10-Q 1 q013rdq.txt 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, 2001 -------------------- __ 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 --------------------------- 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 Number) incorporation or organization) 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, 2001) ------------------- 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 Sept. 30, Nine Months Ended Sept. 30, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- C> Revenues $ 74,147 $ 82,640 $ 223,951 $ 253,254 Subsidy Revenue 4,089 3,682 11,013 11,029 ---------- ---------- ---------- ---------- 78,236 86,322 234,964 264,283 ---------- ---------- ---------- ---------- Operating Expenses: Voyage Expenses 66,687 63,388 192,627 199,092 Vessel and Barge Depreciation 4,307 9,635 22,735 29,418 Impairment Loss on Assets Held for Disposal 400 - 79,328 - Impairment Loss - - 2,355 - ---------- ---------- ---------- ---------- Gross Voyage Profit (Loss) 6,842 13,299 (62,081) 35,773 ---------- ---------- ---------- ---------- Administrative and General Expenses 6,217 5,123 18,361 16,691 Gain on Sale of Vessels/ Other Assets 4,644 - 3,513 5,063 ---------- ---------- ---------- ---------- Operating Income (Loss) 5,269 8,176 (76,929) 24,145 ---------- ---------- ---------- ---------- Interest: Interest Expense 5,810 8,754 20,914 25,624 Investment Income (220) (999) (794) (1,717) ---------- ---------- ---------- ---------- 5,590 7,755 20,120 23,907 ---------- ---------- ---------- ---------- (Loss) Income Before Provision (Benefit) for Income Taxes and Equity in Net Income (Loss) of Unconsolidated Entities (321) 421 (97,049) 238 ---------- ---------- ---------- ---------- (Provision) Benefit for Income Taxes: Current 8 501 193 1,580 Deferred (96) (263) (34,022) (1,294) State - - 128 140 ---------- ---------- ---------- ---------- (88) 238 (33,701) 426 ---------- ---------- ---------- ---------- Equity in Net Income (Loss) of Unconsolidated Entities (Net of Applicable Taxes) 68 (7) 431 7 ---------- ---------- ---------- ---------- Extraordinary Gain on Early Extinguishment of Bonds (Net of Income Tax Provision of $150) - 242 - 242 ---------- ---------- ---------- ---------- Net (Loss) Income $ (165) $ 418 $(62,917) $ 61 ========== ========== ========== ========== Basic and Diluted Earnings Per Share: Net (Loss) Income $ (0.03) $ 0.07 $ (10.34) $ 0.01 ========== ========== ========== ========== Weighted Average Shares of Common Stock Outstanding 6,082,887 6,082,887 6,082,887 6,082,976 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 2001 2000 ----------- ----------- Current Assets: Cash and Cash Equivalents $ 26,791 $ 16,906 Marketable Securities 3,098 6,018 Accounts Receivable, Net of Allowance for Doubtful Accounts of $105 and $282 in 2001 and 2000, Respectively: Traffic 26,555 49,278 Agents' 5,363 5,226 Claims and Other 11,744 9,513 Federal Income Taxes Receivable - 812 Net Investment in Direct Financing Leases 1,734 3,621 Other Current Assets 4,092 8,074 Material and Supplies Inventory, at Lower of Cost or Market 2,991 11,016 ----------- ----------- Total Current Assets 82,368 110,464 ----------- ----------- Assets Held for Disposal 45,432 - ----------- ----------- Marketable Equity Securities 216 186 ----------- ----------- Investment in Unconsolidated Entities 7,439 3,538 ----------- ----------- Net Investment in Direct Financing Leases 53,671 108,106 ----------- ----------- Vessels, Property, and Other Equipment, at Cost: Vessels and Barges 441,766 744,999 Other Marine Equipment 8,314 8,291 Terminal Facilities 17,730 18,377 Land 1,230 1,230 Furniture and Equipment 13,473 15,974 ----------- ---------- 482,513 788,871 Less - Accumulated Depreciation (212,448) (374,006) ----------- ---------- 270,065 414,865 ----------- ---------- Other Assets: Deferred Charges, Net of Accumulated Amortization of $22,138 and $30,867 in 2001 and 2000, Respectively 7,484 32,296 Acquired Contract Costs, Net of Accumulated Amortization of $18,156 and $17,065 in 2001 and 2000, Respectively 12,369 13,461 Due from Related Parties 663 633 Other 17,848 11,627 ----------- ---------- 38,364 58,017 ----------- ---------- $ 497,555 $ 695,176 =========== ========== The accompanying notes are an integral part of these statements.
