Other Current Assets...................................... 5,248 6,295 Material and Supplies Inventory, at Lower of Cost or Market................................................. 3,216 3,177 Current Assets Held for Disposal.......................... 89 89 --------- --------- Total Current Assets........................................ 57,841 60,807 --------- --------- Investment in Unconsolidated Entities....................... 10,128 8,413 --------- --------- Net Investment in Direct Financing Lease.................... 47,386 49,136 --------- --------- Vessels, Property, and Other Equipment, at Cost: Vessels and Barges........................................ 325,759 324,413 Other Equipment........................................... 7,082 5,233 Terminal Facilities....................................... 140 345 Furniture and Equipment................................... 3,839 4,304 --------- --------- 336,820 334,295 Less -- Accumulated Depreciation.......................... (124,968) (111,154) --------- --------- 211,852 223,141 --------- --------- Other Assets: Deferred Charges, Net of Accumulated Amortization of $15,541 and $14,614 in 2004 and 2003, Respectively..... 14,514 12,319 Acquired Contract Costs, Net of Accumulated Amortization of $22,522 and $21,430 in 2004 and 2003, Respectively........................................... 8,004 9,095 Restricted Cash........................................... 6,541 6,590 Due from Related Parties.................................. 2,535 2,535 Other..................................................... 9,111 10,415 --------- --------- 40,705 40,954 --------- --------- Total Assets................................................ $ 367,912 $ 382,451 ========= =========
The accompanying notes are an integral part of these statements. F-3 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS -- (CONTINUED)
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------- ------------ (ALL AMOUNTS IN THOUSANDS) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Current Maturities of Long-Term Debt...................... $ 13,815 $ 14,866 Accounts Payable and Accrued Liabilities.................. 29,500 35,510 Federal Income Tax Payable................................ -- 183 -------- -------- Total Current Liabilities................................... 43,315 50,559 -------- -------- Billings in Excess of Income Earned and Expenses Incurred... 1,809 5,271 -------- -------- Long-Term Debt, Less Current Maturities..................... 152,316 164,144 -------- -------- Other Long-Term Liabilities: Deferred Income Taxes..................................... 22,601 19,565 Other..................................................... 20,528 21,545 -------- -------- 43,129 41,110 -------- -------- Commitments and Contingent Liabilities Stockholders' Investment: Common Stock.............................................. 6,756 6,756 Additional Paid-In Capital................................ 54,450 54,450 Retained Earnings......................................... 74,875 69,930 Less -- Treasury Stock.................................... (8,704) (8,704) Accumulated Other Comprehensive Loss...................... (34) (1,065) -------- -------- 127,343 121,367 -------- -------- Total Liabilities and Stockholders' Investment.............. $367,912 $382,451 ======== ========
The accompanying notes are an integral part of these statements. F-4 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2004 2003 -------- -------- (ALL AMOUNTS IN THOUSANDS) (UNAUDITED) Cash Flows from Operating Activities: Net Income................................................ $ 4,945 $ 3,840 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation........................................... 14,422 15,670 Amortization of Deferred Charges and Other Assets...... 5,735 5,657 Deferred Provision for Federal Income Taxes............ 1,158 2,011 Equity in Net Income of Unconsolidated Entities........ (3,030) (260) Loss (Gain) on Sale of Other Assets.................... 7 (290) Loss on Early Extinguishment of Debt................... 46 1,310 Loss on Sale of Investment............................. 623 -- Changes in: Accounts Receivable.................................... 6,863 (381) Inventories and Other Current Assets................... 522 (544) Deferred Drydocking Charges............................ (5,751) (1,112) Other Assets........................................... 1,049 2,126 Accounts Payable and Accrued Liabilities............... (6,245) 4,028 Federal Income Taxes Payable........................... (819) 2,791 Billings in Excess of Income Earned and Expenses Incurred.............................................. (3,462) (707) Other Long-Term Liabilities............................ (1,590) (5,730) -------- -------- Net Cash Provided by Operating Activities................... 14,473 28,409 -------- -------- Cash Flows from Investing Activities: Net Investment in Direct Financing Lease............... 1,594 1,437 Additions to Vessels and Other Assets.................. (1,802) (5,287) Proceeds from Sale of Vessels and Other Assets......... -- 478 Purchase of and Proceeds from Short Term Investments... (2,273) 46 Proceeds from Sale of Marketable Equity Securities..... -- 200 Distributions from Unconsolidated Entities............. 3,043 128 Partial Sale of Unconsolidated Entities................ -- 1,921 Net Decrease in Restricted Cash Account................ 865 384 Other Investing Activities............................. 113 6 -------- -------- Net Cash Provided (Used) by Investing Activities............ 1,540 (687) -------- -------- Cash Flows from Financing Activities: Proceeds from Issuance of Debt......................... 1,000 41,000 Repayment of Debt...................................... (13,879) (64,728) Additions to Deferred Financing Charges................ (68) (221) Other Financing Activities............................. (16) (197) -------- -------- Net Cash Used by Financing Activities....................... (12,963) (24,146) -------- -------- Net Increase in Cash and Cash Equivalents................... 3,050 3,576 Cash and Cash Equivalents at Beginning of Period............ 8,881 4,419 -------- -------- Cash and Cash Equivalents at End of Period.................. $ 11,931 $ 7,995 ======== ========
The accompanying notes are an integral part of these statements. F-5 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 (UNAUDITED) NOTE 1. BASIS OF PREPARATION We have prepared the accompanying unaudited interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission, and we have omitted certain information and footnote disclosures required by generally accepted accounting principles for complete financial statements. The condensed consolidated balance sheet as of December 31, 2003 has been derived from the audited financial statements at that date. We suggest that you read these interim statements in conjunction with the financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2003. We have made certain reclassifications to prior period financial information in order to conform to current year presentations. The foregoing 2004 interim results are not necessarily indicative of the results of operations for the full year 2004. Interim statements are subject to possible adjustments in connection with the annual audit of our accounts for the full year 2004. Management believes that all adjustments necessary, consisting only of normal recurring adjustments, for a fair presentation of the information shown have been made. Our policy is to consolidate all subsidiaries in which we hold a greater than 50% voting interest and to use the equity method to account for investments in entities in which we hold a 20% to 50% voting interest. We use the cost method to account for investments in entities in which we hold less than 20% voting interest and in which we cannot exercise significant influence over operating and financial activities. We have eliminated all significant intercompany accounts and transactions. NOTE 2. EMPLOYEE BENEFIT PLANS The following table provides the components of net periodic benefit cost for the pension plan:
THREE MONTHS NINE MONTHS ENDED SEPT. 30, ENDED SEPT. 30, --------------- --------------- 2004 2003 2004 2003 ------ ------ ------- ----- (ALL AMOUNTS IN THOUSANDS) Components of net periodic benefit cost: Service cost....................................... $ 137 $ 117 $ 411 $ 351 Interest cost...................................... 308 298 924 894 Expected return on plan assets..................... (346) (300) (1,038) (900) Amortization of prior service cost................. 2 2 6 6 Amortization of net actuarial loss................. 23 47 69 141 ----- ----- ------- ----- Net periodic benefit cost.......................... $ 124 $ 164 $ 372 $ 492 ===== ===== ======= =====
F-6 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) The following table provides the components of net periodic benefit cost for the postretirement benefits plan:
THREE MONTHS NINE MONTHS ENDED SEPT. 30, ENDED SEPT. 30, --------------- --------------- 2004 2003 2004 2003 ------ ------ ------ ------ (ALL AMOUNTS IN THOUSANDS) Components of net periodic benefit cost: Service cost............................................. $ 19 $ 16 $ 57 $ 48 Interest cost............................................ 147 149 441 447 Amortization of net actuarial loss....................... 25 17 75 51 ---- ---- ---- ---- Net periodic benefit cost................................ $191 $182 $573 $546 ==== ==== ==== ====
We contributed $143,000 to our pension plan in the first quarter of 2004. We do not expect to make any further contributions to our pension plan in 2004 and we do not expect to make any contributions to our post retirement benefits plan in 2004. In December of 2003, the Medicare Prescription Drug, Improvements, and Modernization Act of 2003 (the "Act") was signed into law. In addition to including numerous other provisions that have potential effects on an employer's retiree health plan, the Medicare law included a special subsidy for employers that sponsor retiree health plans with prescription drug benefits that are at least as favorable as the new Medicare Part D benefit. In May of 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvements, and Modernization Act of 2003," that provides guidance on the accounting for the effects of the Act for employers that sponsor postretirement health care plans that provide drug benefits. We are still evaluating whether our plan is actuarially equivalent, although its impact on our financial position and results of operations is not material. NOTE 3. OPERATING SEGMENTS Our four operating segments, Liner Services, Time Charter Contracts, Contracts of Affreightment, and Rail-Ferry Service, are identified primarily by the characteristics of the contracts and terms under which our vessels and barges are operated. We report in the Other category results of several of our subsidiaries that provide ship charter brokerage, agency, and other specialized services primarily to our operating segments. We manage each reportable segment separately, as each requires different resources depending on the nature of the contract or terms under which each vessel within the segment operates. We do not allocate administrative and general expenses, investment income, other income, losses or gains on early extinguishment of debt, equity in net income of unconsolidated entities, or income taxes to our segments. Intersegment revenues are based on market prices and include revenues earned by subsidiaries that provide specialized services to the operating segments. F-7 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents information about segment profit and loss for the three months ended September 30, 2004 and 2003:
TIME LINER CHARTER CONTRACTS OF RAIL-FERRY SERVICES CONTRACTS AFFREIGHTMENT SERVICE OTHER ELIMINATION TOTAL -------- --------- ------------- ---------- ------ ----------- ------- (ALL AMOUNTS IN THOUSANDS) 2004 Revenues from external customers...................... $25,725 $29,585 $4,018 $ 3,939 $5,530 -- $68,797 Intersegment revenues............ -- -- -- -- 3,115 (3,115) -- Vessel and barge depreciation.... 859 2,332 604 729 207 -- 4,731 Gross voyage (loss) profit....... (1,191) 7,432 1,013 (1,664) (199) -- 5,391 Interest expense................. 188 1,487 370 480 49 -- 2,574 Segment (loss) profit............ (1,379) 5,945 643 (2,144) (248) -- 2,817 - --------------------------------------------------------------------------------------------------------------------- 2003 Revenues from external customers...................... $18,340 $31,965 $3,991 $ 3,758 $5,496 -- $63,550 Intersegment revenues............ -- -- -- -- 3,297 (3,297) -- Vessel and barge depreciation.... 956 2,886 605 729 111 -- 5,287 Gross voyage (loss) profit....... (1,192) 6,271 1,619 (853) 513 -- 6,358 Interest expense................. 240 1,693 458 524 47 -- 2,962 Gain on sale of other assets..... -- -- -- -- 247 -- 247 Segment (loss) profit............ (1,432) 4,578 1,161 (1,377) 713 -- 3,643
The following table presents information about segment profit and loss for the nine months ended September 30, 2004 and 2003:
TIME LINER CHARTER CONTRACTS OF RAIL-FERRY SERVICES CONTRACTS AFFREIGHTMENT SERVICE OTHER ELIMINATION TOTAL -------- --------- ------------- ---------- ------- ----------- -------- (ALL AMOUNTS IN THOUSANDS) 2004 Revenues from external customers.................... $71,332 $87,086 $12,048 $11,923 $17,094 -- $199,483 Intersegment revenues.......... -- -- -- -- 9,344 (9,344) -- Vessel and barge depreciation................. 2,570 6,898 1,813 2,187 586 -- 14,054 Gross voyage (loss) profit..... (429) 22,144 3,737 (3,382) 923 -- 22,993 Interest expense............... 614 4,533 1,140 1,476 159 -- 7,922 Loss on sale of other assets... -- -- -- -- (7) -- (7) Segment (loss) profit.......... (1,043) 17,611 2,597 (4,858) 757 -- 15,064 - --------------------------------------------------------------------------------------------------------------------- 2003 Revenues from external customers.................... $58,290 $98,579 $12,008 $11,138 $15,846 -- $195,861 Intersegment revenues.......... -- -- -- -- 10,180 (10,180) -- Vessel and barge depreciation................. 2,598 8,204 1,813 2,187 277 -- 15,079 Gross voyage (loss) profit..... (1,737) 25,508 4,100 (2,002) 1,184 -- 27,053 Interest expense............... 809 5,506 1,372 1,768 159 -- 9,614 Gain on sale of other assets... -- -- -- -- 290 -- 290 Segment (loss) profit.......... (2,546) 20,002 2,728 (3,770) 1,315 -- 17,729
F-8 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) Following is a reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements:
THREE MONTHS ENDED NINE MONTHS ENDED SEPT. 30, SEPT. 30, ------------------- ------------------- 2004 2003 2004 2003 -------- -------- -------- -------- (ALL AMOUNTS IN THOUSANDS) Total reportable segment profit.............. $ 2,817 $ 3,643 $ 15,064 $ 17,729 Unallocated amounts: Administrative and general expenses........ (3,903) (3,561) (11,676) (11,379) Loss on sale of investment................. -- -- (623) -- Investment income.......................... 177 119 506 649 Other loss................................. -- (103) -- -- Loss on early extinguishment of debt....... -- (2,570) (46) (1,310) ------- ------- -------- -------- (Loss) income before (benefit) provision for income taxes and equity in net income of unconsolidated entities.................... $ (909) $(2,472) $ 3,225 $ 5,689 ======= ======= ======== ========
NOTE 4. UNCONSOLIDATED ENTITIES In the fourth quarter of 2003, through our wholly-owned subsidiary, we acquired a 50% investment in Dry Bulk Cape Holding Inc. ("Dry Bulk"), which owns two cape-size bulk carrier vessels built in calendar years 2002 and 2003. We account for our investment in Dry Bulk under the equity method, and as such our share of the earnings or losses of Dry Bulk is reported, net of taxes, in our consolidated statements of income. For the nine months ended September 30, 2004, our portion of earnings, net of taxes, was $2.3 million. For the three months ended September 30, 2004, our portion of earnings net of taxes was $593,000. In April of 2004, we received a cash distribution of $1.6 million from Dry Bulk representing first quarter earnings and in July of 2004, we received a cash distribution of $1 million from Dry Bulk representing second quarter earnings, which were both recorded as reductions of our investment in Dry Bulk. At September 30, 2004, we guarantee a portion of the outstanding debt of Dry Bulk. The guarantee is for the full remaining term of the associated debt, which was approximately 7 years as of September 30, 2004. Performance by us would be required under the guarantee in the event of default by Dry Bulk on its third party debt. This represents non-recourse debt to us. The portion of the outstanding debt that we guaranteed at September 30, 2004, was $30,697,000. The unaudited combined condensed results of operations of Dry Bulk are summarized below:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2004 2004 ------------- ------------- (AMOUNTS IN THOUSANDS) Operating Revenue.......................................... $4,210 $14,138 Operating Income........................................... $2,634 $ 9,515 Net Income................................................. $1,822 $ 7,058
NOTE 5. EARNINGS PER SHARE Basic and diluted earnings per share were computed based on the weighted average number of common shares issued and outstanding during the relevant periods. Stock options covering 475,000 shares F-9 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) were included in the computation of diluted earnings per share in the three months and nine months ended September 30, 2004, but were excluded from the computation of diluted earnings per share in the three months and nine months ended September 30, 2003, as the effect would have been antidilutive. NOTE 6. COMPREHENSIVE INCOME (LOSS) The following table summarizes components of comprehensive income (loss) for the three months ended September 30, 2004 and 2003:
THREE MONTHS ENDED SEPT. 30, ---------------- 2004 2003 ----- -------- (AMOUNTS IN THOUSANDS) Net Income (Loss)........................................... $220 $(1,644) Other Comprehensive Income (Loss): Unrealized Holding Gain on Marketable Securities, Net of Deferred Taxes of $21 and $22, Respectively............ 40 41 Net Change in Fair Value of Derivatives, Net of Deferred Taxes of $188 and $37, Respectively.................... 350 69 ---- ------- Total Comprehensive Income (Loss)........................... $610 $(1,534) ==== =======
The following table summarizes components of comprehensive income (loss) for the nine months ended September 30, 2004 and 2003:
NINE MONTHS ENDED SEPT. 30, --------------- 2004 2003 ------ ------ (AMOUNTS IN THOUSANDS) Net Income.................................................. $4,945 $3,840 Other Comprehensive Income (Loss): Recognition of Unrealized Holding Loss on Marketable Securities, Net of Deferred Taxes of $216.............. 402 -- Unrealized Holding (Loss) Gain on Marketable Securities, Net of Deferred Taxes of ($28) and $120, Respectively........................................... (52) 222 Net Change in Fair Value of Derivatives, Net of Deferred Taxes of $367 and $374, Respectively................... 681 694 ------ ------ Total Comprehensive Income.................................. $5,976 $4,756 ====== ======
NOTE 7. COAL CARRIER CONTRACT As previously reported, our wholly owned subsidiary, Enterprise Ship Company, Inc. ("Enterprise"), time charters the U.S. flag coal carrier, Energy Enterprise, to US Generating New England, Inc. ("USGenNE"), an indirect subsidiary of PG&E Corporation. On July 8, 2003, USGenNE filed a petition for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code and has subsequently filed with the court an extension of time to submit its bankruptcy plan until March 1, 2005, and an extension of time until May 1, 2005, to solicit acceptance to its plan. USGenNE is current in all of its obligations to Enterprise under the time charter except for approximately $850,000 of pre-petition invoices covering charter hire and related expenses. The $850,000 is an unsecured claim in the bankruptcy proceeding. Under the federal bankruptcy laws, USGenNE has the right to either accept or reject the F-10 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) charter. If USGenNE accepts the charter, it is then required to meet its financial obligations under the charter including the $850,000 pre-petition invoices. If USGenNE rejects the charter, then Enterprise would have a priority administrative claim with respect to all amounts due it under the charter related to the post-petition period. At this time, we cannot predict whether the charter will be accepted or rejected; therefore, we have not provided an allowance for the pre-petition invoices in our financial statements as of September 30, 2004. In the event the charter is ultimately rejected, management believes the vessel can be utilized in alternative employment without incurring a material impairment to the vessel's carrying value, although we can give no assurance at this time. Although USGenNE has continued to use the vessel in 2004 through the date of this report, we can give no assurance whether USGenNE will continue to use the vessel through the end of the year. NOTE 8. INCOME TAXES Under current United States tax law, U.S. companies like us and their domestic subsidiaries generally are taxed on all income, including in our case income from shipping operations, whether derived in the United States or abroad. With respect to any foreign subsidiary in which we hold more than a 50 percent interest (referred to in the tax laws as controlled foreign corporations, or "CFCs"), we are treated as having received a current taxable distribution of our pro rata share of income derived from foreign shipping operations. The recently-enacted American Jobs Creation Act of 2004 (the "Jobs Creation Act"), which becomes effective for us on January 1, 2005, will change the United States tax treatment of our U.S. flag vessels in foreign operations and foreign flag shipping operations. We intend to make an election under the Jobs Creation Act to have our U.S. flag operations (other than those of two ineligible vessels used exclusively in United States coastwise commerce) taxed under a new "tonnage tax" regime rather than under the usual U.S. corporate income tax regime. As a result of that election, our gross income for United States income tax purposes with respect to our eligible U.S. flag vessels will not include (1) income from qualifying shipping activities in U.S. foreign trade (i.e., transportation between the U.S. and foreign ports or between foreign ports), (2) income from cash, bank deposits and other temporary investments that are reasonably necessary to meet the working capital requirements of our qualifying shipping activities, and (3) income from cash or other intangible assets accumulated pursuant to a plan to purchase qualifying shipping assets. Under the tonnage tax regime, our taxable income with respect to the operations of our eligible U.S. flag vessels will be based on a "daily notional taxable income," which will be taxed at the highest corporate income tax rate. The daily notional taxable income from the operation of a qualifying vessel will be 40 cents per 100 tons of the net tonnage of the vessel (up to 25,000 net tons), and 20 cents per 100 tons of the net tonnage of the vessel in excess of 25,000 net tons. The taxable income of each qualifying vessel will be the product of its daily notional taxable income and the number of days during the taxable year that the vessel operates in United States foreign trade. Under the Jobs Creation Act, the taxable income from the shipping operations of our CFCs will generally no longer be subject to current United States income tax but will be deferred until repatriated. Although we are still analyzing the Jobs Creation Act, we currently estimate that it will result in a $11.5 million reduction of our deferred tax provision which will be recorded and reflected in our results of operations in the period in which our election under the Jobs Creation Act is made. We are awaiting guidance from the Internal Revenue Service as to the earliest period this election can be made. In addition, we project that our effective tax rate under the Jobs Creation Act will be reduced to approximately 25% in fiscal years 2005 and 2006 with a further reduction to approximately 8% in fiscal years thereafter that the Jobs Creation Act remains in effect. F-11 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS In January of 2003, the FASB issued Financial Accounting Series Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by the primary beneficiary of the entity, where the company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. We have investments in certain unconsolidated entities in which we have less than 100% ownership. We have evaluated these investments and determined that we do not have any investments in variable interest entities. Therefore, the adoption of FIN No. 46 as of January 1, 2004 did not have an impact on the financial statements. F-12 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders International Shipholding Corporation We have audited the accompanying consolidated balance sheets of International Shipholding Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders' investment and cash flows for the two years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of International Shipholding Corporation as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations and whose report dated January 11, 2002, expressed an unqualified opinion on those statements. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Shipholding Corporation and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the two years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. As discussed above, the financial statements of International Shipholding Corporation as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations. As described in Note K, the Company changed the composition of reportable segments in 2002 and the 2001 financial statements have been revised to conform to the 2002 composition of reportable segments. We audited the adjustments that were applied to revise the disclosures of reportable segments reflected in the 2001 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole. /s/ ERNST & YOUNG LLP New Orleans, Louisiana January 29, 2004 F-13 THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH INTERNATIONAL SHIPHOLDING CORPORATION'S FILING ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of International Shipholding Corporation: We have audited the accompanying consolidated balance sheets of International Shipholding Corporation (a Delaware corporation) and subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' investment and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Shipholding Corporation and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP New Orleans, Louisiana January 11, 2002 F-14 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, --------------------------------------------- 2003 2002 2001 ------------- ------------- ------------- (ALL AMOUNTS IN THOUSANDS EXCEPT SHARE DATA) Revenues................................................. $ 257,813 $ 227,412 $ 304,370 Operating Expenses: Voyage Expenses........................................ 203,839 177,836 246,180 Vessel and Barge Depreciation.......................... 20,134 19,140 30,960 Impairment Loss........................................ -- (66) 81,038 ---------- ---------- ---------- Gross Voyage Profit (Loss)............................... 33,840 30,502 (53,808) ---------- ---------- ---------- Administrative and General Expenses...................... 15,646 15,734 23,578 Gain on Sale of Vessels and Other Assets................. (1,393) (557) (3,501) ---------- ---------- ---------- Operating Income (Loss).................................. 19,587 15,325 (73,885) ---------- ---------- ---------- Interest and Other: Interest Expense....................................... 12,514 17,706 26,737 Impairment Loss on Investment.......................... -- 598 -- Investment Income...................................... (2,162) (656) (1,157) Other Income........................................... -- (1,498) -- Loss (Gain) on Early Extinguishment of Debt............ 1,310 (65) (23) ---------- ---------- ---------- 11,662 16,085 25,557 ---------- ---------- ---------- Income (Loss) Before Provision (Benefit) for Income Taxes and Equity in Net Income of Unconsolidated Entities.... 7,925 (760) (99,442) ---------- ---------- ---------- Provision (Benefit) for Income Taxes: Current................................................ 183 -- 47 Deferred............................................... 2,634 (170) (34,690) State.................................................. 39 101 83 ---------- ---------- ---------- 2,856 (69) (34,560) ---------- ---------- ---------- Equity in Net Income of Unconsolidated Entities (Net of Applicable Taxes)...................................... 422 555 463 ---------- ---------- ---------- Net Income (Loss)........................................ $ 5,491 $ (136) $ (64,419) ========== ========== ========== Basic and Diluted Earnings Per Share: Net Income (Loss)...................................... $ 0.90 $ (0.02) $ (10.59) ========== ========== ========== Basic and Diluted Weighted Average Shares of Common Stock Outstanding............................................ 6,082,887 6,082,887 6,082,887 ========== ========== ==========
The accompanying notes are an integral part of these statements. F-15 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 2003 2002 ------------ ------------ (ALL AMOUNTS IN THOUSANDS) ASSETS Current Assets: Cash and Cash Equivalents................................. $ 8,881 $ 4,419 Restricted Cash........................................... 816 -- Marketable Securities..................................... 2,650 2,211 Accounts Receivable, Net of Allowance for Doubtful Accounts of $327 and $332 in 2003 and 2002, Respectively: Traffic................................................ 23,070 16,341 Agents'................................................ 4,119 4,343 Claims and Other....................................... 9,438 9,408 Federal Income Taxes Receivable........................... -- 5,755 Deferred Income Tax....................................... 144 576 Net Investment in Direct Financing Lease.................. 2,128 1,944 Other Current Assets...................................... 6,295 6,212 Material and Supplies Inventory, at Lower of Cost or Market................................................. 3,177 3,492 Current Assets Held for Disposal.......................... 89 2,762 --------- --------- Total Current Assets........................................ 60,807 57,463 --------- --------- Marketable Equity Securities................................ -- 200 --------- --------- Investment in Unconsolidated Entities....................... 8,413 8,251 --------- --------- Net Investment in Direct Financing Lease.................... 49,136 51,264 --------- --------- Vessels, Property, and Other Equipment, at Cost: Vessels and Barges........................................ 324,413 336,755 Other Equipment........................................... 5,233 5,507 Terminal Facilities....................................... 345 336 Furniture and Equipment................................... 4,304 9,042 --------- --------- 334,295 351,640 Less -- Accumulated Depreciation.......................... (111,154) (110,535) --------- --------- 223,141 241,105 --------- --------- Other Assets: Deferred Charges, Net of Accumulated Amortization of $14,614 and $13,572 in 2003 and 2002, Respectively..... 12,319 14,628 Acquired Contract Costs, Net of Accumulated Amortization of $21,430 and $19,976 in 2003 and 2002, Respectively........................................... 9,095 10,550 Restricted Cash........................................... 6,590 8,096 Due from Related Parties.................................. 2,535 2,609 Other..................................................... 10,415 12,586 --------- --------- 40,954 48,469 --------- --------- Total Assets................................................ $ 382,451 $ 406,752 ========= =========
The accompanying notes are an integral part of these statements. F-16 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 2003 2002 ------------ ------------ (ALL AMOUNTS IN THOUSANDS EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Current Maturities of Long-Term Debt...................... $ 14,866 $ 21,362 Accounts Payable and Accrued Liabilities.................. 35,510 34,252 Federal Income Tax Payable................................ 183 -- -------- -------- Total Current Liabilities................................... 50,559 55,614 -------- -------- Billings in Excess of Income Earned and Expenses Incurred... 5,271 1,207 -------- -------- Long-Term Debt, Less Current Maturities..................... 164,144 192,297 -------- -------- Other Long-Term Liabilities: Deferred Income Taxes..................................... 19,565 14,358 Claims and Other.......................................... 21,545 28,049 -------- -------- 41,110 42,407 -------- -------- Commitments and Contingent Liabilities Stockholders' Investment: Common Stock, $1.00 Par Value, 10,000,000 Shares Authorized, 6,756,330 Shares Issued at December 31, 2003 and 2002.......................................... 6,756 6,756 Additional Paid-In Capital................................ 54,450 54,450 Retained Earnings......................................... 69,930 64,439 Less -- 673,443 Shares of Common Stock in Treasury, at Cost, at December 31, 2003 and 2002.................... (8,704) (8,704) Accumulated Other Comprehensive Loss...................... (1,065) (1,714) -------- -------- 121,367 115,227 -------- -------- Total Liabilities and Stockholders' Investment.............. $382,451 $406,752 ======== ========
The accompanying notes are an integral part of these statements. F-17 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) TOTAL ------ ---------- -------- -------- ------------- -------- (ALL AMOUNTS IN THOUSANDS) Balance at December 31, 2000.................. $6,756 $54,450 $129,755 $(8,704) $ (725) $181,532 Comprehensive Loss: Net Loss for Year Ended December 31, 2001... -- -- (64,419) -- -- (64,419) Other Comprehensive Income (Loss): Unrealized Holding Loss on Marketable Securities, Net of Deferred Taxes of ($76).................................. -- -- -- -- (144) (144) Cumulative Effect of Adoption of SFAS No. 133, Net of Deferred Taxes of $135, on January 1, 2001........................ -- -- -- -- 250 250 Net Change in Fair Value of Derivatives, Net of Deferred Taxes of ($836)........ -- -- -- -- (1,553) (1,553) -------- Total Comprehensive Loss...................... (65,866) Cash Dividends................................ -- -- (761) -- -- (761) ------ ------- -------- ------- ------- -------- Balance at December 31, 2001.................. $6,756 $54,450 $ 64,575 $(8,704) $(2,172) $114,905 ------ ------- -------- ------- ------- -------- Comprehensive Income: Net Loss for Year Ended December 31, 2002... -- -- (136) -- -- (136) Other Comprehensive Income (Loss): Unrealized Holding Loss on Marketable Securities, Net of Deferred Taxes of ($194)................................. -- -- -- -- (362) (362) Recognition of Unrealized Holding Loss on Marketable Securities, Net of Deferred Taxes of $248.......................... -- -- -- -- 461 461 Net Change in Fair Value of Derivatives Net of Deferred Taxes of $193................ -- -- -- -- 359 359 -------- Total Comprehensive Income.................... 322 ------ ------- -------- ------- ------- -------- Balance at December 31, 2002.................. $6,756 $54,450 $ 64,439 $(8,704) $(1,714) $115,227 ------ ------- -------- ------- ------- -------- Comprehensive Income: Net Income for Year Ended December 31, 2003..................................... -- -- 5,491 -- -- 5,491 Other Comprehensive Income (Loss): Unrealized Holding Gain on Marketable Securities, Net of Deferred Taxes of $207................................... -- -- -- -- 387 387 Net Change in Fair Value of Derivatives, Net of Deferred Taxes of $141................ -- -- -- -- 262 262 -------- Total Comprehensive Income.................... 6,140 ------ ------- -------- ------- ------- -------- Balance at December 31, 2003.................. $6,756 $54,450 $ 69,930 $(8,704) $(1,065) $121,367 ====== ======= ======== ======= ======= ========
The accompanying notes are an integral part of these statements. F-18 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------- 2003 2002 2001 --------- -------- --------- (ALL AMOUNTS IN THOUSANDS) Cash Flows from Operating Activities: Net Income (Loss)........................................ $ 5,491 $ (136) $ (64,419) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation.......................................... 20,855 20,123 32,580 Amortization of Deferred Charges and Other Assets..... 7,525 7,994 11,311 Provision (Benefit) for Deferred Income Taxes......... 2,634 (170) (34,690) Equity in Net Income of Unconsolidated Entities....... (422) (555) (463) Gain on Sale of Other Assets.......................... (1,393) (557) (3,501) Impairment Loss....................................... -- (66) 81,038 Impairment Loss on Investment......................... -- 598 -- Loss (Gain) on Early Extinguishment of Debt........... 1,310 (65) (23) Changes in: Accounts Receivable................................... (7,390) 14,540 20,763 Inventories and Other Current Assets.................. 231 (397) 3,790 Deferred Drydocking Charges........................... (2,210) (2,906) (7,589) Other Assets.......................................... 2,668 3,035 846 Accounts Payable and Accrued Liabilities.............. 3,536 (15,054) (13,851) Federal Income Taxes Payable.......................... 8,379 (564) 982 Billings in Excess of Income Earned and Expenses Incurred............................................ 3,270 (558) (4,109) Other Long-Term Liabilities........................... (5,868) (6,823) (1,347) --------- -------- --------- Net Cash Provided by Operating Activities.................. 38,616 18,439 21,318 --------- -------- --------- Cash Flows from Investing Activities: Net Investment in Direct Financing Leases................ 1,944 1,775 2,540 Additions to Vessels and Other Property.................. (5,360) (8,558) (40,171) Proceeds from Sale of Vessels and Other Assets........... 3,299 18,110 126,011 Purchase of and Proceeds from Short Term Investments..... 126 327 2,824 Proceeds from Sale of Marketable Equity Securities....... 200 -- -- Investment in Unconsolidated Entities.................... (3,362) (2,151) (3,627) Partial Sale of Investment in Unconsolidated Entities.... 4,223 110 -- Net Decrease (Increase) in Restricted Cash Account....... 690 (567) (5,815) Other Investing Activities............................... 12 410 46 --------- -------- --------- Net Cash (Used) Provided by Investing Activities........... 1,772 9,456 81,808 --------- -------- --------- Cash Flows from Financing Activities: Proceeds from Issuance of Debt........................... 139,000 41,500 56,300 Repayment of Debt and Capital Lease Obligations.......... (173,675) (89,976) (148,513) Additions to Deferred Financing Charges.................. (1,054) (264) (195) Common Stock Dividends Paid.............................. -- -- (761) Other Financing Activities............................... (197) 114 -- --------- -------- --------- Net Cash Used by Financing Activities...................... (35,926) (48,626) (93,169) --------- -------- --------- Net Increase (Decrease) in Cash and Cash Equivalents....... 4,462 (20,731) 9,957 Cash and Cash Equivalents at Beginning of Year............. 4,419 25,150 15,193 --------- -------- --------- Cash and Cash Equivalents at End of Year................... $ 8,881 $ 4,419 $ 25,150 ========= ======== =========
The accompanying notes are an integral part of these statements. F-19 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of International Shipholding Corporation (a Delaware corporation) and its majority-owned subsidiaries. In this report, the terms "we," "us," "our," and "the Company" refer to International Shipholding Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Our policy is to consolidate all subsidiaries in which we hold a greater than 50% voting interest or otherwise exercise significant influence over operating and financial activities. We use the equity method to account for investments in entities in which we hold a 20% to 50% voting interest and the cost method to account for investments in entities in which we hold less than 20% voting interest and in which we cannot exercise significant influence over operating and financial activities. Certain reclassifications have been made to the prior period financial information in order to conform to current year presentation. NATURE OF OPERATIONS Through our subsidiaries, we operate a diversified fleet of U.S. and international flag vessels that provide domestic and international maritime transportation services to commercial customers and agencies of the United States government primarily under medium- to long-term charters or contracts. At December 31, 2003, our fleet consisted of 35 ocean-going vessels, 917 LASH (Lighter Aboard SHip) barges, 22 Haul-Away car carrying trucks, and related shoreside handling facilities. Our strategy is to (i) identify customers with marine transportation needs requiring specialized vessels or operating techniques, (ii) seek medium- to long-term charters or contracts with those customers and, if necessary, modify, acquire, or construct vessels to meet the requirements of those charters or contracts, and (iii) secure financing for the vessels predicated primarily on those charter or contract arrangements. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. VOYAGE REVENUE AND EXPENSE RECOGNITION Revenues and expenses relating to our liner and rail-ferry segments' voyages are recorded over the duration of the voyage. Revenues and expenses relating to our other segments' voyages are recorded when earned or incurred during the reporting period. These segments require no estimates or assumptions when reporting revenues and expenses. On our liner services, the voyage revenues are known at the beginning of the vessel's voyage and are reported through the date of the financial statements based on the relative transit time, which is the time between the vessel's loading port to the vessel's discharge port. Variances from initial revenue voyage estimates are generally not material. Voyage expenditures are estimated at the beginning of the vessel's voyage based on historical cost standards and current estimates received from our vendors and port agents. During the course of the vessel's voyage, typically 30 to 60 days, actual costs replace the original estimates and become part of the historical cost standards. Because of our on-going voyage review process, material variances from our original revenue and expense estimates are reported timely and generally are not recurring. F-20 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUBSIDY AGREEMENTS The Maritime Security Act ("MSA"), which provides for a subsidy program, the Maritime Security Program ("MSP"), for certain U.S. flag vessels, was signed into law in October of 1996. As of December 31, 2003, our U.S. flag LASH vessel, four of our Pure Car/Truck Carriers ("PCTCs"), and two vessels operating under a bareboat charter were qualified and received contracts for MSA participation. Under this program, each participating vessel is eligible to receive an annual payment of $2,100,000, which is subject to annual appropriations and not guaranteed. In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships eligible to participate in the program from 47 to 60, and increased MSP payments to companies in the program, all to be effective on October 1, 2005. Annual payments for each vessel in the new MSP program are $2,600,000 in years 2006 to 2008, $2,900,000 in years 2009 to 2011, and $3,100,000 in years 2012 to 2015. We recognize subsidy revenue on a monthly basis over the duration of the qualifying contracts. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES We consider highly liquid debt instruments with a maturity of three months or less to be cash equivalents. We have categorized all marketable securities as available-for-sale. The carrying amount approximates fair value for each of these instruments. INVENTORIES Inventories are stated at the lower of cost or market. The base-stock method is used for our vessels, and the first-in, first-out ("FIFO") method is used for fuel. ALLOWANCE FOR DOUBTFUL ACCOUNTS We provide an allowance for doubtful accounts for accounts receivable balances estimated to be non-collectible. These provisions are maintained based on identified specific accounts, past experiences, and current trends, and require management's estimates with respect to the amounts that are non-collectible. PROPERTY For financial reporting purposes, vessels are depreciated over their estimated useful lives using the straight-line method. Estimated useful lives of Vessels and Barges, Other Equipment, Terminal Facilities, and Furniture and Equipment are as follows:
YEARS ----- 2 LASH Vessels.............................................. 30 3 Pure Car/Truck Carriers................................... 20 1 Coal Carrier.............................................. 15 5 Other Vessels*............................................ 25 Other Equipment............................................. 3-12 Terminal Facilities......................................... 5-10 Furniture and Equipment..................................... 3-10
- --------------- * Includes two Special Purpose vessels, a Dockship, a Molten Sulphur Carrier, and a Container vessel. At December 31, 2003, our fleet of 35 vessels also included (i) three Roll-On/Roll-Off ("RO/RO") vessels, which we operate, (ii) an Ice Strengthened Breakbulk/Multi-Purpose, a Tanker and a Container vessel, which we charter in for one of our services, (iii) three PCTCs which we charter in for our Time Charter contracts, (iv) two Container vessels under a bareboat agreement, (v) one LASH vessel which we F-21 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) charter in for our Transatlantic service, (vi) one Molten Sulphur Tanker, which we charter in for our Contract of Affreightment, (vii) two Cape-Size Bulk Carriers in which we own a 50% interest, and (viii) eight Cement Carriers and one Ice Strengthened Bulk Carrier in which we own a 30% interest. Through our 50% ownership in a car transportation truck company, we own 22 Haul-Away car carrying trucks. Costs of all major property additions and betterments are capitalized. Ordinary maintenance and repair costs are expensed as incurred. Interest and finance costs relating to vessels, barges, and other equipment under construction are capitalized to properly reflect the cost of assets acquired. No interest was capitalized in 2003, 2002 or 2001. At December 31, 2003, our fleet also included 917 LASH barges. We group our LASH barges, excluding those held for disposal, into pools with estimated useful lives corresponding to the remaining useful lives of the vessels with which they are utilized. Major barge refurbishments are capitalized and included in the aforementioned group of barge pools. From time to time, we dispose of barges in the ordinary course of business. In these cases, proceeds from the disposition are credited to the remaining net book value of the respective pool and future depreciation charges are adjusted accordingly. We monitor all of our fixed assets for impairment and perform an impairment analysis in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," when triggering events or circumstances indicate a fixed asset may be impaired. DRYDOCKING COSTS We defer certain costs related to the drydocking of our vessels. Deferred drydocking costs are capitalized as incurred and amortized on a straight-line basis over the period between drydockings (generally two to five years). Because drydocking charges can be material in any one period, we believe that the acceptable deferred method provides a better matching for the amortization of those costs over future revenue periods benefiting from the drydocking of our vessel. (See Note J). DEFERRED FINANCING CHARGES AND ACQUIRED CONTRACT COSTS We amortize our deferred financing charges and acquired contract costs on a straight-line basis over the terms of the related financing and contracts. (See Note J). SELF-RETENTION INSURANCE We maintain provisions for estimated losses under our self-retention insurance based on estimates of the eventual claims settlement costs. Our policy is to establish self-insurance provisions for each policy year based on independent actuarial estimates, and to maintain the provisions at those levels for the estimated run-off period, approximately two years from the inception of that period. We believe most claims will be reported, or estimates for existing claims will be revised, within this two-year period. Subsequent to this two-year period, self-insurance provisions are adjusted to reflect our current estimate of loss exposure for the policy year. Our estimates are determined based on various factors, such as (1) severity of the injury (for personal injuries) and estimated potential liability based on past judgments and settlements, (2) advice from legal counsel based on its assessment of the facts of the case and its experience in other cases, (3) probability of pre-trial settlement which would mitigate legal costs, (4) historical experience on claims for each specific type of cargo (for cargo damage claims), and (5) whether our seamen are employed in permanent positions or temporary revolving positions. It is reasonably possible that changes in our estimated exposure may occur from time to time. However, if during this two-year period our estimate of loss exposure exceeds the actuarial estimate, then additional F-22 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) loss provisions are recorded to increase the self-insurance provisions to our estimate of the eventual claims' settlement cost. The measurement of our exposure for self-insurance liability requires management to make estimates and assumptions that affect the amount of loss provisions recorded during the reporting period. Actual results could differ materially from those estimates. (See Note D). ASBESTOS CLAIMS We maintain provisions for our estimated losses for asbestos claims based on estimates of eventual claims settlement costs. Our policy is to establish provisions based on a range of estimated exposure. We estimate this potential range of exposure using input from legal counsel and internal estimates based on the individual deductible levels for each policy year. We are also indemnified for certain of these claims by the previous owner of one of our wholly-owned subsidiaries. The measurement of our exposure for asbestos liability requires management to make estimates and assumptions that affect the amount of the loss provisions recorded during the period. Our estimates and assumptions are formed from variables such as the maximum deductible levels in a claim year, the amount of the indemnification recovery and the claimant's employment history with the company. Actual results could differ from those estimates. INCOME TAXES Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." Provisions for income taxes include deferred income taxes that are provided on items of income and expense, which affect taxable income in one period and financial income in another. Certain foreign operations are not subject to income taxation under pertinent provisions of the laws of the country of incorporation or operation. However, pursuant to existing U.S. Tax Laws, earnings from certain foreign operations are subject to U.S. income taxes (See Note F). FOREIGN CURRENCY TRANSACTIONS Certain of our revenues and expenses are converted into or denominated in foreign currencies, primarily Singapore Dollar, Indonesian Rupiah, Euro, British Pound, Mexican Peso and Indian Rupee. All exchange adjustments are charged or credited to income in the year incurred. Exchange losses of $96,000, $227,000, and $54,000 were recognized for the years ended December 31, 2003, 2002, and 2001, respectively. DIVIDEND POLICY The Board of Directors declared and paid dividends of 6.25 cents per share for the first and second quarter in 2001. In June of 2001, the Board of Directors elected to suspend future quarterly dividend payments indefinitely as those payments would have exceeded the restricted payments amount as defined in our debt covenants (See Note C). NET INCOME PER COMMON SHARE Earnings per common share are based on the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding was 6,082,887 for the years ended December 31, 2003, 2002 and 2001. Basic and diluted weighted average common shares outstanding were the same for each of these years. The effect of 475,000 stock options granted during 1999 was anti-dilutive for all periods (See Note E). F-23 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, in order to consider a derivative instrument as a hedge, (i) we must designate the instrument as a hedge of future transactions, and (ii) the instrument must reduce our exposure to the applicable risk. If the above criteria are not met, we must record the fair market value of the instrument at the end of each period and recognize the related gain or loss through earnings. If the instrument qualifies as a hedge, net settlements under the agreement are recognized as an adjustment to earnings, while changes in the fair market value of the hedge are recorded through Stockholders' Investment in Other Comprehensive Income. We recognize the fair market value of the hedge through earnings at the time of maturity, sale or termination of the hedge. We adopted SFAS No. 133, as amended, on January 1, 2001, which resulted in a cumulative effect of accounting change to earnings of $16,000 and an increase in Other Comprehensive Income of $385,000. We employ interest rate swap agreements, foreign currency contracts, and commodity swap contracts (See Note N). STOCK-BASED COMPENSATION We account for stock-based compensation using Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense is recognized for employee stock options issued under the Stock Incentive Plan if the exercise price of the options equals the market price of our stock on the date of grant (See Note E). PENSION AND POSTRETIREMENT BENEFITS Our pension and postretirement benefit costs are calculated using various actuarial assumptions and methodologies as prescribed by SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." These assumptions include discount rates, health care cost trend rates, inflation, rate of compensation increases, expected return on plan assets, mortality rates, and other factors. We believe that the assumptions utilized in recording the obligations under our plans are reasonable based on input from our outside actuary and information as to historical experience and performance. Differences in actual experience or changes in assumptions may affect our pension and postretirement obligations and future expense. NEW ACCOUNTING PRONOUNCEMENTS In April of 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which is effective for fiscal years beginning after May 15, 2002. This statement, among other matters, revises current guidance with respect to gains and losses on early extinguishment of debt. Under SFAS No. 145, gains and losses on early extinguishment of debt are no longer treated as extraordinary items unless they meet the criteria for extraordinary treatment in APB Opinion No. 30. We adopted SFAS No. 145 effective January 1, 2003, and reclassified gains and losses on early extinguishment of debt reported in prior period income statements, as those amounts no longer qualify for extraordinary treatment under SFAS No. 145. We reported losses related to the early extinguishment of debt of $1,310,000 for the year ended December 31, 2003 and gains of $65,000 and $23,000 for the years ended December 31, 2002 and 2001, respectively. In July of 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including F-24 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit or disposal plan. The provisions of SFAS No. 146 are effective for exit and disposal activities that are initiated after December 31, 2002. We adopted SFAS No. 146 effective January 1, 2003, which had no material effect on our financial position or results of operations. In December of 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 were effective for fiscal years ending after December 15, 2002. The interim disclosure provisions were effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We continue to apply APB No. 25, "Accounting for Stock Issued to Employees," in accounting for our stock-based compensation. Therefore, the alternative methods of transition referred to above do not apply. We have adopted the disclosure requirements of SFAS No. 148. If compensation expense had been determined using the fair value method in SFAS No. 123, our net income (loss) and earnings (loss) per share for the years ended December 31, 2003, 2002, and 2001 would have agreed to the actual amounts reported due to all outstanding stock options being fully vested and no options being granted during these periods. In January of 2003, the FASB issued Financial Accounting Series Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by the primary beneficiary of the entity, which the company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The provisions of FIN 46 were effective immediately for those variable interest entities created after January 31, 2003. On December 24, 2003, the FASB issued a revision to FIN 46, which among other things deferred the effective date for certain variable interests. Application is required for interests in special-purpose entities in the period ending after December 15, 2003 and application is required for all other types of variable interest entities in the period ending after March 31, 2004. We do not believe that we have a significant interest in a variable interest entity; however, we are still evaluating the effect of adoption of FIN 46. In May of 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires an issuer to classify the following instruments as liabilities: (a) a financial instrument issued in the form of shares that is mandatorily redeemable that embodies an unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified date or upon an event that is certain to occur, (b) a financial instrument other than an outstanding share that embodies an obligation to repurchase the issuer's equity shares, or is indexed to such an obligation, and that requires the issuer to settle the obligation by transferring assets, and (c) a financial instrument that embodies an unconditional obligation that the issuer must or may settle by issuing a variable number of its equity shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except with respect to certain F-25 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) instruments for which the effective date has been deferred. Because we do not have any such instruments outstanding, the adoption of SFAS No. 150 did not materially impact our financial position or results of operations. In September of 2003, the Securities and Exchange Commission approved a Statement of Position ("SOP") on "Accounting for Certain Costs and Activities Related to Property, Plant and Equipment." The SOP is expected to be presented for FASB clearance early in 2004 and may be issued as a final standard shortly thereafter. This proposed SOP provides guidance on accounting for certain costs and activities relating to property, plant, and equipment ("PP&E") and incorporates the following principles; (1) PP&E consists of one or more components, which should be recorded at cost, (2) a PP&E component should be depreciated over its expected useful life, and (3) the costs of a replacement PP&E component and the component replaced should not concurrently be recorded as assets. Costs related to PP&E that are incurred during the in-service stage should be charged to expense as incurred unless the costs are incurred for the acquisition or construction of additional components or the replacement of existing components. Our current policy on drydocking costs is to defer these costs and amortize them over the period between drydockings. As of December 31, 2003, unamortized drydocking costs were $9.8 Million. If this SOP is approved as a final standard in its current form, we would have to recognize a cumulative effect adjustment to expense all unamortized drydocking costs and we would expense all future drydocking costs as incurred. The effective date of the proposed SOP would be no sooner than fiscal years beginning after December 15, 2004. In December of 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The revised statement retains the disclosure requirements of the original statement and requires additional annual disclosures including information describing the types of plan assets, investment strategy, measurement dates, plan obligations, and cash flows. In addition to expanded annual disclosures, the revised statement requires the components of net periodic benefit cost to be disclosed in interim periods. This statement is effective for financial statements with fiscal years ended after December 15, 2003, and the interim period disclosures are effective for interim periods beginning after December 15, 2003. The additional annual disclosures required by the revised statement are included in this report. NOTE B -- PROPERTY In June of 2001, we adopted a plan to separate the LASH service (the Liner Services segment), our Cape-Size Bulk Carrier (the Time Charter Contracts segment), and certain Special Purpose barges (the Other segment) from the balance of our operations and dispose of these assets. The past several years had reflected a downward trend in the Liner Services segment as a result of higher operating cost, disruptions in service due to unplanned maintenance, and changes in market conditions. In December of 2001, we reclassified our foreign flag LASH service assets, which are comprised of two LASH vessels, one Dockship, and a certain number of LASH barges, as assets held for use as a result of extended cargo commitments from a shipper. During the second quarter of 2002, we announced that we were reviewing the possibility of reactivating a U.S. flag service between the U.S. Gulf and East Coast ports and ports in the Red Sea and Middle East due to several changes in circumstances that have occurred since our decision in the second quarter of 2001 to suspend the previous service. We believe that an adequate cargo volume to the service area for shipment on U.S. flag vessels will be maintained. As a result, we have recommissioned one of our foreign flag LASH vessels, which had been idle and scheduled for disposal, together with a certain number of LASH barges. After its upgrade, the foreign flag vessel entered our foreign flag LASH Liner Service in November of 2002, replacing one of the vessels operating in that service. The replaced vessel transferred to F-26 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. flag for use in the renewed U.S. flag LASH Liner Service, which commenced operation in November of 2002. During 2001, in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" issued by the FASB, we recognized an impairment loss of $81,038,000 comprised of $60,553,000 on the U.S. flag LASH service, one Cape-Size Bulk Carrier, and 28 Special Purpose barges; $18,130,000 on our foreign flag LASH service; and $2,355,000 on one of our LASH vessels that was sold while held for disposal. This vessel completed its commitment under charter with the U.S. Military Sealift Command ("MSC"), reached the end of its economic life, and was sold for scrap. The impairment loss on the assets was measured as the amount by which the carrying value of the assets exceeded the fair value. The fair value of the foreign flag LASH service assets was estimated by determining the present value of its expected future cash flows using a discount rate believed to be commensurate with our borrowing rate. The fair value of the U.S. flag LASH service assets was estimated by determining the scrap value per lightweight ton. During 2001, we sold our Cape-Size Bulk Carrier and 77 LASH barges. During 2002, we sold four U.S. flag LASH vessels, our FLASH unit, 803 LASH barges, and 14 Special Purposes barges and recognized a net gain of $66,000 on the sale of these assets. We are still in the process of disposing of 18 LASH barges, which are not needed for current operations. These assets are included in our balance sheet as Current Assets Held for Disposal. We owned a coal transfer terminal facility, which we operated for use with a coal transportation contract that terminated in December of 1998. Upon termination of the contract, we sought various business options that would utilize the coal transfer terminal facility. In September of 2002, we decided to place the terminal facility and land up for sale and accordingly reclassified these assets to Current Assets Held for Disposal. Based on an appraisal of the terminal facility and land, we determined that the fair value of these assets exceeded the net book value. Therefore, no impairment loss was recognized upon reclassification of these assets. We sold the land and facility in 2003 resulting in a gain of $40,000. During 2003, we recognized a net gain on the sale of assets of $1,393,000 primarily as a result of a gain of $756,000 on the sale of the remaining Special Purpose barges that were included in Current Assets Held for Disposal, a gain of $482,000 from the sale of our Ice Strengthened Multi-Purpose vessel, which completed its commitment under charter with the MSC and was no longer needed for operations, a gain of $115,000 relating to the sale of certain of our investments in unconsolidated entities, and the gain of $40,000 for the sale of terminal land and facility described above. During 2002, we recognized a net gain on sale of assets of $557,000 primarily as a result of a gain of $500,000 on the sale of certain contract rights that were no longer beneficial to us and a gain of $57,000 on the sale of certain assets no longer needed for operations. During 2001, we recognized a net gain of $3,501,000 on sale of assets primarily as a result of a gain of $4,485,000 on the sale of one of our PCTCs, which was replaced by a newer and larger PCTC, a gain of $464,000 on the sale of tugboats, and a gain of $930,000 on the sale of certain assets no longer needed for operations, offset by a loss of $2,378,000 on two of our LASH vessels, which completed their commitment under charter with the MSC and were no longer needed for operations. F-27 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- LONG-TERM DEBT
INTEREST RATE TOTAL PRINCIPAL DUE -------------------------------------- --------------------------- DECEMBER 31, DECEMBER 31, MATURITY DECEMBER 31, DECEMBER 31, DESCRIPTION 2003 2002 DATE 2003 2002 ----------- ------------ ------------ -------- ------------ ------------ (ALL AMOUNTS IN THOUSANDS) Unsecured Senior Notes -- Fixed Rate.......................... 7.75% 7.75% 2007 $ 71,296 $ 81,914 Fixed Rate Notes Payable........ N/A 6.70% 2008 -- 19,526 Variable Rate Notes Payable..... 2.66% N/A 2013 89,133 -- 3.92% 4.13% 2006 2,500 11,000 2.9375-3.00% 3.3125% 2007 7,500 9,500 N/A 3.4375% 2009 -- 35,485 N/A 2.40% 2010 -- 17,733 N/A 2.915% 2011 -- 24,750 U.S. Government Guaranteed Ship Financing Notes and Bonds -- Fixed Rate.................... 8.30% 8.30% 2009 8,581 11,479 Promissory Note................. N/A N/A 2003 -- 1,272 Line of Credit.................. N/A 2.98% 2004 -- 1,000 -------- -------- $179,010 $213,659 Less Current Maturities............... (14,866) (21,362) -------- -------- $164,144 $192,297 ======== ========
During 2003, we retired $10,685,000 of the 7 3/4% Notes at a discount. Additionally in 2003, we secured financing of $91,000,000, which was used to retire certain of our outstanding debt, including a loan on our Coal Carrier on which we incurred a make-whole premium upon retirement. During 2002, we retired the remaining $39,085,000 of 9% Senior Notes due 2003 at a slight discount and retired $1,052,000 of the 7 3/4% Senior Notes at a discount. Upon retirement of this indebtedness, we recorded a net Loss on Early Extinguishment of Debt for the year ended December 31, 2003, of approximately $1,310,000 and a Gain on Early Extinguishment of Debt for the year ended December 31, 2002, of approximately $65,000. The aggregate principal payments required as of December 31, 2003, for each of the next five years are $14,866,000 in 2004, $12,366,000 in 2005, $12,253,000 in 2006, $80,411,000 in 2007, primarily due to the maturity of our 7 3/4% Senior Notes due 2007, and $7,468,000 in 2008. We have six vessels with a net book value totaling $169,435,000, mortgaged under certain of our debt agreements. Additional collateral includes a security interest in certain operating contracts and receivables. Our remaining indebtedness is unsecured. Most of these agreements, among other things, impose defined minimum working capital and net worth requirements, impose leverage requirements, impose restrictions on the payment of dividends, and prohibit us from incurring, without prior written consent, additional debt or lease obligations, except as defined. We have consistently met the minimum working capital and net worth requirements, and have not exceeded the leverage requirement during the period covered by the agreements, once amended effective June of 2001 and March of 2002. We have met, as of December 31, 2003, the more restrictive financial covenants that became effective in 2003, and believe we will continue to meet these requirements throughout 2004, although we can give no assurance to that effect. The most restrictive of our credit agreements prohibit the declaration or payment of dividends unless (1) the total of (a) all dividends paid, distributions on, or other payments made with respect to our capital F-28 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock during the period beginning January 1, 1999, and ending on the date of dividend declaration or other payment and (b) all investments other than our Qualified Investments (as defined) and certain designated subsidiaries do not exceed the sum of $10,000,000 plus 50% (or, in case of a loss, minus 100%) of our consolidated net income during the period described above plus the net cash proceeds received from our issuance of common stock during the above period, and (2) no default or event of default has occurred. Certain of our loan agreements also restrict the ability of our subsidiaries to make dividend payments, loans, or advances, the most restrictive of which contain covenants that prohibit payments of dividends, loans, or advances to us from Sulphur Carriers, Inc., our wholly-owned subsidiary, unless certain financial ratios are maintained. As long as these ratios are maintained, there is no restriction on loans or advances to us from that subsidiary, but dividends are restricted to 40% of undistributed earnings. Certain other loan agreements restrict the ability of our subsidiaries to dispose of collateralized assets or any other asset which is substantial in relation to our assets taken as a whole without the approval from the lender. We have consistently remained in compliance with these loan agreements. The amounts of potentially restricted net assets were as follows:
DECEMBER 31, DECEMBER 31, 2003 2002 ------------ ------------ (ALL AMOUNTS IN THOUSANDS) Sulphur Carriers, Inc....................................... $26,553 $21,588 Enterprise Ship Company..................................... -- 45,385 ------- ------- Total Restricted Net Assets............................... $26,553 $66,973 ======= =======
At December 31, 2003 and 2002, we had available a line of credit totaling $15,000,000 and $10,000,000, respectively, used to meet short-term requirements when fluctuations occur in working capital. As of December 31, 2003, we had no balance outstanding on this line of credit. As of December 31, 2002, the balance outstanding on this line of credit was $1,000,000. Under certain of the above described loan agreements, deposits were made into bank retention accounts to meet the requirements of the applicable agreements. These escrowed amounts totaled $513,000 at December 31, 2002 and are included in Restricted Cash. No such amounts were deposited at December 31, 2003. Additionally, under certain operating lease agreements of one of our subsidiaries, deposits were made into bank reserve accounts to meet the requirements of the lease agreements. The owners of the vessels have the ability to draw on these amounts to cover operating lease payments if such payments become overdue. The escrow amounts totaled $6,590,000 and $6,640,000 at December 31, 2003 and 2002, respectively, and are included in Restricted Cash. We are also required to record deposits representing performance bonds required on certain of our commodity swap agreements. The amounts were $816,000 and $590,000 at December 31, 2003 and 2002, respectively. In January of 2004, these deposits were returned to us, as there were no commodity swap agreements in place at December 31, 2003. The additional amounts in Restricted Cash on our Consolidated Balance Sheet at December 31, 2002, were comprised of deposits required to meet minimum working capital commitments of our 12.5% interests in the bulk carrier companies. These interests were sold in 2003, and therefore there are no related amounts in Restricted Cash on our Consolidated Balance Sheet at December 31, 2003. NOTE D -- SELF-RETENTION INSURANCE Due to the effect of the events of September 11, 2001 on the reinsurance market, along with the discontinuation of the four-vessel U.S. flag LASH Liner Service, we revised our self-retention insurance program effective with the policy year beginning June 27, 2002. Under the revised insurance program, we are self-insured for Hull and Machinery claims between $150,000 and $1,000,000 and Loss of Hire claims in excess of 14 days up to an aggregate stop loss amount of $2,000,000. If the aggregate claim amounts F-29 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exceed $2,000,000, the Hull and Machinery deductible reverts to $150,000 for each claim and the Loss of Hire claim level remains at 14 days. We have obtained third party coverage for individual Hull and Machinery claims exceeding $1,000,000 and Loss of Hire claims exceeding 14 days. Protection and Indemnity claims are not included in the revised self-retention insurance program, and we have obtained third party insurance coverage for these claims with a deductible level of $25,000 per incident for all vessels. The independent actuarial estimates of our self-insurance exposure are approximately $672,000 and $652,000 below the aggregate $2,000,000 stop loss amount for each of the policy years beginning June 27, 2003 and 2002, respectively. For prior policy years, we are self-insured for most Personal Injury and Cargo claims under $1,000,000, for Hull claims under $2,500,000, and for claims for Loss of Hire under 60 days. We maintained insurance for individual claims over the above levels and maintained Stop Loss insurance to cover aggregate claims between those levels and the primary deductible levels. Primary deductibles per incident were $25,000 for Hull, Personal Injury, and Cargo, $1,000 for LASH barges, and 10 days for Loss of Hire. We are responsible for all claims under the primary deductibles. Under the Stop Loss insurance, claim costs between the primary deductible and $1,000,000 and $2,500,000, as applicable, are our responsibility until the aggregate Stop Loss amount is met. The aggregate annual Stop Loss, excluding primary deductibles, was $6,000,000 for the policy year ending June 26, 2002. After we have retained the aggregate amounts, all additional claims up to an additional aggregate amount of $6,000,000 are recoverable from underwriters. The current portions of the liabilities for self-insurance exposure were $3,668,000 and $6,657,000 at December 31, 2003 and 2002, respectively, and the noncurrent portions of these liabilities were $675,000 and $433,000 at December 31, 2003 and 2002, respectively. NOTE E -- EMPLOYEE BENEFIT PLANS PENSION AND POSTRETIREMENT BENEFITS Our defined benefit retirement plan covers all full-time employees of domestic subsidiaries who are not otherwise covered under union-sponsored plans. The benefits are based on years of service and the employee's highest sixty consecutive months of compensation. Our funding policy is based on minimum contributions required under ERISA as determined through an actuarial computation. Plan assets consist primarily of investments in equity and fixed income mutual funds and money market holdings. The target asset allocation range is 40% in fixed income investments and 60% in equity investments. The asset allocation on December 31, 2003 was 36% in fixed income investments and 64% in equity investments. The asset allocation on December 31, 2002 was 44% in fixed income investments and 56% in equity investments. The plan's prohibited investments include selling short, commodities and futures, letter stock, unregistered securities, options, margin transactions, derivatives, leveraged securities, and International Shipholding Corporation securities. The plan's diversification strategy includes limiting equity securities in any single industry to 25% of the equity portfolio market value, limiting the equity holdings in any single corporation to 10% of the market value of the equity portfolio, and diversifying the fixed income portfolio so that no one issuer comprises more than 10% of the aggregate fixed income portfolio, except for issues of the U.S. Treasury or other Federal Agencies. The plan's assumed future returns are based primarily on the asset allocation and on the historic returns for the plan's asset classes determined from both actual plan returns and, over longer time periods, market returns for those asset classes. As of December 31, 2003, the plan has assets of $17,828,000 and a projected pension obligation of $20,266,000. F-30 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Our postretirement benefit plans currently provide medical, dental, and life insurance benefits to eligible retired employees and their eligible dependents. The following table sets forth the plans' changes in the benefit obligations and fair value of assets and a statement of the funded status:
PENSION PLAN POSTRETIREMENT BENEFITS --------------------------- --------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ (ALL AMOUNTS IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year.... $18,372 $18,226 $ 9,024 $ 9,043 Service cost............................... 469 511 67 60 Interest cost.............................. 1,194 1,160 595 593 Actuarial (gain) loss...................... 1,119 (591) 98 34 Benefits paid.............................. (888) (934) (634) (706) Assumption change loss..................... -- -- 537 -- Curtailments & special termination benefits................................. -- -- -- -- Expenses paid.............................. -- -- -- -- ------- ------- ------- ------- Benefit obligation at end of year.......... 20,266 18,372 9,687 9,024 ------- ------- ------- ------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year..................................... 15,535 16,669 -- -- Actual return (loss) on plan assets........ 3,181 (1,295) -- -- Employer contribution...................... -- 1,095 634 706 Benefits paid.............................. (888) (934) (634) (706) Expenses paid.............................. -- -- -- -- ------- ------- ------- ------- Fair value of plan assets at end of year... 17,828 15,535 -- -- ------- ------- ------- ------- Funded status.............................. (2,438) (2,837) (9,687) (9,024) Unrecognized net actuarial loss............ 3,090 4,139 2,198 1,629 Unrecognized prior service cost............ 7 15 -- -- ------- ------- ------- ------- Prepaid (accrued) benefit cost............. $ 659 $ 1,317 $(7,489) $(7,395) ======= ======= ======= =======
KEY ASSUMPTIONS Measurement date.................. DEC. 31, 2003 DEC. 31, 2002 DEC. 31, 2003 DEC. 31, 2002 ------------- ------------- ------------- ------------- Discount rate..................... 6.25% 6.75% 6.25% 6.75% Expected return on plan assets.... 8.00% 8.00% N/A N/A Rate of compensation increase..... 5.50% 5.50% N/A N/A
The accumulated benefit obligation for the pension plan was $17,313,000 and $15,104,000 at December 31, 2003 and 2002, respectively. F-31 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table provides the components of net periodic benefit cost for the plans:
POSTRETIREMENT BENEFITS PENSION PLAN --------------- ------------------- FOR THE YEAR FOR THE YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, ------------------- --------------- COMPONENTS OF NET PERIODIC BENEFIT COST 2003 2002 2003 2002 - --------------------------------------- -------- -------- ------ ------ Service cost................................................ $ 469 $ 511 $ 67 $ 60 Interest cost............................................... 1,194 1,160 595 593 Expected return on plan assets.............................. (1,201) (1,313) -- -- Amortization of prior service cost.......................... 8 8 -- -- Amortization of net actuarial loss.......................... 188 -- 67 13 Curtailments & special termination benefits................. -- -- -- -- ------- ------- ---- ---- Net periodic benefit cost................................... $ 658 $ 366 $729 $666 ======= ======= ==== ====
KEY ASSUMPTIONS Measurement date.................. DEC. 31, 2003 DEC. 31, 2002 DEC. 31, 2003 DEC. 31, 2002 ------------- ------------- ------------- ------------- Discount rate..................... 6.75% 7.25% 6.75% 7.25% Expected return on plan assets.... 8.00% 8.00% N/A N/A Rate of compensation increase..... 5.50% 8.50% N/A N/A
For measurement purposes, the health and dental care cost trend rate was assumed to be 8.5% for 2003, decreasing steadily by .50% per year over the next seven years to a long-term rate of 5%. The health and dental care cost trend rate for employees over 65 was assumed to be 10.5% decreasing steadily by .50% per year over the next eleven years to a long-term rate of 5%. A one percent change in the assumed health care cost trend rates would have the following effects:
1% INCREASE 1% DECREASE ------------ ------------ (ALL AMOUNTS IN THOUSANDS) Change in total service and interest cost components for the year ended December 31, 2003.............................. $ 66 $ (56) Change in postretirement benefit obligation as of December 31, 2003.................................................. 1,020 (864)
