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 June 30, 2002
---------------
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to _________
Commission file number 2-63322
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INTERNATIONAL SHIPHOLDING CORPORATION
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2989662
----------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
650 Poydras Street New Orleans, Louisiana 70130
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(504) 529-5461
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(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 (June 30, 2002)
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PAGE>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 June 30, Six Months Ended June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
C>
Revenues $ 54,184 $ 72,686 $ 111,621 $ 149,804
Subsidy Revenue 2,480 3,643 5,495 6,924
---------- ---------- ---------- ----------
56,664 76,329 117,116 156,728
---------- ---------- ---------- ----------
Operating Expenses:
Voyage Expenses 42,758 62,486 92,451 125,940
Vessel and Barge Depreciation 4,829 9,122 9,659 18,428
Impairment Loss (151) 78,928 (97) 81,283
---------- ---------- ---------- ----------
Gross Voyage Profit (Loss) 9,228 (74,207) 15,103 (68,923)
---------- ---------- ---------- ----------
Administrative and General
Expenses 3,799 6,149 8,245 12,144
(Gain) Loss on Sale of Vessels
and Other Assets (513) 1,065 (493) 1,131
---------- ---------- ---------- ----------
Operating Income (Loss) 5,942 (81,421) 7,351 (82,198)
---------- ---------- ---------- ----------
Interest and Other:
Interest Expense 4,482 7,270 9,102 15,104
Investment Income (140) (246) (452) (574)
Other Income - - (1,282) -
---------- ---------- ---------- ----------
4,342 7,024 7,368 14,530
---------- ---------- ---------- ----------
Income (Loss) Before Provision
(Benefit) for Income Taxes,
Equity in Net Income of
Unconsolidated Entities
and Extraordinary Item 1,600 (88,445) (17) (96,728)
---------- ---------- ---------- ----------
Provision (Benefit) for
Income Taxes:
Current - 89 - 185
Deferred 558 (30,990) (1) (33,926)
State 38 72 38 128
---------- ---------- ---------- ----------
596 (30,829) 37 (33,613)
---------- ---------- ---------- ----------
Equity in Net Income of
Unconsolidated Entities
(Net of Applicable Taxes) 112 217 281 363
---------- ---------- ---------- ----------
Income (Loss) Before
Extraordinary Item 1,116 (57,399) 227 (62,752)
---------- ---------- ---------- ----------
Extraordinary Loss on Early
Extinguishment of Debt
(Net of Income Tax Benefit
of $17) - - (31) -
---------- ---------- ---------- ----------
Net Income (Loss) $ 1,116 $(57,399) $ 196 $(62,752)
========== ========== ========== ==========
Basic and Diluted Earnings
Per Share:
Income (Loss) Before
Extraordinary Item $ 0.18 $ (9.44) $ 0.04 $ (10.32)
Extraordinary Loss - - (0.01) -
---------- ---------- ---------- ----------
Net Income (Loss) $ 0.18 $ (9.44) $ 0.03 $ (10.32)
========== ========== ========== ==========
Weighted Average Shares of
Common Stock Outstanding 6,082,887 6,082,887 6,082,887 6,082,887
The accompanying notes are an integral part of these statements.
3
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(All Amounts in Thousands)
(Unaudited)
June 30, December 31,
ASSETS 2002 2001
----------- -----------
Current Assets:
Cash and Cash Equivalents $ 26,305 $ 26,339
Marketable Securities 2,960 3,059
Accounts Receivable, Net of Allowance
for Doubtful Accounts of $606 and $603
in 2002 and 2001, Respectively:
Traffic 14,553 24,979
Agents' 4,370 2,873
Claims and Other 11,832 15,289
Federal Income Taxes Receivable 1,789 100
Net Investment in Direct Financing Lease 1,857 1,774
Other Current Assets 7,202 4,691
Material and Supplies Inventory, at Lower
of Cost or Market 2,925 2,932
Current Assets Held for Disposal 4,241 5,022
----------- -----------
Total Current Assets 78,034 87,058
----------- -----------
Assets Held for Disposal - 9,916
----------- -----------
Marketable Equity Securities 88 88
----------- -----------
Investment in Unconsolidated Entities 9,219 7,857
----------- -----------
Net Investment in Direct Financing Lease 52,267 53,209
----------- -----------
Vessels, Property, and Other Equipment, at Cost:
Vessels and Barges 332,950 333,037
Other Marine Equipment 4,609 4,709
Terminal Facilities 13,484 13,460
Land 1,038 1,038
Furniture and Equipment 8,988 12,099
----------- ----------
361,069 364,343
Less - Accumulated Depreciation (112,887) (106,010)
----------- ----------
248,182 258,333
----------- ----------
Other Assets:
Deferred Charges, Net of Accumulated
Amortization of $17,789 and $16,580
in 2002 and 2001, Respectively 14,408 14,240
Acquired Contract Costs, Net of Accumulated
Amortization of $19,248 and $18,520
in 2002 and 2001, Respectively 11,278 12,006
Due from Related Parties 460 611
Other 8,632 17,085
----------- ----------
34,778 43,942
----------- ----------
$ 422,568 $ 460,403
=========== ==========
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)
June 30, December 31,
2002 2001
----------- -----------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 36,903 $ 40,970
Current Maturities of Long-Term Debt 15,542 15,346
Current Maturities of Capital Lease
Obligations 1,765 -
Current Maturities of Capital Lease
Obligations on Assets Held for Disposal - 5,241
----------- ----------
Total Current Liabilities 54,210 61,557
----------- ----------
Billings in Excess of Income Earned and
Expenses Incurred 693 1,765
----------- ----------
Long-Term Debt, Less Current Maturities 211,402 230,481
----------- ----------
Long-Term Capital Lease Obligations, Less
Current Maturities 726 -
----------- ----------
Long-Term Capital Lease Obligations on
Assets Held for Disposal, Less
Current Maturities - 9,795
----------- ----------
Other Long-Term Liabilities:
Deferred Income Taxes 9,921 8,390
Claims and Other 30,205 33,510
----------- ----------
40,126 41,900
----------- ----------
Commitments and Contingent Liabilities
Stockholders' Investment:
Common Stock 6,756 6,756
Additional Paid-In Capital 54,450 54,450
Retained Earnings 64,771 64,575
Less - Treasury Stock (8,704) (8,704)
Accumulated Other Comprehensive Loss (1,862) (2,172)
----------- ----------
115,411 114,905
----------- ----------
$ 422,568 $ 460,403
=========== ==========
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, 2000 $ 6,756 $ 54,450 $129,755 ($8,704) ($725) $181,532
Comprehensive Loss:
Net Loss for Year
Ended December 31,
2001 - - (64,419) - - (64,419)
Other Comprehensive Loss:
Unrealized Holding Loss
on Marketable Securities,
Net of Deferred Taxes
of ($76) - - - - (144) (144)
Cumulative Effect of Adoption
of SFAS No.133, Net of
Deferred Taxes of $135,
on January 1, 2001 - - - - 250 250
Unrealized Holding Loss
on Derivatives, Net
of Deferred Taxes of
($836) - - - - (1,553) (1,553)
--------
Total Comprehensive Loss (65,866)
Cash Dividends - - (761) - - (761)
-------------------------------------------------------------
Balance at
December 31, 2001 $ 6,756 $54,450 $64,575 ($8,704) ($2,172) $114,905
===========================================================
Comprehensive Income:
Net Income for the Period
Ended June 30, 2002 - - 196 - - 196
Other Comprehensive Income:
Unrealized Holding Loss on
Marketable Securities,
Net of Deferred Taxes
of ($59) - - - - (110) (110)
Unrealized Holding Gain
on Derivatives, Net
of Deferred Taxes of
$226 - - - - 420 420
-------
Total Comprehensive Income 506
----------------------------------------------------------
Balance at
June 30, 2002 $6,756 $54,450 $64,771 ($8,704) ($1,862) $115,411
=========================================================
The accompanying notes are an integral part of these statements.
