AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 2004
REGISTRATION NO. 333-120161
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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INTERNATIONAL SHIPHOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 4412 36-2989662
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
650 POYDRAS STREET
NEW ORLEANS, LOUISIANA 70130
(504) 529-5461
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
GARY L. FERGUSON
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
650 POYDRAS STREET
NEW ORLEANS, LOUISIANA 70130
(504) 529-5461
(Names, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
L. RICHARDS MCMILLAN, II THOMAS D. WASHBURNE, JR.
JONES, WALKER, WAECHTER, POITEVENT, MICHAEL W. CONRON
CARRERE & DENEGRE, L.L.P. VENABLE LLP
201 ST. CHARLES AVENUE, 51ST FLOOR TWO HOPKINS PLAZA
NEW ORLEANS, LOUISIANA 70170-5100 SUITE 1800
(504) 582-8188 BALTIMORE, MARYLAND 21201-2978
FAX: (504) 582-8012 (410) 244-7400
FAX: (410) 244-7742
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE
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Convertible Exchangeable Preferred
Stock.................................. 880,000 $50.00 $44,000,000 $5,575(2)
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Convertible Subordinated Notes........... $44,000,000(3) --(4) --(4) --(4)
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Common Stock............................. (5) --(4) --(4) --(4)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Registration fee of $5,575 paid on November 1, 2004.
(3) This number represents a total of $44,000,000 aggregate principal amount of
Convertible Subordinated Notes issuable if we elect to exchange all of the
Convertible Exchangeable Preferred Stock for Convertible Subordinated Notes.
For purposes of estimating the amount of notes to be included upon exchange
of preferred stock, we calculated the amount of notes issuable upon exchange
based on an exchange rate of $50 principal amount of the notes for each
share of preferred stock.
(4) No additional consideration will be received for the common stock or the
Convertible Subordinated Notes, and, therefore, no additional registration
fee is required pursuant to Rule 457(i).
(5) This number represents shares of common stock issuable upon conversion of
the Convertible Exchangeable Preferred Stock or the Convertible Subordinated
Notes. In accordance with Rule 416 under the Securities Act of 1933, as
amended, there are also being registered hereby such indeterminate number of
additional shares of common stock as may become issuable pursuant to any
stock split, stock dividend, recapitalization or similar transaction.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 10, 2004
(ISC CORPORATION LOGO)
800,000 SHARES
INTERNATIONAL SHIPHOLDING CORPORATION
% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
LIQUIDATION PREFERENCE $50 PER SHARE
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International Shipholding Corporation is offering 800,000 shares of %
convertible exchangeable preferred stock, which is referred to in this
prospectus as the "preferred stock." Cash dividends will be cumulative from the
date of issuance at the annual rate of % of the liquidation preference of
the preferred stock, payable quarterly on each of , ,
, and , commencing , 2005. Any dividend must be
declared by our board of directors and must come from funds that are legally
available for dividend payments.
Each share of the preferred stock will have a liquidation preference of $50
per share. You may convert each share of preferred stock into shares of our
common stock based on the initial conversion price of $ , subject to
adjustment upon the occurrence of certain events.
We may elect to redeem the preferred stock, in whole or in part, for cash
at any time on or after , 2006, provided that prior to ,
2007, we may elect to redeem the preferred stock only if the closing price of
our common stock has exceeded 150% of the conversion price of the preferred
stock for at least 20 trading days during any 30-day trading period ending
within five trading days prior to notice of redemption. We may also elect to
redeem the preferred stock for cash upon a change in control of our company as
further described in this prospectus. In addition, upon a change in control of
our company and to the extent we have not exercised our change in control
redemption option, you may require us to redeem for cash any or all of your
shares of the preferred stock at the liquidation preference of the preferred
stock, plus any accrued and unpaid cash dividends to, but not including, the
date of redemption. You will have no other right to require us to redeem the
preferred stock.
At our option, we may exchange the preferred stock in whole, but not in
part, on any dividend payment date beginning on , 2005 and prior to
, 2014, for our % convertible subordinated notes due 2014,
which are referred to in this prospectus as the "notes." If we elect to exchange
the preferred stock for the notes, the exchange rate will be $50 principal
amount of the notes for each share of preferred stock. The notes, if issued,
will mature on , 2014 and will have terms substantially similar to
those of the preferred stock.
The preferred stock has no maturity date and no voting rights prior to
conversion to common stock, except in the limited circumstances described in
this prospectus. The notes, if issued, will have no voting rights prior to
conversion to common stock.
AN INVESTMENT IN THE SECURITIES OFFERED BY THIS PROSPECTUS INVOLVES
SIGNIFICANT RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS.
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PER SHARE TOTAL
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Public Offering Price....................................... $ $
Underwriting Discount and Financial Advisory Fee............ $ $
Proceeds, Before Expenses, to International Shipholding
Corporation............................................... $ $
We have granted the underwriter a 30-day option to purchase up to 80,000
additional shares of the preferred stock on the same terms and conditions as set
forth above to cover over-allotments, if any.
Shares of our common stock are traded on the New York Stock Exchange under
the symbol "ISH." The last reported sale price of our common stock on December
9, 2004 was $14.10 per share. We will make application to list the preferred
stock on the New York Stock Exchange under the symbol "ISH Pr."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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FERRIS, BAKER WATTS
Incorporated
The date of this prospectus is , 2004
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE OFFERS ARE NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT COVER OF
THIS PROSPECTUS.
TABLE OF CONTENTS
Cautionary Notice Regarding Forward-Looking Statements...... ii
Industry and Other Information.............................. ii
Prospectus Summary.......................................... 1
Risk Factors................................................ 14
Use of Proceeds............................................. 26
Dividend Policy............................................. 26
Price Range of Common Stock................................. 27
Capitalization.............................................. 28
Selected Historical Financial and Operating Data............ 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 31
Business.................................................... 45
Management.................................................. 60
Security Ownership of Management and Certain Beneficial
Owners.................................................... 65
Certain Relationships and Transactions...................... 67
Description of the Preferred Stock.......................... 68
Description of the Notes.................................... 83
Description of Indebtedness................................. 94
Description of Common Stock................................. 96
Material U.S. Federal Income Tax Considerations............. 98
Underwriting................................................ 106
Legal Matters............................................... 107
Experts..................................................... 107
Where You Can Find More Information......................... 108
Glossary.................................................... G-1
Index to Financial Statements............................... F-1
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International Shipholding Corporation is a Delaware corporation. Our
principal executive offices are located at 650 Poydras Street, New Orleans,
Louisiana 70130 and our telephone number at that address is (504) 529-5461. Our
website is located at www.intship.com. The information on our website is not
part of this prospectus.
In this prospectus, except as otherwise noted, "we," "us," "our," "ISH" and
"the company" refer to International Shipholding Corporation and its
consolidated subsidiaries.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act"), both as amended.
All statements other than statements of historical fact are "forward-looking
statements" for purposes of federal and state securities laws, including without
limitation statements regarding (1) estimated fair values of capital assets, the
recoverability of the cost of those assets, the estimated future cash flows
attributable to those assets, and the appropriate discounts to be applied in
determining the net present values of those estimated cash flows; (2) estimated
scrap values of assets held for disposal; (3) estimated fair values of financial
instruments, such as interest rate and commodity swap agreements; (4) estimated
losses (including independent actuarial estimates) under self-insurance
arrangements, as well as estimated losses on certain contracts, trade routes,
lines of business or asset dispositions; (5) estimated losses attributable to
asbestos claims; (6) estimated obligations, and the timing thereof, to the U.S.
Customs Service relating to foreign repair work; (7) the adequacy of our capital
resources and the availability of additional capital resources on commercially
acceptable terms; (8) our ability to remain in compliance with our debt
covenants; (9) anticipated trends in government sponsored cargoes; (10) our
ability to maintain or increase our government subsidies; (11) the anticipated
improvement in the results of our Mexican rail-ferry service; (12) the estimated
effect on our results of operations of the American Jobs Creation Act of 2004;
and (13) assumptions underlying any of the foregoing. Forward-looking statements
may include the words "may," "will," "estimate," "intend," "continue,"
"believe," "expect," "plan" or "anticipate" and other similar words. Such
forward-looking statements may be contained in the sections of this prospectus
entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," among
other places.
Although we believe that the expectations expressed in our forward-looking
statements are reasonable, actual results will differ from those projected or
assumed in our forward-looking statements, and those variations could be
material. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and are subject to
inherent risks and uncertainties, such as those disclosed in the section of this
prospectus entitled "Risk Factors" and elsewhere herein. All forward-looking
statements contained in this prospectus are made as of the date of this
prospectus. Except for our ongoing disclosure obligations under the federal
securities laws, we do not intend, and we undertake no obligation, to update any
forward-looking statement. Currently known risk factors include, but are not
limited to, the factors described in the section of this prospectus entitled
"Risk Factors." We urge you to review carefully this section for a more complete
discussion of the risks of an investment in the preferred stock.