We expect to contribute approximately $143,000 to our pension plan in 2004. Crew members on our U.S. flag vessels belong to union-sponsored pension plans. We contributed approximately $1,472,000, $1,440,000, and $1,712,000 to these plans for the years ended December 31, 2003, 2002, and 2001, respectively. These contributions are in accordance with provisions of negotiated labor contracts and generally are based on the amount of straight pay received by the union members. Information from the plans' administrators is not available to permit us to determine whether there may be unfunded vested benefits. We continue to evaluate ways in which we can better manage these benefits and control the costs. Any changes in the plan or revisions to assumptions that affect the amount of expected future benefits may have a significant effect on the amount of reported obligation and annual expense. In December of 2003, the Medicare Prescription Drug, Improvements, and Modernization Act of 2003 was signed into law. In addition to including numerous other provisions that have potential effects on an employer's retiree health plan, the Medicare law included a special subsidy for employers that sponsor retiree health plans with prescription drug benefits that are at least as favorable as the new Medicare F-32 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Part D benefit. We have elected the delayed accounting treatment. Future FASB action could affect amounts shown in this report. 401(K) SAVINGS PLAN We provide a 401(k) tax-deferred savings plan to all full-time employees who have completed at least 1,000 hours of service. We match 50% of the employee's first $2,000 contributed to the plan annually. We contributed $87,000, $171,000, and $156,000 to the plan for the years ended December 31, 2003, 2002, and 2001, respectively. STOCK INCENTIVE PLAN In April of 1998, we established a stock-based compensation plan, the Stock Incentive Plan (the "Plan"). The purpose of the Plan is to increase shareholder value and to advance the interest of the Company by furnishing a variety of economic incentives designed to attract, retain, and motivate key employees and officers and to strengthen the mutuality of interests between such employees, officers, and our shareholders. Incentives consist of opportunities to purchase or receive shares of common stock in the form of incentive stock options, non-qualified stock options, restricted stock, or other stock-based awards. Under the Plan, we may grant incentives to our eligible Plan participants for up to 650,000 shares of common stock. The exercise price of each option equals the market price of our stock on the date of grant. In July of 1999, options to purchase 475,000 shares of common stock were granted to certain qualified participants at an exercise price of $14.125 per share. The stock options are due to expire on April 14, 2008. All options vested immediately upon the grant date and were exercisable at December 31, 2003. No options were granted, exercised or forfeited during 2003, 2002, or 2001. We account for stock-based compensation in accordance with APB Opinion No. 25. Accordingly, no compensation expense has been recognized for employee options granted under the Plan. If we had determined compensation cost for the Plan based on the fair value at the grant dates for awards under the Plan consistent with the fair value method included in SFAS No. 123 "Accounting for Stock-Based Compensation," our net income and earnings per share for the years ended December 31, 2003, 2002, and 2001 would have agreed to the actual amounts reported since no stock options were granted for these years and all options outstanding vested in 1999. LIFE INSURANCE We have agreements with the former Chairman and current Chairman of the Company whereby their estates will be paid approximately $822,000 and $626,000, respectively upon death. We reserved amounts to fund a portion of these death benefits, which amounted to $1,000,000 and hold an insurance policy, which covers any remaining liability. The cash surrender value of the insurance policy was approximately $134,000 and $140,000 as of December 31, 2003 and 2002, respectively. NOTE F -- INCOME TAXES Our Federal income tax returns are filed on a consolidated basis and include the results of operations of our wholly-owned U.S. subsidiaries. Pursuant to the Tax Reform Act of 1986, the earnings (losses) of foreign subsidiaries, which were $553,000 in 2003, ($606,000) in 2002, and $791,000 in 2001, are also included. Prior to 1987, deferred income taxes were not provided on undistributed foreign earnings of $6,689,000, all of which are expected to remain invested abroad indefinitely. In accordance with the Tax Reform Act of 1986, commencing in 1987, shipping income, as defined under the U.S. Subpart F income tax provisions, generated from profitable controlled foreign subsidiaries are subject to Federal income taxes. F-33 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Components of the net deferred tax liability/(asset) are as follows:
DECEMBER 31, DECEMBER 31, 2003 2002 ------------ ------------ (ALL AMOUNTS IN THOUSANDS) Liabilities: Fixed Assets.............................................. $ 38,864 $ 24,848 Deferred Charges.......................................... 2,515 8,634 Unterminated Voyage Revenue/Expense....................... 1,182 1,719 Intangible Assets......................................... 3,183 3,693 Deferred Insurance Premiums............................... 691 982 Deferred Intercompany Transactions........................ 2,530 2,530 Other Liabilities......................................... 921 1,864 -------- -------- Total Liabilities........................................... 49,886 44,270 -------- -------- Assets: Insurance and Claims Reserve.............................. (3,565) (4,353) Deferred Intercompany Transactions........................ (2,530) (2,530) Post-Retirement Benefits.................................. (2,581) (2,742) Alternative Minimum Tax Credit............................ (4,596) (4,507) Net Operating Loss Carryforward/Unutilized Deficit........ (11,706) (10,455) Valuation Allowance....................................... 879 879 Other Assets.............................................. (6,366) (6,780) -------- -------- Total Assets................................................ (30,465) (30,488) -------- -------- Total Deferred Tax Liability, Net........................... $ 19,421 $ 13,782 ======== ========
The following is a reconciliation of the U.S. statutory tax rate to our effective tax rate -- expense (benefit):
YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 2001 ----- ------ ------ Statutory Rate.............................................. 35.00% (35.00)% (35.00)% State Income Taxes.......................................... 0.49% 12.30% 0.10% Other, Primarily Non-deductible Expenditures................ 0.55% 13.66% 0.15% ----- ------ ------ 36.04% (9.04)% (34.75)% ===== ====== ======
We have available at December 31, 2003, unused foreign deficits of $33,445,000. The unused foreign deficits are available only to offset certain foreign shipping earnings and do not expire. Realization of this tax asset is dependent upon generating future taxable income from foreign operations. In addition, foreign tax credits of $3,657,000 can only be utilized once the foreign deficit is eliminated. At that time, the credits will have a five-year carry forward prior to expiration. We believe that it is more likely than not we will realize these assets from future foreign operations, but there is no guarantee that we will be able to do so. Foreign income taxes of $563,000, $754,000 and $473,000 are included in our Consolidated Statements of Income in the Provision for Income Taxes for the years ended December 31, 2003, 2002, and 2001, respectively. We pay foreign income taxes in Indonesia. F-34 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We have not recognized a deferred tax liability of $688,000 for undistributed earnings of certain non-U.S. subsidiaries because we consider those earnings to be indefinitely invested abroad. As of December 31, 2003, the undistributed earnings of these subsidiaries were $1,967,000. NOTE G -- TRANSACTIONS WITH RELATED PARTIES We had receivables outstanding from a related party of $92,000 at December 31, 2002, relating to the sales of subsidiaries to a former employee prior to 2001. These receivables were paid in full at December 31, 2003. Collections on the total receivable were $92,000, $55,000, and $74,000 for the years ended December 31, 2003, 2002, and 2001, respectively. Interest income on this receivable was earned at the rate of 6% for the first five years and a variable rate of LIBOR plus 2% thereafter. Interest income amounted to $4,000, $10,000, and $16,000 for the years ended December 31, 2003, 2002, and 2001, respectively. During 1998, one of our wholly-owned subsidiaries, LMS Shipmanagement, Inc. ("LMS"), entered into agreements with Belden Shipping Pte. Ltd. ("Belden") to provide ship management services beginning in 1999, from which revenues earned were approximately $80,000 for the year ended December 31, 2001. In February of 2002, LMS discontinued providing management services to Belden, who has subsequently established its own shipmanagement group. We have a 30% interest in Belden, Echelon Shipping, Inc. ("Echelon"), and Belden Cement Holding, Inc. ("BCH") (See Note L). We had long-term receivables from Echelon totaling approximately $150,000 as of December 31, 2003 and 2002. We had long-term receivables from BCH totaling approximately $2,385,000 as of December 31, 2003 and 2002. These long-term receivables are included in Due from Related Parties. Interest income on these receivables is earned at a rate of 6% per year. We had long-term receivables, included in Due from Related Parties, from LMS Manning, Inc. ("LMS Manning") in which we owned a 48.0% interest totaling approximately $55,000 as of December 31, 2002. We sold our interest in LMS Manning in 2003 and have an outstanding receivable at December 31, 2003, of $30,000 included in Other Current Assets (See Note L). A son of our Chairman of the Board and a son of one of our Directors are partners of the legal firm of Jones, Walker, Waechter, Poitevent, Carrere and Denegre, which has been utilized for various legal services since our inception. We made payments to the firm totaling approximately $1,030,000, $738,000, and $1,114,000 for the years ended December 31, 2003, 2002, and 2001, respectively. We believe these payments represent the fair value of the services rendered. NOTE H -- COMMITMENTS AND CONTINGENCIES COMMITMENTS As of December 31, 2003, 16 vessels that we own or operate were under various contracts extending beyond 2003 and expiring at various dates through 2019. Certain of these agreements also contain options to extend the contracts beyond their minimum terms. At December 31, 2003, our unrestricted subsidiary, through its 50% ownership, guarantees a portion of the outstanding debt of an invested bulk carrier company. The guarantee is for the full remaining term of the associated debt, which was 8 years as of December 31, 2003. Performance by our unrestricted subsidiary would be required under the guarantee in the event of default by the bulk carrier company on its third party debt. This represents non-recourse debt to International Shipholding Corporation, the parent of the unrestricted subsidiary. The portion of the outstanding debt that the unrestricted subsidiary guaranteed at December 31, 2003, was $31,775,000. At December 31, 2002, our ownership in the bulk carrier companies was 12.5% and the portion of the outstanding debt guaranteed was $11,000,000. We have been unable to identify an established marketplace that would provide a fair market valuation of this F-35 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) guarantee. However, based on our belief that it is unlikely that performance by our unrestricted subsidiary under the guarantee will be required and our determination that the benefits that have accrued to us through our unrestricted subsidiary's making of the guarantee are minimal, we believe that the fair value of the non-contingent portion of the guarantee is immaterial. (See Note L for further discussion of our investment in the bulk carrier companies). We also maintain lines of credit totaling approximately $728,000 to cover standby letters of credit required on certain of the our contracts. CONTINGENCIES We have been named as a defendant in numerous lawsuits claiming damages related to occupational diseases, primarily related to asbestos and hearing loss. We believe that most of these claims are without merit, and that insurance and the indemnification of a previous owner of one of our subsidiaries mitigate our exposure. Our overall exposure to the numerous lawsuits in question has been estimated by our lawyers and internal staff to be between approximately $450,000 and $1,500,000, and we believe that those estimates are reasonable. Our reserves at December 31, 2003 of approximately $1,000,000 were within this estimated range. There is a reasonable possibility that there will be additional claims associated with occupational diseases asserted against us. However, we do not believe that it is reasonably possible that our exposure from those claims will be material because (1) the lawsuits filed since 1989 claiming damages related to occupational diseases in which we have been named as a defendant have primarily involved seamen that served on-board our vessels and the number of such persons still eligible to file a lawsuit against us is diminishing and (2) such potential additional claims, if pursued, would be covered under an indemnification agreement with a previous owner of one of our subsidiaries and/or under one or more of our existing insurance policies with deductibles ranging from $5,000 to $25,000 per claim. In the normal course of our operations, we become involved in various litigation matters including, among other things, claims by third parties for alleged property damages, personal injuries, and other matters. While we believe that we have meritorious defenses against these claims, our management has used significant estimates in determining our potential exposure. Our estimates are determined based on various factors, such as (1) severity of the injury (for personal injuries) and estimated potential liability based on past judgments and settlements, (2) advice from legal counsel based on its assessment of the facts of the case and its experience in other cases, (3) probability of pre-trial settlement which would mitigate legal costs, (4) historical experience on claims for each specific type of cargo (for cargo damage claims), and (5) whether our seamen are employed in permanent positions or temporary revolving positions. It is reasonably possible that changes in our estimated exposure may occur from time to time. As is true of all estimates based on historical experience, these estimates are subject to some volatility. However, because our total exposure is limited by our aggregate stop loss levels (see Note D for further discussion of our self-retention insurance program), we believe that our exposure is within our estimated levels. Where appropriate, we have recorded provisions, included in Other Long-Term Liabilities: Claims and Other, to cover our potential exposure and anticipated recoveries from insurance companies, included in Other Assets. Although it is difficult to predict the costs of ultimately resolving such issues, we have determined that our current insurance coverage is sufficient to limit any additional exposure to an amount that would not be material to our financial position. Therefore, we do not expect such changes in these estimates to have a material effect on our financial position or results of operations. One of our subsidiaries time charters our U.S. flag Coal Carrier to US Generating New England, Inc. ("USGenNE"), an indirect subsidiary of PG&E Corporation. On July 8, 2003, USGenNE filed a petition for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code and subsequently requested from the court an extension of time to submit its bankruptcy plan until March 4, 2004, and an extension of time until May 3, 2004, to solicit acceptance of its plan. USGenNE is current in all of its F-36 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) obligations to us under the time charter except for approximately $850,000 of pre-petition invoices covering charter hire and related expenses. The $850,000 of pre-petition invoices owed to us is an unsecured claim in the bankruptcy proceeding. Under the federal bankruptcy laws, USGenNE has the right to accept or reject the time charter. If USGenNE accepts the time charter, it is then required to meet its payment and financial obligations under the time charter including the $850,000 pre-petition invoices. If USGenNE rejects the time charter, then we would have a priority administrative claim with respect to all amounts due to us under the time charter that are related to the post-petition period, but we would have no priority with respect to the pre-petition invoices. At this time we cannot predict whether the time charter will be accepted or rejected. Therefore, we have not provided an allowance for the pre-petition invoices in our financial statements as of December 31, 2003. In the event the time charter is ultimately rejected, our management believes the vessel can be utilized in alternative employment without incurring a material impairment to the vessel's carrying value, although we can give no assurance at this time. Further, even though USGenNE was not obligated to use the vessel for the balance of charter year number 8 (12/02-12/03), it utilized the vessel through the end of the year. At this time we can give no assurance as to the extent of USGenNE's use of the vessel beyond 2003; however, USGenNE has continued to use the vessel in 2004 through the date of this report. NOTE I -- LEASES DIRECT FINANCING LEASE In 1999, we entered into a direct financing lease of a foreign flag PCTC expiring in 2019. The schedule of future minimum rentals to be received under this direct financing lease in effect at December 31, 2003, is as follows:
RECEIVABLES UNDER FINANCING LEASE ----------------- (ALL AMOUNTS IN THOUSANDS) Year Ended December 31, 2004...................................................... $ 8,455 2005...................................................... 8,432 2006...................................................... 8,431 2007...................................................... 8,431 2008...................................................... 8,455 Thereafter................................................ 74,874 -------- Total Minimum Lease Payments Receivable..................... 117,078 Estimated Residual Value of Leased Property................. 2,051 Less Unearned Income........................................ (67,865) -------- Total Net Investment in Direct Financing Lease.............. 51,264 Current Portion........................................... (2,128) -------- Long-Term Net Investment in Direct Financing Lease at December 31, 2003......................................... $ 49,136 ========
F-37 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The schedule of future minimum rentals to be received under this direct financing lease in effect at December 31, 2002, is as follows:
RECEIVABLES UNDER FINANCING LEASE ----------------- (ALL AMOUNTS IN THOUSANDS) Year Ended December 31, 2003...................................................... $ 8,431 2004...................................................... 8,455 2005...................................................... 8,432 2006...................................................... 8,431 2007...................................................... 8,431 Thereafter................................................ 83,329 -------- Total Minimum Lease Payments Receivable..................... 125,509 Estimated Residual Value of Leased Property................. 2,051 Less Unearned Income........................................ (74,352) -------- Total Net Investment in Direct Financing Lease.............. 53,208 Current Portion........................................... (1,944) -------- Long-Term Net Investment in Direct Financing Lease at December 31, 2002......................................... $ 51,264 ========
CAPITAL LEASES We entered into sale-leaseback agreements in 1991 and 1992 for a group of our LASH barges. These leases met the required criteria for capital lease treatment and were accounted for as such. The terms of the leases were 12 years. During 2002, we purchased the barges thereby terminating the leases. During 2000, we entered into a sale-leaseback agreement for two of our LASH vessels. The gain on the sale-leaseback was deferred over the life of the lease. The lease met the required criteria for capital lease treatment and was accounted for as such. The term of the lease was 5 years. During 2001, the two vessels were reclassified to Assets Held for Disposal and written down to their estimated fair value. The resulting net loss after recognition of the deferred gain was included in the Impairment Loss on our Consolidated Income Statement for the year ended December 31, 2001. During 2002, the vessels were sold, and the related capital lease obligation was paid off. Additionally in 2000, we entered into a sale-leaseback agreement for one of our PCTCs. At inception, the lease met the required criteria for capital lease treatment and was accounted for as such. Subsequently in December of 2001, we renegotiated the lease agreement, and the amended terms of the lease did not meet the required criteria for capital lease treatment. The lease was reclassified to an operating lease effective December 31, 2001, and has been accounted for as such going forward. There were no capital leases as of December 31, 2003 and 2002. OPERATING LEASES During 2000, we entered into a sale-leaseback agreement for one of our Ice Strengthened Breakbulk/ Multi-Purpose vessels, which is classified as an operating lease. During 2001, we entered into two sale-leasebacks, covering one of our domestic PCTCs and one of our foreign flag PCTCs. The gains on these sale-leasebacks are being deferred over the lives of the leases. We renegotiated a capital lease agreement for one of our domestic PCTCs in December of 2001 and subsequently reclassified the lease to an F-38 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operating lease. This reclassification resulted in a gain of $5,309,000, which is being deferred over the remaining term life of the lease. During 2002, we entered into a sale-leaseback for one of our LASH vessels, which was also classified as an operating lease. The terms of the leases are 5 years for the Breakbulk vessel, 12 years for the domestic PCTC, 15 years for the foreign flag PCTC, 10 years for the domestic PCTC reclassified as an operating lease in 2001, and 5 years for the LASH vessel. Most of the operating lease agreements have a fair value renewal option and a fair value purchase option, with the exception of the operating lease for the Breakbulk vessel. Most of these agreements impose defined minimum working capital and net worth requirements, impose restrictions on the payment of dividends, and prohibit us from incurring, without prior written consent, additional debt or lease obligations, except as defined. Certain agreements require escrow deposits (See Note C). The vessels under these leases, with the exception of the LASH vessel, are operated under fixed charter agreements covering the terms of the respective leases. We also conduct certain of our operations from leased office facilities and use certain transportation and other equipment under operating leases expiring at various dates through 2008. Rent expense related to operating leases totaled approximately $30,079,000, $26,471,000, and $18,965,000, for the years ended December 31, 2003, 2002, and 2001, respectively. The following is a schedule, by year, of future minimum payments required under operating leases that have initial non-cancelable terms in excess of one year as of December 31, 2003:
PAYMENTS UNDER OPERATING LEASES ---------------------------------------------------------------- DOMESTIC FOREIGN FLAG LASH OTHER BREAKBULK PCTCS PCTC VESSEL LEASES TOTAL --------- -------- ------------ ------ ------ -------- (ALL AMOUNTS IN THOUSANDS) Year Ended December 31, 2004............................ $ 940 $ 8,665 $ 6,340 $1,920 $1,148 $ 19,013 2005............................ 783 8,898 6,340 1,920 1,119 19,060 2006............................ -- 9,596 6,340 1,920 1,217 19,073 2007............................ -- 9,596 6,340 1,760 1,252 18,948 2008............................ -- 9,596 6,340 -- 957 16,893 Thereafter...................... -- 44,008 47,550 -- -- 91,558 ------ ------- ------- ------ ------ -------- Total Future Minimum Payments..... $1,723 $90,359 $79,250 $7,520 $5,693 $184,545 ====== ======= ======= ====== ====== ========
NOTE J -- DEFERRED CHARGES AND ACQUIRED CONTRACT COSTS Deferred charges and acquired contract costs are comprised of the following:
DECEMBER 31, DECEMBER 31, 2003 2002 ------------ ------------ (ALL AMOUNTS IN THOUSANDS) Drydocking Costs............................................ $ 9,765 $11,414 Financing Charges and Other................................. 2,554 3,214 Acquired Contract Costs..................................... 9,095 10,550 ------- ------- $21,414 $25,178 ======= =======
The Acquired Contract Costs represent the portion of the purchase price paid for Waterman Steamship Corporation applicable primarily to that company's three U.S. flag RO/RO vessels under maritime prepositioning ship contract agreements, which expire in 2010. F-39 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE K -- SIGNIFICANT OPERATIONS MAJOR CUSTOMERS We have several medium- to long-term contracts related to the operations of various vessels (See Note H), from which revenues represent a significant amount of our total revenue. Revenues from the contracts with the MSC were $35,874,000, $34,543,000, and $36,868,000 for the years ended December 31, 2003, 2002, and 2001, respectively. Until early 2002, we operated four U.S. flag LASH vessels in a liner service, of which three vessels were subsidized under the MSA (See Note A -- "Subsidy Agreements"). These four vessels were sold during 2002. In November of 2002, we began operating one U.S. flag LASH vessel on a subsidized liner service (See Note B). Revenues, including subsidy revenue, from both operations were $26,790,000, $19,466,000, and $91,595,000 for the years ended December 31, 2003, 2002, and 2001, respectively. We have four U.S. flag PCTCs, also under the MSA, which carry automobiles from Japan to the United States for a Japanese charterer. Revenues, including subsidy revenue, were $39,516,000, $38,566,000, and $37,950,000 for the years ended December 31, 2003, 2002, and 2001, respectively. We provide space on our westbound foreign flag LASH liner service to several commercial shippers. The westbound cargoes included steel and other metal products, high-grade paper and wood products, and other general cargo. Revenues were $26,002,000, $26,306,000, and $29,448,000 for the years ended December 31, 2003, 2002, and 2001, respectively. CONCENTRATIONS A significant portion of our traffic receivables are due from contracts with the MSC and transportation of government sponsored cargo. There are no other concentrations of receivables from customers or geographic regions that exceed 10% of stockholders' investment at December 31, 2003 or 2002. With only minor exceptions related to personnel aboard certain foreign flag vessels, most of our shipboard personnel are covered by collective bargaining agreements under multiple unions. GEOGRAPHIC INFORMATION We have operations in several principal markets, including international service between the U.S. Gulf and East Coast ports and ports in the Middle East, Far East, and northern Europe, and domestic transportation services along the U.S. Gulf and East Coast. Revenues attributable to the major geographic areas of the world are presented in the following table. Revenues for the Time Charter Contracts, Contracts of Affreightment, Rail-Ferry Service, and Other are assigned to regions based on the location of the customer. Revenues for the Liner Services are presented based on the location of the ports serviced by F-40 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) this segment. Because we operate internationally, most of our assets are not restricted to specific locations. Accordingly, an allocation of identifiable assets to specific geographic areas is not applicable.
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 2003 2002 2001 --------- --------- --------- (ALL AMOUNTS IN THOUSANDS) United States.......................................... $108,726 $ 88,230 $ 83,972 Asian countries........................................ 56,473 62,842 60,847 Rail-Ferry service operating between U.S. Gulf and Mexico............................................... 15,537 11,240 6,207 Liner services operating between: U.S. Gulf/East Coast ports and ports in Middle East.............................................. 26,790 19,466 91,595 U.S. Gulf/East Coast ports and ports in Northern Europe............................................ 48,845 44,837 57,245 Other countries........................................ 1,442 797 4,504 -------- -------- -------- Total Revenues....................................... $257,813 $227,412 $304,370 ======== ======== ========
OPERATING SEGMENTS Our operating segments are identified primarily based on the characteristics of the contracts or terms under which the fleet of vessels and barges are operated. Each of the reportable segments is managed separately as each requires different resources depending on the nature of the contract or terms under which each vessel within the segment operates. Our operating segments are identified and described below. LINER SERVICES: A liner service operates a vessel or vessels on an established trade route with regularly scheduled sailing dates. We receive revenues for the carriage of cargo within the established trading area and pay the operating and voyage expenses incurred. Our Liner Services include a U.S. flag liner service between the U.S. Gulf and East Coast ports and ports in the Red Sea and Middle East, and a foreign flag transatlantic liner service operating between U.S. Gulf and East Coast ports and ports in northern Europe. TIME CHARTER CONTRACTS: These are contracts by which the charterer obtains the right for a specified period to direct the movements and utilization of the vessel in exchange for payment of a specified daily rate, but we retain operational control over the vessel. Typically, we fully equip the vessel and are responsible for normal operating expenses, repairs, wages and insurance, while the charterer is responsible for voyage expenses, such as fuel, port and stevedoring expenses. Our Time Charter Contracts include contracts with car manufacturers for six PCTCs, with an electric utility for a conveyor-equipped, self-unloading Coal Carrier, and with a mining company providing ocean transportation services at its mine in West Irian Jaya, Indonesia. Also included in this segment are contracts under which the MSC charters three RO/ROs that are under an operating contract. The MSC's charter contract with the Ice Strengthened Multi-Purpose vessel expired in December of 2002, but the vessel continued to operate under charter to the MSC on a voyage-to-voyage basis until the vessel was scrapped in December of 2003. Our Cape-Size Bulk Carrier, which operated in the spot market, was included in this segment in 2001 until it was sold in June of 2001. CONTRACTS OF AFFREIGHTMENT ("COA"): These are contracts by which we provide space on our vessel(s) for the carriage of specified goods or a specified quantity of goods on a single voyage or series of voyages over a given period of time between named ports or within certain geographical areas in return for the payment of an agreed amount per unit of cargo carried. Generally, we are responsible for all operating and voyage expenses. Our COA segment includes a sulphur transportation contract with a sulphur producer. F-41 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RAIL-FERRY SERVICE: This segment includes a service that began in January of 2001 carrying loaded rail cars between the U.S. Gulf and Mexico. Our two Special Purpose vessels are employed with this service, each having a capacity for 60 standard gauge rail cars. With departures every four days from Coatzacoalcos, Mexico and Mobile, Alabama, it offers with each vessel a three-day transit between these ports and provides a total of 90 trips per year in each direction. OTHER: This segment includes results of several of our subsidiaries that provide ship charter brokerage, agency, and other specialized services primarily to our operating segments described above, as well as our 50% ownership in a car transportation truck company. Also included in the Other category are corporate related items, results of insignificant operations, and income and expense items not allocated to reportable segments. The following table presents information about segment profit and loss and segment assets. We do not allocate interest income, other income, losses or gains on early extinguishment of debt, administrative and general expenses, equity in unconsolidated entities, or income taxes to our segments. Intersegment revenues are based on market prices and include revenues earned by our subsidiaries that provide specialized services to the operating segments. Expenditures for segment assets represent cash outlays during the periods presented, including purchases of assets, improvements to assets, and drydock payments.
TIME RAIL- LINER CHARTER CONTRACTS OF FERRY SERVICES CONTRACTS AFFREIGHTMENT SERVICE OTHER ELIMINATION TOTAL -------- --------- ------------- -------- ------- ----------- -------- (ALL AMOUNTS IN THOUSANDS) 2003 Revenues from external customers...................... $ 75,635 $129,685 $16,189 $ 15,537 $20,767 -- $257,813 Intersegment revenues............ -- -- -- -- 13,551 $(13,551) -- Depreciation and amortization.... 5,108 15,144 2,799 4,101 507 -- 27,659 Gross voyage (loss) profit....... (4,199) 33,048 5,495 (2,926) 2,422 -- 33,840 Interest expense................. 1,039 7,152 1,800 2,322 201 -- 12,514 Gain on sale of vessels and other assets......................... -- 482 -- -- 911 -- 1,393 Segment (loss) profit before administrative and general expenses, investment income, loss on early extinguishment of debt, equity in unconsolidated entities, and taxes............ (5,238) 26,378 3,695 (5,248) 3,132 -- 22,719 Segment assets................... 27,196 167,803 40,637 53,519 4,536 -- 293,691 Expenditures for segment assets......................... 4,077 611 -- -- 2,882 -- 7,570 2002 Revenues from external customers...................... $ 65,146 $128,279 $15,370 $ 11,240 $ 7,377 -- $227,412 Intersegment revenues............ -- -- -- -- 16,055 $(16,055) -- Depreciation and amortization.... 5,062 14,242 2,868 4,116 846 -- 27,134 Impairment loss.................. (52) -- -- -- 118 -- 66 Gross voyage (loss) profit....... (4,910) 34,465 5,962 (3,673) (1,342) -- 30,502 Interest expense................. 1,794 10,192 2,338 3,221 161 -- 17,706 Gain on sale of vessels and other assets......................... -- -- -- -- 557 -- 557 Impairment loss on investment.... -- -- -- -- (598) -- (598)
F-42 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TIME RAIL- LINER CHARTER CONTRACTS OF FERRY SERVICES CONTRACTS AFFREIGHTMENT SERVICE OTHER ELIMINATION TOTAL -------- --------- ------------- -------- ------- ----------- -------- (ALL AMOUNTS IN THOUSANDS) Segment (loss) profit before administrative and general expenses, investment income, gain on early extinguishment of debt, other income, equity in unconsolidated entities, and taxes.......................... (6,704) 24,273 3,624 (6,894) (1,544) -- 12,755 Segment assets................... 29,507 184,196 43,784 57,224 2,836 -- 317,547 Expenditures for segment assets......................... 7,997 985 1,193 47 1,242 -- 11,464 2001 Revenues from external customers...................... $148,840 $129,845 $15,839 $ 6,207 $ 3,639 -- $304,370 Intersegment revenues............ -- -- -- -- 28,417 $(28,417) -- Depreciation and amortization.... 14,206 19,834 2,869 4,091 1,271 -- 42,271 Impairment loss.................. (78,683) (2,355) -- -- -- -- (81,038) Gross voyage (loss) profit....... (90,259) 37,248 6,255 (7,501) 449 -- (53,808) Interest expense................. 3,326 17,162 2,772 3,447 30 -- 26,737 Gain on sale of vessels and other assets......................... -- 3,075 -- -- 426 -- 3,501 Segment (loss) profit before administrative and general expenses, investment income, gain on early extinguishment of debt, equity in unconsolidated entities, and taxes............ (93,585) 23,161 3,483 (10,948) 845 -- (77,044) Segment assets................... 39,531 198,202 45,151 60,693 9,149 -- 352,726 Expenditures for segment assets......................... 1,990 40,817 11 4,445 692 -- 47,955
Following is a reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 2003 2002 2001 --------- --------- --------- (ALL AMOUNTS IN THOUSANDS) Profit or Loss: Total profit (loss) for reportable segments.......... $ 22,719 $ 12,755 $(77,044) Unallocated amounts: Interest income.................................... 2,162 656 1,157 Other Income....................................... -- 1,498 -- (Loss) Gain on Early Extinguishment of Debt........ (1,310) 65 23 Administrative and general expenses................ (15,646) (15,734) (23,578) -------- -------- -------- (Loss) income before income taxes, equity in net income (loss) of unconsolidated entities and extraordinary item................................. $ 7,925 $ (760) $(99,442) ======== ======== ========
F-43 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, DECEMBER 31, DECEMBER 31, 2003 2002 2001 ------------ ------------ ------------ Assets: Total assets for reportable segments............ $293,691 $317,547 $352,726 Unallocated amounts............................. 88,760 89,205 108,996 -------- -------- -------- $382,451 $406,752 $461,722 ======== ======== ========
Other income of $1,498,000 in 2002 resulted from interest we earned on overpayments of foreign taxes made in prior years that were previously refunded. Unallocated assets primarily include Current Assets of $67,397,000, $65,559,000, and $89,695,000, as of December 31, 2003, 2002, and 2001, respectively. Also included in unallocated assets are Investment in Unconsolidated Entities of $8,413,000, $8,251,000, and $7,857,000, as of December 31, 2003, 2002, and 2001, respectively and Other Long-term Assets of $10,415,000, $12,586,000, and $10,745,000, as of December 31, 2003, 2002, and 2001, respectively. We manage these unallocated assets on a corporate rather than segment basis. NOTE L -- UNCONSOLIDATED ENTITIES CEMENT CARRIER COMPANIES During 1998, we acquired a 37.5% interest in Belden, a cement carrier management company, and three cement carrier companies, Echelon, Shining Star Shipping, Inc. formerly known as Shining Star Malta Ltd. ("Shining"), and Carson Shipping, Inc. ("Carson") for approximately $3,400,000. During 1999, we sold 7.5% of our 37.5% interest in each of the aforementioned companies for approximately $806,000. During 2000, we acquired a 30% interest in another cement carrier company, Yakuma Shipping Inc. ("Yakuma"), for $600,000. In October of 2000, we sold our interest in Carson for approximately $511,000, resulting in a loss of approximately $273,000. During 2001, we acquired a 30% interest in four additional cement carrier companies, Tilbury Shipping Inc. ("Tilbury"), Emblem Shipping Inc. ("Emblem"), Mattea Shipping Inc. ("Mattea"), and Belden Management, Inc. ("Belden Management"), a management company. Additionally in 2001, BCH, which is a holding company for each of the aforementioned cement carrier companies, was formed. In 2002, we acquired a 30% interest in a company, Minardi Shipping Inc. ("Minardi"), which owns an ice strengthened bulk carrier. In 2003, we acquired a 30% interest in two additional cement carrier companies, Chariot Shipping Inc. ("Chariot"), and Epson Shipping Inc. ("Epson"). Echelon, Shining, Yakuma, Tilbury, Emblem, and Chariot each own and operate one cement-carrying vessel. Mattea owns and operates two cement carriers. Minardi owns and operates an ice strengthened bulk carrier. Epson obtained one cement carrying vessel in January of 2004 and began operating the vessel at that time. All of these vessels operate under medium- to long-term contracts, and Belden Management manages these companies. Currently, we own a 30% interest in BCH, which owns 100% of each of these companies. These investments are accounted for under the equity method, and our share of earnings or losses is reported in our consolidated statements of income net of taxes. Our portion of the combined earnings of these investments, net of taxes, was $339,000, $550,000 and $389,000 for the years ended December 31, 2003, 2002, and 2001, respectively. No distributions were made during 2003, 2002, and 2001. The aggregate amount of consolidated retained earnings that represented undistributed earnings of these investments as of December 31, 2003 was approximately $1,200,000. F-44 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The unaudited combined condensed financial position and results of operations of the cement carrier companies are summarized below:
DECEMBER 31, DECEMBER 31, 2003 2002 ------------ ------------ (AMOUNTS IN THOUSANDS) Current Assets.............................................. $ 3,285 $ 5,522 Noncurrent Assets........................................... $63,027 $55,559 Current Liabilities......................................... $16,263 $ 9,509 Noncurrent Liabilities...................................... $39,094 $42,450
YEAR ENDED DECEMBER 31, --------------------------- 2003 2002 2001 ------- ------- ------- (AMOUNTS IN THOUSANDS) Operating Revenues...................................... $20,293 $18,822 $13,879 Operating Income........................................ $14,780 $13,969 $10,021 Net Income.............................................. $ 1,739 $ 2,782 $ 1,802
CAPE-SIZE BULK CARRIERS During 2000, Cape Shipholding, Inc., our wholly-owned subsidiary, acquired a 12.5% interest in Bulk Venture, Ltd. for approximately $1,280,000, which owned two newly built cape-size bulk carrier vessels. During 2001, we made an additional investment in Bulk Venture, Ltd. of approximately $376,000. We received dividends of approximately $475,000, $56,000 and $113,000 in 2003, 2002 and 2001, respectively. During 2003, we sold our 12.5% interest in Bulk Venture, Ltd. for approximately $1,906,000, resulting in a gain of approximately $250,000. Additional funds of approximately $259,000 are expected to be received in 2004 representing the remaining proceeds from the sale of our investment. During 2001, Bulk Africa Shipholding, Inc., our wholly-owned subsidiary, acquired a 12.5% interest in Bulk Africa, Ltd. for approximately $626,000, which owned a newly built cape-size bulk carrier vessel. During 2002, we made an additional investment in Bulk Africa, Ltd. of approximately $818,000. We received dividends of approximately $388,000 in 2003. No dividends were received during 2002 and 2001. During 2003, we sold our 12.5% interest in Bulk Africa, Ltd. for approximately $1,191,000, resulting in a loss of approximately $126,000. Additional funds of approximately $127,000 are expected to be received in 2004 representing the remaining proceeds from the sale of our investment. During 2001, Bulk Australia Shipholding, Inc., our wholly-owned subsidiary, acquired a 12.5% interest in Bulk Australia, Ltd. for approximately $144,000, which owned a newly built cape-size bulk carrier vessel. During 2002, we made an additional investment in Bulk Australia Ltd. of approximately $1,333,000. During 2003, we received a partial refund for additional funding of $128,000. We received dividends of approximately $300,000 in 2003. No dividends were received during 2002 and 2001. During 2003, we sold our 12.5% interest in Bulk Australia, Ltd. for approximately $1,111,000, resulting in a loss of approximately $9,000. Additional funds of approximately $229,000 are expected to be received in 2004 representing the remaining proceeds from the sale of our investment. The investments described above were accounted for under the cost method of accounting and accordingly income is recognized only upon distribution of dividends or sale of investment. However, the remaining proceeds from the sale of our investments expected to be received in 2004 were recognized as dividend income in 2003 due to the fact that the Board of Directors of the respective companies declared dividends for these amounts in 2003, and therefore these amounts were legally payable to us as of December 31, 2003. F-45 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In the fourth quarter of 2003, Cape Shipholding, Inc., our wholly-owned subsidiary, acquired a 50% investment in Dry Bulk Cape Holding Inc. for approximately $3,479,000, which owns two of the aforementioned newly built cape-size bulk carrier vessels. This investment is accounted for under the equity method, and our share of earnings or losses is reported in our consolidated statements of income net of taxes. For the year ended December 31, 2003, our portion of earnings net of taxes was $80,000. No distributions were made during 2003. MANAGEMENT COMPANIES During 1999, LMS acquired a 40% interest in LMS Manila, Inc. ("LMS Manila") for $21,000. In 2002, we sold our interest in LMS Manila for approximately $176,000, resulting in a gain of approximately $18,000. During 1999, LMS acquired a 48% interest in LMS Manning for $6,000, which provided us with ship management services. During 2003, we sold our 48% interest in LMS Manning for approximately $15,000, resulting in a loss of approximately $3,000. During 2000, CG Railway, Inc., our wholly-owned subsidiary, acquired a 50% interest in Terminales Transgolfo for $100,000, which operates a port in Coatzacoalcos, Mexico, for our Rail-Ferry Service. During 2001, we made an additional investment in Terminales Transgolfo of approximately $128,000. The investment is accounted for under the equity method, and our share of earnings or losses is reported in our consolidated statements of income net of taxes. No distributions were made during 2003, 2002, and 2001. NOTE M -- SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31, --------------------------- 2003 2002 2001 ------- ------- ------- (ALL AMOUNTS IN THOUSANDS) Cash Payments: Interest Paid......................................... $12,339 $18,938 $27,669 Taxes Paid............................................ $ 482 $ 773 $ 982
During 2002, we entered into a sale-leaseback for one of our LASH vessels for $10,000,000 of which $5,000,000 was received in cash and $5,000,000 in the form of a five-year promissory note. A portion of the note, approximately $2,000,000, is being repaid in twenty quarterly installments in addition to approximately $3,000,000 being repaid at the end of the lease. Interest on the note is at 4.845% for the first two years and 4.72% for each of the three years thereafter. During 2003, we sold our coal transfer terminal facility and related land for $2,500,000 of which $500,000 was received in cash and $2,000,000 in the form of a five-year promissory note. The note is being repaid in ten semi-annual installments of $200,000, in addition to interest at 6%. F-46 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE N -- FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES The estimated fair values of our financial instruments and derivatives are as follows (asset/(liability)):
DECEMBER 31, 2003 DECEMBER 31, 2002 ---------------------- ---------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE --------- ---------- --------- ---------- (ALL AMOUNTS IN THOUSANDS) Interest Rate Swap Agreements.......... $ (1,050) $ (1,050) $ (2,045) $ (2,045) Foreign Currency Contracts............. $ (46) $ (46) $ (49) $ (49) Commodity Swap Contracts............... $ -- $ -- $ 603 $ 603 Long-Term Debt......................... $(179,010) $(182,057) $(213,659) $(216,378)
Disclosure of the fair value of all balance sheet classifications, including but not limited to certain vessels, property, equipment, direct financing leases, or intangible assets, which may have a fair value in excess of historical cost, is not required. Therefore, this disclosure does not purport to represent our fair value. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: INTEREST RATE SWAP AGREEMENTS We enter into interest rate swap agreements to manage well-defined interest rate risks. During September of 1999, we entered into an interest rate swap agreement with a commercial bank to reduce the possible impact of higher interest rates in the long-term market by utilizing the fixed rate available with the swap. We are the fixed rate payor, and HSBC Bank plc is the floating rate payor. The fixed rate was 7.7% at December 31, 2003 and 2002, and the floating rates were 2.18% and 2.81% at December 31, 2003 and 2002, respectively. The contract amount totaled $19,920,000 and $23,240,000 at December 31, 2003 and 2002, respectively, and will expire in September of 2004. We have designated this interest rate swap agreement as an effective hedge. Settlements of this agreement are made semi-annually and resulted in increases to interest expense of $1,159,000 and $1,128,000 in 2003 and 2002, respectively. FOREIGN CURRENCY CONTRACTS We enter into forward exchange contracts to hedge certain firm purchase and sale commitments denominated in foreign currencies. The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual dollar cash inflows or outflows resulting from revenue collections from foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates. The term of the currency contracts is rarely more than one year. Due to the immaterial nature of these contracts, we have not designated the foreign currency contracts as hedges. Therefore, the changes in the fair market value of these hedges are recorded through earnings. During 2002, we entered into two forward purchases contracts. One contract was for Mexican Pesos for $1,200,000 U.S. Dollar equivalents beginning in January of 2003 and expired in December of 2003. The other contract was for Indonesian Rupiah for $600,000 U.S. Dollar equivalents effective for one year beginning January of 2003 and expired December of 2003. During 2003, we entered into two forward purchase contracts. One contract is for Mexican Pesos for $420,000 U.S. Dollar equivalents beginning in January of 2004 and is to expire in July of 2004. The other contract is for Indonesian Rupiah for $600,000 U.S. Dollar equivalents beginning in January of 2004 and is to expire in December of 2004. As of December 31, 2003 and 2002, we were a party to forward sales contracts in various currencies totaling $2,974,000 and $1,822,000 U.S. Dollar equivalents, respectively. F-47 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMMODITY SWAP CONTRACTS We enter into commodity swap contracts for portions of our estimated fuel purchases to manage the risk associated with changes in fuel prices. During 2001, we entered into two commodity swap agreements with an energy trading corporation for a portion of our estimated 2002 fuel purchases. The contracts were effective for one year beginning in January of 2002 and expired December 31, 2002, and were for 22,500 and 12,000 tons of fuel. The contracts required that a payment be made for the difference between the contract rate of $106.50 and $99.50 per ton, respectively, and the market rate for the fuel on each settlement date. These contracts covered approximately 49% of our Liner Service segment's 2002 fuel purchases. During November of 2002, we entered into three commodity swap agreements, one with an energy trading corporation and two with financial institutions. The contracts were effective for one year beginning in January of 2003 and expired December 31, 2003. Two of the contracts were for 14,400, and the other was for 12,000 tons of fuel. The contracts required that a payment be made for the difference between the contract rates of $116.25 to $118.83 per ton and the market rate for the fuel on each settlement date. During 2003, we entered into three commodity swap agreements, one with a financial institution and two with an energy trading corporation. One of the contracts was effective for one year beginning in January of 2003 and expired December 31, 2003 and was for 9,198 tons of fuel. The other two contracts were effective for nine months beginning in April of 2003 and expired December 31, 2003 and were for 13,500 and 9,000 tons of fuel, respectively. The contracts required that a payment be made for the difference between the contract rates of $124.00 to $158.75 per ton and the market rate for the fuel on each settlement date. These contracts covered approximately 92% of our Liner Service segment's 2003 fuel purchases and 79% of our Rail-Ferry Service segment's 2003 fuel purchases. As of December 31, 2003, there are no outstanding commodity swap contracts with respect to 2004 fuel purchases. We designated these commodity swap contracts as effective hedges. Monthly settlements of these agreements are recorded as an adjustment to voyage expenses. We made a net positive adjustment to voyage expense of $2,190,000 in 2003 and $1,024,000 in 2002. LONG-TERM DEBT The fair value of our debt is estimated based on the quoted market price for the publicly listed Senior Notes and the current rates offered to us on other outstanding obligations. AMOUNTS DUE FROM RELATED PARTIES The carrying amount of these notes receivable approximated fair market value as of December 31, 2003 and 2002. Fair market value takes into consideration the current rates at which similar notes would be made. RESTRICTED CASH The carrying amount of these investments approximated fair market value as of December 31, 2003 and 2002, based upon current rates offered on similar instruments. F-48 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE O -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Following are the components of the consolidated balance sheet classification Accounts Payable and Accrued Liabilities:
DECEMBER 31, DECEMBER 31, 2003 2002 ------------ ------------ (ALL AMOUNTS IN THOUSANDS) Accrued Voyage Expenses..................................... $19,260 $16,251 Trade Accounts Payable...................................... 5,374 3,425 Self-Insurance Liability.................................... 3,668 6,657 Accrued Customs Liability................................... 3,487 2,410 Accrued Interest............................................ 1,672 2,221 Other Short-Term Liabilities................................ 1,050 9 Accrued Salaries and Benefits............................... 999 591 Accrued Vessel Upgrade Costs................................ -- 2,688 ------- ------- $35,510 $34,252 ======= =======
NOTE P -- QUARTERLY FINANCIAL INFORMATION -- (UNAUDITED)
QUARTER ENDED ------------------------------------------------ MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ---------- ---------- ---------- --------- (ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 2003 Revenue...................................... $64,806 $ 67,505 $63,550 $61,952 Expense...................................... 54,272 57,151 57,023 55,527 Gross Voyage Profit.......................... 10,534 10,354 6,527 6,425 Net Income (Loss)............................ 2,994 2,490 (1,644) 1,651 Basic and Diluted Earnings (Loss) per Common Share: Net Income (Loss).......................... 0.49 0.41 (0.27) 0.27 2002 Revenue...................................... $60,452 $ 56,664 $49,900 $60,396 Expense...................................... 54,523 47,587 44,318 50,548 Impairment Loss.............................. 54 (151) 3 28 Gross Voyage Profit.......................... 5,875 9,228 5,579 9,820 Net (Loss) Income............................ (920) 1,116 (1,125) 793 Basic and Diluted (Loss) Earnings per Common Share: Net (Loss) Income.......................... (0.15) 0.18 (0.18) 0.13
F-49 INTERNATIONAL SHIPHOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED ------------------------------------------------ MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ---------- ---------- ---------- --------- (ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 2001 Revenue...................................... $80,399 $ 76,329 $78,236 $69,406 Expense...................................... 72,760 71,608 70,994 61,778 Impairment Loss.............................. 2,355 78,928 400 (645) Gross Voyage Profit (Loss)................... 5,284 (74,207) 6,842 8,273 Net Loss..................................... (5,353) (57,399) (165) (1,502) Basic and Diluted Loss per Common Share: Net Loss................................... (0.88) (9.44) (0.03) (0.25)
F-50 800,000 SHARES (ISC CORPORATION LOGO) % CONVERTIBLE EXCHANGEABLE PREFERRED STOCK --------------------- PROSPECTUS --------------------- FERRIS, BAKER WATTS Incorporated , 2004 PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than the underwriting discount and the financial advisory fee payable to the underwriter, payable by us in connection with the sale of our preferred stock being registered. All amounts are estimates except the SEC registration fee. SEC Registration Fee........................................ $ 5,575 NYSE Filing Fees............................................ 12,936 Printing Costs.............................................. 45,000 Legal Fees and Expenses..................................... 150,000 Accounting Fees and Expenses................................ 50,000 Transfer Agent and Registrar Fees........................... 3,500 Trustee Fees................................................ 5,000 Miscellaneous............................................... 12,989 -------- Total..................................................... $285,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of the State of Delaware empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer, employee or agent of the corporation or serves or served in these capacities for another enterprise, if serving at the request of the corporation. Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. In the case of an action by or in the right of the corporation, no indemnification may be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Article VI of our certificate of incorporation provides that our board of directors is expressly authorized to provide indemnification to the full extent permitted by Delaware law. In addition, Article II, Section 7 of our by-laws provides as follows: (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the company or any of its subsidiaries (including nominees and designees who have not yet taken office) or is or was serving at the request of the Company (including any person who has not been duly elected or appointed) as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (the "Indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in II-1 any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Company to the fullest extent authorized by the Delaware General Corporation Law ("GCL"), as presently existing or as it may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than the GCL permitted the Company to provide prior to such amendment), against any and all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid in connection with any arbitration or investigation and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Indemnitee's rights hereunder shall be contract rights and shall include the right to be paid by the Company for expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses incurred by an Indemnitee in advance of the final disposition of such proceeding, shall be made only upon delivery to the Company of an undertaking in a form satisfactory to counsel for the Company, by or on behalf of such Indemnitee, to repay all amounts so advanced if it should be ultimately determined that such Indemnitee is not entitled to be indemnified under this provision or otherwise. For purposes of this provision on the term Company shall include any resulting or constituent entities. (b) Nonexclusivity of Rights. The rights conferred herein on any person shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, contract or other agreement, vote of stockholders or disinterested directors or otherwise. (c) Insurance. The Company may maintain at its expense, to protect itself and any such director (including nominees and designees who have not yet taken office), officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise (including service with respect to employee benefit plans)against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the GCL. The underwriting agreement provides that the underwriter will indemnify our directors, officers, employees and agents against certain liabilities, including liabilities under the Securities Act of 1933, insofar as such liabilities arise out of or are based on written information furnished to us by the underwriter. Under an insurance policy maintained by us, our directors and officers are insured, within the limits and subject to the limitations of the policy, against certain expenses in connection with the defense of certain claims, actions, suits or proceedings, and certain liabilities which might be imposed as a result thereof, which may be brought against them by reason of their being or having been directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. None within three years. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits 1.1 Form of Underwriting Agreement 3.1 Restated Certificate of Incorporation of the Registrant (filed with the Securities and Exchange Commission as Exhibit 3.1 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 and incorporated herein by reference) 3.2 By-Laws of the Registrant (filed with the Securities and Exchange Commission as Exhibit 3.2 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 and incorporated herein by reference) 3.3 Form of Certificate of Designations of the Registrant with respect to the % Convertible Exchangeable Preferred Stock of the Registrant
II-2 4.1 Specimen of Common Stock Certificate (filed as an exhibit to the Registrant's Form 8-A filed with the Securities and Exchange Commission on April 25, 1980 and incorporated herein by reference) 4.2 Indenture between the Registrant and The Bank of New York, as Trustee, with respect to the 7 3/4% Senior Notes due October 15, 2007 (filed as Exhibit 4.2 to the Registrant's Form 10-Q for the quarterly period ended September 30, 2004 filed with the Securities and Exchange Commission and incorporated herein by reference) 4.3 Form of 7 3/4% Senior Note due October 15, 2007 (included in Exhibit 4.2 hereto and incorporated herein by reference) 4.4 Form of Indenture between the Registrant and The Bank of New York, as Trustee, with respect to the % Convertible Subordinated Notes due 2014 4.5 Form of % Convertible Subordinated Note due 2014 (included in Exhibit 4.4 hereto) 4.6 Specimen of % Convertible Exchangeable Preferred Stock Certificate 4.7 Form of Certificate of Designations of the Registrant with respect to the % Convertible Exchangeable Preferred Stock of the Registrant (filed as Exhibit 3.3) 5.1 Opinion of Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P. as to the legality of the securities being registered 10.1 Credit Agreement, dated as of November 14, 2002, by and among LCI Shipholdings, Inc., as Borrower, the banks and financial institutions listed therein, as Lenders, Den Norske Bank ASA, as Arranger, Agent and Security Trustee, and the Registrant, as Guarantor (filed as Exhibit 10.1 to Pre-Effective Amendment No. 2 to this registration statement filed with the Securities and Exchange Commission on December 10, 2004 and incorporated herein by reference) 10.2 Credit Agreement, dated as of September 30, 2003, by and among LCI Shipholdings, Inc. and Central Gulf Lines, Inc., as Joint and Several Borrowers, the banks and financial institutions listed therein, as Lenders, HSBC Bank PLC, as Facility Agent, Den Norske Bank ASA, as Documentation Agent, Deutsche Schiffsbank AG, as Security Trustee, and the Registrant, as Guarantor (filed as Exhibit 10.2 to Pre-Effective Amendment No. 2 to this registration statement filed with the Securities and Exchange Commission on December 10, 2004 and incorporated herein by reference) 10.3 Credit Agreement, dated as of December 6, 2004, by and among LCI Shipholdings, Inc., Central Gulf Lines, Inc. and Waterman Steamship Corporation, as Borrowers, the banks and financial institutions listed therein, as Lenders, Whitney National Bank, as Administrative Agent, Security Trustee and Arranger, and the Registrant, Enterprise Ship Company, Inc., Sulphur Carriers, Inc., Gulf South Shipping PTE Ltd. and CG Railway, Inc., as Guarantors (filed as Exhibit 10.3 to Pre- Effective Amendment No. 2 to this registration statement filed with the Securities and Exchange Commission on December 10, 2004 and incorporated herein by reference) 12.1 Statement of Computation of Ratios of Earnings to Fixed Charges and Preferred Stock Dividends (filed as Exhibit 12.1 to Pre-Effective Amendment No. 1 to this registration statement filed with the Securities and Exchange Commission on December 2, 2004 and incorporated herein by reference) 21.1 Subsidiaries of International Shipholding Corporation (filed as Exhibit 21 to the Registrant's Form 10-K for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission and incorporated herein by reference) 23.1 Consent of Independent Registered Public Accounting Firm 23.2 Consent of Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P. (included in Exhibit 5.1) 24.1 Powers of Attorney (included on the signature pages to this registration statement) 25.1 Statement of Eligibility of Trustee
(b) Financial Statement Schedules Report of Independent Registered Public Accounting Firm Schedule II -- Valuation and Qualifying Accounts and Reserves The other schedules required by Regulation S-X have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto beginning on page F-1 of the prospectus forming a part of this registration statement. II-3 ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes that: (1) for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and (2) for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New Orleans, State of Louisiana, on December 22, 2004. INTERNATIONAL SHIPHOLDING CORPORATION By: /s/ ERIK F. JOHNSEN ------------------------------------ Erik F. Johnsen Chairman of the Board, Director and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ERIK F. JOHNSEN Chairman of the Board, Director December 22, 2004 ------------------------------------------------ and Chief Executive Officer Erik F. Johnsen (Principal Executive Officer) /s/ GARY L. FERGUSON Vice President and Chief December 22, 2004 ------------------------------------------------ Financial Officer Gary L. Ferguson (Principal Financial Officer) /s/ MANNY G. ESTRADA Vice President and Controller December 22, 2004 ------------------------------------------------ (Principal Accounting Officer) Manny G. Estrada /s/ NIELS W. JOHNSEN* Director December 22, 2004 ------------------------------------------------ Niels W. Johnsen /s/ NIELS M. JOHNSEN* President and Director December 22, 2004 ------------------------------------------------ Niels M. Johnsen /s/ ERIK L. JOHNSEN* Executive Vice President and December 22, 2004 ------------------------------------------------ Director Erik L. Johnsen /s/ HAROLD S. GREHAN, JR.* Director December 22, 2004 ------------------------------------------------ Harold S. Grehan, Jr. /s/ EDWIN LUPBERGER* Director December 22, 2004 ------------------------------------------------ Edwin Lupberger
- --------------- * Executed by Mr. Erik F. Johnsen pursuant to the power of attorney provided on the signature page to the Registration Statement on Form S-1 filed with the SEC on November 2, 2004. II-5 INDEX OF SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES Report of Independent Registered Public Accounting Firm..... S-2 Schedule II -- Valuation and Qualifying Accounts and Reserves.................................................. S-3
S-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders International Shipholding Corporation We have audited the consolidated financial statements of International Shipholding Corporation as of December 31, 2003 and 2002, and for the two years in the period ended December 31, 2003, and have issued our report thereon dated January 29, 2004 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. The financial statements of International Shipholding Corporation for the year ended December 31, 2001 were audited by other auditors who have ceased operations and whose report dated January 11, 2002, expressed an unqualified opinion on those statements. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein as of December 31, 2003 and 2002, and for the two years in the period ended December 31, 2003. /S/ ERNST & YOUNG LLP New Orleans, Louisiana January 29, 2004 S-2 INTERNATIONAL SHIPHOLDING CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
DEDUCTIONS ADDITIONS FOR PURPOSE FOR BALANCE AT --------------------------- WHICH BALANCE AT BEGINNING OF CHARGED TO CHARGED TO ACCOUNTS END OF PERIOD EXPENSE OTHER ACCOUNTS WERE SET UP PERIOD ------------ ---------- -------------- --------------- ---------- (AMOUNTS IN THOUSANDS) December 31, 2001 (Unaudited)(1): Self-Retention Reserves........ $ 6,988 $10,002 $ -- $12,847 $ 4,143 Non Self-Retention Reserves.... 947 2,916 -- 2,821 1,042 Postretirement Benefits........ 7,559 275 -- -- 7,834 Custom Reserves................ 6,894 1,222 -- 488 7,628 Other Reserves................. 3,347 300 -- 532 3,115 ------- ------- ----- ------- ------- Total............................ $25,735 $14,715 $ -- $16,688 $23,762 December 31, 2002: Self-Retention Reserves........ $ 4,143 $ 6,450 $ -- $ 3,503 $ 7,090 Non Self-Retention Reserves.... 1,042 741 -- 904 879 Postretirement Benefits........ 7,834 343 -- 399 7,778 Custom Reserves................ 7,628 1,157 -- 4,877 3,908 Other Reserves................. 3,115 595 -- 2,134 1,576 ------- ------- ----- ------- ------- Total............................ $23,762 $ 9,286 $ -- $11,817 $21,231 ------- ------- ----- ------- ------- December 31, 2003: Self-Retention Reserves........ $ 7,090 $ 4,302 $ -- $ 7,050 $ 4,342 Non Self-Retention Reserves.... 879 4,092 -- 4,162 809 Postretirement Benefits........ 7,778 59 -- 383 7,454 Custom Reserves................ 3,908 1,264 -- 1,685 3,487 Other Reserves................. 1,576 980 -- 804 1,752 ------- ------- ----- ------- ------- Total............................ $21,231 $10,697 $ -- $14,084 $17,844
- --------------- (1) The information contained in this schedule for the year ended December 31, 2001 is unaudited. Our fiscal year 2001 financial data were audited by Arthur Andersen LLP, which has since ceased operations. S-3 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement 3.3 Form of Certificate of Designations of the Registrant with respect to the % Convertible Exchangeable Preferred Stock of the Registrant 4.4 Form of Indenture between the Registrant and The Bank of New York, as Trustee, with respect to the % Convertible Subordinated Notes due 2014 4.6 Specimen of % Convertible Exchangeable Preferred Stock Certificate 5.1 Opinion of Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P. as to the legality of the securities being registered 23.1 Consent of Independent Registered Public Accounting Firm 25.1 Statement of Eligibility of Trustee
EX-1.1 2 h19465a3exv1w1.txt FORM OF UNDERWRITING AGREEMENT Exhibit 1.1 INTERNATIONAL SHIPHOLDING CORPORATION 800,000 Shares [ %] Convertible Exchangeable Preferred Stock ($1.00 par value per share) UNDERWRITING AGREEMENT December [ ], 2004 --- Ferris, Baker Watts, Incorporated 100 Light Street Baltimore, MD 21202 Ladies and Gentlemen: International Shipholding Corporation, a Delaware corporation (the "Company"), proposes to issue and sell to Ferris, Baker Watts, Incorporated ("you" or the "Underwriter") an aggregate of 800,000 shares (the "Firm Shares") of [ ]% Convertible Exchangeable Preferred Stock, $1.00 par value per share (the "Preferred Stock"), of the Company, which Preferred Stock, at the Company's option and subject to certain conditions, is exchangeable for the Company's [ %] Convertible Subordinated Notes due 2014 (the "Notes") issuable pursuant to an indenture (the "Indenture") between the Company and The Bank of New York, as trustee (the "Trustee") to be dated as of the time of purchase (as defined below). The Preferred Stock is, and the Notes, when and if issued, will be, convertible into shares (the "Conversion Shares") of the Company's Common Stock, $1.00 par value per share (the "Common Stock"). Solely for the purpose of covering over-allotments, the Company proposes to grant to the Underwriter the option to purchase from the Company up to an additional 80,000 shares of the Preferred Stock (the "Additional Shares"). The Firm Shares and the Additional Shares are hereinafter collectively sometimes referred to as the "Shares." The Shares, the Notes and the Conversion Shares (collectively, the "Securities") are described in the Prospectus referred to below. The Company has filed, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively, the "Act"), with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-120161), including a prospectus, relating to the Securities. The Company has furnished to you, for use by you and by dealers, copies of one or more preliminary prospectuses (each such preliminary prospectus being herein called a "Preliminary Prospectus") relating to the Securities. Except where the context otherwise requires, the registration statement, as amended when it became or becomes effective, including all documents filed as a part thereof, and including any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 424(b) under the Act and deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act and also including any registration statement filed pursuant to Rule 462(b) under the Act, is herein called the "Registration Statement," and the prospectus in the form filed by the Company with the Commission pursuant to Rule 424(b) under the Act on or before the second business day after the date hereof (or such earlier time as may be required under the Act), or, if no such filing is required, the form of final prospectus included in the Registration Statement at the time it became effective, is herein called the "Prospectus." As used herein, "business day" shall mean a day on which the New York Stock Exchange is open for trading. The Company has filed, in accordance with Section 12 of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (collectively, the "Exchange Act"), a registration statement (as may be amended prior to the time of execution of this Agreement, the "Exchange Act Registration Statement") on Form 8-A under the Exchange Act to register, under Section 12(b) of the Exchange Act, the Preferred Stock. As used in this Agreement, the term "knowledge" with respect to any entity means to the knowledge of any director or officer of such entity after due inquiry. The Company and the Underwriter agree as follows: 1. Sale and Purchase. Upon the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Underwriter and the Underwriter agrees to purchase from the Company the Firm Shares in each case at a purchase price of $[ ] per share. The Company is advised by you that you intend (i) to make a public offering of the Firm Shares as soon after the effective date of the Registration Statement as in your reasonable judgment is advisable and (ii) initially to offer the Firm Shares upon the terms set forth in the Prospectus. You may from time to time increase or decrease the public offering price after the initial public offering to such extent as you may determine. In addition to the underwriting discount set forth in the Prospectus the Company shall pay to the Underwriter a financial advisory fee equal to the greater of $[ ] or 1.5% of the aggregate public offering price of all Firm Shares purchased. In addition, the Company hereby grants to the Underwriter the option to purchase, and upon the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Underwriter shall have the right to purchase, all or a portion of the Additional Shares as may be necessary to cover over-allotments made in connection with the offering of the Firm Shares, at the same purchase price per share to be paid by the Underwriter to the Company for the Firm Shares. In addition, the Company shall pay to the Underwriter a financial advisory fee equal to the greater of $[ ] or 1.5% of the aggregate public offering price of all Additional Shares purchased. This option may be exercised by the Underwriter at any time and from time to time on or before the thirtieth day following the date of the Prospectus, by written notice to the Company. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised and the date and time when the Additional Shares are to be delivered (such date and time being herein referred to as the "additional time of purchase"); provided, however, that the additional time of purchase shall not be earlier than the time of purchase (as defined below) nor earlier than the second business day after the date on 2 which the option shall have been exercised nor later than the tenth business day after the date on which the option shall have been exercised. 