10-Q 1 h20116e10vq.txt INTERNATIONAL SHIPHOLDING CORPORATION - 9/30/2004 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, 2004 or [ ] 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)
NOT APPLICABLE -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 requirements for the past 90 days. YES [X] NO [ ] --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES 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, 2004) -------------------------- ---------------- --------------------
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 September 30, Nine Months Ended September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Revenues $ 68,797 $ 63,550 $ 199,483 $ 195,861 Operating Expenses: Voyage Expenses 58,675 51,905 162,436 153,729 Vessel and Barge Depreciation 4,731 5,287 14,054 15,079 ------------- ------------- ------------- ------------- Gross Voyage Profit 5,391 6,358 22,993 27,053 ------------- ------------- ------------- ------------- Administrative and General Expenses 3,903 3,561 11,676 11,379 (Gain) Loss on Sale of Other Assets -- (247) 7 (290) ------------- ------------- ------------- ------------- Operating Income 1,488 3,044 11,310 15,964 ------------- ------------- ------------- ------------- Interest and Other: Interest Expense 2,574 2,962 7,922 9,614 Loss on Sale of Investment -- -- 623 -- Investment Income (177) (119) (506) (649) Other Loss -- 103 -- -- Loss on Early Extinguishment of Debt -- 2,570 46 1,310 ------------- ------------- ------------- ------------- 2,397 5,516 8,085 10,275 ------------- ------------- ------------- ------------- (Loss) Income Before (Benefit) Provision for Income Taxes and Equity in Net Income of Unconsolidated Entities (909) (2,472) 3,225 5,689 ------------- ------------- ------------- ------------- (Benefit) Provision for Income Taxes: Current (79) (164) 131 -- Deferred (189) (661) 1,158 2,011 State 8 30 21 98 ------------- ------------- ------------- ------------- (260) (795) 1,310 2,109 ------------- ------------- ------------- ------------- Equity in Net Income of Unconsolidated Entities (Net of Applicable Taxes) 869 33 3,030 260 ------------- ------------- ------------- ------------- Net Income (Loss) $ 220 $ (1,644) $ 4,945 $ 3,840 ============= ============= ============= ============= Basic and Diluted Earnings Per Share: Net Income (Loss) $ 0.04 $ (0.27) $ 0.81 $ 0.63 ============= ============= ============= ============= Weighted Average Shares of Common Stock Outstanding: Basic 6,082,887 6,082,887 6,082,887 6,082,887 Diluted 6,088,036 6,082,887 6,092,536 6,082,887
The accompanying notes are an integral part of these statements. 2 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (All Amounts in Thousands) (Unaudited)
SEPTEMBER 30, December 31, ASSETS 2004 2003 ------------- ------------- Current Assets: Cash and Cash Equivalents $ 11,931 $ 8,881 Restricted Cash -- 816 Marketable Securities 4,837 2,650 Accounts Receivable, Net of Allowance for Doubtful Accounts of $288 and $327 in 2004 and 2003, Respectively: Traffic 18,463 23,070 Agents 5,935 4,119 Claims and Other 5,367 9,438 Federal Income Taxes Receivable 327 -- Deferred Income Tax 144 144 Net Investment in Direct Financing Lease 2,284 2,128 Other Current Assets 5,248 6,295 Material and Supplies Inventory, at Lower of Cost or Market 3,216 3,177 Current Assets Held for Disposal 89 89 ------------- ------------- Total Current Assets 57,841 60,807 ------------- ------------- Investment in Unconsolidated Entities 10,128 8,413 ------------- ------------- Net Investment in Direct Financing Lease 47,386 49,136 ------------- ------------- Vessels, Property, and Other Equipment, at Cost: Vessels and Barges 325,759 324,413 Other Equipment 7,082 5,233 Terminal Facilities 140 345 Furniture and Equipment 3,839 4,304 ------------- ------------- 336,820 334,295 Less - Accumulated Depreciation (124,968) (111,154) ------------- ------------- 211,852 223,141 ------------- ------------- Other Assets: Deferred Charges, Net of Accumulated Amortization of $15,541 and $14,614 in 2004 and 2003, Respectively 14,514 12,319 Acquired Contract Costs, Net of Accumulated Amortization of $22,522 and $21,430 in 2004 and 2003, Respectively 8,004 9,095 Restricted Cash 6,541 6,590 Due from Related Parties 2,535 2,535 Other 9,111 10,415 ------------- ------------- 40,705 40,954 ------------- ------------- $ 367,912 $ 382,451 ============= =============
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, 2004 2003 ------------- ------------- LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Current Maturities of Long-Term Debt $ 13,815 $ 14,866 Accounts Payable and Accrued Liabilities 29,500 35,510 Federal Income Tax Payable -- 183 ------------- ------------- Total Current Liabilities 43,315 50,559 ------------- ------------- Billings in Excess of Income Earned and Expenses Incurred 1,809 5,271 ------------- ------------- Long-Term Debt, Less Current Maturities 152,316 164,144 ------------- ------------- Other Long-Term Liabilities: Deferred Income Taxes 22,601 19,565 Other 20,528 21,545 ------------- ------------- 43,129 41,110 ------------- ------------- Commitments and Contingent Liabilities Stockholders' Investment: Common Stock 6,756 6,756 Additional Paid-In Capital 54,450 54,450 Retained Earnings 74,875 69,930 Less -Treasury Stock (8,704) (8,704) Accumulated Other Comprehensive Loss (34) (1,065) ------------- ------------- 127,343 121,367 ------------- ------------- $ 367,912 $ 382,451 ============= =============
The accompanying notes are an integral part of these statements. 4 INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (All Amounts in Thousands) (Unaudited)
Nine Months Ended September 30, 2004 2003 ----------- ----------- Cash Flows from Operating Activities: Net Income $ 4,945 $ 3,840 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 14,422 15,670 Amortization of Deferred Charges and Other Assets 5,735 5,657 Deferred Provision for Federal Income Taxes 1,158 2,011 Equity in Net Income of Unconsolidated Entities (3,030) (260) Loss (Gain) on Sale of Other Assets 7 (290) Loss on Early Extinguishment of Debt 46 1,310 Loss on Sale of Investment 623 -- Changes in: Accounts Receivable 6,863 (381) Inventories and Other Current Assets 522 (544) Deferred Drydocking Charges (5,751) (1,112) Other Assets 1,049 2,126 Accounts Payable and Accrued Liabilities (6,245) 4,028 Federal Income Taxes Payable (819) 2,791 Billings in Excess of Income Earned and Expenses Incurred (3,462) (707) Other Long-Term Liabilities (1,590) (5,730) ----------- ----------- Net Cash Provided by Operating Activities 14,473 28,409 ----------- ----------- Cash Flows from Investing Activities: Net Investment in Direct Financing Lease 1,594 1,437 Additions to Vessels and Other Assets (1,802) (5,287) Proceeds from Sale of Vessels and Other Assets -- 478 Purchase of and Proceeds from Short Term Investments (2,273) 46 Proceeds from Sale of Marketable Equity Securities -- 200 Distributions from (Investment in) Unconsolidated Entities 3,043 128 Partial Sale of Unconsolidated Entities -- 1,921 Net Decrease in Restricted Cash Account 865 384 Other Investing Activities 113 6 ----------- ----------- Net Cash Provided (Used) by Investing Activities 1,540 (687) ----------- ----------- Cash Flows from Financing Activities: Proceeds from Issuance of Debt 1,000 41,000 Repayment of Debt (13,879) (64,728) Additions to Deferred Financing Charges (68) (221) Other Financing Activities (16) (197) ----------- ----------- Net Cash Used by Financing Activities (12,963) (24,146) ----------- ----------- Net Increase in Cash and Cash Equivalents 3,050 3,576 Cash and Cash Equivalents at Beginning of Period 8,881 4,419 ----------- ----------- Cash and Cash Equivalents at End of Period $ 11,931 $ 7,995 =========== ===========
