1
INTERNATIONAL SHIPHOLDING CORPORATION AND SUBSIDIARIES
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
--------------------
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 2-63322
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INTERNATIONAL SHIPHOLDING CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2989662
- ---------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
650 Poydras Street New Orleans, Louisiana 70130
- --------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(504) 529-5461
- --------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing for the past 90 days. YES ___x___ NO _______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $1 Par Value 6,082,887 shares (September 30, 2003)
---------------------------- ------------------ ---------------------
2
PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(All Amounts in Thousands Except Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues $ 63,550 $ 49,900 $195,861 $167,016
Operating Expenses:
Voyage Expenses 51,736 39,536 153,367 131,987
Vessel and Barge Depreciation 5,287 4,782 15,079 14,441
Impairment Loss - 3 - (94)
--------- --------- --------- ---------
Gross Voyage Profit 6,527 5,579 27,415 20,682
--------- --------- --------- ---------
Administrative and
General Expenses 3,730 3,694 11,741 11,939
Gain on Sale of Other Assets (247) (44) (290) (537)
--------- --------- --------- ---------
Operating Income 3,044 1,929 15,964 9,280
--------- --------- --------- ---------
Interest and Other:
Interest Expense 2,962 4,137 9,614 13,239
Investment Income (119) (126) (649) (578)
Other Loss (Income) 103 (200) - (1,482)
Loss on Early
Extinguishment of Debt 2,570 55 1,310 103
--------- --------- --------- ---------
5,516 3,866 10,275 11,282
--------- --------- --------- ---------
(Loss) Income Before (Benefit)
Provision for Income Taxes and
Equity in Net Income of
Unconsolidated Entities (2,472) (1,937) 5,689 (2,002)
--------- --------- --------- ---------
(Benefit) Provision for
Income Taxes:
Current (164) - - -
Deferred (661) (671) 2,011 (689)
State 30 1 98 39
--------- --------- --------- ---------
(795) (670) 2,109 (650)
--------- --------- --------- ---------
Equity in Net Income of
Unconsolidated Entities
(Net of Applicable Taxes) 33 142 260 423
--------- --------- --------- ---------
Net (Loss) Income $ (1,644) $ (1,125) $ 3,840 $ (929)
========= ========= ========= =========
Basic and Diluted Earnings
Per Share:
Net (Loss) Income $ (0.27) $ (0.18) $ 0.63 $ (0.15)
========= ========= ========= =========
Weighted Average Shares of
Common Stock Outstanding 6,082,887 6,082,887 6,082,887 6,082,887
The accompanying notes are an integral part of these statements.
3
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(All Amounts in Thousands)
(Unaudited)
September 30, December 31,
ASSETS 2003 2002
------------ ------------
Current Assets:
Cash and Cash Equivalents $ 7,995 $ 4,419
Restricted Cash 7,712 8,096
Marketable Securities 2,476 2,211
Accounts Receivable, Net of Allowance
for Doubtful Accounts of $394 and $332
in 2003 and 2002, Respectively:
Traffic 14,572 16,341
Agents' 4,696 4,343
Claims and Other 12,087 9,408
Federal Income Taxes Receivable 5,505 5,755
Deferred Income Tax 576 576
Net Investment in Direct Financing Lease 2,079 1,944
Other Current Assets 7,381 6,212
Material and Supplies Inventory, at
Lower of Cost or Market 3,387 3,492
Current Assets Held for Disposal 356 2,762
------------ ------------
Total Current Assets 68,822 65,559
------------ ------------
Marketable Equity Securities - 200
------------ ------------
Investment in Unconsolidated Entities 7,123 8,251
------------ ------------
Net Investment in Direct Financing Lease 49,692 51,264
------------ ------------
Vessels, Property, and Other
Equipment, at Cost:
Vessels and Barges 337,584 336,755
Other Equipment 3,592 5,507
Terminal Facilities 362 336
Furniture and Equipment 7,074 9,042
------------ ------------
348,612 351,640
Less - Accumulated Depreciation (119,525) (110,535)
------------ ------------
229,087 241,105
------------ ------------
Other Assets:
Deferred Charges, Net of Accumulated
Amortization of $13,126 and $13,572
in 2003 and 2002, Respectively 13,040 14,628
Acquired Contract Costs, Net of Accumulated
Amortization of $21,067 and $19,976
in 2003 and 2002, Respectively 9,459 10,550
Due from Related Parties 2,535 2,609
Other 11,725 12,586
------------ ------------
36,759 40,373
------------ ------------
$ 391,483 $ 406,752
============ ============
The accompanying notes are an integral part of these statements.