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INDUSTRY AND OTHER INFORMATION
Unless we indicate otherwise, the information about the shipping industry
contained in this prospectus, including information about our market positions
and market shares, is based on our general knowledge of, and expectations
concerning, the industry, including estimates prepared by us using data from
various industry sources, and on assumptions we made based on such data and
knowledge. We believe that data regarding the shipping industry and our market
positions and market shares within such industry provide generally reliable
guidance, but such data is inherently imprecise because it is not gathered for
each of the specific segments of our business. Further, our estimates involve
risks and uncertainties and are subject to change based on various factors,
including those discussed in the "Risk Factors" section of this prospectus. We
have not independently verified data from industry sources and cannot guarantee
its accuracy or completeness, but we believe the data is generally accurate and
we use it in evaluating our performance and planning our future activities.
ii
PROSPECTUS SUMMARY
This summary highlights selected information appearing elsewhere in this
prospectus. You should carefully read this prospectus and the registration
statement of which this prospectus is a part in their entirety before making an
investment decision, and you should pay particular attention to the risks
associated with our business and the risks of investing in the preferred stock,
which we discuss under "Risk Factors" beginning on page 14, and to our financial
statements and related notes beginning on page F-1.
ABOUT THE COMPANY
Through our subsidiaries, we operate a diversified fleet of U.S. and
foreign flag vessels that provide international and domestic maritime
transportation services to commercial and governmental customers primarily under
medium- to long-term charters and contracts. At September 30, 2004, our fleet
consisted of 35 ocean-going vessels, of which 11 were 100% owned by us, nine
were 30% owned by us, two were 50% owned by us, seven were leased by us, and six
were operated by us under operating contracts. We also own 917 LASH (Lighter
Aboard SHip) barges and 32 over-the-road haul-away car carrying trucks that are
leased to a company in which we have a 50% interest.
Our fleet is deployed by our principal operating subsidiaries, Central Gulf
Lines, Inc. ("Central Gulf"), LCI Shipholdings, Inc. ("LCI"), which includes a
transatlantic liner service doing business as "Forest Lines," Waterman Steamship
Corporation ("Waterman"), and CG Railway, Inc. ("CG Railway"). Other of our
subsidiaries provide ship charter brokerage, agency and other specialized
services primarily to our operating segments.
We have five operating segments: Liner Services, Time Charter Contracts,
Contracts of Affreightment ("COA"), Rail-Ferry Service, and Other. In addition
to our five operating segments, we have investments in several unconsolidated
entities of which we own 50% or less and do not exercise significant influence
over operating and financial activities. For additional information about our
operating segments, see note K of the notes to our consolidated financial
statements included elsewhere in this prospectus.
During the year ended December 31, 2003 and the nine months ended September
30, 2004, those segments made the following contributions to our revenues, gross
voyage profit or loss and segment profit or loss:
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2004 DECEMBER 31, 2003
---------------------------------------- ----------------------------------------
GROSS VOYAGE SEGMENT GROSS VOYAGE SEGMENT
REVENUES PROFIT (LOSS) PROFIT (LOSS) REVENUES PROFIT (LOSS) PROFIT (LOSS)
-------- ------------- ------------- -------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Liner Services............ $ 71,332 $ (429) $(1,043) $ 75,635 $(4,199) $(5,238)
Time Charter Contracts.... 87,086 22,144 17,611 129,685 33,048 26,378
Contracts of
Affreightment........... 12,048 3,737 2,597 16,189 5,495 3,695
Rail-Ferry Service........ 11,923 (3,382) (4,858) 15,537 (2,926) (5,248)
Other..................... 17,094 923 757 20,767 2,422 3,132
-------- ------- ------- -------- ------- -------
Total................... $199,483 $22,993 $15,064 $257,813 $33,840 $22,719
======== ======= ======= ======== ======= =======
Liner Services. In our liner services segment we operate four vessels,
including one "dockship" that positions barges for pick-up and discharge, on
established trade routes with regularly scheduled sailing dates. We receive
revenues for the carriage of cargo within the established trading areas and pay
the operating and voyage expenses incurred. Our liner services include a U.S.
flag service between U.S. Gulf and East Coast ports and ports in the Red Sea and
Middle East, and a foreign flag transatlantic service operating between U.S.
Gulf and East Coast ports and ports in northern Europe.
Time Charter Contracts. Time charters are contracts by which our charterer
obtains the right for a specified period to direct the movements and utilization
of the vessel in exchange for payment of a specified daily rate, but we retain
operating control over the vessel. Typically, we fully equip the vessel and are
responsible for normal operating expenses, repairs, crew wages, and insurance,
while the charterer is
1
responsible for voyage expenses, such as fuel, port and stevedoring expenses.
Our time charter contracts include charters of three Roll-On/Roll-Off ("RO/RO")
vessels to the Military Sealift Command (the "MSC") for varying terms. Also
included in this segment are contracts with car manufacturers for six Pure
Car/Truck Carriers ("PCTCs"), with an electric utility for a conveyor-equipped,
self-unloading coal carrier and with a mining company to provide transportation
services at its mine in Papua, Indonesia.
Contracts of Affreightment. COAs are contracts by which we undertake to
provide space on our vessels for the carriage of specified goods or a specified
quantity of goods on a single voyage or series of voyages over a given period of
time between named ports or within certain geographical areas in return for the
payment of an agreed amount per unit of cargo carried. Generally, we are
responsible for all operating and voyage expenses. Our COA segment includes a
molten sulphur transportation contract with a sulphur transporter.
Rail-Ferry Service. In the beginning of 2001, we began a new service,
through our subsidiary CG Railway, carrying loaded rail cars between the U.S.
Gulf and Mexico. This service uses our two Special Purpose vessels, which were
modified to enable them to carry standard size railroad cars. Each vessel has a
capacity for 60 standard size rail cars.
Other. This segment consists of operations that include more specialized
services than the former four segments and subsidiaries that provide ship
charter brokerage and agency services. Also included in this segment is our 50%
ownership in a car transportation truck company.
Unconsolidated Entities. We have a 30% interest in a company owning and
operating nine Cement Carriers. We also have a 50% interest in a company owning
two newly built Cape-Size Bulk Carriers, and a 50% interest in a company that
operates a terminal in Coatzacoalcos, Mexico for our Rail-Ferry Service.
Recent Losses. Our net losses in fiscal years 2002 and 2001 were due
primarily to impairment losses incurred in 2001 in connection with our adoption
of a plan to separate certain of our vessels from our operations and dispose of
those vessels, and related expenses incurred in 2001 and 2002 related to the
termination of services provided by those vessels. For further information, see
the section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and note B to our consolidated
financial statements included elsewhere in this prospectus.
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Our parent company is a Delaware corporation headquartered in New Orleans,
Louisiana, with administrative and sales offices in New York, Nashville and
Shanghai, and a network of marketing agents in other major cities around the
world. Our principal executive offices are located at 650 Poydras Street, New
Orleans, Louisiana 70130, and our telephone number at that address is (504)
529-5461.
BUSINESS STRATEGY
Our strategy is to
- identify customers with high credit quality and marine transportation
needs requiring specialized vessels or operating techniques;
- seek medium- to long-term charters or contracts with those customers and,
if necessary, modify, acquire or construct vessels to meet the
requirements of those charters or contracts; and
- provide our customers with reliable, high quality service at a reasonable
cost.
We believe that our strategy has produced relatively stable operating cash
flows for an industry that tends to be cyclical and valuable long-term
relationships with our customers. We plan to continue this strategy by expanding
our relationships with existing customers, seeking new customers and selectively
pursuing acquisitions.
HISTORY
The company was originally founded as Central Gulf Steamship Corporation in
1947 by the late Niels F. Johnsen and his sons, Niels W. Johnsen, a director of
the company, and Erik F. Johnsen, our
2
Chairman and Chief Executive Officer. Central Gulf was privately held until 1971
when it merged with Trans Union Corporation ("Trans Union"). In 1978,
International Shipholding Corporation was formed to act as a holding company for
Central Gulf, LCI, and certain other affiliated companies in connection with the
1979 spin-off by Trans Union of our common stock to Trans Union's stockholders.
In 1986, we acquired the assets of Forest Lines, and in 1989, we acquired
Waterman. Since our spin-off from Trans Union, we have continued to act solely
as a holding company, and our only significant assets are the capital stock of
our subsidiaries.
COMPETITIVE STRENGTHS
Diversification. Our strategy for many years has been to seek and obtain
contracts that contribute to a diversification of operations. These diverse
operations vary from chartering vessels to the government, to chartering vessels
for the transportation of automobiles and sport utility vehicles, transportation
of paper, steel, wood and wood pulp products, carriage of supplies for a mining
company, transporting molten sulphur, transporting coal for use in generating
electricity, and transporting standard size railroad cars. In recent years we
have upgraded our fleet and brought the average age of our vessels down to
approximately 14.5 years as compared with approximately 17.7 years in 2000. As a
result, our management believes that the outlook for fulfilling current
contracts, obtaining extensions through the exercise of options by current
customers, and obtaining new contracts is good.