The accompanying notes are an integral part of these statements. 5 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 (UNAUDITED) Note 1. Basis of Preparation We have prepared the accompanying unaudited interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission, and we have omitted certain information and footnote disclosures required by generally accepted accounting principles for complete financial statements. The condensed consolidated balance sheet as of December 31, 2003 has been derived from the audited financial statements at that date. We suggest that you read these interim statements in conjunction with the financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2003. We have made certain reclassifications to prior period financial information in order to conform to current year presentations. The foregoing 2004 interim results are not necessarily indicative of the results of operations for the full year 2004. Interim statements are subject to possible adjustments in connection with the annual audit of our accounts for the full year 2004. Management believes that all adjustments necessary, consisting only of normal recurring adjustments, for a fair presentation of the information shown have been made. Our policy is to consolidate all subsidiaries in which we hold a greater than 50% voting interest and to use the equity method to account for investments in entities in which we hold a 20% to 50% voting interest. We use the cost method to account for investments in entities in which we hold less than 20% voting interest and in which we cannot exercise significant influence over operating and financial activities. We have eliminated all significant intercompany accounts and transactions. Note 2. Employee Benefit Plans The following table provides the components of net periodic benefit cost for the pension plan: (All Amounts in Thousands)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, COMPONENTS OF NET PERIODIC BENEFIT COST: 2004 2003 2004 2003 --------------- --------------- --------------- --------------- Service cost $ 137 $ 117 $ 411 $ 351 Interest cost 308 298 924 894 Expected return on plan assets (346) (300) (1,038) (900) Amortization of prior service cost 2 2 6 6 Amortization of net actuarial loss 23 47 69 141 --------------- --------------- --------------- --------------- Net periodic benefit cost $ 124 $ 164 $ 372 $ 492 =============== =============== =============== ===============
6 The following table provides the components of net periodic benefit cost for the postretirement benefits plan: (All Amounts in Thousands)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, COMPONENTS OF NET PERIODIC BENEFIT COST: 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Service cost $ 19 $ 16 $ 57 $ 48 Interest cost 147 149 441 447 Amortization of net actuarial loss 25 17 75 51 ------------- ------------- ------------- ------------- Net periodic benefit cost $ 191 $ 182 $ 573 $ 546 ============= ============= ============= =============
We contributed $143,000 to our pension plan in the first quarter of 2004. We do not expect to make any further contributions to our pension plan in 2004 and we do not expect to make any contributions to our post retirement benefits plan in 2004. In December of 2003, the Medicare Prescription Drug, Improvements, and Modernization Act of 2003 ("Act") was signed into law. In addition to including numerous other provisions that have potential effects on an employer's retiree health plan, the Medicare law included a special subsidy for employers that sponsor retiree health plans with prescription drug benefits that are at least as favorable as the new Medicare Part D benefit. In May of 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvements, and Modernization Act of 2003, " that provides guidance on the accounting for the effects of the Act for employers that sponsor postretirement health care plans that provide drug benefits. We are still evaluating whether our plan is actuarially equivalent, although its impact on our financial position and results of operations is not material. Note 3. Operating Segments Our four operating segments, LINER SERVICES, TIME CHARTER CONTRACTS, CONTRACTS OF AFFREIGHTMENT, and RAIL-FERRY SERVICE, are identified primarily by the characteristics of the contracts and terms under which our vessels and barges are operated. We report in the OTHER category results of several of our subsidiaries that provide ship charter brokerage, agency, and other specialized services primarily to our operating segments. We manage each reportable segment separately, as each requires different resources depending on the nature of the contract or terms under which each vessel within the segment operates. We do not allocate administrative and general expenses, investment income, other income, losses or gains on early extinguishment of debt, equity in net income of unconsolidated entities, or income taxes to our segments. Intersegment revenues are based on market prices and include revenues earned by subsidiaries that provide specialized services to the operating segments. 7 The following table presents information about segment profit and loss for the three months ended September 30, 2004 and 2003:
Liner Time Charter Contracts of Rail-Ferry (All Amounts in Thousands) Services Contracts Affreightment Service Other Elimination Total ----------------------------------------------------------------------------------------------------------------------------------- 2004 REVENUES FROM EXTERNAL CUSTOMERS $ 25,725 $ 29,585 $ 4,018 $ 3,939 $ 5,530 -- $ 68,797 INTERSEGMENT REVENUES -- -- -- -- 3,115 (3,115) -- VESSEL AND BARGE DEPRECIATION 859 2,332 604 729 207 -- 4,731 GROSS VOYAGE (LOSS) PROFIT (1,191) 7,432 1,013 (1,664) (199) -- 5,391 INTEREST EXPENSE 188 1,487 370 480 49 -- 2,574 SEGMENT (LOSS) PROFIT (1,379) 5,945 643 (2,144) (248) -- 2,817 ----------------------------------------------------------------------------------------------------------------------------------- 2003 Revenues from external customers $ 18,340 $ 31,965 $ 3,991 $ 3,758 $ 5,496 -- $ 63,550 Intersegment revenues -- -- -- -- 3,297 (3,297) -- Vessel and barge depreciation 956 2,886 605 729 111 -- 5,287 Gross voyage (loss) profit (1,192) 6,271 1,619 (853) 513 -- 6,358 Interest expense 240 1,693 458 524 47 -- 2,962 Gain on sale of other assets -- -- -- -- 247 -- 247 Segment (loss) profit (1,432) 4,578 1,161 (1,377) 713 -- 3,643 -----------------------------------------------------------------------------------------------------------------------------------
The following table presents information about segment profit and loss for the nine months ended September 30, 2004 and 2003:
Liner Time Charter Contracts of Rail-Ferry (All Amounts in Thousands) Services Contracts Affreightment Service Other Elimination Total ----------------------------------------------------------------------------------------------------------------------------------- 2004 REVENUES FROM EXTERNAL CUSTOMERS $ 71,332 $ 87,086 $ 12,048 $ 11,923 $ 17,094 -- $ 199,483 INTERSEGMENT REVENUES -- -- -- -- 9,344 (9,344) -- VESSEL AND BARGE DEPRECIATION 2,570 6,898 1,813 2,187 586 -- 14,054 GROSS VOYAGE (LOSS) PROFIT (429) 22,144 3,737 (3,382) 923 -- 22,993 INTEREST EXPENSE 614 4,533 1,140 1,476 159 -- 7,922 LOSS ON SALE OF OTHER ASSETS -- -- -- -- (7) -- (7) SEGMENT (LOSS) PROFIT (1,043) 17,611 2,597 (4,858) 757 -- 15,064 ----------------------------------------------------------------------------------------------------------------------------------- 2003 Revenues from external customers $ 58,290 $ 98,579 $ 12,008 $ 11,138 $ 15,846 -- $ 195,861 Intersegment revenues -- -- -- -- 10,180 (10,180) -- Vessel and barge depreciation 2,598 8,204 1,813 2,187 277 -- 15,079 Gross voyage (loss) profit (1,737) 25,508 4,100 (2,002) 1,184 -- 27,053 Interest expense 809 5,506 1,372 1,768 159 -- 9,614 Gain on sale of other assets -- -- -- -- 290 -- 290 Segment (loss) profit (2,546) 20,002 2,728 (3,770) 1,315 -- 17,729 -----------------------------------------------------------------------------------------------------------------------------------
8 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, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Total reportable segment profit $ 2,817 $ 3,643 $ 15,064 $ 17,729 Unallocated amounts: Administrative and general expenses (3,903) (3,561) (11,676) (11,379) Loss on sale of investment -- -- (623) -- Investment income 177 119 506 649 Other loss -- (103) -- -- Loss on early extinguishment of debt -- (2,570) (46) (1,310) ------------- ------------- ------------- ------------- (Loss) income before (benefit) provision for income taxes and equity in net income of unconsolidated entities $ (909) $ (2,472) $ 3,225 $ 5,689 ============= ============= ============= =============
Note 4. Unconsolidated Entities In the fourth quarter of 2003, through our wholly-owned subsidiary, we acquired a 50% investment in Dry Bulk Cape Holding Inc. ("Dry Bulk"), which owns two cape-size bulk carrier vessels built in calendar years 2002 and 2003. We account for our investment in Dry Bulk under the equity method, and as such our share of the earnings or losses of Dry Bulk is reported, net of taxes, in our consolidated statements of income. For the nine months ended September 30, 2004, our portion of earnings, net of taxes, was $2.3 million. For the three months ended September 30, 2004, our portion of earnings net of taxes was $593,000. In April of 2004, we received a cash distribution of $1.6 million from Dry Bulk representing first quarter earnings and in July of 2004, we received a cash distribution of $1 million from Dry Bulk representing second quarter earnings, which were both recorded as reductions of our investment in Dry Bulk. At September 30, 2004, we guarantee a portion of the outstanding debt of Dry Bulk. The guarantee is for the full remaining term of the associated debt, which was approximately 7 years as of September 30, 2004. Performance by us would be required under the guarantee in the event of default by Dry Bulk on its third party debt. This represents non-recourse debt to us. The portion of the outstanding debt that the we guaranteed at September 30, 2004, was $30,697,000. The unaudited combined condensed results of operations of Dry Bulk are summarized below:
Three Months Ended Nine Months Ended (Amounts in Thousands) September 30, 2004 September 30, 2004 --------------------------- -------------------------- Operating Revenue $ 4,210 $ 14,138 Operating Income $ 2,634 $ 9,515 Net Income $ 1,822 $ 7,058
Note 5. Earnings Per Share Basic and diluted earnings per share were computed based on the weighted average number of common shares issued and outstanding during the relevant periods. Stock options covering 475,000 shares were included in the computation of diluted earnings per share in the three months and nine months ended September 30, 2004, but 9 were excluded from the computation of diluted earnings per share in the three months and nine months ended September 30, 2003, as the effect would have been antidilutive. Note 6. Comprehensive Income (Loss) The following table summarizes components of comprehensive income (loss) for the three months ended September 30, 2004 and 2003:
Three Months Ended Sept. 30, (Amounts in Thousands) 2004 2003 ------------- ------------- Net Income (Loss) $ 220 $ (1,644) Other Comprehensive Income (Loss): Unrealized Holding Gain on Marketable Securities, Net of Deferred Taxes of $21 and $22, Respectively 40 41 Net Change in Fair Value of Derivatives, Net of Deferred Taxes of $188 and $37, Respectively 350 69 ------------- ------------- Total Comprehensive Income (Loss) $ 610 $ (1,534) ------------- -------------
The following table summarizes components of comprehensive income (loss) for the nine months ended September 30, 2004 and 2003:
Nine Months Ended Sept. 30, (Amounts in Thousands) 2004 2003 ----------- ----------- Net Income $ 4,945 $ 3,840 Other Comprehensive Income (Loss): Recognition of Unrealized Holding Loss on Marketable Securities, Net of Deferred Taxes of $216 402 -- Unrealized Holding (Loss) Gain on Marketable Securities, Net of Deferred Taxes of ($28) and $120, Respectively (52) 222 Net Change in Fair Value of Derivatives, Net of Deferred Taxes of $367 and $374, Respectively 681 694 ----------- ----------- Total Comprehensive Income $ 5,976 $ 4,756 ----------- -----------
Note 7. Coal Carrier Contract As previously reported, our wholly owned subsidiary, Enterprise Ship Company, Inc. ("Enterprise"), time charters the U.S. flag coal carrier, ENERGY ENTERPRISE, to US Generating New England, Inc. ("USGenNE"), an indirect subsidiary of PG&E Corporation. On July 8, 2003, USGenNE filed a petition for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code and has subsequently filed with the court an extension of time to submit its bankruptcy plan until March 1, 2005, and an extension of time until May 1, 2005, to solicit acceptance to its plan. USGenNE is current in all of its obligations to Enterprise under the time charter except for approximately $850,000 of pre-petition invoices covering charter hire and related expenses. The $850,000 is an unsecured claim in the bankruptcy proceeding. Under the federal bankruptcy laws, USGenNE has the right to either accept or reject the charter. If USGenNE accepts the charter, it is then required to meet its financial obligations under the charter including the $850,000 pre-petition invoices. If USGenNE rejects the charter, then Enterprise would have a priority administrative claim with respect to all amounts due it under the charter related to the post- 10 petition period. At this time, we cannot predict whether the charter will be accepted or rejected; therefore, we have not provided an allowance for the pre-petition invoices in our financial statements as of September 30, 2004. In the event the charter is ultimately rejected, management believes the vessel can be utilized in alternative employment without incurring a material impairment to the vessel's carrying value, although we can give no assurance at this time. Although USGenNE has continued to use the vessel in 2004 through the date of this report, we can give no assurance whether USGenNE will continue to use the vessel through the end of the year. Note 8. Income