4
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(All Amounts in Thousands)
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' INVESTMENT 2003 2002
------------ ------------
Current Liabilities:
Current Maturities of Long-Term Debt $ 15,366 $ 21,362
Accounts Payable and Accrued Liabilities 39,161 34,252
------------ ------------
Total Current Liabilities 54,527 55,614
------------ ------------
Billings in Excess of Income Earned
and Expenses Incurred 1,871 1,207
------------ ------------
Current Maturities of Long-Term Debt
to be Refinanced 10,439 -
------------ ------------
Long-Term Debt, Less Current Maturities 164,152 192,297
------------ ------------
Other Long-Term Liabilities:
Deferred Income Taxes 19,533 14,358
Claims and Other 20,978 28,049
------------ ------------
40,511 42,407
------------ ------------
Commitments and Contingent Liabilities
Stockholders' Investment:
Common Stock 6,756 6,756
Additional Paid-In Capital 54,450 54,450
Retained Earnings 68,279 64,439
Less - Treasury Stock (8,704) (8,704)
Accumulated Other Comprehensive Loss (798) (1,714)
------------ ------------
119,983 115,227
------------ ------------
$ 391,483 $ 406,752
============ ============
The accompanying notes are an integral part of these statements.
5
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(All Amounts in Thousands)
(Unaudited)
Accumulated
Additional Other
Common Paid-In Retained Treasury Comprehensive
Stock Capital Earnings Stock Income(Loss) Total
----------------------------------------------------------
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
Unrealized Holding
Gain on 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 the
Period Ended
September 30, 2003 - - 3,840 - - 3,840
Other Comprehensive
Income (Loss):
Unrealized Holding
Gain on Marketable
Securities, Net of
Deferred Taxes
of $120 - - - - 222 222
Unrealized Holding
Gain on Derivatives,
Net of Deferred
Taxes of $374 - - - - 694 694
--------
Total Comprehensive Income 4,756
----------------------------------------------------------
Balance at
September 30, 2003 $6,756 $54,450 $68,279 ($8,704) ($798) $119,983
==========================================================
The accompanying notes are an integral part of these statements.
6
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
(Unaudited)
Nine Months Ended September 30,
2003 2002
------------ ------------
Cash Flows from Operating Activities:
Net Income (Loss) $ 3,840 $ (929)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation 15,670 15,190
Amortization of Deferred Charges
and Other Assets 5,657 5,742
Provision (Benefit) for Deferred
Income Taxes 2,011 (689)
Equity in Net Income of Unconsolidated
Entities (260) (423)
Gain on Sale of Other Assets (290) (537)
Impairment Loss - (94)
Loss on Early Extinguishment of Debt 1,310 103
Changes in:
Accounts Receivable (381) 19,012
Inventories and Other Current Assets (544) (1,556)
Other Assets 2,126 2,634
Accounts Payable and Accrued Liabilities 4,028 (12,685)
Federal Income Taxes Payable 2,791 (495)
Billings in Excess of Income Earned
and Expenses Incurred (707) (1,102)
Other Long-Term Liabilities (5,730) (7,659)
------------ ------------
Net Cash Provided by Operating Activities 29,521 16,512
------------ ------------
Cash Flows from Investing Activities:
Net Investment in Direct Financing Lease 1,437 1,312
Additions to Vessels and Other Property (5,287) (1,051)
Additions to Deferred Charges (1,112) (3,570)
Proceeds from Sale of Vessels and Other
Property 478 12,874
Purchase of and Proceeds from Short
Term Investments 46 54
Proceeds from Sale of Marketable
Equity Securities 200 -
Investment in Unconsolidated Entities 128 (1,153)
Partial Sale of Unconsolidated Entities 1,921 110
Net Decrease in Restricted Cash Account 384 375
Other Investing Activities 6 54
------------ ------------
Net Cash (Used) Provided by Investing
Activities (1,799) 9,005
------------ ------------
Cash Flows from Financing Activities:
Proceeds from Issuance of Debt 41,000 23,500
Repayment of Debt and Capital Lease
Obligations (64,728) (66,298)
Additions to Deferred Financing Charges (221) (67)
Other Financing Activities (197) (85)
------------ ------------
Net Cash Used by Financing Activities (24,146) (42,950)
------------ ------------
Net Increase (Decrease) in
Cash and Cash Equivalents 3,576 (17,433)
Cash and Cash Equivalents at Beginning of Period 4,419 25,150
------------ ------------
Cash and Cash Equivalents at End of Period $ 7,995 $ 7,717
============ ============
The accompanying notes are an integral part of these statements.
7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(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. 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, 2002. We have made certain reclassifications to
prior period financial information in order to conform to current year
presentation.
The foregoing 2003 interim results are not necessarily indicative of the
results of operations for the full year 2003. Interim statements are subject
to possible adjustments in connection with the annual audit of our accounts
for the full year 2003, although management believes that all adjustments
necessary for a fair presentation of the information shown have been made in
the interim statements.
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.
We have eliminated all significant intercompany accounts and
transactions.