Stable Cash Flow. We believe that our historical cash flows have been
relatively stable for an industry that tends to be cyclical, because of the
length and structure of our contracts, the creditworthiness of our customers and
our diversified customer and cargo bases. Our cash flow from operations was
approximately $38.6 million, $18.4 million and $21.3 million for the years ended
December 31, 2003, 2002 and 2001, respectively, and $14.5 million and $28.4
million for the nine-month periods ended September 30, 2004 and 2003,
respectively. Our medium- to long-term time charters provide for a daily charter
rate that is payable whether or not the charterer utilizes the vessel. These
charters generally require the charterer to pay certain voyage operating costs,
including fuel, port and stevedoring expenses, and often include cost escalation
features covering certain of our expenses. In addition, our COAs guarantee a
minimum amount of cargo for transportation, and our diversified cargo and
customer bases have contributed to the stability of our operating cash flow. We
also believe that the high credit quality of most of our customers and the
length of our contracts help reduce the effects of the cyclical nature of the
shipping industry.
Longstanding Customer Relationships. We currently have medium- to
long-term time charters with, or contracts to carry cargo for, the MSC (14% of
our fiscal year 2003 revenues) and a variety of high credit quality commercial
customers that include International Paper Company (2% of our fiscal year 2003
revenues), P.T. Freeport Indonesia (6% of our fiscal year 2003 revenues), Toyota
Motor Corporation (6% of our fiscal year 2003 revenues) and Hyundai Motor
Company (6% of our fiscal year 2003 revenues). Most of these companies have been
customers of ours for over ten years. Substantially all of our current cargo
contracts and charter agreements are renewals or extensions of previous
agreements. In recent years, we have been successful in winning extensions or
renewals of substantially all of the contracts rebid by our commercial
customers, and we have been operating vessels for the MSC for more than 30
years. We believe that our longstanding customer relationships are in part due
to our excellent reputation for providing quality specialized maritime service
in terms of on-time performance, low cargo loss, minimal damage claims and
reasonable rates.
Experienced Management Team. Our management team has substantial
experience in the shipping industry. Our Chairman has served the company in
various management capacities since its founding in 1947. In addition, our
President, Executive Vice President, and Chief Financial Officer have over 92
years of collective experience with the company. We believe that the experience
of our management team is important to maintaining long-term relationships with
our customers.
3
RECENT DEVELOPMENTS
NEW TAX LEGISLATION
Under current United States tax law, U.S. companies like us and their
domestic subsidiaries generally are taxed on all income, whether derived in the
United States or abroad. With respect to foreign subsidiaries in which we hold
more than a 50 percent interest (referred to in the tax laws as controlled
foreign corporations or "CFCs"), we are currently taxed on our pro rata share of
foreign shipping income.
The recently enacted American Jobs Creation Act of 2004 (the "Jobs Creation
Act"), which becomes effective for our company on January 1, 2005, will change
the United States tax treatment of our U.S. flag vessels in foreign operations
and foreign flag shipping operations. We intend to make an election under the
Jobs Creation Act to have most of our U.S. flag operations taxed under a new
"tonnage tax" regime rather than under the usual U.S. corporate income tax
regime. Once the election is effective, the only U.S. tax on the operation of
those vessels will be based on their tonnage, rather than their contribution to
our income or profits.
Also under the Jobs Creation Act, the taxable income of our CFCs from
foreign shipping operations will be deferred until repatriated. For further
information regarding the Jobs Creation Act and its estimated effect on our
results of operations, see the section of this prospectus entitled
"Business -- New Tax Legislation."
VESSEL PURCHASE AGREEMENT
In November 2004, we entered into an agreement to purchase two used vessels
for an aggregate purchase price of approximately $20.0 million. We took delivery
of one of these vessels in early December 2004 and expect to take delivery of
the second vessel prior to the end of 2004. The vessels will be operated by us
under two of our Maritime Security Program ("MSP") contracts. We drew $10.0
million on our new $50 million revolving credit facility (see "Description of
Indebtedness") to purchase the delivered vessel and expect to draw an additional
$10.0 million on our new credit facility to purchase the second vessel. We
intend to use a portion of the proceeds of this offering to repay the amounts
drawn. See "Use of Proceeds."
RAIL-FERRY SERVICE EXPANSION
We also intend to use a portion of the proceeds of this offering to add a
second cargo deck to each of the two vessels operating in our rail-ferry service
between the U.S. Gulf and Mexico in order to essentially double their capacity.
See "Use of Proceeds." We hope to conclude the necessary shipyard modification
contracts shortly and expect the vessels to return to service in the second half
of 2005.
MARITIME SECURITY PROGRAM CONTRACTS
In 2003, Congress authorized an extension of the MSP through 2015,
increased the number of ships industry-wide eligible to participate in the
program from 47 to 60, and increased MSP payments to companies in the program,
all to be effective on October 1, 2005. Annual payments for each vessel in the
new MSP program will be $2.6 million in years 2006 to 2008, $2.9 million in
years 2009 to 2011, and $3.1 million in years 2012 to 2015. On October 15, 2004,
Waterman and Central Gulf each filed applications to extend their MSP contracts
for another 10 years (i.e., through September 30, 2015), all seven of which were
effectively grandfathered in the MSP reauthorization. Simultaneously, we offered
additional ships for participation in the MSP. The U.S. Maritime Administration
("MarAd") is expected to announce MSP contract awards on January 14, 2005, and
we have no way of knowing at this time whether Waterman or Central Gulf will be
awarded contracts for the additional ships.
4
THE OFFERING
The following is a brief summary of selected terms of this offering. For a
more complete description of the terms of the preferred stock and the notes, see
the sections of this prospectus entitled "Description of the Preferred Stock"
and "Description of the Notes."
Issuer........................ International Shipholding Corporation, a
Delaware corporation.
Securities Offered............ 800,000 shares of our % convertible
exchangeable preferred stock, $1.00 par value
per share (880,000 shares if the underwriter
exercises its over-allotment option in full).
Liquidation Preference........ In the event of our voluntary or involuntary
dissolution, liquidation or winding up, holders
of the preferred stock will be entitled to a
liquidation preference of $50 per share of
preferred stock, plus accrued and unpaid
dividends, before any distribution of assets
may be made to holders of our capital stock
ranking junior to the preferred stock.
Dividends..................... Dividends will be cumulative from the date of
issuance at the annual rate of % of the
liquidation preference of the preferred stock,
payable quarterly on the day of ,
, , and ,
commencing , 2005. The payment of
dividends is at the discretion of our board of
directors and must come from funds that are
legally available for dividend payments. Our
board of directors is not required to declare
these dividends, and holders of the preferred
stock cannot force it to do so. Accrued and
unpaid dividends on the preferred stock will
not bear interest.
For so long as the preferred stock remains
outstanding, (1) we will not declare, pay or
set apart funds for the payment of any dividend
or other distribution with respect to any
junior stock or parity stock and (2) neither
we, nor any of our subsidiaries, will, subject
to certain exceptions, redeem, purchase or
otherwise acquire for consideration junior
stock or parity stock through a sinking fund or
otherwise, in each case unless we have paid or
set apart funds for the payment of all accrued
and unpaid dividends with respect to the
preferred stock and any parity stock for all
preceding dividend periods. See "Description of
the Preferred Stock -- Dividends."
Conversion Rights............. Unless we redeem or exchange the preferred
stock, the preferred stock can be converted at
your option at any time into shares of our
common stock at an initial conversion price of
$ (equivalent to a conversion rate of
approximately shares of common stock
for each share of preferred stock). The initial
conversion price of the preferred stock is
subject to adjustment upon the occurrence of
certain events. See "Description of the
Preferred Stock -- Conversion."
Optional Redemption........... We may redeem the preferred stock, in whole or
in part, for cash at any time on or after
, 2006 at the following redemption
prices:
- $ per share if the redemption date is on
or after , 2006, provided that the
closing price of our
5
common stock has exceeded 150% of the
conversion price of the preferred stock for
at least 20 trading days during any 30-day
trading period ending within five trading
days prior to notice of redemption,
- $ per share if the redemption date is on
or after , 2007, and
- $ per share if the redemption date is on
or after , 2008,
in each case together with accrued and unpaid
dividends to, but not including, the date of
redemption. See "Description of the Preferred
Stock -- Optional Redemption."
The preferred stock is not subject to any
mandatory redemption or sinking fund provision.