Taxes Under current United States tax law, U.S. companies like us and their domestic subsidiaries generally are taxed on all income, including in our case income from shipping operations, whether derived in the United States or abroad. With respect to any foreign subsidiary in which we hold more than a 50 percent interest (referred to in the tax laws as controlled foreign corporations, or "CFCs"), we are treated as having received a current taxable distribution of our pro rata share of income derived from foreign shipping operations. The recently-enacted American Jobs Creation Act of 2004 (the "Jobs Creation Act"), which becomes effective for us on January 1, 2005, will change the United States tax treatment of our U.S. flag vessels in foreign operations and foreign flag shipping operations. We intend to make an election under the Jobs Creation Act to have our U.S. flag operations (other than those of two ineligible vessels used exclusively in United States coastwise commerce) taxed under a new "tonnage tax" regime rather than under the usual U.S. corporate income tax regime. As a result of that election, our gross income for United States income tax purposes with respect to our eligible U.S. flag vessels will not include (1) income from qualifying shipping activities in U.S. foreign trade (i.e., transportation between the U.S. and foreign ports or between foreign ports), (2) income from cash, bank deposits and other temporary investments that are reasonably necessary to meet the working capital requirements of our qualifying shipping activities, and (3) income from cash or other intangible assets accumulated pursuant to a plan to purchase qualifying shipping assets. Under the tonnage tax regime, our taxable income with respect to the operations of our eligible U.S. flag vessels will be based on a "daily notional taxable income," which will be taxed at the highest corporate income tax rate. The daily notional taxable income from the operation of a qualifying vessel will be 40 cents per 100 tons of the net tonnage of the vessel (up to 25,000 net tons), and 20 cents per 100 tons of the net tonnage of the vessel in excess of 25,000 net tons. The taxable income of each qualifying vessel will be the product of its daily notional taxable income and the number of days during the taxable year that the vessel operates in United States foreign trade. Under the Jobs Creation Act, the taxable income from the shipping operations of our CFCs will generally no longer be subject to current United States income tax but will be deferred until repatriated. Although we are still analyzing the Jobs Creation Act, we currently estimate that it will result in a $11.5 million reduction of our deferred tax provision which will be recorded and reflected in our results of operations in the period in which our election under the Jobs Creation Act is made. We are awaiting guidance from the Internal Revenue Service as to the earliest period this election can be made. In addition, we project that our effective tax rate under the Jobs Creation Act will be reduced to approximately 25% in fiscal years 2005 and 2006 with a further reduction to approximately 8% in fiscal years thereafter that the Jobs Creation Act remains in effect. 11 Note 9. New Accounting Pronouncements In January of 2003, the FASB issued Financial Accounting Series Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by the primary beneficiary of the entity, where the company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. We have investments in certain unconsolidated entities in which we have less than 100% ownership. We have evaluated these investments and determined that we do not have any investments in variable interest entities. Therefore, the adoption of FIN No. 46 as of January 1, 2004 did not have an impact on the financial statements. 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 losses attributable to asbestos claims; (6) estimated obligations, and the timing thereof, to the U.S. Customs Service relating to foreign repair work; (7) the adequacy of our capital resources and the availability of additional capital resources on commercially acceptable terms; (8) our ability to remain in compliance with our debt covenants; (9) anticipated trends in government sponsored cargoes; (10) our ability to maintain or increase our government subsidies; (11) the anticipated improvement in the results of our Mexican Rail-Ferry Service; (12) the potential effects on us of the American Jobs Creation Act of 2004; and (13) assumptions underlying any of the foregoing. 12 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 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 their obligations to us; (10) the performance of our unconsolidated subsidiaries, (11) the uncertain future of our Coal Carrier contract with USGenNE, 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, 2003. CRITICAL ACCOUNTING POLICIES Set forth below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and which require complex management judgments, uncertainties and/or estimates. Information regarding our other accounting policies is included in the Notes to Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2003. VOYAGE REVENUE AND EXPENSE RECOGNITION Revenues and expenses relating to our Liner and Rail-Ferry Segments' voyages are recorded over the duration of the voyage. Revenues and expenses relating to our other segments' voyages are recorded when earned or incurred during the reporting period. These segments require no estimates or assumptions when reporting revenues and expenses. On our Liner Services, the voyage revenues are known at the beginning of the vessel's voyage and are reported based on percentage of completion through the date of the financial statements. Variances from initial revenue voyage estimates are generally not material. Voyage expenditures are estimated at the beginning of the vessel's voyage based on historical cost standards and current estimates received from our vendors and port agents. During the course of the vessel's voyage, typically 30 to 60 days, actual costs replace the original estimates and become part of the historical cost standards. Because of our on-going voyage review process, material variances from our original revenue and expense estimates are reported timely and generally are not recurring. 