Note 2. 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. 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, 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.
8
The following table presents information about segment profit and loss
for the nine months ended September 30, 2003 and 2002:
(All Amounts in Thousands)
Time
Liner Charter Contracts of Rail-Ferry
Services Contracts Affreightment Service Other Elim. Total
- -------------------------------------------------------------------------------
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) 1,546 - 27,415
Interest expense 763 5,611 1,424 1,666 150 - 9,614
Gain on sale of
other assets - - - - 290 - 290
Segment (loss) profit
before administrative
and general expenses,
investment income,
other income, equity
in net income of
unconsolidated entities,
and taxes (2,500) 19,897 2,676 (3,668) 1,686 - 18,091
- -------------------------------------------------------------------------------
2002
Revenues from external
customers $50,062 $94,458 $11,805 $7,876 $2,815 - $167,016
Intersegment
revenues - - - - 10,480 (10,480) -
Vessel and barge
depreciation 2,687 7,293 1,812 2,187 462 - 14,441
Impairment loss 94 - - - - - 94
Gross voyage
(loss) profit (4,848) 25,376 4,809 (2,857) (1,798) - 20,682
Interest expense 1,338 8,058 1,629 2,022 192 - 13,239
Gain on sale of
other assets - - - - 537 - 537
Segment (loss) profit
before administrative
and general expenses,
investment income,
other income, equity
in net income of
unconsolidated entities,
and taxes (6,186) 17,318 3,180 (4,879) (1,453) - 7,980
- -------------------------------------------------------------------------------
The following table presents information about segment profit and loss
for the three months ended September 30, 2003 and 2002:
(All Amounts in Thousands)
Time
Liner Charter Contracts of Rail-Ferry
Services Contracts Affreightment Service Other Elim. Total
- -------------------------------------------------------------------------------
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) 682 - 6,527
Interest expense 240 1,693 458 524 47 - 2,962
Gain on sale of
other assets - - - - 247 - 247
Segment (loss) profit
before administrative
and general expenses,
investment income,
other income, equity
in net income of
unconsolidated entities,
and taxes (1,432) 4,578 1,161 (1,377) 882 - 3,812
- -------------------------------------------------------------------------------
2002
Revenues from external
customers $8,867 $31,776 $4,042 $3,023 $2,192 - $49,900
Intersegment
revenues - - - - 1,880 (1,880) -
Vessel and barge
depreciation 895 2,431 604 729 123 - 4,782
Impairment loss (3) - - - - - (3)
Gross voyage
(loss) profit (4,471) 8,907 1,543 (791) 391 - 5,579
Interest expense 316 2,589 523 647 62 - 4,137
Gain on sale of
other assets - - - - 44 - 44
Segment (loss) profit
before administrative
and general expenses,
investment income,
other income, equity
in net income of
unconsolidated entities,
and taxes (4,787) 6,318 1,020 (1,438) 373 - 1,486
- -------------------------------------------------------------------------------
9
The following is a reconciliation of the totals reported for the
operating segments to the applicable line items in the consolidated financial
statements:
(All Amounts
in Thousands) Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Total profit for
reportable segments $3,812 $1,486 $18,091 $7,980
Unallocated amounts:
Administrative and
general expenses (3,730) (3,694) (11,741) (11,939)
Investment income 119 126 649 578
Other (loss) income (103) 200 - 1,482
Loss on early
extinguishment of debt (2,570) (55) (1,310) (103)
---------- ---------- ---------- ----------
(Loss) Income before
(benefit) provision for
income taxes and equity
in net income of
unconsolidated entities ($2,472) ($1,937) $5,689 ($2,002)
========== ========== ========== ==========
Note 3. 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 were excluded from the
computation of diluted earnings per share in the three and nine months ended
September 30, 2003 and 2002, as the effect would have been antidilutive.
Note 4. 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 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 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 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 either 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 ultimately rejects the time charter, then Enterprise would have a
priority administrative claim with respect to all amounts due it under the
time charter related to the post-petition period. At this time, we cannot
predict whether the time charter will be accepted or rejected, therefore, we
have not made an allowance for the pre-petition invoices on our financial
statements as of September 30, 2003. In the event the time 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. Further, even
though USGenNE was not obligated to use the vessel for the balance of charter
year number 8, it has expressed to the Company its intent to use the vessel
through the end of the year. At this time we can give no assurance whether
USGenNE will use the vessel beyond the end of the year.