2. Payment and Delivery. Payment of the purchase price for the Firm Shares shall be made to the Company by wire transfer of immediately available funds to the account(s) specified by the Company against delivery of the Firm Shares to you through the facilities of The Depository Trust Company ("DTC") for the account of the Underwriter. Such payment and delivery shall be made at 9:00 A.M., New York City time, on [ ], 2004 (unless another time shall be agreed to by you and the Company). The time at which such payment and delivery are to be made is hereinafter sometimes called "the time of purchase." Electronic transfer of the Firm Shares shall be made to you at the time of purchase in such names and in such denominations as you shall specify. Payment of the purchase price for the Additional Shares shall be made at the additional time of purchase in the same manner and at the same office as the payment for the Firm Shares (unless otherwise agreed to by you and the Company). Electronic transfer of the Additional Shares shall be made to you at the additional time of purchase in such names and in such denominations as you shall specify. Deliveries of the documents described in Section 6 hereof with respect to the purchase of the Shares shall be made at the offices of Venable LLP at 2 Hopkins Plaza, Baltimore, Maryland 21201, at 9:00 A.M., New York City time, on the date of the closing of the purchase of the Firm Shares or the Additional Shares, as the case may be. 3. Representations, Warranties and Covenants of the Company. The Company represents and warrants to and agrees with the Underwriter that: (a) the Registration Statement has been declared effective under the Act; no stop order of the Commission preventing or suspending the use of any Preliminary Prospectus or the effectiveness of the Registration Statement has been issued and no proceedings for such purpose have been instituted or, to the Company's knowledge after due inquiry, are contemplated by the Commission; each Preliminary Prospectus, at the time of filing thereof, complied in all material respects with the requirements of the Act, and the last Preliminary Prospectus distributed in connection with the offering of the Shares did not, as of its date, and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; the Registration Statement complied when it became effective, complies and, at the time of purchase and any additional time of purchase and any time at which any sales with respect to which the Prospectus is delivered, will comply with the requirements of the Act, and the Prospectus will comply, as of its date and at the time of purchase and any additional times of purchase and any time at which any sales with respect to which the Prospectus is delivered, with the requirements of the Act; any statutes, regulations, contracts or other documents that are required to 3 be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement have been and will be so described or filed; the conditions to the use of Form S-1 have been satisfied; the Registration Statement did not when it became effective, does not and, at the time of purchase and any additional time of purchase and any time at which any sales with respect to which the Prospectus is delivered, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus will not, as of its date and at the time of purchase and any additional time of purchase and any time at which any sales with respect to which the Prospectus is delivered, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no warranty or representation with respect to any statement contained in the last Preliminary Prospectus, the Registration Statement or the Prospectus in reliance upon and in conformity with information concerning an Underwriter and furnished in writing by or on behalf of such Underwriter through you to the Company expressly for use in the last Preliminary Prospectus, the Registration Statement or the Prospectus; the Exchange Act Registration Statement has become effective as provided in Section 12 of the Exchange Act; and the Company has not distributed and will not distribute any "prospectus" (within the meaning of the Act) or offering material in connection with the offering or sale of the Shares other than the Registration Statement, the then most recent Preliminary Prospectus and the Prospectus; (b) each of the Company and each of the subsidiaries listed on Exhibit 21.1 to the Registration Statement (the "Subsidiaries") has been duly organized and is validly existing and in good standing under the laws of its respective jurisdiction of organization with authority and power, corporate or otherwise, to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus and, with respect to the Company, to: (i) execute and deliver this Agreement and to issue, sell and deliver the Shares as contemplated herein, (ii) execute, issue and deliver the Indenture and the Notes and perform its obligations thereunder, and (iii) issue and deliver the Conversion Shares in accordance with the terms of the Certificate of Designations of the [ %] Convertible Exchangeable Preferred Stock of the Company in the form filed as an exhibit to the Registration Statement (the "Certificate of Designations") or the Indenture, as the case may be; each of the Company and the Subsidiaries is duly qualified as a foreign entity to transact business in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property and assets or the conduct of business or otherwise, except where the failure to so qualify would not have a material adverse effect on the condition (financial or otherwise), results of operations, business, properties, assets or business prospects of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"); 4 (c) as of the date of this Agreement, the Company has an authorized and outstanding capitalization as set forth in the sections of the Registration Statement and the Prospectus entitled "Capitalization" and "Description of Common Stock," and, as of the time of purchase and the additional time of purchase, as the case may be, the Company shall have an authorized and outstanding capitalization as set forth in the sections of the Registration Statement and the Prospectus entitled "Capitalization," "Description of the Preferred Stock" and "Description of Common Stock" (subject, in each case, to the issuance of shares of Common Stock upon exercise of stock options disclosed as outstanding in the Registration Statement and the Prospectus and the grant of options under the Company's Stock Incentive Plan); all of the issued and outstanding shares of capital stock, including the Common Stock, of the Company have been duly authorized and validly issued and are fully paid and non-assessable, have been issued in compliance with all federal and state securities laws, except for any failure to comply that could not, individually or in the aggregate, have a Material Adverse Effect, and were not issued in violation of any preemptive right, right of first refusal or similar right; the Certificate of Designations has been duly authorized and approved in accordance with the Delaware General Corporation Law, will be filed with the Secretary of State of the State of Delaware on or before the time of purchase, requires no governmental or third party consent or approval prior to its becoming effective other than acceptance for recording by the Secretary of State of the State of Delaware, shall become effective and in full force and effect on or before the time of purchase and immediately subsequent to the filing of the Certificate of Designations, the Company will be duly incorporated and validly existing as a corporation in good standing under the laws of the State of Delaware; (d) all of the issued and outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, have been issued in compliance with all federal and state securities laws, except for any failure to comply that could not, individually or in the aggregate, have a Material Adverse Effect, and were not issued in violation of any preemptive right, right of first refusal or similar right; and are owned by the Company either directly or through wholly-owned subsidiaries, free and clear of any liens, claims or encumbrances of any kind; the Company has no direct or indirect subsidiaries (as defined under the Act) other than the Subsidiaries, the Subsidiaries include the only significant subsidiaries of the Company as defined by Rule 1-02 of Regulation S-X and, except as described in the Registration Statement and the Prospectus, the Company does not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity other than the Subsidiaries; (e) true, complete and correct copies of the Restated Certificate of Incorporation (the "Certificate") and the By-laws (the "Bylaws") of the Company and all amendments (including, without limitation, any certificates of 5 designations) thereto have been delivered to you, and, except for the filing and effectiveness of the Certificate of Designations, no changes therein will be made on or after the date hereof or on or before the time of purchase or, if later, the additional time of purchase; (f) the Shares have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and non-assessable and free of statutory and contractual preemptive rights, rights of first refusal and similar rights; (g) the Conversion Shares have been duly authorized and reserved for issuance upon conversion of the Shares or the Notes, as the case may be, and if and when issued in accordance with the Certificate of Designations or the Indenture, as the case may be, will be duly and validly issued, fully paid and nonassessable and free of statutory and contractual preemptive rights, rights of first refusal and similar rights; (h) the Notes are in the form contemplated by the Indenture, have been duly authorized by the Company for issuance pursuant to the terms of the Indenture and, when executed by the Company and authenticated by the Trustee in the manner provided in the Indenture, will constitute valid and binding obligations of the Company, entitled to the benefits provided by the Indenture, and enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting enforcement of the rights and remedies of creditors or by general equitable principles; (i) the capital stock of the Company, including the Shares and the Conversion Shares, conforms in all material respects to the description thereof contained in the Registration Statement and the Prospectus, and the certificates for the Shares and the Conversion Shares are in due and proper form and the holders of the Shares and the Conversion Shares will not be subject to personal liability by reason of being such holders; (j) this Agreement has been duly authorized, executed and delivered by the Company; (k) the Indenture and the Notes conform in all material respects to the descriptions thereof in the Registration Statement and the Prospectus; (l) the Indenture has been duly and validly authorized by the Company, and assuming due authorization, execution and delivery of the Indenture by the Trustee, will constitute a legally valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, 6 reorganization, moratorium or other similar laws relating to or affecting enforcement of the rights and remedies of creditors or by general equitable principles; the Indenture (i) has been duly qualified under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and (ii) complies as to form with the requirements of the Trust Indenture Act; as of each of the time of purchase and any additional times of purchase, as applicable, no event will have occurred nor will any circumstance have arisen which, had the Notes been issued on such date, would constitute an Event of Default (as such term is defined in the Indenture); (m) neither the Company nor any of the Subsidiaries is in breach or violation of or in default under (and no event has occurred which with notice, lapse of time or both would result in any breach or violation of, constitute a default under or give the holder of any indebtedness (or a person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a part of such indebtedness under) (A) its articles of incorporation, by-laws or other charter documents (including, with respect to the Company, the Certificate and the Bylaws) (collectively, "Organization Documents"), (B) any indenture, mortgage, deed of trust, bank loan, credit agreement, other evidence of indebtedness, license, lease, contract or other agreement or instrument to which it is a party or by which it or any of its properties may be bound or affected or (C) any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to, or of any court or other governmental or regulatory authority, agency or other body with jurisdiction over, the Company or any Subsidiary or any of their respective assets or properties, except, in the case of clauses (B) and (C), for breaches, violations, defaults and events that would not, individually or in the aggregate, have a Material Adverse Effect; (n) the execution, delivery and performance of this Agreement, the Indenture and the Notes, the consummation of the transactions contemplated by this Agreement, the Certificate of Designations, the Indenture and the Notes (collectively, the "Transaction Documents"), the execution, filing and effectiveness of the Certificate of Designations, the issuance and sale of the Shares, the issuance of the Notes in compliance with the Indenture and the issuance of the Conversion Shares in compliance with the Certificate of Designations or the Indenture, as the case may be, will not conflict with, result in any breach or violation of or constitute a default under (nor constitute an event which with notice, lapse of time or both would result in any breach or violation of or constitute a default under or give the holder of any indebtedness (or a person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a part of such indebtedness under) (A) the Certificate, Bylaws or any Organizational Documents of the Company or any Subsidiary, (B) any indenture, mortgage, deed of trust, bank loan, credit agreement, other evidence of indebtedness, license, lease, contract or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company, any Subsidiary or any of their respective properties may be bound or affected or (C) 7 any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to, or of any court or other governmental or regulatory authority, agency or other body with jurisdiction over, the Company or any Subsidiary or any of their respective assets or properties, except, in the case of clauses (B) and (C), for breaches, violations, defaults and events that would not, individually or in the aggregate, have a Material Adverse Effect; (o) no approval, authorization, consent or order of or filing with any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency, or of or with the New York Stock Exchange, Inc., or approval of the stockholders of the Company, is required in connection with the execution, delivery and performance of this Agreement, the Indenture, the issuance and sale of the Shares, the issuance of the Conversion Shares, the issuance of the Notes, or the consummation by the Company of the transactions contemplated by the Transaction Documents other than the registration of the Securities under the Act, qualification of the Indenture under the Trust Indenture Act, filing with and acceptance by the Delaware Secretary of State of the Certificate of Designations, authorization for quotation of the Preferred Stock on or with the New York Stock Exchange, each of which has been effected (except for the filing with and acceptance by the Delaware Secretary of State of the Certificate of Designations, which shall occur prior to the time of purchase), listing of the Notes on the New York Stock Exchange, the American Stock Exchange or another similar securities exchange or securities trading market and such other conditions to issuance of the Notes as are set forth in the Indenture, and any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriter or under the rules and regulations of the NASD; (p) except as expressly set forth in the Registration Statement and the Prospectus, (i) no person has the right, contractual or otherwise, to cause the Company to issue or sell to it any shares of Common Stock or shares of any other capital stock or other equity interests of the Company, (ii) no person has any preemptive rights, rights of first refusal or other rights to purchase any shares of Common Stock or shares of any other capital stock of or other equity interests in the Company, and (iii) no person has the right to act as an underwriter or as a financial advisor to the Company in connection with the offer and sale of the Shares, in the case of each of the foregoing clauses (i), (ii) and (iii), whether as a result of the filing or effectiveness of the Registration Statement or the sale of the Shares as contemplated thereby or otherwise; no person has the right, contractual or otherwise, to cause the Company to register under the Act any shares of Common Stock or shares of any other capital stock of or other equity interests in the Company, or to include any such shares or interests in the Registration Statement or the offering contemplated thereby, whether as a result of the filing or effectiveness of the Registration Statement or the sale of the Shares as contemplated thereby or otherwise; and, except as disclosed in the Registration Statement and Prospectus, no person has the right, exercisable during the Lock- 8 Up Period (as defined below), to cause the Company to purchase any capital stock or other security of the Company; (q) each of the Company and the Subsidiaries owns, possesses or has obtained all permits, licenses, consents, orders, approvals, franchises and authorizations of governmental or regulatory authorities and has obtained all necessary licenses, authorizations, consents and approvals from other persons, ("Permits"), as are necessary to own or lease its properties and to conduct its businesses in the manner described or contemplated in the Registration Statement and the Prospectus, except where the failure to own, possess or obtain such Permits could not, individually or in the aggregate, have a Material Adverse Effect; each of the Company and the Subsidiaries has fulfilled and performed in all material respects all of its obligations with respect to such Permits and no event has occurred, or as a result of the consummation of the transactions contemplated hereby or in the Registration Statement and the Prospectus would occur, which allows, or after notice or lapse of time or both would allow, revocation or termination thereof or results or would result in any other material impairment of the rights of the holder of any such Permit; except as described in the Registration Statement and the Prospectus, none of such Permits contains any material limitation on the ability of the Company or any of the Subsidiaries to own its respective properties or to conduct its business in the manner described in the Registration Statement and the Prospectus; none of the Company or any of the Subsidiaries has any knowledge of a threatened revocation or modification relating to any such Permit; and none of the Company or any of the Subsidiaries is in violation of, or in default under, any federal, state, local or foreign law, treaty, regulation or rule or any decree, order or judgment applicable to the Company or any Subsidiary, except where such violation or default would not, individually or in the aggregate, have a Material Adverse Effect; (r) all legal or governmental proceedings, affiliate transactions, off-balance sheet transactions (including, without limitation, transactions related to, and the existence of, "variable interest entities" within the meaning of Financial Accounting Series Interpretation No. 46), contracts, licenses, agreements, leases or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement have been so described or filed as required; (s) there are no actions, suits, claims, investigations or proceedings pending or threatened or, to the Company's or any Subsidiary's knowledge, contemplated to which the Company, any of the Subsidiaries or any of their respective directors or officers is or would be a party or of which any of their respective properties is or would be subject at law or in equity, before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency, except any such action, suit, claim, investigation or proceeding which would not result in a judgment, decree or order having, individually or in the aggregate, a Material Adverse Effect or preventing 9 consummation of the transactions contemplated hereby, except as set forth in the Registration Statement and the Prospectus; (t) Ernst & Young LLP, whose report on the financial statements of the Company is included the Registration Statement and the Prospectus, are independent public accountants as required by the Act and by Rule 3600T of the Public Company Accounting Oversight Board (the "PCAOB"); (u) the financial statements included in the Registration Statement and the Prospectus, together with the related notes and schedules, present fairly the financial position of the Company and its consolidated subsidiaries on a consolidated basis as of the dates indicated and the respective results of operations and cash flows of the Company and its consolidated subsidiaries for the periods specified and have been prepared in compliance with the requirements of the Act and in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved; any pro forma financial statements or data included in the Registration Statement and the Prospectus comply with the requirements of Regulation S-X of the Act, including, without limitation, Article 11 thereof, and the assumptions used in the preparation of such pro forma financial statements and data are reasonable, the pro forma adjustments used therein are appropriate to give effect to the transactions or circumstances described therein and the pro forma adjustments have been properly applied to the historical amounts in the compilation of those statements and data; the other financial and statistical data set forth in the Registration Statement and the Prospectus are accurately presented and prepared on a basis consistent with the financial statements and books and records of the Company; there are no financial statements (historical or pro forma) that are required to be included in the Registration Statement and the Prospectus (including, without limitation, as required by Rules 3-12 or 3-05 or Article 11 of Regulation S-X under the Act) that are not included as required; the Company and its consolidated subsidiaries do not have any material liabilities or obligations, direct or contingent (including any off-balance sheet obligations or any "variable interest entities" within the meaning of Financial Accounting Series Interpretation No. 46), not disclosed in the Registration Statement and the Prospectus; and all disclosures contained in the Registration Statement or the Prospectus regarding "non-GAAP financial measures" (as such term is defined by the rules and regulations of the Commission) comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K under the Act, to the extent applicable; (v) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been (i) any material adverse change, or any development involving a prospective material adverse change, in the business, properties, management, financial condition or results of operations of the Company or any of the Subsidiaries, (ii) any transaction which is material to the Company or any of the Subsidiaries, (iii) any obligation, direct or contingent (including any off-balance sheet obligations), 10 incurred by the Company or any of the Subsidiaries, which is material to the Company, (iv) any change in the capital stock or outstanding indebtedness of the Company or any of the Subsidiaries, or (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company; (w) the Company has obtained for the benefit of the Underwriter the agreement (a "Lock-Up Agreement"), in the form set forth as Exhibit A hereto, of each of its directors and executive officers; (x) neither the Company nor any of the Subsidiaries is now, nor will any of them be, after giving effect to the offering and sale of the Shares and application of the net proceeds from such offering and sale as described in the Registration Statement and the Prospectus under the heading "Use of Proceeds" and consummation of each of the transactions contemplated by the Registration Statement and the Prospectus, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (y) neither the Company nor any of the Subsidiaries is now, nor will any of them be, after giving effect to the offering and sale of the Shares, a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended (the "Public Utility Holding Company Act"); (z) each of the Company and the Subsidiaries has good and marketable title in fee simple to all real property and good and marketable title to all personal property (including each of the vessels listed in the Prospectus and the Registration Statement) described the Registration Statement or in the Prospectus as being owned by it, free and clear of all liens, claims, security interests or other encumbrances except for such liens, claims, security interests or other encumbrances as are described in the Registration Statement or the Prospectus or which, individually or in the aggregate, would not have or result in a Material Adverse Effect; all the property described in the Registration Statement and the Prospectus as being held under lease by the Company or any of the Subsidiaries is held thereby under valid, subsisting and enforceable leases, except where the failure to so hold could not, individually or in the aggregate, have a Material Adverse Effect; all leases, contracts and agreements to which the Company or any of the Subsidiaries is a party or by which any of them is bound are valid and enforceable against the Company or such Subsidiary, and are valid and enforceable against the other party or parties thereto and are in full force and effect with only such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect; the Company and the Subsidiaries own or possess adequate licenses or other rights to use all patents, trademarks, service marks, trade names, copyrights and know-how necessary to conduct the businesses now or proposed to be operated by them as described in the Registration Statement and 11 the Prospectus, except where the failure to own or possess such licenses or other rights could not, individually or in the aggregate, have a Material Adverse Effect, and none of the Company or the Subsidiaries has received any notice of infringement of or conflict with (or knows of any such infringement of or conflict with) asserted rights of others with respect to any patents, trademarks, service marks, trade names, copyrights or know-how; (aa) Except for matters which would not, individually or in the aggregate, have a Material Adverse Effect, (i) there is (A) no unfair labor practice complaint pending or, to the Company's or any Subsidiary's knowledge after due inquiry, threatened against the Company or any Subsidiary before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is pending or threatened, (B) no strike, labor dispute, slowdown or stoppage pending or, to the Company's or any Subsidiary's knowledge after due inquiry, threatened against the Company or any Subsidiary and (C) no union representation dispute currently existing concerning the employees of the Company or of any Subsidiary, and (ii) to the Company's or any Subsidiary's knowledge after due inquiry, (A) no union organizing activities are currently taking place concerning the employees of the Company or any Subsidiary and (B) there has been no violation of any federal, state, local or foreign law or regulation relating to discrimination in the hiring, promotion or pay of employees, labor practices, immigration, social security, occupational safety and health, or plant closing, or of any applicable wage or hour laws, concerning the employees of the Company or any Subsidiary; the minimum funding standard under Section 302 of the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder ("ERISA"), has been satisfied by each "pension plan" (as defined in Section 3(2) of ERISA) which has been established or maintained by the Company and/or one or more of the Subsidiaries, and the trust forming part of each such plan which is intended to be qualified under Section 401 of the Internal Revenue Code of 1986, as amended (the "Code"), is so qualified; each of the Company and the Subsidiaries has fulfilled its obligations, if any, under Section 515 of ERISA; neither the Company nor any of the Subsidiaries maintains or is required to contribute to a "welfare plan" (as defined in Section 3(1) of ERISA) which provides retiree or other post-employment welfare benefits or insurance coverage (other than "continuation coverage" (as defined in Section 602 of ERISA)); each pension plan and welfare plan established or maintained by the Company and/or one or more of its Subsidiaries is in compliance in all material respects with the currently applicable provisions of ERISA, and neither the Company nor any of the Subsidiaries has incurred or could reasonably be expected to incur excise tax obligations under Sections 4971 through 4980G of the Code, any penalties under section 502(c) or (l) of ERISA, any withdrawal liability under Section 4201 of ERISA, any liability under Section 4062, 4063, or 4064 of ERISA, or any other liability under Title IV of ERISA; 12 (bb) the Company, each Subsidiary and their respective properties, assets and operations are in compliance with, and hold all permits, authorizations and approvals required under, Environmental Laws (as defined below), except to the extent that failure to so comply or to hold such permits, authorizations or approvals would not, individually or in the aggregate, have a Material Adverse Effect; there has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission or other release of any Hazardous Materials (as defined below) due to, caused by or otherwise relating to the operations of the Company or any Subsidiary (or, to the knowledge of the Company or any Subsidiary, any other entity (including any predecessor) for whose acts or omission the Company or any Subsidiary is or could reasonably be expected to be liable); there are no past, present or, to the Company's or any Subsidiary's knowledge, reasonably anticipated future events, conditions, circumstances, activities, practices, actions, omissions or plans that could reasonably be expected to give rise to any material costs or liabilities to the Company or any Subsidiary under, or to interfere with or prevent compliance by the Company or any Subsidiary with, Environmental Laws, except as would not, individually or in the aggregate, have a Material Adverse Effect; to the Company's or any Subsidiaries' knowledge, neither the Company nor any Subsidiary (i) is the subject of any investigation, (ii) has received any notice or claim, (iii) is a party to or affected by any pending or threatened action, suit or proceeding, (iv) is bound by any judgment, decree or order, or (v) has entered into any agreement, in each case relating to any alleged violation of any Environmental Law or any actual or alleged release or threatened release or cleanup at any location of any Hazardous Materials (as defined below) (as used herein, "Environmental Law" means any federal, state, local or foreign law, statute, ordinance, rule, regulation, order, decree, judgment, injunction, permit, license, authorization or other binding requirement, or common law, relating to health, safety or the protection, cleanup or restoration of the environment or natural resources, including those relating to the distribution, processing, generation, treatment, storage, disposal, transportation, other handling or release or threatened release of Hazardous Materials, and "Hazardous Materials" means any material (including, without limitation, pollutants, contaminants, hazardous or toxic substances or wastes including petroleum and any petroleum products or byproducts) that is regulated by or may give rise to liability under any Environmental Law); (cc) from time to time, the Company and each of the Subsidiaries conducts a review of the effect of the Environmental Laws on its business, operations and properties, in a manner which is reasonable in light of the Company's and each respective Subsidiary's business in order to identify and evaluate associated costs and liabilities (including, without limitation, any capital or operating expenditures required for cleanup, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties); 13 (dd) all tax returns required to be filed by the Company and each of the Subsidiaries have been filed except where the failure to file could not, individually or in the aggregate, have a Material Adverse Effect, and all taxes and other assessments of a similar nature (whether imposed directly or through withholding) including any interest, additions to tax or penalties applicable thereto due or claimed to be due from such entities have been paid, other than those being contested in good faith and for which adequate reserves have been provided and other than any failure to pay that could not, individually or in the aggregate, have a Material Adverse Effect; (ee) the Company and each of the Subsidiaries maintains insurance covering its respective properties (including the vessels described in the Prospectus and the Registration Statement), operations, personnel and businesses as the Company and each respective Subsidiary deems adequate; such insurance insures against such losses and risks (including environmental damage and pollution coverage) to an extent which is adequate in accordance with customary industry practice to protect the Company, each of the Subsidiaries and their respective businesses; all such insurance is fully in force on the date hereof and will be fully in force at the time of purchase and any additional time of purchase; and none of the Company or the Subsidiaries has received written notice from any insurer or agent of such insurer that any material capital improvements or other material expenditures are required or necessary to be made in order to continue such insurance; (ff) neither the Company nor any Subsidiary has sustained since the date of the last audited financial statements included in the Registration Statement and the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or judicial or governmental action, order or decree; (gg) neither the Company nor any Subsidiary has sent or received any communication regarding termination of, or intent not to renew, any of the contracts or agreements referred to or described in, or filed as an exhibit to, the Registration Statement, and no such termination or non-renewal has been threatened by the Company or any Subsidiary or, to the Company's or any Subsidiary's knowledge, any other party to any such contract or agreement; (hh) the Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences; 14 (ii) the Company has established and maintains and evaluates "disclosure controls and procedures" (as such term is defined in Rule 13a-15 and 15d-15 under the Exchange Act) and "internal control over financial reporting" (as such term is defined in Rule 13a-15 and 15d-15 under the Exchange Act); such disclosure controls and procedures are designed to ensure that material information relating to the Company and its subsidiaries is made known to the Company's chief executive officer, its principal financial officer and its principal accounting officer by others within those entities, and such disclosure controls and procedures are effective to perform the functions for which they were established; the Company's auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (i) any significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize, and report financial data; and (ii) any known fraud, whether or not material, that involves management or other employees who have a role in the Company's internal controls; any material weaknesses in internal controls have been identified for the Company's auditors; since the date of the most recent evaluation of such disclosure controls and procedures, there have been no significant changes in internal controls or in other factors that could significantly affect the Company's internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses; and the Company is, and since July 30, 2002 has been, in compliance with all applicable effective provisions of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and the rules and regulations of the Commission and the New York Stock Exchange, Inc. promulgated thereunder and is actively taking reasonable steps to ensure that it will be in compliance with other applicable provisions of the Sarbanes-Oxley Act upon the effectiveness of such provisions; (jj) the chief executive officer and the chief financial officer of the Company have made all certifications required by the Sarbanes-Oxley Act and any related rules and regulations promulgated by the Commission, and the statements contained in each such certification were true and correct when made; (kk) there are no business relationships or related party transactions involving the Company or any of the Subsidiaries or any other person required to be described in the Prospectus and the Registration Statement which have not been described as required; the Company has provided you true, correct and complete copies of all documentation pertaining to any currently outstanding extension of credit in the form of a personal loan made, directly or indirectly, by the Company to any director or executive officer of the Company, or to any family member or affiliate of any director or executive officer of the Company; and on or after July 30, 2002, the Company has not, directly or indirectly, (i) extended credit, arranged to extend credit, or renewed any extension of credit, in the form of a personal loan, to or for any director or executive officer of the Company, or to or for any family member or affiliate of any director or executive officer of the Company; or (ii) made any material modification, including any 15 renewal thereof, to any term of any personal loan to any director or executive officer of the Company, or any family member or affiliate of any director or executive officer, which was outstanding on July 30, 2002; (ll) all statistical or market-related data included in the Registration Statement or the Prospectus are based on or derived from sources that the Company believes to be reliable and accurate, and the Company has obtained the written consent to the use of such data from such sources to the extent required; (mm) neither the Company, nor any Subsidiary, nor, to the Company's or any Subsidiary's knowledge, any employee or agent of the Company or any Subsidiary has made any payment of funds of the Company or any Subsidiary or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Registration Statement or the Prospectus; (nn) except pursuant to this Agreement, the Company has not incurred any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby or by the Registration Statement and the Prospectus; (oo) neither the Company nor any of its directors, officers, affiliates or controlling persons has taken, directly or indirectly, any action designed, or which has constituted or might reasonably be expected to cause or result in, under the Exchange Act or otherwise, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares; (pp) to the Company's knowledge after due inquiry, there are no affiliations or associations between any member of the NASD and any of the Company's executive officers, directors or 5% or greater securityholders, except as described in the NASD Questionnaire for Directors, Executive Officers and Certain Beneficial Owners completed by each of the Company's executive officers, directors and 5% securityholders and provided to the Underwriter; (qq) the Company is a citizen of the United States within the meaning of Section 2 of the Shipping Act, 1916, as amended (the "Shipping Act"), and is qualified to engage in the coastwise trade of the United States; neither the compliance by the Company with the provisions of the Transaction Documents nor the consummation of the transactions set forth therein will cause the Company to cease to be a citizen of the United States within the meaning of Section 2 of the Shipping Act or cause the Company to cease to be qualified to engage in the coastwise trade of the United States; 16 (rr) neither the Company nor any Subsidiary or any of their respective affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes; (ss) neither the Company nor any Subsidiary nor, to the knowledge of the Company or any Subsidiary, any director, officer, agent, employee or affiliate of the Company or any of the Subsidiaries, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus and the Registration Statement; neither the Company nor any Subsidiary nor, to the knowledge of the Company or any Subsidiary, any director, officer, agent, employee or affiliate of the Company or any Subsidiary is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the "FCPA"), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any "foreign official" (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and the Company, the Subsidiaries and, to the knowledge of the Company or any Subsidiary, its affiliates have conducted their businesses in compliance with the FCPA, and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith; (tt) except as described in the Prospectus and the Registration Statement, no Subsidiary is prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such Subsidiary's capital stock or other equity interests, from repaying to the Company any loans or advances to such Subsidiary from the Company or from transferring any of such Subsidiary's property or assets to the Company or any other Subsidiary of the Company; except as described in the Prospectus and the Registration Statement, the Company is not prohibited, directly or indirectly, from paying any dividends to its stockholders; and (uu) the statements in the Prospectus and the Registration Statement under the headings "Business -- Regulation," "Business -- New Tax Legislation," "Business -- Insurance," "Description of the Preferred Stock," "Description of the Notes," "Description of Indebtedness," "Description of Common Stock," "Certain Relationships and Transactions," "Material U.S. Federal Income Tax Considerations," and "Underwriting," in each case insofar as such statements summarize legal matters, agreements, documents or proceedings discussed therein, are accurate and fair summaries of such legal matters, agreements, documents or proceedings. 17 In addition, any certificate signed by any officer of the Company and delivered to the Underwriter or counsel for the Underwriter in connection with the offering of the Shares shall be deemed to be a representation and warranty by the Company as to matters covered thereby, to the Underwriter. 4. Certain Covenants of the Company. The Company hereby agrees: (a) to furnish such information as may be required and otherwise to cooperate in qualifying the Shares for offering and sale under the securities or blue sky laws of such states or other jurisdictions as you may designate and to maintain such qualifications in effect so long as you may request for the distribution of the Shares; provided, however, that the Company shall not be required to qualify as a foreign corporation or to consent to the service of process under the laws of any such jurisdiction (except service of process with respect to the offering and sale of the Shares); and to promptly advise you of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for offer or sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (b) to make available to the Underwriter in Baltimore, Maryland, as soon as practicable after the Registration Statement becomes effective, and thereafter from time to time to furnish to the Underwriter, as many copies of the Prospectus (or of the Prospectus as amended or supplemented if the Company shall have made any amendments or supplements thereto after the effective date of the Registration Statement) as the Underwriter may reasonably request for the purposes contemplated by the Act; in case the Underwriter is required to deliver a prospectus after the nine-month period referred to in Section 10(a)(3) of the Act in connection with the sale of the Shares, the Company will prepare, at its expense, promptly upon request, such amendment or amendments to the Registration Statement and the Prospectus as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; (c) if, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or any post-effective amendment thereto to be declared effective before the Shares may be sold, the Company will use its best efforts to cause the Registration Statement or such post-effective amendment to become effective as soon as practicable, and the Company will advise you promptly and, if requested by you, will confirm such advice in writing, (i) when the Registration Statement and any such post-effective amendment thereto has become effective, and (ii) if Rule 430A under the Act is used, when the Prospectus is filed with the Commission pursuant to Rule 424(b) under the Act (which the Company agrees to file in a timely manner under such Rule); (d) to advise you promptly, confirming such advice in writing, of any request by the Commission for amendments or supplements to the Registration Statement or the Exchange Act Registration Statement or the Prospectus or for 18 additional information with respect thereto, or of notice of institution of proceedings for, or the entry of, a stop order, suspending the effectiveness of the Registration Statement and, if the Commission should enter a stop order suspending the effectiveness of the Registration Statement, to use its best efforts to obtain the lifting or removal of such order as soon as practicable; to advise you promptly of any proposal to amend or supplement the Registration Statement or the Exchange Act Registration Statement or the Prospectus and to provide you and your counsel copies of any such documents for review and comment a reasonable amount of time prior to any proposed filing and to file no such amendment or supplement to which you shall object in writing; (e) to file promptly all reports and any definitive proxy or information statement required to be filed by the Company with the Commission in order to comply with the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Shares; to provide you with a copy of such reports and statements and other documents to be filed by the Company pursuant to Section 13, 14 or 15(d) of the Exchange Act during such period for your review and comment a reasonable amount of time prior to any proposed filing, and to file no such report, statement or document to which you shall object in writing; and to promptly notify you of any such filing; (f) if necessary or appropriate, to file a registration statement pursuant to Rule 462(b) under the Act and pay the applicable fees in accordance with the Act; (g) to advise the Underwriter promptly of the happening of any event within the time during which a prospectus relating to the Shares is required to be delivered under the Act which could require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading, and, during such time, subject to Section 4(d) hereof, to prepare and furnish, at the Company's expense, to the Underwriter promptly such amendments or supplements to such Prospectus as may be necessary to reflect any such change; (h) to make generally available to its security holders, and to deliver to you, an earnings statement of the Company (which will satisfy the provisions of Section 11(a) of the Act) covering a period of twelve months beginning after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act) as soon as is reasonably practicable after the termination of such twelve-month period but in any case not later than, March 1, 2006; (i) to furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a consolidated balance sheet and 19 statements of income, stockholders' equity and cash flow of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of nationally recognized independent certified public accountants duly registered with the PCAOB); (j) to furnish to you five (5) copies of the Registration Statement, as initially filed with the Commission, and of all amendments thereto (including all exhibits thereto); (k) to furnish to you promptly for a period of five years from the date of this Agreement (i) at the same time as distributed to the Company's stockholders after the end of each fiscal year, copies of the annual report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, changes in stockholders' investment and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) at the same time as distributed to the Company's stockholders copies of any reports, proxy statements, or other communications which the Company shall send to its stockholders or shall from time to time publish or publicly disseminate, (iii) at the same time as filed with any national securities exchange, copies of documents or reports filed with any national securities exchange on which any class of securities of the Company is listed, and (iv) such other information as you may reasonably request regarding the Company; (l) to furnish to you as early as practicable prior to the time of purchase and any additional time of purchase, as the case may be, but not later than two business days prior thereto, a copy of the latest available unaudited interim and monthly financial statements, if any, of the Company which have been read by the Company's independent certified public accountants, as stated in their letter to be furnished pursuant to Section 6(d) hereof; (m) to apply the net proceeds from the sale of the Shares in the manner set forth under the caption "Use of Proceeds" in the Prospectus; (n) to pay all costs, expenses, fees and taxes in connection with (i) the preparation and filing of the Registration Statement, each Preliminary Prospectus, the Prospectus and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to the Underwriter and to dealers (including costs of mailing and shipment), (ii) the registration, issue, sale and delivery of the Shares including any stock or transfer taxes and stamp or similar duties payable upon the sale, issuance or delivery of the Shares to the Underwriter, (iii) the producing, word processing and/or printing of this Agreement, any dealer agreements, any Powers of Attorney and any closing documents (including compilations thereof) and the reproduction and/or printing and furnishing of copies of each thereof to the Underwriter and (except closing documents) to dealers (including costs of mailing and shipment), (iv) the qualification of the 20 Shares for offering and sale under state or foreign laws and the determination of their eligibility for investment under state or foreign laws as aforesaid (including the reasonable legal fees and filing fees and other disbursements of counsel for the Underwriter related to such qualification and determination) and the printing and furnishing of copies of any blue sky surveys or legal investment surveys to the Underwriter and to dealers, (v) listing of the Shares on the New York Stock Exchange, Inc. and any registration thereof under the Exchange Act, (vi) any filing for review of the public offering of the Shares by the NASD, including the reasonable legal fees and filing fees and other disbursements of counsel to the Underwriter related to such filing, (vii) the fees and disbursements of any transfer agent or registrar for the Shares, (viii) the costs and expenses of the Company relating to presentations or meetings undertaken in connection with the marketing of the offering and sale of the Shares to prospective investors and the Underwriter's sales forces, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel, lodging and other expenses incurred by the officers of the Company and any such consultants in connection with the road show, (ix) the preparation and filing of the Exchange Act Registration Statement, including any amendments thereto, and (x) the performance of the Company's other obligations hereunder; (o) not to sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or warrants or other rights to purchase Common Stock or any other securities of the Company that are substantially similar to Common Stock, or file or cause to be declared effective a registration statement under the Act relating to the offer and sale of any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock or warrants or other rights to purchase Common Stock or any other securities of the Company that are substantially similar to Common Stock for a period of 60 days after the date hereof (the "Lock-Up Period"), without the prior written consent of the Underwriter, except for (i) the registration of the Shares and the sales to the Underwriter pursuant to this Agreement, (ii) issuances of Common Stock upon the exercise of options or warrants disclosed as outstanding in the Registration Statement and the Prospectus, (iii) the issuance of employee stock options not exercisable during the Lock-Up Period pursuant to stock option plans described in the Registration Statement and the Prospectus and (iv) the issuance of Common Stock upon conversion of the Shares in compliance with the Certificate of Designations; (p) prior to the time of purchase or the additional time of purchase, as the case may be, to issue no press release or other communication directly or indirectly and hold no press conferences with respect to the Company, the financial condition, results of operations, business, properties, assets, or liabilities of the Company, or the offering of the Shares, without your prior consent; 21 (q) to use its best efforts to cause the Shares and the Conversion Shares, if any, to be listed for quotation on the New York Stock Exchange, Inc. and to maintain the listing of the Shares and the Common Stock (including the Conversion Shares) on the New York Stock Exchange, Inc.; (r) to maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Shares; and (s) to cause the Notes, if issued, to be listed for quotation on one of the following markets: New York Stock Exchange, Inc., National Association of Securities Dealers Automated Quotation National Market System ("NASDAQ"), American Stock Exchange or another similar securities exchange or securities trading market and to use its best efforts to maintain such listing. 5. Reimbursement of Underwriter's Expenses. If the Shares are not delivered for any reason other than the default by the Underwriter in its obligations hereunder, the Company shall, in addition to paying the amounts described in Section 4(n) hereof, reimburse the Underwriter for its out-of-pocket expenses reasonably incurred in connection with this Agreement and the offering contemplated hereby, including the fees and disbursements of its counsel. 6. Conditions of Underwriter's Obligations. The obligations of the Underwriter hereunder are subject to the accuracy of the representations and warranties on the part of the Company on the date hereof, at the time of purchase and, if applicable, at the additional time of purchase, the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (a) The Company shall furnish to you at the time of purchase and, if applicable, at the additional time of purchase, an opinion of Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P., counsel for the Company, addressed to the Underwriter, and dated the time of purchase or the additional time of purchase, as the case may be, in form and substance reasonably satisfactory to Venable LLP, counsel for the Underwriter, in the form set forth in Exhibit B hereto. (b) You shall have received from Ernst & Young LLP letters dated, respectively, the date of this Agreement, the time of purchase and, if applicable, the additional time of purchase, and addressed to the Underwriter in the forms heretofore approved by the Underwriter. (c) You shall have received at the time of purchase and, if applicable, at the additional time of purchase, the favorable opinion of Venable LLP, counsel for the Underwriter, dated the time of purchase or the additional time of purchase, as the case may be, in form and substance reasonably satisfactory to the Underwriter. 22 (d) No Prospectus or amendment or supplement to the Registration Statement or the Prospectus shall have been filed to which you object in writing. (e) The Registration Statement and the Exchange Act Registration Statement shall become effective not later than 5:30 P.M., New York City time, on the date of this Agreement and, if Rule 430A under the Act is used, the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) under the Act at or before 5:30 P.M., New York City time, on the second full business day after the date of this Agreement, and any registration statement pursuant to Rule 462(b) under the Act required in connection with the offering and sale of the Shares shall have been filed and become effective no later than 10:00 P.M., New York City time, on the date of this Agreement. (f) Prior to the time of purchase, and, if applicable, the additional time of purchase, (i) no stop order with respect to the effectiveness of the Registration Statement shall have been issued under the Act or proceedings initiated under Section 8(d) or 8(e) of the Act; (ii) the Registration Statement and all amendments thereto shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading; and (iii) the Prospectus and all amendments or supplements thereto shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading. (g) Between the time of execution of this Agreement and the time of purchase or the additional time of purchase, as the case may be, (A) no Material Adverse Effect or any development involving a prospective Material Adverse Effect shall occur or become known, (B) no change in the capital stock or long-term debt of the Company or any Subsidiary (other than as contemplated by this Agreement) shall occur or become known and (C) no transaction which is material to the Company and the Subsidiaries, taken as a whole, shall have been entered into by the Company or any Subsidiary. (h) The Company will, at the time of purchase and, if applicable, at the additional time of purchase, deliver to you a certificate of its chief executive officer and its chief financial officer, dated the time of purchase or additional time of purchase, as the case may be, in the form attached as Exhibit C hereto. (i) You shall have received signed Lock-up Agreements referred to in Section 3(w) hereof. (j) The Company shall have furnished to you such other documents and certificates as to the accuracy and completeness of any statement in the 23 Registration Statement and the Prospectus as of the time of purchase and, if applicable, the additional time of purchase, as you may reasonably request. (k) The Shares shall have been approved for listing on the New York Stock Exchange, Inc., subject only to notice of issuance at or prior to the time of purchase or the additional time of purchase, as the case may be. (l) The Company and the Trustee shall have executed and delivered the Indenture. 7. Effective Date of Agreement; Termination. This Agreement shall become effective (i) if Rule 430A under the Act is not used, when you shall have received notification of the effectiveness of the Registration Statement, or (ii) if Rule 430A under the Act is used, when the parties hereto have executed and delivered this Agreement. The obligations of the Underwriter hereunder shall be subject to termination in the absolute discretion of the Underwriter if (x) since the time of execution of this Agreement or the earlier respective dates as of which information is given in the Registration Statement and the Prospectus, there has been any material adverse change or any development involving a prospective material adverse change in the business, properties, management, condition (financial or otherwise), results of operations or prospects of the Company and the Subsidiaries, taken as a whole, which would, in the Underwriter's judgment make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Registration Statement and the Prospectus, or (y) since the time of execution of this Agreement, there shall have occurred: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the NASDAQ; (ii) a suspension or material limitation in trading in the Company's securities on the New York Stock Exchange, Inc.; (iii) a general moratorium on commercial banking activities declared by either federal, New York State or Louisiana State authorities or a material disruption in commercial banking or securities settlement or clearance services in the United States; (iv) an outbreak or escalation of hostilities or acts of terrorism involving the United States or a declaration by the United States of a national emergency or war; or (v) any other calamity or crisis or any change in financial, political or economic conditions in the United States or elsewhere, if the effect of any such event specified in clause (iv) or (v) in the Underwriter's judgment makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Registration Statement and the Prospectus, or (z) since the time of execution of this Agreement, there shall have occurred any downgrading, or any notice or announcement shall have been given or made of (i) any intended or potential downgrading, or (ii) any watch, review or possible change that does not indicate an affirmation or improvement in the rating accorded any securities of or guaranteed by the Company by any "nationally recognized statistical rating organization," as that term is defined in Rule 436(g)(2) under the Act. 24 If the Underwriter elects to terminate this Agreement as provided in this Section 7, the Company shall be notified promptly in writing. If the sale to the Underwriter of the Shares, as contemplated by this Agreement, is not carried out by the Underwriter for any reason permitted under this Agreement, or if such sale is not carried out because the Company shall be unable to comply with any of the terms of this Agreement, the Company shall not be under any obligation or liability under this Agreement (except to the extent provided in Sections 4(n), 5 and 9 hereof), and the Underwriter shall be under no obligation or liability to the Company under this Agreement (except to the extent provided in Section 9 hereof) hereunder). 8. Reserved. 9. Indemnity and Contribution. (a) Subject to the provisions of subsection (c) below, the Company agrees to indemnify, defend and hold harmless the Underwriter, its partners, directors and officers, and any person who controls the Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons, from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, the Underwriter or any such person may incur under the Act, the Exchange Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in such Registration Statement or necessary to make the statements made therein not misleading, except insofar as any such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in, and in conformity with information concerning the Underwriter furnished in writing by or on behalf of the Underwriter through you to the Company expressly for use in, such Registration Statement or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or necessary to make such information not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in a Prospectus (the term Prospectus for the purpose of this Section 9 being deemed to include any Preliminary Prospectus, the Prospectus and the Prospectus as amended or supplemented by the Company), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in such Prospectus or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading, except insofar as any such loss, damage, expense, liability or claim arises out of or is based upon any untrue 25 statement or alleged untrue statement of a material fact contained in, and in conformity with information concerning the Underwriter furnished in writing by or on behalf of the Underwriter to the Company expressly for use in, such Prospectus or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Prospectus or necessary to make such information, in light of the circumstances under which it was presented, not misleading, (iii) any untrue statement or alleged untrue statement made by the Company in Section 3 hereof or the failure by the Company to perform when and as required any agreement or covenant contained herein, or (iv) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials provided by the Company or based upon written information furnished by or on behalf of the Company including, without limitation, slides, videos, films or tape recordings used in connection with the marketing of the Shares. If any action, suit or proceeding (each, a "Proceeding") is brought against the Underwriter or any such person in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, the Underwriter or such person shall promptly notify the Company in writing of the institution of such Proceeding and the Company shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided, however, that the omission to so notify the Company shall not relieve the Company from any liability which the Company may have to the Underwriter or any such person or otherwise, except to the extent that the Company has been materially prejudiced (through the forfeiture of substantive rights or defenses or otherwise) by such omission. The Underwriter or such person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Underwriter or of such person unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such Proceeding or the Company shall not have, within a reasonable period of time in light of the circumstances, employed counsel reasonably satisfactory to such indemnified party to defend such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from, additional to or in conflict with those available to the Company (in which case the Company shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties, but the Company may, without limiting the generality of the foregoing, employ counsel and participate in the defense thereof, provided the fees and expenses of such counsel shall be at the expense of the Company), in any of which events such fees and expenses shall be borne by the Company and paid as incurred (it being understood, however, that the Company shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). The Company shall not be liable for any settlement of any Proceeding effected without its written 26 consent but, if settled with the written consent of the Company, the Company agrees to indemnify and hold harmless the Underwriter and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by this subsection, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have fully reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days' prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and does not include an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party. (b) The Underwriter agrees to indemnify, defend and hold harmless the Company, its directors and officers, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons, from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, the Company or any such person may incur under the Act, the Exchange Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in, and in conformity with information concerning the Underwriter furnished in writing by or on behalf of the Underwriter to the Company expressly for use in, the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or in a Prospectus, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or such Prospectus or necessary to make such information, in light of the circumstances under which it was presented, not misleading. If any Proceeding is brought against the Company or any such person in respect of which indemnity may be sought against the Underwriter pursuant to the foregoing paragraph, the Company or such person shall promptly notify the Underwriter in writing of the institution of such Proceeding and the Underwriter shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees 27 and expenses; provided, however, that the omission to so notify the Underwriter shall not relieve the Underwriter from any liability which the Underwriter may have to the Company or any such person or otherwise, except to the extent that the Underwriter has been materially prejudiced (through the forfeiture of substantive rights or defenses or otherwise) by such omission. The Company or such person shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Company or such person unless the employment of such counsel shall have been authorized in writing by the Underwriter in connection with the defense of such Proceeding or the Underwriter shall not have, within a reasonable period of time in light of the circumstances, employed counsel reasonably satisfactory to such indemnified party to defend such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to or in conflict with those available to the Underwriter (in which case the Underwriter shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties, but the Underwriter may employ counsel and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of the Underwriter), in any of which events such fees and expenses shall be borne by the Underwriter and paid as incurred (it being understood, however, that the Underwriter shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). The Underwriter shall not be liable for any settlement of any such Proceeding effected without the written consent of the Underwriter but, if settled with the written consent of the Underwriter, the Underwriter agrees to indemnify and hold harmless the Company and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by this subsection, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have fully reimbursed the indemnified party in accordance with such request prior to the date of such settlement, and (iii) such indemnified party shall have given the indemnifying party at least 30 days' prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and such settlement does not include an admission of fault or culpability, or a failure to act, by or on behalf of such indemnified party. 28 (c) If the indemnification provided for in this Section 9 is unavailable to an indemnified party under subsection (a) or (b), as the case may be, of this Section 9 or insufficient to hold an indemnified party harmless in respect of any losses, damages, expenses, liabilities or claims referred to therein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, damages, expenses, liabilities or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriter on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Underwriter on the other in connection with the statements or omissions which resulted in such losses, damages, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriter on the other shall be deemed to be in the same respective proportions as the total proceeds from the offering (net of underwriting discounts but before deducting expenses) received by the Company, and the total underwriting discounts received by the Underwriter, bear to the aggregate public offering price of the Shares. The relative fault of the Company on the one hand and of the Underwriter on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Company or by the Underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, damages, expenses, liabilities and claims referred to in this subsection shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating, preparing to defend or defending any Proceeding. (d) The Company and the Underwriter agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in subsection (c) above. Notwithstanding the provisions of this Section 9, the Underwriter shall not be required to contribute any amount in excess of the amount by which the total underwriting discounts received by the Underwriter with respect to the offering of the Shares exceeds the amount of any damage which the Underwriter has otherwise been required to pay by reason of such untrue statement or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) The indemnity and contribution agreements contained in this Section 9 and the covenants, warranties and representations of the Company 29 contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the Underwriter, its partners, directors or officers or any person (including each partner, officer or director of such person) who controls the Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf of the Company, its directors or officers or any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and shall survive any termination of this Agreement or the issuance and delivery of the Shares. The Company and the Underwriter agree promptly to notify each other of the commencement of any Proceeding against it and, in the case of the Company, against any of the Company's officers or directors in connection with the issuance and sale of the Shares, or in connection with the Registration Statement or the Prospectus. (f) The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies that may otherwise be available to any indemnified person hereunder at law or in equity. 10. Information Furnished by the Underwriter. The statements set forth in "Underwriting Discount and Financial Advisory Fee" under the caption "Underwriting" in the Prospectus, only insofar as such statements relate to the amount of selling concession and reallowance that may be undertaken by the Underwriter, constitute the only information furnished by or on behalf of the Underwriter as such information is referred to in Sections 3 and 9 hereof. 11. Notices. Except as otherwise herein provided, all statements, requests, notices and agreements shall be in writing or by facsimile and, if to the Underwriter, shall be sufficient in all respects if delivered or sent to Ferris, Baker Watts, Incorporated, 100 Light Street, Baltimore, MD 21202, Attention: Peter McGowan, Senior Vice President (facsimile number: (410) 659-4632,with a copy (which shall not constitute notice) to Venable LLP, 2 Hopkins Plaza, Suite 1800, Baltimore, MD, 21201-2978 Attention: Thomas D. Washburne, Jr. (facsimile number: (410) 244-7742), and, if to the Company, shall be sufficient in all respects if delivered or sent to the Company at the offices of the Company at 650 Poydras Street, New Orleans, Louisiana 70130, Attention: Gary L. Ferguson, Vice President and Chief Financial Officer (facsimile number: (504) 529-2078, with a copy (which shall not constitute notice) to Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P., 201 St. Charles Avenue, 51st Floor, New Orleans, Louisiana 70170-5100 Attention: L. Richards McMillan, II (facsimile number: (504) 582-8012. 12. Governing Law; Construction. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement ("Claim"), directly or indirectly, shall be governed by, and construed in accordance with, the laws of the State of Maryland without regard to the conflict of law principles thereof. The section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. 30 13. Submission to Jurisdiction. Except as set forth below, no Claim may be commenced, prosecuted or continued in any court other than the courts of the State of Maryland located in the City of Baltimore or in the United States District Court for the District of Maryland, which courts shall have jurisdiction over the adjudication of such matters, and the Company consents to the jurisdiction of such courts and personal service with respect thereto. The Company hereby consents to personal jurisdiction, service and venue in any court in which any Claim arising out of or in any way relating to this Agreement is brought by any third party against the Underwriter or any indemnified party. Each of the Underwriter and the Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) waives all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement. The Company agrees that a final judgment in any such action, proceeding or counterclaim brought in any such court shall be conclusive and binding upon the Company and may be enforced in any other courts to the jurisdiction of which the Company is or may be subject, by suit upon such judgment. 14. Parties at Interest. The Agreement herein set forth has been and is made solely for the benefit of the Underwriter and the Company and to the extent provided in Section 9 hereof the controlling persons, partners, directors and officers referred to in such Section, and their respective successors, assigns, heirs, personal representatives and executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from the Underwriter) shall acquire or have any right under or by virtue of this Agreement. 15. Counterparts. This Agreement may be signed by the parties in one or more counterparts which together shall constitute one and the same agreement among the parties. 16. Successors and Assigns. This Agreement shall be binding upon the Underwriter and the Company and their successors and assigns and any successor or assign of any substantial portion of the Company's and the Underwriter's respective businesses and/or assets. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS] 31 If the foregoing correctly sets forth the understanding between the Company and the Underwriter, please so indicate in the space provided below for that purpose, whereupon this agreement and your acceptance shall constitute a binding agreement between the Company and the Underwriter. Very truly yours, INTERNATIONAL SHIPHOLDING CORPORATION By: --------------------------------------- Name: Title: FERRIS, BAKER WATTS, INCORPORATED By: ------------------------------------ Name: Title: 32 EXHIBIT A Lock-Up Agreement December , 2004 ---- Ferris, Baker Watts, Incorporated 100 Light Street Baltimore, MD 21202 Re: Proposed Public Offering of International Shipholding Corporation ----------------------------------------------------------------- Ladies and Gentlemen: The undersigned understands that Ferris, Baker Watts, Incorporated (the "Underwriter") proposes to enter into an Underwriting Agreement (the "Underwriting Agreement") with International Shipholding Corporation (the "Company") providing for a public offering (the "Offering") by the Underwriter of securities of the Company, which may consist of common stock, convertible preferred stock, convertible debt securities or other securities of the Company (the "Securities"), pursuant to the Company's registration statement on Form S-1 (File No. 333-120161) as filed with the U.S. Securities and Exchange Commission (the "Registration Statement"). In consideration of the Underwriter's agreement to purchase and make the Offering of the Securities, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned hereby agrees that without the prior written consent of the Underwriter (which consent may be withheld in the Underwriter's sole discretion), the undersigned will not, during the period commencing on the date of this letter and ending 60 days after the date of the final prospectus relating to the Offering, directly or indirectly: (1) offer, sell, contract to sell, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of any shares of the Company's common stock (the "Common Stock"), or any securities convertible into or exercisable or exchangeable for the Common Stock; (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, or any securities convertible into or exchangeable for the Common Stock, regardless of whether any such transaction described herein is to be settled by delivery of the Common Stock or such other securities, or by delivery of cash or otherwise; (3) make any demand for, or exercise any right with respect to, the registration of any shares of the Common Stock or any security convertible into or exercisable or exchangeable for the Common Stock; or (4) publicly announce any intention to do any of the foregoing. The foregoing sentence shall not apply to (a) the sale of any Common Stock to the Underwriter pursuant to the A-1 Underwriting Agreement, (b) bona fide gifts, provided the recipient or recipients thereof agree in writing to be bound by the terms of this Lock-Up Agreement, or (c) dispositions to any trust for the direct or indirect benefit of the undersigned and/or the immediate family of the undersigned, provided that such trust agrees in writing to be bound by the terms of this Lock-Up Agreement. For purposes of this paragraph, "immediate family" shall mean the undersigned and the spouse, any lineal descendant, father, mother, brother or sister of the undersigned and father, mother, brother or sister of the undersigned's spouse. The undersigned hereby agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of securities of the Company held by the undersigned except in compliance with this Lock-Up Agreement. The undersigned recognizes that the Offering will benefit the undersigned and the Company. The undersigned acknowledges that the Underwriter is relying on the representations and agreements of the undersigned contained in this Lock-Up Agreement in carrying out the Offering and in entering into the Underwriting Agreement. The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Agreement. This Lock-Up Agreement is irrevocable and all authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and any obligations of the undersigned shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. This Lock-Up Agreement shall be terminated and the undersigned shall be released from the undersigned's obligations hereunder (i) upon the date the Company notifies you in writing that it does not intend to proceed with the Offering, (ii) upon the date the registration statement filed with the Securities and Exchange Commission with respect to the Offering is withdrawn, (iii) upon the date the Underwriting Agreement is terminated, for any reason, prior to the time of purchase (as defined in the Underwriting Agreement), or (iv) if the Underwriting Agreement does not become effective by [ ], 2005. Very truly yours, --------------------------------------- --------------------------------------- Printed Name of Securityholder: --------------------------------------- Capacity (Indicate capacity of person signing if signing as custodian or trustee or on behalf of an entity) A-2 Address: ---------------------------------- ---------------------------------- ---------------------------------- Accepted as of the date first set forth above: FERRIS, BAKER WATTS, INCORPORATED By: --------------------------------------- Name: Title: A-3 EXHIBIT B OPINION OF JONES, WALKER, WAECHTER, POITEVENT, CARRERE & DENEGRE, L.L.P. 1. Each of the Company and the significant subsidiaries of the Company, as defined by Rule 1-02 of Regulation S-X (each a "Subsidiary" and collectively, the "Subsidiaries") is validly existing and in good standing under the laws of its respective jurisdiction of organization with full power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement and the Prospectus. The Company has full corporate power and authority to execute and deliver the Agreement and to issue, sell and deliver the Shares as contemplated therein, to execute, issue and deliver the Indenture and the Notes and perform its obligations thereunder, and to issue and deliver the Conversion Shares in accordance with the terms of the Certificate of Designations or the Indenture, as the case may be. 2. Each of the Company and the Subsidiaries is duly qualified to do business as a foreign entity and is in good standing in each jurisdiction where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified and in good standing would not, individually or in the aggregate, have a Material Adverse Effect. 3. The Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnification and contribution may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting enforcement of the rights and remedies of creditors or by general equitable principles. 4. The Shares have been duly authorized and, upon their issuance, will be validly issued, fully paid and non-assessable, and will not have been issued in violation of or subject to any statutory preemptive rights or any preemptive rights, rights of first refusal or similar rights created by any contracts to which the Company is a party and of which such counsel is aware. 5. The Conversion Shares have been duly authorized and reserved for issuance upon conversion of the Shares or the Notes, as the case may be, and if and when issued in accordance with the Certificate of Designations or the Indenture, as the case may be, will be duly and validly issued, fully paid and nonassessable and will not have been issued in violation of or subject to any statutory preemptive rights or any preemptive rights, rights of first refusal or similar rights created by any contracts to which the Company is a party and of which such counsel is aware. B-1 6. The Notes are in the form contemplated by the Indenture, have been duly authorized by the Company for issuance pursuant to the terms of the Indenture and, when executed by the Company and authenticated by the Trustee in the manner provided in the Indenture, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting enforcement of the rights and remedies of creditors or by general equitable principles. 7. The Indenture has been duly and validly authorized by all necessary corporate action on the part of the Company and the Trustee, and has been duly executed and delivered by the Company and the Trustee, and is a legally valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting enforcement of the rights and remedies of creditors or by general equitable principles. The Indenture (i) has been duly qualified under the Trust Indenture Act and (ii) complies as to form with the requirements of the Trust Indenture Act. As of each of the time of purchase and the additional time of purchase, as applicable, no event has occurred nor has any circumstance arisen which, had the Notes been issued on such date, would constitute an Event of Default (as each such term is defined in the Indenture); 8. The Company has an authorized capitalization as set forth in the Registration Statement and the Prospectus. All of the issued and outstanding shares of capital stock of the Company and each Subsidiary (a) have been duly authorized and validly issued, (b) are fully paid and non-assessable, (c) have been issued in compliance with all federal and state securities laws, (d) have not been issued in violation of or subject to any statutory preemptive rights, and (e) have not been issued in violation of or subject to any preemptive rights, rights of first refusal or similar rights created by any contracts to which the Company or any Subsidiary is a party and of which such counsel is aware. All of the issued and outstanding shares of capital stock of each Subsidiary are owned, directly or indirectly, by the Company free and clear of any liens, claims or encumbrances of any kind. The Certificate and the Bylaws, each in the form filed (or incorporated by reference) as an exhibit to the Registration Statement, have been heretofore duly authorized and adopted, and are in full force and effect as of the date hereof, in each case in accordance with the Delaware General Corporation Law. 9. The Certificate of Designations has been duly authorized and adopted by the Company, has been filed with and accepted by the office of the Secretary of State of the State of Delaware and is in full force and effect. 10 The capital stock of the Company, including the Shares, conforms to the descriptions thereof contained in the Registration Statement and the Prospectus. 11. The form of specimen stock certificate relating to the Shares filed as an exhibit to the Registration Statement complies with the applicable provisions of the B-2 Delaware General Corporation Law and the rules and regulations of the New York Stock Exchange, Inc. 12. The Indenture and the Notes conform in all material respects to the descriptions thereof in the Registration Statement and the Prospectus. 13. The Registration Statement and the Prospectus and each amendment or supplement thereto (except as to the financial statements and schedules and other financial data contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act, and the conditions to the use of Form S-1 have been satisfied. 14. The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order proceedings with respect thereto are pending or threatened under the Act, and any required filing of the Prospectus and any supplement thereto pursuant to Rule 424 under the Act has been made in the manner and within the time period required by such Rule 424; and the class of securities consisting of the Preferred Stock has become registered under Section 12(b) of the Exchange Act. 15. No approval, authorization, consent or order of or filing with any United States federal, state or local governmental or regulatory commission, board, body, authority or agency, or of or with the New York Stock Exchange, Inc., or approval of the stockholders of the Company, is required in connection with the execution, delivery and performance of this Agreement, the Indenture, the issuance and sale of the Shares, the issuance of the Conversion Shares, or the consummation by the Company of the transactions contemplated by the Transaction Documents other than such as have been filed or obtained under the Act and the Trust Indenture Act, filed under the Exchange Act, filed with and accepted by the Delaware Secretary of State, obtained from the New York Stock Exchange, Inc., each of which has been effected. 16. The Preferred Stock is authorized for listing on the New York Stock Exchange, Inc. 17. The execution, delivery and performance of this Agreement, the Indenture and the Notes by the Company, the issuance and sale of the Shares, the issuance of the Notes in compliance with the Indenture, the issuance of the Conversion Shares in compliance with the Certificate of Designations or the Indenture, as the case may be, and the consummation of the transactions contemplated by the Transaction Documents do not and will not conflict with, result in any breach or violation of or constitute a default under (nor constitute any event which with notice, lapse of time or both would result in any breach or violation of or constitute a default under) (a) the Certificate (including the Certificate of Designations and any other certificate of designations) or Bylaws, (b) any indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any license, lease, contract or other agreement or instrument known to us to which the Company or any Subsidiary is a party or by which any of their respective properties are bound (the foregoing, a "Material Document"), or (c) any United States B-3 federal or state regulation or rule, or any decree, judgment or order applicable to the Company, any Subsidiary or any of respective properties, except in the case of clauses (b) and (c) above, for such breaches, violations or defaults as could not, individually or in the aggregate, have a Material Adverse Effect. 