4 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (All Amounts in Thousands Except Share Data) (Unaudited)
September 30, December 31, 2001 2000 ----------- ----------- LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Current Maturities of Long-Term Debt $ 15,250 $ 22,181 Current Maturities of Capital Lease Obligations 1,042 7,824 Accounts Payable and Accrued Liabilities 40,231 52,276 Federal Income Tax Payable 50 - Current Maturities of Capital Lease Obligations on Assets Held for Disposal 5,188 - ----------- ---------- Total Current Liabilities 61,761 82,281 ----------- ---------- Long-Term Capital Lease Obligations on Assets Held for Disposal 10,482 - ----------- ---------- Billings in Excess of Income Earned and Expenses Incurred 3,347 5,462 ----------- ---------- Long-Term Capital Lease Obligations, Less Current Maturities 36,003 51,827 ----------- ---------- Long-Term Debt, Less Current Maturities 238,748 308,037 ----------- ---------- Other Long-Term Liabilities: Deferred Income Taxes 8,163 43,300 Claims and Other 22,562 22,737 ----------- ---------- 30,725 66,037 ----------- ---------- Commitments and Contingent Liabilities Stockholders' Investment: Common Stock 6,756 6,756 Additional Paid-In Capital 54,450 54,450 Retained Earnings 66,076 129,755 Less - Treasury Stock (8,704) (8,704) Accumulated Other Comprehensive Loss (2,089) (725) ----------- ---------- 116,489 181,532 ----------- ---------- $ 497,555 $ 695,176 =========== ========== 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, 1999 $ 6,756 $ 54,450 $130,440 ($8,654) ($508) $182,484 Comprehensive Income: Net Income for Year Ended December 31, 2000 - - 836 - - 836 Other Comprehensive Income: Unrealized Holding Loss on Marketable Securities, Net of Deferred Taxes of ($117) - - - - (217) (217) -------- Total Comprehensive Income 619 Treasury Stock - - - (50) - (50) Cash Dividends - - (1,521) - - (1,521) ------------------------------------------------------------- Balance at December 31, 2000 $ 6,756 $54,450 $129,755 ($8,704) ($725) $181,532 =========================================================== Comprehensive Income: Net Loss for the Period Ended September 30, 2001 - - (62,917) - - (62,917) Other Comprehensive Income: Unrealized Holding Loss on Marketable Securities, Net of Deferred Taxes of ($17) - - - - (32) (32) Cumulative Effect of Adoption of SFAS No.133, Net of Deferred Taxes of ($135), on January 1, 2001 - - - - (250) (250) Unrealized Holding Loss on Derivatives, Net of Deferred Taxes of ($583) - - - - (1,082) (1,082) ------- Total Comprehensive Income (64,281) Cash Dividends - - (762) - - (762) ---------------------------------------------------------- Balance at September 30, 2001 $6,756 $54,450 $66,076 ($8,704) ($2,089) $116,489 ========================================================= The accompanying notes are an integral part of these statements.
6 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (All Amounts in Thousands) (Unaudited)
For Nine Months Ended September 30, 2001 2000 ---------- ---------- Cash Flows from Operating Activities: Net (Loss) Income $ (62,917) $ 61 Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities: Depreciation 24,222 31,687 Amortization of Deferred Charges and Other Assets 9,852 14,588 Benefit for Deferred Income Taxes (34,022) (1,294) Equity in Net Gain of Unconsolidated Entities (418) (7) Gain on Sale of Vessels and Other Property (3,513) (5,345) Impairment Loss 2,355 - Extraordinary Gain - (242) Impairment Loss on Assets Held for Disposal 79,328 - Changes in: Accounts Receivable 20,284 6,240 Inventories and Other Current Assets 4,246 (1,135) Other Assets (6,247) 3,773 Accounts Payable and Accrued Liabilities (13,675) (6,933) Federal Income Taxes Payable 256 (303) Billings in Excess of Income Earned and Expenses Incurred (2,527) 1,082 Other Long-Term Liabilities (3,560) (835) ---------- ---------- Net Cash Provided by Operating Activities 13,664 41,337 ---------- ---------- Cash Flows from Investing Activities: Net Investment in Direct Financing Leases 2,118 2,666 Purchase of Vessels and Other Property (39,843) (33,865) Additions to Deferred Charges (7,474) (4,709) Proceeds from Sale of Vessels and Other Property 125,863 20,988 Proceeds from Sales of Short-Term Investments 2,830 3,990 Investment in Unconsolidated Entities (3,258) (1,391) Other Investing Activities (19) (233) ---------- ---------- Net Cash Provided (Used) by Investing Activities 80,217 (12,554) ---------- ---------- Cash Flows from Financing Activities: Proceeds from Issuance of Debt and Capital Lease Obligations 52,300 117,400 Reduction of Debt and Capital Lease Obligations (135,456) (146,254) Additions to Deferred Financing Charges (78) (324) Purchase of Treasury Stock - (50) Common Stock Dividends Paid (762) (1,141) Other Financing Activities - 897 ---------- ---------- Net Cash Used by Financing Activities (83,996) (29,472) ---------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents 9,885 (689) Cash and Cash Equivalents at Beginning of Year 16,906 18,661 ---------- ---------- Cash and Cash Equivalents at End of Year $ 26,791 $ 17,972 ========== ========== The accompanying notes are an integral part of these statements.