10
In connection with the financing of the acquisition of the ENERGY
ENTERPRISE in 1996, Enterprise issued $50 Million in notes (the "Enterprise
Notes") which were held by four institutions and had an outstanding principal
balance of approximately $17 Million at the time of USGenNE's bankruptcy
filing. Although the Enterprise Notes were non-recourse to the Company and
its other affiliates, the indenture under which they were issued provided that
USGenNE's bankruptcy filing was an event of default, which automatically
accelerated the maturity of principal and interest on the Enterprise Notes as
well as requiring a "make-whole" prepayment penalty and a write-off of deferred
charges totaling approximately $2.6 Million. Management notified the indenture
trustee of the event of default on July 15, 2003. Management secured
alternative financing, which, together with other funds available to the
Company, was used to pay in full the Enterprise Notes, including the required
"make-whole" prepayment penalty, and all amounts due to the trustee under the
related indenture. The indenture and related documents have therefore been
terminated, satisfied and discharged in full, and the Enterprise Notes have
been paid in full and cancelled, all as of August 14, 2003.
Notwithstanding the non-recourse nature of the Enterprise Notes, the
automatic acceleration of the Enterprise Notes triggered cross-default
provisions in certain of the Company's other credit and sale/leaseback
facilities. On July 25, 2003, the Company sent notices to each of the required
parties under those facilities advising them of the event of default under the
Enterprise indenture and advising them of the resulting cross-default under
each of their respective facilities. However, because no action was taken by
any trustee, debt holder, owner or owner/trustee under any of the affected
facilities, the termination, satisfaction and discharge of the indenture under
which the Enterprise Notes were issued, and the payment in full of the
Enterprise Notes and their cancellation, cured the cross-defaults under those
facilities. Therefore, the Company is no longer in default under any of its
credit or sale/leaseback facilities. The Company has notified all parties
under the affected credit and sale/leaseback facilities that the cross defaults
no longer exist.
Note 5. Current Maturities of Long-Term Debt to be Refinanced
On September 30, 2003, we secured financing in the amount of $91 Million,
which was received on October 2, 2003. The funds were used to repay and
consolidate into a new loan certain outstanding debt obligations on three of
our vessels, the current portion of which are classified as current maturities
of long-term debt to be refinanced as of September 30, 2003.
Note 6. New Accounting Pronouncements
In April of 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 Accounting Principles Board ("APB") Opinion No. 30.
We adopted SFAS No. 145 effective January 1, 2003, and reclassified gains and
losses on early extinguishment
11
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 $1.3 Million and $103,000 for
the nine months ended September 30, 2003 and 2002, 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 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.
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 are effective for fiscal years ending after December 15, 2002. The
interim disclosure provisions are 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 three months and nine months ended
September 30, 2003 and 2002 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 a
company if that 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 are
effective immediately for those variable interest entities created after
January 31, 2003, and existing variable interest entities in the first fiscal
year or interim period ending after December 15, 2003. We do not believe that
we have a significant variable interest in a variable interest entity; however,
we are still evaluating the effect of adoption of this Interpretation.
12
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 instruments for which the effective date
has been deferred. Because we do not have any such instruments outstanding,
the adoption of SFAS No. 150 is not expected to materially impact our financial
position or results of operations.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
- ---------------------------
Certain statements made by us or on our behalf in this report or
elsewhere that are not based on historical facts are intended to be "forward-
looking statements" within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
are based on beliefs and assumptions about future events that are inherently
unpredictable and are therefore subject to significant risks and uncertainties.
In this report, the terms "we," "us," "our," and "the Company" refer to
International Shipholding Corporation and its subsidiaries.
Such statements include, 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 and
asset dispositions; (5) estimated obligations, and the timing thereof, to U.S.
Customs relating to foreign repair work; (6) the adequacy and availability of
capital resources on commercially acceptable terms; (7) our ability to remain
in compliance with our debt covenants; (8) anticipated trends in government
sponsored cargoes; (9) our ability to maintain our government subsidies; and
(10) the anticipated improvement in the results of our Mexican service.
We caution readers that certain important factors have affected, and are
likely in the future to affect, our ability to achieve our expectations in
those areas and in others, including our actual consolidated results of
13
operations. Such factors may, and in some cases are likely to, cause future
results to differ materially from those expressed in or implied by any forward-
looking statements made in this report or elsewhere by us or on our behalf.
Such factors include, without limitation, (1) political events in the United
States and abroad, including terrorism, and the U.S. military's response to
those events; (2) election results, regulatory activities and the appropriation
of funds by the U.S. Congress; (3) charter hire rates and vessel utilization
rates; (4) unanticipated trends in operating expenses such as fuel and labor
costs; (5) trends in interest rates, and the availability and cost of capital
to us; (6) the frequency and severity of claims against us, and unanticipated
court results and changes in laws and regulations; (7) our success in renewing
existing contracts and securing new ones, in each case on favorable economic
terms; (8) unplanned maintenance and out-of-service days; (9) the ability of
customers to fulfill obligations with us; (10) the uncertain future of our Coal
Carrier contract; (11) the performance of our unconsolidated subsidiaries; and
(12) our ability to effectively handle our substantial leverage by servicing
and meeting the covenant requirements in each of our debt instruments, thereby
avoiding any defaults under those instruments and avoiding cross defaults under
others.