18. To such counsel's knowledge, the Company is not in breach or violation of or in default under (nor has any event occurred which with notice, lapse of time, or both would result in any breach or violation of, or constitute a default under or give the holder of any indebtedness (or a person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a part of such indebtedness under) (a) the Certificate or Bylaws, (b) any Material Document, or (c) any United States federal or state regulation or rule, or any decree, judgment or order applicable to the Company, any Subsidiary or any of their respective properties and known to such counsel. 19. To such counsel's knowledge, there are no actions, suits, claims, investigations or proceedings pending, threatened or contemplated to which the Company or any Subsidiary is or would be a party or to which any of their respective properties is or would be subject at law or in equity, before or by any United States federal, state or local governmental or regulatory commission, board, body, authority or agency which are required to be described in the Registration Statement or the Prospectus but are not so described. 20. The Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. 21. The information in the Registration Statement and the Prospectus under the headings "Risk Factors--If sufficient appropriations under the Maritime Security Act of 1996 are not made in any fiscal year, we may not continue to receive annual subsidy payments with respect to certain of our vessels," "Risk Factors--Our business and operations are highly-regulated," "Risk Factors--We are dependent on government charters and contracts," "Risk Factors--Operating hazards may increase our operating costs; our insurance coverage is limited," "Risk Factors--Our vessels could be seized by maritime claimants, which could result in a significant loss of earnings and cash flow for the related off-hire period," "Risk Factors--One of our time charter customers has filed for bankruptcy, the outcome of which could adversely affect our results of operations," "Business--Regulation," "Business--New Tax Legislation," "Business--Insurance," "Dividend Policy," "Management--Directors and Executive Officers--NYSE Director Independence Rules," "Management--Executive Compensation," "Certain Relationships and Transactions," "Description of the Preferred Stock," "Description of the Notes," "Description of Indebtedness," "Description of Common Stock," "Underwriting," and "Part II - Item 14 - Indemnification of Directors and Officers," insofar as such statements constitute a summary of documents or matters of law, as of the date hereof, are accurate B-4 and complete in all material respects and present fairly the information required to be shown. 22. To such counsel's knowledge, no holders of securities of the Company have rights to the registration of such securities under the Registration Statement, other than rights that have been waived or not exercised in connection with the transactions contemplated by the Registration Statement. 23. To such counsel's knowledge, there are no agreements to which the Company is a party that are required to be filed as exhibits to the Registration Statement which have not been filed as so required. 24. The statements set forth in the Registration Statement and the Prospectus under the heading "Material U.S. Federal Income Tax Considerations," while not purporting to address all possible United States federal income tax consequences of acquiring, owning or disposing of the Shares, the Notes and the Common Stock, insofar as they purport to constitute summaries of matters of United States federal income tax law or legal conclusions with respect thereto, constitute accurate summaries of the matters described therein in all material respects. 25. To such counsel's knowledge, with respect to trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights"), the Company and the Subsidiaries own or possess such Intellectual Property Rights as are reasonably necessary to conduct their business as now conducted, and the expected expiration of any such Intellectual Property Rights would not result in a Material Adverse Effect. To such counsel's knowledge, the Company has not received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Effect. To such counsel's knowledge, any of the Company's discoveries, inventions, products, or processes referred to in the Registration Statement or Prospectus do not infringe or conflict with any right or patent which is the subject of a patent application known to the Company. 26. Immediately prior to the sale of the Shares by the Company pursuant to the terms of the Agreement, the Company was a citizen of the United States within the meaning of Section 2 of the Shipping Act and was qualified to engage in the coastwise trade of the United States. 27. Immediately following the sale of the Shares by the Company and the compliance by the Company and the Underwriter with all of the provisions of the Agreement (and the consummation of the transactions herein contemplated), the Company will remain a citizen of the United States within the meaning of Section 2 of the Shipping Act and will continue to be qualified to engage in the coastwise trade of the United States. B-5 28. Nothing has come to our attention which leads us to believe that, at the date of the Prospectus, at the time of purchase and at the time of additional purchase, as the case may be, the Registration Statement and the Prospectus (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no opinion) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. B-6 EXHIBIT C OFFICERS' CERTIFICATE Each of the undersigned, Erik F. Johnsen, Chairman of the Board and Chief Executive Officer, and Gary L. Ferguson, Vice President and Chief Financial Officer of International Shipholding Corporation, a Delaware corporation (the "COMPANY"), on behalf of the Company, does hereby certify pursuant to Section 6(h) of that certain Underwriting Agreement dated [ ], 2004 (the "UNDERWRITING AGREEMENT") between the Company and Ferris, Baker Watts, Incorporated (terms used in this Certificate but not defined herein are as defined in the Underwriting Agreement) do hereby certify, in their respective capacities as officers of the Company, as follows: 1. The representations, warranties and agreements of the Company contained in the Underwriting Agreement were true and correct when made and are true and correct as of the date hereof; 2. The Company has performed all covenants and agreements and satisfied all conditions contained in the Underwriting Agreement; 3. (i) No stop order with respect to the effectiveness of the Registration Statement has been issued under the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively, the "Act") and no proceedings have been initiated under Section 8(d) or 8(e) of the Act; (ii) the undersigned has carefully examined the Registration Statement and the Prospectus; (iii) the Registration Statement and all amendments thereto do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (iv) the Prospectus and all amendments or supplements thereto do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; 4. Between the time of execution of the Underwriting Agreement and the time of purchase or the additional time of purchase, as the case may be, (i) no Material Adverse Effect and no development involving a prospective Material Adverse Effect has occurred or become known to the undersigned, (ii) no change in the capital stock or long-term debt of the Company or any Subsidiary (other than as contemplated by the Underwriting Agreement) has occurred or become known to the undersigned and (iii) no transaction which is material to the Company and the Subsidiaries, taken as a whole, has been entered into by the Company or any Subsidiary. 5. Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P. and Venable LLP are entitled to rely on this certificate in connection with the opinions such firms are rendering pursuant to the Underwriting Agreement. C-1 [SIGNATURES NEXT PAGE] C-2 IN WITNESS WHEREOF, I have signed my name to this Officers' Certificate this [ ] day of [ ], 2004. - ------------------------------------------- Erik F. Johnsen Chairman of the Board and Chief Executive Officer - ------------------------------------------- Gary L. Ferguson Vice President and Chief Financial Officer [SIGNATURE PAGE TO OFFICERS' CERTIFICATE] C-3 EX-3.3 3 h19465a3exv3w3.txt FORM OF CERTIFICATE OF DESIGNATIONS Exhibit 3.3 INTERNATIONAL SHIPHOLDING CORPORATION CERTIFICATE OF DESIGNATIONS OF THE _______% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK ($1.00 PAR VALUE) (LIQUIDATION PREFERENCE $50 PER SHARE) PURSUANT TO SECTION 151(g) OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE THE UNDERSIGNED, being the Chairman of the Board and Chief Executive Officer of International Shipholding Corporation, a Delaware corporation (the "COMPANY"), does hereby certify that, pursuant to the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, the following resolutions were duly adopted by the Board of Directors of the Company and the Pricing Committee thereof, and pursuant to authority conferred upon the Board of Directors by the provisions of the Restated Certificate of Incorporation of the Company (the "CERTIFICATE OF INCORPORATION") and, in the case of the Pricing Committee, by express resolution of the Board of Directors, the Board of Directors of the Company and the Pricing Committee adopted resolutions fixing the designations and the relative powers, preferences, rights, qualifications, limitations and restrictions of the ______% Convertible Exchangeable Preferred Stock of the Company. These composite resolutions are as follows: RESOLVED, that, pursuant to authority expressly granted to and vested in the Board of Directors of the Company (the "BOARD OF DIRECTORS") by the provisions of the Certificate of Incorporation, the issuance of a series of preferred stock, par value $1.00 per share, which shall consist of 880,000 of the 1,000,000 shares of preferred stock which the Company now has authority to issue, be, and the same hereby is, authorized, and the Board of Directors hereby fixes the powers, designations, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the preferred stock of this series) as follows: 1. NUMBER OF SHARES AND DESIGNATION. 880,000 shares of the preferred stock, par value $1.00 per share, of the Company are hereby constituted as a series of the preferred stock designated as _____% Convertible Exchangeable Preferred Stock (the "PREFERRED STOCK"). 2. DEFINITIONS. For purposes of the Preferred Stock, in addition to those terms otherwise defined herein, the following terms shall have the meanings indicated: "accrued" has the meaning specified in Section 3(a). "Affiliate" of any specified person shall mean any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control," when used with respect to any specified person means the power to direct or cause the direction of the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Amended Rights Plan" has the meaning specified in Section 7(d)(iv). "Beneficial Owner" means the person in whose name a share of Preferred Stock is recorded as beneficial owner of such share by the Depositary, or by any participant or indirect participant in the Depositary, as the case may be. "Board of Directors" shall mean the Board of Directors of the Company or a committee of the Board of Directors duly authorized to act for it hereunder. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Transfer Agent. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which the banking institutions in the City of New York, New York are authorized or obligated by law or executive order to close or be closed. "Certificate of Designations" means this Certificate of Designations of the Preferred Stock. "Certificate of Incorporation" means the Restated Certificate of Incorporation of the Company. "Change in Control" shall be deemed to have occurred at the time, after the Issue Date, (i) that any person or group of persons (within the meaning of Sections 13(d) or 14(a) of the Exchange Act) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Commission under the Exchange Act) of 50% or more of the voting capital stock of the Company; or (ii) within a period of twelve (12) consecutive calendar months, individuals who were directors of the Company on the first day of such period (together with any new directors whose election to the Board of Directors, or whose nomination for election, was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) shall cease to constitute a majority of the Board of Directors. "Change in Control Purchase Date" has the meaning specified in Section 6(a). "Change in Control Purchase Notice" has the meaning specified in Section 6(c). -2- "Closing Price" has the meaning specified in Section 7(i)(i). "Commission" shall mean the Securities and Exchange Commission. "Common Stock" shall mean the class of capital stock of the Company designated as Common Stock, par value $1.00 per share, at the date hereof. Subject to the provisions of Section 7(e), shares issuable on conversion of the Preferred Stock shall include only shares of such class or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable on conversion of the Preferred Stock shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" shall mean International Shipholding Corporation, a Delaware corporation, and shall include its successors and assigns. "Conversion Price" shall have the meaning specified in Section 7(a). "Current Market Price" has the meaning specified in Section 7(i)(ii). "Depositary" means, with respect to the Preferred Stock issuable or issued in the form of a Global Certificate, the person specified in Section 14(c) as the Depositary with respect to the Preferred Stock, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Certificate of Designations, and thereafter, "Depositary" shall mean or include such successor. The foregoing sentence shall likewise apply to any subsequent successor or successors. "Dividend Payment Date" shall have the meaning specified in Section 3(a). "Dividend Payment Record Date" shall have the meaning specified in Section 3(a). "Dividend Period" or "Dividend Periods" shall mean the quarterly dividend period or periods, commencing on, and including, a Dividend Payment Date and ending on, but excluding, the immediately succeeding Dividend Payment Date (other than the initial Dividend Period which shall commence on the Issue Date and end on, but exclude, the initial Dividend Payment Date). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Exchange Date" shall have the meaning specified in Section 10(b). -3- "'ex' date" has the meaning specified in Section 7(i)(ii). "Expiration Time" shall have the meaning specified in Section 7(d)(vi). "fair market value" has the meaning specified in Section 7(i)(iii). "Global Certificate" shall have the meaning specified in Section 14(a). "holder," "holder of shares of Preferred Stock," or "holder of the Preferred Stock," as applied to any share of Preferred Stock, or other similar terms (but excluding the term "beneficial holder"), shall mean any person in whose name at the time a particular share of Preferred Stock is registered on the Company's stock records, which shall include the books of the Transfer Agent in respect of the Company and any stock transfer books of the Company. "Indenture" shall mean the Indenture governing the Notes, dated as of _____________ __, 2004, between the Company and The Bank of New York, as trustee. "Issue Date" shall mean the first date on which shares of the Preferred Stock are issued. "Junior Stock" means the Common Stock and each other class of capital stock or series of preferred stock of the Company established by the Board of Directors after the Issue Date, the terms of which do not expressly provide that such class or series ranks senior to or on parity with the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Company. "Junior Stock" shall include warrants, rights, calls, options and other securities exercisable or exchangeable for, or convertible into, such capital stock or preferred stock of the Company. "Liquidation" has the meaning specified in Section 4(a). "Liquidation Preference" shall have the meaning specified in Section 4(a). "New Rights Plan" has the meaning specified in Section 7(d)(iv). "Non-Electing Share" has the meaning specified in Section 7(e). "Notes" shall mean the Company's _________% Convertible Subordinated Notes due 2014, issuable under the Indenture upon the Company's exchange of the Preferred Stock pursuant to Section 10. "Officers' Certificate," when used with respect to the Company, shall mean a certificate signed by (a) one of the President, the Chief Executive Officer, Executive or Senior Vice President, any Vice President (whether or not designated by a number or numbers or -4- word or words added before or after the title "Vice President") or the Chief Financial Officer, and (b) one of the Treasurer or any Assistant Treasurer, Secretary or any Assistant Secretary, or the Controller of the Company, which is delivered to the Transfer Agent. "Parity Stock" means any class of capital stock or series of preferred stock of the Company established by the Board of Directors after the Issue Date, the terms of which expressly provide that such class or series will rank on parity with the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Company. "Parity Stock" shall include warrants, rights, calls, options and other securities exercisable or exchangeable for, or convertible into, such capital stock or preferred stock of the Company. "person" shall mean a corporation, an association, a partnership, an individual, a joint venture, a joint stock company, a trust, a limited liability company, an unincorporated organization or any other entity or organization, including a government or an agency, instrumentality or political subdivision thereof. "Preferred Stock" has the meaning specified in Section 1. "Purchased Shares" has the meaning specified in Section 7(d)(vi). "Record Date" has the meaning specified in Section 7(i)(iv). "Reference Period" has the meaning specified in Section 7(d)(iv). "Rights Plan" has the meaning specified in Section 7(d)(iv). "Securities" has the meaning specified in Section 7(d)(iv). "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Senior Stock" means each class of capital stock or series of preferred stock of the Company established by the Board of Directors after the Issue Date, the terms of which expressly provide that such class or series will rank senior to the Preferred Stock as to dividend rights or rights upon the liquidation, winding-up or dissolution of the Company. "Senior Stock" shall include warrants, rights, calls, options and other securities exercisable or exchangeable for, or convertible into, such capital stock or preferred stock of the Company. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Tender Expiration Time" has the meaning specified in Section 7(d)(vii). -5- "Tender Purchased Shares" has the meaning specified in Section 7(d)(vii). "Trading Day" has the meaning specified in Section 7(i)(v). "Transfer Agent" means American Stock Transfer & Trust Company or such other agent or agents of the Company as may be designated by the Board of Directors as the transfer agent for the Preferred Stock. "Trigger Event" has the meaning specified in Section 7(d)(iv). "Trustee" shall mean The Bank of New York and its successors and any corporation resulting from or surviving any consolidation or merger to which it or its successors may be a party and any successor trustee at the time serving as successor trustee under the Indenture. 3. DIVIDENDS. (a) Holders of the Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors, out of the funds of the Company legally available therefor, cash dividends, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, at the annual rate of ___% of the Liquidation Preference, payable in equal quarterly installments on ________, __________, and (each a "DIVIDEND PAYMENT DATE"), commencing __________, 2005 (and, in the case of any accrued but unpaid dividends, at such additional times and for such interim periods, if any, as determined by the Board of Directors). If any Dividend Payment Date shall be on a day other than a Business Day, then the Dividend Payment Date shall be on the next succeeding Business Day. Dividends on the Preferred Stock will be cumulative from the Issue Date, whether or not in any Dividend Period or Dividend Periods there shall be funds of the Company legally available for the payment of such dividends and whether or not such dividends are declared, and will be payable to holders of record as they appear on the stock books of the Company on the record dates (each such date, a "DIVIDEND PAYMENT RECORD DATE"), which shall be not more than 60 days nor less than 10 days preceding the Dividend Payment Dates thereof, as shall be fixed by the Board of Directors. Dividends on the Preferred Stock shall accrue (whether or not declared) on a daily basis from the Issue Date, and accrued dividends for each Dividend Period shall accumulate to the extent not paid on the Dividend Payment Date first following the Dividend Period for which they accrue. As used herein, the term "accrued" with respect to dividends includes both accrued and accumulated dividends. (b) The amount of dividends payable per share for each full Dividend Period for the Preferred Stock shall be computed by dividing the annual dividend rate by four (rounded down to the nearest one one-hundredth (1/100) of one cent). The amount of dividends payable for the initial Dividend Period on the Preferred Stock, or any other period shorter or longer than a full Dividend Period on the Preferred Stock, shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Holders of shares of Preferred Stock shall not -6- be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Preferred Stock which may be in arrears. (c) So long as any shares of Preferred Stock are outstanding, no dividends, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on any Parity Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof set apart for such payment, on the Preferred Stock through the then-most recent Dividend Payment Date. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, upon the shares of Preferred Stock and any Parity Stock, all dividends declared upon shares of Preferred Stock and all dividends declared upon such Parity Stock shall be declared pro rata so that the ratio of the amount of dividends declared per share on the Preferred Stock to the amount of dividends declared per share on such Parity Stock shall in all cases equal the ratio of the amount of accrued and unpaid dividends per share on the shares of Preferred Stock to the amount of accrued and unpaid dividends per share on the shares of such Parity Stock. (d) So long as any shares of the Preferred Stock are outstanding, no Parity Stock shall be redeemed, purchased or otherwise acquired for any consideration (or any monies be paid to or made available for a sinking fund or otherwise for the purchase or redemption of any shares of any such Parity Stock) by the Company or any Subsidiary unless (i) the full cumulative dividends accrued on all outstanding shares of Preferred Stock shall have been paid or set apart for payment for all past Dividend Periods and (ii) sufficient funds shall have been set apart for the payment of the dividend for the current Dividend Period with respect to the Preferred Stock. (e) So long as any shares of the Preferred Stock are outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock or other Junior Stock) shall be declared or paid or set apart for payment, and no other distribution shall be declared or made or set apart for payment, in each case upon the Common Stock or any other Junior Stock, nor shall any Common Stock nor any other Junior Stock be redeemed, purchased or otherwise acquired for any consideration (or any monies be paid to or made available for a sinking fund or otherwise for the purchase or redemption of any shares of Common Stock or any other such Junior Stock) by the Company or any Subsidiary (except (A) by conversion into or exchange for Common Stock or any other such Junior Stock; or (B) repurchases of unvested shares of Common Stock or any other such Junior Stock at cost upon termination of the employment or consultancy of the holder thereof, provided such repurchases are approved by the Board of Directors in good faith) unless, in each case (i) the full cumulative dividends accrued on all outstanding shares of Preferred Stock and any Parity Stock shall have been paid or set apart for payment for all past Dividend Periods and all past dividend periods with respect to such other Parity Stock, (ii) sufficient funds shall have been set apart for the payment of the dividend for the current Dividend Period with respect to the Preferred Stock and for the current dividend period with respect to such other Parity Stock, and (iii) such dividend, distribution, redemption, purchase or acquisition is not -7- declared, paid or made, or funds or other assets therefor set aside or made available for payment or distribution (whether by way of a sinking fund or otherwise), until December 31, 2007. 4. LIQUIDATION PREFERENCE. (a) In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Company (for the purposes of this Section 4, a "LIQUIDATION"), before any distribution of assets shall be made to the holders of Common Stock or any other Junior Stock, the holder of each share of Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, a liquidation preference in an amount equal to $50 per share (the "LIQUIDATION PREFERENCE") plus all dividends accrued and unpaid on such share through and including the date of distribution of the assets of the Company to the holders of Preferred Stock, and the holders of any Parity Stock shall be entitled to receive the full respective liquidation preferences (including any premium) to which they are entitled and shall receive all accrued and unpaid dividends with respect to their respective shares through and including the date of distribution. (b) If upon any Liquidation of the Company, the assets available for distribution to the holders of Preferred Stock and any Parity Stock which shall then be outstanding shall be insufficient to pay the holders of all outstanding shares of Preferred Stock and such Parity Stock the full amounts (including all dividends accrued and unpaid) of the liquidation preferences to which they shall be entitled, then the holders of each series of such stock will share ratably in any such distribution of assets, first in proportion to their respective liquidation preferences until such preferences are paid in full, and then in proportion to their respective amounts of accrued and unpaid dividends. After payment of the liquidation preference and any accrued and unpaid dividends, the holders of shares of the Preferred Stock will not be entitled to any further participation in any distribution of assets by the Company. (c) For purposes of this Section 4, a Liquidation shall not include (i) any consolidation or merger of the Company with or into any other corporation, (ii) any liquidation, dissolution, winding up or reorganization of the Company immediately followed by reincorporation or reorganization as another corporation or other entity or (iii) a sale or other disposition of all or substantially all of the Company's assets to another corporation unless in connection therewith the Liquidation of the Company is specifically approved by all requisite corporate action. (d) The holder of any shares of Preferred Stock shall not be entitled to receive any payment owed for such shares under this Section 4 until such holder shall have effected book-entry transfer or physical delivery of certificates representing its shares of Preferred Stock, together with any necessary endorsements, to the Company or the Transfer Agent (as appropriate) free of any liens, security interests or other claims. No interest shall accrue on any payment due upon Liquidation. -8- 5. REDEMPTION AT THE OPTION OF THE COMPANY. (a) Prior to __________ _____, 2006, Preferred Stock may not be redeemed by the Company except pursuant to Section 5(b). On or after __________ _____, 2006, the Company, at its option, may redeem the shares of Preferred Stock, in whole or in part, out of funds legally available therefor, at any time or from time to time, subject to the notice provisions and provisions for partial redemption described below, during the periods shown below, for cash at the following redemption prices per share plus an amount equal to accrued and unpaid dividends, if any, to (but excluding) the date fixed for redemption, whether or not declared; provided that prior to __________ __, 2007, Preferred Stock may not be redeemed by the Company except pursuant to Section 5(b) unless the Closing Price of Common Stock (or, if more than one class of Common Stock is then issued and outstanding, all classes of Common Stock) has exceeded 150% of the Conversion Price for at least 20 Trading Days during any period of 30 consecutive Trading Days ending within five Trading Days prior to the notice of redemption. YEAR REDEMPTION PRICE ------------------ ---------------- Beginning on , 2006 and ending on , 2007 $ Beginning on , 2007 and ending on , 2008 Beginning on , 2008 and thereafter If the date fixed for redemption falls after a Dividend Payment Record Date and on or before the corresponding Dividend Payment Date, the payment of dividends becoming due on such Dividend Payment Date shall be payable to the holders of shares of Preferred Stock to be redeemed who are registered as such on the relevant Dividend Payment Record Date, subject to the terms and provisions of Section 3, and the amount payable to holders of such shares of Preferred Stock on the date fixed for redemption will not include any amount in respect of dividends declared and payable on such Dividend Payment Date. No sinking fund, mandatory redemption, mandatory retirement or other similar provision shall apply to the Preferred Stock. (b) In the event of a Change in Control, the Company, at its option, may redeem the shares of Preferred Stock, in whole but not in part, out of funds legally available therefor, on a date which is not later than sixty (60) Business Days following the effective date of the event or circumstance resulting in the Change in Control, subject to the notice provisions described below, for cash at the following redemption prices per share plus an amount equal to accrued and unpaid dividends, if any, to (but excluding) the date fixed for redemption, whether or not declared: -9- IF THE CHANGE IN CONTROL OCCURS WITHIN THE TWELVE MONTHS REDEMPTION PRECEDING [ ], PRICE -------------- ------- 2005 $ 2006 2007 2008 2009 If the date fixed for redemption falls after a Dividend Payment Record Date and on or before the corresponding Dividend Payment Date, the payment of dividends becoming due on such Dividend Payment Date shall be payable to the holders of shares of Preferred Stock registered as such on the relevant Dividend Payment Record Date, subject to the terms and provisions of Section 3, and the amount payable to holders of such shares of Preferred Stock on the date fixed for redemption will not include any amount in respect of dividends declared and payable on such Dividend Payment Date. (c) If the Company elects to exercise the right to redeem the shares of Preferred Stock in whole or in part pursuant to Section 5(a), it shall fix a date for redemption, and it, or at its request, the Transfer Agent, in the name of and at the expense of the Company, shall mail or cause to be mailed a notice of such redemption at least thirty (30) and not more than sixty (60) days prior to the date fixed for redemption to the holders of shares of the Preferred Stock to be redeemed at their last addresses as the same appear on the Company's stock records and to the Beneficial Owners in accordance with the procedures established by the Depositary and the Transfer Agent; provided that if the Company shall give such notice, it shall also give such notice, and notice of the shares of Preferred Stock to be redeemed, to the Transfer Agent. Such mailing shall be by first class mail. The notice, if mailed in the manner herein provided, shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any share of Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other share of Preferred Stock. Concurrently with the mailing of any such notice of redemption, the Company shall (i) issue a press release announcing such redemption, (ii) publish such information once in a daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, New York, and (iii) publish such information on the Company's website; it being understood that the form and content of such press release and such publications shall be determined by the Company in its sole discretion. None of the failure to issue any such press release nor make such publications nor any defect therein shall affect the validity of the redemption notice or any of the proceedings for the redemption of any share of Preferred Stock called for redemption. (d) If the Company elects to exercise the right to redeem the shares of Preferred Stock in whole pursuant to Section 5(b), it shall fix a date for redemption, and it, or at -10- its request, the Transfer Agent, in the name of and at the expense of the Company, shall mail or cause to be mailed a notice of such redemption on a date that shall be at least thirty (30) and not more than sixty (60) days prior to the date fixed for redemption, which shall not be later than sixty (60) days following the effective date of the event or circumstance resulting in the Change in Control, to the holders of shares of the Preferred Stock at their last addresses as the same appear on the Company's stock records and to the Beneficial Owners in accordance with the procedures established by the Depositary and the Transfer Agent; provided that if the Company shall give such notice, it shall also give such notice to the Transfer Agent. Such mailing shall be by first class mail. The notice, if mailed in the manner herein provided, shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any share of Preferred Stock shall not affect the validity of the proceedings for the redemption of any other share of Preferred Stock. The notice shall state that a Change in Control has occurred or may occur and shall describe the event or circumstance which has resulted or may result in a Change in Control, shall be accompanied by a copy of any press release or other public announcement of the Change in Control event, and may state that the Company's obligation to redeem the shares of Preferred Stock is subject to consummation of the Change in Control event. Concurrently with the mailing of any such notice of redemption, the Company shall (i) issue a press release announcing such redemption, (ii) publish such information once in a daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, New York, and (iii) publish such information on the Company's website; it being understood that the form and content of such press release and such publications shall be determined by the Company in its sole discretion. None of the failure to issue any such press release nor make such publications nor any defect therein shall affect the validity of the redemption notice or any of the proceedings for the redemption of any share of Preferred Stock called for redemption. (e) In addition to the information specified in Section 5(d), if applicable, each notice of redemption shall indicate that the Company has exercised its right to redeem the outstanding shares of Preferred Stock in respect of which notice is given and shall specify the number of shares of Preferred Stock to be redeemed, the date fixed for redemption (which shall be a Business Day), the redemption price at which such shares of Preferred Stock are to be redeemed, the place or places of payment and that payment will be made upon presentation and surrender of the certificate or certificates representing such shares of Preferred Stock, including any procedures applicable to a redemption to be accomplished through book-entry transfer and shall state that accrued and unpaid dividends to (but excluding) the date fixed for redemption will be paid as specified in said notice and that on and after said date dividends thereon will cease to accrue. Such notice shall also state the current Conversion Price and the date on which the right to convert such shares of Preferred Stock into Common Stock will expire. (f) If the Company gives notice of redemption as provided in this Section 5, then the Company shall, on the date fixed for redemption, before 12:00 p.m., New York City time, to the extent funds are legally available, with respect to: (i) shares of Preferred Stock held by the Depositary or its nominees, deposit or cause to be deposited, irrevocably with the Transfer Agent or the Depositary an amount of money sufficient to redeem on the date fixed for redemption all the shares of Preferred Stock so called for redemption (other than those theretofore surrendered for conversion into Common Stock) at the applicable redemption price, -11- together with accrued and unpaid dividends to (but excluding) the date fixed for redemption and shall give the Transfer Agent or the Depositary, as the case may be, irrevocable instructions and authority to pay such amount to holders of such shares of Preferred Stock upon book-entry transfer of such shares of Preferred Stock to the Transfer Agent's account at the Depositary; and (ii) shares of Preferred Stock held in certificated form, deposit or cause to be deposited, irrevocably with the Transfer Agent an amount of money sufficient to redeem on the date fixed for redemption all the shares of Preferred Stock so called for redemption (other than those theretofore surrendered for conversion into Common Stock) at the applicable redemption price, together with accrued and unpaid dividends to (but excluding) the date fixed for redemption and shall give the Transfer Agent irrevocable instructions and authority to pay such amount to holders of such shares of Preferred Stock upon surrender of the certificates evidencing such shares of Preferred Stock. (g) Payment of the redemption price for shares of the Preferred Stock, together with accrued and unpaid dividends to (but excluding) the date fixed for redemption, is conditioned upon book-entry transfer or physical delivery of certificates representing shares of the Preferred Stock, together with any necessary endorsements, to the Transfer Agent, or to the Transfer Agent's account at the Depositary, at any time after delivery of the notice of redemption. The Company shall be entitled to retain any interest, yield or gain on funds deposited with the Transfer Agent and/or the Depositary pursuant to this Section 5 in excess of the amounts required to pay the redemption price, together with accrued and unpaid dividends to (but excluding) the date fixed for redemption. Payment of the redemption price for the Preferred Stock, together with accrued and unpaid dividends to (but excluding) the date fixed for redemption will be made: (i) if book-entry transfer of or physical delivery of the Preferred Stock has been made by or on the date fixed for redemption, on the date fixed for redemption, or (ii) if book-entry transfer of or physical delivery of the Preferred Stock has not been made by or on such date, at the time of book-entry transfer of or physical delivery of the Preferred Stock. If any shares of Preferred Stock called for redemption are converted prior to the date fixed for redemption, any money deposited with the Transfer Agent and/or the Depositary or segregated and held in trust for the redemption of such shares of Preferred Stock shall be paid or delivered to the Company upon its written request, or, if then held by the Company, shall be discharged from such trust. If the conditions precedent to the disbursement of any funds deposited by the Company pursuant to this Section 5 shall not have been satisfied within two years after the establishment of such funds, then (i) such funds shall be returned to the Company upon its request; (ii) the person entitled to the payment for which such funds shall have been originally intended shall have the right to look only to the Company for such payment, subject to applicable abandoned property laws; and (iii) the Transfer Agent and/or the Depositary which shall have held such funds shall be relieved of any responsibility for such funds upon the return of such funds to the Company. (h) If fewer than all the outstanding shares of Preferred Stock are to be redeemed, shares to be redeemed shall be selected by the Company from outstanding shares of Preferred Stock not previously called for redemption by lot or pro rata (as near as may be) or by any other equitable method determined by the Company in its sole discretion. If a portion of a holder's shares of Preferred Stock are selected for redemption pursuant to subsection (a) of this Section 5 and such holder elects to convert a portion of its shares of Preferred Stock into -12- Common Stock pursuant to Section 7 prior to the date fixed for redemption, then such converted portion shall be deemed to be taken from the portion selected for redemption. If fewer than all the shares of Preferred Stock represented by a certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (i) If notice of redemption has been given as above provided, and the Transfer Agent and the Depositary hold, in accordance with this Section 5, money sufficient to pay the redemption price of the shares of Preferred Stock called for redemption together with accrued and unpaid dividends to (but excluding) the date fixed for redemption, on and after the date fixed for redemption (unless the Company shall default in the payment of the redemption price, together with accrued and unpaid dividends to (but excluding) said date), dividends on such shares of Preferred Stock called for redemption shall cease to accrue and such shares of Preferred Stock shall be deemed no longer outstanding and the holders thereof shall have no right in respect of such shares of Preferred Stock except the right to receive the redemption price thereof and accrued and unpaid dividends to (but excluding) the date fixed for redemption, without interest thereon. On presentation and surrender of such shares of Preferred Stock via book entry transfer or physical delivery, such shares of Preferred Stock to be redeemed shall be redeemed by the Company at the applicable redemption price, together with payment of accrued and unpaid dividends to (but excluding) the date fixed for redemption. (j) If the Company shall default in the payment of the redemption price, together with accrued and unpaid dividends to (but excluding) the date fixed for redemption, of any shares of Preferred Stock called for redemption, upon surrender thereof for redemption, dividends shall continue to accrue from the date fixed for redemption and such shares of Preferred Stock shall remain outstanding and remain convertible into Common Stock until the Company pays the redemption price, together with accrued and unpaid dividends to (but excluding) the date of such payment. 6. REQUIRED PURCHASE AT OPTION OF HOLDER ON CHANGE IN CONTROL. (a) If there shall occur a Change in Control and the Company does not elect to exercise the right to redeem shares of Preferred Stock in whole pursuant to Section 5(b), shares of Preferred Stock shall be purchased by the Company, out of funds legally available therefor, at the option of the holders thereof as of the date (the "CHANGE IN CONTROL PURCHASE DATE") specified by the Company that is 45 calendar days (or if such day is not a Business Day, then the next succeeding Business Day) after the Company, or at its request, the Transfer Agent, has mailed written notice of such Change in Control to holders of the Preferred Stock as set forth below, subject to satisfaction by or on behalf of any holder of the requirements set forth below, for cash at a purchase price per share equal to 100% of the Liquidation Preference per share plus an amount equal to accrued and unpaid dividends, if any, to (but excluding) the Change in Control Purchase Date, whether or not declared. (b) Within 30 days after the effective date of the event or circumstance resulting in a Change in Control, the Company, or at its request the Transfer Agent, in the name -13- of and at the expense of the Company, shall mail a written notice of the Change in Control to the holders of shares of Preferred Stock at their last addresses as the same appear on the Company's stock records and to the Beneficial Owners in accordance with the procedures established by the Depositary and the Transfer Agent, as of the date of the Change in Control; provided that if the Company shall give such notice, it shall also give such notice to the Transfer Agent. Such mailing shall be by first class mail. The notice, if mailed in the manner herein provided, shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any share of Preferred Stock shall not affect the validity of the proceedings for the purchase of any other share of Preferred Stock. Concurrently with the mailing of any such notice of Change in Control, the Company shall (i) issue a press release announcing the Change in Control, (ii) publish such information once in a daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, New York, and (iii) publish such information on the Company's website; it being understood that the form and content of such press release and such publications shall be determined by the Company in its sole discretion. None of the failure to issue any such press release nor make such publications nor any defect therein shall affect the validity of the Change in Control notice or any of the proceedings for the purchase of any share of Preferred Stock. The notice shall include the form of a Change in Control Purchase Notice to be completed by the holder and a copy of any press release or other public announcement of the Change in Control event, and shall state: (i) that a Change in Control has occurred or may occur (including a description of the event or circumstance which has or may result in a Change in Control), and that, as a result, the holders of shares of Preferred Stock have certain purchase rights; (ii) the Change in Control Purchase Date; (iii) the date by which the Change in Control Purchase Notice pursuant to this Section 6 must be given; (iv) the purchase price that will be payable with respect to the shares of Preferred Stock as of the Change in Control Purchase Date, (v) that, on the Change in Control Purchase Date, if the Change in Control Purchase Notice is timely given, the purchase price of the Preferred Stock subject to such Change in Control Purchase Notice, together with accrued and unpaid dividends, if any, to (but excluding) the Change in Control Purchase Date, will become due and payable and dividends on such shares of Preferred Stock shall cease to accrue; (vi) the name and address of the Transfer Agent; (vii) the Conversion Price then in effect; (viii) that shares of Preferred Stock as to which a Change in Control Purchase Notice has been given may be converted into Common Stock only to the extent -14- that the Change in Control Purchase Notice has been withdrawn in accordance with the terms of this Section 6; (ix) the procedures that the holder of Preferred Stock must follow to exercise its rights under this Section 6; (x) the procedures for withdrawing a Change in Control Purchase Notice, including a form of notice of withdrawal; and (xi) that the Company's obligation to redeem the shares of the Preferred Stock may be subject to the consummation of the Change in Control event. If any of the Preferred Stock is in the form of a Global Certificate, then the Company shall modify such notice to the extent necessary to accord with the procedures of the Depositary and the Transfer Agent applicable to the purchase of shares represented by the Global Certificate. (c) A holder of shares of Preferred Stock may exercise its rights pursuant to this Section 6 upon delivery of a written notice (which shall be in substantially the form set forth in Section 15(c) which may be delivered by letter, overnight courier, hand delivery, facsimile transmission or in any other written form and, in the case of shares represented by a Global Certificate, may be delivered electronically or by other means in accordance with the Depositary's customary procedures) of the exercise of such rights (a "CHANGE IN CONTROL PURCHASE NOTICE") to the Transfer Agent at any time prior to the close of business on the Business Day immediately before the Change in Control Purchase Date. Payment of the purchase price for shares of the Preferred Stock, together with accrued and unpaid dividends to (but excluding) the Change in Control Purchase Date, is conditioned upon (i) timely delivery of a completed Change in Control Purchase Notice and (ii) book-entry transfer or physical delivery of certificates representing the shares of Preferred Stock, together with any necessary endorsements, to the Transfer Agent, or to the Transfer Agent's account at the Depositary, at any time after timely delivery of the Change in Control Purchase Notice. If a holder timely delivers its Change in Control Purchase Notice, payment of the purchase price for the Preferred Stock, together with accrued and unpaid dividends to (but excluding) the Change in Control Purchase Date, will be made: (i) if book-entry transfer of or physical delivery of the Preferred Stock has been made by or on the Change in Control Purchase Date, on the Change in Control Purchase Date, or (ii) if book-entry transfer of or physical delivery of the Preferred Stock has not been made by or on such date, at the time of book-entry transfer of or physical delivery of the Preferred Stock. (d) Notwithstanding anything herein to the contrary, any holder of Preferred Stock delivering to the Transfer Agent the Change in Control Purchase Notice shall have the right to withdraw such Change in Control Purchase Notice in whole or in part (provided such part is a share of Preferred Stock or an integral multiple thereof) at any time prior to the close of business on the Business Day before the Change in Control Purchase Date (unless the Company shall default in the payment of the purchase price, together with accrued and unpaid dividends to (but excluding) the Change in Control Purchase Date, in which case, such -15- withdrawal shall be permitted until the Company pays the purchase price, together with accrued and unpaid dividends to (but excluding) the date of such payment) by delivery of a written notice of withdrawal to the Transfer Agent in accordance with the provisions of this Section 6 specifying: (i) the number of shares of Preferred Stock, in whole shares, with respect to which such notice of withdrawal is being submitted; (ii) if certificated shares of Preferred Stock have been issued, the certificate numbers for such shares in respect of which such notice of withdrawal is being submitted, or if such shares are in the form of a Global Certificate, such information as is required by the Depositary; and (iii) the number of shares of Preferred Stock, if any, that remain subject to the original Change in Control Purchase Notice and have been or will be delivered for purchase by the Company. The Transfer Agent shall promptly notify the Company of the receipt by it of any Change in Control Purchase Notice or written withdrawal thereof. The Transfer Agent will promptly return to the respective holders thereof any shares of Preferred Stock with respect to which a Change in Control Purchase Notice has been withdrawn in compliance with this Section 6, in which case, upon such return, the Change in Control Purchase Notice with respect thereto shall be deemed to have been withdrawn. Any money deposited with the Transfer Agent or the Depositary or segregated and held in trust for the purchase of shares of Preferred Stock as to which a Change in Control Purchase Notice has been withdrawn in compliance with this Section 6 shall be paid or delivered to the Company upon its written request. (e) Anything herein to the contrary notwithstanding, in the case of shares of Preferred Stock held pursuant to a Global Certificate, any Change in Control Purchase Notice may be delivered or withdrawn and the shares of Preferred Stock in respect of such Global Certificate may be delivered for purchase or withdrawn in accordance with the applicable procedures of the Depositary as in effect from time to time. (f) The Company shall, on the Change in Control Purchase Date, before 12:00 p.m., New York City time, to the extent funds are legally available, with respect to: (i) all shares of Preferred Stock which are to be purchased pursuant to this Section 6 and are held by the Depositary or its nominees, deposit or cause to be deposited, irrevocably with the Transfer Agent or the Depositary an amount of money sufficient to pay the aggregate purchase price of all shares of Preferred Stock which are to be purchased pursuant to this Section 6 plus an amount equal to the accrued and unpaid dividends, if any, to (but excluding) the Change in Control Purchase Date, and shall give the Transfer Agent or the Depositary, as the case may be, irrevocable instructions and authority to pay such amount to holders of such shares of Preferred Stock upon book-entry transfer of such shares of Preferred Stock to the Transfer Agent's account at the Depositary; and (ii) all shares of Preferred Stock which are to be purchased pursuant to this Section 6 and are held in certificated form, deposit or cause to be deposited, irrevocably with the -16- Transfer Agent an amount of money sufficient to pay the aggregate purchase price of all shares of Preferred Stock which are to be purchased pursuant to this Section 6 plus an amount equal to the accrued and unpaid dividends, if any, to (but excluding) the Change in Control Purchase Date, and shall give the Transfer Agent irrevocable instructions and authority to pay such amount to holders of such shares of Preferred Stock upon surrender of the certificates evidencing such shares of Preferred Stock. The Company shall be entitled to retain any interest, yield or gain on funds deposited with the Transfer Agent and/or the Depositary pursuant to this Section 6 in excess of the amounts required to pay the purchase price, together with accrued and unpaid dividends to (but excluding) the Change in Control Purchase Date. If the conditions precedent to the disbursement of any funds deposited by the Company pursuant to this Section 6 shall not have been satisfied within two years after the establishment of such funds, then (i) such funds shall be returned to the Company upon its request; (ii) the person entitled to the payment for which such funds shall have been originally intended shall have the right to look only to the Company for such payment, subject to applicable abandoned property laws; and (iii) the Transfer Agent and/or the Depositary which shall have held such funds shall be relieved of any responsibility for such funds upon the return of such funds to the Company. (g) If a Change in Control Purchase Notice has been given as provided above and has not been withdrawn pursuant to Section 6(d), and the Transfer Agent and the Depositary hold, in accordance with this Section 6, money sufficient to pay the purchase price of the shares of Preferred Stock to be purchased together with accrued and unpaid dividends to (but excluding) the Change in Control Purchase Date, on and after the Change in Control Purchase Date (unless the Company shall default in the payment of the purchase price, together with accrued and unpaid dividends to (but excluding) the Change in Control Purchase Date, in which case dividends shall continue to accrue until the Company pays the purchase price, together with accrued and unpaid dividends to (but excluding) the date of such payment), dividends on such shares of Preferred Stock shall cease to accrue and such shares of Preferred Stock shall be deemed no longer outstanding and the holders thereof shall have no right in respect of such shares of Preferred Stock except the right to receive the purchase price thereof and accrued and unpaid dividends to (but excluding) the Change in Control Purchase Date, without interest thereon. Shares of Preferred Stock in respect of which a Change in Control Purchase Notice has been given by the holder thereof may not be converted into shares of Common Stock on or after the date of the delivery of such Change in Control Purchase Notice unless such Change in Control Purchase Notice has first been validly withdrawn as specified in this Section 6. If the Change in Control Purchase Date falls after a Dividend Payment Record Date and before the corresponding Dividend Payment Date, holders of the shares of Preferred Stock at the close of business on that Dividend Payment Record Date shall be entitled to receive the full dividend payable on those shares on the corresponding Dividend Payment Date, and the amount payable to holders of such shares of Preferred Stock on the Change in Control Purchase Date will not include any amount in respect of dividends declared and payable on such corresponding Dividend Payment Date. (h) If fewer than all the shares of Preferred Stock represented by any certificate are purchased, a new certificate shall be issued representing the unpurchased shares without cost to the holder thereof. -17- (i) The Company shall comply with any applicable provisions of Rule 13e-4 and any other tender offer rules under the Exchange Act (including, without limitation, a filing on Schedule TO or other schedule) to the extent then applicable in connection with the purchase rights of the holders of the Preferred Stock pursuant to this Section 6. (j) To the extent the Company has insufficient funds to purchase all shares of Preferred Stock for which the Transfer Agent has received a Change in Control Purchase Notice that has not subsequently been withdrawn, the shares to be purchased shall be selected by the Company from the shares of Preferred Stock for which the Transfer Agent has received a Change in Control Purchase Notice that has not subsequently been withdrawn by lot or pro rata (as near as may be) or by any other equitable method determined by the Company in its sole discretion. (k) The Company shall not be required to purchase any shares of Preferred Stock upon the occurrence of a Change in Control if a third party makes an offer to purchase the Preferred Stock in the manner, for the amount, at the times and otherwise in compliance with the requirements described in this Section 6 and purchases all shares of Preferred Stock for which the Transfer Agent has received a Change in Control Purchase Notice that has not subsequently been withdrawn. (l) If the Company shall default in the payment of the purchase price, together with accrued and unpaid dividends to (but excluding) the Change in Control Purchase Date, of any shares of Preferred Stock tendered for purchase, upon surrender thereof for purchase, dividends shall continue to accrue from the Change in Control Purchase Date, such shares of Preferred Stock shall remain outstanding and the Change in Control Purchase Notice in respect of such shares shall remain subject to withdrawal until the Company pays the purchase price, together with accrued and unpaid dividends to (but excluding) the date of such payment. 7. CONVERSION. Holders of shares of Preferred Stock shall have the right to convert all or a portion of such shares into shares of Common Stock, as follows: (a) Subject to and upon compliance with the provisions of this Section 7, a holder of shares of Preferred Stock shall have the right, at the holder's option, at any time after the Issue Date (except that, with respect to shares of Preferred Stock which shall be called for redemption, such right shall terminate at the close of business on the Business Day immediately preceding the date fixed for redemption of such shares of Preferred Stock unless the Company shall default in payment of the amount due upon redemption thereof, in which case such right shall terminate upon payment of the amount due upon such redemption) to convert any of such shares into that number of fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing $50 by the Conversion Price, as adjusted in accordance with this Section 7, by surrender of the shares of Preferred Stock so to be converted in the manner provided in Section 7(b). As used herein, the initial "CONVERSION PRICE" shall mean $[______]. A holder of the Preferred Stock is not entitled to any rights of a holder of Common Stock until such holder has converted his, her or its Preferred Stock to Common Stock, and only to the extent such Preferred Stock is deemed to have been converted to Common Stock under this Section 7. -18- (b) In order to exercise the conversion right, if the shares of Preferred Stock are held in certificated form, the holder of the Preferred Stock to be converted shall surrender the certificate or certificates (with a Conversion Notice, a form of which is set forth in Section 15(a), duly completed) representing the number of shares to be so converted, duly endorsed, at the office or an agency of the Transfer Agent, and shall give written notice of conversion to the office or agency of the Transfer Agent that the holder elects to convert such number of shares of Preferred Stock specified in said notice. Such notice shall also state the name or names (with addresses) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, and shall be accompanied by payment of any transfer taxes required pursuant to Section 7(f). Each such share of Preferred Stock surrendered for conversion shall, unless the shares of Common Stock issuable on conversion are to be issued in the same name in which such share of Preferred Stock is registered, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or his, her or its duly authorized attorney. In order to exercise the conversion right, if the shares of Preferred Stock are represented by a Global Certificate, the holder of the Preferred Stock to be converted shall comply with the procedures established by the Depositary for conversion. As promptly as practicable after satisfaction of the requirements for conversion set forth above, the Company shall issue and shall deliver to such holder or, if shares of Common Stock issuable on conversion are to be issued in a name other than that in which such shares of Preferred Stock to be converted are registered (as if such transfer were a transfer of the share of Preferred Stock so converted), to such other person, at the office or an agency of the Transfer Agent, the certificate or certificates representing the number of shares of Common Stock issuable upon the conversion of such shares of Preferred Stock in accordance with the provisions of this Section 7, and a check or cash in respect of any fractional share of Common Stock arising upon such conversion, as provided in Section 7(c) (which payment, if any, shall be paid no later than five Business Days after satisfaction of the requirements for conversion set forth above). Each conversion pursuant to Section 7(a) shall be deemed to have been effected on the date on which the requirements set forth above in this Section 7(b) or the requirements of the Depositary, as the case may be, have been satisfied as to such shares of Preferred Stock so converted, and the person in whose name any certificate or certificates for the shares of Common Stock is issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; provided, however, that if any such surrender occurs on any date when the stock transfer books of the Company are closed, the conversion shall be effected on the next succeeding day on which such stock transfer books are open, and the person in whose name the certificates are to be issued shall be the record holder thereof on such date for all purposes, but such conversion shall be at the Conversion Price in effect on the date upon which certificate or certificates representing such shares of Preferred Stock shall be surrendered. In the case of any share of Preferred Stock which is converted after any Dividend Payment Record Date and prior to the close of business on the Business Day -19- immediately preceding the corresponding Dividend Payment Date, the dividend due on such Dividend Payment Date shall be payable on such Dividend Payment Date to the holder of record of such share as of such Dividend Payment Record Date notwithstanding such conversion; provided that shares of Preferred Stock surrendered for conversion during the period between the close of business on any Dividend Payment Record Date and prior to the close of business on the Business Day immediately preceding the corresponding Dividend Payment Date must (except in the case of shares of Preferred Stock which have been called for redemption and a notice of redemption has been sent to the holders of Preferred Stock pursuant to Section 5) be accompanied by payment of an amount equal to the dividend payable on such Dividend Payment Date on the shares of Preferred Stock being surrendered for conversion. The Transfer Agent shall not be required to accept for conversion any shares of Preferred Stock not accompanied by any payment required by the preceding sentence. Except as provided in this paragraph, no payment or adjustment shall be made upon any conversion on account of any dividends accrued on shares of Preferred Stock surrendered for conversion or on account of any dividends on the Common Stock issued upon conversion. (c) In connection with the conversion of any shares of Preferred Stock pursuant to Section 7(a), all or a portion of such holder's shares, in whole shares, may be converted; however, no fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of the Preferred Stock. If any fractional share of Common Stock otherwise would be issuable upon the conversion of the Preferred Stock, the Company shall make a payment therefor in cash to the holder of the Preferred Stock based on the then-current market value of a whole share of Common Stock. For purposes of this Section 7(c), the then-current market value of a whole share of Common Stock shall be the Closing Price of the Common Stock on the first Trading Day immediately preceding the day on which the Preferred Stock is deemed to have been converted and such Closing Price of the Common Stock shall be determined as provided in Section 7(i)(i). If more than one share shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered. (d) The Conversion Price shall be adjusted from time to time by the Company as follows: (i) In the event the Company shall hereafter pay a dividend in shares of Common Stock or make a distribution to all holders of Common Stock in shares of Common Stock, the Conversion Price in effect at the opening of business on the Business Day following the Record Date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Record Date and the denominator shall be the sum of such number of shares of Common Stock and the total number of shares of Common Stock constituting such dividend or other distribution. If any dividend or distribution of the type described in this Section 7(d)(i) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would have been in effect if such dividend or distribution had not been declared. -20- (ii) In the event the Company shall issue rights or warrants to all holders of its outstanding shares of Common Stock entitling them (for a period expiring within forty-five (45) days after the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price of the Common Stock on the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants, the Conversion Price shall be adjusted so that the Conversion Price shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date after such Record Date by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Record Date plus the number of shares of Common Stock which the aggregate subscription, purchase or exercise price of the shares of Common Stock called for by all such issued rights or warrants would purchase at such Current Market Price, and of which the denominator shall be the number of shares of Common Stock outstanding at the close of business on such Record Date plus the total number of additional shares of Common Stock so offered for subscription or purchase. Such adjustment shall become effective at the opening of business on the Business Day following the Record Date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants, the Conversion Price shall be readjusted to the Conversion Price which would have been in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect if the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than the Current Market Price, and in determining the aggregate subscription, purchase or exercise price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors in its sole discretion. (iii) In the event the outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the Business Day following the day upon which such subdivision becomes effective shall be proportionately reduced, and conversely, in the event the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the Business Day following the day upon which such combination becomes effective shall be proportionately increased. (iv) In the event the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of capital stock of the Company (other than any dividends or distributions to which Section 7(d)(i) applies) or evidences of its indebtedness, cash or other assets (including securities, but excluding (1) any rights or warrants referred to in Section 7(d)(ii) or (2) dividends and distributions paid exclusively in cash (such shares of capital stock, evidences of indebtedness, cash or other assets hereinafter in this Section -21- 7(d)(iv) referred to as the "SECURITIES")), then, in each such case, the Conversion Price shall be reduced so that the Conversion Price shall be equal to the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Record Date with respect to such distribution by a fraction of which the numerator shall be the Current Market Price on such Record Date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on such Record Date of the portion of the Securities so distributed applicable to one share of Common Stock and the denominator shall be such Current Market Price, such reduction to become effective at the opening of business on the day following such Record Date; provided, however, that in the event the then fair market value (as so determined by the Board of Directors) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of the Preferred Stock shall have the right to receive upon conversion of a share of the Preferred Stock the amount of Securities such holder would have received had such holder converted such share of Preferred Stock immediately prior to such Record Date. In the event that such distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect if such distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 7(d)(iv) by reference to the trading market for any securities comprising all or part of such distribution, it must in doing so consider the prices in such market over the same period (the "REFERENCE PERIOD") used in computing the Current Market Price pursuant to Section 7(i)(ii) to the extent possible, unless the Board of Directors in a Board Resolution determines in good faith that determining the fair market value during the Reference Period would not be in the best interest of the holders of the Preferred Stock. For purposes of this Section 7(d)(iv) and Sections 7(d)(i) and (ii), any dividend or distribution to which this Section 7(d)(iv) is applicable that also includes shares of Common Stock to which Section 7(d)(i) applies, or rights or warrants to subscribe for or purchase shares of Common Stock to which Section 7(d)(ii) applies (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets, shares of capital stock, rights or warrants other than such shares of Common Stock to which Section 7(d)(i) applies or rights or warrants to which Section 7(d)(ii) applies (and any Conversion Price reduction required by this Section 7(d)(iv) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Conversion Price reduction required by Sections 7(d)(i) and (ii) with respect to such dividend or distribution shall then be made) except (A) the Record Date of such dividend or distribution shall be substituted as "the Record Date fixed for the determination of stockholders entitled to receive such dividend or other distribution" and "Record Date" within the meaning of Section 7(d)(i) and as "the Record Date fixed for the determination of the stockholders entitled to receive such rights or warrants" and "Record Date" within the meaning of Section 7(d)(ii), and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on such Record Date" within the meaning of Section 7(d)(i). In the event that the Company implements a stockholders' rights plan (a "NEW RIGHTS PLAN") or amends any then-existing stockholders' rights plan (as -22- amended, an "AMENDED RIGHTS PLAN" and together with any New Rights Plan, a "RIGHTS PLAN"), such Rights Plan shall provide that upon conversion of the Preferred Stock the holders will receive, in addition to the Common Stock issuable upon such conversion, the rights under such Rights Plan (notwithstanding the occurrence of an event causing such rights to separate from the Common Stock at or prior to the time of conversion), unless prior to conversion of the Preferred Stock the rights have expired, terminated or been redeemed. Any distribution of rights or warrants pursuant to the Rights Plan complying with the requirements set forth in the immediately preceding sentence of this paragraph shall not constitute a distribution of rights or warrants for purposes of this Section 7(d). Rights or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Company's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("TRIGGER EVENT") (i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall be deemed not to have been distributed for purposes of this Section 7(d)(iv) (and no adjustment to the Conversion Price under this Section 7(d)(iv) will be required) until the occurrence of the earliest Trigger Event. If such right or warrant is subject to subsequent events, upon the occurrence of which such right or warrant shall become exercisable to purchase different securities, evidences of indebtedness or other assets or entitle the holder to purchase a different number or amount of the foregoing or to purchase any of the foregoing at a different purchase price, then the occurrence of each such event shall be deemed, for purposes of this Section 7(d)(iv), to be the date of issuance and record date with respect to a new right or warrant (and a termination or expiration of the existing right or warrant without exercise by the holder thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or the occurrence of any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto, that resulted in an adjustment to the Conversion Price under this Section 7(d)(iv), (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution equal to the per share redemption or repurchase price received by a holder of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants) made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants all of which shall have expired or been terminated without exercise, the Conversion Price shall be readjusted as if such rights and warrants had never been issued. (v) In the event the Company shall, by dividend or otherwise, make a distribution to holders of its Common Stock consisting exclusively of cash (excluding any dividend or distribution made in connection with the liquidation, dissolution or winding up of the Company and excluding any cash that is distributed upon a merger or consolidation to which Section 7(e) applies or as part of a distribution referred to in Section 7(d)(iv)) in an amount that when combined with all other distributions of cash to holders of its Common Stock (excluding any dividend or distribution made in connection with the liquidation, dissolution or winding up of the Company and excluding any cash that is distributed upon a merger or consolidation to which Section 7(e) applies or as part of a distribution referred to in Section 7(d)(iv)) in such calendar year exceeds on a per-share basis the greater of $0.50 per share or -23- three percent (3%) of the Current Market Price on the date prior to the date of the declaration of such distribution, then, immediately after the close of business on the Record Date with respect to such distribution, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such Record Date by a fraction (i) the numerator of which shall be equal to the Current Market Price on the Record Date less an amount equal to the quotient of (x) the aggregate amount of such distribution and (y) the number of shares of Common Stock outstanding on the Record Date and (ii) the denominator of which shall be equal to the Current Market Price on such Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect if such dividend or distribution had not been declared. (vi) In the event a tender offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender offer (as amended upon the expiration thereof) shall require the payment to stockholders of consideration (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) that, as of the date upon which occurred the last time tenders could have been made pursuant to such tender offer (the "EXPIRATION TIME"), exceeds the Closing Price of a share of Common Stock on the Trading Day next succeeding the Expiration Time then, immediately prior to the opening of business on the day after the Expiration Time, the Conversion Price shall be reduced so that the Conversion Price shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date of the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered shares) as of the Expiration Time multiplied by the Current Market Price on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "PURCHASED SHARES") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price on the Trading Day next succeeding the Expiration Time, such reduction (if any) to become effective at the opening of business on the Business Day following the Expiration Time. In the event that the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect if such tender offer had not been made. If the application of this Section 7(d)(vi) to any tender offer would result in an increase in the Conversion Price, no adjustment shall be made for such tender offer under this Section 7(d)(vi). (vii) In the event of a tender or exchange offer made by a person other than the Company or any Subsidiary for an amount of Common Stock which increases the offeror's ownership of Common Stock to more than 25% of the Common Stock outstanding and -24- shall involve the payment by such person of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a Board Resolution) at the last time (the "TENDER EXPIRATION TIME") tenders or exchanges may be made pursuant to such tender or exchange offer (as amended) that exceeds the Current Market Price on the Trading Day next succeeding the Tender Expiration Time, and with respect to which, as of the Tender Expiration Time, the Board of Directors is not recommending rejection of the offer, the Conversion Price shall be reduced so that the Conversion Price shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Tender Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) as of the Tender Expiration Time multiplied by the Current Market Price on the Trading Day next succeeding the Tender Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Tender Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "TENDER PURCHASED SHARES") and (y) the product of the number of shares of Common Stock outstanding (less any Tender Purchased Shares) on the Tender Expiration Time and the Current Market Price on the Trading Day next succeeding the Tender Expiration Time, such reduction to become effective at the opening of business on the Business Day following the Tender Expiration Time. In the event that such person is obligated to purchase shares pursuant to any such tender or exchange offer, but such person is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect if such tender or exchange offer had not been made. Notwithstanding the foregoing, the adjustment described in this Section 7(d)(vii) shall not be made if, as of the Tender Expiration Time, the offering documents with respect to such tender offer or exchange offer disclose a plan or intention to cause the Company to consolidate with or merge with or into another person (whether or not affiliated with the Company) or permit any other person (whether or not affiliated with the Company) to consolidate with or merge with or into the Company (or enter into or permit successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties), or enter into any sale, lease, conveyance or transfer of all or substantially all of the assets of the Company (computed on a consolidated basis), whether in a single transaction or a series of related transactions, to another person or group of affiliated persons (whether or not affiliated with the Company) and either: (i) in the case of a consolidation or merger, the Company is the resulting or surviving entity and each share of Preferred Stock shall remain outstanding and unaffected; or (ii) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and the Preferred Stock shall be converted into or exchanged for convertible exchangeable preferred stock of the corporation formed by such consolidation, or into which the Company shall have been merged, or of the corporation which shall have acquired or leased all or substantially all of the assets of the Company having powers, preferences and relative, participating, optional and other rights and qualifications, limitations and restrictions substantially similar to (but no less favorable than) the powers, preferences and relative, participating, optional and other rights and qualifications, limitations and restrictions of a share of the Preferred Stock as set forth in this Certificate of Designations. -25- (viii) The Company may make such reductions in the Conversion Price, in addition to those required by Sections 7(d)(i), (ii), (iii), (iv), (v), (vi), and (vii), as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. (ix) To the extent permitted by applicable law, the Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least twenty (20) Business Days, the reduction is irrevocable during the period and the Board of Directors shall have made a determination that such reduction is in the best interests of the Company, which determination shall be conclusive and described in a Board Resolution. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Company shall mail to each holder of the Preferred Stock at his, her or its last address appearing on the Company's stock records a notice of the reduction at least fifteen (15) days prior to the date the reduced Conversion Price takes effect, and such notice shall state the reduced Conversion Price and the period during which it will be in effect. No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 7(d)(ix) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under Section 7 shall be made by the Company and shall be rounded to the nearest cent. No adjustment need be made for a change in the par value of the Common Stock or a change from par value to no par value or from no par value to par value. (x) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Transfer Agent an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which such adjustment becomes or became effective and shall mail such notice of such adjustment of the Conversion Price to each holder of the Preferred Stock at his, her or its last address appearing on the Company's stock records, within twenty (20) days of the effective date of such adjustment. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. (xi) In any case in which this Section 7(d) provides that an adjustment shall become effective immediately after a Record Date for an event, the Company may defer until the occurrence of such event (i) issuing to the holder of any share of Preferred Stock converted after such Record Date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon conversion before giving effect to such adjustment and (ii) paying to such holder of Preferred Stock any amount in cash in lieu of any fractional shares of Common Stock pursuant to Section 7(c). -26- (xii) For purposes of this Section 7(d), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company, unless a dividend or distribution that requires an adjustment to the Conversion Price pursuant to this Section 7 is paid or made with respect to such treasury shares, but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. (e) If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock (other than a subdivision or combination to which Section 7(d)(iii) applies or a change in par value), (ii) any consolidation, merger or combination of the Company with another person as a result of which holders of Common Stock shall be entitled to receive stock, other securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or conveyance of all or substantially all of the assets of the Company to any other person as a result of which holders of Common Stock shall be entitled to receive stock, other securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then each share of Preferred Stock shall be convertible into the kind and amount of shares of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of the number of shares of Common Stock issuable upon conversion of such Preferred Stock (assuming, for such purposes, a sufficient number of authorized shares of Common Stock are available to convert all such Preferred Stock) immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming such holder of Common Stock did not exercise his rights of election, if any, as to the kind or amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance (provided that, if the kind or amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("NON-ELECTING SHARE"), then for the purposes of this Section 7(e) the kind and amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance for each Non-Electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-Electing Shares). If this Section 7(e) applies to any event or occurrence, Section 7(d) shall not apply. The Company shall not be a party to any event or occurrence to which this Section 7(e) applies unless the terms of such event or occurrence are consistent with this Section 7(e). The above provisions of this Section shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. (f) The issuance of stock certificates representing the shares of Common Stock issuable upon conversion of the Preferred Stock shall be made without charge to the holders of such shares for any issuance tax in respect thereof imposed by the government of the United States or any political subdivision thereof or other cost incurred by the Company in connection with such conversion and/or the issuance of such shares. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Stock in any name other than the name in which the shares of -27- Preferred Stock with respect to which such shares of Common Stock are issued are registered, and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (g) All shares of Common Stock which may be delivered upon conversion of shares of Preferred Stock will upon delivery be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock or its issued shares of Common Stock held in its treasury, or both, a sufficient number of shares of Common Stock for the purpose of effecting conversions of shares of Preferred Stock not theretofore converted into Common Stock. For purposes of this reservation of Common Stock, the number of shares of Common Stock which shall be deliverable upon the conversion of all outstanding shares of Preferred Stock shall be computed as if at the time of computation all outstanding shares of Preferred Stock were held by a single holder. The issuance of shares of Common Stock upon conversion of shares of Preferred Stock is authorized in all respects. The Company shall from time to time, in accordance with the laws of the State of Delaware, use its best efforts to increase the authorized number of shares of Common Stock if at any time the number of shares of authorized and unissued Common Stock shall not be sufficient to permit the conversion of all of the then outstanding shares of Preferred Stock. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Preferred Stock, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted Conversion Price. If any shares of Common Stock to be provided for the purpose of conversion of the Preferred Stock hereunder require registration with or approval of any governmental authority under any Federal or state law before such shares may be validly issued upon conversion, the Company will, in good faith and as expeditiously as possible, endeavor to secure such registration or approval, as the case may be. If at any time the Common Stock shall be listed on the Nasdaq National Market or any national securities exchange or automated quotation system, the Company will, if permitted by the rules of such exchange or automated quotation system, list and keep listed, so long as the Common Stock shall be so listed on such exchange or automated quotation system, all Common Stock issuable upon conversion of the Preferred Stock. -28- (h) In the event: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any share of any class of the Company's capital stock or any other rights or warrants; or (iii) of any reclassification of the Common Stock (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (iv) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company shall cause to be filed with the Transfer Agent and to be mailed to each holder of the Preferred Stock at his, her or its address appearing on the Company's stock records, as promptly as possible but in any event at least fifteen (15) days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or grant of rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or grant is to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. (i) The following definitions shall apply to terms used in this Section 7 and elsewhere in this Certificate of Designations: (i) "CLOSING PRICE" with respect to any securities on any day shall mean the closing sale price regular way on such day or, in case no sale of such securities takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on the Nasdaq National Market or New York Stock Exchange, as applicable, or, if such security is not listed or admitted to trading on such Nasdaq National Market or New York Stock Exchange, on the principal national security exchange, trading market or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange, trading market or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on such day as reported by the National Quotation Bureau Incorporated, or a similar generally -29- accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution. (ii) "CURRENT MARKET PRICE" shall mean, subject to the second paragraph hereof, the lesser of (a) the Closing Price per share of Common Stock on the date in question and (b) the average of the daily Closing Prices per share of Common Stock for the ten (10) consecutive Trading Days immediately prior to the date in question; provided, however, that (1) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 7(d)(i), (ii), (iii), (iv), (v), (vi), or (vii) occurs during such ten (10) consecutive Trading Days, the Closing Price per share of Common Stock for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price per share of Common Stock by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (2) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 7(d)(i), (ii), (iii), (iv), (v), (vi), or (vii) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the Closing Price per share of Common Stock for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price per share of Common Stock by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event, and (3) if the "ex" date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Closing Price per share of Common Stock for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 7(d)(iv), (vi) or (vii) whose determination shall be conclusive and described in a Board Resolution) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For purposes of any computation under Sections 7(d)(vi) or (vii), the Current Market Price on any date shall be deemed to be the average of the daily Closing Prices per share of Common Stock for such day and the next two succeeding Trading Days; provided, however, that if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 7(d)(i), (ii), (iii), (iv), (v), (vi), or (vii) occurs on or after the Expiration Time or the Tender Expiration Time, as the case may be, for the tender or exchange offer requiring such computation and prior to the day in question, the Closing Price per share of Common Stock for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price per share of Common Stock by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (1) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price per share of Common Stock -30- was obtained without the right to receive such issuance or distribution, (2) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (3) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time or Tender Expiration Time, as the case may be, of such offer. Notwithstanding the foregoing, whenever successive adjustments to the Conversion Price are called for pursuant to Section 7(d), such adjustments shall be made to the Current Market Price as may be necessary or appropriate to effectuate the intent of Section 7(d) and to avoid unjust or inequitable results as determined in good faith by the Board of Directors. (iii) "FAIR MARKET VALUE" shall mean the amount which a willing buyer would pay a willing seller in an arm's length transaction. (iv) "RECORD DATE" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). (v) "TRADING DAY" shall mean (x) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be made thereon or (y) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national securities exchange or securities trading market, a day on which the New York Stock Exchange or such other national securities exchange or securities trading market is open for business or (z) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. 8. RANKING. The Preferred Stock shall, with respect to dividend rights and rights upon the liquidation, winding-up or dissolution of the Company, rank (a) senior to all Junior Stock, (b) on parity with all Parity Stock and (c) junior to all Senior Stock. 9. VOTING RIGHTS. (a) The holders of the Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. In connection with any right to vote, each holder of the Preferred Stock will have one vote for each share of Preferred Stock held. Any shares of Preferred Stock held by the Company or any entity controlled by the Company shall not have voting rights hereunder and shall not be counted in determining the presence of a quorum. -31- (b) Whenever dividends on the Preferred Stock or on any Parity Stock shall be in arrears in an aggregate amount equal to at least six quarterly dividends (whether or not consecutive), (i) the number of members of the Board of Directors shall be increased by two, effective as of the time of election of such directors as hereinafter provided and (ii) the holders of the Preferred Stock (voting separately as a class with the holders of any Parity Stock on which like voting rights have been conferred and are exercisable) will have the exclusive right to vote for and elect such two additional directors of the Company at any meeting of stockholders of the Company at which directors are to be elected held during the period such dividends remain in arrears. The right of the holders of the Preferred Stock to vote for such two additional directors shall terminate when all accrued and unpaid dividends on the Preferred Stock and all other affected classes or series of Parity Stock have been declared and paid or set apart for payment. The holders of the Preferred Stock and the holders of any Parity Stock on which like voting rights have been conferred and are exercisable, voting separately as a class, shall have the right to remove without cause at any time and replace any directors which such holders shall have elected pursuant to this Section 9. If the office of any director elected by the holders of Preferred Stock and the holders of any Parity Stock on which like voting rights have been conferred and are exercisable, voting separately as a class, becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the remaining director elected by the holders of Preferred Stock and the holders of any Parity Stock on which like voting rights have been conferred and are exercisable, voting separately as a class, may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. The term of office of all directors so elected shall terminate immediately upon the termination of the right of the holders of the Preferred Stock and the holders of any Parity Stock on which like voting rights have been conferred and are exercisable to vote for such directors, and the number of directors of the Board of Directors shall immediately thereafter be reduced by two. The Board of Directors shall determine, when and if required, to which class of directors such directors appointed by the holders of the Preferred Stock and the holders of any Parity Stock having like voting rights shall be appointed under the Certificate of Incorporation; provided, however, that if applicable, the term of such directors shall terminate earlier than the expiration of the terms provided for the applicable class or classes of directors if the right of the holders of Preferred Stock and the holders of any Parity Stock having like voting rights to appoint directors under this Section 9 terminates as provided herein. The foregoing right of the holders of the Preferred Stock with respect to the election of two directors may be exercised at any annual meeting of stockholders or at any special meeting of stockholders held for such purpose. If the right to elect directors shall have accrued to the holders of the Preferred Stock more than ninety (90) days preceding the date established for the next annual meeting of stockholders, the President of the Company shall, within twenty (20) days after the delivery to the Company at its principal office of a written request for a special meeting signed by the holders of at least 10% of all outstanding shares of Preferred Stock, call a special meeting of the holders of the Preferred Stock to be held within sixty (60) days after the delivery of such request for the purpose of electing such additional directors. (c) So long as the Preferred Stock is outstanding, the Company shall not, without the affirmative vote or consent of the holders of at least 66 2/3 percent (unless a -32- higher percentage shall then be required by applicable law) of all outstanding shares of Preferred Stock and any Parity Stock on which like voting rights have been conferred and are exercisable, voting together as a separate class, (i) amend, alter or repeal any provision of the Certificate of Incorporation (including, without limitation, this Certificate of Designations) or the By-laws of the Company so as to affect adversely the relative rights, preferences, qualifications, limitations or restrictions of the Preferred Stock, or (ii) create, authorize or issue, or reclassify any authorized capital stock of the Company into, or increase the authorized amount of, any Senior Stock or any obligation or security convertible into shares of any Senior Stock. In addition, so long as the Preferred Stock is outstanding, the Company shall not, without the affirmative vote or consent of the holders of at least 66 2/3 percent (unless a higher percentage shall then be required by applicable law) of all outstanding shares of Preferred Stock voting separately as a class with the holders of any Parity Stock on which like voting rights have been conferred and are exercisable, enter into a share exchange pursuant to which the Preferred Stock would be exchanged for any other securities (except an exchange pursuant to Section 10) or consolidate with or merge with or into another person (whether or not affiliated with the Company) or permit any other person (whether or not affiliated with the Company) to consolidate with or merge with or into the Company, or enter into any sale, lease, conveyance or transfer of all or substantially all of the assets of the Company (computed on a consolidated basis), whether in a single transaction or a series of related transactions, to another person or group of affiliated persons (whether or not affiliated with the Company) unless either: (A) in the case of a consolidation or merger, the Company is the resulting or surviving entity and each share of Preferred Stock shall remain outstanding and unaffected; or (B) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and the Preferred Stock shall be converted into or exchanged for convertible exchangeable preferred stock of the corporation formed by such consolidation, or into which the Company shall have been merged, or of the corporation which shall have acquired or leased all or substantially all of the assets of the Company having powers, preferences and relative, participating, optional and other rights and qualifications, limitations and restrictions substantially similar to (but no less favorable than) the powers, preferences and relative, participating, optional and other rights and qualifications, limitations and restrictions of a share of the Preferred Stock as set forth in this Certificate of Designations. A class vote of the holders of the Preferred Stock shall not be required (except as otherwise required by law or Board Resolution) in connection with (1) the authorization, issuance or increase in the authorized amount of any shares of Junior Stock or Parity Stock, when and if issued, including Common Stock; or (2) the authorization, issuance or increase in the amount of any bonds, mortgages, notes, debentures or other obligations of the Company (other than those that may be covered by clause (ii) of the first sentence of this paragraph). The holders of Preferred Stock shall also be entitled to vote on certain amendments or supplements to the Indenture establishing the Notes, for which the Preferred Stock may be exchanged, as described in Section 10 hereof, and provided in Section 11.2 of the Indenture. -33- 10. EXCHANGE. (a) The Preferred Stock shall be exchangeable, in whole but not in part, at the option of the Company on any Dividend Payment Date beginning [ ], 2005, for the Notes at the rate of $50 principal amount of Notes for each share of Preferred Stock outstanding at the time of exchange. On the Exchange Date (as defined below), (i) the rights of holders of the Preferred Stock, as such, will terminate, and (ii) shares of the Preferred Stock will be deemed to be no longer outstanding and will only represent the right to receive the Notes and payment of accrued and unpaid dividends, if any, to (but excluding) the Exchange Date (except in the event of a default by the Company or the Trustee in the delivery of the Notes or the failure to satisfy the conditions for exchange set forth in this Section 10), whether or not declared. The Notes will be issuable in denominations of $50 and integral multiples thereof. If the exchange results in an amount of Notes that is not an integral multiple of $50, the amount in excess of the closest integral multiple of $50 will be paid in cash by the Company. (b) In the event the Company shall elect to exercise the right to exchange the shares of Preferred Stock for the Notes pursuant to this Section 10, it shall fix a date for exchange which shall be a Dividend Payment Date (the "EXCHANGE DATE"), and it, or at its request, the Transfer Agent, in the name of and at the expense of the Company, shall mail or cause to be mailed a notice of such exchange at least thirty (30) and not more than sixty (60) days prior to the Exchange Date to the Trustee and the holders of the shares of Preferred Stock so to be exchanged at their last addresses as the same appear on the Company's stock records and to the Beneficial Owners in accordance with the procedures established by the Depositary and the Transfer Agent; provided that if the Company shall give such notice, it shall also give such notice to the Transfer Agent. Such mailing shall be by first class mail. If mailed in the manner herein provided, the exchange notice shall be conclusively presumed to have been duly given, whether or not the Trustee or the holders receive such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any share of Preferred Stock shall not affect the validity of the proceedings for the exchange of any other share of Preferred Stock. The Company will cause the Notes to be delivered to the Trustee in preparation for the exchange no later than five Business Days prior to the Exchange Date. Concurrently with the mailing of any such notice of exchange, the Company shall: (i) issue a press release announcing such exchange; (ii) publish such information once in a daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, New York; and (iii) publish such information on the Company's website; it being understood that the form and content of such press release and such publications shall be determined by the Company in its sole discretion. None of the failure to issue any such press release nor make such publications nor any defect therein shall affect the validity of the exchange notice or any of the proceedings for the exchange of any share of Preferred Stock. (c) Each such notice of exchange shall state: (i) the Company's election to exercise the right to exchange the shares of Preferred Stock for the Notes; (ii) a description of the type and amount of Notes to be delivered in respect of the Preferred Stock, the place or places where certificates for shares of Preferred Stock are to be surrendered for exchange, including any procedures applicable to an exchange to be accomplished through book-entry transfers; (iii) the Exchange Date; and (iv) that dividends on the shares of Preferred Stock -34- to be exchanged shall cease to accrue on the Exchange Date whether or not shares of Preferred Stock are surrendered for exchange on such Exchange Date via physical delivery or book-entry transfer, unless the Company or the Trustee shall default in the delivery of the Notes or the conditions for exchange set forth in this Section 10 have not been satisfied as of the Exchange Date, in which case dividends shall continue to accrue until the Company or the Trustee delivers the Notes or satisfies such conditions for exchange, as the case may be, in either case accompanied by delivery of accrued and unpaid dividends to (but excluding) the date of delivery of the Notes or the satisfaction of such conditions for exchange, as the case may be. (d) If the Company exercises the right to exchange the shares of Preferred Stock for the Notes pursuant to this Section 10, delivery of the Notes together with accrued and unpaid dividends to (but excluding) the Exchange Date to the holders of the Preferred Stock to be exchanged is conditioned upon book-entry transfer or physical delivery of certificates representing the Preferred Stock, together with any necessary endorsements, to the Trustee at any time after delivery of the notice of the exchange. Delivery of the Notes will be made: (i) if book-entry transfer of or physical delivery of the Preferred Stock has been made by or on the Exchange Date, on the Exchange Date, or (ii) if book-entry transfer of or physical delivery of the Preferred Stock has not been made by or on such date, at the time of book-entry transfer of or physical delivery of the Preferred Stock, in either case, via book-entry transfer or physical delivery, as the case may be. (e) If notice of exchange has been given as above provided, and the Trustee holds, in accordance with this Section 10, authenticated Notes in respect of the Preferred Stock to be exchanged together with money sufficient to pay accrued and unpaid dividends to (but excluding) the Exchange Date, and the Company has complied with the other provisions of this Section 10, on and after the Exchange Date: (i) the Company shall be the owner and record holder of such Preferred Stock; (ii) the holders of such Preferred Stock shall have no further rights with respect to the Preferred Stock other than the right to receive the Notes together with accrued and unpaid dividends to (but excluding) the Exchange Date without interest thereon, upon book-entry transfer of or physical delivery of the Preferred Stock; (iii) dividends on the Preferred Stock to be exchanged will cease to accrue on the Exchange Date whether or not certificates for shares of Preferred Stock are surrendered for exchange on the Exchange Date; and (iv) the Depositary or its nominee, as the record holder of any Preferred Stock represented by one or more Global Certificates, will exchange the Global Certificate or Global Certificates representing the Preferred Stock for a global certificate or certificates representing the Notes to be delivered upon such exchange. In the event that the Company or the Trustee shall default in the delivery of the Notes together with accrued and unpaid dividends to (but excluding) the Exchange Date, or the conditions for exchange set forth in this Section 10 have not been satisfied as of the Exchange Date, dividends on the Preferred Stock will continue to accrue from the Exchange Date, the Preferred Stock shall remain outstanding and remain convertible into Common Stock until the Company delivers the Notes together with accrued and unpaid dividends to (but excluding) the date of such payment and, if applicable, the satisfaction of such conditions. (f) Notwithstanding the foregoing, if notice of exchange has been given pursuant to this Section 10 and any holder of shares of Preferred Stock shall, prior to the -35- close of business on the Exchange Date, give written notice to the Company pursuant to Section 7 of the conversion of any or all of the shares held by the holder (with book-entry transfer of or physical delivery of the Preferred Stock duly endorsed or assigned to the Company), then the exchange shall not become effective as to the shares to be converted and the conversion shall become effective as provided in Section 7. (g) Notwithstanding the other provisions of this Section 10, if on the Exchange Date (i) the Company has not paid all accrued dividends on the Preferred Stock (or set aside a sum therefor); (ii) the Notes shall not be listed or approved for listing upon issuance on the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, the American Stock Exchange or another similar national securities exchange or securities trading market; or (iii) the exchange shall result in an Event of Default (as defined in the Indenture) under the Indenture or an Event of Default under the Indenture shall have occurred and be continuing, the Company may not exchange the Preferred Stock for the Notes and any notice previously given pursuant to this Section 10 shall be of no effect. If the conditions to exercising the right to exchange the shares of Preferred Stock for the Notes pursuant to this Section 10 have not been satisfied as of the Exchange Date, the Company will be prohibited from making the exchange and the exchange will not be consummated. In such case, the Company will (i) issue a press release indicating that such conditions have not been satisfied and that the exchange will not be consummated, and (ii) publish such information on the Company's website on the World Wide Web. Thereafter, the Company again will have the right to exercise the exchange right in accordance with the provisions of this Section 10. (h) Prior to the Exchange Date, the Company will comply with any applicable securities and blue sky laws with respect to the exchange of the Preferred Stock for the Notes. (i) Dividends with respect to the shares of Preferred Stock to be exchanged which are due on the Dividend Payment Date which is the Exchange Date shall be payable to the holders of such shares of Preferred Stock registered as such on the relevant Dividend Payment Record Date subject to the terms and provisions of Section 3 and the amount payable to holders of such shares of Preferred Stock on the Exchange Date will not include any amount in respect of dividends declared and payable on such Dividend Payment Date. 11. RECORD HOLDERS. The Company and the Transfer Agent may deem and treat the record holder of any shares of Preferred Stock as the true and lawful owner thereof for all purposes and neither the Company nor the Transfer Agent shall be affected by any notice to the contrary. 12. SHARES TO BE RETIRED. Any share of Preferred Stock converted, redeemed, purchased or otherwise acquired by the Company shall be retired and canceled and shall upon cancellation be restored to the status of authorized but unissued shares of preferred stock, subject to reissuance by the Board of Directors as shares of preferred stock of one or more series. -36- 13. NOTICE. Except as may otherwise be provided for herein, all notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon receipt, in the case of a Change in Control Purchase Notice as contemplated in Section 6(c) or Conversion Notice as contemplated in Section 7(b) hereof, or, in all other cases, upon the earlier of receipt of such notice or three Business Days after the mailing of such notice if sent by registered mail (unless first-class mail shall be specifically permitted for such notice under the terms of this Certificate of Designations) with postage prepaid, addressed, if to the Company, to its offices at 650 Poydras Street, New Orleans, Louisiana 70130, or to an agent of the Company designated as permitted by this certificate, or, if to any holder of the Preferred Stock, to such holder at the address of such holder of the Preferred Stock as listed in the Company's stock records or to such other address as the Company or holder, as the case may be, shall have designated by notice similarly given. 14. FORM OF CERTIFICATES; TRANSFER. (a) For so long as the shares of Preferred Stock are eligible for book-entry settlement with the Depositary or as book-entry settlement may be required by law, all shares of Preferred Stock that are so eligible shall be represented by one or more Preferred Stock certificates in global form (each, a "GLOBAL CERTIFICATE" and together, the "GLOBAL CERTIFICATES") registered in the name of the Depositary or the nominee of the Depositary, except as otherwise specified below. The transfer, conversion, redemption, purchase and exchange of beneficial interests in the Global Certificate shall be effected through the Depositary in accordance with this Certificate of Designations and the procedures of the Depositary therefor. Transfers of interests in a Global Certificate will be made in accordance with the standing instructions and procedures of the Depositary and its participants. The Transfer Agent shall make appropriate endorsements to reflect increases or decreases in the Global Certificate as set forth on the face of the Global Certificate to reflect any such transfers. Except as provided below, Beneficial Owners of an interest in a Global Certificate shall not be entitled to have certificates registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and will not be considered holders of such Global Certificates. No definitive Preferred Stock certificate, or portion thereof, in respect of which the Company or an Affiliate of the Company holds a beneficial interest shall be included in a Global Certificate. The Transfer Agent shall issue Preferred Stock certificates in definitive form upon any transfer of a beneficial interest in any Global Certificate to the Company or any Affiliate of the Company. (b) Any Global Certificate may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Certificate of Designations as may be required by the Transfer Agent, the Depositary, a nominee of the Depositary, by the New York Stock Exchange or by the National Association of Securities Dealers, Inc. in order to comply with any applicable law or any regulation thereunder or with the rules and regulations of any securities exchange upon which the shares of Preferred Stock may -37- be listed or traded or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular shares of Preferred Stock are subject. (c) Notwithstanding any other provisions of this Certificate of Designations (other than the provisions set forth in this Section 14(c)), a Global Certificate may not be transferred in whole except (i) by the Depositary to a nominee of the Depositary, (ii) by a nominee of the Depositary to the Depositary, another nominee of the Depositary or to a successor Depositary or (iii) by such a successor Depositary to a nominee of such successor Depositary. The Depositary shall be a clearing agency registered under the Exchange Act. The Company initially appoints The Depository Trust Company to act as Depositary with respect to the Global Certificates. Initially, the Global Certificate shall be issued to the Depositary, registered in the name of Cede & Co., as the nominee of the Depositary, and deposited with a custodian for Cede & Co. If at any time (i) the Depositary for a Global Certificate notifies the Company that it is unwilling or unable to continue as Depositary for such Global Certificate and a successor Depositary for such Global Certificate is not appointed by the Company within 90 days after the Company receives such notice; (ii) the Depositary for a Global Certificate ceases to be a "clearing agency" registered under the Exchange Act and a successor Depositary for such Global Certificate is not appointed by the Company within 90 days; or (iii) the Company decides to discontinue the use of book-entry transfer through the Depositary or any successor Depositary, the Company shall execute, and shall cause the Transfer Agent to authenticate and deliver, Preferred Stock in certificated form, in an aggregate principal amount equal to the principal amount of the Global Certificate, in exchange for such Global Certificate. Preferred Stock in definitive form issued in exchange for all or a part of a Global Certificate pursuant to this Section 14 shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Transfer Agent. Upon execution and authentication, the Transfer Agent shall deliver such Preferred Stock in certificated form to the persons in whose names such Preferred Stock in definitive form are so registered. At such time as all interests in a Global Certificate have been redeemed, converted, exchanged, purchased or canceled for Preferred Stock in definitive form, or transferred to a transferee who receives Preferred Stock in definitive form, such Global Certificate shall be, upon receipt thereof, canceled by the Transfer Agent in accordance with standing procedures and instructions existing between the Transfer Agent and Depositary. At any time prior to such cancellation, if any interest in a Global Certificate is exchanged for Preferred Stock in certificated form, redeemed, converted, exchanged, repurchased by the Company or canceled, or transferred for part of a Global Certificate, the principal amount of such Global Certificate shall, in accordance with the standing procedures and instructions existing between the Transfer Agent and the Depositary, be reduced or increased, as the case may be, and an endorsement shall be made on such Global Certificate, by the Transfer Agent to reflect such reduction or increase. -38- (d) Any Preferred Stock, or Common Stock issued upon the conversion of Preferred Stock, that is purchased or owned by the Company or any Affiliate thereof, may not be resold by the Company or such Affiliate unless registered under the Securities Act or resold pursuant to an exemption from the registration requirements of the Securities Act in a transaction which results in such Preferred Stock or Common Stock, as the case may be, no longer being "restricted securities" (as defined under Rule 144). Any such Preferred Stock or Common Stock issued in definitive form to the Company or any Affiliate thereof shall be endorsed with or have incorporated in the text thereof such legends or recitals as necessary to set forth the foregoing restrictions. 15. FORM OF NOTICE OF CONVERSION; FORM OF ASSIGNMENT; FORM OF CHANGE IN CONTROL PURCHASE NOTICE. (a) The following is a form of Conversion Notice to be set forth on the reverse of any Preferred Stock certificate: [FORM OF CONVERSION NOTICE] CONVERSION NOTICE To: _____________________________ The undersigned registered owner of ___% Convertible Exchangeable Preferred Stock, $1.00 par value per share (the "PREFERRED STOCK"), of International Shipholding Corporation, a Delaware corporation (the "COMPANY"), hereby irrevocably exercises the option to convert the Preferred Stock, or the portion hereof below designated, into shares of Common Stock of the Company in accordance with the terms of the Certificate of Designations, dated _______________, 20___, governing the Preferred Stock, and directs that the shares issuable and deliverable upon such conversion and any check in payment for fractional shares and any Preferred Stock representing any unconverted amount of shares hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of the Preferred Stock not converted are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated: __________________ _____________________________________ _____________________________________ Signature(s) Signature(s) must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations and -39- credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17AD-15 if shares of Common Stock are to be issued or Preferred Stock to be delivered other than to and in the name of the registered holder of the Preferred Stock. Signature Guarantee NOTICE: The signature on the conversion notice must correspond with the name as written upon the face of the Preferred Stock certificate in every particular without alteration or enlargement or any change whatever. Fill in for registration of shares if to be issued, and Preferred Stock if to be delivered, other than to and in the name of the registered holder of the Preferred Stock: _______________________________ (Name) _______________________________ (Street Address) _______________________________ (City, State and Zip Code) Please print name and address Number of shares to be covered (if less than all):__________________ -------------------------------- Taxpayer Social Security or Other Identification Number: __________ (b) The following is the form of Assignment to be set forth on the reverse of the Preferred Stock certificate: [FORM OF ASSIGNMENT] -40- For value received hereby sell(s), assign(s) and transfer(s) unto (Please insert social security or Taxpayer Identification Number of assignee) __________ shares of the ___% Convertible Exchangeable Preferred Stock, $1.00 par value per share (such shares, the "PREFERRED STOCK"), of International Shipholding Corporation, a Delaware corporation (the "COMPANY"), and hereby irrevocably constitutes and appoints attorney to transfer the Preferred Stock on the books of the Company, with full power of substitution in the premises. Unless the appropriate box below is checked, the undersigned confirms that the Preferred Stock is not being transferred to the Company or an "affiliate" of the Company as defined in Rule 144 under the Securities Act of 1933, as amended (an "AFFILIATE"). [ ] The transferee is an Affiliate of the Company. [ ] The transferee is the Company Dated: _________________ ___________________________ ___________________________ Signature(s) Signature(s) must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17AD-15 if shares of Common Stock are to be issued or Preferred Stock to be delivered other than to and in the name of the registered holder. Signature Guarantee NOTICE: The signature on the assignment must correspond with the name as written upon the face of the Preferred Stock certificate in every particular without alteration or enlargement or any change whatever. (c) The following is the form of Form of Change in Control Purchase Notice: [FORM OF CHANGE IN CONTROL PURCHASE NOTICE] -41- To: _____________________________ The undersigned hereby irrevocably acknowledges receipt of a notice from International Shipholding Corporation, a Delaware corporation (the "COMPANY"), as to the occurrence of a Change in Control with respect to the Company and requests and instructs the Company to purchase _____ shares of Preferred Stock in accordance with the terms of the Certificate of Designations of the Company, dated _______________, 2004, governing the Preferred Stock (the "CERTIFICATE OF DESIGNATIONS"), at a purchase price per share equal to 100% of the Liquidation Preference per share plus an amount equal to accrued and unpaid dividends, if any, to (but excluding) the Change in Control Purchase Date. The certificate number(s) of such share(s) is/are ____________ (include if the Preferred Stock is certificated). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Certificate of Designations. Dated: _____________ _____________________ _____________________ Signature(s) NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Security in every particular without alteration or enlargement or any change whatever. Aggregate Liquidation Preference to be purchased (if less than all): $___________________________________ ____________________________________ Social Security or Other Taxpayer Identification Number [SIGNATURES NEXT PAGE] -42- IN WITNESS WHEREOF, the Company has caused this certificate to be signed and attested this _____ day of December, 2004. INTERNATIONAL SHIPHOLDING CORPORATION By: __________________________________ Name: Erik F. Johnsen Title: Chairman of the Board and Chief Executive Officer Attest: _______________________________ Name: H. Hughes Grehan Title: Assistant Secretary -43- EX-4.4 4 h19465a3exv4w4.txt INDENTURE INTERNATIONAL SHIPHOLDING CORPORATION AND THE BANK OF NEW YORK AS TRUSTEE INDENTURE DATED AS OF____________________, 2004 _____% CONVERTIBLE SUBORDINATED NOTES DUE 2014 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS 1 Section 1.1 Definitions 1 ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES 8 Section 2.1 Designation, Amount and Issue of Notes 9 Section 2.2 Form of Notes 9 Section 2.3 Date and Denomination of Notes; Maturity; Payments of Interest 9 Section 2.4 Execution of Notes 11 Section 2.5 Exchange and Registration of Transfer of Notes 12 Section 2.6 Mutilated, Destroyed, Lost or Stolen Notes 15 Section 2.7 Temporary Notes 16 Section 2.8 Cancellation of Notes Paid, Etc. 16 ARTICLE III REDEMPTION AND PURCHASE OF NOTES 16 Section 3.1 Redemption of Notes at Option of the Company 16 Section 3.2 Optional Redemption of Notes Upon a Change in Control 17 Section 3.3 Notice of Redemption; Selection of Notes 17 Section 3.4 Payment of Notes Called for Redemption by Company 20 Section 3.5 Reserved 21 Section 3.6 Required Purchase at Option of Holders Upon a Change in Control 21 ARTICLE IV SUBORDINATION OF NOTES 26 Section 4.1 Agreement of Subordination 26 Section 4.2 Payments to Noteholders 27 Section 4.3 Subrogation of Notes 29 Section 4.4 Authorization by Noteholders 30 Section 4.5 Notice to Trustee 30 Section 4.6 Trustee's Relation to Senior Indebtedness 31 Section 4.7 No Impairment of Subordination 31 Section 4.8 Certain Conversions Not Deemed Payment 31 Section 4.9 Article Applicable to Paying Agents 32 Section 4.10 Senior Indebtedness Entitled to Rely 32 ARTICLE V PARTICULAR COVENANTS OF THE COMPANY 32 Section 5.1 Payment of Principal, Premium and Interest 32 Section 5.2 Maintenance of Office or Agency 32 Section 5.3 Appointments to Fill Vacancies in Trustee's Office 33 Section 5.4 Provisions as to Paying Agent 33 Section 5.5 Existence 34
i Section 5.6 Restriction as to Dividends 34 Section 5.7 Stay, Extension and Usury Laws 34 Section 5.8 Compliance Certificate 35 Section 5.9 Further Instruments and Acts 35 ARTICLE VI NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE 35 Section 6.1 Noteholders' Lists 35 Section 6.2 Preservation and Disclosure of Lists 36 Section 6.3 Reports by Trustee 36 Section 6.4 Reports by Company 36 ARTICLE VII DEFAULTS AND REMEDIES 37 Section 7.1 Events of Default 37 Section 7.2 Payments of Notes on Default; Suit Therefor 39 Section 7.3 Application of Monies Collected by Trustee 41 Section 7.4 Proceedings by Noteholder 41 Section 7.5 Proceedings by Trustee 42 Section 7.6 Remedies Cumulative and Continuing 42 Section 7.7 Direction of Proceedings and Waiver of Defaults by Majority of Noteholders 42 Section 7.8 Notice of Defaults 43 Section 7.9 Undertaking to Pay Costs 43 Section 7.10 Delay or Omission Not Waiver 44 ARTICLE VIII CONCERNING THE TRUSTEE 44 Section 8.1 Duties and Responsibilities of Trustee 44 Section 8.2 Reliance on Documents, Opinions, Etc. 45 Section 8.3 Trustee's Disclaimer 46 Section 8.4 Trustee, Paying Agents, Conversion Agents or Registrar May Own Notes 46 Section 8.5 Monies to Be Held in Trust 46 Section 8.6 Compensation and Expenses of Trustee 46 Section 8.7 Officers' Certificate as Evidence 47 Section 8.8 Conflicting Interests of Trustee 47 Section 8.9 Eligibility of Trustee 47 Section 8.10 Resignation or Removal of Trustee 48 Section 8.11 Acceptance by Successor Trustee 49 Section 8.12 Succession by Merger, Etc. 49 Section 8.13 Limitation on Rights of Trustee as Creditor 50 ARTICLE IX CONCERNING THE NOTEHOLDERS 50 Section 9.1 Action by Noteholders 50 Section 9.2 Proof of Execution by Noteholders 50 Section 9.3 Who Are Deemed Absolute Owners 51 Section 9.4 Company-Owned Notes Disregarded 51
ii Section 9.5 Revocation of Consents; Future Holders Bound 51 ARTICLE X NOTEHOLDERS' MEETINGS 52 Section 10.1 Purpose of Meetings 52 Section 10.2 Call of Meetings by Trustee 52 Section 10.3 Call of Meetings by Company or Noteholders 53 Section 10.4 Qualifications for Voting 53 Section 10.5 Regulations 53 Section 10.6 Voting 53 Section 10.7 No Delay of Rights by Meeting 54 ARTICLE XI SUPPLEMENTAL INDENTURES 54 Section 11.1 Supplemental Indentures Without Consent of Noteholders 54 Section 11.2 Supplemental Indentures with Consent of Noteholders 55 Section 11.3 Effect of Supplemental Indentures 56 Section 11.4 Notation on Notes 57 Section 11.5 Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee 57 ARTICLE XII MERGER, SALE OR CONSOLIDATION 57 Section 12.1 Limitation on Merger, Sale or Consolidation 57 Section 12.2 Successor Corporation to Be Substituted 57 ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE 58 Section 13.1 Discharge of Indenture 58 Section 13.2 Deposited Monies to Be Held in Trust by Trustee 59 Section 13.3 Paying Agent to Repay Monies Held 59 Section 13.4 Return of Unclaimed Monies 59 Section 13.5 Reinstatement 59 ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS 60 Section 14.1 Indenture and Notes Solely Corporate Obligations 60 ARTICLE XV CONVERSION OF NOTES 60 Section 15.1 Holder's Right to Convert 60 Section 15.2 Exercise of Conversion Right; Issuance of Common Stock on Conversion; No Adjustment for Interest or Dividends 60 Section 15.3 Cash Payments in Lieu of Fractional Shares 62 Section 15.4 Conversion Price 62 Section 15.5 Adjustment of Conversion Price 62 Section 15.6 Reclassification, Consolidation, Merger or Sale 70 Section 15.7 Taxes on Shares Issued 71 Section 15.8 Reservation of Shares; Shares to Be Fully Paid; Listing of Common Stock 72 Section 15.9 Responsibility of Trustee 73
iii Section 15.10 Notice to Holders Prior to Certain Actions 73 ARTICLE XVI MISCELLANEOUS PROVISIONS 74 Section 16.1 Provisions Binding on Company's Successors 74 Section 16.2 Official Acts by Successor Corporation 74 Section 16.3 Addresses for Notices, Etc. 75 Section 16.4 Governing Law 74 Section 16.5 Evidence of Compliance with Conditions Precedent; Certificates to Trustee 75 Section 16.6 Legal Holidays 75 Section 16.7 No Security Interest Created 75 Section 16.8 Trust Indenture Act 75 Section 16.9 Benefits of Indenture 76 Section 16.10 Table of Contents, Headings, Etc. 76 Section 16.11 Authenticating Agent 76 Section 16.12 Execution in Counterparts 77
iv CROSS REFERENCE SHEET* Between Provisions of Trust Indenture Act of 1939 and Indenture, dated as of , 2004, between International Shipholding Corporation and The Bank of New York, as Trustee, providing for the % Convertible Subordinated Notes Due 2014:
SECTION OF SECTION OF THE ACT INDENTURE - ------------------ --------- 310(a)(1) and (2) 8.9 310(a)(3) and (4) Inapplicable 310(b) 8.8 and 8.10(b) and (d) 310(c) Inapplicable 311(a) 8.13 311(b) 8.13 311(c) Inapplicable 312(a) 6.1 and 6.2(a) 312(b) 6.2(b) 312(c) 6.2(c) 313(a) 6.3(a) 313(b)(1) Inapplicable 313(b)(2) 6.3(a) 313(c) 6.3(a) 313(d) 6.3(b) 314(a) 6.4 314(b) Inapplicable 314(c)(1) and (2) 16.5 314(c)(3) Inapplicable 314(d) Inapplicable 314(e) 16.5 314(f) Inapplicable 315(a), (c) and (d) 8.1 315(b) 7.8 315(e) 7.9 316(a)(1) 7.7 316(a)(2) Inapplicable 316(a)(last sentence) 9.4 316(b) 11.2 317(a) 7.2 317(b) 5.4 and 13.2 318(a) 16.8
v INDENTURE INDENTURE, dated as of _______________, 2004, between International Shipholding Corporation, a Delaware corporation (hereinafter sometimes called the "Company," as more fully set forth in Section 1.1), and The Bank of New York, a state banking corporation organized and existing under the laws of the State of New York, as trustee (hereinafter sometimes called the "Trustee", as more fully set forth in Section 1.1). W I T N E S S E T H: WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue of its _____% Convertible Subordinated Notes Due 2014 (hereinafter sometimes called the "Notes"), in an aggregate principal amount not to exceed $___,000,000 and, to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and WHEREAS, the Notes, the certificate of authentication to be borne by the Notes, a form of assignment, and a form of conversion notice to be borne by the Notes are to be substantially in the forms hereinafter provided for; and WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee or a duly authorized authenticating agent, as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Notes have in all respects been duly authorized. NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Notes are to be authenticated, issued and delivered, and in consideration of the premises and of the purchase and acceptance of the Notes by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Notes (except as otherwise provided below), as follows: ARTICLE I DEFINITIONS SECTION 1.1 DEFINITIONS. Each of the terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1. Each of the terms used in this Indenture, which are defined in the Trust Indenture Act or which are by reference therein defined in the Securities Act (except as herein otherwise expressly provided or unless the context otherwise requires) shall have the meanings assigned to such term in said Trust Indenture Act and in said Securities Act as in force at the date of the execution of this Indenture. The words "herein," "hereof," "hereunder," and words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other Subdivision. The terms defined in this Article include the plural as well as the singular. AFFILIATE. The term "Affiliate" of any specified person shall mean any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control," when used with respect to any specified person means the power to direct or cause the direction of the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. AMENDED RIGHTS PLAN. The term "Amended Rights Plan" shall have the meaning specified in Section 15.5(d). BENEFICIAL OWNER. The term "Beneficial Owner" means the person in whose name a Note is recorded as beneficial owner of such Note by the Depositary, or by any participant or indirect participant in the Depositary, as the case may be. BOARD OF DIRECTORS. The term "Board of Directors" shall mean the Board of Directors of the Company or a committee of such Board duly authorized to act for it hereunder. BOARD RESOLUTION. The term "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. BUSINESS DAY. The term "Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which the banking institutions in The City of New York, New York or the city in which the Corporate Trust Office is located are authorized or obligated by law or executive order to close or be closed. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred at the time, after the Exchange Date, (i) that any person or group of persons (within the meaning of Sections 13(d) or 14(a) of the Exchange Act) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Commission under the Exchange Act) of 50% or more of the voting capital stock of the Company; or (ii) within a period of twelve (12) consecutive calendar months, individuals who were directors of the Company on the first day of such period (together with any new directors whose election to the Board of Directors, or whose nomination for election, was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) shall cease to constitute a majority of the Board of Directors. 2 CHANGE IN CONTROL PURCHASE DATE. The term "Change in Control Purchase Date" shall have the meaning specified in Section 3.6(a). CHANGE IN CONTROL PURCHASE NOTICE. The term "Change in Control Purchase Notice" shall have the meaning specified in Section 3.6(c). CLOSING PRICE. The term "Closing Price" shall have the meaning specified in Section 15.5(h)(1). COMMISSION. The term "Commission" shall mean the Securities and Exchange Commission. COMMON STOCK. The term "Common Stock" shall mean the class of capital stock of the Company designated as Common Stock, par value $1.00 per share, at the date hereof. Subject to the provisions of Section 15.6, shares issuable on conversion of Notes shall include only shares of such class or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable on conversion of Notes shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. COMPANY. The term "Company" shall mean International Shipholding Corporation, a Delaware corporation and, subject to the provisions of Article XII, shall include its successors and assigns. CONVERSION PRICE. The term "Conversion Price" shall have the meaning specified in Section 15.4. CORPORATE TRUST OFFICE. The term "Corporate Trust Office," or other similar term, shall mean the office of the Trustee at which at any particular time its corporate trust business as it relates to this Indenture shall be principally administered, which office is, at the date as of which this Indenture is dated, located at 10161 Centurion Parkway, 2nd Floor, Jacksonville, Florida 32256, Attention: William Cardozo (International Shipholding Corporation, ____% Convertible Subordinated Notes Due 2014). CURRENT MARKET PRICE. The term "Current Market Price" shall have the meaning specified in Section 15.5(h)(2). CUSTODIAN. The term "Custodian" shall mean The Bank of New York, as custodian with respect to the Notes in global form, or any successor entity thereto. DEFAULT. The term "default" shall mean any event that is, or after notice or passage of time, or both, would be, an Event of Default. 3 DEFAULTED INTEREST. The term "Defaulted Interest" shall have the meaning specified in Section 2.3. DEPOSITARY. The term "Depositary" shall mean, with respect to the Notes issuable or issued in whole or in part in global form, the person specified in Section 2.5(d) as the Depositary with respect to such Notes, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and thereafter, "Depositary" shall mean or include such successor. EVENT OF DEFAULT. The term "Event of Default" shall mean any event specified in Section 7.1 continued for the period of time, if any, and after the giving of notice, if any, therein designated. EXCHANGE ACT. The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. EXCHANGE DATE. The term "Exchange Date" shall mean the date on which the Notes are issued in exchange for all of the outstanding shares of Preferred Stock. "EX" DATE. The term "ex" date shall have the meaning specified in Section 15.5(h)(2). EXPIRATION TIME. The term "Expiration Time" shall have the meaning specified in Section 15.5(f). FAIR MARKET VALUE. The term "fair market value" shall have the meaning specified in Section 15.5(h)(3). GLOBAL NOTE. The term "Global Note" shall have the meaning specified in Section 2.5(b). INDEBTEDNESS. The term "Indebtedness" shall mean, with respect to any person, all obligations, whether or not contingent, of such person (i) (a) for borrowed money, whether or not evidenced by a note, Note, bond, or other written instrument, (b) evidenced by a note, Note, bond or other written instrument, (c) under a lease required to be capitalized on the balance sheet of the lessee under generally accepted accounting principles or under any lease or related document (including a purchase agreement) that provides that the lessee is contractually obligated to purchase or cause a third party to purchase and thereby guarantee a minimum residual value of the leased property to the lessor and the obligations of the lessee under such lease or related document to purchase or to cause a third party to purchase such leased property, (d) in respect of letters of credit, bank guarantees or bankers' acceptances (including reimbursement obligations with respect to any of the foregoing), (e) with respect to Indebtedness secured by a mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or an encumbrance to which the property or assets of such person are subject, whether or not the obligation secured thereby shall have been assumed by or shall otherwise be such person's legal liability, (f) in respect of the balance of deferred and unpaid purchase price of any property or assets, (g) under interest rate or 4 currency swap agreements, cap, floor and collar agreements, spot and forward contracts and similar agreements and arrangements; (ii) with respect to any obligation of others of the type described in the preceding clause (i) or under clause (iii) below assumed by or guaranteed in any manner by such person or in effect guaranteed by such person through an agreement to purchase (including, without limitation, "take or pay" and similar arrangements), contingent or otherwise (and the obligations of such person under any such assumptions, guarantees or other such arrangements); and (iii) any and all Indebtedness constituting deferrals, renewals, extensions, refinancings and refundings of, or amendments, modifications or supplements to, any of the foregoing. INDENTURE. The term "Indenture" shall mean this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. MATURITY DATE. The term "Maturity Date" shall mean _____________, 2014. NEW RIGHTS PLAN. The term "New Rights Plan" shall have the meaning specified in Section 15.5(d). NON-ELECTING SHARE. The term "non-electing share" shall have the meaning specified in Section 15.6. NOTE OR NOTES. The terms "Note" or "Notes" shall mean any Note or Notes, as the case may be, authenticated and delivered under this Indenture. NOTEHOLDER; HOLDER. The terms "Noteholder" or "holder" as applied to any Note, or other similar terms (but excluding the term "beneficial holder"), shall mean any person in whose name at the time a particular Note is registered on the Note register. NOTE REGISTER. The term "Note register" shall have the meaning specified in Section 2.5. NOTE REGISTRAR. The term "Note registrar" shall have the meaning specified in Section 2.5(a). OFFICERS' CERTIFICATE. The term "Officers' Certificate," when used with respect to the Company, shall mean a certificate signed by (a) one of the President, the Chief Executive Officer, Executive or Senior Vice President, any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") or the Chief Financial Officer and (b) by one of the Treasurer or any Assistant Treasurer, Secretary or any Assistant Secretary, or the Controller of the Company, which is delivered to the Trustee. Each such certificate shall include the statements provided for in Section 16.5 if and to the extent required by the provisions of such Section. OPINION OF COUNSEL. The term "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or other counsel acceptable to the Trustee, which is delivered to the Trustee. Each such opinion shall 5 include the statements provided for in Section 16.5 if and to the extent required by the provisions of such Section. OUTSTANDING. The term "outstanding," when used with reference to Notes, shall, subject to the provisions of Section 9.4, mean, as of any particular time, all Notes authenticated and delivered by the Trustee under this Indenture, except (a) Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) Notes, or portions thereof, for the payment, redemption or purchase of which monies in the necessary amount shall have been deposited in trust pursuant hereto with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided that if such Notes are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in Section 3.3, or provision satisfactory to the Trustee shall have been made for giving such notice; and provided further that if such Notes are to be purchased prior to the maturity thereof in connection with a Change in Control, a Change in Control Purchase Notice shall have been received as provided in Section 3.6. (c) Notes in lieu of which, or in substitution for which, other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.6 unless proof satisfactory to the Trustee is presented that any such Notes are held by bona fide holders in due course; and (d) Notes converted into Common Stock pursuant to Article XV and Notes deemed not outstanding pursuant to Section 3.4 or 3.6. PAYMENT BLOCKAGE NOTICE. The term "Payment Blockage Notice" has the meaning specified in Section 4.2(b). PERSON. The term "person" shall mean a corporation, a limited liability company, an association, a partnership, an individual, a joint venture, a joint stock company, a trust, an unincorporated organization or any other entity or organization, including a government or an agency, instrumentality or political subdivision thereof. PREDECESSOR NOTE. The term "Predecessor Note" of any particular Note shall mean every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 2.6 in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the lost, destroyed or stolen Note that it replaces. PREFERRED STOCK. The term "Preferred Stock" shall mean the _______% Convertible Exchangeable Preferred Stock of the Company. PURCHASED SHARES. The term "Purchased Shares" shall have the meaning specified in Section 15.5(f). 6 RECORD DATE. The term "Record Date" shall have the meaning specified in Section 15.5(h)(4). REFERENCE PERIOD. The term "Reference Period" shall have the meaning specified in Section 15.5(d). REPRESENTATIVE. The term "Representative" means the (a) indenture trustee or other trustee, agent or representative for any Senior Indebtedness or (b) with respect to any Senior Indebtedness that does not have any such trustee, agent or other representative, (i) in the case of such Senior Indebtedness issued pursuant to an agreement providing for voting arrangements as among the holders or owners of such Senior Indebtedness, any holder or owner of such Senior Indebtedness acting with the consent of the required persons necessary to bind such holders or owners of such Senior Indebtedness and (ii) in the case of all other such Senior Indebtedness, the holder or owner of such Senior Indebtedness. RESPONSIBLE OFFICER. The term "Responsible Officer", when used with respect to the Trustee, shall mean an officer of the Trustee assigned to the Corporate Trust Office, and any officer of the Trustee to whom such matter is referred to because of his, her or its knowledge of and familiarity with the particular subject. RIGHTS PLAN. The term "Rights Plan" shall have the meaning specified in Section 15.5(d). RULE 144. The term "Rule 144" shall mean Rule 144 as promulgated under the Securities Act. SECURITIES. The term "Securities" shall have the meaning specified in Section 15.5(d). SECURITIES ACT. The term "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. SENIOR INDEBTEDNESS. The term "Senior Indebtedness" means the principal of, premium, if any, and interest on any Indebtedness of the Company (including, without limitation, any interest accruing after the filing of a petition by or against the Company under any bankruptcy law, whether or not allowed as a claim after such filing in any proceeding under such bankruptcy law), or any other payment of Indebtedness, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company (including all deferrals, renewals, extensions or refundings of, or amendments, modifications or supplements to the foregoing); provided, however, that Senior Indebtedness does not include (i) Indebtedness evidenced by the Notes, (ii) any liability for federal, state, local or other taxes owed or owing by the Company, (iii) Indebtedness of the Company to any Subsidiary, (iv) any trade payables of the Company incurred in the ordinary course of its business, and (v) any indebtedness in which the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to, or is pari passu with, or subordinated or junior to, the Notes. 7 SUBSIDIARY. The term "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. TENDER EXPIRATION TIME. The term "Tender Expiration Time" shall have the meaning specified in Section 15.5(g). TENDER PURCHASED SHARES. The term "Tender Purchased Shares" shall have the meaning specified in Section 15.5(g). TRADING DAY. The term "Trading Day" has the meaning specified in Section 15.5(h)(5). TRANSFER AGENT. The term "Transfer Agent" means American Stock Transfer & Trust Company or such other agent or agents of the Company as may be designated by the Board of Directors as the transfer agent for the Preferred Stock. TRIGGER EVENT. The term "Trigger Event" shall have the meaning specified in Section 15.5(d). TRUST INDENTURE ACT. The term "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as amended, as it was in force at the date of execution of this Indenture, except as provided in Sections 11.3 and 15.6; provided, however, that in the event the Trust Indenture Act of 1939 is amended after the date hereof, the term "Trust Indenture Act" shall mean, to the extent required by such amendment, the Trust Indenture Act of 1939 as so amended. TRUSTEE. The term "Trustee" shall mean The Bank of New York and its successors and any corporation resulting from or surviving any consolidation or merger to which it or its successors may be a party and any successor trustee at the time serving as successor trustee hereunder. UNDERWRITER. The term "Underwriter" shall mean Ferris, Baker Watts, Incorporated. ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES SECTION 2.1 DESIGNATION, AMOUNT AND ISSUE OF NOTES. The Notes shall be designated as "_____% Convertible Subordinated Notes Due 2014." Notes not to exceed the aggregate principal amount of $_______________ (or $_______________ if the over-allotment option set forth in Section [ ] of the Underwriting Agreement dated _______________, 2004 (as amended from time to time by the parties thereto) by and between the Company and the Underwriter is 8 exercised in full) (except pursuant to Sections 2.5, 2.6, 3.3 and 15.2) upon the execution of this Indenture, or from time to time thereafter, may be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes upon the written order of the Company, signed by the Company's (a) President, Chief Executive Officer, Executive or Senior Vice President, any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") or Chief Financial Officer and (b) Treasurer or Assistant Treasurer or its Secretary or any Assistant Secretary, without any further action by the Company hereunder; provided, however, that said Notes may not be executed, delivered or authenticated unless and until (i) the Company may legally issue said Notes in accordance with the Delaware General Corporation Law, as amended, and (ii) the Trustee shall have received an Officer's Certificate and Opinion of Counsel in accordance with Section 16.5. The Notes may only be issued upon the exchange of all outstanding Preferred Stock. SECTION 2.2 FORM OF NOTES. The Notes and the Trustee's certificate of authentication to be borne by such Notes shall be substantially in the form set forth in Exhibit A, which is incorporated in and made a part of this Indenture. Any of the Notes may have such letters, numbers or other marks of identification and such notations, legends and endorsements as the officers executing the same may approve (execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange or automated quotation system on which the Notes may be listed or designated for issuance, or to conform to usage. Any Global Note shall represent such of the outstanding Notes as shall be specified therein and shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and that the aggregate amount of outstanding Notes represented thereby may from time to time be increased or reduced to reflect transfers or exchanges permitted hereby. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in such manner and upon instructions given by the holder of such Notes in accordance with this Indenture. Payment of principal of and interest and premium, if any (including any redemption or purchase price), on any Global Note shall be made to the holder of such Note. The terms and provisions contained in the form of Note attached as Exhibit A hereto shall constitute, and are hereby expressly made, a part of this Indenture and to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. SECTION 2.3 DATE AND DENOMINATION OF NOTES; MATURITY; PAYMENTS OF INTEREST. The Notes shall be issuable in registered form without coupons in denominations of $50 principal amount and integral multiples thereof equal to the number of shares of Preferred Stock for which the Notes are exchanged. Every Note shall be dated the date of its authentication and, except as 9 provided in this Section, shall bear interest at the annual rate of _____%, payable quarterly on the _________ day of _________, _________, _________ and _________ of each year, commencing on the first such date after the Exchange Date, from the most recent date to which interest has been paid or duly provided for, or if no interest has been paid or duly provided for on the Notes, from the Exchange Date, until payment of the principal sum has been made or fully provided for. The Notes will mature on the Maturity Date, regardless of the Exchange Date, unless earlier converted, redeemed or purchased. Notwithstanding the foregoing, when there is no existing default in the payment of interest on the Notes, all Notes authenticated by the Trustee after the close of business on the record date (as defined in this Section 2.3) for any interest payment date (the _________ day of _________, _________, _________ or _________, as the case may be) and prior to such interest payment date shall be dated the date of authentication but shall bear interest from such interest payment date; provided, however, that if and to the extent that the Company shall default in interest due on such interest payment date then any such Note shall bear interest from the _________ day of _________, _________, _________ or _________, as the case may be, immediately preceding the date of such Note to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for on the Notes, from the Exchange Date. The person in whose name any Note (or its Predecessor Note) is registered at the close of business on any record date with respect to any interest payment date (including any Note that is converted after the record date and on or before the interest payment date) shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such Note upon any transfer, exchange or conversion subsequent to the record date and on or prior to such interest payment date. Interest may, at the option of the Company, be paid by check mailed to the address of such person on the registry kept for such purposes; provided that, with respect to any holder of Notes with an aggregate principal amount equal to or in excess of $2,000,000, at the request of such holder in writing to the Company, interest on such holder's Notes shall be paid by wire transfer in immediately available funds in accordance with the wire transfer instruction supplied by such holder to the Trustee and paying agent (if different from Trustee). Interest payable with respect to Notes held in the form of a Global Note shall be paid to the Depositary by wire transfer in immediately available funds in accordance with the applicable procedures of the Depositary. The term "record date" with respect to any interest payment date shall mean the _________ day of _________, _________, _________ or _________, as the case may be, preceding said _________ day of _________, _________, _________ or _________, as the case may be. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any said _________ day of _________, _________, _________ or _________ (herein called "Defaulted Interest") shall forthwith cease to be payable to the Noteholder on the relevant record date by virtue of his, her or it having been such Noteholder; and such Defaulted Interest shall be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: 10 (1) The Company may elect to make payment of any Defaulted Interest to the persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest to be paid on each Note and the date of the payment (which shall be not less than twenty-five (25) days after the receipt by the Trustee of such notice, unless the Trustee shall consent to an earlier date), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this clause provided. Thereupon, the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall be not more than fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment and not less than ten (10) days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first-class postage prepaid, to each Noteholder as of such special record date at his, her or its address as it appears in the Note register, not less than ten (10) days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been so mailed, such Defaulted Interest shall be paid to the persons in whose names the Notes (or their respective Predecessor Notes) were registered at the close of business on such special record date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange or automated quotation system on which the Notes may be listed or designated for issuance, and upon such notice as may be required by such exchange or automated quotation system, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. SECTION 2.4 EXECUTION OF NOTES. The Notes shall be signed in the name and on behalf of the Company by the facsimile signature of its President, its Chief Executive Officer, any of its Executive or Senior Vice Presidents, or any of its Vice Presidents (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and attested by the manual or facsimile signature of its Secretary or any of its Assistant Secretaries (which may be printed, engraved or otherwise reproduced thereon, by facsimile or otherwise). Only such Notes as shall bear thereon a certificate of authentication substantially in the form set forth on the form of Note attached as Exhibit A hereto, manually executed by the Trustee (or an authenticating agent appointed by the Trustee as provided by Section 16.11), shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee (or such an authenticating agent) upon any Note executed by the Company shall be 11 conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Notes shall cease to be such officer before the Notes so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Notes nevertheless may be authenticated and delivered or disposed of as though the person who signed such Notes had not ceased to be such officer of the Company; and any Note may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Note, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. SECTION 2.5 EXCHANGE AND REGISTRATION OF TRANSFER OF NOTES. (a) The Company shall cause to be kept at the Corporate Trust Office or other office of the Trustee or its Affiliate a register (the register maintained in such office and in any other office or agency of the Company designated pursuant to Section 5.2 being herein sometimes collectively referred to as the "Note register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. Such register shall be in written form or in any form capable of being converted into written form within a reasonable period of time. The Trustee is hereby initially appointed "Note registrar" for the purpose of registering Notes and transfers of Notes as herein provided. The Company may appoint one or more co-registrars in accordance with Section 5.2. There shall be only one Note register. Upon surrender for registration of transfer of any Note to the Note registrar or any co-registrar, and satisfaction of the requirements for such transfer set forth in this Section 2.5, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denominations and of a like aggregate principal amount. Notes may be exchanged for other Notes of any authorized denominations and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at any such office or agency. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Notes which the Noteholder making the exchange is entitled to receive, bearing registration numbers not contemporaneously outstanding. All Notes presented or surrendered for registration of transfer or for exchange shall (if so required by the Company, the Trustee, the Note registrar or any co-registrar) be duly endorsed, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and duly executed, by the Noteholder thereof or his, her or its attorney duly authorized in writing. No service charge shall be charged to the Noteholder for any exchange or registration of transfer of Notes. None of the Company, the Trustee, the Note registrar or any co-registrar shall be required to exchange or register a transfer of (a) any Notes for a period of fifteen (15) days next preceding 12 any selection of Notes to be redeemed or (b) any Notes called for redemption or, if a portion of any Note is selected or called for redemption, such portion thereof selected or called for redemption or (c) any Notes surrendered for conversion or, if a portion of any Note is surrendered for conversion, such portion thereof surrendered for conversion or (d) any Notes tendered for purchase or, if a portion of a Note is tendered for purchase, such portion thereof tendered for purchase. All Notes issued upon any transfer or exchange of Notes in accordance with this Indenture shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture as the Notes surrendered upon such registration of transfer or exchange. (b) So long as the Notes are eligible for book-entry settlement with the Depositary, or unless otherwise required by law, all Notes that are so eligible may be represented by a Note or Notes in global form (the "Global Note" or "Global Notes") registered in the name of the Depositary or the nominee of the Depositary, except as otherwise specified below. The transfer, conversion and exchange of beneficial interests in the Global Note shall be effected through the Depositary in accordance with this Indenture and the procedures of the Depositary therefor. Transfers of interests in a Global Note will be made in accordance with the standing instructions and procedures of the Depositary and its participants. The Trustee shall make appropriate endorsements to reflect increases or decreases in the Global Note as set forth on the face of the Global Note to reflect any such transfers. Except as provided below, beneficial owners of an interest in a Global Note shall not be entitled to have certificates registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and will not be considered holders of such Global Notes. No definitive Note, or portion thereof, in respect of which the Company or an Affiliate of the Company held any beneficial interest shall be included in a Global Note. The Trustee shall authenticate Notes in definitive form upon any transfer of a beneficial interest in any Global Note to the Company or any Affiliate of the Company. (c) Any Global Note may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Indenture as may be required by the Custodian, the Depositary, the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc. or any other exchange or automated quotation system in which the Notes are then authorized for trading in order to comply with any applicable law or any regulation thereunder or with the rules and regulations of any securities exchange upon which the Notes may be listed or traded or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Notes are subject. (d) Notwithstanding any other provisions of this Indenture (other than the provisions set forth in this Section 2.5(d)), a Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the 13 Depositary or another nominee to a successor Depositary or a nominee of such successor Depositary. The Depositary shall be a clearing agency registered under the Exchange Act. The Company initially appoints The Depository Trust Company to act as Depositary with respect to the Global Notes. Initially, the Global Note shall be issued to the Depositary, registered in the name of Cede & Co., as the nominee of the Depositary, and deposited with the Custodian for Cede & Co. If at any time: (A) the Depositary for a Global Note (i) has notified the Company that it is unwilling or unable to continue as Depositary for such Global Note and a successor depositary has not been appointed by the Company within ninety (90) calendar days, or (ii) has ceased to be a clearing agency registered under the Exchange Act and no successor clearing agency has been appointed by the Company within ninety (90) calendar days; (B) an Event of Default has occurred and is continuing; or (C) the Company, in its sole discretion, notifies the Trustee in writing that it no longer wishes to have all the Notes represented by Global Notes, the Company will execute, and the Trustee will authenticate and deliver, Notes in certificated form, in an aggregate principal amount equal to the principal amount of the Global Note, in exchange for such Global Note. Any Global Note exchanged pursuant to clause (A) or (B) above shall be so exchanged in whole and not in part, and any Global Note exchanged pursuant to clause (C) above may be exchanged in whole or in part from time to time as directed by the Company. Notes in definitive form issued in exchange for all or a part of a Global Note pursuant to this Section 2.5(d) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. Upon execution and authentication, the Trustee shall deliver such Notes in certificated form to the persons in whose names such Notes in definitive form are so registered. Any Global Note exchanged pursuant to clause (A) or (B) above shall be so exchanged in whole and not in part and any Global Note exchanged pursuant to clause (C) above may be exchanged in whole or from time to time in part as directed by the Company. At such time as all interests in a Global Note have been redeemed, converted, exchanged, purchased or canceled for Notes in definitive form, or transferred to a transferee who receives Notes in definitive form, such Global Note shall be, upon receipt thereof, canceled by the Trustee in accordance with standing procedures and instructions existing between the Custodian and Depositary. At any time prior to such cancellation, if any interest in a Global Note is exchanged for Notes in certificated form, redeemed, converted, exchanged, purchased by the Company or canceled, or transferred for part of a Global Note, the principal amount of such Global Note shall, in accordance with the standing procedures and instructions existing between the Custodian and the Depositary, be reduced or increased, as the case may be, and an endorsement shall be made on such Global Note, by the Trustee or the Custodian, at the direction of the Trustee, to reflect such reduction or increase. (e) Any Note or Common Stock issued upon the conversion or exchange of a Note that is purchased or owned by the Company or any Affiliate thereof may not be resold by the Company or such Affiliate unless registered under the Securities Act or resold pursuant to an exemption from the registration requirements of the Securities Act in a transaction which results 14 in such Note or Common Stock, as the case may be, no longer being "restricted securities" (as defined under Rule 144). Any Note or Common Stock issued in definitive form to the Company or any Affiliate thereof shall be endorsed with or have incorporated in the text thereof such legends or recitals as necessary to set forth the foregoing restrictions. SECTION 2.6 MUTILATED, DESTROYED, LOST OR STOLEN NOTES. In case any Note shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its request the Trustee or an authenticating agent appointed by the Trustee shall authenticate and deliver, a new Note, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Note, or in lieu of and in substitution for the Note so destroyed, lost or stolen. In every case the applicant for a substituted Note shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company, to the Trustee and, if applicable, to such authenticating agent evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. The Trustee or such authenticating agent may authenticate any such substituted Note and deliver the same upon the receipt of such security or indemnity as the Trustee, the Company and, if applicable, such authenticating agent may require. Upon the issuance of any substituted Note, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Note which has matured or is about to mature or has been called for redemption, or tendered for purchase in connection with a Change in Control, or is about to be converted into Common Stock shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Note, pay or authorize the payment of or convert or authorize the conversion of the same (without surrender thereof except in the case of a mutilated Note), as the case may be, if the applicant for such payment or conversion shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in case of destruction, loss or theft, evidence satisfactory to the Company, the Trustee and, if applicable, any paying agent or conversion agent of the destruction, loss or theft of such Note and of the ownership thereof. Every substitute Note issued pursuant to the provisions of this Section 2.6 by virtue of the fact that any Note is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be found at any time, and shall be entitled to all the benefits of (but shall be subject to all the limitations set forth in) this Indenture equally and proportionately with any and all other Notes duly issued hereunder. To the extent permitted by law, all Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment or conversion of mutilated, destroyed, lost or stolen Notes and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment or conversion of negotiable instruments or other securities without their surrender. 