7 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (Unaudited) Note 1. Basis of Preparation The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures required by generally accepted accounting principles for complete financial statements have been omitted. It is suggested that these interim statements are read in conjunction with the financial statements and notes thereto included in the Form 10-K of International Shipholding Corporation for the year ended December 31, 2000. Certain reclassifications have been made to prior period financial information in order to conform to current year presentations. Interim statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the full year 2001. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the information shown have been included. The foregoing 2001 interim results are not necessarily indicative of the results of operations for the full year 2001. The Company's policy is to consolidate all subsidiaries in which it holds greater than 50% voting interest. All significant intercompany accounts and transactions have been eliminated. The Company uses the cost method to account for investments in entities in which it holds less than 20% voting interest and in which the Company cannot exercise significant influence over operating and financial activities. The Company uses the equity method to account for investments in entities in which it holds a 20% to 50% voting interest. Note 2. Operating Segments The Company's three operating segments, LINER SERVICES, TIME CHARTER CONTRACTS, and CONTRACTS OF AFFREIGHTMENT, are identified primarily based on the characteristics of the contracts and terms under which its fleet of vessels and barges are operated. During the second quarter, 2001, a reclassification of the Mexican Service was made from the LINER SERVICES segment to the OTHER segment since that service is a more specialized service than the 8 categorization of the operations included in the LINER SERVICES segment leaving the Company's U.S. and international Flag LASH services under the names of "Waterman" and "Forest Lines" as the only remaining operations in the LINER SERVICES segment. The Company also reports in the OTHER category results of several of the Company's subsidiaries that provide ship charter brokerage, agency, barge fleeting and other specialized services primarily to the Company's operating segments described below. 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. The Company does not allocate interest income, administrative and general expenses, equity in unconsolidated entities, or income taxes to its segments. Intersegment revenues are based on market prices and include revenues earned by subsidiaries of the Company that provide specialized services to the operating segments. The following table presents information about segment profit and loss for the nine months ended September, 2001 and 2000.
Time Liner Charter Contracts of (All Amounts in Thousands) Services Contracts Affreightment Other Total ----------------------------------------------------------------------------- 2001 Revenues from external customers $116,611 $ 98,769 $11,722 $ 7,862 $234,964 Intersegment revenues - - - 21,023 21,023 Gross voyage profit before depreciation & Impairment Loss on Assets Held-for-Disposal (3,049) 41,979 6,162 (2,755) 42,337 Depreciation 6,824 11,323 2,237 2,351 22,735 Interest expense 2,972 13,229 2,063 2,650 20,914 Segment (loss) profit before Impairment Loss on Assets Held-for-Disposal, interest income, Administrative and general expenses, equity in Unconsolidated entities and taxes (12,845) 17,427 1,862 (7,756) (1,312) Impairment Loss on Assets Held-for-Disposal (62,385) (5,185) - (11,758) (79,328) Impairment Loss - (2,355) - - (2,355) Gain on Sale of Vessels and Other Assets - 3,075 - 438 3,513 Segment (loss) profit before interest income, Administrative and general expenses, equity in Unconsolidated entities and taxes (75,230) 12,962 1,862 (19,076) (79,482) ----------------------------------------------------------------------------- 2000 Revenues from external customers $135,282 $102,265 $ 23,814 $ 2,922 $264,283 Intersegment revenues - - - 22,891 22,891 Gross voyage profit before depreciation 8,669 44,421 9,753 2,348 65,191 Depreciation 11,486 12,780 4,944 208 29,418 Interest expense 4,305 15,580 5,414 325 25,624 Gain on Sale of Vessel and land - 5,063 - - 5,063 Segment (loss) profit before interest income, Administrative and general expenses, equity in Unconsolidated entities and taxes (7,122) 21,124 (605) 1,815 15,212 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
9 The following table presents information about segment profit and loss for the third quarter ended September 30, 2001 and 2000.