6
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
(Unaudited)
Six Months Ended June 30,
2002 2001
---------- ----------
Cash Flows from Operating Activities:
Net Income (Loss) $ 196 $(62,752)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation 10,173 19,543
Amortization of Deferred Charges
and Other Assets 3,840 8,318
Benefit for Deferred Income Taxes (1) (33,927)
Equity in Net Income of Unconsolidated Entities (281) (350)
(Gain) Loss on Sale of Vessels and Other Assets (493) 1,131
Impairment Loss (97) 81,283
Extraordinary Loss 31 -
Changes in:
Accounts Receivable 14,827 21,374
Inventories and Other Current Assets (1,270) 4,589
Other Assets 8,425 (391)
Accounts Payable and Accrued Liabilities (10,451) (14,764)
Federal Income Taxes Payable (486) 359
Billings in Excess of Income Earned and
Expenses Incurred (1,072) (1,427)
Other Long-Term Liabilities (1,833) (3,399)
---------- ----------
Net Cash Provided by Operating Activities 21,508 19,587
---------- ----------
Cash Flows from Investing Activities:
Net Investment in Direct Financing Leases 859 1,705
Purchase of Furniture and Other Equipment (78) (298)
Additions to Deferred Charges (2,028) (5,910)
Proceeds from Sale of Vessels and Other Property 12,046 7,420
Purchase of and Proceeds from
Short Term Investments (31) 2,876
Investment in Unconsolidated Entities (941) (3,469)
Partial Sale of Unconsolidated Entities 110 -
Other Investing Activities 42 (34)
---------- ----------
Net Cash Provided by Investing Activities 9,979 2,290
---------- ----------
Cash Flows from Financing Activities:
Proceeds from Issuance of Debt 11,500 24,800
Repayment of Debt and Capital Lease Obligations (42,928) (48,060)
Additions to Deferred Financing Charges (7) (74)
Common Stock Dividends Paid - (761)
Other Financing Activities (86) -
---------- ----------
Net Cash Used by Financing Activities (31,521) (24,095)
---------- ----------
Net Decrease in Cash and Cash Equivalents (34) (2,218)
Cash and Cash Equivalents at Beginning of Period 26,339 16,906
---------- ----------
Cash and Cash Equivalents at End of Period $ 26,305 $ 14,688
========== ==========
The accompanying notes are an integral part of these statements.
7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(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, 2001. Certain reclassifications have been made to prior period financial
information in order to conform to current year presentations.
The foregoing 2002 interim results are not necessarily indicative of the
results of operations for the full year 2002. Interim statements are subject
to possible adjustments in connection with the annual audit of the Company's
accounts for the full year 2002. 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 Company's policy is to consolidate all subsidiaries in which it holds
greater than 50% voting interest and to use the equity method to account for
investments in entities in which it holds a 20% to 50% voting interest. 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.
All significant intercompany accounts and transactions have been
eliminated.
Note 2. Impairment Loss on Assets Held for Disposal
In June of 2001, the Company adopted a plan to separate the LASH service
(the LINER SERVICES segment), its Cape-Size Bulk Carrier (included in the TIME
CHARTER CONTRACTS segment) and certain Special Purpose barges (included in the
OTHER segment), from the balance of its operations and dispose of the assets.
In December of 2001, as a result of extended cargo commitments from a major
shipper, the Company reclassified its Foreign Flag LASH service (operating
under the name "Forest Lines") assets, including two LASH vessels, one
Dockship and 599 LASH barges, to assets held for use. For accounting purposes,
the U.S. Flag LASH liner service assets, the Cape-Size Bulk Carrier, and the
Special Purpose barges were reclassified in the Company's balance sheet as
"Current Assets Held for Disposal" and "Assets Held for Disposal." The Foreign
Flag LASH service assets are included in "Vessels, Property, and Other
Equipment."
The Company recognized an impairment loss of $81 Million in 2001 on the
aforementioned assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." The impairment loss on the U.S.
Flag LASH liner service, Cape-Size Bulk Carrier, and 28 Special Purpose barges
was $60.5
8
Million and the impairment loss on the Foreign Flag LASH service was $18.1
Million. Additionally, an impairment loss of $2.4 Million was recognized on a
LASH vessel that was sold for scrap while held for disposal after completing
its commitment under charter with the U.S. Military Sealift Command ("MSC")
and reaching the end of its economic useful life. The impairment losses on
these assets were measured as the amount by which the carrying value of the
assets exceeded their estimated fair value. The fair value of the Foreign
Flag LASH service assets was estimated by determining the present value of
their expected future cash flows using a discount rate believed to be
commensurate with the Company's borrowing rate. The fair values of the
remaining assets were based on scrap values using an estimated scrap value per
lightweight ton.
At the time this plan was adopted, the assets related to the U.S. Flag
LASH liner service included four U.S. Flag LASH vessels, one Foreign Flag LASH
vessel, one FLASH unit, 1,200 LASH barges, and ancillary assets. This service
previously transported cargo between the U.S. Gulf and Atlantic coasts and
the Middle East, East Africa, the Indian sub-continent and Southeast Asia
operating under the name "Waterman." The past several years have reflected a
downward trend in this service as a result of higher operating costs,
disruptions in service due to unplanned maintenance, lower subsidy revenues,
and changes in market conditions. During the first quarter of 2002, two of
the U.S. Flag LASH vessels and related LASH barges were sold for scrap
resulting in an additional impairment loss of $54,000. During the second
quarter of 2002, the two remaining U.S. Flag LASH vessels, certain LASH barges,
and the FLASH unit were sold. The proceeds of these sales were used to repay
capital lease obligations of approximately $9.6 Million associated with these
assets before the scheduled maturity. The result of the sale of these assets
and costs associated with repayment of these capital lease obligations was a
net gain of $151,000 in the second quarter of 2002.
The Company sold the Cape-Size Bulk Carrier resulting in an additional
impairment loss of approximately $400,000 in excess of the original write-down
amount during the third quarter of 2001.