15 SECTION 2.7 TEMPORARY NOTES. Pending the preparation of definitive Notes or any Global Note, the Company may execute and the Trustee or an authenticating agent appointed by the Trustee shall, upon written request of the Company, authenticate and deliver temporary Notes (printed or lithographed). Temporary Notes shall be issuable in any authorized denomination, and substantially in the form of the definitive Notes but with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Company. Every such temporary Note shall be executed by the Company and authenticated by the Trustee or such authenticating agent upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Notes. Without unreasonable delay the Company will execute and deliver to the Trustee or such authenticating agent definitive Notes and thereupon any or all temporary Notes may be surrendered in exchange therefor, at each office or agency maintained by the Company pursuant to Section 5.2 and the Trustee or such authenticating agent shall authenticate and deliver in exchange for such temporary Notes an equal aggregate principal amount of definitive Notes. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits and subject to the same limitations under this Indenture as definitive Notes authenticated and delivered hereunder. SECTION 2.8 CANCELLATION OF NOTES PAID, ETC. All Notes surrendered for the purpose of payment, redemption, purchase, conversion, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent or any Note registrar or any conversion agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee, shall be promptly canceled by it, and no Notes shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. Upon written instructions of the Company, the Trustee shall destroy canceled Notes and, after such destruction, shall, if requested by the Company, deliver a certificate of such destruction to the Company. If the Company shall acquire any of the Notes, such acquisition shall not operate as a redemption, purchase or satisfaction of the indebtedness represented by such Notes unless and until the same are delivered to the Trustee for cancellation. ARTICLE III REDEMPTION AND REPURCHASE OF NOTES SECTION 3.1 REDEMPTION OF NOTES AT OPTION OF THE COMPANY. Except as provided in Section 3.2, the Company may not redeem any Notes prior to __________, 2006. On or after __________, 2006, and prior to the Maturity Date, the Notes may, subject to the last paragraph of Section 3.4, be redeemed at the option of the Company, in whole or in part, at any time or from time to time, upon notice as set forth in Section 3.3 and subject to the provisions for partial redemption described below, for cash, at the redemption prices set forth in the form of Note attached as Exhibit A hereto, plus an amount equal to accrued and unpaid interest, if any, to, but excluding, the date fixed for redemption; provided that prior to __________ __, 2007, the Notes may not be redeemed by the Company, except as provided in Section 3.2, unless the Closing Price of Common Stock (or, if more than one class of Common Stock is then issued and outstanding, all classes of Common Stock) has exceeded 150% of the Conversion Price for at 16 least 20 Trading Days during any period of 30 consecutive Trading Days ending within five Trading Days prior to the notice of redemption. SECTION 3.2 OPTIONAL REDEMPTION OF NOTES UPON A CHANGE IN CONTROL. Upon the occurrence of a Change in Control, the Notes may, subject to the last paragraph of Section 3.4, be redeemed at the option of the Company, in whole but not in part, on a date which is not later than sixty (60) Business Days following the effective date of the event or circumstance resulting in the Change in Control, upon notice as set forth in Section 3.3, for cash at the redemption prices set forth in the form of Note attached as Exhibit A hereto, plus an amount equal to accrued and unpaid interest, if any, to, but excluding, the date fixed for redemption. SECTION 3.3 NOTICE OF REDEMPTION; SELECTION OF NOTES. (a) If the Company elects to exercise its right to redeem all or any part of the Notes pursuant to Section 3.1, it shall fix a date for redemption and it, or at its written request (which must be received by the Trustee at least five (5) Business Days prior to the date the Trustee is requested to give notice as described below unless a shorter period is agreed to by the Trustee), the Trustee, in the name of and at the expense of the Company, shall mail or cause to be mailed a notice of such redemption not fewer than thirty (30) nor more than sixty (60) days prior to the date fixed for redemption to each holder of Notes to be redeemed in whole or in part at its last address as the same appears on the Note register and to the Beneficial Owners in accordance with the procedures established by the Depositary and the Trustee; provided that if the Company shall give such notice, it shall also give such notice, and notice of the Notes to be redeemed, to the Trustee. Such mailing shall be by first class mail. The notice, if mailed in the manner herein provided, shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Note designated for redemption in whole or in part shall not affect the validity of the proceedings for the redemption of any other Note. Concurrently with the mailing of any such notice of redemption, the Company shall (i) issue a press release announcing such redemption, (ii) publish such information once in a daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, New York, and (iii) publish such information on the Company's website; it being understood that the form and content of such press release and such publications shall be determined by the Company in its sole discretion. None of the failure to issue any such press release nor make such publications nor any defect therein shall affect the validity of the redemption notice or any of the proceedings for the redemption of any Note called for redemption. (b) If the Company elects to exercise its right to redeem the Notes in whole pursuant to Section 3.2, it shall fix a date for redemption and it, or at its written request (which must be received by the Trustee at least five (5) Business Days prior to the date the Trustee is requested to give notice as described below unless a shorter period is agreed to by the Trustee), the Trustee, in the name of and at the expense of the Company, shall mail or cause to be mailed a notice of such redemption on a date that is at least thirty (30) and not more than sixty (60) days prior to the date fixed for redemption, which shall not be later than sixty (60) days following the effective date of the event or circumstance resulting in the Change in Control, to each holder of Notes at its last address as the same appears on the Note register and to the 17 Beneficial Owners in accordance with the procedures established by the Depositary and the Trustee, provided that if the Company shall give such notice, it shall also give such notice to the Trustee. Such mailing shall be by first class mail. The notice, if mailed in the manner herein provided, shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Note shall not affect the validity of the proceedings for the redemption of any other Note. The notice shall state that a Change in Control has occurred or may occur and shall describe the event or circumstance which has resulted or may result in a Change in Control, shall be accompanied by a copy of any press release or other public announcement of the Change in Control event, and may state that the Company's obligation to redeem the Notes is subject to consummation of the Change in Control event. Concurrently with the mailing of any such notice of redemption, the Company shall (i) issue a press release announcing such redemption, (ii) publish such information once in a daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, New York, and (iii) publish such information on the Company's website; it being understood that the form and content of such press release and such publications shall be determined by the Company in its sole discretion. None of the failure to issue any such press release nor make such publications nor any defect therein shall affect the validity of the redemption notice or any of the proceedings for the redemption of any Note called for redemption. (c) In addition to the information specified in Section 3.3(b), if applicable, each such notice of redemption shall indicate that the Company has exercised its right to redeem the Notes in respect of which notice is given and shall specify the aggregate principal amount of Notes to be redeemed, the CUSIP number or numbers of the Notes being redeemed, the date fixed for redemption (which shall be a Business Day), the redemption price at which Notes are to be redeemed, the place or places of payment that payment will be made upon presentation and surrender of such Notes, including any procedures applicable to a redemption to be accomplished through book-entry transfer, that accrued and unpaid interest to (but excluding) the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portion thereof to be redeemed (as the case may be) will cease to accrue. Such notice shall also state the current Conversion Price and the date on which the right to convert such Notes or portions thereof into Common Stock will expire. If fewer than all the Notes are to be redeemed, the notice of redemption shall identify the Notes to be redeemed (including CUSIP numbers). In the event any Note represented by a certificate is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that, on and after the date fixed for redemption, upon presentation and surrender of such Note, a new Note or Notes in an aggregate principal amount equal to the unredeemed portion thereof will be issued without cost to the holder of such Note. (d) If the Company gives notice of redemption as provided in this Section 3.3, then the Company shall, on the date fixed for redemption, before 12:00 p.m., New York City time, with respect to: (i) Notes held by the Depositary or its nominees, deposit or cause to be deposited, irrevocably with the Trustee or any paying agent an amount of money sufficient to redeem on the date fixed for redemption all the Notes so called for redemption (other than those theretofore surrendered for conversion into Common Stock) at the applicable redemption price, together with accrued and unpaid interest, if any, to, but excluding, the date fixed for redemption 18 and shall give the Trustee or any paying agent irrevocable instructions and authority to pay such amount to holders of such Notes upon book-entry transfer of such Notes to the Trustee's account at the Depositary; (ii) Notes held in certificated form, deposit or cause to be deposited, irrevocably with the Trustee an amount of money sufficient to redeem on the date fixed for redemption all the Notes so called for redemption (other than those theretofore surrendered for conversion into Common Stock) at the applicable redemption price, together with accrued and unpaid interest, if any, to, but excluding, the date fixed for redemption and shall give the Trustee irrevocable instructions and authority to pay such amount to holders of such Notes upon surrender of their certificates evidencing such Notes. (e) Payment of the redemption price for Notes, together with accrued and unpaid interest, if any, to, but excluding, the date fixed for redemption is conditioned upon book-entry transfer or physical delivery of certificates representing the Notes, together with any necessary endorsements, to the Trustee, or the Trustee's account at the Depositary, at any time after delivery of the notice of redemption. The Company shall be entitled to retain any interest, yield or gain on amounts deposited with the Trustee or any paying agent pursuant to this Section 3.3 in excess of the amounts required hereunder to pay the redemption price and accrued and unpaid interest to, but excluding, the date fixed for redemption. Payment of the redemption price for the Notes, together with accrued and unpaid interest to (but excluding) the date fixed for redemption, will be made: (i) if book-entry transfer or physical delivery of the Notes has been made by or on the date fixed for redemption, on the date fixed for redemption, or (ii) if book-entry transfer or physical delivery of the Notes has not been made by or on such date, at the time of book-entry transfer or physical delivery of the Notes. If any Note called for redemption is converted into Common Stock pursuant to Article XV prior to the date fixed for redemption, any money deposited with the Trustee or any paying agent or segregated and held in trust for the redemption of such Note shall be paid to the Company or, if then held by the Company, shall be discharged from such trust. Whenever any Notes are to be redeemed pursuant to Section 3.1 or 3.2, the Company will give the Trustee written notice in the form of an Officers' Certificate not fewer than sixty (60) days (or such shorter period of time as may be acceptable to the Trustee) prior to the date fixed for redemption as to the aggregate principal amount of Notes to be redeemed. (f) If less than all of the outstanding Notes are to be redeemed, the Trustee shall select the Notes or portions thereof of the Global Note or the Notes in certificated form to be redeemed (in principal amounts of $50 or integral multiples thereof) by lot, on a pro rata basis or by another method the Trustee deems fair and appropriate in its sole discretion. If a portion of a holder's Notes are selected for redemption pursuant to Section 3.1 and such holder elects to convert a portion of its Notes into Common Stock pursuant to Article XV prior to the date fixed for redemption, then such converted portion shall be deemed to be taken from the portion selected for redemption. The Notes (or portions thereof) so selected shall be deemed duly selected for redemption for all purposes hereof, notwithstanding that any such Note is submitted for conversion, into Common Stock pursuant to Article XV, in whole or in part, before the mailing of the notice of redemption. In the event any Note represented by a certificate is to be redeemed in part only, upon presentation of such Note, the Company shall execute and the Trustee shall authenticate and deliver to the holder of such Note, at the expense of the Company, a new Note or Notes in an aggregate principal amount equal to the unredeemed portion of such Note. 19 (g) Upon any redemption of less than all of the outstanding Notes, the Company and the Trustee may (but need not), solely for purposes of determining the pro rata allocation among such Notes as are unconverted and outstanding at the time of redemption, treat as outstanding any Notes surrendered for conversion into Common Stock pursuant to Article XV, during the period of fifteen (15) days immediately preceding the mailing of a notice of redemption, and may (but need not) treat as outstanding any Note authenticated and delivered during such period in exchange for the unconverted portion of any Note converted into Common Stock pursuant to Article XV, in part during such period. SECTION 3.4 PAYMENT OF NOTES CALLED FOR REDEMPTION BY COMPANY. If notice of redemption has been given as provided above, the Notes or portion of Notes with respect to which such notice has been given shall, unless converted into Common Stock pursuant to Article XV, become due and payable on the date and at the place or places stated in such notice at the applicable redemption price, together with accrued and unpaid interest to, but excluding, the date fixed for redemption, and if the Trustee or any paying agent holds, in accordance with this Section 3.4, money sufficient to pay the redemption price of the Notes called for redemption, together with accrued and unpaid interest to, but excluding, the date fixed for redemption, on and after said date (unless the Company shall default in the payment of such Notes at the redemption price, together with accrued and unpaid interest to, but excluding, said date, in which case the Notes will remain outstanding and interest shall continue to accrue until the Company pays the redemption price, together with accrued and unpaid interest to (but excluding) the date of such payment)) interest on the Notes or portion of Notes called for redemption shall cease to accrue, such Notes shall be deemed to be no longer outstanding and, except as provided in Sections 8.5 and 13.4, shall cease to be entitled to any benefit or security under this Indenture, such Notes shall cease after the close of business on the Business Day immediately preceding the date fixed for redemption to be convertible into Common Stock and the holders thereof shall have no right in respect of such Notes except the right to receive the redemption price thereof and accrued and unpaid interest to, but excluding, the date fixed for redemption, without interest thereon. On presentation and surrender of such Notes via book-entry transfer or physical delivery, such Notes to be redeemed shall be paid and redeemed by the Company at the applicable redemption price, together with payment of accrued and unpaid interest thereon to, but excluding, the date fixed for redemption; provided that, if the date fixed for redemption is after a record date and on or before the corresponding interest payment date, holders of such Notes registered as such on such record date, subject to the terms and provisions of Section 2.3 hereof, shall be entitled to receive the interest payable on such Notes on the corresponding interest payment date, and the amount payable to holders of such Notes on the date fixed for redemption will not include any amount in respect of interest payable on such corresponding interest payment date. Upon presentation of any Note redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver to the holder thereof, at the expense of the Company, a new Note or Notes, of authorized denominations, in principal amount equal to the unredeemed portion of the Notes so presented. Notwithstanding the foregoing, the Trustee shall not redeem any Notes or mail any notice of redemption during the continuance of a default in payment of interest or premium, if any, on 20 the Notes or of any Event of Default of which, in the case of any Event of Default other than under Section 7.1(a) or (b), a Responsible Officer of the Trustee has knowledge. SECTION 3.5 RESERVED. SECTION 3.6 REQUIRED PURCHASE AT OPTION OF HOLDER UPON A CHANGE IN CONTROL. (a) If there shall occur a Change in Control at any time prior to the Maturity Date, and the Company does not elect to exercise the right to redeem the Notes in whole pursuant to Section 3.2, Notes shall be purchased by the Company, at the option of the holders thereof, in whole or in part (in integral multiples of $50) as of the date (the "Change in Control Purchase Date") specified by the Company that is 45 calendar days (or if such day is not a Business Day, then the next succeeding Business Day) after the Company, or at its request, the Trustee, has mailed written notice of such Change in Control to holders of the Notes as set forth below, subject to satisfaction by or on behalf of any holder of the requirements set forth below, for cash at a purchase price equal to one-hundred percent (100%) of the aggregate principal amount thereof, together with accrued and unpaid interest, if any, to, but excluding, the Change in Control Purchase Date. (b) Within 30 calendar days after the effective date of the event or circumstance resulting in a Change in Control, the Company, or at its written request (which must be received by the Trustee at least five (5) Business Days prior to the date the Trustee is requested to give notice unless a shorter period is agreed to by the Trustee), the Trustee, in the name of and at the expense of the Company, shall mail a written notice of the Change in Control to the holders of Notes at their last addresses as the same appear on the Company's Note register and to the Beneficial Owners in accordance with the procedures established by the Depositary and the Trustee, as of the date of the Change in Control; provided that if the Company shall give such notice, it shall also give such notice to the Trustee. Such mailing shall be by first class mail. The notice, if mailed in the manner herein provided, shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Note shall not affect the validity of the proceedings for the purchase of any other Note. Concurrently with the mailing of any such notice of Change in Control, the Company shall (i) issue a press release announcing the Change in Control, (ii) publish such information once in a daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, New York, and (iii) publish such information on the Company's website; it being understood that the form and content of such press release and such publications shall be determined by the Company in its sole discretion. None of the failure to issue any such press release nor make such publications nor any defect therein shall affect the validity of the notice of Change in Control or any of the proceedings for the purchase of any Note. The notice shall include the form of a Change in Control Purchase Notice to be completed by the holder and a copy of any press release or other public announcement of the Change in Control event, and shall state: (i) that a Change in Control has occurred or may occur (including a description of the event or circumstance which has or may result in a Change in Control), and that, as a result, the holders of Notes have certain purchase rights; 21 (ii) the Change in Control Purchase Date; (iii) the date by which the Change in Control Purchase Notice pursuant to this Section 3.6 must be given; (iv) the purchase price that will be payable with respect to the Notes as of the Change in Control Purchase Date; (v) that, on the Change in Control Purchase Date, if the Change in Control Purchase Notice is timely given, the purchase price of the Notes subject to such Change in Control Purchase Notice, together with accrued and unpaid interest, if any, to, but excluding, the Change in Control Purchase Date, will become due and payable and interest on such Notes shall cease to accrue; (vi) the name and address of the Trustee; (vii) the Conversion Price then in effect; (viii) that Notes as to which a Change in Control Purchase Notice has been given may be converted into Common Stock only to the extent that the Change in Control Purchase Notice has been withdrawn in accordance with the terms of this Section 3.6; (ix) the procedures that the holder of Notes must follow to exercise its rights under this Section 3.6; (x) the procedures for withdrawing a Change in Control Purchase Notice, including a form of notice of withdrawal; and (xi) that the Company's obligation to redeem the Notes may be subject to the consummation of the Change in Control event. If any of the Notes is in the form of a Global Note, then the Company shall modify such notice to the extent necessary to accord with the procedures of the Depositary and the Trustee applicable to the purchase of Notes represented by the Global Note. (c) A holder of Notes may exercise its rights pursuant to this Section 3.6 upon delivery of a written notice (a form of which is set forth on the reverse of the Note) duly completed, which may be delivered by letter, overnight courier, hand delivery, facsimile transmission or in any other written form and, in the case of Notes represented by a Global Note, may be delivered electronically or by other means in accordance with the Depositary's customary procedures, of the exercise of such rights (a "Change in Control Purchase Notice") to the Trustee at any time prior to the close of business on the Business Day immediately before the Change in Control Purchase Date. Payment of the purchase price for Notes, together with accrued and unpaid interest, if any, to, but excluding, the Change in Control Purchase Date, is conditioned upon (i) timely delivery of a completed Change in Control Purchase Notice and (ii) book-entry 22 transfer or physical delivery of the Notes, together with any necessary endorsements, to the Trustee, or to the Trustee's account at the Depositary, at any time after timely delivery of the Change in Control Purchase Notice. If a holder timely delivers its Change in Control Purchase Notice, payment of the purchase price for the Notes, together with accrued and unpaid interest, if any, to, but excluding, the Change in Control Purchase Date, will be made: (i) if book-entry transfer of or physical delivery of the Notes has been made by or on the Change in Control Purchase Date, on the Change in Control Purchase Date, or (ii) if book-entry transfer of or physical delivery of the Notes has not been made by or on such date, at the time of book-entry transfer of or physical delivery of the Notes. (d) Notwithstanding anything herein to the contrary, any holder of Notes delivering to the Trustee the Change in Control Purchase Notice shall have the right to withdraw such Change in Control Purchase Notice in whole or as to a portion of such holder's Notes that is an integral multiple of $50 at any time prior to the close of business on the Business Day before the Change in Control Purchase Date (unless the Company shall default in the payment of the purchase price, together with accrued and unpaid interest to (but excluding) the Change in Control Purchase Date, in which case, such withdrawal shall be permitted until the Company pays the purchase price, together with accrued and unpaid interest to (but excluding) the date of such payment) by delivery of a written notice of withdrawal to the Trustee in accordance with the provisions of this Section 3.6 specifying: (i) the principal amount of Notes, in integral multiples of $50, with respect to which such notice of withdrawal is being submitted; (ii) if certificated Notes have been issued, the certificate numbers for such shares in respect of which such notice of withdrawal is being submitted or, if such Notes are in the form of a Global Note, such information as is required by the Depositary; and (iii) the principal amount of Notes, if any, that remain subject to the original Change in Control Purchase Notice and have been or will be delivered for purchase by the Company. The Trustee shall promptly notify the Company of the receipt by it of any Change in Control Purchase Notice or written withdrawal thereof. The Trustee will promptly return to the respective holders thereof any Notes with respect to which a Change in Control Purchase Notice has been withdrawn in compliance with this Section 3.6, in which case, upon such return, the Change in Control Purchase Notice with respect thereto shall be deemed to have been withdrawn. Any money deposited with the Trustee or any paying agent or segregated and held in trust for the purchase of Notes as to which a Change in Control Purchase Notice has been withdrawn shall be paid to the Company or, if then held by the Company, shall be discharged from such trust. (e) Anything herein to the contrary notwithstanding, in the case of Notes held pursuant to a Global Note, any Change in Control Purchase Notice may be delivered or withdrawn and the Notes in respect of such Global Note may be delivered for purchase or 23 withdrawn in accordance with the applicable procedures of the Depositary as in effect from time to time. (f) The Company shall, on the Change in Control Purchase Date, before 12:00 p.m., New York City time, with respect to: (i) all Notes or portions thereof which are to be purchased pursuant to this Section 3.6 and are held by the Depositary or its nominees, deposit or cause to be deposited, irrevocably with the Trustee or any paying agent an amount of money sufficient to pay the aggregate purchase price of all Notes or portions thereof which are to be purchased pursuant to this Section 3.6 plus an amount equal to the accrued and unpaid interest, if any, to (but excluding) the Change in Control Purchase Date, and shall give the Trustee or any paying agent irrevocable instructions and authority to pay such amount to holders of such Notes upon book-entry transfer of such Notes to the Trustee's account at the Depositary; and (ii) all Notes or portions thereof which are to be purchased pursuant to this Section 3.6 and are held in certificated form, deposit or cause to be deposited, irrevocably with the Trustee an amount of money sufficient to pay the aggregate purchase price of all Notes or portions thereof which are to be purchased pursuant to this Section 3.6 plus an amount equal to the accrued and unpaid interest, if any, to (but excluding) the Change in Control Purchase Date, and shall give the Trustee irrevocable instructions and authority to pay such amount to holders of the certificates evidencing such Notes upon surrender of the certificates evidencing such Notes. The Company shall be entitled to retain any interest, yield or gain on funds deposited with the Trustee or any paying agent pursuant to this Section 3.6 in excess of the amounts required to pay the purchase price, together with accrued and unpaid interest to (but excluding) the Change in Control Purchase Date. (g) If a Change in Control Purchase Notice has been given as provided above, the purchase price of the Notes or portion of the Notes with respect to which such Change in Control Purchase Notice has been given shall, unless such Change in Control Purchase Notice is withdrawn pursuant to this Section 3.6, become due and payable on the Change in Control Purchase Date together with accrued and unpaid interest to, but excluding, the Change in Control Purchase Date and if the Trustee or any paying agent holds, in accordance with this Section 3.6, money sufficient to pay the purchase price of the Notes to be purchased, together with accrued and unpaid interest to, but excluding, the Change in Control Purchase Date, on and after the Change in Control Purchase Date (unless the Company shall default in the payment of the purchase price, together with accrued and unpaid interest to, but excluding, the Change in Control Purchase Date, in which case the Notes will remain outstanding and interest shall continue to accrue until the Company pays the purchase price, together with accrued and unpaid interest to (but excluding) the date of such payment), interest on such Notes shall cease to accrue, such Notes shall be deemed no longer outstanding and, except as provided in Sections 8.5 and 13.4, shall cease to be entitled to any benefit or security under this Indenture, the holders of such Notes shall no longer have the right to withdraw any Change in Control Purchase Notice in respect of such Notes after the close of business on the Business Day immediately preceding the Change in Control Purchase Date and the holders thereof shall have no right in respect of such Notes except the right to receive the purchase price thereof and accrued and unpaid interest to, but excluding, the Change in Control Purchase Date, without interest thereon. Notes in respect of which a Change in Control Purchase Notice has been given by the holder thereof may not be converted into shares of Common Stock on or after the date of the delivery of such Change in 24 Control Purchase Notice unless such Change in Control Purchase Notice has first been validly withdrawn as specified in this Section 3.6. On presentation and surrender of such Notes via book-entry transfer or physical delivery, such Notes to be purchased shall be paid and purchased by the Company at the purchase price, together with payment of accrued and unpaid interest thereon to, but excluding, the Change in Control Purchase Date; provided that, if the Change in Control Purchase Date falls after a record date and on or before the corresponding interest payment date holders of such Notes registered as such on such record date, subject to the terms and provisions of Section 2.3 hereof, shall be entitled to receive the interest payable on such Notes on the corresponding interest payment date, and the amount payable to holders of such Notes on the Change in Control Purchase Date will not include any amount in respect of interest payable on such corresponding interest payment date. (h) Upon presentation of any Note purchased in part only, the Company shall execute and the Trustee shall authenticate and deliver to the holder thereof, at the expense of the Company, a new Note or Notes, in an aggregate principal amount equal to the unpurchased portion of such Note. (i) The Company shall comply with any applicable provisions of Rule 13e-4 and any other tender offer rules under the Exchange Act (including, without limitation, a filing on Schedule TO or other schedule) to the extent then applicable in connection with the purchase rights of the holders of the Notes pursuant to this Section 3.6. (j) To the extent the Company has insufficient funds to purchase all Notes for which the Trustee has received a Change in Control Purchase Notice that has not subsequently been withdrawn, the Trustee shall select the Notes or portions thereof of the Global Note or the Notes in certificated form to be purchased (in principal amounts of $50 or integral multiples thereof) from the Notes for which the Trustee has received a Change in Control Purchase Notice that has not subsequently been withdrawn by lot, on a pro rata basis or by another method the Trustee deems fair and appropriate in its sole discretion. To the extent the Company has insufficient funds to purchase all Notes for which the Trustee has received a Change in Control Purchase Notice that has not subsequently been withdrawn, the Company and the Trustee may (but need not), solely for purposes of determining the pro rata allocation among such Notes as are unconverted and outstanding on the Change in Control Purchase Date, treat as outstanding any Notes surrendered for conversion into Common Stock pursuant to Article XV, during the period of fifteen (15) days immediately preceding the mailing of the notice of Change in Control pursuant to Section 3.6(b), and may (but need not) treat as outstanding any Note authenticated and delivered during such period in exchange for the unconverted portion of any Note converted into Common Stock pursuant to Article XV, in part during such period. (k) The Company shall not be required to purchase any Notes upon the occurrence of a Change in Control if a third party makes an offer to purchase the Notes in the manner, for the amount, at the times and otherwise in compliance with the requirements described in this Section 3.6 and purchases all Notes for which the Trustee has received a Change in Control Purchase Notice that has not subsequently been withdrawn. 25 (l) In the event of a reclassification, change, consolidation, merger, combination, sale or conveyance to which clause (i) of Section 12.1 applies as a result of which the Common Stock issuable upon conversion of the Notes changed or exchanged into the right to receive stock, securities or other property or assets (including cash), which includes Common Stock or common stock of another person that are, or upon issuance will be, traded on a United States national securities exchange or approved for trading on an established automated over-the-counter trading market in the United States and such shares constitute at the time such change or exchange becomes effective in excess of fifty percent (50%) of the aggregate fair market value of such stock, securities or other property or assets (including cash) (as determined by the Company, which determination shall be conclusive and binding), then the person formed by such consolidation or resulting from such merger or that acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture (accompanied by an Opinion of Counsel that such supplemental indenture complies with the Trust Indenture Act as in force at the date of execution of such supplemental indenture) modifying the provisions of this Indenture relating to the right of holders of the Notes to cause the Company to purchase the Notes following a Change in Control, including without limitation the applicable provisions of this Section 3.6 and the definitions of Common Stock and Change in Control, as appropriate, as determined in good faith by the Company (which determination shall be conclusive and binding), to make such provisions apply to such other person if different from the Company and the common stock issued by such Person (in lieu of the Company and the Common Stock, respectively). ARTICLE IV SUBORDINATION OF NOTES SECTION 4.1 AGREEMENT OF SUBORDINATION. The Company covenants and agrees, and each holder of Notes issued hereunder by his, her or its acceptance thereof likewise covenants and agrees, that all Notes shall be issued subject to the provisions of this Article IV; and each person holding any Note, whether upon original issue or upon transfer, assignment or exchange thereof, accepts and agrees to be bound by such provisions. The payment of the principal of, premium, if any, and interest on all Notes (including, but not limited to, the redemption price with respect to the Notes called for redemption in accordance with Section 3.3 and the purchase price with respect to Notes tendered for purchase in accordance with Section 3.6) issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and subject in right of payment to the prior payment in full in cash or other payment satisfactory to holders of Senior Indebtedness of all Senior Indebtedness. No provision of this Article IV shall prevent the occurrence of any default or Event of Default hereunder. SECTION 4.2 PAYMENTS TO NOTEHOLDERS. No payment shall be made with respect to the principal of, or premium, if any, or interest on the Notes (including, but not limited to, the redemption price with respect to the Notes called for redemption in accordance with Section 3.3 and the purchase price with respect to Notes tendered for purchase in accordance with Section 26 3.6), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 4.5, if: (a) a default in the payment of principal, premium, if any, interest, or other obligations due on any Senior Indebtedness occurs and is continuing (or, in the case of Senior Indebtedness for which there is a period of grace, in the event of such a default that continues beyond the period of grace, if any, specified in the instrument or lease evidencing such Senior Indebtedness), unless and until such default shall have been cured or waived or shall have ceased to exist; or (b) a default, other than a payment default, on a Senior Indebtedness occurs and is continuing that then permits holders of such Senior Indebtedness to accelerate its maturity and the Trustee receives a notice of the default (a "Payment Blockage Notice") from the Company or holder or Representative of Senior Indebtedness. If the Trustee receives any Payment Blockage Notice pursuant to clause (b) above, no subsequent Payment Blockage Notice shall be effective for purposes of this Section unless and until (A) at least 365 days shall have elapsed since the effectiveness of the immediately prior Payment Blockage Notice, and (B) all scheduled payments of principal, premium, if any, and interest on the Notes that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. The Company may and shall resume payments on and distributions in respect of the Notes upon the earlier of: (1) the date upon which the default is cured or waived or ceases to exist, or (2) in the case of a default referred to in clause (b) above, the earlier of (x) the date such default is cured or waived or ceases to exist or (y) the date that is 179 days after a Payment Blockage Notice is received if the maturity of such Senior Indebtedness has not been accelerated, unless this Article IV otherwise prohibits the payment or distribution at the time of such payment or distribution. Upon any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full, in cash or other payment satisfactory to the holders of Senior Indebtedness or payment thereof provided for in cash or other payment satisfactory to the holders of Senior Indebtedness, before any payment is made on account of the principal (and premium, if any) or interest on the Notes (except payments made pursuant to Article XIII from monies deposited with the Trustee pursuant thereto prior to the happening of such dissolution, winding-up, liquidation or reorganization or bankruptcy, insolvency, receivership or other such proceedings); and upon any such dissolution or winding-up or liquidation or reorganization or bankruptcy, insolvency, receivership or other such 27 proceedings, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the holders of the Notes or the Trustee under this Indenture would be entitled, except for the provision of this Article IV, shall (except as aforesaid) be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the holders of the Notes or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders or as otherwise required by law or a court order) or their respective Representative or Representatives, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash or other payment satisfactory to holders of Senior Indebtedness after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution is made to the holders of the Notes or to the Trustee under this Indenture. In the event of the acceleration of the Notes pursuant to Article VII, no payment or distribution shall be made to the Trustee or any holder of Notes in respect of the principal of, premium, if any, or interest on the Notes (including, but not limited to, the redemption price with respect to the Notes called for redemption in accordance with Section 3.3 and the purchase price with respect to Notes tendered for purchase in accordance with Section 3.6), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 4.5, until all Senior Indebtedness has been paid in full in cash or other payment satisfactory to the holders of Senior Indebtedness or such acceleration is rescinded in accordance with the terms of this Indenture. If payment of the Notes is accelerated pursuant to Article VII, the Company shall promptly notify holders of Senior Indebtedness of such acceleration. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (including, without limitation, by way of set-off or otherwise), prohibited by the foregoing, shall be received by the Trustee under this Indenture or by any holders of the Notes before all Senior Indebtedness is paid in full in cash or other payment satisfactory to holders of Senior Indebtedness, or provision is made for in cash or other payment satisfactory to holders of Senior Indebtedness, such payment or distribution shall be held by the recipient or recipients in trust for the benefit of, and shall be immediately paid over or delivered to, the holders of Senior Indebtedness or their respective Representative or Representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash or other payment satisfactory to the holders of Senior Indebtedness, after giving effect to any concurrent payment or distribution (or provision therefor) to or for the holders of such Senior Indebtedness. For purposes of this Article IV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated (at least to the extent provided in this Article IV with respect to the Notes) to the payment of all Senior Indebtedness which may at the time be 28 outstanding; provided that (i) the Senior Indebtedness is assumed by the new corporation, if any, resulting from such reorganization or adjustment, and (ii) the rights of the holders of Senior Indebtedness (other than leases which are not assumed by the Company or by the new corporation, as the case may be) are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XII shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 4.2 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XII. Nothing in this Section 4.2 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 8.6. This Section 4.2 shall be subject to the further provisions of Section 4.5. SECTION 4.3 SUBROGATION OF NOTES. Subject to the payment in full of all Senior Indebtedness, the rights of the holders of the Notes shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this Article IV (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to other indebtedness of the Company to substantially the same extent as the Notes are subordinated and is entitled to like rights of subrogation) to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until the principal of (and premium, if any) and interest on the Notes shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the holders of the Notes or the Trustee would be entitled except for the provisions of this Article IV, and no payment over pursuant to the provisions of this Article IV, to or for the benefit of the holders of Senior Indebtedness by holders of the Notes or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness, and the holders of the Notes, be deemed to be a payment by the Company to or on account of the Senior Indebtedness; and no payments or distributions of cash, property or securities to or for the benefit of the holders of the Notes pursuant to the subrogation provisions of this Article IV, which would otherwise have been paid to the holders of Senior Indebtedness shall be deemed to be a payment by the Company to or for the account of the Notes. It is understood that the provisions of this Article IV are and are intended solely for the purposes of defining the relative rights of the holders of the Notes, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Nothing contained in this Article IV or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Notes, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Notes the principal of (and premium, if any) and interest on the Notes as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Notes and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Note from exercising all remedies 29 otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article IV of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article IV, the Trustee, subject to the provisions of Section 8.1, and the holders of the Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such bankruptcy, dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, delivered to the Trustee or to the holders of the Notes, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article IV. SECTION 4.4 AUTHORIZATION BY NOTEHOLDERS. Each holder of a Note by his, her or its acceptance thereof authorizes and directs the Trustee on his, her or its behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article IV and appoints the Trustee his, her or its attorney-in-fact for any and all such purposes. SECTION 4.5 NOTICE TO TRUSTEE. The Company shall give prompt written notice in the form of an Officers' Certificate to a Responsible Officer of the Trustee and to any paying agent of any fact known to the Company which would prohibit the making of any payment of monies to or by the Trustee or any paying agent in respect of the Notes pursuant to the provisions of this Article IV. Notwithstanding the provisions of this Article IV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any Senior Indebtedness or of any default or event of default with respect to any Senior Indebtedness or of any other facts which would prohibit the making of any payment of monies to or by the Trustee in respect of the Notes pursuant to the provisions of this Article IV, unless and until a Responsible Officer of the Trustee shall have received written notice thereof at the Corporate Trust Office from the Company (in the form of an Officers' Certificate) or a holder or holders or Representative of Senior Indebtedness who shall have been certified by the Company or otherwise established to the reasonable satisfaction of the Trustee to be such holder or Representative; and before the receipt of any such written notice, the Trustee, subject to the provisions of Section 8.1, shall be entitled in all respects to assume that no such facts exist; provided that if on a date at least two (2) Business Days prior to the date upon which by the terms hereof any such monies may become payable for any purpose (including, without limitation, the payment of the principal of, or premium, if any, or interest on any Note), the Trustee shall not have received with respect to such monies the notice provided for in this Section 4.5, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such prior date. Notwithstanding anything to the contrary hereinbefore set forth, nothing shall prevent (a) any payment by the Company or the Trustee to the Noteholders of amounts in connection with (i) 30 a redemption of Notes if notice of such redemption has been given to the holders of Notes in compliance with Section 3.3 prior to the receipt by the Trustee of written notice as aforesaid, or (ii) a purchase of Notes tendered for purchase if the Change in Control Purchase Notice has been received in compliance with Section 3.6 prior to the receipt by the Trustee of written notice as aforesaid; or (b) any payment by the Trustee to the Noteholders of monies deposited with it pursuant to Section 13.1. The Trustee, subject to the provisions of Section 8.1, shall be entitled to rely on the delivery to it of a written notice by a person representing himself, herself or itself to be a holder of Senior Indebtedness (or a Representative on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a Representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article IV, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article IV, and if such evidence is not furnished the Trustee may defer any payment to such person pending judicial determination as to the right of such person to receive such payment. SECTION 4.6 TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS. The Trustee and any agent of the Company or the Trustee in its individual capacity shall be entitled to all the rights set forth in this Article IV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in Section 8.13 or elsewhere in this Indenture shall deprive the Trustee or any such agent of any of its rights as such holder. Nothing in this Article IV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 8.6. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article IV, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and, subject to the provisions of Sections 4.2, 4.5 and 8.1, the Trustee shall not be liable to any holder of Senior Indebtedness if it shall pay over or deliver to holders of Notes, the Company or any other person money or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article IV or otherwise. SECTION 4.7 NO IMPAIRMENT OF SUBORDINATION. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. 31 SECTION 4.8 CERTAIN CONVERSIONS NOT DEEMED PAYMENT. For the purposes of this Article IV only, (1) the issuance and delivery of junior securities upon (i) conversion of Notes in accordance with Article XV shall not be deemed to constitute a payment or distribution on account of the principal of (or premium, if any) or interest on Notes or on account of the purchase or other acquisition of Notes, and will therefor not be subject to the subordination provisions of Article IV and (2) the payment, issuance or delivery of cash (except in satisfaction of fractional shares pursuant to Section 15.3), property or securities (other than junior securities) upon conversion of a Note shall be deemed to constitute payment on account of the principal of such Note. For the purposes of this Section, the term "junior securities" means (a) shares of any stock of any class of the Company and (b) securities of the Company which are subordinated in right of payment to all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Notes are so subordinated as provided in this Article. Nothing contained in this Article or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the holders of the Notes, the right, which is absolute and unconditional, of the holder of any Note to convert such Note in accordance with Article XV. SECTION 4.9 ARTICLE APPLICABLE TO PAYING AGENTS. If at any time any paying agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall (unless the context otherwise requires) be construed as extending to and including such paying agent within its meaning as fully for all intents and purposes as if such paying agent were named in this Article in addition to or in place of the Trustee; provided, however, that the first paragraph of Section 4.5 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as paying agent. SECTION 4.10 SENIOR INDEBTEDNESS ENTITLED TO RELY. The holders of Senior Indebtedness shall have the right to rely upon this Article IV, and no amendment or modification of the provisions contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto. ARTICLE V PARTICULAR COVENANTS OF THE COMPANY SECTION 5.1 PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on each of the Notes at the places, at the respective times and in the manner provided herein and in the Notes. SECTION 5.2 MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in the Borough of Manhattan, The City of New York, New York, an office or agency where the Notes may be surrendered for registration of transfer or exchange or for presentation for payment or for conversion or redemption or purchase and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency not 32 designated or appointed by the Trustee. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office, or the office or agency of the Trustee or an Affiliate of the Trustee, in the Borough of Manhattan, The City of New York, New York. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, New York, for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Trustee as paying agent, Note registrar, Custodian and conversion agent. The Corporate Trust Office and the office or agency of the Trustee in the Borough of Manhattan, The City of New York, New York (which shall initially be The Bank of New York Trust Company, N.A. located at 101 Barclay Street, New York, NY 10286) shall be considered as one such office or agency of the Company for each of the aforesaid purposes. So long as the Trustee is the Note registrar, the Trustee agrees to mail, or cause to be mailed, the notices set forth in Section 8.10(a) and the third paragraph of Section 8.11. SECTION 5.3 APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 8.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 5.4 PROVISIONS AS TO PAYING AGENT. (a) If the Company shall appoint a paying agent other than the Trustee, the Company will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 5.4: (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest on the Notes (whether such sums have been paid to it by the Company or by any other obligor on the Notes) in trust for the benefit of the holders of the Notes; (2) that it will give the Trustee written notice of any failure by the Company (or by any other obligor on the Notes) to make any payment of the principal of and premium, if any, or interest on the Notes when the same shall be due and payable; and (3) that at any time during the continuance of an Event of Default, upon request of the Trustee, it will forthwith pay to the Trustee all sums so held in trust. 33 The Company shall, on or before each due date of the principal of, premium, if any, or interest on the Notes, deposit with the paying agent a sum (in funds which are immediately available) sufficient to pay such principal, premium, if any, or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee in writing of any failure to take such action, provided that if such deposit is made on the due date, such deposit must be received by the paying agent by 10:00 a.m., New York City time, on such date. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of, premium, if any, or interest on the Notes, set aside, segregate and hold in trust for the benefit of the holders of the Notes a sum sufficient to pay such principal, premium, if any, or interest so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or any other obligor under the Notes) to make any payment of the principal of, premium, if any, or interest on the Notes when the same shall become due and payable. (c) Anything in this Section 5.4 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Company or any paying agent hereunder as required by this Section 5.4, such sums to be held by the Trustee upon the trusts herein contained and upon such payment by the Company or any paying agent to the Trustee, the Company or such paying agent shall be released from all further liability with respect to such sums. (d) Anything in this Section 5.4 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 5.4 is subject to Sections 13.3 and 13.4. SECTION 5.5 EXISTENCE. Subject to Article XII, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence. SECTION 5.6 RESTRICTION AS TO DIVIDENDS. The Company covenants and agrees that so long as any Note is outstanding, no dividend (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock) shall be declared or paid or set apart for payment, and no other distribution shall be declared or made or set apart for payment, in each case upon the Common Stock, nor shall any Common Stock be redeemed, purchased or otherwise acquired for any consideration (or any monies be paid to or made available for a sinking fund or otherwise for the purchase or redemption of any shares of Common Stock), by the Company or any Subsidiary (except (A) by conversion into or exchange for Common Stock; or (B) repurchases of unvested shares of Common Stock at cost upon termination of the employment or consultancy of the holder thereof, provided such repurchases are approved by the Board of Directors in good faith) unless such dividend, distribution, redemption, purchase or acquisition is not declared, paid or made, or funds or other assets therefor set aside or made available for payment or distribution (whether by way of a sinking fund or otherwise), until December 31, 2007. 34 SECTION 5.7 STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. SECTION 5.8 COMPLIANCE CERTIFICATE. The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company (beginning with the fiscal year in which the Exchange Date falls), an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. The Company will deliver to the Trustee, forthwith upon becoming aware of any default in the performance or observance of any covenant, agreement or condition contained in this Indenture, or any Event of Default, an Officers' Certificate specifying with particularity such default or Event of Default and further stating what action the Company has taken, is taking or proposes to take with respect thereto. Any notice required to be given under this Section 5.8 shall be delivered to the Trustee at its Corporate Trust Office. SECTION 5.9 FURTHER INSTRUMENTS AND ACTS. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purposes of this Indenture. ARTICLE VI NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 6.1 NOTEHOLDERS' LISTS. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee, quarterly, not more than fifteen (15) days after the _________ day of _________, _________, _________ and _________ of each year beginning with the _________ day of _________, _________, _________ or _________, immediately after the Exchange Date, and at such other times as the Trustee may request in writing, within thirty (30) days after receipt by the Company of any such request (or such lesser time as the Trustee may reasonably request in order to enable it to timely provide any notice to be provided by it hereunder), a list in such form as the Trustee may reasonably require of the names and addresses of the holders of Notes as of a date not more than fifteen (15) days (or such other date as the 35 Trustee may reasonably request in order to so provide any such notices) prior to the time such information is furnished, except that no such list need be furnished so long as the Trustee is acting as Note registrar. SECTION 6.2 PRESERVATION AND DISCLOSURE OF LISTS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Notes contained in the most recent list furnished to it as provided in Section 6.1 or maintained by the Trustee in its capacity as Note registrar, if so acting. The Trustee may destroy any list furnished to it as provided in Section 6.1 upon receipt of a new list so furnished. (b) The rights of Noteholders to communicate with other holders of Notes with respect to their rights under this Indenture or under the Notes and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Noteholder, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of holders of Notes made pursuant to the Trust Indenture Act. SECTION 6.3 REPORTS BY TRUSTEE. (a) Within 60 days after May 1 of each year commencing with the year in which the Exchange Date falls, the Trustee shall transmit to holders of Notes such reports dated as of May 1 of the year in which such reports are made concerning the Trustee and its actions under this Indenture as may be required pursuant to Section 313 of the Trust Indenture Act at the times and in the manner provided pursuant thereto. In the event that no events have occurred under the applicable sections of the Trust Indenture Act, the Trustee shall be under no duty or obligation to provide such reports. (b) A copy of such report shall, at the time of such transmission to holders of Notes, be filed by the Trustee with each stock exchange or automated quotation system upon which the Notes are listed, with the Commission and with the Company. The Company will notify the Trustee when the Notes are listed on any stock exchange or automated quotation system and when any such listing is discontinued. SECTION 6.4 REPORTS BY COMPANY. (a) The Company (and any obligor upon the Notes) shall file with the Trustee and the Commission, and transmit to holders of Notes, such information, documents and other reports and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. 36 (b) The Company will deliver to the Trustee (a) as soon as available and in any event within ninety (90) days after the end of each fiscal year of the Company (i) a consolidated balance sheet of the Company and its subsidiaries as of the end of such fiscal year and the related consolidated statements of operations, stockholders' equity and cash flows for such fiscal year, all reported on by an independent public accountant of nationally recognized standing and (ii) a report containing a management's discussion and analysis of the financial condition and results of operations and a description of the business and properties of the Company and (b) as soon as available and in any event within forty-five (45) days after the end of each of the first three quarters of each fiscal year of the Company an unaudited consolidated management's discussion and analysis of the financial condition and results of operations of the Company for such quarter; provided that the foregoing statements and reports shall not be required for any fiscal year or quarter, as the case may be, with respect to which the Company files or expects to file with the Trustee an annual report or quarterly report, as the case may be, pursuant to Section 6.4(a). The Trustee shall have no liability as regards the substance of the information provided by the Company or its agents pursuant to this Section 6.4. ARTICLE VII DEFAULTS AND REMEDIES SECTION 7.1 EVENTS OF DEFAULT. In case one or more of the following Events of Default (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall have occurred and be continuing: (a) default in the payment of the principal of and premium, if any, on any of the Notes as and when the same shall become due and payable either at maturity or in connection with any redemption or purchase, by declaration or otherwise, whether or not such payment is prohibited by the provisions of Article IV; or (b) default in the payment of any installment of interest, upon any of the Notes as and when the same shall become due and payable, and continuance of such default for a period of thirty (30) days, whether or not such payment is prohibited by the provisions of Article IV; or (c) default in the Company's obligation to deliver shares of Common Stock, together with cash in lieu of any fractional shares, when due upon conversion of Notes as provided in Article XV, and continuance of such default for a period of ten (10) Business Days; or (d) failure on the part of the Company to provide timely notice of a Change in Control as provided in Section 3.6(b); or (e) failure on the part of the Company duly to observe or perform any other of the covenants or agreements on the part of the Company in the Notes or in this Indenture (other than 37 a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with) continued for a period of forty-five (45) days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee, or to the Company and a Responsible Officer of the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Notes at the time outstanding determined in accordance with Section 9.4; or (f) failure by the Company, or any current or future Subsidiary, to make any payment at maturity, including any applicable grace period, in respect of Indebtedness, in an amount in excess of $5,000,000 or the equivalent thereof in any other currency or composite currency and such failure shall have continued for a period of thirty (30) days after written notice thereof shall have been given to the Company by the Trustee, or to the Company and a Responsible Officer of the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Notes at the time outstanding determined in accordance with Section 9.4; or (g) a default by the Company, or any current or future Subsidiary, with respect to any Indebtedness which default results in the acceleration of Indebtedness in an amount in excess of $5,000,000 or the equivalent thereof in any other currency or composite currency without such Indebtedness having been discharged or such acceleration having been cured, waived, rescinded or annulled for a period of thirty (30) days after written notice thereof shall have been given to the Company by the Trustee or to the Company and a Responsible Officer of the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Notes at the time outstanding determined in accordance with Section 9.4; or (h) the Company or any current or future Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or (i) an involuntary case or other proceeding shall be commenced against the Company or any current or future Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of ninety (90) consecutive days; then, and in each and every such case (other than an Event of Default specified in Section 7.1(h) or (i)), unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding hereunder determined in accordance with Section 9.4, by notice in writing to the Company (and to the Trustee if given by Noteholders), may declare the principal of and premium, if any, on all the Notes and the interest accrued thereon to be due and payable 38 immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Notes contained to the contrary notwithstanding. If an Event of Default specified in Section 7.1(h) or (i) occurs and is continuing, the principal of and premium, if any, on all the Notes and the interest accrued thereon shall be immediately due and payable. This provision, however, is subject to the conditions that if, at any time after the principal of the Notes shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all Notes and the principal of and premium, if any, on any and all Notes which shall have become due otherwise than by acceleration (with interest on overdue installments of interest (to the extent that payment of such interest is enforceable under applicable law) and on such principal and premium, if any, at the rate borne by the Notes, to the date of such payment or deposit) and amounts due to the Trustee pursuant to Section 8.6, and if any and all defaults under this Indenture, other than the nonpayment of principal of and premium, if any, and accrued interest on Notes which shall have become due by acceleration, shall have been cured or waived pursuant to Section 7.7, then and in every such case the holders of a majority in aggregate principal amount of the Notes then outstanding, by written notice to the Company and to the Trustee, may waive all defaults or Events of Default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or Event of Default, or shall impair any right consequent thereon. The Company shall notify the Responsible Officer of the Trustee, promptly upon becoming aware thereof, of any Event of Default. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such waiver or rescission and annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the holders of Notes, and the Trustee shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the holders of Notes, and the Trustee shall continue as though no such proceeding had been instituted. SECTION 7.2 PAYMENTS OF NOTES ON DEFAULT; SUIT THEREFOR. The Company covenants that (a) in case default shall be made in the payment by the Company of any installment of interest upon any of the Notes as and when the same shall become due and payable, and such default shall have continued for a period of thirty (30) days, or (b) in case default shall be made in the payment of the principal of or premium, if any, on any of the Notes as and when the same shall have become due and payable, whether at maturity of the Notes or in connection with any redemption, purchase, by declaration under this Indenture or otherwise, then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Notes, the whole amount that then shall have become due and payable on all such Notes for principal and premium, if any, or interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) upon the overdue installments of interest at the rate borne by the Notes; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its 39 negligence or bad faith. Until such demand by the Trustee, the Company may pay the principal of and premium, if any, and interest on the Notes to the registered holders, whether or not the Notes are overdue. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Notes and collect in the manner provided by law out of the property of the Company or any other obligor on the Notes wherever situated the monies adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Notes under Title 11 of the United States Code, or any other applicable law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Company or such other obligor, the property of the Company or such other obligor, or in the case of any other judicial proceedings relative to the Company or such other obligor upon the Notes, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 7.2, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Notes, and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the Noteholders allowed in such judicial proceedings relative to the Company or any other obligor on the Notes, its or their creditors, or its or their property, and to collect and receive any monies or other property payable or deliverable on any such claims, and to distribute the same after the deduction of any amounts due the Trustee under Section 8.6; and any receiver, assignee or trustee in bankruptcy or reorganization, liquidator, custodian or similar official is hereby authorized by each of the Noteholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Noteholders, to pay to the Trustee any amount due it for reasonable compensation, expenses, advances and disbursements, including counsel fees incurred by it up to the date of such distribution. To the extent that such payment of reasonable compensation, expenses, advances and disbursements out of the estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, monies, securities and other property which the holders of the Notes may be entitled to receive in such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or adopt on behalf of any Noteholder any plan of reorganization or arrangement affecting the Notes or the rights of any Noteholder, or to authorize the Trustee to vote in respect of the claim of any Noteholder in any such proceeding; provided, however, that the Trustee may, on behalf of 40 the Noteholders, vote for the election of a trustee in bankruptcy or similar official and may be a member of the creditor's committee established with respect to such bankruptcy. All rights of action and of asserting claims under this Indenture, or under any of the Notes, may be enforced by the Trustee without the possession of any of the Notes, or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the holders of the Notes. SECTION 7.3 APPLICATION OF MONIES COLLECTED BY TRUSTEE. Any monies collected by the Trustee pursuant to this Article VII shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such monies, upon presentation of the several Notes, and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid: First: To the payment of all amounts due the Trustee under Section 8.6; Second: Subject to the provisions of Article IV, in case the principal of the outstanding Notes shall not have become due and be unpaid, to the payment of interest on the Notes in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest at the rate borne by the Notes, such payments to be made ratably to the persons entitled thereto; Third: Subject to the provisions of Article IV, in case the principal of the outstanding Notes shall have become due, by declaration or otherwise, and be unpaid, to the payment of the whole amount then owing and unpaid upon the Notes for principal and premium, if any, and interest, with interest on the overdue principal and premium, if any, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the rate borne by the Notes; and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Notes, then to the payment of such principal and premium, if any, and interest without preference or priority of principal and premium, if any, over interest, or of interest over principal and premium, if any, or of any installment of interest over any other installment of interest, or of any Note over any other Note, ratably to the aggregate of such principal and premium, if any, and accrued and unpaid interest; and Fourth: Subject to the provisions of Article IV, to the payment of the remainder, if any, to the Company or any other person lawfully entitled thereto. SECTION 7.4 PROCEEDINGS BY NOTEHOLDER. No holder of any Note shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture, or for the appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof, as hereinbefore provided, and unless also the 41 holders of not less than 25% in aggregate principal amount of the Notes then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 7.7; it being understood and intended that no one or more holders of Notes shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other holders of Notes, or to obtain or seek to obtain priority or preference over any other holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the holders of Notes. Notwithstanding any other provision of this Indenture and any provision of any Note, the right of any holder of any Note to receive payment of the principal of and premium, if any, and interest on such Note, on or after the respective due dates expressed in such Note, or to institute suit for the enforcement of any such payment on or after such respective dates against the Company shall not be impaired or affected without the consent of such holder. Anything in this Indenture or the Notes to the contrary notwithstanding, the holder of any Note, without the consent of either the Trustee or the holder of any other Note, in his, her or its own behalf and for his, her or its own benefit, may enforce, and may institute and maintain any proceeding suitable to enforce, his, her or its rights of conversion as provided herein. SECTION 7.5 PROCEEDINGS BY TRUSTEE. In case of an Event of Default, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 7.6 REMEDIES CUMULATIVE AND CONTINUING. Except as provided in Section 2.6, all powers and remedies given by this Article VII to the Trustee or to the Noteholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and remedies available to the Trustee or the holders of the Notes, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any holder of any of the Notes to exercise any right or power accruing upon any default or Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or any acquiescence therein; and, subject to the provisions of Section 7.4, every power and remedy given by this Article VII or by law to the Trustee or to the Noteholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Noteholders. 42 SECTION 7.7 DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY MAJORITY OF NOTEHOLDERS. The holders of a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 9.4 shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided, however, that (a) such direction shall not be in conflict with any rule of law or with this Indenture, and (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. The holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 9.4 may on behalf of the holders of all of the Notes waive any past default or Event of Default hereunder and its consequences except (i) a default by the Company in the payment of interest or premium, if any, on, or the principal of, the Notes, (ii) a failure by the Company to convert any Notes into Common Stock or (iii) a default by the Company in respect of a covenant or provision hereof which under Article XI cannot be modified or amended without the consent of the holders of all Notes then outstanding affected thereby. Upon any such waiver the Company, the Trustee and the holders of the Notes shall be restored to their former positions and rights hereunder; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 7.7, said default or Event of Default shall for all purposes of the Notes and this Indenture be deemed to have been cured and to be not continuing; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 7.8 NOTICE OF DEFAULTS. The Trustee shall, within ninety (90) days after the occurrence of a default, mail to all Noteholders, as the names and addresses of such holders appear upon the Note register, notice of all defaults known to a Responsible Officer, unless such defaults shall have been cured or waived before the giving of such notice; and provided that, except in the case of default in the payment of the principal of, or premium, if any (either at maturity or in connection with any redemption or purchase, by declaration or otherwise), or interest on any of the Notes, the Trustee shall be protected in withholding such notice if and so long as a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the best interests of the Noteholders. The Trustee shall not be charged with the knowledge of any default or Event of Default with respect to the Notes, other than an Event of Default under Section 7.1(a) or (b) unless either (1) a Responsible Officer shall have actual knowledge of such default or Event of Default or (2) written notice of such default or Event of Default making reference to this Indenture and to the Notes shall have been given to the Trustee by the Company or any Noteholder. SECTION 7.9 UNDERTAKING TO PAY COSTS. All parties to this Indenture agree, and each holder of any Note by his, her or its acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided that the provisions of this Section 7.9 43 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Noteholder, or group of Noteholders, holding in the aggregate more than 10% in principal amount of the Notes at the time outstanding determined in accordance with Section 9.4, or to any suit instituted by any Noteholder for the enforcement of the payment of the principal of or premium, if any, or interest on any Note (including, but not limited to, the redemption price with respect to the Notes being redeemed or the purchase price with respect to the Notes being purchased as provided in this Indenture) on or after the due date expressed in such Note or to any suit for the enforcement of the right to convert any Note in accordance with the provisions of Article XV. SECTION 7.10 DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or any acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the holders of Notes may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the holders of Notes, as the case may be. ARTICLE VIII CONCERNING THE TRUSTEE SECTION 8.1 DUTIES AND RESPONSIBILITIES OF TRUSTEE. The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred: (1) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture and the Trust Indenture Act, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture and the Trust Indenture Act against the Trustee; and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of 44 any such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein); (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (c) the Trustee shall not be liable to any Noteholder with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the Notes at the time outstanding determined as provided in Section 9.4 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (d) whether or not therein provided, every provision of this Indenture relating to the conduct or affecting the liability of, or affording protection to, the Trustee shall be subject to the provisions of this Section. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 8.2 RELIANCE ON DOCUMENTS, OPINIONS, ETC. Except as otherwise provided in Section 8.1: (a) the Trustee may rely and shall be protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, Note, coupon or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties; (b) before the Trustee acts or refrains from acting, it may request an Officers' Certificate or an Opinion of Counsel, or both; (c) the Trustee may consult with counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Noteholders pursuant to the provisions of this Indenture, unless such Noteholders shall have offered to the 45 Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, Note, note or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity from the Noteholders against such expenses or liability as a condition to so proceeding; the reasonable expenses of every such examination shall be paid by the Company or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Company upon demand; and (f) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care hereunder. In no event shall the Trustee be liable for any consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action. SECTION 8.3 TRUSTEE'S DISCLAIMER. The recitals contained herein and in the Notes (except in the Trustee's certificate of authentication) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of any Notes or the proceeds of any Notes authenticated and delivered by the Trustee in conformity with the provisions of this Indenture. SECTION 8.4 TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR MAY OWN NOTES. The Trustee, any paying agent, any conversion agent or Note registrar, in its individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not Trustee, paying agent, conversion agent or Note registrar. SECTION 8.5 MONIES TO BE HELD IN TRUST. Subject to the provisions of Section 13.4, all monies received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as may be agreed from time to time by the Company and the Trustee. 46 SECTION 8.6 COMPENSATION AND EXPENSES OF TRUSTEE. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder in any capacity (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances reasonably incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or willful misconduct. The Company also covenants to indemnify the Trustee in any capacity under this Indenture and its agents and any authenticating agent for, and to hold them harmless against, any loss, liability or expense incurred without negligence or willful misconduct on the part of the Trustee or such agent or authenticating agent, as the case may be, and arising out of or in connection with the acceptance or administration of this trust or in any other capacity hereunder, including the costs and expenses of defending themselves against any claim of liability in the premises. The obligations of the Company under this Section 8.6 to compensate or indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall be secured by a lien prior to that of the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust herewith for the benefit of the holders of particular Notes prior to the date of the accrual of such unpaid compensation or indemnifiable claim. The obligation of the Company under this Section shall survive the satisfaction and discharge of this Indenture. When the Trustee and its agents and any authenticating agent incur expenses or render services after an Event of Default specified in Section 7.1(h) or (i) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy, insolvency or similar laws. SECTION 8.7 OFFICERS' CERTIFICATE AS EVIDENCE. Except as otherwise provided in Section 8.1 or Section 8.2, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence, willful misconduct, recklessness and bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such Officers' Certificate, in the absence of negligence, willful misconduct, recklessness and bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 8.8 CONFLICTING INTERESTS OF TRUSTEE. (a) If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. 47 (b) In the event that the Trustee shall fail to comply with Subsection (a) of this Section 8.8, the Trustee shall transmit notice of such failure to the holders of Notes to the extent and in the manner provided by, and subject to, the provisions of the Trust Indenture Act. SECTION 8.9 ELIGIBILITY OF TRUSTEE. There shall at all times be a Trustee hereunder which shall be a person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus (together with its corporate parent) of at least $50,000,000 (or, if such person is a member of a bank holding company system, the bank holding company shall have a combined capital and surplus of at least $50,000,000). If such person publishes reports of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 8.10 RESIGNATION OR REMOVAL OF TRUSTEE. (a) The Trustee may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof to the holders of Notes at their addresses as they shall appear on the Note register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment thirty (30) days after the mailing of such notice of resignation to the Noteholders, the resigning Trustee may, at the expense of the Company, petition any court of competent jurisdiction for the appointment of a successor trustee, or any Noteholder who has been a bona fide holder of a Note or Notes for at least six months may, subject to the provisions of Section 7.9, on behalf of himself, herself or itself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (1) the Trustee shall fail to comply with Section 8.8(a) after written request therefor by the Company or by any Noteholder who has been a bona fide holder of a Note or Notes for at least six months, or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 8.9 and shall fail to resign after written request therefor by the Company or by any such Noteholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver of the Trustee or of its property shall be 48 appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 7.9, any Noteholder who has been a bona fide holder of a Note or Notes for at least six months may, on behalf of himself, herself or itself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Notes at the time outstanding may at any time remove the Trustee and nominate a successor trustee which shall be deemed appointed as successor trustee unless within ten (10) days after notice to the Company of such nomination the Company objects thereto, in which case the Trustee so removed or any Noteholder, upon the terms and conditions and otherwise as in Section 8.10(a) provided, may petition any court of competent jurisdiction for an appointment of a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 8.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 8.11. SECTION 8.11 ACCEPTANCE BY SUCCESSOR TRUSTEE. Any successor trustee appointed as provided in Section 8.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 8.6, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property and funds held or collected by such trustee as such, except for funds held in trust for the benefit of holders of particular Notes, to secure any amounts then due it pursuant to the provisions of Section 8.6. No successor trustee shall accept appointment as provided in this Section 8.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 8.8 and be eligible under the provisions of Section 8.9. Upon acceptance of appointment by a successor trustee as provided in this Section 8.11, each of the Company and the former trustee shall mail or cause to be mailed notice of the 49 succession of such trustee hereunder to the holders of Notes at their addresses as they shall appear on the Note register. If the Company fails to mail such notice within ten (10) days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. SECTION 8.12 SUCCESSION BY MERGER, ETC. Any corporation or other entity into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation or other entity succeeding to all or substantially all of the corporate trust business of the Trustee (including the trust created hereunder), shall be the successor to the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that in the case of any corporation succeeding to all or substantially all of the trust business of the Trustee such corporation shall be qualified under the provisions of Section 8.8 and eligible under the provisions of Section 8.9. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture, any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee or authenticating agent appointed by such predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee or an authenticating agent appointed by such successor trustee may authenticate such Notes either in the name of any predecessor trustee hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 8.13 LIMITATION ON RIGHTS OF TRUSTEE AS CREDITOR. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Notes and the Trust Indenture Act is applicable hereto), the Trustee shall be subject to the provisions of Section 311(a) of the Trust Indenture Act or, if applicable, Section 311(b) of the Trust Indenture Act regarding the collection of the claims against the Company (or any such other obligor). ARTICLE IX CONCERNING THE NOTEHOLDERS SECTION 9.1 ACTION BY NOTEHOLDERS. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action, the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Noteholders in person or by agent or proxy appointed in writing, or (b) by the record of the holders of Notes voting in favor thereof at any meeting of Noteholders duly called and held in accordance with the provisions of Article X, or 50 (c) by a combination of such instrument or instruments and any such record of such a meeting of Noteholders. Whenever the Company or the Trustee solicits the taking of any action by the holders of the Notes, the Company or the Trustee may fix in advance of such solicitation, a date as the record date for determining holders entitled to take such action. The record date shall be not more than fifteen (15) days prior to the date of commencement of solicitation of such action. SECTION 9.2 PROOF OF EXECUTION BY NOTEHOLDERS. Subject to the provisions of Sections 8.1, 8.2 and 10.5, proof of the execution of any instrument by a Noteholder or his, her or its agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The holding of Notes shall be proved by the Note register or by a certificate of the Note registrar. The record of any Noteholders' meeting shall be proved in the manner provided in Section 10.6. SECTION 9.3 WHO ARE DEEMED ABSOLUTE OWNERS. The Company, the Trustee, any paying agent, any conversion agent and any Note registrar may deem the person in whose name such Note shall be registered upon the Note register to be, and may treat him, her or it as, the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Note, for conversion of such Note and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any conversion agent nor any Note registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being, or upon his, her or its order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon any such Note. SECTION 9.4 COMPANY-OWNED NOTES DISREGARDED. In determining whether the holders of the requisite aggregate principal amount of Notes have concurred in any direction, consent, waiver or other action under this Indenture, Notes which are owned by the Company or any other obligor on the Notes or by any Affiliate of the Company or any other obligor on the Notes shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent, waiver or other action only Notes which a Responsible Officer of the Trustee knows are so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 9.4 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Notes and that the pledgee is not the Company, any other obligor on the Notes or an Affiliate of the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Notes, if any, known by the Company to be owned or held by or for the account of any of the above described persons; and, subject to Section 8.1, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Notes not listed therein are outstanding for the purpose of any such determination. 51 SECTION 9.5 REVOCATION OF CONSENTS; FUTURE HOLDERS BOUND. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 9.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action, any holder of a Note which is shown by the evidence to be included in the Notes the holders of which have consented to such action may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in Section 9.2, revoke such action so far as concerns such Note. Except as aforesaid, any such action taken by the holder of any Note shall be conclusive and binding upon such holder and upon all future holders and owners of such Note and of any Notes issued in exchange or substitution therefor, irrespective of whether any notation in regard thereto is made upon such Note or any Note issued in exchange or substitution therefor. ARTICLE X NOTEHOLDERS' MEETINGS SECTION 10.1 PURPOSE OF MEETINGS. A meeting of Noteholders may be called at any time and from time to time pursuant to the provisions of this Article X for any of the following purposes: (1) to give any notice to the Company or to the Trustee or to give any directions to the Trustee permitted under this Indenture, or to consent to the waiving of any default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Noteholders pursuant to any of the provisions of Article VII; (2) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VIII; (3) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 11.2; (4) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Notes under any other provision of this Indenture or under applicable law; or (5) to take any other action authorized by this Indenture or under applicable law. SECTION 10.2 CALL OF MEETINGS BY TRUSTEE. The Trustee may at any time call a meeting of Noteholders to take any action specified in Section 10.1, to be held at such time and at such place in the Borough of Manhattan, The City of New York, New York, as the Trustee shall determine. Notice of every meeting of the Noteholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting and the establishment of any record date pursuant to Section 9.1, shall be mailed to holders of Notes at their addresses as they shall appear on the Note register. Such notice shall also be mailed to the 52 Company. Such notices shall be mailed not less than twenty (20) nor more than ninety (90) days prior to the date fixed for the meeting. Any meeting of Noteholders shall be valid without notice if the holders of all Notes then outstanding are present in person or by proxy or if notice is waived before or after the meeting by the holders of all Notes outstanding, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice. SECTION 10.3 CALL OF MEETINGS BY COMPANY OR NOTEHOLDERS. In case at any time the Company, pursuant to a resolution of its Board of Directors, or the holders of at least 10% in aggregate principal amount of the Notes then outstanding, shall have requested the Trustee to call a meeting of Noteholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within twenty (20) days after receipt of such request, then the Company or such Noteholders may determine the time and the place for such meeting and may call such meeting to take any action authorized in Section 10.1, by mailing notice thereof as provided in Section 10.2. SECTION 10.4 QUALIFICATIONS FOR VOTING. To be entitled to vote at any meeting of Noteholders a person shall (a) be a holder of one or more Notes on the record date pertaining to such meeting or (b) be a person appointed by an instrument in writing as proxy by a holder of one or more Notes. The only persons who shall be entitled to be present or to speak at any meeting of Noteholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 10.5 REGULATIONS. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Noteholders, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Noteholders as provided in Section 10.3, in which case the Company or the Noteholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the holders of a majority in principal amount of the Notes represented at the meeting and entitled to vote at the meeting. Subject to the provisions of Section 9.4, at any meeting each Noteholder or proxyholder shall be entitled to one vote for each $50 principal amount of Notes held or represented by him, her or it; provided, however, that no vote shall be cast or counted at any meeting in respect of any Note challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Notes held by him, her or it or instruments in writing as aforesaid duly designating him, her or it 53 as the proxy to vote on behalf of other Noteholders. Any meeting of Noteholders duly called pursuant to the provisions of Section 10.2 or 10.3 may be adjourned from time to time by the holders of a majority of the aggregate principal amount of Notes represented at the meeting, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. SECTION 10.6 VOTING. The vote upon any resolution submitted to any meeting of Noteholders shall be by written ballot on which shall be subscribed the signatures of the holders of Notes or of their representatives by proxy and the principal amount of the Notes held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Noteholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 10.2. The record shall show the principal amount of the Notes voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 10.7 NO DELAY OF RIGHTS BY MEETING. Nothing in this Article X contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Noteholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Noteholders under any of the provisions of this Indenture or of the Notes. ARTICLE XI SUPPLEMENTAL INDENTURES SECTION 11.1 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS. The Company, when authorized by the resolutions of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to make provision with respect to the conversion rights of the holders of Notes pursuant to the requirements of Section 15.6; (b) subject to Article IV, to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Notes, any property or assets; 54 (c) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article XII; (d) to add to the covenants of the Company such further covenants, restrictions or conditions as the Board of Directors and the Trustee shall consider to be for the benefit of the holders of Notes, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (e) to provide for the issuance under this Indenture of Notes in coupon form (including Notes registrable as to principal only) and to provide for exchange of such Notes with the Notes issued hereunder in fully registered form and to make all appropriate changes for such purpose; (f) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture which shall not materially adversely affect the interests of the holders of the Notes; (g) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Notes; or (h) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualifications of this Indenture under the Trust Indenture Act, or under any similar federal statute hereafter enacted. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 11.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 11.2. 55 SECTION 11.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS. With the consent (evidenced as provided in Article IX) of the holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding (determined in accordance with Section 9.4), the Company, when authorized by the resolutions of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or any supplemental indenture or of modifying in any manner the rights of the holders of the Notes; provided, however, that no such supplemental indenture shall, in each case, without the consent of the holder of each Note so affected: (i) extend the fixed maturity of any Note, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption or purchase thereof, or change the obligation of the Company to redeem any Note on a redemption date in a manner adverse to the holders of Notes, or change the obligation of the Company to purchase any Note upon the happening of a Change in Control in a manner adverse to the holders of Notes, or impair or adversely affect the right of any Noteholder to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Notes, or change or impair in a manner adverse to the Noteholders the right to convert the Notes into Common Stock or reduce the number of shares of Common Stock or any other property receivable by a Noteholder upon conversion subject to the terms set forth herein, including Section 15.6, or modify the provisions of this Indenture with respect to the subordination of the Notes in a manner adverse to the Noteholders; or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any supplemental indenture, waiver or modification of any of the provisions of this Section or Section 7.7. Up to and prior to the close of business on the Exchange Date, only the holders of shares of Preferred Stock shall be entitled to approve any amendments or supplements to this Indenture as provided above. Any such vote of the holders of shares of Preferred Stock shall require the affirmative vote or consent of the holders of at least 66 2/3 percent (unless a higher percentage shall then be required by applicable law) of all outstanding shares of Preferred Stock voting separately as a class. Upon the written request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Noteholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Noteholders under this Section 11.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 11.3 EFFECT OF SUPPLEMENTAL INDENTURES. Any supplemental indenture executed pursuant to the provisions of this Article XI shall comply with the Trust Indenture Act, as then in 56 effect. Upon the execution of any supplemental indenture pursuant to the provisions of this Article XI, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Notes shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 11.4 NOTATION ON NOTES. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article XI may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may, at the Company's expense, be prepared and executed by the Company, authenticated by the Trustee (or an authenticating agent duly appointed by the Trustee pursuant to Section 16.11) and delivered in exchange for the Notes then outstanding, upon surrender of such Notes then outstanding. SECTION 11.5 EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO BE FURNISHED TRUSTEE. The Trustee, subject to the provisions of Sections 8.1 and 8.2, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article XI. ARTICLE XII MERGER, SALE OR CONSOLIDATION SECTION 12.1 LIMITATION ON MERGER, SALE OR CONSOLIDATION. The Company shall not consolidate with or merge with or into another person or permit any other person to consolidate with or merge with or into the Company, or sell, lease, convey or transfer all or substantially all of its assets (computed on a consolidated basis), whether in a single transaction or a series of related transactions, to another person or group of affiliated persons, unless (i) either (A) in the case of a consolidation or merger, the Company is the surviving entity or (B) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and expressly assumes by supplemental indenture all of the obligations of the Company in connection with the Notes and the Indenture; (ii) no default or Event of Default shall exist or shall occur immediately after giving effect on a pro forma basis to such transaction; and (iii) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, sale, lease, conveyance or transfer and, if a supplemental indenture is required, such supplemental indenture comply with the Indenture and that all conditions precedent relating to such transactions have been satisfied. SECTION 12.2 SUCCESSOR CORPORATION TO BE SUBSTITUTED. In case of any such consolidation, merger, sale, conveyance or lease and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and 57 interest on all of the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of International Shipholding Corporation any or all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor corporation instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver, or cause to be authenticated and delivered, any Notes which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Notes which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Notes so issued shall in all respects have the same legal rank and benefit under this Indenture as the Notes theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Notes had been issued at the date of the execution hereof. In the event of any such consolidation, merger, sale or conveyance (but not in the event of such lease), the person named as the "Company" in the first paragraph of this Indenture, or any successor which shall thereafter have become such in the manner prescribed in this Article XII and which shall have transferred its rights and obligations hereunder to another successor in the manner prescribed in this Article XII, may be dissolved, wound up and liquidated at any time thereafter and such person shall be released from its liabilities as obligor and maker of the Notes and from its obligations under this Indenture. In case of any such consolidation, merger, sale, conveyance or lease, such changes in phraseology and form (but not in substance) may be made in the Notes thereafter to be issued as may be appropriate. ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE SECTION 13.1 DISCHARGE OF INDENTURE. When (a) the Company shall deliver to the Trustee for cancellation all Notes theretofore authenticated (other than any Notes which have been destroyed, lost or stolen and in lieu of or in substitution for which other Notes shall have been authenticated and delivered) and not theretofore canceled, or (b) all the Notes not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall irrevocably deposit with the Trustee, in trust, funds sufficient to pay at maturity or upon redemption of all of the Notes (other than any Notes which shall have been mutilated, destroyed, lost or stolen and in lieu of or in substitution for which other Notes shall have been authenticated and delivered) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect with respect to the Notes (except 58 as to (i) remaining rights of registration of transfer, substitution and exchange and conversion of Notes and maintenance of an office therefor, (ii) rights hereunder of Noteholders to receive payments of principal of and premium, if any, and interest on, the Notes and the other rights, duties and obligations of Noteholders, as beneficiaries hereof with respect to the amounts, if any, so deposited with the Trustee and (iii) the rights, obligations and immunities of the Trustee hereunder), and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel as required by Section 16.5 and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture; the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Notes. SECTION 13.2 DEPOSITED MONIES TO BE HELD IN TRUST BY TRUSTEE. Subject to Section 13.4, all monies deposited with the Trustee pursuant to Section 13.1 shall be held in trust and applied by it to the payment, notwithstanding the provisions of Article IV, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Notes for the payment or redemption of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest and premium, if any. SECTION 13.3 PAYING AGENT TO REPAY MONIES HELD. Upon the satisfaction and discharge of this Indenture, all monies then held by any paying agent of the Notes (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such monies. SECTION 13.4 RETURN OF UNCLAIMED MONIES. Subject to the requirements of applicable law, any monies deposited with or paid to the Trustee or any paying agent for payment of the principal of, premium, if any, or interest on Notes and not applied but remaining unclaimed by the holders of Notes for two years after the date upon which the principal of, premium, if any, or interest on such Notes, as the case may be, shall have become due and payable, shall be returned to the Company by the Trustee or any paying agent upon the Company's request and all liability or responsibility of the Trustee or any paying agent shall thereupon cease with respect to such monies; and the holder of any of the Notes shall thereafter have the right to look only to the Company for any payment which such holder may be entitled to collect unless an applicable abandoned property law designates another person. SECTION 13.5 REINSTATEMENT. If (i) the Trustee or the paying agent is unable to apply any money in accordance with Section 13.2 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application and (ii) the holders of at least a majority in principal amount of the then outstanding Notes so request by written notice to the Trustee, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 13.1 until such time as the Trustee or the paying agent is permitted to apply all such money in accordance with Section 13.2; provided, however, that if the Company makes any payment of interest on or principal of any Note following the reinstatement of its obligations, the Company shall be 59 subrogated to the rights of the holders of such Notes to receive such payment from the money held by the Trustee or paying agent. ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 14.1 INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS. No recourse for the payment of the principal of or premium, if any, or interest on any Note, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer or director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes. ARTICLE XV CONVERSION OF NOTES SECTION 15.1 HOLDER'S RIGHT TO CONVERT. Subject to and upon compliance with the provisions of this Indenture, the holder of any Note shall have, at his, her or its option, the right, at any time on or prior to the close of business on the Maturity Date (except that, with respect to any Note or portion of a Note which shall be called for redemption, such right shall terminate at the close of business on the Business Day immediately preceding the date fixed for redemption of such Note or portion of a Note unless the Company shall default in payment of the amount due upon redemption thereof, in which case such right shall terminate upon payment of the amount due upon such redemption) to convert the principal amount of any such Note, or any portion of such principal amount which is $50 or an integral multiple thereof, into that number of fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing the principal amount of the Note or portion thereof surrendered for conversion by the Conversion Price in effect at such time, by surrender of the Note so to be converted in whole or in part in the manner provided in Section 15.2. A holder of Notes is not entitled to any rights of a holder of Common Stock until such holder has converted his, her or its Notes to Common Stock, and only to the extent such Notes are deemed to have been converted to Common Stock under this Article XV. SECTION 15.2 EXERCISE OF CONVERSION RIGHT; ISSUANCE OF COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. In order to exercise the conversion right with respect to any Note held in certificated form, the holder of any such Note to be converted in whole or in part shall surrender such Note, duly endorsed, at the office or agency maintained by the Company pursuant to Section 5.2, accompanied by the funds, if any, required 60 by the last paragraph of this Section 15.2, and shall give written notice of conversion in substantially the form provided on the reverse of the form of Note attached hereto as Exhibit A (or such other notice which is acceptable to the Company) to such office or agency that the holder elects to convert such Note or such portion thereof specified in such notice. Such notice shall also state the name or names (with addresses) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, and shall be accompanied by payment of any transfer taxes required pursuant to Section 15.7. Each such Note surrendered for conversion shall, unless the shares of Common Stock issuable on conversion are to be issued in the same name in which such Notes are registered, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or his, her or its duly authorized attorney. In order to exercise the conversion right with respect to any Notes represented by a Global Note, the holder of the Note to be converted shall comply with the procedures established by the Depositary for conversion. As promptly as practicable after satisfaction of the requirements for conversion set forth above, the Company shall issue and shall deliver to such holder or, if shares issuable on conversion are to be issued in a name other than that of the Noteholder (as if such transfer were a transfer of the Note or Notes (or portion thereof) so converted), to such other person, at the office or agency maintained by the Company for such purpose pursuant to Section 5.2, a certificate or certificates representing the number of shares of Common Stock issuable upon the conversion of such Note or portion thereof in accordance with the provisions of this Article XV and a check or cash in respect of any fractional share of Common Stock arising upon such conversion, as provided in Section 15.3 (which payment, if any, shall be paid no later than five Business Days after satisfaction of the requirements for conversion set forth above). In case any Note of a denomination greater than $50 shall be surrendered for partial conversion, the Company shall, subject to Section 2.3, execute and the Trustee shall authenticate and deliver to the holder of the Note so surrendered, without charge to him, her or it, a new Note or Notes in an aggregate principal amount equal to the unconverted portion of the surrendered Note. Each conversion pursuant to Section 15.1 shall be deemed to have been effected on the date on which the requirements set forth above in this Section 15.2 or the requirements of the Depositary, as the case may be, have been satisfied as to such Note (or portion thereof), and the person in whose name any certificate or certificates for shares of Common Stock issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; provided, however, that if any such surrender occurs on any date when the stock transfer books of the Company shall be closed, the conversion shall be effected on the next succeeding day on which such stock transfer books are open, and the person in whose name the certificates are to be issued shall be the record holder thereof on such date for all purposes, but such conversion shall be at the Conversion Price in effect on the date upon which such Note shall be surrendered. Upon such conversion, the Company will be deemed to have satisfied its obligation to pay in full the principal of, premium, if any, and any accrued but unpaid interest with respect to such Note. Upon the conversion of a Note represented by a Global Note, the Trustee, or the Custodian at the direction of the Trustee, shall make a notation on such Global Note as to the reduction in the principal amount represented thereby. 61 In the case of any Note or portion thereof which is converted after any record date for an interest payment and prior to the close of business on the Business Day immediately preceding the corresponding interest payment date, the interest payment due on such payment date shall be payable on such interest payment date to the holder of record of such Note or portion thereof as of such record date notwithstanding such conversion; provided that any Note or portion thereof surrendered for conversion during the period between the close of business on the record date for an interest payment and prior to the close of business on the Business Day immediately preceding the corresponding interest payment date shall (unless such Note or portion thereof being converted shall have been called for redemption and a notice of redemption has been sent to the holders of the Notes pursuant to Section 3.3) be accompanied by payment of an amount equal to the interest payable on such interest payment date on the principal amount of Notes being converted; provided, however, that no such payment need be made if there shall exist at the time of conversion a default in the payment of interest on the Notes. The Trustee shall not be required to accept for conversion any Notes not accompanied by any payment required by the preceding sentence. Except as provided above in this Section 15.2, no payment or adjustment shall be made for interest accrued on any Note surrendered for conversion or on account of any dividends on any shares of Common Stock issued upon the conversion of such Note. SECTION 15.3 CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of Notes. If any fractional share of Common Stock otherwise would be issuable upon the conversion of any Note or Notes, the Company shall make a payment therefor in cash to the holder of such converted Notes based on the then-current market value of a whole share of Common Stock. For purposes of this Section 15.3, the then-current market value of a whole share of Common Stock shall be the Closing Price of the Common Stock on the first Trading Day immediately preceding the day on which the Notes (or specified portions thereof) are deemed to have been converted and such Closing Price shall be determined as provided in Section 15.5(h)(1). If more than one Note shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof to the extent permitted hereby) so surrendered for conversion. SECTION 15.4 CONVERSION PRICE. The conversion price shall be as specified in the form of Note (herein called the "Conversion Price") attached as Exhibit A hereto, subject to adjustment as provided in this Article XV. SECTION 15.5 ADJUSTMENT OF CONVERSION PRICE. The Conversion Price shall be adjusted from time to time by the Company as follows: (a) In the event the Company shall hereafter pay a dividend in shares of Common Stock or make a distribution to all holders of Common Stock in shares of Common Stock, the Conversion Price in effect at the opening of business on the Business Day following the Record Date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business 62 on such Record Date and the denominator shall be the sum of such number of shares of Common Stock and the total number of shares of Common Stock constituting such dividend or other distribution. If any dividend or distribution of the type described in this Section 15.5(a) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would have been in effect if such dividend or distribution had not been declared. (b) In the event the Company shall issue rights or warrants to all holders of its outstanding shares of Common Stock entitling them (for a period expiring within forty-five (45) days after the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price on the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants, the Conversion Price shall be adjusted so that the Conversion Price shall equal the price determined by multiplying the Conversion Price in effect at the opening of business on the date after such Record Date by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the Record Date plus the number of shares which the aggregate subscription, purchase or exercise price of the shares of Common Stock called for by all such issued rights or warrants would purchase at such Current Market Price, and of which the denominator shall be the number of shares of Common Stock outstanding at the close of business on the Record Date plus the total number of additional shares of Common Stock so offered for subscription or purchase. Such adjustment shall become effective at the opening of business on the Business Day following the Record Date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered pursuant to such rights or warrants, upon the expiration or termination of such rights or warrants the Conversion Price shall be readjusted to the Conversion Price which would have been in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect if the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than the Current Market Price, and in determining the aggregate subscription, purchase or exercise price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors in its sole discretion. (c) In the event the outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the Business Day following the day upon which such subdivision becomes effective shall be proportionately reduced, and conversely, in the event the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the Business Day following the day upon which such combination becomes effective shall be proportionately increased. (d) In the event the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of capital stock of the Company (other than any 63 dividends or distributions to which Section 15.5(a) applies) or evidences of its indebtedness, cash or other assets (including securities, but excluding (1) any rights or warrants referred to in Section 15.5(b) or (2) dividends and distributions paid exclusively in cash (such shares of capital stock, evidences of indebtedness, cash or other assets hereinafter in this Section 15.5(d) referred to as the "Securities")), then, in each such case, the Conversion Price shall be reduced so that the Conversion Price shall be equal to the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Record Date with respect to such distribution by a fraction of which the numerator shall be the Current Market Price (determined as provided in Section 15.5(h)(2)) on such Record Date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on such Record Date of the portion of the Securities so distributed applicable to one share of Common Stock and the denominator shall be such Current Market Price, such reduction to become effective at the opening of business on the day following such Record Date; provided, however, that in the event the then fair market value (as so determined by the Board of Directors) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Noteholder shall have the right to receive upon conversion of a Note (or any portion thereof) the amount of Securities such holder would have received had such holder converted such Note (or portion thereof) immediately prior to such Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 15.5(d) by reference to the trading market for any securities comprising all or part of such distribution, it must in doing so consider the prices in such market over the same period (the "Reference Period") used in computing the Current Market Price pursuant to Section 15.5(h)(2) to the extent possible, unless the Board of Directors in a Board Resolution determines in good faith that determining the fair market value during the Reference Period would not be in the best interest of the Noteholders. For purposes of this Section 15.5(d) and Sections 15.5(a) and (b), any dividend or distribution to which this Section 15.5(d) is applicable that also includes shares of Common Stock to which Section 15.5(a) applies, or rights or warrants to subscribe for or purchase shares of Common Stock to which Section 15.5(b) applies (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets, shares of capital stock, rights or warrants other than such shares of Common Stock to which 15.5(a) applies or rights or warrants to which Section 15.5(b) applies (and any Conversion Price reduction required by this Section 15.5(d) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Conversion Price reduction required by Sections 15.5(a) and (b) with respect to such dividend or distribution shall then be made, except (A) the Record Date of such dividend or distribution shall be substituted as "the Record Date fixed for the determination of stockholders entitled to receive such dividend or other distribution" and "Record Date" within the meaning of Section 15.5(a) and as "the Record Date fixed for the determination of stockholders entitled to receive such rights or warrants" and "Record Date" within the meaning of Section 15.5(b) and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed 64 "outstanding at the close of business on such Record Date" within the meaning of Section 15.5(a). In the event that the Company implements a stockholders' rights plan (a "New Rights Plan") or amends any existing stockholders' rights plan (as amended, an "Amended Rights Plan" and together with any New Rights Plan, a "Rights Plan"), such Rights Plan shall provide that upon conversion of the Notes the holders will receive, in addition to the Common Stock issuable upon such conversion, the rights under such Rights Plan (notwithstanding the occurrence of an event causing such rights to separate from the Common Stock at or prior to the time of conversion), unless prior to conversion of the Preferred Stock the rights have expired, terminated or been redeemed. Any distribution of rights or warrants pursuant to a Rights Plan complying with the requirements set forth in the immediately preceding sentence of this paragraph shall not constitute a distribution of rights or warrants for purposes of this Section 15.5(d). Rights or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Company's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("Trigger Event"), (i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall be deemed not to have been distributed for purposes of this Section 15.5(d) (and no adjustment to the Conversion Price under this Section 15.5(d) will be required) until the occurrence of the earliest Trigger Event. If such right or warrant is subject to subsequent events, upon the occurrence of which such right or warrant shall become exercisable to purchase different securities, evidences of indebtedness or other assets or entitle the holder to purchase a different number or amount of the foregoing or to purchase any of the foregoing at a different purchase price, then the occurrence of each such event shall be deemed, for the purposes of this Section 15.5(d), to be the date of issuance and record date with respect to a new right or warrant (and a termination or expiration of the existing right or warrant without exercise by the holder thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or the occurrence of any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto, that resulted in an adjustment to the Conversion Price under this Section 15.5(d), (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution equal to the per share redemption or repurchase price received by a holder of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants) made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants all of which shall have expired or been terminated without exercise, the Conversion Price shall be readjusted as if such rights and warrants had never been issued. (e) In the event the Company shall, by dividend or otherwise, make a distribution to holders of its Common Stock consisting exclusively of cash (excluding any dividend or distribution made in connection with a merger or consolidation to which Section 15.6 applies or as part of a distribution referred to in Section 15.5(d)), in an amount that when combined with all other distributions of cash to holders of its Common Stock (excluding any dividend or distribution made in connection with a merger or consolidation to which Section 7(e) applies or 65 as part of a distribution referred to in Section 7(d)(iv)) in such calendar year exceeds on a per-share basis the greater of $0.50 per share or three percent (3%) of the Current Market Price on the date prior to the date of the declaration of such distribution, then, immediately after the close of business on the Record Date with respect to such distribution, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on such Record Date by a fraction (i) the numerator of which shall be equal to the Current Market Price on the Record Date less an amount equal to the quotient of (x) the aggregate amount of such distribution and (y) the number of shares of Common Stock outstanding on the Record Date and (ii) the denominator of which shall be equal to the Current Market Price on such Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect if such dividend or distribution had not been declared. (f) In the event a tender offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender offer (as amended upon the expiration thereof) shall require the payment to stockholders of consideration (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) that, as of the date upon which occurred the last time tenders could have been made pursuant to such tender offer (the "Expiration Time"), exceeds the Closing Price of a share of Common Stock on the Trading Day next succeeding the Expiration Time then, immediately prior to the opening of business on the day after the Expiration Time, the Conversion Price shall be reduced so that the Conversion Price shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date of the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered shares) as of the Expiration Time multiplied by the Current Market Price on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price on the Trading Day next succeeding the Expiration Time, such reduction (if any) to become effective at the opening of business on the Business Day following the Expiration Time. In the event that the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect if such tender offer had not been made. If the application of this Section 15.5(f) to any tender offer would result in an increase in the Conversion Price, no adjustment shall be made for such tender offer under this Section 15.5(f). 66 (g) In the event of a tender or exchange offer made by a person other than the Company or any Subsidiary for an amount of Common Stock which increases the offeror's ownership of Common Stock to more than 25% of the Common Stock outstanding and shall involve the payment by such person of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a Board Resolution) at the last time (the "Tender Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as amended) that exceeds the Current Market Price on the Trading Day next succeeding the Tender Expiration Time, and with respect to which, as of the Tender Expiration Time, the Board of Directors is not recommending rejection of the offer, the Conversion Price shall be reduced so that the Conversion Price shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Tender Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) as of the Tender Expiration Time multiplied by the Current Market Price on the Trading Day next succeeding the Tender Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Tender Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Tender Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Tender Purchased Shares) on the Tender Expiration Time and the Current Market Price on the Trading Day next succeeding the Tender Expiration Time, such reduction to become effective at the opening of business on the Business Day following the Tender Expiration Time. In the event that such person is obligated to purchase shares pursuant to any such tender or exchange offer, but such person is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect if such tender or exchange offer had not been made. Notwithstanding the foregoing, the adjustment described in this Section 15.5(g) shall not be made if, as of the Tender Expiration Time, the offering documents with respect to such tender offer or exchange offer disclose a plan or intention to cause the Company to engage in any transaction described in Article XII. (h) For purposes of this Section 15.5 and the other provisions of this Indenture, the following terms shall have the meaning indicated: (1) "Closing Price" with respect to any securities on any day shall mean the closing sale price regular way on such day or, in case no sale of such securities takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on the Nasdaq National Market or New York Stock Exchange, as applicable, or, if such security is not listed or admitted to trading on such Nasdaq National Market or New York Stock Exchange, on the principal national securities exchange, trading market or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange, trading market or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on such day as reported by the National Quotation 67 Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution. (2) "Current Market Price" shall mean, subject to the second paragraph hereof, the lesser of (a) the Closing Price per share of Common Stock on the date in question and (b) the average of the daily Closing Prices per share of Common Stock for the ten (10) consecutive Trading Days immediately prior to the date in question; provided, however, that (1) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs during such ten (10) consecutive Trading Days, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (2) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event, and (3) if the "ex" date for the issuance or distribution requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 15.5(d), (f) or (g), whose determination shall be conclusive and described in a Board Resolution) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For purposes of any computation under Section 15.5(f) or (g), the Current Market Price on any date shall be deemed to be the average of the daily Closing Prices per share of Common Stock for such day and the next two succeeding Trading Days; provided, however, that if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs on or after the Expiration Time or the Tender Expiration Time, as the case may be, for the tender or exchange offer requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the 68 term "ex" date, (1) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (2) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (3) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time or Tender Expiration Time, as the case may be, of such offer. Notwithstanding the foregoing, whenever successive adjustments to the Conversion Price are called for pursuant to this Section 15.5, such adjustments shall be made to the Current Market Price as may be necessary or appropriate to effectuate the intent of this Section 15.5 and to avoid unjust or inequitable results as determined in good faith by the Board of Directors. (3) "fair market value" shall mean the amount which a willing buyer would pay a willing seller in an arm's length transaction. (4) "Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). (5) "Trading Day" shall mean (x) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be made thereon or (y) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national securities exchange or securities trading market, a day on which the New York Stock Exchange or such other national securities exchange or securities trading market is open for business or (z) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. (i) The Company may make such reductions in the Conversion Price, in addition to those required by Sections 15.5(a), (b), (c), (d), (e), (f) and (g), as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, the Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least twenty (20) Business Days, the reduction is irrevocable during the period and the Board of Directors shall have made a determination that such reduction is in the best interests of the Company, which determination shall be conclusive and described in a Board Resolution. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Company shall mail to the holder of each Note, at his, her or its last address appearing on the Note register 69 provided for in Section 2.5, a notice of the reduction at least fifteen (15) days prior to the date the reduced Conversion Price takes effect, and such notice shall state the reduced Conversion Price and the period during which it will be in effect. (j) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 15.5(j) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article XV shall be made by the Company and shall be rounded to the nearest cent. No adjustment need be made for a change in the par value or no par value of the Common Stock or a change from par value to no par value or from no par value to par value. (k) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Trustee and any conversion agent other than the Trustee an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Unless and until a Responsible Officer of the Trustee shall have received such Officers' Certificate, the Trustee shall not be deemed to have knowledge of any adjustment of the Conversion Price and may assume without inquiry that the last Conversion Price of which it has knowledge remains in effect. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which such adjustment becomes or became effective and shall mail such notice of such adjustment of the Conversion Price to the holder of each Note, at his, her or its last address appearing on the Note register provided for in Section 2.5, within twenty (20) days of the effective date of such adjustment. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. (l) In any case in which this Section 15.5 provides that an adjustment shall become effective immediately after a Record Date for an event, the Company may defer until the occurrence of such event (i) issuing to the holder of any Note converted after such Record Date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of any fractional shares of Common Stock pursuant to Section 15.3. (m) For purposes of this Section 15.5, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company, unless a dividend or distribution that requires an adjustment to the Conversion Price pursuant to this Section 15.5 is paid or made with respect to such treasury shares, but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. SECTION 15.6 RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock (other than a subdivision or combination to which Section 15.5(c) applies or a change in par value), (ii) any consolidation, merger or combination of the Company with another person as a result of which holders of Common Stock shall be entitled to receive stock, other securities or 70 other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or conveyance of all or substantially all of the assets of the Company to any other person as a result of which holders of Common Stock shall be entitled to receive stock, other securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Company, its successor or purchasing person, as the case may be, shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture) providing that each Note shall be convertible into the kind and amount of shares of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of the number of shares of Common Stock issuable upon conversion of such Notes (assuming, for such purposes, a sufficient number of authorized shares of Common Stock are available to convert all such Notes) immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming such holder of Common Stock did not exercise his rights of election, if any, as to the kind or amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance (provided that, if the kind or amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purposes of this Section 15.6 the kind and amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article XV. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each holder of Notes, at its address appearing on the Note register provided for in Section 2.5 of this Indenture, within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. The above provisions of this Section 15.6 shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. If this Section 15.6 applies to any event or occurrence, Section 15.5 shall not apply. The Company shall not be a party to any event or occurrence to which this Section 15.6 applies unless the terms of such event or occurrence are consistent with this Section 15.6. SECTION 15.7 TAXES ON SHARES ISSUED. The issuance of stock certificates representing the shares of Common Stock issuable upon conversion of the Notes shall be made without charge to the holders of such shares for any issuance tax in respect thereof imposed by the government of the United States or any political subdivision thereof or other cost incurred by the Company in connection with such conversion and/or the issuance of such shares. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Stock in any name other than the name in which the Note with 71 respect to which such shares of Common Stock are issued is registered, and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 15.8 RESERVATION OF SHARES; SHARES TO BE FULLY PAID; LISTING OF COMMON STOCK. The Company shall provide, free from preemptive rights, out of its authorized but unissued shares of Common Stock or shares of Common Stock held in treasury, or both, sufficient shares of Common Stock to provide for the conversion of the Notes from time to time as such Notes are presented for conversion, and no Note shall be issued unless such sufficient number of shares of Common Stock has been reserved and is available for issuance upon conversion of Notes under this Article XV. The Company covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock or its issued shares of Common Stock held in its treasury, or both, a sufficient number of shares of Common Stock for the purpose of effecting conversions of the Notes not theretofore converted into Common Stock. For purposes of this reservation of Common Stock, the number of shares of Common Stock which shall be deliverable upon the conversion of all outstanding Notes shall be computed as if at the time of computation all outstanding Notes were held by a single holder. The issuance of shares of Common Stock upon conversion of the Notes is duly authorized in all respects. The Company shall from time to time, in accordance with the laws of the State of Delaware, use its best efforts to increase the authorized number of shares of Common Stock if at any time the number of shares of authorized and unissued Common Stock shall not be sufficient to permit the conversion of all of the then outstanding Notes. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Notes, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted Conversion Price. The Company covenants that all shares of Common Stock issued upon conversion of Notes will, upon such issuance, be fully paid and non-assessable shares of the capital stock of the Company, free from all taxes, liens and charges. The Company covenants that if any shares of Common Stock to be provided for the purpose of conversion of Notes hereunder require registration with or approval of any governmental authority under any Federal or state law before such shares may be validly issued upon conversion, the Company will, in good faith and as expeditiously as possible, endeavor to secure such registration or approval, as the case may be. The Company further covenants that, if at any time the Common Stock shall be listed on the Nasdaq National Market, the New York Stock Exchange or any other national securities exchange or automated quotation system, the Company will, if permitted by the rules of such exchange or automated quotation system, list and keep listed, so long as the Common Stock shall 72 be so listed on such exchange or automated quotation system, all Common Stock issuable upon conversion of the Notes. SECTION 15.9 RESPONSIBILITY OF TRUSTEE. Except as otherwise expressly provided for in this Article XV, the Company is solely responsible for performing the duties and responsibilities contained in this Article XV. The Trustee and any other conversion agent shall not at any time be under any duty or responsibility to any holder of Notes to determine whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or employed herein or in any supplemental indenture, in making the same. The Trustee and any other conversion agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Note; and the Trustee and any other conversion agent make no representations with respect thereto. Subject to the provisions of Section 8.1, neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or cash upon the surrender of any Note for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Article XV. Without limiting the generality of the foregoing, neither the Trustee nor any conversion agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 15.6 relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by Noteholders upon the conversion of their Notes after any event referred to in such Section 15.6 or to any adjustment to be made with respect thereto, but, subject to the provisions of Section 8.1, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, an Officers' Certificate (which the Company shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) with respect thereto. SECTION 15.10 NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS. In the event: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any share of any class of the Company's capital stock or any other rights or warrants; or (c) of any reclassification of the Common Stock (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; 73 the Company shall cause to be filed with the Trustee and to be mailed to each holder of Notes, at his, her or its address appearing on the Note register provided for in Section 2.5 of this Indenture, as promptly as possible but in any event at least fifteen (15) days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. ARTICLE XVI MISCELLANEOUS PROVISIONS SECTION 16.1 PROVISIONS BINDING ON COMPANY'S SUCCESSORS. All the covenants, stipulations, promises and agreements of the Company in this Indenture contained shall bind its successors and assigns whether so expressed or not. SECTION 16.2 OFFICIAL ACTS BY SUCCESSOR CORPORATION. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 16.3 ADDRESSES FOR NOTICES, ETC. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Notes on the Company shall be deemed to have been sufficiently given or made, for all purposes if given or served by any standard form of telecommunication (until another address is filed by the Company with the Trustee). Notices shall be directed to 650 Poydras Street, New Orleans, Louisiana 70130 Attention: Chief Financial Officer, or to an agent of the Company designated as permitted by this Indenture. Any notice, direction, request or demand hereunder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or served by any standard form of telecommunication. Notices shall be directed to the Corporate Trust Office, which office is, at the date as of which this Indenture is dated, located at 10161 Centurion Parkway, 2nd Floor, Jacksonville, Florida 32256, Attention: Corporate Trust Department (International Shipholding Corporation _____% Convertible Subordinated Notes Due 2014). The Trustee, by notice to the Company, may designate additional or different addresses for subsequent notices or communications. 74 Any notice or communication mailed to a Noteholder shall be mailed to him, her or it by first class mail, postage prepaid, at his, her or its address as it appears on the Note register and shall be sufficiently given to him, her or it if so mailed within the time prescribed. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 16.4 GOVERNING LAW. This Indenture and each Note shall be deemed to be a contract made under the laws of New York, and for all purposes shall be construed in accordance with the laws of New York, without regard to the conflict of laws provisions thereof. SECTION 16.5 EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT; CERTIFICATES TO TRUSTEE. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, including those actions set forth in Section 314(c) of the Trust Indenture Act, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for by or on behalf of the Company in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him, her or it to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 16.6 LEGAL HOLIDAYS. In any case where the date of maturity of interest on or principal of the Notes or the date fixed for redemption of any Note or the Change in Control Purchase Date will not be a Business Day, then payment of such interest on or principal of the Notes need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity, the date fixed for redemption or the Change in Control Purchase Date, and no interest shall accrue for the period from and after such date. SECTION 16.7 NO SECURITY INTEREST CREATED. Nothing in this Indenture or in the Notes, expressed or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction. 75 SECTION 16.8 TRUST INDENTURE ACT. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under the Trust Indenture Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. Until such time as this Indenture shall be qualified under the Trust Indenture Act, this Indenture, the Company and the Trustee shall be deemed for all purposes hereof to be subject to and governed by the Trust Indenture Act to the same extent as would be the case if this Indenture were so qualified on the date hereof. SECTION 16.9 BENEFITS OF INDENTURE. Nothing in this Indenture or in the Notes, expressed or implied, shall give to any person, other than the parties hereto, any paying agent, any conversion agent, any authenticating agent, any Note registrar and their successors hereunder, the holders of Notes and the holders of Senior Indebtedness, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 16.10 TABLE OF CONTENTS, HEADINGS, ETC. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 16.11 AUTHENTICATING AGENT. The Trustee may appoint an authenticating agent which shall be authorized to act on its behalf and subject to its direction in the authentication and delivery of Notes in connection with the original issuance thereof and transfers and exchanges of Notes hereunder, including under Sections 2.4, 2.5, 2.6, 2.7, 3.3 and 3.6, as fully to all intents and purposes as though the authenticating agent had been expressly authorized by this Indenture and those Sections to authenticate and deliver Notes. For all purposes of this Indenture, the authentication and delivery of Notes by the authenticating agent shall be deemed to be authentication and delivery of such Notes "by the Trustee" and a certificate of authentication executed on behalf of the Trustee by an authenticating agent shall be deemed to satisfy any requirement hereunder or in the Notes for the Trustee's certificate of authentication. Such authenticating agent shall at all times be a person eligible to serve as trustee hereunder pursuant to Section 8.9. Any corporation into which any authenticating agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any authenticating agent shall be a party, or any corporation succeeding to the corporate trust business of any authenticating agent, shall be the successor of the authenticating agent hereunder, if such successor corporation is otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the parties hereto or the authenticating agent or such successor corporation. Any authenticating agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any authenticating agent by giving written notice of termination to such authenticating agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case 76 at any time any authenticating agent shall cease to be eligible under this Section, the Trustee shall promptly appoint a successor authenticating agent (which may be the Trustee), shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Notes as the names and addresses of such holders appear on the Note register. The Trustee agrees to pay to the authenticating agent from time to time reasonable compensation for its services (to the extent pre-approved by the Company in writing), and the Trustee shall be entitled to be reimbursed for such pre-approved payments, subject to Section 8.6. The provisions of Sections 8.2, 8.3, 8.4, 9.3 and this Section 16.11 shall be applicable to any authenticating agent. SECTION 16.12 EXECUTION IN COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. The Bank of New York hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 77 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly signed all as of the date first written above. INTERNATIONAL SHIPHOLDING CORPORATION By: ------------------------------------------- Title: ---------------------------------------- THE BANK OF NEW YORK, as Trustee By: ------------------------------------------ Title: Agent 78 EXHIBIT A - FORM OF NOTE [FORM OF FACE OF NOTE] No. ------------------ $ ------------------- INTERNATIONAL SHIPHOLDING CORPORATION CUSIP: [ ] % Convertible Subordinated Note Due 2014 --------------------- International Shipholding Corporation, a corporation duly organized and validly existing under the laws of the State of Delaware (herein called the "Company", which term includes any successor corporation under the Indenture referred to on the reverse hereof), for value received hereby promises to pay to________________, or registered assigns, the principal sum of ________________ Dollars on________________, 2014 and to pay interest on said principal sum quarterly on the _________ day of _________, _________, _________ and _________ of each year, commencing on the first such date after the Exchange Date (as defined in the Indenture), at the rate per annum specified in the title of this Note, accrued from the _________ day of _________, _________, _________ or _________, as the case may be, next preceding the date of this Note to which interest has been paid or duly provided for, unless the date of this Note is a date to which interest has been paid or duly provided for, in which case interest shall accrue from the date of this Note, or unless no interest has been paid or duly provided for on this Note, in which case interest shall accrue from the Exchange Date, until payment of said principal sum has been made or duly provided for. Notwithstanding the foregoing, if the date hereof is after the _________ day of _________, _________, _________ or _________ of any year, as the case may be, and before the following _________ day of _________, _________, _________ or _________, of any year, as the case may be, this Note shall bear interest from such _________ day of _________, _________, _________ or _________, respectively; provided, however, that if the Company shall default in the payment of interest due on the _________ day of _________, _________, _________ or _________, then this Note shall bear interest from the next preceding _________ day of _________, _________, _________ or _________ to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for on this Note, from the Exchange Date. The interest so payable on the _________ day of _________, _________, _________ and _________ of any year will be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the record date, which shall be the _________ day of _________, _________, _________ or _________ (whether or not a Business Day) next preceding the _________ day of _________, _________, _________ and _________, respectively, as provided in the Indenture; provided that any such interest not punctually paid or duly provided for shall be payable as provided in the Indenture. Payment of the principal of and interest accrued on this Note shall be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, New York, which shall initially be the office of the Trustee or its affiliate, or, at the option of the A-1 holder of this Note, at the Corporate Trust Office, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts; provided, however, that at the option of the Company, payment of interest may be made by check mailed to the registered address of the person entitled thereto; provided further that, with respect to any holder of Notes with an aggregate principal amount equal to or in excess of $2,000,000, at the request of such holder in writing to the Company, interest on such holder's Notes shall be paid by wire transfer in immediately available funds in accordance with the wire transfer instruction supplied by such holder to the Trustee and paying agent (if different from Trustee). Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium, if any, and interest on this Note to the prior payment as and when due of all Senior Indebtedness as defined in the Indenture and provisions giving the holder of this Note the right to convert this Note into Common Stock of the Company on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with and governed by the laws of said State. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee or a duly authorized authenticating agent under the Indenture. IN WITNESS WHEREOF, the Company has caused this Note to be duly executed under its corporate seal. INTERNATIONAL SHIPHOLDING CORPORATION Dated By: ----------------------- ----------------------------------------- Title Attest: -------------------------------------------- Secretary A-2 [FORM OF CERTIFICATE OF AUTHENTICATION] TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the within-named Indenture. THE BANK OF NEW YORK TRUST COMPANY, N.A. as Trustee By: ------------------------------------------ Authorized Signatory A-3 [FORM OF REVERSE OF NOTE] INTERNATIONAL SHIPHOLDING CORPORATION ________________% Convertible Subordinated Note Due 2014 This Note is one of a duly authorized issue of Notes of the Company, designated as its ________________% Convertible Subordinated Notes Due 2014 (herein called the "Notes"), limited to the aggregate principal amount of $________________, all issued or to be issued under and pursuant to an Indenture, dated as of ________________, 2004 (herein called the "Indenture"), between the Company and The Bank of New York (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Notes. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of and accrued interest on all Notes may be declared, and upon said declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority of the aggregate principal amount of the Notes at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Notes; provided, however, that no such supplemental indenture shall, in each case, without the consent of the holder of each Note so affected: (i) extend the fixed maturity of any Note, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption or purchase thereof, or change the obligation of the Company to redeem any Note on a redemption date in a manner adverse to the holders of Notes, or change the obligation of the Company to purchase any Note upon the happening of a Change in Control in a manner adverse to the holders of Notes, or impair or adversely affect the right of any Noteholder to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Notes, or change or impair in a manner adverse to the Noteholders the right to convert the Notes into Common Stock or reduce the number of shares of Common Stock or any other property receivable by a Noteholder upon conversion subject to the terms set forth in the Indenture, including Section 15.6, or modify the provisions of the Indenture with respect to the subordination of the Notes in a manner adverse to the Noteholders; or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any supplemental indenture, waiver or modification of any of the provisions of Section 7.7 or Section 11.2 of the Indenture. It is also provided in the Indenture that, prior to any declaration accelerating the maturity of the Notes, the holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding may on behalf of the holders of all of the Notes waive any past default or Event of Default under the Indenture and its consequences except (i) a default by the Company in the payment of interest or premium, if any, A-4 on, or the principal of, any of the Notes, (ii) a failure by the Company to convert any Notes into Common Stock of the Company or (iii) a default by the Company in respect of a covenant or provision in the Indenture which cannot be modified or waived without the consent of the holders of all Notes then outstanding affected thereby. Any such consent or waiver by the holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Note and any Notes which may be issued in exchange or substitution hereof, irrespective of whether or not any notation thereof is made upon this Note or such other Notes. The indebtedness evidenced by the Notes is, to the extent and in the manner provided in the Indenture, expressly subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness of the Company, as defined in the Indenture, whether outstanding at the date of the Indenture or thereafter incurred, and this Note is issued subject to the provisions of the Indenture with respect to such subordination. Each holder of this Note, by accepting the same, agrees to and shall be bound by such provisions and authorizes the Trustee on his, her or its behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and appoints the Trustee his, her or its attorney in fact for such purpose. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Note at the place, at the respective times, at the rate and in the coin or currency herein prescribed. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. The Notes are issuable in registered form without coupons in denominations of $50 principal amount and integral multiples thereof equal to the number of shares of Preferred Stock for which the Notes are exchanged. At the office or agency of the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, without payment of any service charge, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. Prior to __________ _____, 2006, the Notes may not be redeemed by the Company except in connection with a Change in Control. At any time on or after __________ _____, 2006 and prior to maturity, the Company, at its option, may redeem the Notes, in whole or in part, at any time or from time to time, upon mailing a notice of such redemption not less than thirty (30) nor more than sixty (60) days before the date fixed for redemption to the holders of Notes at their last registered addresses, all as provided in the Indenture, during the periods shown below, for cash at the following redemption prices plus an amount equal to accrued and unpaid interest, if any, to (but excluding) the date fixed for redemption; provided that if the date fixed for redemption falls after an interest payment record date and on or prior to the corresponding interest payment date, then holders of the Notes at the close of business on that interest payment record date shall be entitled to receive the interest payable on such Notes on the corresponding interest payment date and the amount payable to holders of such Notes on the date fixed for redemption will not include any amount in respect of interest payable on such corresponding A-5 interest payment date; and provided further that, prior to __________ __, 2007, Notes may not be redeemed by the Company except in connection with a Change in Control unless the Closing Price of Common Stock (or, if more than one class of Common Stock is then issued and outstanding, all classes of Common Stock) has exceeded 150% of the Conversion Price for at least 20 Trading Days during any period of 30 consecutive Trading Days ending within five Trading Days prior to the notice of redemption.