Change in Control............. HOLDERS OF THE PREFERRED STOCK WILL NOT BE
ENTITLED TO HAVE THE PREFERRED STOCK REDEEMED
AT A PREMIUM PRICE IN THE EVENT OF A CHANGE IN
CONTROL OF OUR COMPANY. Rather, in such event
we may elect to redeem the preferred stock, in
whole but not in part, for cash at the
following redemption prices:
- $ per share if the change in control
occurs on or after , 2004 and prior
to , 2005,
- $ per share if the change in control
occurs on or after , 2005 and prior
to , 2006,
- $ per share if the change in control
occurs on or after , 2006 and prior
to , 2007,
- $ per share if the change in control
occurs on or after , 2007 and prior
to , 2008, and
- $ per share if the change in control
occurs on or after , 2008,
in each case together with accrued and unpaid
dividends to, but not including, the date of
redemption. See "Description of the Preferred
Stock -- Optional Redemption on Change in
Control."
In addition, upon a change in control of our
company, a holder of the preferred stock may
require us to redeem for cash any or all of
such holder's shares of the preferred stock at
the liquidation preference of the preferred
stock, plus any accrued and unpaid cash
dividends to, but not including, the date of
purchase. See "Description of the Preferred
Stock -- Required Redemption on Change in
Control."
Voting Rights................. Except as provided by Delaware law or our
certificate of incorporation, which will
include the certificate of designations for the
preferred stock, holders of the preferred stock
will not be entitled to any voting rights.
However, holders of the preferred stock will be
entitled to vote as a separate class with the
holders of any of our other parity stock having
like voting rights to elect two directors if we
have not paid the equivalent of six or more
quarterly dividends, whether or not
consecutive, on the preferred
6
stock or such other parity stock. These voting
rights will continue until we pay the full
accrued and unpaid dividends on the preferred
stock and any of our other parity stock having
like voting rights. See "Description of the
Preferred Stock -- Voting Rights."
The affirmative consent of holders of at least
66 2/3% of the preferred stock and any of our
other parity stock having like voting rights,
voting separately as a class, will be required
for the issuance of any class or series of
stock (or security convertible into stock)
ranking senior to the preferred stock or such
other parity stock as to dividend rights or
rights upon our liquidation, winding-up or
dissolution and for amendments to our
certificate of incorporation or by-laws that
would materially and adversely affect the terms
of the preferred stock or such other parity
stock.
Ranking....................... The preferred stock will be, with respect to
dividend rights and rights upon our
liquidation, winding up or dissolution:
- junior to all of our existing and future debt
obligations;
- on a parity with any class or series of
capital stock that we may issue in the
future, the terms of which provide that such
class or series will rank on a parity with
the preferred stock;
- senior to our common stock and any other
class or series of capital stock that we may
issue in the future, the terms of which
provide that such class or series will rank
junior to the preferred stock; and
- effectively junior to all of our
subsidiaries' (1) existing and future
liabilities and (2) capital stock held by
others.
Optional Exchange............. At our option, beginning on , 2005
and prior to , 2014, we may exchange
the preferred stock in whole, but not in part,
on any divided payment date, for our %
convertible subordinated notes due 2014,
provided (1) all accrued dividends on the
preferred stock have been paid or set aside for
payment and (2) no event of default under the
indenture governing the notes has occurred and
is continuing or would occur upon the exchange
of the preferred stock. If we elect to exchange
the preferred stock for notes, the exchange
rate will be $50 principal amount of the notes
for each share of preferred stock.
Convertible Subordinated
Notes......................... The notes, if issued, will have the following
terms:
Denomination................ $50 per note.
Interest Rate............... The notes will bear interest at % per year.
Interest will be payable quarterly on
, , and
of each year, beginning on the first
interest payment date after the exchange date.
Maturity.................... The notes will mature on , 2014.
7
Optional Redemption......... We may redeem the notes, in whole or in part,
for cash at any time on or after ,
2006 at the following redemption prices:
- $ if the redemption date is on or after
, 2006, provided that the closing
price of our common stock has exceeded 150%
of the conversion price of the notes for at
least 20 trading days during any 30-day
trading period ending within five trading
days prior to notice of redemption,
- $ if the redemption date is on or after
, 2007, and
- $ if the redemption date is on or after
, 2008,
in each case together with accrued and unpaid
interest to, but not including, the date of
redemption. See "Description of the
Notes -- Optional Redemption."
Change in Control........... HOLDERS OF THE NOTES WILL NOT BE ENTITLED TO
HAVE THE NOTES REDEEMED AT A PREMIUM PRICE IN
THE EVENT OF A CHANGE IN CONTROL OF OUR
COMPANY. Rather, in such event we may elect to
redeem the notes, in whole but not in part, for
cash at the following redemption price:
- $ if the change in control occurs on or
after , 2004 and prior to
, 2005,
- $ if the change in control occurs on or
after , 2005 and prior to
, 2006,
- $ if the change in control occurs on or
after , 2006 and prior to
, 2007,
- $ if the change in control occurs on or
after , 2007 and prior to
, 2008, and
- $ if the change in control occurs on or
after , 2008,
in each case together with accrued and unpaid
interest to, but not including, the date of
redemption. See "Description of the
Notes -- Optional Redemption on Change in
Control."
In addition, upon a change in control of our
company, a holder of the notes may require us
to redeem for cash any or all of such holder's
notes at a price equal to the aggregate
principal amount of such notes, plus any
accrued and unpaid interest to, but not
including, the date of purchase. See
"Description of the Notes -- Required
Redemption on Change in Control."
Conversion.................. The notes may be converted by the holder at any
time prior to maturity into shares of our
common stock at the same conversion price
applicable to shares of the preferred stock.
See "Description of the Preferred
Stock -- Conversion."
Ranking..................... The notes will be unsecured and subordinated
and:
- will be subordinate to all of our existing
and future senior and unsecured debt;
8
- will rank on a parity with any of our future
subordinated debt;
- will be subordinate to our secured debt to
the extent of the value of the assets
securing such debt; and
- will be effectively subordinate to all
liabilities and preferred stock, if any, of
our subsidiaries.
Voting Rights................. Holders of the notes will not be entitled to
any voting rights.
Use of Proceeds............... We estimate that we will receive net proceeds
from this offering of approximately $37.9
million, after deducting the underwriting
discount and the financial advisory fee payable
to the underwriter and our estimated offering
expenses. We intend to use a portion of the
proceeds of this offering to repay the amount
drawn on our new $50 million revolving credit
facility in early December 2004 to purchase a
used vessel and the additional amount we expect
to draw on our new credit facility prior to the
end of 2004 to purchase a second used vessel
(see "Prospectus Summary -- Recent
Developments -- Vessel Purchase Agreement"). We
also intend to use a portion of the proceeds of
this offering to add a second deck to each of
the two vessels operating in our rail-ferry
service (see "Prospectus Summary -- Recent
Developments -- Rail-Ferry Service Expansion").
We will use any remaining proceeds of this
offering and the proceeds from any exercise of
the underwriter's over-allotment option to
acquire additional new or used vessels, to
satisfy our working capital requirements or for
general corporate purposes. See "Use of
Proceeds."
Common Stock.................. Our common stock is listed on the New York
Stock Exchange under the symbol "ISH."
Listing of Preferred Stock.... We will make application to list the preferred
stock on the New York Stock Exchange under the
symbol "ISH Pr."
Listing of Notes.............. It is a condition to our ability to exchange
the preferred stock for notes that the notes be
listed on one or more of the following markets:
the New York Stock Exchange, the Nasdaq
National Market, the Nasdaq SmallCap Market,
the American Stock Exchange or another similar
securities exchange or securities trading
market.
Tax Consequences.............. United States federal income tax considerations
relevant to the purchase, ownership and
disposition of the preferred stock, the notes
issuable upon our exchange of the preferred
stock, and our common stock issuable upon the
conversion of the preferred stock are described
in the section of this prospectus entitled
"Material U.S. Federal Income Tax
Considerations." Prospective investors are
advised to consult with their own tax advisors
regarding the tax consequences of acquiring,
holding or disposing of the preferred stock,
the notes and our common stock. Tax
consequences will vary depending on current tax
laws, the particular circumstances of the
stockholder, and the application of state,
local and other tax laws.
9
Risk Factors.................. An investment in the preferred stock involves
significant risks. See the section of this
prospectus entitled "Risk Factors" beginning on
page 14 and the other information in this
prospectus for a discussion of important
factors that you should consider before
deciding to invest in the preferred stock.
10
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The financial data presented below for the years ended December 31, 2003,
2002 and 2001 have been derived from our audited financial statements. The
financial data presented below for the nine months ended September 30, 2004 and
2003 were derived from our unaudited interim financial statements. In our
opinion, the financial data for the nine months ended September 30, 2004 and
2003 reflects all adjustments, consisting of only normal, recurring adjustments,
necessary for a fair presentation of such data. The interim financial data have
been prepared in accordance with the same accounting principles followed in the
presentation of our audited financial statements for the fiscal year ended
December 31, 2003. The historical results presented below are not necessarily
indicative of results that you can expect for any future period. You should read
the table in conjunction with the section of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and related notes and the
other financial information included elsewhere in this prospectus.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- --------------------------------------------
2004 2003 2003 2002 2001(1)
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS, FLEET CAPACITY DATA AND PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Revenues....................... $ 199,483 $ 195,861 $ 257,813 $ 227,412 $ 304,370
Impairment Loss................ -- -- -- 66 (81,038)
Gross Voyage Profit (Loss)..... 22,993 27,053 33,840 30,502 (53,808)
Operating Income (Loss)........ 11,310 15,964 19,587 15,325 (73,885)
Net Income (Loss).............. 4,945 3,840 5,491 (136) (64,419)
Pro Forma Net Income Available
to Common Stockholders(2)...