Time Liner Charter Contracts of (All Amounts in Thousands) Services Contracts Affreightment Other Total ----------------------------------------------------------------------------- 2001 Revenues from external customers $ 39,577 $ 31,073 $ 4,212 $ 3,374 $ 78,236 Intersegment revenues - - - 7,280 7,280 Gross voyage profit before depreciation & Impairment Loss on Assets Held-for-Disposal (2,189) 11,769 2,385 (416) 11,549 Depreciation - 2,799 746 762 4,307 Interest expense 1,196 3,417 595 602 5,810 Segment (loss) profit before Impairment Loss on Assets Held-for-Disposal, interest income, Administrative and general expenses, equity in Unconsolidated entities and taxes (3,385) 5,553 1,044 (1,780) 1,432 Impairment Loss on Assets Held-for-Disposal - 400 - - 400 Gain on sale of vessels and other assets - 4,485 - 159 4,644 Segment (loss) profit before interest income, Administrative and general expenses, equity in Unconsolidated entities and taxes (3,385) 9,638 1,044 (1,621) 5,676 ----------------------------------------------------------------------------- 2000 Revenues from external customers $ 43,068 $ 34,645 $ 7,961 $ 648 $ 86,322 Intersegment revenues - - - 7,518 7,518 Gross voyage profit before Vessel and barge depreciation 2,963 15,975 3,193 803 22,934 Vessel and barge depreciation 3,794 4,122 1,648 71 9,635 Interest expense 1,520 5,225 1,909 100 8,754 Segment (loss) profit before interest income, Administrative and general expenses, equity in Unconsolidated entities and taxes (2,351) 6,628 (364) 632 4,545 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
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, 2001 2000 2001 2000 --------- --------- --------- --------- Total profit (loss) for reportable segments $ 5,676 $ 4,545 $ (79,482) $ 15,212 Unallocated amounts: Interest income 220 999 794 1,717 Administrative and general expenses 6,217 5,123 18,361 16,691 --------- --------- --------- --------- (Loss) income before equity in Unconsolidated entities, taxes, and extraordinary item $ (321) $ 421 $ (97,049) $ 238 ========= ========= ========= =========
10 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 first nine months of 2001 and 2000, as the effect would have been antidilutive. Note 4. New Accounting Pronouncements During 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June of 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 is an amendment of SFAS No. 133 and defers the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 on January 1, 2001, which resulted in a cumulative effect of an accounting change to earnings of $16,000 and an increase in other comprehensive income included in Stockholders' Investment of $385,000. The Company employs interest rate swap agreements, foreign currency contracts, and commodity swap contracts. In July 2001, the FASB issued SFAS No. 141 "Business Combinations," SFAS No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 141 prohibits the use of the pooling-of-interests method of accounting for all business combinations initiated after June 30, 2001. SFAS No. 142 requires goodwill not be amortized in any circumstance and also requires that goodwill is tested for impairment annually or when events or circumstances occur between annual tests indicating that goodwill for a reporting unit might be impaired. The standard establishes a new method for testing goodwill for impairment based on a fair value concept and is effective for fiscal years beginning after December 15, 2001. SFAS No. 143 requires the Company to record the fair value of liabilities related to future asset retirement obligations in the period the obligation is incurred and is effective for fiscal years beginning after June 15, 2002. The adoption of any of the above is not 11 expected to have a material impact on the Company's financial statements, because the Company does not have any goodwill recorded or any assets that require retirement obligations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. This statement revises current guidance with respect to the process for measuring impairment of long-lived assets. The Company has not yet determined what effect, if any, this statement will have on its financial statements. Note 5. Impairment Loss on Assets Held-for-Disposal At June 30, 2001, the Company adopted a plan to separate the LASH (Lighter Aboard Ship) service (the LINER SERVICES segment), its Cape-size Bulk Carrier (the TIME CHARTER CONTRACTS segment) and certain special purpose barges (the OTHER segment), from the balance of its operations and dispose of these assets. Net impairment losses for Assets Held-for-Disposal of approximately $79 Million before taxes were recognized in accordance with FASB 121, "Accounting for the Impairment of Long-lived Assets," reflecting a non-cash charge to write-down these assets to estimated market value. The write-down of the impaired assets held-for-disposal was based on the Company's estimate of the fair value of the assets which included the assumption that some of the assets would be sold for scrap value while others would be sold or operated for net cash flows greater than scrap. In the event these assets are sold or scrapped for less, the Company could see a further deterioration in its impairment loss. If totally scrapped, under prevailing scrap prices, the additional loss adjustment would be approximately $19.4 Million before tax or $12.6 Million net of tax benefit. For accounting purposes, these assets were reclassified in the Company's balance sheet as "Current Assets Held-for-Disposal" and "Assets Held-for- Disposal." During the third quarter 2001, the asset included in "Current Assets Held-for-Disposal" was sold. The "Assets Held-for Disposal" in the LINER SERVICES segment include those used in the operation of a U.S. flag LASH service between the U.S. Gulf and Atlantic coasts and the Middle East, East Africa, the Indian sub-continent and Southeast Asia operated under the name "Waterman" and an international flag Trans-Atlantic LASH service operated under the name "Forest Lines" and associated ancillary assets. The past several years have reflected a downward trend in the LINER SERVICES segment as a result of higher operating cost, disruptions in service due to unplanned maintenance and change in market conditions. 