REDEMPTION YEAR PRICE - ------------------- ------------------------- Beginning on , 2006 and ending on , 2007 $ Beginning on , 2007 and ending on , 2008 Beginning on , 2008 and thereafter
The Notes are not subject to redemption or retirement through the operation of any sinking fund. The Company may not give notice of any redemption of the Notes if a default in the payment of interest, or premium, if any, on the Notes has occurred and is continuing or if any other Event of Default of which a Responsible Officer of the Trustee has knowledge has occurred and is continuing. If a Change in Control occurs at any time prior to maturity of the Notes, the Notes may be redeemed at the option of the Company, in whole but not in part, not later than sixty (60) Business Days following the effective date of the event or circumstance resulting in the Change in Control, upon mailing a notice of such redemption at least thirty (30) and not more than sixty (60) days prior to the date fixed for redemption to holders of the Notes as provided in the Indenture for cash at the following redemption prices together with accrued and unpaid interest to, but excluding, the date fixed for redemption; provided that if the date fixed for redemption falls after an interest payment record date and on or prior to the corresponding interest payment date, then holders of the Notes at the close of business on that interest payment record date shall be entitled to receive the interest payable on such Notes on the corresponding interest payment date and the amount payable to holders of such Notes on the redemption date will not include any amount in respect of interest payable on such corresponding interest payment date: A-6 IF THE CHANGE IN CONTROL OCCURS WITHIN THE TWELVE MONTHS REDEMPTION PRECEDING [ ], PRICE ------------------- --------------- 2005 $ 2006 2007 2008 2009 If a Change in Control occurs at any time prior to maturity of the Notes, and the Company shall not have exercised its right to redeem all of the Notes, the holder of this Note, at the holder's option, shall have the right, upon delivery of a Change in Control Purchase Notice in accordance with the provisions of the Indenture, to require the Company to purchase this Note (or any portion of the principal amount hereof that is at least $50 and an integral multiple of $50, provided that the portion of the principal amount of this Note to be outstanding after such purchase is at least equal to $50) for cash at a purchase price equal to 100% of the aggregate principal amount thereof, together with accrued and unpaid interest to (but excluding) the Change in Control Purchase Date, as provided in Section 3.6(a) of the Indenture; provided that if the Change in Control Purchase Date falls after an interest payment record date and on or prior to the corresponding interest payment date, then holders of the Notes at the close of business on that interest payment record date shall be entitled to receive the interest payable on such Notes on the corresponding interest payment date and the amount payable to holders of such Notes on the Change in Control Purchase Date will not include any amount in respect of interest payable on such corresponding interest payment date. Any holder of this Note delivering to the Trustee the Change in Control Purchase Notice shall have the right to withdraw such Change in Control Purchase Notice in whole, or as to a portion hereof that is an integral multiple of $50, at any time prior to the close of business on the Business Day before the Change in Control Purchase Date (unless the Company shall default in the payment of the purchase price, together with accrued and unpaid interest to (but excluding) the Change in Control Purchase Date, in which case, such withdrawal shall be permitted until the Company pays the purchase price, together with accrued and unpaid interest to (but excluding) the date of such payment) by delivery of a written notice of withdrawal to the Trustee in accordance with the provisions of the Indenture. Subject to the provisions of the Indenture, the holder hereof has, at its option, the right, at any time or on or prior to the close of business on the Maturity Date (or as to all or any portion hereof called for redemption, prior to the close of business on the Business Day immediately preceding the date fixed for redemption (unless the Company shall default in payment of the amount due upon redemption in which case such right shall terminate upon payment of the amount due upon such redemption)), to convert the principal hereof or any portion of such principal which is $50 or an integral multiple thereof, into that number of fully paid and non-assessable shares of the Company's Common Stock, as said shares shall be constituted at the date of conversion, obtained by dividing the principal amount of this Note or portion thereof to be A-7 converted by the conversion price of $________._______, as adjusted from time to time pursuant to Article XV of the Indenture, upon surrender of this Note, together with a conversion notice as provided in the Indenture and this Note, to the Company at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, New York, or at the option of such holder, the Corporate Trust Office, and, unless the shares issuable on conversion are to be issued in the same name as this Note, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or by his, her or its duly authorized attorney. If a Change in Control Purchase Notice has been given by the holder of this Note, this Note may not be converted into shares of Common Stock on or after the date of the delivery of such Change in Control Purchase Notice unless such Change in Control Purchase Notice has first been validly withdrawn as specified in Section 3.6 of the Indenture. No adjustment in respect of interest accrued on any Note or on account of any dividends on any shares of Common Stock will be made upon any conversion; provided, however, that if this Note shall be surrendered for conversion during the period between the close of business on a record date for the payment of interest and prior to the close of business on the Business Day immediately preceding the corresponding interest payment date, this Note (unless it or the portion being converted shall have been called for redemption and a notice of redemption has been mailed to the holders of the Notes pursuant to Section 3.3 of the Indenture) must be accompanied by an amount, in funds acceptable to the Company, equal to the interest otherwise payable on such interest payment date on the principal amount being converted. No fractional shares of Common Stock will be issued upon any conversion, but an adjustment in cash will be paid to the holder, as provided in the Indenture, in respect of any fractional share which would otherwise be issuable upon the surrender of any Note or Notes for conversion. Upon due presentment for registration of transfer of this Note at the office or agency of the Company in the Borough of Manhattan, The City of New York, New York, which shall initially be an Affiliate of the Trustee, or at the option of the holder of this Note, at the Corporate Trust Office, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange thereof, subject to the limitations provided in the Indenture, without charge, and bearing any restrictive legends required by the Indenture. The Company, the Trustee, any paying agent, any conversion agent and any Note registrar may deem and treat the registered holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment hereof, or on account hereof, for the conversion hereof and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any other conversion agent nor any Note registrar shall be affected by any notice to the contrary. All payments made to or upon the order of such registered holder shall, to the extent of the sum or sums paid, satisfy and discharge liability for monies payable on this Note. No recourse for the payment of the principal of or any premium or interest on this Note, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer, director or A-8 subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. Terms used in this Note and defined in the Indenture are used herein as therein defined. A-9 ABBREVIATIONS The following abbreviations, when used in the inscription of the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act (Cust) (Minor) JT TEN - as joint tenants with right of survivorship and not as tenants in common (State)
Additional abbreviations may also be used though not in the above list. A-10 [FORM OF CONVERSION NOTICE] CONVERSION NOTICE To ------------------- The undersigned registered owner of this Note hereby irrevocably exercises the option to convert this Note, or the portion hereof (which is $50 principal amount or an integral multiple thereof) below designated, into shares of Common Stock in accordance with the terms of the Indenture referred to in this Note, and directs that the shares issuable and deliverable upon such conversion and any check in payment for fractional shares and any Notes representing any unconverted principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of this Note not converted are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid to the undersigned on account of interest accompanies this Note. Dated: ------------------- --------------------------------------------- --------------------------------------------- Signature(s) Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17AD-15 if shares of Common Stock are to be issued, or Notes to be delivered, other than to and in the name of the registered holder. Signature Guarantee Fill in for registration of shares if to be issued, and Notes if to be delivered, other than to and in the name of the registered holder: - ------------------------------ (Name) - ------------------------------ (Street Address) - ------------------------------ (City, State and Zip Code) Please print name and address A-11 Principal amount to be converted (if less than all): $_________,000 --------------------------------------------------- Social Security or Other Taxpayer Identification Number A-12 [FORM OF ASSIGNMENT] For value received ________________ hereby sell(s), assign(s) and transfer(s) unto ________________ (Please insert social security number or Taxpayer Identification Number of assignee) the Note, and hereby irrevocably constitutes and appoints ________________ attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises. Unless the appropriate box below is checked, the undersigned confirms that such Note is not being transferred to the Company or an "affiliate" of the Company as defined in Rule 144 under the Securities Act of 1933, as amended (an "Affiliate"). [ ] The transferee is an Affiliate of the Company [ ] The transferee is the Company Dated: ------------------- --------------------------------------------- --------------------------------------------- Signature(s) Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17AD-15 if shares of Common Stock are to be issued, or Notes are to be delivered, other than to and in the name of the registered holder. Signature Guarantee NOTICE: The signature on the conversion notice or the assignment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. [FORM OF CHANGE IN CONTROL PURCHASE NOTICE] CHANGE IN CONTROL PURCHASE NOTICE To: _____________________________ The undersigned registered owner of this Note hereby irrevocably acknowledges receipt of a notice from International Shipholding Corporation, a Delaware corporation (the "COMPANY"), as to the occurrence of a Change in Control with respect to the Company and A-13 requests and instructs the Company to purchase this Note, or the portion hereof (which is $50 principal amount or an integral multiple thereof) below designated, in accordance with the terms of the Indenture referred to in this Note, at a purchase price per share equal to one hundred percent (100%) of the principal amount, or portion designated below, of this Note, together with accrued and unpaid interest, if any, to, but excluding, the Change in Control Purchase Date. The certificate number(s) of such Note(s) is/are ____________ (include if the Notes are certificated). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Indenture. Dated: -------------------- --------------------------------------------- --------------------------------------------- Signature(s) NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. Aggregate principal amount to be purchased (if less than all): $ ------------------------------------------ ------------------------------------------- Social Security or Other Taxpayer Identification Number A-14 EX-4.6 5 h19465a3exv4w6.txt SPECIMEN OF CONVERTIBLE EXCHANGEABLE PREFERRED STOCK CERTIFICATE EXHIBIT 4.6 INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE NUMBER SHARES INTERNATIONAL SHIPHOLDING CORPORATION ____% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK THIS CERTIFIES THAT __________________________________________ is the registered holder of ____________________________________ Shares of ____% Convertible Exchangeable Preferred Stock, $1.00 par value per share, of INTERNATIONAL SHIPHOLDING CORPORATION transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this ____________ day of _______________A.D. 20__. - -------------------------------------- ------------------------------------- Erik F. Johnsen, Chairman of the Board H. Hughes Grehan, Assistant Secretary and Chief Executive Officer $1.00 PAR VALUE EX-5.1 6 h19465a3exv5w1.txt OPINION OF JONES, WALKER, WAECHTER, POITEVENT, CARRERE & DENEGRE, L.L.P. EXHIBIT 5.1 December 23, 2004 International Shipholding Corporation 650 Poydras Street New Orleans, Louisiana 70130 Re: Registration Statement on Form S-1 Convertible Exchangeable Preferred Stock Registration No. 333-120161 Ladies and Gentlemen: We have served as counsel to International Shipholding Corporation, a Delaware corporation ("ISH"), in connection with the preparation of a registration statement on Form S-1 filed with the Securities and Exchange Commission (the "Commission") on November 2, 2004 (Registration No. 333-120161), as amended by Pre-Effective Amendment No. 1 thereto filed with the Commission on December 2, 2004, Pre-Effective Amendment No. 2 thereto filed with the Commission on December 10, 2004 and Pre-Effective Amendment No. 3 thereto filed with the Commission on the date hereof (as amended, the "Registration Statement"), relating to the registration of (a) 880,000 shares of Convertible Exchangeable Preferred Stock (the "Preferred Stock"), (b) $44,000,000 aggregate principal amount of Convertible Subordinated Notes due 2014 issuable upon exchange of the Preferred Stock (the "Convertible Notes") and (c) the shares of Common Stock issuable upon the conversion of the Preferred Stock or the Convertible Notes (the "Conversion Shares" and, together with the Preferred Stock and the Convertible Notes, the "Securities"). In rendering the opinions expressed below, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments as we have deemed necessary or advisable for purposes of this opinion. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such documents. Based upon the foregoing and subject to the following qualifications and comments, we are of the opinion that: 1. The Preferred Stock has been duly authorized and, upon its issuance, will be validly issued, fully paid and nonassessable. International Shipholding Corporation December 23, 2004 Page 2 2. The Convertible Notes have been duly authorized and, if and when issued by ISH in exchange for the Preferred Stock, will be valid and binding obligations of ISH and entitled to the benefits of the indenture governing the Convertible Notes to be entered into by and between ISH and The Bank of New York, as trustee (the "Indenture"). 3. The Conversion Shares have been duly authorized and, if and when issued by ISH upon conversion of the Preferred Stock in accordance with the terms of the Certificate of Designations governing the Preferred Stock to be filed with the Delaware Secretary of State or upon conversion of the Convertible Notes in accordance with the Indenture, as the case may be, will be validly issued, fully paid and nonassessable. We hereby consent to the use of this opinion as an exhibit to the Registration Statement relating to the Securities and to the reference to our name in the prospectus contained therein. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 or the general rules and regulations of the Commission. Very truly yours, JONES, WALKER, WAECHTER, POITEVENT CARRERE & DENEGRE, L.L.P. By: /s/ L. R. McMillan, II -------------------------------------------- L. R. McMillan, II, Partner EX-23.1 7 h19465a3exv23w1.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm We consent to the reference to our firm under the captions "Experts" and "Risk Factors" and to the use of our report dated January 29, 2004, in Pre-Effective Amendment No. 3 to the Registration Statement (Form S-1 No. 333-120161) and related Prospectus of International Shipholding Corporation for the registration of 880,000 shares of Convertible Exchangeable Preferred Stock. /s/ ERNST & YOUNG LLP New Orleans, Louisiana December 22, 2004 EX-25.1 8 h19465a3exv25w1.txt STATEMENT OF ELIGIBILITY OF TRUSTEE EXHIBIT 25.1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM T-1 ---------- STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ---------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) [ ] ---------- THE BANK OF NEW YORK (Exact Name of Trustee as Specified in its Charter) NEW YORK 13-5160382 (Jurisdiction of Incorporation (I.R.S. Employer Identification No.) of organization if not a U.S. national bank) ONE WALL STREET 10286 NEW YORK, NEW YORK (Zip Code) (Address of Principal Executive Offices) ---------- THE BANK OF NEW YORK 10161 CENTURION PARKWAY JACKSONVILLE, FLORIDA 32256 ATTN: MR. WILLIAM CARDOZO (904) 998-4718 (Name, address and telephone number of agent for service) ---------- INTERNATIONAL SHIPHOLDING CORPORATION (Exact Name of Obligor as Specified in its Charter) DELAWARE 36-2989662 (State or other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 650 POYDRAS STREET 70130 NEW ORLEANS, LOUISIANA (Zip Code) (Address of principal executive offices) ---------- CONVERTIBLE SUBORDINATED NOTES DUE 2014 (Title of the indenture securities) ================================================================================ 1. General information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK 2 RECTOR STREET NEW YORK, NEW YORK 10006 FEDERAL RESERVE BANK OF NEW YORK 33 LIBERTY PLAZA NEW YORK, NEW YORK 10045 NEW YORK CLEARING HOUSE ASSOCIATION NEW YORK, NEW YORK 10005 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. 20429 (b) Whether it is authorized to exercise corporate trust powers. YES. 2. Affiliations with the Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. NONE. 3-15. NOT APPLICABLE. 16. List of Exhibits. List below all exhibits filed as a part of this statement of eligibility. Exhibits identified in parentheses below are filed with the Commission and are incorporated herein by reference as exhibits hereto pursuant to Rule 7a-29 under the Trust Indenture Act of 1939, as amended (the "Act"), and 17 C.F.R. 229.10(d). (1) A copy of the Organization Certificate of The Bank of New York (formerly Irving Trust Company) as now in effect, which contains the authority to commence business and a grant of powers to exercise corporate trust powers (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration Statement No. 33-29637). (2) Not applicable. (3) Not applicable. (4) A copy of the existing By-laws of the trustee as now in effect. (5) Not applicable. (6) The consent of the trustee required by Section 321(b) of the Act. (7) A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. (8) Not applicable. (9) Not applicable. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the trustee, The Bank of New York, a banking corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Jacksonville, and the State of Florida, on the 14th day of December, 2004. THE BANK OF NEW YORK By: /s/ William Cardozo -------------------- William Cardozo Agent EXHIBIT 4 TO FORM T-1 BYLAWS (ATTACHED) BY-LAWS OF THE BANK OF NEW YORK As amended through May 13, 2003 TABLE OF CONTENTS
Page No. ARTICLE I Stockholders .................................................... 4 SECTION 1.1 Annual Meeting ................................................ 4 SECTION 1.2 Special Meetings .............................................. 4 SECTION 1.3 Notice of Meetings ............................................ 4 SECTION 1.4 Quorum of Stockholders ........................................ 4 ARTICLE II Board of Directors .............................................. 5 SECTION 2.1 Number of Directors ........................................... 5 SECTION 2.2 Eligibility ................................................... 5 SECTION 2.3 Meetings of the Board ......................................... 5 SECTION 2.4 Quorum of Directors and Action by the Board ................... 6 SECTION 2.5 Removal of Directors .......................................... 6 SECTION 2.6 Vacancies ..................................................... 6 SECTION 2.7 Compensation .................................................. 6 SECTION 2.8 Minutes ....................................................... 6 SECTION 2.9 Reports ....................................................... 6 SECTION 2.10 Action Without a Meeting ...................................... 6 ARTICLE III Executive Committee ............................................. 6 SECTION 3.1 Membership .................................................... 6 SECTION 3.2 Time and Place of Meetings .................................... 7 SECTION 3.3 Special Meetings .............................................. 7 SECTION 3.4 Quorum ........................................................ 7 SECTION 3.5 Compensation .................................................. 7 SECTION 3.6 Minutes ....................................................... 7 SECTION 3.7 Reports ....................................................... 7 ARTICLE IV Other Committees ................................................ 7 SECTION 4.1 Examining Committee ........................................... 7 SECTION 4.2 Other Committees of Directors Officers and/or Other Persons ... 8 SECTION 4.3 Compensation .................................................. 8 SECTION 4.4 Manner of Acting .............................................. 8 ARTICLE V Officers ........................................................ 8 SECTION 5.1 Principal Executive Officers .................................. 8 SECTION 5.2 Senior Executive Officers ..................................... 8 SECTION 5.3 Other Senior Officers ......................................... 8 SECTION 5.4 Appointed Officers ............................................ 9 SECTION 5.5 Bonds ......................................................... 9 SECTION 5.6 General Supervisory Powers .................................... 9 SECTION 5.7 Executive Officers ............................................ 9 SECTION 5.8 Senior Vice Presidents and Vice Presidents .................... 9 SECTION 5.9 Secretary ..................................................... 9 SECTION 5.10. Treasurer ..................................................... 9 SECTION 5.11. Comptroller ................................................... 9
2 SECTION 5.12. Auditor........................................................ 10 SECTION 5.13. Other Officers................................................. 10 ARTICLE VI Signing Authorities ............................................. 10 SECTION 6.1 Real Property ................................................. 10 SECTION 6.2 Senior Signing Powers ......................................... 10 SECTION 6.3 Limited Signing Powers ........................................ 10 SECTION 6.4 Powers of Attorney ............................................ 11 SECTION 6.5 Auditor ....................................................... 11 ARTICLE VII Indemnification ................................................. 11 SECTION 7.1 Indemnification ............................................... 11 SECTION 7.2 Other Indemnification ......................................... 11 ARTICLE VIII Capital Stock ................................................... 11 SECTION 8.1 Certificates of Stock ......................................... 11 SECTION 8.2 Transfer of Certificates ...................................... 12 SECTION 8.3 New Certificates .............................................. 12 ARTICLE IX Corporate Seal .................................................. 12 SECTION 9.1 The Seal ...................................................... 12 ARTICLE X Amendment of By-Laws ............................................ 12 SECTION 10.1. Procedure for Amendments ...................................... 12
3 BY-LAWS of The Bank of New York As amended through May 13, 2003 ARTICLE I STOCKHOLDERS SECTION 1.1. Annual Meeting. The annual meeting of stockholders of The Bank of New York (hereinafter called the Bank) for the election of directors and the transaction of such other business as properly may be brought before such meeting shall be held within each calendar year at the principal office of the Bank, or such other place as shall be specified in the notice of such meeting, on such day and at such hour as may be fixed by the Board of Directors (hereinafter called the Board). SECTION 1.2. Special Meetings. Special meetings of the stockholders of the Bank (hereinafter called the stockholders) may be called by the Board, the Chairman of the Board or the President and shall be called upon the written request of the holders of record of a majority of the outstanding shares of stock of the Bank entitled to vote at the meeting requested to be called. Such meetings of stockholders shall be held on such day and at such hour and at such place, within or without the State of New York, as may be fixed by the Board. SECTION 1.3. Notice of Meetings. Notice of each meeting of stockholders shall be given in writing, not less than ten nor more than fifty days before the date of the meeting, to each stockholder entitled to vote at such meeting, and shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called. If mailed, such notice shall be deemed to have been given when deposited in the United States mail, with postage thereon prepaid, directed to the stockholder at his address as it appears on the record of stockholders. Notwithstanding the foregoing, notice of meeting need not be given to any stockholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any stockholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him. SECTION 1.4. Quorum of Stockholders. The holders of a majority of the shares entitled to vote thereat shall constitute a quorum at a meeting of stockholders for the transaction of any business. At all meetings of stockholders, a quorum being present, all matters, except as otherwise provided by law or the Organization Certificate of the Bank, shall be authorized by a majority of the votes cast at the meeting by the stockholders present in person or by proxy and entitled to vote thereon. The stockholders present may adjourn the meeting despite the absence of a quorum. 4 ARTICLE II BOARD OF DIRECTORS SECTION 2.1. Number of Directors. The business of the Bank shall be managed by the Board which shall consist of such number of directors, within the minimum and maximum limits prescribed in the Organization Certificate of the Bank, as from time-to-time shall be determined by the vote of a majority of the directors then in office or by the stockholders. In the event of any increase in the number of directors, additional directors shall be elected in the manner herein prescribed for the filling of vacancies. No decrease in the number of directors shall shorten the term of any incumbent director. All directors must possess such qualifications as to stock ownership, citizenship, residence and age as are prescribed by the Banking Law. Directors shall hold office until the next annual meeting of the stockholders and until their successors are elected and have qualified. SECTION 2.2. Eligibility. No person shall be eligible for election or reelection as a member of the Board who shall have attained the age of seventy years. SECTION 2.3. Meetings of the Board. An annual meeting of the Board shall be held in each year within fifteen days after the annual meeting of stockholders. Regular meetings of the Board shall be held on such day and at such hour as the directors may fix from time-to-time, and no notice thereof need be given. In case any date for a meeting shall fall on a public holiday, such meeting shall be held on the next succeeding business day. Special meetings of the Board may be held at any time upon the call of the Chief Executive Officer or, in his absence, a principal executive officer and shall be called upon the written request of any two directors. Meetings of the Board shall be held at such places within or without the State of New York as may be fixed by the Board. If no place is so fixed, meetings of the Board shall be held at the principal office of the Bank in the City of New York. Notices of the annual and special meetings of the Board shall be given by delivery, mail, telegraph, facsimile, e-mail, radio or cable to each director at his usual place of business or residence address not later than noon, New York time, on the third day prior to the day on which the meeting is to be held or, if given personally or by telephone, not later than noon, New York time, on the day before the day on which the meeting is to be held. Notice of a meeting of the Board need not be given to any director who submits a signed waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. Except for announcement at the meeting, notice of the time and place of any adjourned meeting need not be given. 5 Members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. SECTION 2.4. Quorum of Directors and Action by the Board. One-third of the entire Board, but in no case less than five directors, shall constitute a quorum for the transaction of business. Except as otherwise required by law, the Organization Certificate of the Bank or these By-laws, the vote of a majority of the directors present at a meeting at the time of such vote, if a quorum is then present, shall be the act of the Board. SECTION 2.5. Removal of Directors. Any one or more of the directors may be removed for cause by action of the Board. Any or all of the directors may be removed with or without cause by vote of the stockholders. SECTION 2.6. Vacancies. All vacancies in the office of director shall be filled by election by the stockholders, except that vacancies not exceeding one-third of the entire Board may be filled by the affirmative vote of a majority of the directors in office and the directors so elected shall hold office for the balance of the unexpired term. SECTION 2.7. Compensation. Members of the Board, except members who are officers of The Bank of New York Company, Inc. or any of its subsidiaries, shall be entitled to receive such compensation and such fees for attendance as the Board shall fix from time-to-time. SECTION 2.8. Minutes. Regular minutes of the proceedings of the Board shall be kept in books to be provided for that purpose which shall always be open for the inspection of any director. SECTION 2.9. Reports. At each regular meeting of the Board there shall be submitted a report of the concerns and business of the Bank, including such reports as shall be required by law or by regulation of the authorities having jurisdiction over the Bank. SECTION 2.10. Action without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, to the extent permitted by law and regulation, may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing and such consent is filed with the minutes of the proceedings of the Board or such committee. ARTICLE III EXECUTIVE COMMITTEE SECTION 3.1. Membership. The Board, by resolution adopted by a majority of the entire Board at its annual meeting, shall designate from among its members an Executive Committee, consisting of not less than five directors, which shall have all the authority of the Board, except as may be otherwise provided by law. 6 Vacancies in the Executive Committee shall be filled by the Board. The Board may designate one or more directors as alternate members of the Executive Committee who may replace any absent member or members at any meeting of such committee. SECTION 3.2. Time and Place of Meetings. There shall be meetings of the Executive Committee at the principal office of the Bank, on such day, at such hour and at such place as the Committee may fix from time-to-time, and no notice thereof need be given. SECTION 3.3. Special Meetings. Special meetings of the Executive Committee may be called at any time by the Chief Executive Officer or, in his absence, a principal executive officer and shall be called upon the written request of any two members of the Committee. Notice of such meetings shall be given or waived as provided in Article II for special meetings of the Board. SECTION 3.4. Quorum. A majority of the members of the Executive Committee shall constitute a quorum for the transaction of business. Members of the Executive Committee may participate in a meeting of the Executive Committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. SECTION 3.5. Compensation. The members of the Executive Committee, other than officers of The Bank of New York Company, Inc. or any of its subsidiaries, shall receive such compensation and fees as the Board may determine from time-to-time. SECTION 3.6. Minutes. Regular minutes of the proceedings of the Executive Committee shall be kept in books to be provided for that purpose which shall always be open for the inspection of any director. Minutes of the meetings of the Executive Committee since the previous meeting of the Board shall be submitted at the next regular monthly meeting of the Board. SECTION 3.7. Reports. At each meeting of the Executive Committee there shall be submitted a report of the concerns and business of the Bank, including such reports as shall be required by law or by regulation of the authorities having jurisdiction over the Bank. ARTICLE IV OTHER COMMITTEES SECTION 4.1. Examining Committee. The Board shall appoint an Examining Committee of not less than three of its members, none of whom shall be an officer of The Bank of New York Company, Inc. or any of its subsidiaries, who shall hold office at the pleasure of the Board. The Committee shall conduct examinations of the affairs of the Bank as required by the Banking Law or as directed by the Board and shall have supervision over the activities of the Auditor. The Committee also shall review the examinations of the Bank made by the regulatory authorities and report to the Board its recommendations with respect thereto. 7 SECTION 4.2. Other Committees of Directors, Officers and\or Other Persons. The Board may appoint, or authorize the Chief Executive Officer or, in his absence, a principal executive officer to appoint, from time-to-time, such other committees consisting of directors, officers and/or other persons and having such powers, duties and functions in or relating to the business and affairs of the Bank as the Board may determine. Each such committee and each member thereof shall serve at the pleasure of the Board and, in the case of any committee appointed by the Chief Executive Officer or a principal executive officer, at the pleasure of the Chief Executive Officer or, in his absence, of a principal executive officer. A majority of all members of any such committee may determine the rules of order and procedure of such committee and the time and place of its meetings, unless the Board, or, in the case of any committee appointed by the Chief Executive Officer or a principal executive officer, the Chief Executive Officer or, in his absence, a principal executive officer, shall otherwise provide. SECTION 4.3. Compensation. Members of committees, other than officers of The Bank of New York Company, Inc. or any of its subsidiaries, shall be paid such compensation and such other fees for attendance at meetings as the Board shall determine from time-to-time. SECTION 4.4. Manner of Acting. Members of the Examining Committee or other committees of directors, officers and/or other persons appointed by the Board may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. ARTICLE V OFFICERS SECTION 5.1. Principal Executive Officers. The Board at its annual meeting shall elect from its number a Chairman of the Board (hereinafter called the Chairman), who shall serve also as Chairman of the Executive Committee, and a President, one of whom shall be designated to act as and to carry the additional title of Chief Executive Officer; provided that any two or more offices may be held by the same person. The Board may designate the President or Chairman, or one of the persons holding titles provided in Section 5.2, to act as and carry the additional title of Chief Operating Officer. Officers elected pursuant to this Section 5.1 shall hold office during the pleasure of the Board, which may fill any vacancy and change the designation of the Chief Executive Officer or Chief Operating Officer at any regular or special meeting. Officers elected under this section may be removed with or without cause by the Board. SECTION 5.2. Senior Executive Officers. The Board or the Executive Committee shall elect one or more senior executive officers, any of whom may be designated Vice Chairman of the Board, or Senior Executive Vice President and may elect such other officers with such titles as may be specified upon election. The order of seniority shall be determined by the Chief Executive Officer with the approval of the Board or the Executive Committee. Senior executive officers elected under this section may be removed with or without cause by the Board. SECTION 5.3. Other Senior Officers. The Board or the Executive Committee shall elect a Secretary; a Treasurer; a Comptroller; an Auditor; and 8 such other officers with such titles as may be specified upon election. The order of seniority shall be determined by the Chief Executive Officer with the approval of the Board or the Executive Committee. The Chief Executive Officer or, in his absence, a principal executive officer, may remove any of the officers elected under this section with or without cause with the approval of the Board or the Executive Committee. SECTION 5.4. Appointed Officers. Officers of the Bank carrying titles set forth in this section may be appointed and removed with or without cause by the Chief Executive Officer or, in his absence, by a principal executive officer. Such officers may include one or more Executive Vice Presidents; one or more Managing Directors; one or more Senior Vice Presidents; one or more Vice Presidents; one or more Assistant Vice Presidents; and such other officers with such titles as may be specified upon appointment. SECTION 5.5. Bonds. The Board may require any or all officers or employees to give bonds from time-to-time. SECTION 5.6. General Supervisory Powers. The Chief Executive Officer or, in his absence, a principal executive officer, shall have general supervision of the policies and operations of the Bank which shall in every case be subject to the direction and control of the Board. SECTION 5.7. Executive Officers. The principal executive officers, the senior executive officers and Executive Vice Presidents shall participate in the supervision of the policies and operations of the Bank as directed by the Chief Executive Officer. In his absence a principal executive officer, or a senior executive officer in the order of seniority determined by the Chief Executive Officer as provided in Section 5.2, shall have general supervision of such policies and operations. SECTION 5.8. Senior Vice Presidents and Vice Presidents. Senior Vice Presidents and Vice Presidents shall participate in the supervision of operations of the Bank as directed by the Chief Executive Officer. They shall perform such other duties as shall be assigned to them by the Board, the Chief Executive Officer or an executive officer. SECTION 5.9. Secretary. The Secretary shall keep the minutes of all meetings of the Board and of the Executive Committee; shall attend to the giving of such notices of meetings as may be required by these By-laws and shall perform all the duties assigned to him by the Board or the Chief Executive Officer and in general those duties incident to the office of Secretary. He shall have custody of the corporate seal and shall have authority to affix the same to any documents requiring such seal and to attest the same. In the absence of the Secretary, an Assistant Secretary shall act in his stead. SECTION 5.10. Treasurer. The Treasurer shall have the care and custody of all moneys, funds and other property of the Bank which may come into his hands and shall perform such other duties as may be assigned to him from time-to-time by the Board or the Chief Executive Officer. SECTION 5.11. Comptroller. The Comptroller shall exercise general supervision over, and be responsible for, all matters pertaining to the accounting and bookkeeping of the Bank. He shall keep the permanent records of property 9 and indebtedness and of all transactions bearing on the financial affairs of the Bank. The Comptroller shall perform such additional duties as shall be assigned to him by the Board or the Chief Executive Officer. He shall at any time on the request of any three directors report to the Board or the Executive Committee such matters concerning the affairs of the Bank as, in his or their judgment, should be brought to the attention of the directors. SECTION 5.12. Auditor. The Auditor shall report directly to the Chief Executive Officer and, through the Examining Committee, to the Board. He shall be responsible for the planning and direction of the internal auditing function and the evaluation of the internal control safeguards of the Bank. He shall perform such additional duties as shall be assigned by the Board, the Examining Committee or the Chief Executive Officer. SECTION 5.13. Other Officers. All officers whose duties are not described by these By-laws shall perform such duties as may be designated by the Chief Executive Officer or any officer authorized by him to do so. ARTICLE VI SIGNING AUTHORITIES SECTION 6.1. Real Property. Real property owned by the Bank in its own right shall not be deeded, conveyed, mortgaged, assigned or transferred except when duly authorized by a resolution of the Board. The Board may from time-to-time authorize officers to deed, convey, mortgage, assign or transfer real property owned by the Bank in its own right with such maximum values as the Board may fix in its authorizing resolution. SECTION 6.2. Senior Signing Powers. Subject to the exception provided in Section 6.1, the Chairman, the President, any Vice Chairman of the Board, any Senior Executive Vice President and any Executive Vice President is authorized to accept, endorse, execute or sign any document, instrument or paper in the name of, or on behalf of, the Bank in all transactions arising out of, or in connection with, the normal course of the Bank's business or in any fiduciary, representative or agency capacity and, when required, to affix the seal of the Bank thereto. In such instances as in the judgment of the Chairman, the President, any Vice Chairman of the Board, any Senior Executive Vice President or any Executive Vice President may be proper and desirable, any one of said officers may authorize in writing from time-to-time any other officer to have the powers set forth in this section applicable only to the performance or discharge of the duties of such officer within his or her particular division or function. Any officer of the Bank authorized in or pursuant to Section 6.3 to have any of the powers set forth therein, other than the officer signing pursuant to this Section 6.2, is authorized to attest to the seal of the Bank on any documents requiring such seal. SECTION 6.3. Limited Signing Powers. Subject to the exception provided in Section 6.1, in such instances as in the judgment of the Chairman, the President, any Vice Chairman of the Board, any Senior Executive Vice President, or any Executive Vice President may be proper and desirable, any one of said officers may authorize in writing from time to time any other officer, employee or individual to have the limited signing powers or limited power to affix the seal of the Bank to specified classes of documents set forth in a resolution of 10 the Board applicable only to the performance or discharge of the duties of such officer, employee or individual within his or her division or function. SECTION 6.4 Powers of Attorney. All powers of attorney on behalf of the Bank shall be executed by any officer of the Bank jointly with the Chairman of the Board, the President, any Vice Chairman, any Senior Executive Vice President, any Executive Vice President, any Senior Vice President or any Managing Director, provided that the execution by such Senior Vice President or Managing Director of said Power of Attorney shall be applicable only to the performance or discharge of the duties of such officer within his or her particular division or function. Any such power of attorney may, however, be executed by any officer or officers or person or persons who may be specifically authorized to execute the same by the Board of Directors and, at foreign branches only, by any two officers provided one of such officers is the Branch Manager. SECTION 6.5. Auditor. The Auditor or any officer designated by the Auditor is authorized to certify in the name of, or on behalf of the Bank, in its own right or in a fiduciary or representative capacity, as to the accuracy and completeness of any account, schedule of assets, or other document, instrument or paper requiring such certification. ARTICLE VII INDEMNIFICATION SECTION 7.1. Indemnification. Any person made, or threatened to be made, a party to any action or proceeding, whether civil or criminal, by reason of the fact that he, his testator or intestate, is or was a director, trustee, officer or employee of the Bank or serves or served any other corporation in any capacity, at the request of the Bank, shall be indemnified by the Bank and the Bank may advance his related expenses, to the full extent permitted by law. For purposes of this Article VII, the Bank may consider the term "Bank" to include any corporation which has been merged or consolidated into the Bank or of which the Bank has acquired all or substantially all the assets in a transaction requiring authorization by the shareholders of the corporation whose assets were acquired. SECTION 7.2. Other Indemnification. The foregoing provisions of this Article VII shall apply in respect of all alleged or actual causes of action accrued before, on or after September 1, 1964, except that, as to any such cause of action which accrued before such date, the Bank may provide, and any person concerned shall be entitled to, indemnification under and pursuant to any statutory provision or principle of common law in effect prior to such date, all to the extent permitted by law. ARTICLE VIII CAPITAL STOCK SECTION 8.1. Certificates of Stock. Certificates of stock shall be signed by the Chairman, the President or a Vice President and the Secretary or an Assistant Secretary and may bear the seal of the Bank. The signatures and the seal may be facsimile to the extent permitted by law. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Bank with the same effect as if he were such officer at the date of issue. 11 SECTION 8.2. Transfer of Certificates. Separate books of transfer shall be kept in which transfers of shares of stock shall be entered by the person entitled to make such transfer or his attorney-in-fact, upon surrender of the certificate for the shares to be transferred in proper form for such transfer. SECTION 8.3. New Certificates. No new certificate shall be issued until the former certificate is cancelled except when a certificate is lost or destroyed a new certificate may be issued on such terms as the Board may prescribe. ARTICLE IX CORPORATE SEAL SECTION 9.1. The Seal. The Board shall provide a corporate seal for the Bank which may be affixed to any document, certificate or paper and attested by such individuals as provided by these By-laws or as the Board may from time-to-time determine. ARTICLE X AMENDMENT OF BY-LAWS SECTION 10.1. Procedure for Amendments. By-laws of the Bank may be adopted, amended or repealed by vote of the stockholders entitled to vote in any election of directors. By-laws may also be adopted, amended or repealed by a majority of all the directors then in office. Any By-law adopted by the Board may be amended or repealed by the stockholders entitled to vote thereon as hereinabove provided. If any By-law regulating an impending election of directors is adopted, amended or repealed by the Board, there shall be set forth in the notice of the next meeting of stockholders for the election of directors the By-law so adopted, amended or repealed, together with a concise statement of the changes made. 12 EXHIBIT 6 TO FORM T-1 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, in connection with the proposed issuance of up to $44,000,000 of Convertible Subordinated Notes by International Shipholding Corporation., The Bank of New York hereby consents that reports of examinations by Federal, State, Territorial or District Authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. THE BANK OF NEW YORK By: /s/ William Cardozo ------------------------------------- William Cardozo EXHIBIT 7 TO FORM T-1 REPORT OF CONDITION (ATTACHED) FFIEC 031 The Bank of New York Consolidated Report of Condition NEW YORK for September 30, 2004 Certificate Number: 00639 CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED SAVINGS BANKS FOR SEPTEMBER 30, 2004 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. SCHEDULE RC - BALANCE SHEET C400 Dollar Amounts in Thousands - --------------------------------------------------------------------------------
ASSETS 1. Cash and balances due from depository institutions (from Schedule RC-A): RCFD ---- a. Non-interest bearing balances and currency and coin(1) ................................. 0081 3,036,306 1.a ---------- b. Interest-bearing balances(2) ........................................................... 0071 9,034,655 1.b ---------- 2. Securities: a. Held-to-maturity securities (from Schedule RC-B, column A) ............................. 1754 1,693,598 2.a ---------- b. Available-for-sale securities (from Schedule RC-B, column D) ........................... 1773 20,325,634 2.b ---------- 3. Federal funds sold and securities purchased under agreements to resell: RCON ---- a. Federal funds sold in domestic offices ............................................... B987 19,100 3.a ---------- RCFD ---- b. Securities purchased under agreements to resell(3) ................................... B989 4,324,992 3.b ---------- 4. Loans and lease financing receivables (from Schedule RC-C): a. Loans and leases held for sale ......................................................... 5369 6,685 4.a ---------- b. Loans and leases, net of unearned income .................. B528 37,402,355 4.b ---------- c. LESS: Allowance for loan and lease losses ................. 3123 594,211 4.c ---------- d. Loans and leases, net of unearned income and allowance (item 4.b minus 4.c) ............ B529 36,808,144 4.d ---------- 5. Trading assets (from Schedule RC-D) ...................................................... 3545 3,420,107 5 ---------- 6. Premises and fixed assets (including capitalized leases) ................................. 2145 969,419 6 ---------- 7. Other real estate owned (from Schedule RC-M) ............................................. 2150 1,253 7 ---------- 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) . 2130 253,729 8 ---------- 9. Customers' liability to this bank on acceptances outstanding ............................. 2155 166,157 9 ---------- 10. Intangible assets: 10 a. Goodwill ............................................................................. 3163 2,708,882 10.a ---------- b. Other intangible assets from Schedule RC-M ........................................... 0426 748,171 10.b ---------- 11. Other assets (from Schedule RC-F) ........................................................ 2160 6,998,625 11 ---------- 12. Total assets (sum of items 1 through 11) ................................................. 2170 90,515,457 12
- ---------- (1) Includes cash items in process of collection and unposted debits. (2) Include time certificates of deposit not held for trading. (3) INCLUDES ALL SECURITIES RESALE AGREEMENTS IN DOMESTIC AND FOREIGN OFFICES, REGARDLESS OF MATURITY. The Bank of New York Certificate Number: 00639 FFIEC 031 SCHEDULE RC - CONTINUED Dollar Amounts in Thousands
LIABILITIES 13. Deposits: RCON ---- a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, part I): 2200 40,236,165 13.a ---------- (1) Noninterest-bearing(4) ................................................. 6631 15,201,748 13.a.1 ---------- (2) Interest-bearing ....................................................... 6636 25,034,417 13.a.2 ---------- b. In foreign offices, Edge and Agreement subsidiaries, and IBFs RCFN ---- (from Schedule RC-E, part II) 2200 24,110,224 13.b ---------- (1) Noninterest-bearing .................................................... 6631 300,559 13.b.1 ---------- (2) Interest-bearing ....................................................... 6636 23,809,665 13.b.2 ---------- 14. Federal funds purchased and securities sold under agreements to repurchase: RCON ---- a. Federal funds purchased in domestic offices(5) .................................................. 993 717,565 14.a ---------- RCFD ---- b. Securities sold under agreements to repurchase(6) ............................................... B995 812,853 14.b ---------- 15. Trading liabilities (from Schedule RC-D) ............................................................ 3548 2,598,442 15 ---------- 16. Other borrowed money (includes mortgage indebtedness and obligations under capitalized leases) (from Schedule RC-M) ............................................................ 3190 4,158,526 16 ---------- 17. Not applicable 18. Bank's liability on acceptances executed and outstanding ............................................ 2920 167,267 18 ---------- 19. Subordinated notes and debentures(7) ................................................................ 3200 2,389,088 19 ---------- 20. Other liabilities (from Schedule RC-G) .............................................................. 2930 6,730,454 20 ---------- 21. Total liabilities (sum of items 13 through 20) ...................................................... 2948 81,920,584 21 ---------- 22. Minority interest in consolidated subsidiaries ...................................................... 3000 142,058 22 ---------- EQUITY CAPITAL 23. Perpetual preferred stock and related surplus ....................................................... 3838 0 23 ---------- 24. Common stock ........................................................................................ 3230 1,135,284 24 ---------- 25. Surplus (exclude all surplus related to preferred stock) ............................................ 3839 2,087,205 25 ---------- 26. a. Retained earnings ............................................................................... 3632 5,213,125 26.a ---------- b. Accumulated other comprehensive income(8) ....................................................... B530 17,201 26.b ---------- 27. Other equity capital components(9) .................................................................. A130 0 27 ---------- 28. Total equity capital (sum of items 23 through 27) ................................................... 3210 8,452,815 28 ---------- 29. Total liabilities, minority interest, and equity capital (sum of items 21, 22 and 28) ............... 3300 90,515,457 29 ---------- RCFD Number ---- ---------- 6724 N/A M.1 ----------
MEMORANDUM TO BE REPORTED ONLY WITH THE JUNE REPORT OF CONDITION. - ---------- (4) Includes total demand deposits and noninterest-bearing time and savings deposits. (5) REPORT OVERNIGHT FEDERAL HOME LOAN BANK ADVANCES IN SCHEDULE RC, ITEM 16, "OTHER BORROWED MONEY." (6) INCLUDES ALL SECURITIES REPURCHASE AGREEMENTS IN DOMESTIC AND FOREIGN OFFICES, REGARDLESS OF MATURITY. (7) Includes limited-life preferred stock and related surplus. (8) Includes net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, cumulative foreign currency translation adjustments, and minimum pension liability adjustments. (9) Includes treasury stock and unearned Employee Stock Ownership Plan Shares. CORRESP 9 filename9.txt Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P. December 23, 2004 VIA EDGAR, BY-HAND DELIVERY AND FACSIMILE Securities and Exchange Commission 450 Fifth Street, N.W. Judiciary Plaza Washington, D.C. 20549 Attention: Mr. Max A. Webb Mr. Doug Jones Ms. Hanna T. Teshome Mr. Michael Fay Re: International Shipholding Corporation Registration Statement on Form S-1 filed November 2, 2004 File No. 333-120161 Ladies and Gentlemen: We have filed on behalf of International Shipholding Corporation ("ISH"), via transmission to the Securities and Exchange Commission's (the "Commission") EDGAR system, Pre-Effective Amendment No. 3 (the "Amendment") to the above-captioned registration statement (the "Registration Statement"). The Amendment responds to the comments from the Commission's staff (the "Staff") received by facsimile transmittal on December 21, 2004. The Amendment also responds to the comments from the Staff received via telephone conference with Mr. Doug Jones of the Staff on December 21, 2004. In addition, the Amendment (i) updates ISH's prior disclosure regarding its agreement to purchase two used vessels to reflect that ISH has now purchased both vessels (see the section of the prospectus entitled "Prospectus Summary - Recent Developments - Vessel Purchase Agreement" on page 4), with appropriate conforming revisions made elsewhere in the Amendment; and (ii) reflects certain revisions to the sections of the prospectus entitled "Description of the Preferred Stock" on pages 68-82 and "Description of the Notes" on pages 83-93 in order to conform such sections to the corresponding certificate of designations and indenture (forms of which have been filed as Exhibits 3.3 and 4.4, respectively, to the Amendment), with appropriate conforming revisions made elsewhere in the Amendment. Securities and Exchange Commission December 23, 2004 Page 2 We have numbered and reproduced below the full text of the Staff's written comments in italics, followed by ISH's response to each comment. All page references to the Amendment in this letter refer to the copies of the Amendment that are marked to reflect the revisions made to the Registration Statement and which are to be delivered by-hand to the Staff on December 23, 2004. Comment 1. Please provide us with the artwork you intend to use. The inside front cover artwork should be clear illustrations of your product or business with concise language describing the illustrations. Artwork that does not convey the business purpose and language that strays beyond a limited scope will not be appropriate inside the front cover. Please refer to Section VIII of the Division of Corporation Finance March 31, 2001 Current Issues and Rulemaking Projects Quarterly Update available at www.sec.gov. Response 1: ISH did not include any artwork (other than its logo) in the preliminary prospectus dated December 10, 2004 distributed to prospective investors, and does not intend to include any artwork (other than its logo) in the final prospectus. Cautionary Notice Regarding Forward-Looking Statements, page ii Comment 2. Please delete the next-to-last sentence in the last paragraph. If you are aware of material risk factors, you should discuss them in the risk factors section. Response 2: We have complied with this comment by deleting the next-to-last sentence in the last paragraph on page ii. Capitalization, page 28 Comment 3. We note that the preferred stock to be offered is redeemable upon a change of control of the company. Redemption upon change of control is considered to be a "deemed liquidation event" that may be outside of the company's control, making the associated security redeemable for purposes of Rule 5-02(28) of Regulation S-X. In this regard, please explain to us why your classification of preferred stock in stockholders' investment is appropriate. Refer to EITF D-98 for guidance. Response 3: ISH has considered this comment and the provisions of EITF D-98 and has concluded that the new convertible exchangeable preferred stock is properly classified and presented as a non-equity item. Accordingly, ISH has complied with this comment by presenting the convertible exchangeable preferred stock as a separate line item (i.e., outside of "Stockholders' Investment") on the table set forth in the section entitled "Capitalization" on page 28. In addition, in the first paragraph of the first risk factor in the section entitled "Risk Factors" on page 14, ISH has revised its pro forma September 30, 2004 debt-to-equity ratio to give effect to this reclassification. Securities and Exchange Commission December 23, 2004 Page 3 Results of Operations-Nine Months Ended September 30, 2004 Gross Voyage Profit, page 34 Rail-Ferry Service, page 35 Comment 4. To the extent practicable, quantify the amount each of the reasons you cite contributed to the change in costs. Response 4: We have complied with this comment by quantifying, under the caption "Contracts of Affreightment" on page 34 and under the caption "Rail-Ferry Service" on pages 34 and 35, the contribution of each of the factors cited thereunder to the higher operating costs of ISH's contracts-of-affreightment and rail-ferry service segments during the first nine months of fiscal year 2004. Customers and Cargo, page 50 Comment 5. Confirm that no customer, other than MSC, accounts for 10% or more of your revenues. Response 5: ISH charters its four U.S. flag PCTC (Pure Car/Truck Carrier) vessels to Nippon Yusen Kaisha, a Japanese shipping company ("NYK"). However, Japanese automakers are the end users of the vessels. Accordingly, ISH has historically regarded each automaker, and not NYK, as its customer; in none of fiscal years 2003, 2002 or 2001 did any of these automakers account for 10% or more of ISH's total revenues. In light of the Staff's comment, however, we have added a new third paragraph under the caption "Customers and Cargo" on page 50 to clarify that (i) NYK contributed approximately 15%, 17% and 12% of ISH's total revenues for fiscal years 2003, 2002 and 2001, respectively; (ii) Japanese automakers are the end users of the four PCTC vessels and that none of those automakers accounted for 10% or more of ISH's total revenues in fiscal years 2003, 2002 or 2001; and (iii) other than NYK and the Military Sealift Command (MSC), none of ISH's customers accounted for 10% or more of ISH's fiscal year 2003, 2002 or 2001 total revenues. Securities and Exchange Commission December 23, 2004 Page 4 Exhibit 5.1 Comment 6. Delete the paragraph beginning with "In connection with the opinions expressed above" and ending with "affecting the validity of such Securities" as it is an inappropriate assumption. Response 6: We have complied with this comment by deleting the referenced paragraph. Please refer to our opinion filed as Exhibit 5.1 to the Amendment. Comment 7. We note that your opinion is limited to Louisiana and Delaware law. We remind you that with respect to the Convertible Notes, Counsel must opine on the laws of the state governing the indenture. Response 7: We have complied with this comment by deleting the sentence limiting the opinion to the laws of specified jurisdictions. Please refer to our opinion filed as Exhibit 5.1 to the Amendment. Comment 8. Either revise to delete the last sentence of the next-to-last paragraph or refile the opinion dated the date of effectiveness. Response 8: We have complied with this comment by deleting the referenced sentence. Please refer to our opinion filed as Exhibit 5.1 to the Amendment. --------------- Thank you for your assistance with this filing. As we have discussed, ISH is very anxious to have the registration statement declared effective at the earliest possible date. We would, therefore, appreciate anything that the Staff can do to help us expedite the completion of the review process. If you have any questions or comments regarding the Amendment, please call me at your convenience at (504) 582-8188. In my absence, please contact my associate, Amos Oelking, at (504) 582-8516. Sincerely, /s/ L. R. McMillan, II L. R. McMillan, II cc: Gary L. Ferguson Amos J. Oelking, III -----END PRIVACY-ENHANCED MESSAGE-----