A more complete description of certain of these important factors is
contained in our Form 10-K filed with the Securities and Exchange Commission
for the year ended December 31, 2002.
General
- --------
Our vessels are operated under a variety of charters, liner services, 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 performance
than revenues. Accordingly, the discussion below addresses variations in gross
voyage profits rather than variations in revenues.
RESULTS OF OPERATIONS
-----------------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Gross Voyage Profit
- --------------------
Gross voyage profit increased 32.6% from $20.7 Million in the first nine
months of 2002 to $27.4 Million in the first nine months of 2003. The changes
associated with each of our segments are discussed below.
14
LINER SERVICES: Gross voyage loss for this segment improved from a loss
of $4.8 Million in the first nine months of 2002 to a loss of $1.7 Million in
the first nine months of 2003. Our U.S. Flag LASH Liner service improved from
a loss of $3 Million in the first nine months of 2002 to a loss of $477,000.
The first nine months of 2002 included expenses associated with winding down
the four-vessel service, while this year's results reflect the current one-
vessel operation. Our Foreign Flag LASH Liner Service improved from a loss of
$1.9 Million in the first nine months of 2002 to a loss of $1.3 Million in the
first nine months of 2003 as a result of out of service days in 2002 from a
vessel's scheduled drydock.
TIME CHARTER CONTRACTS: This segment's gross voyage profit in the first
nine months of 2003 was approximately the same as the first nine months of
2002. Our Coal Carrier operating on time charter
to USGenNE experienced higher results due to the vessel being utilized for all
but two days during the first nine months of 2003 under its basic time charter
contract as compared to the same period of the previous year when it was out of
service thirty-three days for repairs and during which it operated sixty days
in the spot market at lower rates as compared to its basic charter. Offsetting
this increase in gross voyage profit were unanticipated vessel repairs
resulting from machinery deficiencies on one of our Multi-Purpose vessels in
the third quarter. 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 change in the estimated useful
life of our Multi-Purpose vessel, which is expected to be sold during the
fourth quarter of 2003.
CONTRACTS OF AFFREIGHTMENT: The decrease in this segment's gross voyage
profit from $4.8 Million in the first nine months of 2002 to $4.1 Million in
the first nine months of 2003 resulted from 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 $2.9 Million in the first nine months of 2002 to a loss of $2 Million
in the first nine months of 2003. The improvement was a result of higher cargo
volume during 2003.
OTHER: Gross voyage profit for this segment improved from a loss of $1.8
Million in the first nine months of 2002 to a profit of $1.5 Million in the
first nine months of 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. Additionally, the first nine months of 2003
include the results of two chartered vessels that we are operating under
Maritime Security Program contracts, which did not operate in the same period
of 2002.
Other Income and Expense
- -------------------------
Administrative and general expenses decreased 1.7% from $11.9 Million in
the first nine months of 2002 to $11.7 Million in the first nine months of
2003. The decrease resulted primarily from severance payments related to
non-recurring staff reductions, that were recognized in the first quarter of
2002.
Interest expense decreased 27.4% from $13.2 Million in the first nine
months of 2002 to $9.6 Million in the first nine months of 2003. Decreases due
to reduction in regularly scheduled payments on outstanding debt and
15
lower interest rates accounted for $1.2 Million of the total difference.
Approximately $2.4 Million of the decrease resulted from the early repayment of
our 9% Senior Notes and repurchases of our 7.75% Senior Notes, which was
partially offset by the cost of new financings used to repurchase some of the
Notes.
Investment income of $649,000 earned during the first nine months of 2003
was slightly higher than the $578,000 in the first nine months of 2002
primarily as a result of interest earned on a receivable which resulted from
the fourth quarter 2002 sale and leaseback of one of our Foreign Flag LASH
vessels, and higher dividend income received in 2003 from our investment in
certain bulk carrier companies accounted for under the cost method. 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 the first nine months of 2002 was a
result of interest collected in 2002 on foreign tax refunds.
Loss on early extinguishment of debt 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 necessary prepayment of the
Coal Carrier loan to cure the technical default (see Part II, Item 3 for
further discussion on the Coal Carrier Contract). This was partially offset by
a discount on the retirement of approximately $10.7 Million of our 7.75% Senior
Notes due in 2007. The loss of $103,000 reported in the first nine months of
2002 resulted primarily from the retirement at a slight premium of
approximately $30 Million of our 9% Senior Notes due in 2003. The 9% Senior
Notes were fully retired by the end of 2002.
Income Taxes
- -------------
We had a tax provision of $2.1 Million for the first nine months of 2003
and a tax benefit of $650,000 for the first nine months of 2002 at the
statutory rate of 35% for both periods.