12 A major contributing factor to the downward trend has been the high cost of fuel along with the need for extensive capital improvements to the Company's LASH vessels. Extensive steel work has been required to maintain a number of the older LASH vessels, thereby resulting in a significant number of non- operating days that negatively impacted the results of this segment. During the first nine months of 2001, these operations accounted for approximately 51% of the Company's total revenues while contributing a negative $10.0 Million against gross voyage profits (after depreciation) and accounting for approximately 50% of the Company's administrative and general expenses. Although these operations have accounted for 50% of the administrative and general expenses, there is no certainty that all of the savings will be achieved by the time the final disposition of these assets is completed. As of September 30, 2001, the carrying value of this segment was written down to approximately $45.0 Million, which is reflected as part of the Company's Balance Sheet total for "Assets Held-for Disposal." The Company's debt specifically attributable to these assets is approximately $15.7 Million. As of September 30, 2001, the Company had sold the Cape Size Bulk Carrier previously reflected in the Company's Balance Sheet under "Current Assets Held- for Disposal." This asset was sold for a loss of approximately $400,000 in excess of the original write-down amount. The "Assets Held-for-Disposal" in the OTHER segment include certain special purpose barges. Those assets are no longer in use due to a restructuring of the contract with a major mining company in the fourth quarter of 2000 which allowed the Company to deploy its two special purpose vessels, the Bali Sea and Banda Sea, on a service between Mobile, Alabama and Coatzacoalcos, Mexico ("Mexican Service"). The special purpose barges have been written down to $.5 Million reflecting a value close to current scrap value. The Company has no debt specifically attributable to this asset. This amount is reflected as part of the Company's Balance Sheet total for "Assets Held-for Disposal." The Company has retained an investment banker to assist in its efforts regarding the disposal of these assets. The pending outcome of this review as well as market conditions will determine when and how these assets will be disposed of. In the meantime, a staff reduction of approximately 20% of the Company's shore base staff was effected early in the third quarter in anticipation of the pending transition. This action reduces the Company's administration and general expenses by approximately $2.3 Million on an annualized basis. Additional reductions are probable as the asset disposition program proceeds. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements --------------------------- Certain statements made in this report or elsewhere by, or on behalf of, the Company 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 assumptions about future events and are therefore subject to risks and uncertainties. The Company cautions readers that certain important factors have affected and may affect in the future the Company's actual consolidated results of operations and may cause future results to differ materially from those expressed in or implied by any forward-looking statements made in this report or elsewhere by, or on behalf of, the Company. A description of certain of these important factors is contained in the Company's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2000. General -------- The Company's 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, the Company's 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 management believes that gross voyage profit is a more appropriate measure of performance than revenues. Accordingly, the discussion below address variations in gross voyage profits rather than variations in revenues. 14 RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Gross Voyage Profit -------------------- Gross voyage profit before depreciation and Impairment Loss on Assets Held-for-Disposal decreased 35.1% from $65.2 Million in the first nine months of 2000 to $42.3 Million in the first nine months of 2001. The Company's LINER SERVICES segment decreased $11.7 Million. The Waterman service has had 228 out of service days from unplanned maintenance on two of its vessels and scheduling realignments as a result of those unplanned maintenance periods. In addition, the service experienced a drop in its inbound tonnage volume as a result of market conditions and has reduced the vessels operating within the service by laying-up one of its LASH vessels in Southeast Asia. The OTHER segment's results decreased $5.1 Million primarily as a result of the start-up losses from the Company's Mexican Service. The CONTRACTS OF AFFREIGHTMENT segment had a drop in its gross voyage profit of $3.6 Million reflecting the change in one of the Company's contracts, during the fourth quarter of 2000, which resulted in the results of that contract being accounted for in the TIME CHARTER CONTRACTS segment. The TIME CHARTER CONTRACTS segment, excluding the results from the above reclassification decreased $5.5 Million resulting from the completion of charters to the U.S. Military Sealift Command ("MSC") for four of the Company's vessels. Three of these vessels were at the end of their economic lives and were scrapped in March, May and July, 2001 and the other vessel was sold and now operates in the Freeport Indonesian Service. Vessel and barge depreciation for the first nine months of 2001 decreased 22.7% to $22.7 Million as compared to $29.4 Million in the same period of 2000 primarily due to the sale of one of the Company's Ice Strengthened Multi- Purpose vessels, the scrapping of four of the Company's LASH vessels, and the write-down of the assets included in the LINER SERVICES segment, the TIME CHARTER CONTRACTS segment and the OTHER segment (reference Impairment Loss on Assets Held-for-Disposal) partially offset by the purchase of a Pure Car/Truck Carrier. The Assets Held-for-Disposal are not being further depreciated. The depreciation expense related to these assets for the first nine months of 2000 was $12.9 Million. 