The Special Purpose barges are no longer in use due to a restructuring
of a contract with a major mining company in the fourth quarter of 2000. These
barges were used in conjunction with the Company's two Special Purpose vessels,
the Bali Sea and Banda Sea, to service this contract. The restructuring
allowed the Company to deploy the Bali Sea and Banda Sea in its railcar ferry
service operating between Alabama and Coatzacoalcos, Mexico (the "Mexican
Service"), which does not require the Special Purpose barges. These barges
were written-down to their estimated scrap value of approximately $574,000 in
the second quarter of 2001.
"Current Assets Held for Disposal" of $4.2 Million as of June 30, 2002,
includes one Foreign Flag LASH vessel, the remaining LASH barges not associated
with the Foreign Flag LASH service, and the aforementioned Special Purpose
barges, all of which are reported at amounts approximating scrap values.
The Foreign Flag LASH vessel is currently idle pending the Company's review
of alternative deployment as discussed in the Liquidity and Capital Resources
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
9
In anticipation of the disposal of the U.S. Flag LASH service assets, a
reduction of approximately 31% of the Company's shore base staff was effected
early in the third quarter of 2001 and in January of 2002.
Note 3. 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. The Company reports in the OTHER category
results of the Company's Mexican Service and 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 administrative and general expenses,
investment income, other income, equity in net income of 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 six months ended
June 30, 2002 and 2001:
Time
Liner Charter Contracts of
(All Amounts in Thousands) Services Contracts Affreightment Other Total
- -----------------------------------------------------------------------------
2002
Revenues from external
customers $ 41,195 $ 62,682 $ 7,763 $ 5,476 $117,116
Intersegment revenues - - - 8,600 8,600
Gross voyage profit (loss)
before depreciation and
impairment loss 1,318 21,331 4,474 (2,458) 24,665
Depreciation 1,791 4,862 1,208 1,798 9,659
Impairment loss 97 - - - 97
Gain on sale of other assets - - - 493 493
Interest expense 1,032 5,497 1,115 1,458 9,102
Segment (loss) profit before
administrative and general
expenses, investment income,
other income, equity in net
income of unconsolidated entities,
and taxes (1,408) 10,972 2,151 (5,221) 6,494
- -----------------------------------------------------------------------------
2001
Revenues from external
customers $ 77,034 $ 67,696 $ 7,510 $ 4,488 $156,728
Intersegment revenues - - - 13,743 13,743
Gross voyage (loss) profit
before depreciation and
impairment loss (860) 30,210 3,905 (2,467) 30,788
Depreciation 6,824 8,524 1,208 1,872 18,428
Impairment loss (62,385) (7,140) - (11,758) (81,283)
(Loss) gain on sale of vessels
and other assets - (1,410) - 279 (1,131)
Interest expense 1,776 9,812 1,468 2,048 15,104
Segment (loss) profit before
administrative and general
expenses, investment income,
equity in net income of
unconsolidated entities
and taxes (71,845) 3,324 1,229 (17,866) (85,158)
- -----------------------------------------------------------------------------
10
The following table presents information about segment profit and loss
for the three months ended June 30, 2002 and 2001:
Time
Liner Charter Contracts of
(All Amounts in Thousands) Services Contracts Affreightment Other Total
- -----------------------------------------------------------------------------
2002
Revenues from external
customers $ 17,339 $ 32,234 $ 4,095 $ 2,996 $ 56,664
Intersegment revenues - - - 3,421 3,421
Gross voyage profit (loss)
before depreciation and
impairment loss 1,586 11,782 2,286 (1,748) 13,906
Depreciation 895 1,702 604 1,628 4,829
Impairment loss 151 - - - 151
Gain on sale of other assets - - - 513 513
Interest expense 454 2,776 511 741 4,482
Segment profit (loss) before
administrative and general
expenses, investment income,
equity in net income of
unconsolidated entities,
and taxes 388 7,304 1,171 (3,604) 5,259
- -----------------------------------------------------------------------------
2001
Revenues from external
customers $ 36,386 $ 33,327 $ 3,744 $ 2,872 $ 76,329
Intersegment revenues - - - 6,565 6,565
Gross voyage (loss) profit
before depreciation and
impairment loss (2,922) 15,384 1,955 (574) 13,843
Depreciation 3,421 4,140 603 958 9,122
Impairment loss (62,385) (4,785) - (11,758) (78,928)
Loss on sale of vessels
and other assets - (1,065) - - (1,065)
Interest expense 594 4,786 763 1,127 7,270
Segment (loss) profit before
administrative and general
expenses, investment income,
equity in net income of
unconsolidated entities,
and taxes (69,322) 608 589 (14,417) (82,542)
- -----------------------------------------------------------------------------
As discussed in Note 2 - "Impairment Loss on Assets Held for Disposal,"
the Company adopted a plan in 2001 to separate its U.S. Flag LASH service, its
Cape-Size Bulk Carrier, and certain Special Purpose barges from the balance of
its operations and dispose of the assets. REVENUES and GROSS VOYAGE PROFIT
(LOSS) BEFORE DEPRECIATION AND IMPAIRMENT LOSS related to the U.S. Flag LASH
service and the Cape-Size Bulk Carrier, included in the LINER SERVICES and TIME
CHARTER CONTRACTS segments, respectively, for the three and six months ended
June 30, 2002 and 2001 are reported in the table below. All of the U.S. Flag
LASH service assets were sold or were idle as of June 30, 2002. The Cape-Size
Bulk Carrier was sold in the third quarter of 2001. However, finalized results
related to 2001, when this ship operated in a pool of similar ships, were
reported to the Company during the second quarter of 2002, resulting in an
adjustment of $511,000 included in revenues and gross voyage loss in the three
and six months ended June 30, 2002. The Special Purpose barges were not in use
during either of the periods presented in the table.
Six Months Ended June 30, Three Months Ended June 30,
Time Charter Time Charter
Liner Services: Contracts: Liner Services: Contracts:
U.S. Flag Cape-Size U.S. Flag Cape-Size
(All Amounts LASH Liner Bulk LASH Liner Bulk
in Thousands) Service Carrier Service Carrier
- -------------------------------------------------------------------------------
2002
Revenues from external
customers $ 16,766 $ (511) $5,590 $ (511)
Gross voyage (loss)
profit before
depreciation and
impairment loss (745) (511) 421 (511)
- -------------------------------------------------------------------------------
2001
Revenues from external
customers 48,913 2,282 22,941 1,127
Gross voyage (loss)
profit before
depreciation and
impairment loss (5,065) 612 (4,871) 299
- -------------------------------------------------------------------------------
11
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 June 30, Six Months Ended June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Total profit (loss) for
reportable segments $ 5,259 $ (82,542) $ 6,494 $(85,158)
Unallocated amounts:
Administrative and
general expenses (3,799) (6,149) (8,245) (12,144)
Investment income 140 246 452 574
Other income - - 1,282 -
--------- --------- --------- ---------
Income (loss) before
provision (benefit) for
income taxes, equity in net
income of unconsolidated
entities, and
extraordinary item $ 1,600 $(88,445) $ (17) $(96,728)
========= ========= ========= =========
Note 4. Earnings Per Share
Basic and diluted earnings per share were computed based on the weighted
average number of common shares issued and outstanding during the relevant
periods. Stock options covering 475,000 shares were excluded from the
computation of diluted earnings per share in the three and six months ended
June 30, 2002 and 2001, as the effect would have been antidilutive.