Equity in Net Income of Unconsolidated Entities
- ------------------------------------------------
Equity in net income of unconsolidated entities, net of taxes, of
$260,000 and $423,000 for the first nine months of 2003 and 2002, respectively,
was primarily related to our investments 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.
THREE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2002
Gross Voyage Profit
- --------------------
Gross voyage profit increased 17% from $5.6 Million in the third quarter
of 2002 to $6.5 Million in the third quarter of 2003. The changes associated
with each of our segments are discussed below.
LINER SERVICES: This segment's gross voyage loss improved from a loss
of $4.5 Million in the third quarter of 2002 to a loss of $1.2 Million in the
third quarter of 2003. Our U.S. Flag LASH Liner service improved
16
from a loss of $2.3 Million in the third quarter of 2002 to a profit of
$10,000. The third quarter of 2002 included expenses associated with winding
down the four-vessel service, while this quarter's results reflect the
current one-vessel operation. Our Foreign Flag LASH Liner Service improved
from a loss of $2.1 Million in the third quarter of 2002 to a loss of $1.2
Million in the third quarter of 2003 as a result of out of service days in
2002 from a vessel's scheduled drydock.
TIME CHARTER CONTRACTS: The decrease in this segment's gross voyage
profit from $8.9 Million in the third quarter of 2002 to $6.3 Million in the
third quarter of 2003 was attributable primarily to unanticipated vessel
repairs resulting from machinery deficiencies on one of our Multi-Purpose
vessels in the third quarter of 2003. The cost of the repairs and resulting
vessel downtime impacted this segment by approximately $1.1 Million.
Additionally, vessel and barge depreciation increased because of a change in
the estimated useful life of our Multi-Purpose vessel, which is expected to be
sold during the fourth quarter of 2003.
CONTRACTS OF AFFREIGHTMENT: The segment's gross voyage profit in the
third quarter of 2003 was approximately the same as the third quarter of 2002.
RAIL-FERRY SERVICE: Gross voyage loss for this segment increased
slightly from a loss of $791,000 in the third quarter of 2002 to a loss of
$853,000 in the third quarter of 2003. While cargo volume improved, this
segment experienced unanticipated vessel repairs in the third quarter of 2003,
amounting to approximately $650,000.
OTHER: Gross voyage profit for this segment increased from $391,000 in
the third quarter of 2002 to $682,000 in the third quarter of 2003. Included
in the third quarter of 2002 were costs associated with winding down operations
at our coal transfer terminal facility in Gulf County, Florida, which was sold
in 2003. Additionally, our LITCO facility incurred cost in 2002 due to the
transition of our Waterman Liner Service from a four-vessel service to a one-
vessel service.
Other Income and Expense
- -------------------------
Administrative and general expenses in the third quarter of 2003 were
approximately the same as the third quarter of 2002.
Interest expense decreased 28.4% from $4.1 Million in the third quarter
of 2002 to $3 Million in the third quarter of 2003. Decreases due to reduction
in regularly scheduled payments on outstanding debt and lower interest rates
accounted for approximately $480,000 of the total difference. Approximately
$660,000 of the decrease resulted from the early repayment of our 9% Senior
Notes and repurchases of our 7.75% Senior Notes, which was partially offset
by the cost of new financings used to repurchase some of the Notes.
Investment income in the third quarter of 2003 was approximately the same
as the third quarter of 2002.
Loss on early extinguishment of debt of $2.6 Million in the third quarter
of 2003 resulted from a "make-whole" prepayment penalty and write-off of
deferred financing charges associated with the necessary prepayment of the
Coal Carrier loan to cure the technical default (see Part II, Item 3 for
further discussion on the Coal Carrier Contract). The loss of $55,000
reported in the third quarter of 2002 resulted primarily from the retirement
at a slight premium of approximately $18.6 Million of our 9% Senior Notes
due in 2003. The 9% Senior Notes were fully retired by the end of 2002.
17
Income Taxes
- -------------
We had a tax benefit of $795,000 for the third quarter of 2003 and
$670,000 for the third quarter of 2002 at the statutory rate of 35% for both
periods.
Equity in Net Income of Unconsolidated Entities
- ------------------------------------------------
Equity in net income of unconsolidated entities, net of taxes, of $33,000
and $142,000 for the third quarter of 2003 and 2002, respectively, was
primarily related to our investments 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.
LIQUIDITY AND CAPITAL RESOURCES
---------------------------------
The following discussion should be read with the more detailed
Consolidated Condensed Balance Sheets and Consolidated Statements of Cash Flows
included elsewhere herein as part of our Consolidated Financial Statements.