15 Impairment Loss on Assets Held-for-Disposal -------------------------------------------- At June 30, 2001, the Company adopted a plan to separate the LASH (Lighter Aboard Ship) service (the LINER SERVICES segment), its Cape-size Bulk Carrier (the TIME CHARTER CONTRACTS segment) and certain special purpose barges (the OTHER segment), from the balance of its operations and dispose of these assets. Net impairment losses for Assets Held-for-Disposal of approximately $79 Million before taxes were recognized in accordance with FASB 121, "Accounting for the Impairment of Long-lived Assets," reflecting a non-cash charge to write-down these assets to estimated market value. The write-down of the impaired assets held-for-disposal was based on the Company's estimate of the fair value of the assets which included the assumption that some of the assets would be sold for scrap value while others would be sold or operated for net cash flows greater than scrap. In the event these assets are sold or scrapped for less, the Company could see a further deterioration in its impairment loss. If totally scrapped, under prevailing scrap prices, the additional loss adjustment would be approximately $19.4 Million before tax or $12.6 Million net of tax benefit. For accounting purposes, these assets were reclassified in the Company's balance sheet as "Current Assets Held-for-Disposal" and "Assets Held-for- Disposal." During the third quarter 2001, the asset included in "Current Assets Held-for-Disposal" was sold. The "Assets Held-for Disposal" in the LINER SERVICES segment include those used in the operation of a U.S. flag LASH service between the U.S. Gulf and Atlantic coasts and the Middle East, East Africa, the Indian sub-continent and Southeast Asia operated under the name "Waterman" and an international flag Trans-Atlantic LASH service operated under the name "Forest Lines" and associated ancillary assets. The past several years has reflected a downward trend in the LINER SERVICES segment as a result of higher operating cost, disruptions in service due to unplanned maintenance and change in market conditions. A major contributing factor to the downward trend has been the high cost of fuel along with the need for extensive capital improvements to the Company's LASH vessels. Extensive steel work has been required to maintain a number of the older LASH vessels, thereby resulting in a significant amount of non- operating days that negatively impacted the results of this segment. During the first nine months of 2001, these operations accounted for approximately 51% of the Company's total revenues while contributing a negative $10.0 Million against gross voyage profits (after depreciation) and accounting for approximately 50% of the Company's administrative and general expenses. Although these operations have accounted for 50% of the administrative and general expenses, there is no certainty that all of the savings will be achieved by the time the final disposition of these assets is completed. 16 As of September 30, 2001, the carrying value of this segment was written down to approximately $45.0 Million, which is reflected as part of the Company's Balance Sheet total for "Assets Held-for Disposal." The Company's debt specifically attributable to these assets is approximately $15.7 Million. As of September 30, 2001, the Company had sold the Cape Size Bulk Carrier previously reflected in the Company's Balance Sheet under "Current Assets Held-for Disposal." This asset was sold for a loss of approximately $400,000 in excess of original write-down amount. The "Assets Held-for-Disposal" in the OTHER segment include certain special purpose barges. Those assets are no longer in use due to a restructuring of the contract with a major mining company in the fourth quarter of 2000 which allowed the Company to deploy its two special purpose vessels, the Bali Sea and Banda Sea, on a service between Mobile, Alabama and Coatzacoalcos, Mexico ("Mexican Service"). The special purpose barges have been written down to $.5 Million reflecting a value close to current scrap value. The Company has no debt specifically attributable to this asset. This amount is reflected in the Company's Balance Sheet as part of the Company's Balance Sheet total for "Assets Held-for Disposal." The Company has retained an investment banker to assist in its efforts regarding the disposal of these assets. The pending outcome of this review as well as market conditions will determine when and how these assets will be disposed of. In the meantime, a staff reduction of approximately 20% of the Company's shore base staff was effected early in the third quarter in anticipation of the pending transition. This action reduces the Company's administration and general expenses by approximately $2.3 Million on an annualized basis. Additional reductions are probable as the asset disposition program proceeds. Other Income and Expenses -------------------------- Administrative and general expenses increased from $16.7 Million in the first nine months of 2000 to $18.4 Million in the same period in 2001 primarily reflecting increases associated with the start-up of the Mexican Service and severance payments as a result of a reduction of approximately 20% of the Company's shore base staff. Earnings for the TIME CHARTER CONTRACTS segment in 2001 included a gain of $4.5 Million from the sale of one Pure Car Carrier and a gain of $ .9 Million from the sale of certain other assets no longer required in the Company's operations, partially offset by a loss of $2.3 Million on the sale of two Lash vessels. Interest expense was $20.9 Million for the first nine months of 2001 as compared to $25.6 Million for the same period in 2000. This decrease is primarily due to the repurchase of 17 9% and 7.75% Senior Notes in the second half of 2000 partially offset by the financing associated with the acquisition of the Pure Car/Truck Carrier ("PCTC"), "Green Cove", in June of 2000 and the refinancing of two Pure Car Carriers. Investment income decreased from $1,717,000 for the first nine months of 2000 to $794,000 for the nine months of 2001 due to a lower average balance of invested funds. Income Taxes ------------- In the first nine months of 2001, the Company had an income tax benefit of $33.7 Million compared to an income tax provision of $426,000 in the same period in 2000, at the statutory rate of 35% for both periods. 