Note 5. New Accounting Pronouncements
During 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
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. The fair values of the Company's
interest rate swap agreements and commodity swap contracts at June 30, 2002,
were a liability of $1.9 Million and an asset of $482,000, respectively.
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 that goodwill not be
amortized in any circumstance and also requires goodwill to be 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 Company adopted SFAS No. 142 on January 1, 2002, which had
no material impact on the Company's financial statements. The adoption of SFAS
No. 143 is not expected to have a material impact on the Company's financial
statements as the Company does not have any assets that require retirement
obligations.
12
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." This statement revises current guidance with
respect to the process for measuring impairment of long-lived assets. 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. The reclassification of certain of the Company's assets to Assets Held
for Disposal during 2001 was made prior to the Company's adoption of SFAS No.
144. Therefore, these assets will continue to be accounted for under SFAS No.
121. The Company's adoption of SFAS No. 144 will only impact the accounting
for future transactions relating to the impairment or disposal of long-lived
assets.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement revises current guidance with respect to gains
and losses on early extinguishment of debt. Under SFAS No. 145 gains and
losses on early extinguishment of debt will no longer be treated as
extraordinary items unless they meet the criteria for extraordinary treatment
in APB Opinion No. 30. The Company will be required to adopt SFAS No. 145
effective January 1, 2003. Upon adoption of SFAS No. 145, the Company will be
required to reclassify gains and losses on early extinguishment of debt
reported in prior period income statements as those amounts will no longer
qualify for extraordinary treatment under SFAS No. 145. The Company reported
extraordinary gains related to early extinguishment of debt of $15,000 and
$688,000, net of taxes, for the years ended December 31, 2001 and 2000,
respectively, and extraordinary losses of ($31,000), net of taxes, for the six
months ended June 30, 2002. However, the adoption of SFAS No. 145 is not
expected to have a material effect on the Company's financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supercedes Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit or disposal
plan. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not anticipate that adoption of SFAS No. 146 will have
a material effect on its financial position.
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, 2001.
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 addresses variations in gross voyage profits rather than variations in
revenues.
14
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001
Gross Voyage Profit
- --------------------
Gross voyage profit before depreciation and impairment loss decreased
19.9% from $30.8 Million to $24.7 Million in the six-month periods ended June
30, 2001 and 2002, respectively. The changes associated with each of the
Company's segments are discussed below.
LINER SERVICES: The increase in gross voyage profit before depreciation
and impairment loss for this segment from a loss of $860,000 in the first six
months of 2001 to a profit of $1.3 Million in same period of 2002 was primarily
due to the discontinuation of the U.S. Flag LASH Liner service. The
elimination of that service contributed $4.3 Million to the increase, including
$2.2 Million associated with the reduction of loss provisions and other
accruals during the period. Additionally, lower gross voyage profit from the
Company's Foreign Flag LASH Liner service resulting from a decrease in the
volume of outbound cargo partially offset the increase associated with the
elimination of the U.S. Flag LASH Liner service. The reductions of accrued
expenses, which were related to self-retention insurance provisions, customs
liabilities, and other estimated expenses, are each discussed in more detail
below.
The Company maintains provisions for its estimated losses under its
self-retention insurance program based on estimates of the eventual claims
settlement costs. During the first six months of 2002, the Company reduced
the estimated provision by approximately $1.7 Million. This resulted in an
increase in gross voyage profit before depreciation and impairment loss of
$500,000 in the first quarter and $1.2 Million in the second quarter of which
$343,000 and $824,000, respectively, was related to the LINER SERVICES segment.
The Company's 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. The Company believes most claims will be reported, or estimates for
existing claims will be revised, within this two-year period. The reduction
in the provisions during 2002 resulted primarily from a review of the Company's
current estimate of its loss exposure for the policy year that reached the end
of this two-year period. The Company determined that the provisions for this
policy year, which were based on actuarial estimates, exceeded the Company's
loss exposure estimate, mainly as related to personal injury claims. The
Company routinely reviews its self-retention loss provisions and makes
adjustments as it believes they are warranted.
The Company's accruals for amounts due to U.S. Customs are related to
repair work performed on U.S. flag ships at foreign shipyards. U.S. Customs
advised the Company during the second quarter of 2002 that several claims
related to the U.S. Flag LASH Liner service would be settled and require
payment within the year. As a result, the portion of accruals associated with
the Company's settlement estimate was reclassified from long-term to current
liabilities as of June 30, 2002. Amounts previously accrued in excess of the
revised estimates were adjusted during the second quarter resulting in an
increase in gross voyage profit of the LINER SERVICES segment of approximately
$500,000.
15
The Company accrues for estimated trailing expenses on voyages related
primarily to costs incurred in foreign locations. As a result of the
discontinuation of the U.S. Flag LASH Liner service, the Company substantially
reduced the accrual of costs related to that service, as it believes materially
all expenses had been incurred as of June 30, 2002. This reduction resulted in
an increase in gross voyage profit of the LINER SERVICES segment in the second
quarter of 2002 of approximately $500,000.
TIME CHARTER CONTRACTS: This segment's gross voyage profit before
depreciation and impairment loss decreased from $30.2 Million to $21.3 Million
in the six-month periods ending June 30, 2001 and 2002, respectively. The sale
and leaseback of two of the Company's Pure Car Truck Carriers ("PCTCs") during
the second half of 2001; renegotiated lease terms on another PCTC that resulted
in different accounting treatment; and offhire time for repair work on the
Company's Coal Carrier accounted for the decrease. An increase of
approximately $2 Million in revenue earned by the Company's PCTCs due to
carrying more supplemental cargoes during the first six months of 2002 than
in the same period of 2001 and $386,000 related to the reduction of loss
provisions discussed earlier partially offset the decrease.
The contracts under which the three PCTCs operate were not affected by
the aforementioned lease transactions. However, because the leases now qualify
for treatment as operating leases, the lease payments were included in voyage
expenses during the first six months of 2002. The resulting increase in voyage
expenses was comparable to the depreciation and interest charges incurred on
these vessels during the first six months of 2001, which were eliminated by
the lease transactions.
The Company's Ice-Strengthened Multi-Purpose vessel, which is included
in this segment, is operating under charter to the MSC re-supplying scientific
projects in the Arctic and Antarctic. This contract expires in November 2002,
and is under offer to the MSC for renewal for an additional fifty-one months.
Gross voyage profit associated with this contract was not material.