Basic Income (Loss) From
Continuing Operations Per
Common Share................ 1.86 2.62 3.22 2.52 (12.15)
Diluted Income (Loss) From
Continuing Operations Per
Common Share................ 1.86 2.62 3.22 2.52 (12.15)
Basic Net Income (Loss) Per
Common Share................ 0.81 0.63 0.90 (0.02) (10.59)
Diluted Net Income (Loss) Per
Common Share................ 0.81 0.63 0.90 (0.02) (10.59)
Pro Forma Basic Net Income Per
Common Share(2).............
Pro Forma Diluted Net Income
Per Common Share(2).........
Average Common Shares
Outstanding
Basic....................... 6,082,887 6,082,887 6,082,887 6,082,887 6,082,887
Diluted..................... 6,092,536 6,082,887 6,082,887 6,082,887 6,082,887
Cash Dividends Declared Per
Common Share................ -- -- -- -- 0.125
BALANCE SHEET DATA:
Working Capital................ 14,526 7,398 10,248 1,849 25,631
Total Assets................... 367,912 391,483 382,451 406,752 461,722
Long-Term Debt, Less Current
Maturities (including
Capital Lease
Obligations)................ 152,316 174,591 164,144 192,297 240,276
Stockholders' Investment....... 127,343 119,983 121,367 115,227 114,905
11
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- --------------------------------------------
2004 2003 2003 2002 2001(1)
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS, FLEET CAPACITY DATA AND PER SHARE AMOUNTS)
OTHER FINANCIAL DATA:
Cash Flow From Operations...... 14,473 28,409 38,616 18,439 21,318
Cash Flow From Investing
Activities.................. 1,540 (687) 1,772 9,456 81,808
Cash Flow From Financing
Activities.................. (12,963) (24,146) (35,926) (48,626) (93,169)
Depreciation and Amortization
Expense..................... 21,751 23,716 31,276 29,892 46,484
Capital Expenditures:
Vessel Acquisition and
Refurbishment Costs....... -- 2,300 2,361 6,905 43,342
Barge Refurbishment Costs... -- -- -- 1,628(3) --
Haul-Away Car Carrying
Trucks Costs.............. 1,641 2,456 2,456 937 --
Other Assets................ 161 531 543 288 781
Drydocking, Positioning and
Other Costs................. 5,819 1,333 3,264 3,170 7,784
Ratio of Earnings to Fixed
Charges(4).................. 1.39x 1.33x 1.35x --(5) --(5)
Pro Forma Ratio of Earnings to
Fixed Charges and Preferred
Stock Dividends(6)..........
FLEET CAPACITY (at end of period)
Vessels........................ 35 36 35 36 36
LASH Barges.................... 917 917 917 919 1,722
Other Barges and Towboats...... -- -- -- 14 37
Haul-Away Car Carrying
Trucks...................... 32 22 22 7 --
Carrying Capacity (thousands of
deadweight tons)............ 1,090 1,097 1,084 1,398 1,137
---------------
(1) Results for 2001 reflect an impairment loss of approximately $81.0 million,
in accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-lived Assets." This non-cash
charge was made to write down certain assets to estimated market value as
part of the reclassification of our U.S. flag LASH Service, our Cape-Size
Bulk Carrier and certain Special Purpose barges to "Assets Held for
Disposal" and impairment charges recorded on our foreign flag LASH Liner
Service.
(2) Pro forma results assume this offering had been consummated as of the
beginning of the period, assuming an annual dividend rate on the preferred
stock offered hereby of % of the liquidation preference and no exercise
of the underwriter's over-allotment option.
(3) Barge refurbishment costs include $1.2 million for the purchase of 318 LASH
barges that we had previously leased.
(4) For the ratio of earnings to fixed charges calculation, earnings consist of
income (loss) before provision (benefit) for income taxes and equity in net
income of unconsolidated entities plus distributions received from
unconsolidated entities. Fixed charges include interest, amortization of
financing charges and that portion of rent deemed representative of
interest.
(5) Earnings were insufficient to cover fixed charges by $28.6 million and
$132.9 million for the years ended December 31, 2002 and 2001, respectively.
We sustained a net loss from continuing operations of $0.8 million for 2002,
which included impairment losses of $0.5 million, and a net loss from
12
continuing operations of $99.4 million for 2001, which included impairment
losses of $81.0 million. These losses were inadequate to cover our fixed
charges of $27.8 million for 2002 and $33.5 million for 2001.
(6) Reflects the ratio of earnings to fixed charges and preferred stock
dividends as if this offering had been consummated as of the beginning of
the period, assuming an annual dividend rate on the preferred stock offered
hereby of % of the liquidation preference and no exercise of the
underwriter's over-allotment option. See note 4 above for a description of
the items constituting earnings and fixed charges.
13
RISK FACTORS
You should carefully consider the risks described below in addition to the
other information contained in this prospectus before making an investment
decision. Realization of any of the following risks could have a material
adverse effect on our business, financial condition, cash flow and results of
operations.
RISKS RELATED TO OUR BUSINESS
WE ARE HIGHLY LEVERAGED.
At September 30, 2004, after giving pro forma effect to this offering and
the application of the net proceeds, we would have had outstanding aggregate
long-term indebtedness of $181.7 million (including long-term guarantees of
indebtedness of our subsidiaries of $29.4 million) and a debt-to-equity ratio of
1.09 to 1. See note 2 to the table set forth in the section of this prospectus
entitled "Capitalization." Upon the consummation of this offering and the
application of the net proceeds, we will continue to be highly leveraged and
will continue to devote a substantial portion of our operating income to debt
service.
To date, we have been able to generate sufficient cash from operations to
meet annual interest and principal payments on our indebtedness. However,
following completion of this offering, our combined debt service and preferred
stock dividend requirements will be greater than they have been in the past, and
our ability to satisfy those obligations will depend upon our future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, many of which are beyond our control. If
our cash flow and capital resources are insufficient to fund our debt service
and preferred stock dividend requirements, we may be forced to reduce or delay
capital expenditures, sell assets, obtain additional equity capital or
restructure our debt. There can be no assurance that we will be able to generate
sufficient operating cash flows to service our debt and meet our preferred stock
dividend requirements.
Subject to compliance with various financial and other covenants imposed by
the agreements governing our existing indebtedness and that of our subsidiaries,
we may incur additional indebtedness from time to time, thus increasing our
leverage. The degree to which we are leveraged could have important adverse
consequences to holders of the preferred stock. Among other things, high
leverage may
- impair our ability to obtain additional financing for working capital,
capital expenditures, vessel and other acquisitions, and general
corporate purposes;
- require us to dedicate a substantial portion of our cash flows from
operations to the payment of principal and interest;
- limit the funds available to meet our preferred stock dividend
requirements;
- place us at a competitive disadvantage to less highly-leveraged
competitors; and
- make us more vulnerable to economic downturns and limit our ability to
withstand competitive pressures.
A DEFAULT UNDER ONE OF OUR DEBT AGREEMENTS MAY RESULT IN A DEFAULT UNDER ONE OR
MORE OF OUR OTHER DEBT AGREEMENTS.
Our debt obligations are represented by separate agreements with different
lenders. A default under any agreement can result in the acceleration of
principal and interest, and in some cases penalties, under that agreement. In
some cases, a default under one agreement may create an event of default under
other agreements, resulting in the acceleration of principal, interest and
penalties under such other agreements even though we are otherwise in compliance
with all payment and other obligations under those agreements. Thus, an event of
default under a single agreement, including one that is technical in nature or
otherwise not material, may create an event of default under multiple lending
agreements, which could result in the acceleration of significant indebtedness
under multiple agreements that we may not be able to pay or refinance at that
time. If such a technical event of default occurs under any of our debt that is
14
senior indebtedness, we will be prohibited from making any payment on the notes
issuable upon our exchange of the preferred stock until the default is cured or
waived or until 179 days have elapsed. If an event of default under our senior
indebtedness caused by the acceleration of the maturity date or our failure to
make a scheduled interest payment occurs, we will be prohibited from making any
payment on the notes until the default is cured or waived.
THE AGREEMENTS GOVERNING CERTAIN OF OUR DEBT INSTRUMENTS IMPOSE RESTRICTIONS ON
OUR BUSINESS.
The agreements governing certain of our debt instruments contain a number
of covenants imposing restrictions on our business. The restrictions these
covenants place on us include limitations on our ability to:
- redeem and pay dividends on our capital stock;
- make investments;
- engage in transactions with affiliates; and
- create or permit to exist liens on our assets.