13 DEPRECIATION Provisions for depreciation are computed on the straight-line method based on estimated useful lives of our depreciable assets. Various methods are used to estimate the useful lives and salvage values of our depreciable assets and due to the capital intensive nature of our business and our large base of depreciable assets, changes in such estimates could have a material effect on our results of operations. DRYDOCKING COSTS We defer certain costs related to the drydocking of our vessels. Deferred drydocking costs are capitalized as incurred and amortized on a straight-line basis over the period between drydockings (generally two to five years). Because drydocking charges can be material in any one period, we believe that the acceptable deferred method provides a better matching for the amortization of those costs over future revenue periods benefiting from the drydocking of our vessel. INCOME TAXES Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Provisions for income taxes include deferred income taxes that are provided on items of income and expense, which affect taxable income in one period and financial income in another. Certain foreign operations are not subject to income taxation under pertinent provisions of the laws of the country of incorporation or operation. However, pursuant to U.S. tax laws existing prior to the changes effected by the Jobs Creation Act, earnings from certain foreign operations are subject to U.S. income taxes. We had approximately $33 Million of unused foreign deficit carryforwards as of December 31, 2003. The evaluation of the recoverability of these deferred tax assets requires management to make estimates and assumptions with respect to our expected future taxable income. While we expect to be able to utilize these net operating loss carryforwards even after the effectiveness of the Jobs Creation Act, actual future taxable income may differ from our estimates and as such we may be required to record additional valuation allowances against these assets. SELF-RETENTION INSURANCE We maintain provisions for estimated losses under our self-retention insurance based on estimates of the eventual claims settlement costs. Our policy is to establish self-insurance provisions for each policy year based on independent actuarial estimates, and to maintain the provisions at those levels for the estimated run-off period, approximately two years from the inception of that period. We believe most claims will be reported, or estimates for existing claims will be revised, within this two-year period. Subsequent to this two-year period, self-insurance provisions are adjusted to reflect our current estimate of loss exposure for the policy year. Our estimates are determined based on various factors, such as (1) severity of the injury (for personal injuries) and estimated potential liability based on past judgments and settlements, (2) advice from legal counsel based on its assessment of the facts of the case and its experience in other cases, (3) probability of pre-trial settlement which would mitigate legal costs, (4) historical experience on claims for each specific type of cargo (for cargo damage claims), and (5) whether our seamen are employed in permanent positions or temporary revolving positions. It is reasonably possible that changes in our estimated exposure may occur from time to time. However, if during this two-year period our estimate of loss exposure exceeds the actuarial estimate, then additional loss provisions are recorded to increase the 14 self-insurance provisions to our estimate of the eventual claims' settlement cost. The measurement of our exposure for self-insurance liability requires management to make estimates and assumptions that affect the amount of loss provisions recorded during the reporting period. Actual results could differ materially from those estimates. ASBESTOS CLAIMS We maintain provisions for our estimated losses for asbestos claims based on estimates of eventual claims settlement costs. Our policy is to establish provisions based on a range of estimated exposure. We estimate this potential range of exposure using input from legal counsel and internal estimates based on the individual deductible levels for each policy year. We are also indemnified for certain of these claims by the previous owner of one of our wholly-owned subsidiaries. The measurement of our exposure for asbestos liability requires management to make estimates and assumptions that affect the amount of the loss provisions recorded during the period. Our estimates and assumptions are formed from variables such as the maximum deductible levels in a claim year, the amount of the indemnification recovery and the claimant's employment history with the Company. Actual results could differ from those estimates. PENSION AND POSTRETIREMENT BENEFITS Our pension and postretirement benefit costs are calculated using various actuarial assumptions and methodologies as prescribed by SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." These assumptions include discount rates, health care cost trend rates, inflation, rate of compensation increases, expected return on plan assets, mortality rates, and other factors. We believe that the assumptions utilized in recording the obligations under our plans are reasonable based on input from our outside actuary and information as to historical experience and performance. Differences in actual experience or changes in assumptions may affect our pension and postretirement obligations and future expense. RESULTS OF OPERATIONS 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. 15 EXECUTIVE SUMMARY Our net income for the third quarter of 2004 was $220,000 as compared to a net loss of $1.6 million for the third quarter of 2003. For the nine months of 2004, net income was $4.9 million as compared to net income of $3.8 million for the same period of 2003. During this quarter, our Liner Services and Rail-Ferry Service, operating out of the Gulf of Mexico, experienced some weather delays as a result of hurricanes. This along with higher than anticipated operating cost, primarily from machinery deficiencies, caused the Rail-Ferry Service results to drop below the comparable 2003 period. The Liner Services managed to offset the weather impact with increased cargo volumes in comparison to third quarter 2003 levels. Our investments in a fleet of cement carriers and two cape-size bulk carriers showed improvements from the same quarter of 2003 as a result of an increase in our investment in the two cape-size bulk carriers, which currently is a 50% interest in each ship versus the 2003 investment of a 12.5% interest in four vessels, and continued firmness in the charter market for these vessels. For the first nine months of 2004, income from our Liner Services improved over the comparable period of 2003 primarily as a result of improved cargo volume in our foreign flag LASH Liner service and in spite of higher fuel costs and weather delays. However, during the same period, we experienced a reduction in the results of our time charter vessels as a result of our U.S. flag Pure Car/Truck Carriers ("PCTC") carrying less supplemental cargoes, which are in addition to the time charter agreements. The results of our U.S. flag PCTCs were further impacted by a casualty on one vessel resulting in twenty-six unplanned out of service days during the first nine months of 2004. The results of our U.S. flag Coal Carrier were impacted by an accelerated drydock and other required repair work and upgrading which resulted in the vessel being out of service forty-three days in 2004 versus full employment in 2003. Results in the first nine months of 2004 for our Rail-Ferry Service were down from 2003 primarily as a result of higher operating costs due to unanticipated maintenance problems, higher fuel costs, added rail hire, and weather delays. Also contributing to our improved results for the nine months comparable periods was the loss during the third quarter of 2003 incurred on the early extinguishment of debt. This resulted from a "make-whole" prepayment penalty and write off of deferred financing charges associated with the necessary prepayment of a loan on our U.S. flag Coal Carrier in order to correct a technical default as reported in previous filings. Under current United States tax law, U.S. companies like us and their domestic