Our working capital increased from $9.9 Million at December 31, 2002, to
$14.3 Million at September 30, 2003. Of the $54.5 Million in current
liabilities, $15.4 Million related to the current maturities of long-term debt
at September 30, 2003. Cash and cash equivalents increased during the first
nine months of 2003 by $3.6 Million from $4.4 Million at December 31, 2002, to
$8 Million at September 30, 2003. The increase was due to cash provided by
operating activities of $29.5 Million, partially offset by cash used for
investing activities of $1.8 Million and financing activities of $24.1 Million.
Operating activities generated a positive cash flow after adjusting the
net income of $3.8 Million for non-cash provisions such as depreciation and
amortization. Cash used for investing activities of $1.8 Million was primarily
to cover payments for vessel upgrades and purchases of non-vessel related
assets. Partially offsetting these additions is the sale of our investment in
two of the Cape-size Bulk Carriers.
Cash used for financing activities of $24.1 Million included $9.1 Million
used to repurchase $10.7 Million of our 7.75% Senior Notes at a discount, $13.3
Million used for regularly scheduled payments of debt, $16.7 Million used for
prepayment of the Coal Carrier loan (see Part II, Item 3 for further discussion
on the Coal Carrier Contract), and $24 Million used to repay draws on our line
of credit. These uses were partially offset by proceeds of $31 Million from
draws on our line of credit and the financing of $10 Million used for the
prepayment of the aforementioned Coal Carrier loan.
On September 30, 2003, we secured financing in the amount of $91 Million,
which was received on October 2, 2003. The funds were used to repay and
consolidate into a new loan certain outstanding debt obligations on three of
our vessels.
18
As of September 30, 2003, $1.2 Million was available on our $10 Million
revolving credit facility, which expires in April of 2005. At the beginning of
the fourth quarter, we repaid $6 Million of this credit facility utilizing
partial proceeds from the aforementioned $91 Million loan. During the first
quarter of 2003, we entered into an agreement for a $5 Million overline credit
facility, which expires in December of 2003. This overline credit facility
was fully available as of September 30, 2003.
Debt and Lease Obligations - We have several vessels under operating
leases, including three Pure Car/Truck Carriers, one LASH vessel, one Ice
Strengthened Breakbulk/Multi Purpose vessel, a Container vessel and a Tanker
vessel. Our obligations associated with these leases are disclosed 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, 2003:
Oct. 1 -
Debt and Lease Dec. 31,
Obligations (000's) 2003 2004 2005 2006 2007 Thereafter
- -------------------------------------------------------------------------------
Long-term debt (including
current maturities) $ 16,027 $ 15,805 $ 24,305 $ 14,691 $ 80,850 $ 38,435
Operating leases 5,832 23,329 17,941 17,856 17,856 107,495
------------------------------------------------------
Total by period $ 21,859 $ 39,134 $ 42,246 $ 32,547 $ 98,706 $145,930
======================================================
Included in the table above in year 2005 is $6 Million of our credit
facility that we repaid in the beginning of the fourth quarter of 2003.
Debt Covenant Compliance Status - We have met all of the financial
covenants under our various debt agreements, after they were amended for the
full year 2002. We have met, as of September 30, 2003, the more restrictive
financial covenants that became effective in 2003, and believe we will continue
to meet them in 2003, although we cannot give assurances at this time.
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 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.
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.
19
NEW ACCOUNTING PRONOUNCEMENTS
-------------------------------
In April of 2002, the 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 gains (losses) related to the early
extinguishment of debt of $1.3 Million and $103,000 for the nine months ended
September 30, 2003 and 2002, respectively.
In July of 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supersedes EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including 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.
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 are effective for fiscal years ending after December 15, 2002. The
interim disclosure provisions are 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 three months and nine months ended
September 30, 2003 and 2002 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 a
company if that 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
20
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 are
effective immediately for those variable interest entities created after
January 31, 2003, and existing variable interest entities in the first fiscal
year or interim period ending after December 15, 2003. We do not believe that
we have a significant variable interest in a variable interest entity; however,
we are still evaluating the effect of adoption of this Interpretation.
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 instruments for which the effective date has been deferred. Because we
do not have any such instruments outstanding, the adoption of SFAS No. 150 is
not expected to materially impact our financial position or results of
operations.
ITEM 3.
QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
In the ordinary course of our business, we are exposed to foreign
currency, interest rate, and commodity price risk. 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.
Interest Rate Risk. The fair value of long-term debt at September 30,
2003, including current maturities, was estimated to be $194.3 Million compared
to a carrying value of $190 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, 2003, would be approximately
$1.9 Million or 1% of the carrying value.
The fair value of the interest rate swap agreement discussed in our Form
10-K was a liability of $1.1 Million at September 30, 2003, estimated based on
the amount that the banks would receive or pay to terminate the swap agreement
at the reporting date taking into account current market conditions and
interest rates. A
21
hypothetical 10% decrease in interest rates as of September 30, 2003, would
have resulted in a $13,000 increase in the fair value of the liability.