These agreements also require us to meet a number of financial ratios. As a
result of these covenants, our ability to respond to changes in business and
economic conditions and to secure additional financing, if needed, may be
significantly restricted, and we may be prevented from engaging in transactions
that otherwise might be considered beneficial to the company. See "Description
of Indebtedness."
In addition, the breach of any of these covenants could result in a default
under several other of these agreements. Upon the occurrence of an event of
default under any such agreement, the lenders could elect to declare all amounts
outstanding to be immediately due and payable. If we were unable to repay those
amounts, such lenders could proceed against the collateral securing that
indebtedness. If amounts outstanding under such agreements were to be
accelerated, there can be no assurance that our assets would be sufficient to
generate sufficient cash flow to repay the accelerated indebtedness.
IF SUFFICIENT APPROPRIATIONS UNDER THE MARITIME SECURITY ACT OF 1996 ARE NOT
MADE IN ANY FISCAL YEAR, WE MAY NOT CONTINUE TO RECEIVE ANNUAL SUBSIDY PAYMENTS
WITH RESPECT TO CERTAIN OF OUR VESSELS.
The Maritime Security Act of 1996 (the "MSA"), which provides a subsidy
program for certain U.S. flag vessels, was signed into law in October of 1996.
Under this program, each participating vessel is eligible to receive an annual
subsidy payment of $2.1 million through the government's fiscal year 2005. In
2003, Congress authorized an extension of the program through 2015, increased
the number of ships eligible industry-wide to participate in the program from 47
to 60, and increased subsidy payments to companies in the program, all to be
effective on October 1, 2005. Annual payments for each vessel in the MSP are
$2.6 million in years 2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1
million in years 2012 to 2015.
As of September 30, 2004, seven of our vessels operated under MSP
contracts, the terms of which were extended in October 2004 through September
30, 2015. Also in October 2004, we offered additional vessels for participation
in the program, although we have no way of predicting whether any of those
vessels will be allowed to participate in the program. Payments under this
program are subject to annual appropriation by Congress and are not guaranteed.
Congress may not make sufficient appropriations under the program in one or more
fiscal years and, as a result, we can provide no assurance as to our continued
receipt, in full or in part, of the annual subsidy payments.
OUR BUSINESS AND OPERATIONS ARE HIGHLY-REGULATED.
Our business is materially affected by government regulation in the form of
international conventions, national, state and local laws and regulations, and
laws and regulations of the flag nations of our vessels, including laws relating
to the discharge of materials into the environment. Because such conventions,
laws and regulations are often revised, we are unable to predict the ultimate
costs of compliance. In addition,
15
we are required by various governmental and quasi-governmental agencies to
obtain and maintain certain permits, licenses and certificates with respect to
our operations. In certain instances, the failure to obtain or maintain such
permits, licenses or certificates could have a material adverse effect on our
business. In the event of war or national emergency, our U.S. flag vessels are
subject to requisition by the United States without any guarantee of
compensation for lost profits, although the United States government has
traditionally paid fair compensation in such circumstances. See
"Business -- Regulation."
AN INCREASE IN THE SUPPLY OF VESSELS WITHOUT A CORRESPONDING INCREASE IN DEMAND
FOR VESSELS COULD CAUSE OUR CHARTER AND CARGO RATES TO DECLINE, WHICH COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR REVENUES AND EARNINGS.
Historically, the shipping industry has been cyclical. The profitability
and asset values of companies in the industry have fluctuated in part because of
changes in the supply and demand of vessels. The supply of vessels generally
increases with deliveries of new vessels and decreases with the scrapping of
older vessels. If the number of new vessels delivered exceeds the number of
vessels being scrapped, vessel capacity will increase. If the supply of vessels
increases and the demand for vessels does not, the charter and cargo rates for
our vessels could decline significantly. A decline in our charter and cargo
rates could have a material adverse effect on our revenues and earnings.
THE REVENUES OF OUR LINER SERVICES SEGMENT ARE SUBJECT TO SEASONAL AND CYCLICAL
VARIATIONS, WHICH MAY CAUSE MATERIAL FLUCTUATIONS IN OUR REPORTED EARNINGS.
The demand for certain cargoes carried in our liner services, such as
agricultural products, steel and forest products, and the corresponding demand
for liner services to ship these cargoes, has historically exhibited seasonal
and cyclical variations. As a result, the revenues of our liner services segment
are subject to seasonal and cyclical variations, which may cause material
fluctuations in our revenues and earnings on a quarterly or annual basis, or
both.
WE ARE DEPENDENT ON GOVERNMENT CHARTERS AND CONTRACTS.
We have various charters or contracts with agencies of the United States
government. Companies engaged in government contracting are subject to certain
unique business risks, including dependence on congressional appropriations and
administrative allotment of funds, and changing policies and regulations.
Because government contracts are usually awarded for relatively short periods of
time and are subject to renewal options in favor of the government, the
stability and continuity of this type of business depends on the periodic
exercise by the government of contract renewal options. Further, government
contracting laws provide that the United States government is to do business
only with responsible contractors. In this regard, federal agencies have the
authority under certain circumstances to suspend or debar a contractor from
further government contracting for periods of time in order to protect the
government's interest. While we have never been suspended or debarred from
government contracting, nor have we ever been the subject of any proceeding for
such a purpose, there can be no assurance that we will not be suspended or
debarred, or subject to such a proceeding, in the future.
WE ARE SUBJECT TO THE RISK OF CONTINUING HIGH PRICES, AND INCREASING PRICES, OF
THE FUEL WE CONSUME IN OUR LINER AND RAIL-FERRY OPERATIONS.
We are exposed to price risks with respect to fuel consumption in our liner
and rail-ferry operations, and we can give no assurance that we will be able to
offset higher fuel costs due to the competitive nature of these operations.
Moreover, while we entered into hedging arrangements with respect to a portion
of our 2003 fuel requirements for our liner and rail-ferry segments to reduce
our exposure to increases in fuel prices, we currently have no hedging
arrangements in place with respect to our estimated 2004 fuel requirements.
Accordingly, a material increase in fuel prices that we cannot recover through
fuel cost surcharges could adversely affect our results of operations and
financial condition. For an analysis of the effect on our operating costs and
earnings per share of an increase in fuel prices, see the section of this
prospectus entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Disclosures About Market Risk -- Commodity Price
Risk."
16
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY.
The shipping industry is intensely competitive and can be influenced by
economic and political events that are outside the control of shipping
companies. There can be no assurance that we will be able to renew expiring
charters on economically attractive terms, maintain attractive freight rates,
pass cost increases through to our customers or otherwise successfully compete
against our competitors.
WE ARE SUBJECT TO THE CONTROL OF OUR PRINCIPAL STOCKHOLDERS.
Four of our directors, Niels W. Johnsen, Erik F. Johnsen, Niels M. Johnsen
and Erik L. Johnsen, and their family members and affiliated entities,
beneficially owned an aggregate of 38.67% (including currently exercisable
options to acquire 400,000 shares) of our common stock as of September 30, 2004.
As a result, the Johnsen family has the power to determine many of our policies,
the election of our directors and officers, and the outcome of various corporate
actions requiring stockholder approval.
OPERATING HAZARDS MAY INCREASE OUR OPERATING COSTS; OUR INSURANCE COVERAGE IS
LIMITED.
Our vessels are subject to operating risks such as:
- catastrophic marine disaster;
- adverse weather conditions;
- mechanical failure;
- collisions;
- hazardous substance spills;
- war, terrorism and piracy; and
- navigation and other human errors.
The occurrence of any of these events may result in damage to or loss of
our vessels and our vessels' cargo or other property, and in injury to
personnel. Such occurrences may also result in a significant increase in our
operating costs or liability to third parties. In addition, such occurrences may
result in our company being held strictly liable for pollution damages under the
Oil Pollution Act of 1990 (the "OPA"), the Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA") or one of the international
conventions to which our vessels operating in foreign waters may be subject. See
"Business -- Regulation."
We maintain insurance coverage against certain of these risks, which our
management considers to be customary in the industry. We cannot assure you,
however, that we will be able to renew our existing insurance coverage at
commercially reasonable rates or that such coverage will be adequate to cover
future claims that may arise.
In addition, the terrorist attacks that occurred in the U.S. on September
11, 2001, as well as the potential for future attacks, compliance with recently
enacted maritime security laws and other factors, have caused significant
increases in the cost of our war risk insurance coverage, which covers damages
to our vessels and liability to third parties arising from acts of terrorism.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OPERATING INTERNATIONALLY.
Our international shipping operations are subject to risks inherent in
doing business in countries other than the United States. These risks include,
among others:
- economic, political and social instability;
- potential vessel seizure, expropriation of assets and other governmental
actions, which are not covered by our insurance;
17
- currency restrictions and exchange rate fluctuations;
- potential submission to the jurisdiction of a foreign court or
arbitration panel; and
- import and export quotas, the imposition of increased environmental and
safety regulations and other forms of public and governmental regulation.