18 THIRD QUARTER ENDED SEPTEMBER 30, 2001 COMPARED TO THIRD QUARTER ENDED SEPTEMBER 30, 2001 Gross Voyage Profit -------------------- Gross voyage profit before depreciation and Impairment Loss on Assets Held-for- Disposal decreased $11.4 Million from $22.9 Million in the third quarter of 2000 to $11.5 Million in the third quarter of 2001. Gross voyage profit before depreciation and Impairment Loss on Assets Held-for-Disposal for the LINER SERVICES segment decreased $5.2 Million, from a profit of $3.0 Million in the third quarter ending 2000 to a loss of $2.2 Million in the third quarter of 2001. This decrease is primarily due to the Waterman service experiencing a decrease in its inbound cargo volume due to depressed market conditions. As a result of lower volume, one of the vessels operating in this service was laid-up during this Quarter. Gross voyage profit before depreciation and Impairment Loss on Assets Held-for-Disposal for the TIME CHARTER CONTRACTS segment decreased from $16.0 Million in the third quarter, 2000 to $11.8 Million for the same period in 2001. This decrease was primarily due to the completion of charter on four of the Vessels under contract with the MSC. The impact of these contract terminations was partially offset by the reclassification of the Company's contract with a major mining company to this segment. The CONTRACTS OF AFFREIGHTMENT segment's gross profit before depreciation and Impairment Loss on Assets Held-for-Disposal decreased from $3.2 Million for the third quarter 2000 to $2.4 Million for the same period 2001 due to the aforementioned reclassification resulting from the change in the nature of a contract as noted in the TIME CHARTER CONTRACTS segment. The OTHER segment's gross profit before depreciation and Impairment Loss on Assets Held-for-Disposal decreased from $803,000 for the third quarter ending 2000 to ($416,000) for the same period in 2001. This decrease was primarily due to results from the Company's recently initiated Mexican service, which reported a loss for the quarter. Impairment Loss on Assets Held-for-Disposal -------------------------------------------- At June 30, 2001, the Company adopted a plan to separate the LASH (Lighter Aboard Ship) service (the LINER SERVICES segment), its Cape-size Bulk Carrier (the TIME CHARTER CONTRACTS segment) and certain special purpose barges (the OTHER segment), from the balance of 19 its assets in order to write-down the aforementioned assets to estimated market value. For accounting purposes, these assets have been reclassified in the Company's balance sheet as "Assets Held-for-Disposal." During the third quarter 2001, the asset previously classified under "Current Assets Held-for- Disposal" was sold. (See Note 5) Other Income and Expenses -------------------------- Administrative and general expenses increased from $5.1 Million in the third quarter of 2000 to $6.2 Million in the same period in 2001 primarily as a result of severance payments associated with the reduction of 20% of the Company's shore base staff. The results of the TIME CHARTER CONTRACTS segment in the third quarter 2001, included a gain of $4.5 Million from the sale of one of the Company's Pure Car Carrier. Interest expense was $8.8 Million for the third quarter of 2000 as compared to $5.8 Million for the same period in 2001. This decrease is primarily due to the repurchase of 9% and 7.75% Senior Notes in the second half of 2000 partially offset by the financing associated with the acquisition of the Pure Car/Truck Carrier ("PCTC"), "Green Cove," in June 2000 and the refinancing of a Foreign Pure Car Carrier. Investment income decreased from $999,000 for the third quarter of 2000 to $220,000 for the third quarter of 2001 due to a lower average balance of invested funds. Income Taxes ------------- In the third quarter 2001, the Company had an income tax benefit of $88,000 compared to an income tax provision of $238,000 in the same period in 2000, at the statutory rate of 35% for both periods. 20 LIQUIDITY AND CAPITAL RESOURCES The Company's working capital decreased from $28.2 Million at December 31, 2000, to $20.1 Million at September 30, 2001, after provision for current maturities of long-term debt and capital lease obligations of $21.5 Million. Cash and cash equivalents increased during the first nine months of 2001 by $9.9 Million to a total of $26.8 Million. This increase was provided by cash provided by operating activities of $13.7 Million, cash provided by investing activities of $80.2 Million, partially offset by cash used for financing activities of $84.0 Million. Operating activities generated a positive cash flow after adjusting the net loss for non-cash provisions such as depreciation, amortization and impairment loss. Cash flow was provided through the sale of six vessels generating $125.6 Million and property and proceeds from the sale of short-term investments of $2.8 Million. These were partially offset by $7.5 Million in deferred vessel drydocking charges and $39.3 Million for the purchase of a Pure Car/Truck Carrier. The net cash used for financing activities of $84.0 Million included reductions of debt and capital lease obligations of $135.5 Million. Approximately $24.9 Million stemmed from regularly scheduled principal payments, $69.6 Million was the payoff of two loans that were replaced with long term leases and $41.0 