Commodity Price Risk. In addition to the commodity swap agreements
discussed in our Form 10-K, we entered into three additional fuel hedge
agreements in 2003 at various contract prices ranging from $124 to $158.75 per
metric ton of fuel. The fair value of the commodity swap agreements was an
asset of $652,000 at September 30, 2003, estimated based on the difference
between price per ton of fuel and the contract delivery price per ton of fuel
times the quantity applicable to the agreements. A hypothetical 10% decrease
in the fuel price per ton of fuel as of September 30, 2003, would have resulted
in a $311,000 decrease in the fair value of the asset.
Foreign Exchange Rate Risk. There were no material changes in market
risk exposure for the foreign currency risk described in our Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
2002.
ITEM 4.
CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this report, we conducted an
evaluation of the effectiveness of our "disclosure controls and procedures," as
that phrase is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934. The evaluation was carried out under the supervision and
with the participation of our management, including our Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO").
Based on that evaluation, the CEO and CFO have concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be disclosed in our periodic filings with the
Securities and Exchange Commission ("SEC"), and in ensuring that the
information required to be disclosed in those filings is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules
and forms.
(b) Subsequent to the date of the evaluation, there were no significant
changes in our internal controls or in other factors that could significantly
affect the internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
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 requested from the court an extension
22
of time to submit its bankruptcy plan until March 4, 2004, and an extension of
time until May 3, 2004, 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 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 either 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 ultimately rejects the time charter, then
Enterprise would have a priority administrative claim with respect to all
amounts due it under the time charter related to the post-petition period. At
this time, we cannot predict whether the time charter will be accepted or
rejected, therefore, we have not made an allowance for the pre-petition
invoices on our financial statements as of September 30, 2003. In the event
the time 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.
Further, even though USGenNE was not obligated to use the vessel for the
balance of charter year number 8, it has expressed to the Company its intent to
use the vessel through the end of the year. At this time we can give no
assurance whether USGenNE will use the vessel beyond the end of the year.
In connection with the financing of the acquisition of the ENERGY
ENTERPRISE in 1996, Enterprise issued $50 Million in notes (the "Enterprise
Notes") which were held by four institutions and had an outstanding principal
balance of approximately $17 Million at the time of USGenNE's bankruptcy
filing. Although the Enterprise Notes were non-recourse to the Company and its
other affiliates, the indenture under which they were issued provided that
USGenNE's bankruptcy filing was an event of default, which automatically
accelerated the maturity of principal and interest on the Enterprise Notes as
well as requiring a "make-whole" prepayment penalty and a write-off of deferred
charges totaling approximately $2.6 Million. Management notified the indenture
trustee of the event of default on July 15, 2003. Management secured
alternative financing, which, together with other funds available to the
Company, was used to pay in full the Enterprise Notes, including the required
"make-whole" prepayment penalty, and all amounts due to the trustee under the
related indenture. The indenture and related documents have therefore been
terminated, satisfied and discharged in full, and the Enterprise Notes have
been paid in full and cancelled, all as of August 14, 2003.
Notwithstanding the non-recourse nature of the Enterprise Notes, the
automatic acceleration of the Enterprise Notes triggered cross-default
provisions in certain of the Company's other credit and sale/leaseback
facilities. On July 25, 2003, the Company sent notices to each of the required
parties under those facilities advising them of the event of default under the
Enterprise indenture and advising them of the resulting cross-default under
each of their respective facilities. However, because no action was taken by
any trustee, debt holder, owner or owner/trustee under any of the affected
facilities, the termination, satisfaction and discharge of the indenture under
which the Enterprise Notes were issued, and the payment in full of the
Enterprise Notes and their cancellation, cured the cross-defaults under those
facilities. Therefore, the Company is no longer in default under any of its
credit or sale/leaseback facilities. The Company has notified all parties
under the affected credit and sale/leaseback facilities that the cross defaults
no longer exist.
23
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
Exhibit Number Description
---------------- -----------------------------
Part II Exhibits: 3 Restated Certificate of
Incorporation, as amended, and
By-Laws of the Registrant
(filed with the Securities and
Exchange Commission as Exhibit
3 to the Registrant's Form
10-Q for the quarterly period
ended June 30, 1996, and
incorporated herein by
reference)
31.1 Certification of Chief
Executive Officer Pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Certification of Chief
Financial Officer Pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 Certification of Chief
Executive Officer Pursuant to
18 U.S.C. Section 1350 as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Chief
Financial Officer Pursuant to
18 U.S.C. Section 1350 as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
(b) On October 23, 2003, we filed a current report on Form 8-K to furnish the
public announcement of third quarter 2003 earnings.
24
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL SHIPHOLDING CORPORATION
/s/ Gary L. Ferguson
_____________________________________________
Gary L. Ferguson
Vice President and Chief Financial Officer
Date November 12, 2003
___________________________