subsidiaries generally are taxed on all income, whether derived in the United States or abroad. With respect to foreign subsidiaries in which we hold more than a 50 percent interest (referred to in the tax laws as controlled foreign corporations or "CFCs"), we are currently taxed on our pro rata share of foreign shipping income. The recently-enacted Jobs Creation Act, which becomes effective for us on January 1, 2005, will change the United States tax treatment of our domestic and foreign shipping operations. We intend to make an election under the Jobs Creation Act to have most of our U.S. flag operations taxed under a new "tonnage tax" regime rather than under the usual U.S. corporate income tax regime. Once the election is effective, the only federal income tax on the operations of those vessels will be based on their tonnage, rather than their contribution to our income or profits. Also under the Jobs Creation Act, the 16 taxable income of our CFCs from foreign shipping operations will be deferred until repatriated. For further information regarding the Jobs Creation Act, see Note 8 Income Taxes. NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003 GROSS VOYAGE PROFIT Gross voyage profit decreased 15% from $27.1 million in the first nine months of 2003 to $23 million in the first nine months of 2004. The changes associated with each of our segments are discussed below. Liner Services: Gross voyage loss for this segment improved from a loss of $1.7 million in the first nine months of 2003 to a loss of $429,000 in the first nine months of 2004. The improvement was primarily a result of higher cargo volumes in the first nine months of 2004 compared to 2003 for both our U.S. flag LASH Liner service and foreign flag LASH Liner service, although the U.S. flag LASH Liner service experienced less profitable cargo mix in the third quarter of 2004 as compared to the same period of 2003. Time Charter Contracts: The decrease in this segment's gross voyage profit from $25.5 million in the first nine months of 2003 to $22.1 million in the first nine months of 2004 was attributable primarily to our U.S. flag PCTCs carrying less supplemental cargoes, which are in addition to the time charter agreements, during 2004 as compared to 2003. The results of our U.S. flag PCTCs were also affected by a casualty on one vessel resulting in twenty-six unplanned out-of-service days in the second quarter of 2004. The results of our U.S. flag Coal Carrier were affected by an accelerated drydock due to required repair work and upgrading work resulting in forty-three out-of-service days during the second and third quarters of 2004. Additionally, our Multi-Purpose vessel, completed its charter with the Military Sealift Command (" MSC") in early 2003 and was sold shortly thereafter. Contracts of Affreightment: The decrease in this segment's gross voyage profit from $4.1 million in the first nine months of 2003 to $3.7 million in the first nine months of 2004 was primarily due to higher operating costs as a result of machinery deficiencies and weather delays as a result of hurricanes in the Gulf of Mexico. Rail-Ferry Service: Gross voyage loss for this segment increased from a loss of $2 million in the first nine months of 2003 to a loss of $3.4 million in the first nine months of 2004. This service experienced higher operating costs due to unanticipated maintenance problems, higher fuel costs, weather delays as a result of hurricanes in the Gulf of Mexico, and added rail hire related to such delays on northbound and southbound rail cargoes. Other: Gross voyage profit for this segment decreased from $1.2 million in the first nine months of 2003 to $923,000 in the first nine months of 2004. The decrease resulted primarily from our 50% owned car transportation truck company, which has operated at a loss, as well as a casualty on one of our vessels that our insurance subsidiary covered for the policy year ended June 26, 2004. OTHER INCOME AND EXPENSE Interest expense decreased 17.6% from $9.6 million in the first nine months of 2003 to $7.9 million in the first nine months of 2004. Decreases due to regularly scheduled payments on outstanding debt and lower interest 17 rates accounted for $1 million of the difference. Reduced cost from the early repayment of our 7.75% Senior Notes due in 2007, as well as early debt retirements, accounted for approximately $700,000 of the decrease. Loss on early extinguishment of debt of $46,000 reported in the first nine months of 2004 was due to the early retirement of debt associated with our Molten Sulphur Carrier, as well as the retirement at a slight premium of $410,000 of our 7.75% Senior Notes due in 2007. The loss of $1.3 million in the first nine months of 2003 resulted from a "make-whole" prepayment penalty and write-off of deferred financing charges associated with the necessary prepayment of the Coal Carrier loan to cure a technical default as described in Note 7 herein. This was partially offset by the retirement at a discount of approximately $10.7 million of our 7.75% Senior Notes due in 2007. INCOME TAXES We had a tax provision of $1.3 million in the first nine months of 2004 and $2.1 million for the first nine months of 2003 at the statutory rate of 35% for both periods. EQUITY IN NET INCOME OF UNCONSOLIDATED ENTITIES Equity in net income of unconsolidated entities, net of taxes, increased from $260,000 in the first nine months of 2003 to $3 million in the first nine months of 2004. The improvement was primarily related to our 50% investment in a company owning two newly built cape-size bulk carriers and our minority interest in companies owning and operating cement carriers. Our 50% investment in the cape-size bulk carrier company, which was acquired in November of 2003, contributed $2.3 million net of taxes in 2004. Our 30% investment in the cement carrier company contributed $693,000 net of taxes in the first nine months of 2004 compared to $260,000 net of taxes in the first nine months of 2003. THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003 GROSS VOYAGE PROFIT Gross voyage profit decreased 11.2% from $6.5 million in the third quarter of 2003 to $5.8 million in the third quarter of 2004. The changes associated with each of our segments are discussed below. Liner Services: Gross voyage loss for this segment of $1.2 million was the same for both the third quarter of 2004 and 2003. While our foreign flag LASH liner service experienced higher cargo volumes in the third quarter of 2004 compared to 2003, our U.S. flag LASH Liner service experienced less profitable cargo mix as compared to the same period of 2003. Time Charter Contracts: The increase in this segment's gross voyage profit from $6.3 million in the third quarter of 2003 to $7.4 million in the third quarter of 2004 was primarily a result of the 2003 sale of our Multi-Purpose vessel, which had operated unprofitably during the third quarter of 2003, following the termination of its charter with the MSC. Partially offsetting this increase were lower results of our U.S. flag Coal Carrier, which was drydocked for unanticipated repairs resulting in eight out-of-service days during the third quarter of 2004. 