Many of these risks are beyond our control, and we cannot predict the
nature or the likelihood of any such events. However, if such an event should
occur, it could have a material adverse effect on our financial condition and
results of operations.
OUR VESSELS COULD BE SEIZED BY MARITIME CLAIMANTS, WHICH COULD RESULT IN A
SIGNIFICANT LOSS OF EARNINGS AND CASH FLOW FOR THE RELATED OFF-HIRE PERIOD.
Crew members, suppliers of goods and services to a vessel, shippers of
cargo and other parties may be entitled to a maritime lien against a vessel for
unsatisfied debts or claims for damages. In many jurisdictions, a maritime
lienholder may enforce its lien by either arresting or attaching a vessel
through foreclosure proceedings. The arrest or attachment of one or more of our
vessels could result in a significant loss of earnings and cash flow for the
related off-hire period.
In addition, international vessel arrest conventions and certain national
jurisdictions allow so-called "sister ship" arrests, that allow the arrest of
vessels that are within the same legal ownership as the vessel which is subject
to the claim or lien. Certain jurisdictions go further, permitting not only the
arrest of vessels within the same legal ownership, but also any "associated"
vessel. In nations with these laws, an "association" may be recognized when two
vessels are owned by companies controlled by the same party. Consequently, a
claim may be asserted against us, any of our subsidiaries or our vessels for the
liability of one or more of the other vessels we own.
ONE OF OUR TIME CHARTER CUSTOMERS HAS FILED FOR BANKRUPTCY, THE OUTCOME OF WHICH
COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We charter our Coal Carrier to US Generating New England, Inc. ("USGenNE").
In July of 2003, USGenNE filed a petition for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code. USGenNE is current in all of its
obligations to us under the time charter, except for approximately $850,000 of
pre-petition invoices covering charter hire and related expenses. The $850,000
of pre-petition invoices owed to us is an unsecured claim in the bankruptcy
proceeding. Under the federal bankruptcy laws, USGenNE has the right to accept
or reject the time charter. If USGenNE accepts the time charter, it is then
required to meet its financial obligations under the time charter, including the
$850,000 of pre-petition invoices. If USGenNE rejects the time charter, then we
would have a priority administrative claim with respect to all amounts due us
under the time charter that are related to the post-petition period, but we
would have no priority with respect to the pre-petition invoices.
At this time we cannot predict whether the time charter will be accepted or
rejected. Therefore, we have not provided an allowance for the pre-petition
invoices in our financial statements as of September 30, 2004. In the event the
time charter is ultimately rejected, we believe the vessel can be utilized in
alternative employment without incurring a material impairment charge with
respect to its carrying value, although we can give no assurance of such at this
time. USGenNE utilized the vessel through the end of fiscal year 2003 and has
continued to utilize the vessel in 2004 as of the date of this prospectus.
However, we can give no assurance as to the extent of USGenNE's use of the
vessel subsequent to the date of this prospectus.
OUR RAIL-FERRY SERVICE HAS BEEN UNPROFITABLE TO DATE, AND WE CAN GIVE NO
ASSURANCE AS TO ITS FUTURE PROFITABILITY.
Our rail-ferry service began operating in February 2001. The introduction
of this service in a competitive market contributed $7.5 million to our net loss
in fiscal year 2001. The service's results of operations improved in fiscal
years 2002 and 2003, but still contributed $3.7 million to our net loss in 2002
18
and reduced our net income by $2.9 million in 2003. Moreover, the service has
continued to incur losses in fiscal year 2004, reducing our net income for the
nine months ended September 30, 2004 by $3.4 million. We can give no assurance
that the service will be profitable in 2005 or in any subsequent fiscal year.
In addition, we intend to use a portion of the proceeds of this offering to
add a second cargo deck to each of the two vessels operating in this service in
order to essentially double their capacity. We believe that these additions will
significantly reduce our cost per unit of cargo carried, but that will occur
only if we are able to book substantially all of the additional capacity, and we
can give no assurance at this time that we will be successful in doing so.
A SUBSTANTIAL NUMBER OF OUR EMPLOYEES ARE UNIONIZED; IN THE EVENT OF A STRIKE OR
OTHER WORK STOPPAGE OUR BUSINESS AND OPERATIONS MAY BE ADVERSELY AFFECTED.
As of September 30, 2004, all of our shipboard personnel and certain of our
shoreside personnel were covered by collective bargaining agreements. While we
have experienced no strikes, work stoppages or other significant labor problems
during the last ten years, we cannot assure you that such events will not occur
in the future. In the event we experience one or more strikes, work stoppages or
other labor problems, our business and operations and, in turn, our results of
operations, may be materially and adversely affected.
WE MAY NOT BE ABLE TO RENEW OUR TIME CHARTERS AND CONTRACTS WHEN THEY EXPIRE.
There can be no assurance that any of our existing time or bareboat
charters or contracts of affreightment will be renewed or, if renewed, that they
will be renewed at favorable rates. If upon expiration of our existing charters
and contracts, we are unable to obtain new charters or contracts at rates
comparable to those received under the expired charters or contracts, our
revenues and earnings may be adversely affected.
OLDER VESSELS HAVE HIGHER OPERATING COSTS AND ARE LESS DESIRABLE TO CHARTERERS.
The average age of the vessels in our fleet is approximately 14.5 years. In
general, capital expenditures and other costs necessary for maintaining a vessel
in good operating condition increase as the age of the vessel increases.
Accordingly, it is likely that the operating costs of our older vessels will
increase. In addition, changes in governmental regulations and compliance with
classification society standards may require us to make expenditures for new
equipment. In order to add such equipment, we may be required to take our
vessels out of service, thereby reducing our revenues. Moreover, customers
generally prefer modern vessels over older vessels, which places the older
vessels at a competitive disadvantage, especially in weak markets. There can be
no assurance that market conditions will justify the expenditures necessary to
maintain our older vessels in good operating condition or enable us to operate
our older vessels profitably during the remainder of their estimated useful
lives. For more specific information on the age of each of our vessels, see the
table in the section of this prospectus entitled "Business -- Vessel
Deployment."
WE FACE PERIODIC DRYDOCKING COSTS FOR OUR VESSELS WHICH CAN BE SUBSTANTIAL.
Vessels must be drydocked periodically. The cost of repairs and renewals
required at each drydock are difficult to predict with certainty and can be
substantial and our insurance does not cover these costs.
RISKS RELATED TO THE PREFERRED STOCK
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR
BUSINESS AND LIMIT OUR ABILITY TO PAY DIVIDENDS ON THE PREFERRED STOCK.
We have substantial indebtedness and, as a result, significant debt service
obligations. As of September 30, 2004, our total indebtedness was approximately
$197.9 million (including guarantees of
19
indebtedness of our subsidiaries of $31.8 million), representing approximately
64 percent of our total capitalization. For the year ended December 31, 2003,
our ratio of earnings to fixed charges was 1.35 to 1.
Our substantial debt could have important consequences to you. For example,
it could:
- make it more difficult for us to pay dividends on the preferred stock
(see "Dividend Policy");
- require us to dedicate a substantial portion of our cash flow to payments
on our indebtedness, which would reduce the amount of cash flow available
to fund working capital, capital expenditures and other corporate
requirements;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to respond to business opportunities;
- limit our ability to borrow additional funds; and
- subject us to financial and other restrictive covenants that, if violated
by us under circumstances that are not waived by our lenders or cured by
us, could result in an event of default under one or more of our debt
instruments.
THERE IS NO CURRENT MARKET FOR THE PREFERRED STOCK, AND AN ACTIVE TRADING MARKET
FOR THE PREFERRED STOCK MAY NOT DEVELOP.
The preferred stock is a new issue of securities with no established
trading market, and we cannot assure you that a market for the preferred stock
will develop. An inactive or illiquid trading market could adversely affect the
trading price of shares of the preferred stock, and you may not be able to sell
your shares quickly or at the market price if the trading market for the
preferred stock is inactive. Moreover, the public offering price of the
preferred stock as set forth on the cover page of this prospectus may not be
indicative of prices that will prevail in the trading market.
While we will apply to list the preferred stock on the New York Stock
Exchange, we cannot assure you that we will be successful in doing so. Our
ability to list and continue to list the preferred stock on the New York Stock
Exchange will depend on our ability to meet the New York Stock Exchange's
listing requirements for both the preferred stock and our common stock.
WE MAY NOT BE PERMITTED TO PAY CASH DIVIDENDS ON THE PREFERRED STOCK AND
STOCKHOLDERS CANNOT COMPEL US TO PAY THEM. IN ADDITION, UNPAID DIVIDENDS ON THE
PREFERRED STOCK WILL NOT EARN INTEREST.