CONTRACTS OF AFFREIGHTMENT: Gross voyage profit before depreciation of
$4.5 Million for this segment in the first six months of 2002 increased
slightly from $3.9 Million in the same period of 2001 primarily due to payment
received for loss of hire from an insurance claim on the Company's Molten
Sulphur Carrier related to pre-existing damages identified during a scheduled
drydocking.
The transportation contract under which the Company's Molten Sulphur
Carrier operates was assigned by Freeport-McMoRan Sulphur LLC to Gulf Sulphur
Services Ltd., LLP during the second quarter of 2002. The terms of the
contract were not affected by the assignment.
OTHER: This segment's gross voyage loss before depreciation during the
first six months of 2002 was comparable to the same period of 2001. Results
for the Company's railcar ferry service operating in the Company's Mexican
Service improved by approximately $1.6 Million. However, this improvement
was substantially offset by reduced profit from certain of the Company's
subsidiaries that provided specialized services to the discontinued U.S. Flag
LASH Liner service.
Impairment Loss on Assets Held for Disposal
- --------------------------------------------
In June of 2001, the Company adopted a plan to separate the LASH service
(the LINER SERVICES segment), its Cape-Size Bulk Carrier (included in the TIME
CHARTER CONTRACTS segment) and certain Special Purpose barges (included in the
OTHER segment), from the balance of its operations and dispose of
16
the assets. In December of 2001, as a result of extended cargo commitments
from a major shipper, the Company reclassified its Foreign Flag LASH service
(operating under the name "Forest Lines") assets, including two LASH vessels,
one Dockship and 599 LASH barges, to assets held for use. For accounting
purposes, the U.S. Flag LASH liner service assets, the Cape-Size Bulk Carrier,
and the Special Purpose barges were reclassified in the Company's balance sheet
as "Current Assets Held for Disposal" and "Assets Held for Disposal." The
Foreign Flag LASH service assets are included in "Vessels, Property, and Other
Equipment."
The Company recognized an impairment loss of $81 Million in 2001 on the
aforementioned assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The impairment loss on the U.S. Flag LASH liner service, Cape-Size Bulk
Carrier, and 28 Special Purpose barges was $60.5 Million and the impairment
loss on the Foreign Flag LASH service was $18.1 Million. Additionally, an
impairment loss of $2.4 Million was recognized on a LASH vessel that was sold
for scrap while held for disposal after completing its commitment under charter
with the MSC and reaching the end of its economic useful life. The impairment
losses on these assets were measured as the amount by which the carrying value
of the assets exceeded their estimated fair value. The fair value of the
Foreign Flag LASH service assets was estimated by determining the present value
of their expected future cash flows using a discount rate believed to be
commensurate with the Company's borrowing rate. The fair values of the
remaining assets were based on scrap values using an estimated scrap value
per lightweight ton.
At the time this plan was adopted, the assets related to the U.S. Flag
LASH liner service included four U.S. Flag LASH vessels, one Foreign Flag LASH
vessel, one FLASH unit, 1,200 LASH barges, and ancillary assets. This service
previously transported cargo between the U.S. Gulf and Atlantic coasts and the
Middle East, East Africa, the Indian sub-continent and Southeast Asia operating
under the name "Waterman." The past several years have reflected a downward
trend in this service as a result of higher operating costs, disruptions in
service due to unplanned maintenance, lower subsidy revenues, and changes in
market conditions. During the first quarter of 2002, two of the U.S. Flag
LASH vessels and related LASH barges were sold for scrap resulting in an
additional impairment loss of $54,000. During the second quarter of 2002, the
two remaining U.S. Flag LASH vessels, certain LASH barges, and the FLASH unit
were sold. The proceeds of these sales were used to repay capital lease
obligations of approximately $9.6 Million associated with these assets before
the scheduled maturity. The result of the sale of these assets and costs
associated with repayment of these capital lease obligations was a net gain
of $151,000 in the second quarter of 2002.
The Company sold the Cape-Size Bulk Carrier resulting in an additional
impairment loss of approximately $400,000 in excess of the original write-down
amount during the third quarter of 2001.
The Special Purpose barges are no longer in use due to a restructuring
of a contract with a major mining company in the fourth quarter of 2000.
These barges were used in conjunction with the Company's two Special Purpose
vessels, the Bali Sea and Banda Sea, to service this contract. The
restructuring allowed the Company to deploy the Bali Sea and Banda Sea in its
Mexican Service, which does not require
17
the Special Purpose barges. These barges were written-down to their estimated
scrap value of approximately $574,000 in the second quarter of 2001.
"Current Assets Held for Disposal" of $4.2 Million as of June 30, 2002,
includes one Foreign Flag LASH vessel, the remaining LASH barges not associated
with the Foreign Flag LASH service, and the aforementioned Special Purpose
barges, all of which are reported at amounts approximating scrap values. The
Foreign Flag LASH vessel is currently idle pending the Company's review of
alternative deployment as discussed in the "Liquidity and Capital Resources"
section.
In anticipation of the disposal of the U.S. Flag LASH Liner service
assets, a reduction of approximately 31% of the Company's shore base staff was
effected early in the third quarter of 2001 and in January, 2002. This action
is expected to reduce the Company's administrative and general expenses by
approximately $3.6 Million on an annualized basis as compared to 2001 rates.
Vessel and Barge Depreciation
- ------------------------------
Vessel and barge depreciation decreased 47.6% from $18.4 Million in the
first six months of 2001 to $9.7 Million in the same period of 2002. The
reclassification of the U.S. Flag LASH Liner service, Cape-Size Bulk Carrier,
and certain Special Purpose barges to Assets Held for Disposal, and subsequent
sale of most of these assets, as described earlier in the "Impairment Loss on
Assets Held for Disposal" section accounted for most of this decrease. The
lease transactions related to the PCTCs discussed earlier in the "Gross Voyage
Profit - Time Charter Contracts" section and the sale for scrap during 2001 of
two of the Company's LASH vessels previously chartered to the MSC also largely
contributed to this decrease.
Other Income and Expense
- --------------------------
ADMINISTRATIVE AND GENERAL EXPENSES decreased 32.1% from $12.1 Million
in the first six months of 2001 to $8.2 Million in the same period of 2002.
Savings resulting from the staff reductions discussed earlier in the
"Impairment Loss on Assets Held for Disposal" section accounted for most of
this decrease, and were slightly offset by related severance payments.
Additionally, the Company retained an unrelated third party during 2001 to
provide ship management services that were previously provided by a wholly-
owned subsidiary of the Company. The costs for these services of approximately
$600,000 were included in voyage expenses during the first six months of 2002
while the expenses of the subsidiary were included in administrative and
general expenses in the first six months of 2001.
The GAIN ON SALE OF VESSELS AND OTHER ASSETS of $493,000 during the
first six months of 2002 primarily related to the sale of certain contract
rights that were no longer beneficial to the Company. The loss of $1.1 Million
in the first six months of 2001 was related to the sale of three of the
Company's U.S. Flag LASH vessels previously operated under contracts with the
MSC after being partially offset by a gain on the sale of additional contract
rights no longer required by the Company.