18 Contracts of Affreightment: Gross voyage profit for this segment decreased from $1.6 million in the third quarter of 2003 to $1 million in the third quarter of 2004, primarily due to higher operating costs as a result of machinery deficiencies and weather delays as a result of hurricanes in the Gulf of Mexico. Rail-Ferry Service: Gross voyage loss for this segment increased from a loss of $853,000 in the third quarter of 2003 to a loss of $1.7 million in the third quarter of 2004. The increase in this service's gross voyage loss was primarily related to unanticipated maintenance problems, higher fuel costs, weather delays as a result of hurricanes in the Gulf of Mexico, and added rail hire related to such delays on northbound and southbound rail cargoes. Other: Gross voyage profit for this segment decreased from $513,000 in the third quarter of 2003 to a loss of $199,000 in the third quarter of 2004. The decrease resulted primarily from our 50% owned car transportation truck company, which has operated at a loss, as well as a casualty on one of our vessels that our insurance subsidiary covered for the policy year ended June 26, 2004. OTHER INCOME AND EXPENSE Interest expense decreased 13.1% from $3 million in the third quarter of 2003 to $2.6 million in the third quarter of 2004. Decreases due to regularly scheduled payments on outstanding debt and lower interest rates accounted for $273,000 of the difference. Reduced cost from the early repayment of our 7.75% Senior Notes due in 2007, as well as early debt retirements, accounted for approximately $116,000 of the decrease. 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 a technical default as described in Note 7 herein. INCOME TAXES We had a tax benefit of $260,000 and $795,000 for the third quarter of 2004 and 2003, respectively, 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, increased from $33,000 in the third quarter of 2003 to $869,000 in the third quarter of 2004. The improvement was primarily related to our 50% investment in a company owning two newly built cape-size bulk carriers and our minority interest in companies owning and operating cement carriers. Our 50% investment in the cape-size bulk carrier company, which was acquired in November of 2003, contributed $593,000 net of taxes in 2004. Our 30% investment in the cement carrier company contributed $276,000 net of taxes in the third quarter of 2004 compared to $33,000 net of taxes in the third quarter of 2003. 19 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 $10.2 million at December 31, 2003, to $14.5 million at September 30, 2004. Of the $43.3 million in current liabilities, $13.8 million related to current maturities of long-term debt at September 30, 2004. Cash and cash equivalents increased during the first nine months of 2004 by $3 million from $8.9 million at December 31, 2003, to $11.9 million at September 30, 2004. The increase was due to cash provided by operating activities of $14.5 million and investing activities of $1.5 million, partially offset by cash used for financing activities of $13 million. Operating activities generated a positive cash flow after adjusting net income of $4.9 million for non-cash provisions such as depreciation and amortization. Cash provided by operating activities also included a decrease in accounts receivables of $6.9 million primarily due to the timing on collections of receivables from the MSC and U.S. Department of Transportation and slightly offset by a decrease in accounts payable and accrued liabilities of $6.2 million primarily due to the timing of payments to U.S. Customs in 2004. Also included was cash used of $5.8 million primarily to cover payments for vessel drydocking costs in 2004. Cash provided by investing activities of $1.5 million was primarily related to cash distributions received from our investments in unconsolidated entities, partially offset by purchases of non-vessel related assets used by our car transportation truck company and purchases of short-term investments. Cash used for financing activities of $13 million included $8.9 million used for regularly scheduled payments of debt, $1 million used to repay draws on our line of credit made during the same period, $2.5 million used for early repayment of one of our debt obligations, and $1.5 million used for an additional payment on our Title XI loan, which was partially offset by draws on our line of credit of $1 million. As of September 30, 2004, $14.7 million was available on our $15 million revolving credit facility, which expires in April of 2006. We are currently negotiating a $70 million revolving credit facility that would replace this facility if we are able to successfully conclude our negotiations. The additional credit line would allow us further flexibility to be used, among other options, on future capital investments and early retirement of debt if the market is attractive. Debt and Lease Obligations - We have several vessels under operating leases, including three PCTCs, one LASH vessel, one Breakbulk/Multi Purpose vessel, a Container vessel and a Tanker vessel. We also conduct certain of our operations from leased office facilities and use certain transportation and other equipment under operating leases. Our obligations associated with these leases are summarized in the table below. 20 The following is a summary of the scheduled maturities by period of our outstanding debt and lease obligations as of September 30, 2004:
OCT. 1- DEC. 31, DEBT AND LEASE OBLIGATIONS (000'S) 2004 2005 2006 2007 2008 THEREAFTER --------------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- Long-term debt (including current maturities) $ 5,265 $ 12,253 $ 9,468 $ 80,001 $ 7,468 $ 51,793 Operating leases 6,119 19,060 19,073 18,948 16,893 91,558 ----------- ----------- ----------- ----------- ----------- ----------- Total by period $ 11,384 $ 31,313 $ 28,541 $ 98,949 $ 24,361 $ 143,351 =========== =========== =========== =========== =========== ===========
Debt Covenant Compliance Status - We have met all of the financial covenants under our various debt agreements, the most restrictive of which include the working capital, leverage ratio, minimum net worth, and interest coverage ratio as of September 30, 2004, and believe we will continue to meet them throughout 2004, although we can give no assurance to that effect. If our cash flow and capital resources are not sufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, obtain additional equity capital, enter into additional financings of our unencumbered vessels or restructure debt. Registration Statement - On November 2, 2004, we filed a registration statement on Form S-1 with the Securities and Exchange Commission ("SEC") related to our offering 800,000 shares of convertible exchangeable preferred stock (the "Offering"). We expect to receive approximately $40 million and we intend to use a portion of the proceeds to purchase two used ships and to add a second cargo deck on each of the two vessels operating in our Rail-Ferry Service, as well as possibly purchasing certain leased vessels, acquiring newbuildings and/or other second hand vessels. We will use the remaining proceeds of this offering to satisfy working capital requirements and for general corporate purposes. A registration statement relating to these securities has been filed with the SEC but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This report shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Mexican Rail-Ferry Service Results - Our Rail-Ferry Service provides a