Million was for the repayment of amounts drawn under a line of credit. These reductions were offset by proceeds received from financing secured by one of the Company's PCTC's for $1.8 Million, $27.5 Million for the financing of a Pure Car/Truck Carrier and draws against the Company's line of credit totaling $23.0 Million. At September 30, 2001, the Company's revolving credit facility of $10.0 Million was fully available. This facility expires April 23, 2003. Despite the reported loss during the first nine months of 2001, the Company continues to meet all of its financial covenants under its various debt agreements, after these were amended, effective June, 2001. However as a result of reduced margins on certain covenants, management is taking steps to ensure continuing compliance. Management believes that normal operations will provide sufficient working capital and cash flows to meet debt service during the foreseeable future. However, in view of the write-down charge taken for Assets Held-for- Disposal and to be certain that the Company is in compliance with financial covenants under its loan agreements, at a regular meeting held June 25, 2001, the Board of Directors elected to suspend quarterly dividend payments on Common Shares of stock. 21 NEW ACCOUNTING PRONOUNCEMENTS During 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June of 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 is an amendment of SFAS No. 133 and defers the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 on January 1, 2001, which resulted in a cumulative effect of an accounting change to earnings of $16,000 and an increase in other comprehensive income included in Stockholders' Investment of $385,000. The Company employs interest rate swap agreements, foreign currency contracts, and commodity swap contracts. In July 2001, the FASB issued SFAS No. 141 "Business Combinations," SFAS No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 141 prohibits the use of the pooling- of-interests method of accounting for all business combinations initiated after June 30,2001. SFAS No. 142 requires goodwill not be amortized in any circumstance and also requires that goodwill is tested for impairment annually or when events or circumstances occur between annual tests indicating that goodwill for a reporting unit might be impaired. The standard establishes a new method for testing goodwill for impairment based on a fair value concept and is effective for fiscal years beginning after December 15, 2001. SFAS No. 143 requires the Company to record the fair value of liabilities related to future asset retirement obligations in the period the obligation is incurred and is effective for fiscal years beginning after June 15, 2002. The adoption of any of the above is not expected to have a material impact on the Company's financial statements, because the Company does not have any goodwill recorded or any assets that require retirement obligations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The provisions of this statement are required to be applied for fiscal years beginning after December 22 15, 2001 and interim periods within those fiscal years. This statement revises current guidance with respect to the process for measuring impairment of long- lived assets. The Company has not yet determined what effect, if any, this statement will have on its financial statements. 23 MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT In the ordinary course of its business, the Company is exposed to foreign currency, interest rate, and commodity price risk. The Company utilizes derivative financial instruments including forward exchange contracts, interest rate swap agreements and commodity swap agreements to manage certain of these exposures. The Company hedges only firm commitments or anticipated transactions and does not use derivatives for speculation. The Company neither holds nor issues financial instruments for trading purposes. There were no material changes in market risk exposure for the foreign currency risk described in the Company's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2000. The fair value of long-term debt at September 30, 2001, including current maturities, was estimated to be $262.1 Million compared to a carrying value of $254.0 Million. The potential increase in fair value resulting from a hypothetical 10% decrease in the average interest rates applicable to the Company's long-term debt at September 30, 2001, would be approximately $4.5 Million or 1.8% of the carrying value. The fair value of the interest rate swap agreements at September 30, 2001, as discussed in the Form 10-K, estimated based on the amount that the banks would receive or pay to terminate the swap agreements at the reporting date taking into account current market conditions and interest rates, was a liability of $1.9 Million. A hypothetical 10% decrease in interest rates as of September 30, 2001, would have resulted in a $2.2 Million increase in the fair value of the liability. The fair value of the commodity swap agreements at September 30, 2001, as discussed in the Form 10-K, 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, was a liability of $84,000. A hypothetical 10% decrease in the fuel price per ton of fuel as of September 30, 2001 would have resulted in a $321,000 increase in the fair value of the liability. 24 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The matters voted upon and results of the voting at the Company's annual meeting of Shareholders of April 18, 2001, were reported in response to Item 4 of the Company's Form 10-Q filed with the Securities and Exchange Commission for the quarterly period ended March 31, 2001. Item 6. Exhibits and Reports on Form 8-K (a) EXHIBIT INDEX Exhibit Number Description -------------- ----------- Part I Exhibits: 27 Financial Data Schedule 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) (b) Form 8-K was filed on July 26, 2001 disclosing the Disposition of Assets. 25 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 14, 2001 ___________________________