INTEREST EXPENSE decreased 39.7% from $15.1 Million in the first six
months of 2001 to $9.1 Million in the same period of 2002. The early repayment
of the debt associated with the two PCTCs sold and leased back during 2001
under operating leases, and the reclassification of another PCTC lease from a
capital lease to an operating lease due to a change in lease terms together
accounted for approximately $4
18
Million of the decrease. Regularly scheduled payments on outstanding debt and
lower interest rates contributed $1.5 Million to the decrease. Additionally,
interest expense decreased because the Company's line of credit had a lower
balance drawn during the first six months of 2002 as compared to the same
period of 2001, and the Company repurchased $11.4 Million of its 9% Senior
Notes during the first quarter of 2002. These decreases were partially offset
by interest incurred during the first six months of 2002 on the financing of a
new PCTC purchased in the second half of 2001.
INVESTMENT INCOME of $452,000 earned during the first six months of 2002
decreased slightly from $574,000 in the same period of 2001 due to lower
interest rates, partially offset by an increase in the balance of funds
invested.
OTHER INCOME of $1.3 Million resulted from interest earned by the Company
on overpayments of foreign taxes made in prior years that were previously
refunded.
Income Taxes
- -------------
The Company's tax provision was $37,000 for the first six months of 2002,
and its tax benefit was $33.6 Million in the same period of 2001. The
statutory rate was 35% for both periods. The benefit for the six months ended
June 30, 2001, resulted primarily from the impairment loss on assets held for
disposal discussed earlier in this report.
Equity in Net Income of Unconsolidated Entities
- ------------------------------------------------
Equity in net income of unconsolidated entities, net of taxes, of
$281,000 and $363,000 for the six months ended June 30, 2002 and 2001,
respectively, was primarily related to the Company's minority interest in
companies owning and operating cement-carrying vessels.
THREE MONTHS ENDED JUNE 30, 2002
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2001
Gross Voyage Profit
- ---------------------
Gross voyage profit before depreciation and impairment loss of $13.9
Million in the second quarter of 2002 was comparable to the same period of
2001. However, gross voyage profit associated with each of the Company's
operating segments varied between periods as discussed below.
LINER SERVICES: The increase in gross voyage profit before
depreciation and impairment loss for this segment from a loss of $2.9 Million
in the second quarter of 2001 to a profit of $1.6 Million in the same period
of 2002 was primarily due to the discontinuation of the U.S. Flag LASH Liner
service. The elimination of that service contributed $5.3 Million to the
increase, including $1.8 Million associated with the reduction of loss
provisions and other accruals during the period as explained in the discussion
of results of operations for the six months ended June 30, 2002. Additionally,
lower gross voyage profit from the Company's Foreign Flag LASH Liner service
resulting from a decrease in the volume of outbound cargo partially offset the
increase associated with the elimination of the U.S. Flag LASH Liner service.
TIME CHARTER CONTRACTS: This segment's gross voyage profit before
depreciation and impairment loss decreased from $15.4 Million to $11.8 Million
in the quarterly periods ending June 30, 2001 and 2002,
19
respectively. The sale and leaseback of two of the Company's PCTCs during the
second half of 2001 and renegotiated lease terms on another PCTC that resulted
in different accounting treatment accounted for most of this decrease.
Additionally, the sale of one of the Company's vessels previously operating
under charter to the MSC during 2001 and losses associated with prior period
operations of the Company's Cape-Size Bulk Carrier reported in 2002 contributed
to the decrease. An increase in revenue earned by the Company's PCTCs due to
carrying more supplemental cargoes during the second quarter of 2002 than in
the same period of 2001 and the reversal of insurance reserves discussed
earlier partially offset the decrease. As explained earlier, the contracts
associated with the PCTCs were not affected by the aforementioned lease
transactions. Payments related to these leases included in voyage expenses
during the second quarter of 2002 were comparable to the depreciation and
interest charges incurred on these vessels during the second quarter of 2001,
which were eliminated by the lease transactions.
CONTRACTS OF AFFREIGHTMENT: Gross voyage profit before depreciation of
$2.3 Million for this segment in the second quarter of 2002 increased slightly
from $2 Million in the same period of 2001 primarily due to payment received
from an insurance claim for loss of hire as explained in the discussion of
results of operations for the six months ended June 30, 2002.
OTHER: this segment's gross voyage loss before depreciation during the
second quarter of 2002 was $1.7 Million as compared to $574,000 in the same
period of 2001. An improvement in results for the Company's railcar ferry
service operating in the Company's Mexican Service was more than offset by
reduced profit from certain of the Company's subsidiaries that provided
specialized services to the discontinued U.S. Flag LASH Liner service.
Impairment Loss on Assets Held for Disposal
- --------------------------------------------
During the second quarter of 2002, two U.S. Flag LASH vessels, certain
LASH barges, and a FLASH unit, all of which were associated with the U.S. Flag
LASH Liner service, were sold. The proceeds of these sales were used to repay
capital lease obligations of approximately $9.6 Million associated with these
assets before the scheduled maturity. The result of the sale of these assets
and costs associated with repayment of these capital lease obligations was a
net gain of $151,000 in the second quarter of 2002. The discussion of results
of operations for the six months ended June 30, 2002, includes a detailed
description of the discontinuation of the U.S. Flag LASH Liner service,
classification of the related assets as "Assets Held for Disposal," and
recognition of impairment losses associated with those assets.
Vessel and Barge Depreciation
- -------------------------------
Vessel and barge depreciation decreased 47.1% from $9.1 Million in the
second quarter of 2001 to $4.8 Million in the same period of 2002. The
reclassification of the U.S. Flag LASH Liner service, Cape-Size Bulk Carrier,
and certain Special Purpose barges to Assets Held for Disposal, and subsequent
sale of most of these assets, as described earlier in the "Impairment Loss on
Assets Held for Disposal" section accounted for most of this decrease. The
lease transactions related to the PCTCs discussed earlier in the "Gross Voyage
Profit - Time Charter Contracts" section and the sale for scrap during 2001 of
two of the Company's LASH vessels previously chartered to the MSC also largely
contributed to this decrease.
20
Other Income and Expense
- --------------------------
ADMINISTRATIVE AND GENERAL EXPENSES decreased 38.2% from $6.1 Million in
the second quarter of 2001 to $3.8 Million in the same period of 2002. Savings
resulting from the staff reductions discussed earlier in the "Impairment Loss
on Assets Held for Disposal" section accounted for most of this decrease, and
were slightly offset by related severance payments.
The GAIN ON SALE OF VESSELS AND OTHER ASSETS of $513,000 during the
second quarter of 2002 primarily related to the sale of certain contract rights
that were no longer beneficial to the Company. The loss of $1.1 Million in the
second quarter of 2001 was related to the sale of three of the Company's U.S.