unique combination of rail and water ferry service between the U.S. Gulf and Mexico. As with any innovative venture, we expected and have experienced an adjustment period for the market to embrace our alternative transportation service. However, since the inception of the service in 2001, it has experienced improvement in gross revenues and operating cash flows overall. We intend to use a portion of the proceeds from the aforementioned Offering to add a second deck to each of the two vessels operating in our Rail-Ferry Service in order to essentially double their capacity. We believe that these additions will significantly reduce our cost per unit of cargo carried and significantly increase our cash flow but that will occur only if we are able to book substantially all of the additional capacity, and we can give no assurance at this time that we will be successful in doing so. If market conditions adversely impact those projections, we believe we could find alternative placement for the two vessels supporting the service. We hope to 21 conclude the necessary shipyard modification contracts shortly and we expect the vessels to begin shipyard work in mid-2005 returning to service in the second half of 2005. Proposed Vessel Purchase - We have entered into an agreement to purchase two used ships in the fourth quarter of 2004. We intend to use a portion of the proceeds from the aforementioned Offering for the purchase of these ships. These vessels will enable us to maintain two of our Maritime Security Program ("MSP") contracts. Maritime Security Program Contracts - In 2003, Congress authorized an extension of the MSP through 2015, increased the number of ships industry-wide eligible to participate in the program from 47 to 60, and increased MSP payments to companies in the program, all to be effective on October 1, 2005. Annual payments for each vessel in the new MSP program will be $2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012 to 2015. On October 15, 2004, we filed applications to extend our seven MSP contracts for another 10 years, all of which were effectively grandfathered in the MSP reauthorization. Simultaneously, we offered additional ships for participation in the MSP. The U.S. Maritime Administration is expected to announce MSP contract awards on January 14, 2005, and we have no way of knowing at this time whether we will be awarded contracts for the additional ships. Dividend Payments - In order to comply with certain financial covenants under our debt agreements, the suspension of quarterly dividend payments on our common shares of stock remains in effect. Environmental Issues - We have not been notified that we are a potentially responsible party in connection with any environmental matters, and we have determined that we have no known risks for which assertion of a claim is probable that are not covered by third party insurance, provided for in our self-retention insurance reserves or otherwise indemnified. Our environmental risks primarily relate to oil pollution from the operation of our vessels. We have pollution liability insurance coverage with a limit of $1 billion per each occurrence, with a deductible amount of $25,000 for each incident. NEW ACCOUNTING PRONOUNCEMENTS In January of 2003, the FASB issued Financial Accounting Series Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by the primary beneficiary of the entity, where the company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. We have investments in certain unconsolidated entities in which we have less than 100% ownership. We have evaluated these investments and determined that we do not have any investments in variable interest entities. Therefore, the adoption of FIN No. 46 as of January 1, 2004 did not have an impact on the financial statements. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK In the ordinary course of our business, we are exposed to foreign currency, interest rate, and commodity price risks. We utilize derivative financial instruments including forward exchange contracts, interest rate swap agreements, and commodity swap agreements to manage certain of these exposures. We hedge only firm commitments or anticipated transactions and do not use derivatives for speculation. We neither hold nor issue financial instruments for trading purposes. INTEREST RATE RISK. The fair value of our cash and short-term investment portfolio at September 30, 2004 approximated carrying value due to its short-term duration. The potential decrease in fair value resulting from a hypothetical 10% increase in interest rates at September 30, 2004 for our investment portfolio is not material. The fair value of long-term debt at September 30, 2004, including current maturities, was estimated to be $169.0 million compared to a carrying value of $166.1 million. The potential increase in fair value resulting from a hypothetical 10% decrease in the average interest rates applicable to our long-term debt at September 30, 2004, would be approximately $1.5 million or 0.9% of the carrying value. As of September 30, 2004, we have no interest rate swap agreements to manage our exposure to interest rate risks. COMMODITY PRICE RISK. As of September 30, 2004, we have no commodity swap agreements to manage our exposure to price risk related to the purchase of the estimated 2004 fuel requirements for our LINER SERVICES or RAIL-FERRY SERVICE segment. A 20% increase in the price of fuel for the period October 1, 2003 through September 30, 2004 would have resulted in an increase of approximately $2.7 million in our fuel costs for the same period, and in a corresponding decrease of approximately $0.44 in our earnings per share based on the shares of our common stock outstanding as of September 30, 2004, assuming that none of the price increase could have been passed on to our customers through fuel cost surcharges during the same period. FOREIGN EXCHANGE RATE RISK. 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, 2003. 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-15(e) and 15d-15(e) 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, our CEO and CFO have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report in timely alerting them to material information required to be disclosed in our periodic filings with the Securities and Exchange Commission ("SEC"), and in 23 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) There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 6. EXHIBITS
Exhibit Number Description -------------- ----------- 3.1 Restated Certificate of Incorporation of the Registrant 3.2 By-Laws of the Registrant 4.1 Specimen of Common Stock Certificate (filed as an exhibit to the Registrant's Form 8-A filed with the Securities and Exchange Commission on April 25, 1980, and incorporated herein by reference) 4.2 Indenture between the Registrant and The Bank of New York, as Trustee, with respect to the 7 3/4% Senior Notes due October 15, 2007 4.3 Form of 7 3/4% Senior Note due October 15, 2007 (included in Exhibit 4.2 hereto 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
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 24 INTERNATIONAL SHIPHOLDING CORPORATION /s/ GARY L. FERGUSON --------------------------------------------- Gary L. Ferguson Vice President and Chief Financial Officer Date November 12, 2004 ----------------------------------------- 25