Flag LASH vessels previously operated under contracts with the MSC and was
partially offset by a gain on the sale of additional contract rights no longer
required by the Company.
INTEREST EXPENSE decreased 38.3% from $7.3 Million in the second quarter
of 2001 to $4.5 Million in the same period of 2002. The early repayment of
the debt associated with the two PCTCs sold and leased back during 2001 under
operating leases and reclassification of another PCTC lease from a capital
lease to an operating lease due to a change in lease terms accounted for most
of this decrease. Additionally, the repurchase of $11.4 Million of the
Company's 9% Senior Notes during the first quarter of 2002, a decrease in the
balance on the line of credit, lower interest rates, and regularly scheduled
payments on outstanding debt contributed to the reduction in interest expense.
These decreases were partially offset by interest incurred during the second
quarter of 2002 on the financing of a new PCTC purchased in the second half
of 2001.
INVESTMENT INCOME of $140,000 earned during the second quarter of 2002
decreased slightly from $246,000 in the same period of 2001 due to lower
interest rates, partially offset by an increase in the balance of funds
invested.
Income Taxes
- -------------
The Company's tax provision was $596,000 for the second quarter of 2002,
and its tax benefit was $30.8 Million in the same period of 2001. The
statutory rate was 35% for both periods. The benefit for the quarterly period
ended June 30, 2001, resulted primarily from the impairment loss on assets held
for disposal discussed earlier in this report.
Equity in Net Income of Unconsolidated Entities
- ------------------------------------------------
Equity in net income of unconsolidated entities, net of taxes, of $112,000
and $217,000 for the quarterly periods ended June 30, 2002 and 2001,
respectively, was primarily related to the Company's minority interest in
companies owning and operating cement-carrying vessels.
21
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 the Company's Consolidated Financial
Statements.
The Company's working capital decreased slightly from $25.5 Million at
December 31, 2001, to $23.8 Million at June 30, 2002, after provision for
current maturities of long-term debt and capital lease obligations of $17.3
Million. Cash and cash equivalents were approximately $26.3 Million at both
December 31, 2001 and June 30, 2002. Cash provided by operating and investing
activities of $21.5 Million and $10 Million, respectively, were offset by cash
used for financing activities of $31.5 Million.
Operating activities generated a positive cash flow after adjusting net
income for non-cash provisions such as depreciation and amortization. Cash
flows from investing activities of $10 Million were generated primarily from
the sale Assets Held for Disposal and were slightly offset by payments for
vessel drydocking expenses.
Cash used for financing activities of $31.5 Million included $42.9
Million for repayment of debt and capital lease obligations, which was offset
by draws on the Company's line of credit of $11.5 Million. The $42.9 Million
for repayment of debt and capital lease obligations consisted of $11.4 Million
to repurchase a portion of the Company's 9% Senior Notes; $9.6 Million to repay
the capital lease obligations associated with two of the U.S. Flag LASH vessels
sold in 2002; $10.4 Million for regularly scheduled payments on debt and
capital lease obligations; and $11.5 Million to repay draws on the Company's
line of credit made during the same period.
9% SENIOR NOTES - As of June 30, 2002, the balance outstanding on the
Company's 9% Senior Notes (the "Notes") was $27.2 Million. These Notes, which
mature July 1, 2003, became current liabilities of the Company on July 1, 2002.
At that time, the Company obtained additional financing of $12 Million secured
by a second mortgage on the Company's Molten Sulphur Carrier, the proceeds of
which have been designated for repurchase of a portion of the Notes during the
third quarter of 2002. This financing is for a four-year term with a floating
interest rate. The Company remains in compliance with its working capital
covenants included in its loan agreements after giving effect to classification
of the Notes as current liabilities and this new financing. The Company has
adopted a plan to provide for the orderly retirement of the remaining $15.2
Million balance of these Notes within the required time frame, while also
repaying other existing debt in accordance with scheduled maturities. The
Company anticipates that it will be able to meet these obligations with its
cash flow from future projected earnings and available line of credit, or
additional financing. However, there can be no assurance that this will occur.
At June 30, 2002, the Company's revolving credit facility of $10 Million was
fully available.
DEBT AND LEASE OBLIGATIONS - As discussed earlier, the Company sold and
leased back two PCTCs during 2001 and renegotiated the terms of the lease
agreement for another of its PCTCs. The PCTCs are operated under fixed charter
agreements covering the terms of the respective leases. For accounting
purposes, the leases qualify for treatment as operating leases. The Company's
obligations associated with these and other operating leases are disclosed in
the table below.
22
The following is a summary of the Company's debt and lease obligations as
of June 30, 2002:
July 1 -
Debt and lease December 31
obligations (000's) 2002 2003 2004 2005 2006 Thereafter
- -------------------------------------------------------------------------------
Long-term debt $7,682 $42,868 $13,999 $14,264 $14,451 $133,680
Capital lease
Obligations 633 1,858 - - - -
Operating leases 9,145 17,476 16,223 16,293 16,313 124,150
---------------------------------------------------------
Total by period $17,460 $62,202 $30,222 $30,557 $30,764 $257,830
=========================================================
DEBT COVENANT COMPLIANCE STATUS - The Company continues to meet all of
its financial covenants under its various debt agreements, after these were
amended for the year 2002. The Company believes it will be able to meet its
requirements for the balance of 2002 and the more restrictive financial
covenants that become effective in 2003, although it can give no assurance to
that effect.
If the Company's cash flow and capital resources are not sufficient to
fund its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, obtain additional equity capital, enter into
additional financings of its unencumbered vessels or restructure debt.
POTENTIAL REACTIVATION OF U.S. FLAG LASH LINER SERVICE - The Company is
currently reviewing the possibility of reactivating its U.S. Flag LASH Liner
service due to several changes in circumstances that have occurred since the
Company's decision in 2001 to discontinue this service. The Company believes
that the events of September 11, 2001, will significantly affect the level of
government-sponsored foreign aid cargo available for shipment by U.S. flag
vessels over the next few years. The Company is considering upgrading the
foreign flag LASH vessel currently classified as "Current Assets Held for
Disposal," and has retained LASH barges as discussed below with the potential
to use these assets to renew the service in the near future. If the foreign
flag vessel is upgraded, it could enter the Company's Foreign Flag LASH Liner
service, replacing one of the vessels currently operating in that service,
which could be converted to U.S. flag for potential use in the renewed U.S.
Flag LASH Liner service. Alternatives for financing the costs of upgrading
this vessel while remaining in compliance with debt covenants are also being
reviewed.
EARLY BUYOUT OF CAPITAL LEASE OBLIGATIONS - As of June 30, 2002, the
Company reported a capital lease obligation of approximately $2.5 Million
related to a group of LASH barges, of which $1.8 Million was due within one
year with the remainder due in the second half of 2003. Early in the third
quarter of 2002, the Company paid $2.8 Million to the lessor, which
approximated the remaining lease payments and accrued interest, in fulfillment
of an agreement to terminate the lease earlier than scheduled. Additionally,
the Company signed a promissory note for $1.3 Million due in July of 2003 for
the purchase from the lessor of the LASH barges associated with this obligation
and another group of LASH barges previously leased from the same party. This
promissory note is secured by LASH barges currently operating in the Company's
Foreign Flag LASH Liner service. The Company is currently reviewing
alternatives for the utilization or disposition of the LASH barges acquired in
this transaction, including using them in a renewed U.S. Flag LASH Liner
service as discussed earlier in this report, or replacing barges in its Foreign
Flag LASH Liner service.
23
SUBSIDY REVENUE CONTRACTS - Three of the Company's LASH vessels that
previously operated in its U.S. Flag LASH Liner service participated in the
Maritime Security Program ("MSP"), which provides for subsidy payments of $2.1
Million per vessel annually. As discussed previously in the "Assets Held for
Disposal" section, these three vessels were sold during the first half of 2002,
and accordingly subsidy payments under MSP were suspended. The Company must
operate a qualified vessel under each of these contracts for a specified number
of days during each fiscal year to maintain the MSP contract. The Company
reached an agreement early in the third quarter of 2002 to bareboat charter a
vessel that allows the Company to maintain one of these contracts. This vessel
is being operated under a time charter arrangement. The effect on the
Company's gross voyage profit related to this transaction will not be material.
The Company must find replacement vessels for the remaining two contracts by
mid-September of 2002 and April of 2003, respectively, to maintain the MSP
contracts, but it cannot give assurance that this will occur. The Company
anticipates that the vessel it is considering reflagging for use in a renewed
U.S. Flag LASH Liner service would qualify under the MSP program, and that one
of these contracts could be used with this vessel. MSP subsidy payments are
subject to annual appropriation by Congress. The current MSP program expires
in September 2005. The Company, along with other MSP carriers, has been in
discussion with maritime labor, the Maritime Administration, and Congress
regarding an extension of this program. However, the Company can provide no
assurances in this regard. The MSP subsidy payments are discussed in more
detail in the Company's Form 10-K for the year ended December 31, 2001.
SELF-RETENTION INSURANCE PROGRAM - Due to the effect of the events of
September 11, 2001, on the reinsurance market, along with the discontinuation
of the U.S. Flag LASH Liner service, the Company revised its self-retention
insurance program for policy years beginning in the third quarter of 2002. The
Company anticipates an additional cost of approximately $1 Million annually to
maintain a comparable level of risk exposure under this new program. The
Company's self-retention insurance program in effect during the first half of
2002 is explained in more detail in the Company's Form 10-K for the year ended
December 31, 2001.
MEXICAN SERVICE PROFITABILITY - The Company's Mexican Service is
projected to generate a profit in the second half of 2002 and contribute to
the Company's positive cash flows. However, if market conditions impact those
projections, the Company believes it could find alternative placement for the
two vessels supporting the service.
DIVIDEND PAYMENTS - In view of the impairment loss recognized on Assets
Held for Disposal during 2001, and to ensure compliance with financial
covenants under the Company's debt agreements, at a regular meeting held June
25, 2001, the Board of Directors suspended quarterly dividend payments on its
Common shares of stock.
ENVIRONMENTAL ISSUES - The Company has not been notified that it is a
potentially responsible party in connection with any environmental matters.
24
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." 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.
The fair values of the Company's interest rate swap agreements and commodity
swap contracts at June 30, 2002, were a liability of $1.9 Million and an asset
of $482,000, respectively.
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 that goodwill not be
amortized in any circumstance and also requires goodwill to be 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 Company adopted SFAS No. 142 on January 1, 2002, which had no
material impact on the Company's financial statements. The adoption of SFAS
No. 143 is not expected to have a material impact on the Company's financial
statements as the Company does not have 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." This statement revises current guidance with
respect to the process for measuring impairment of long-lived assets. 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. The reclassification of certain of the Company's assets to Assets Held
for Disposal during 2001 was made prior to the Company's adoption of SFAS No.
144. Therefore, these assets will continue to be accounted for under SFAS No.
121. The Company's adoption of SFAS No. 144 will only impact the accounting
for future transactions relating to the impairment or disposal of long-lived
assets.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement revises current guidance with respect to gains
and losses on early extinguishment of debt. Under SFAS No. 145 gains and
losses on early extinguishment of debt will no longer be treated as
extraordinary items unless they meet the criteria for extraordinary treatment
in APB Opinion No. 30. The Company will be required to adopt SFAS No. 145
effective January 1, 2003. Upon adoption of SFAS No. 145, the Company will be
required to reclassify gains and losses on early extinguishment of debt
reported in prior period income statements as those amounts will no longer
qualify for extraordinary treatment under SFAS No. 145. The Company
25
reported extraordinary gains related to early extinguishment of debt of $15,000
and $688,000, net of taxes, for the years ended December 31, 2001 and 2000,
respectively, and extraordinary losses of ($31,000), net of taxes, for the six
months ended June 30, 2002. However, the adoption of SFAS No. 145 is not
expected to have a material effect on the Company's financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supercedes EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the
date of an entity's commitment to an exit or disposal plan. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
anticipate that adoption of SFAS No. 146 will have a material effect on its
financial position.
26
ITEM 3.
QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
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.
INTEREST RATE RISK. The fair value of long-term debt at June 30, 2002,
including current maturities, was estimated to be $232.7 Million compared to a
carrying value of $226.9 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 June 30, 2002, would be
approximately $2.7 Million or 1.2% of the carrying value.
The fair value of the interest rate swap agreement discussed in the Form
10-K was a liability of $1.9 Million at June 30, 2002, 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. A hypothetical 10% decrease in interest rates as of June 30, 2002,
would have resulted in a $147,000 increase in the fair value of the liability.
COMMODITY PRICE RISK. The fair value of the commodity swap agreements
discussed in the Form 10-K was an asset of $482,000 at June 30, 2002, estimated
based on the difference between price per ton of fuel and the contract delivery
price per ton of fuel times the quantity applicable to the agreements. A
hypothetical 10% decrease in the fuel price per ton of fuel as of June 30,
2002, would have resulted in a $228,000 decrease in the fair value of the
asset.
FOREIGN EXCHANGE RATE RISK. There were no material changes in market
risk exposure for the foreign currency sale commitments described in the
Company's Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 2001. Additionally, market risk associated with
foreign currency purchase commitments entered into by the Company during 2002
was not material.
27
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 held on April 17, 2002, 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, 2002, and are incorporated
herein by reference.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
Exhibit Number Description
----------------- ---------------
Part II Exhibits: 3 Restated Certificate of
Incorporation, as amended, and
By-Laws of the Registrant
(filed with the Securities and
Exchange Commission as Exhibit 3
to the Registrant's Form 10-Q for
the quarterly period ended June
30, 1996, and incorporated herein
by reference)
(b) The Company filed a Form 8-K on June 21, 2002, to report its change in
certifying accountants.
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 _________8/14/02_______________