Any decision to pay a cash dividend on the preferred stock, and the amount
of any dividend to be paid, will be made at the discretion of our board of
directors, subject to funds being legally available for the payment of dividends
and subject to the restrictions imposed by certain of our debt agreements,
including the indenture governing our 7 3/4% senior notes due 2007 (see
"Dividend Policy" and "Description of Indebtedness"). Moreover, our ability to
pay cash dividends may depend on criteria set forth in future credit agreements.
If there is a default under a current or future credit agreement, we may not be
able to pay dividends on the preferred stock. Even if our credit agreements
permit us to pay cash dividends, we can make those payments only from our
surplus (the excess of the fair value of our total assets over the sum of our
liabilities plus our total paid-in share capital). In addition, we can pay cash
dividends only if after paying those dividends we would be able to pay our
liabilities as they become due. Holders cannot force us to pay accumulated
dividends, but we must pay them before we pay dividends on any junior stock, and
we must pay them on an equal basis with any dividends that we pay on any stock
with equal rights. In addition, unpaid dividends on the preferred stock will not
earn interest.
THE PREFERRED STOCK IS SUBORDINATE TO ALL OF OUR EXISTING LIABILITIES AND DOES
NOT LIMIT OUR ABILITY TO INCUR FUTURE INDEBTEDNESS THAT WILL RANK SENIOR TO THE
PREFERRED STOCK.
The rights of holders of the preferred stock to the payment of dividends
and amounts distributable upon our dissolution, liquidation or winding up will
rank junior to the rights of all of our creditors to have
20
our obligations paid to them. In addition, the preferred stock will effectively
rank junior to all existing and future liabilities of our subsidiaries and any
capital stock of our subsidiaries held by others We and our subsidiaries may
incur substantial amounts of additional debt and other obligations that will
rank senior to the preferred stock, and the terms of the preferred stock will
not limit the amount of the debt and other obligations that we may incur.
UPON A CHANGE IN CONTROL OF OUR COMPANY, WE MAY NOT HAVE SUFFICIENT FUNDS WITH
WHICH TO PURCHASE THE SHARES OF PREFERRED STOCK TENDERED TO US.
Upon a change in control of our company, each holder of the preferred stock
will have the right to require us to purchase for cash all or a portion of such
holder's shares of the preferred stock at a price equal to the liquidation
preference of the shares, together with accrued and unpaid dividends to, but not
including, the date of purchase. Even if the terms of the instruments governing
our indebtedness allow us to purchase the shares, there can be no assurance that
sufficient funds will be available to us at the time of a change in control to
make any required repurchase of the preferred stock. See "Description of the
Preferred Stock -- Required Redemption on Change in Control."
OUR ABILITY TO ISSUE PREFERRED STOCK IN THE FUTURE COULD ADVERSELY AFFECT THE
RIGHTS OF HOLDERS OF THE PREFERRED STOCK AND OUR COMMON STOCK.
Although our certificate of incorporation authorizes us to issue only
1,000,000 shares of preferred stock in one or more series on terms determined by
our board of directors, 800,000 shares of which are being offered hereby (plus
any shares issuable upon exercise of the underwriter's over-allotment option),
we expect to seek stockholder approval at our annual stockholders meeting in
2005 to increase the number of shares of preferred stock that we may issue. Such
approval can be given by our common stockholders without the consent of the
holders of the preferred stock. In such event, our board of directors would be
able to issue one or more series of preferred stock that would rank senior to
the preferred stock as to dividend rights or rights upon our liquidation,
winding-up or dissolution, although we would need the affirmative vote or
consent of the holders of at least 66 2/3% of the outstanding shares of the
preferred stock to do so. We would not need that vote or consent to authorize,
increase the authorized amount of, or issue any series of preferred stock that
ranks equal or junior to the preferred stock as to such rights. Our future
issuance of preferred stock could therefore effectively diminish or supersede
dividends on, and the liquidation preference of, the preferred stock and
adversely affect the value of the preferred stock and our common stock.
SALES, OR THE AVAILABILITY FOR SALE, OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD ADVERSELY AFFECT THE VALUE OF OUR COMMON STOCK AND, IN TURN, THE VALUE OF
THE PREFERRED STOCK, AND IMPAIR OUR ABILITY TO RAISE EQUITY CAPITAL.
Sales of substantial amounts of our common stock in the public market or
the perception of the market that such sales may occur, as well as the
availability of shares of our common stock for future sale (including our common
stock issuable upon the conversion of shares of the preferred stock or upon
exercise of outstanding options to acquire shares of our common stock) could
adversely affect the market price of our common stock. This could also adversely
affect the market value of the preferred stock and impair our future ability to
raise capital through an offering of our equity securities. As of September 30,
2004, we had outstanding 6,082,887 shares of our common stock and options to
purchase 475,000 shares of our common stock, all of which had an exercise price
of $14.125 per share.
UPON THE EXPIRATION OF 60-DAY LOCK-UP AGREEMENTS, A SUBSTANTIAL NUMBER OF SHARES
OF OUR COMMON STOCK WILL BECOME AVAILABLE FOR SALE IN THE PUBLIC MARKET, WHICH
MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK AND THE PREFERRED STOCK TO
DECLINE.
On , 2005, which is 60 days after the commencement of this
offering, lock-up agreements covering approximately 2.4 million shares of our
common stock (approximately 36.4% of our common stock outstanding as of
September 30, 2004, including currently exercisable stock options) beneficially
21
owned by our directors and executive officers will expire and those shares will
become available for sale. If our directors and executive officers sell
substantial amounts of our common stock in the public market at concentrated
times, the market price of our common and, in turn, the preferred stock, could
fall. These sales also might make it more difficult for us to sell equity
securities in the future at a time and price acceptable to us. While we do not
anticipate that any such sales will be made, we can give no assurances that they
will not.
THE TRADING PRICES FOR THE PREFERRED STOCK WILL BE DIRECTLY AFFECTED BY THE
TRADING PRICES FOR OUR COMMON STOCK.
The public offering price for shares of the preferred stock, the conversion
price and the exchange rate set forth on the cover page of this prospectus were
determined by our board of directors and the underwriter after considering the
likely cost of capital from other sources, comparable transactions, and historic
and current trading prices for our common stock. We believe that the trading
prices of the preferred stock will be directly affected by the trading prices of
our common stock.
OUR COMMON STOCK HAS EXPERIENCED, AND MAY CONTINUE TO EXPERIENCE, PRICE
VOLATILITY AND A LOW TRADING VOLUME.
Price volatility may adversely affect the trading price of our common stock
regardless of our operating performance. In addition, our common stock has
experienced low trading volume in the past. Our average daily trading volume was
less than one percent of our outstanding common stock over the past six-month
period. Therefore, the trading price of our common stock has been and may
continue to be subject to large fluctuations, which may result in losses to
investors. Coupled with the low trading volume, the trading price of our common
stock may increase or decrease significantly in response to a number of events
and factors, including:
- trends in our industry and the markets in which we operate;
- changes in the profitability of our individual charters and contracts;
- changes in financial estimates and recommendations by securities
analysts;
- acquisitions and financings;
- quarterly variations in our operating results;
- the addition of key personnel or the loss of any of our current key
personnel;
- changes in accounting principles;
- changes in tax laws affecting us;
- the operating and stock price performance of other companies that
investors may deem comparable to us; and
- purchases or sales of blocks of our common stock.
WE HAVE NOT RECENTLY PAID DIVIDENDS ON OUR COMMON STOCK AND WE DO NOT ANTICIPATE
DOING SO IN THE FORESEEABLE FUTURE.
Any decision to pay a cash dividend on our common stock, and the amount of
any dividend to be paid, will be made at the discretion of our board of
directors, subject to funds being legally available for the payment of dividends
and the restrictions imposed by certain of our debt agreements, including the
indenture governing our 7 3/4% senior notes due 2007. In connection with this
offering, we will further restrict our ability to pay dividends on our common
stock. See "Dividend Policy." We have not paid cash dividends on our common
stock since 2001 and do not anticipate paying cash dividends on our common stock
in the foreseeable future.
22
THE HOLDERS OF THE PREFERRED STOCK AND THE NOTES WILL HAVE CERTAIN CHANGE IN
CONTROL REPURCHASE RIGHTS WHICH MAY DISCOURAGE A CHANGE IN CONTROL OF OUR
COMPANY AND THE REMOVAL OF OUR INCUMBENT MANAGEMENT.
Upon a change in control of our company, each holder of the preferred stock
will have the right to require us to redeem for cash all or a portion of such
holder's shares of the preferred stock. See "Description of the Preferred
Stock -- Required Redemption on Change in Control." Similarly, each holder of
notes issuable upon our exchange of the preferred stock will have, upon a change
in control of our company, the right to require us to redeem for cash all or a
portion of such holder's notes. See "Description of the Notes -- Required
Redemption on Change in Control." These rights could make more difficult a
merger, tender offer or proxy contest involving us, and could impede an attempt
to acquire a significant or controlling interest in us, even if such events
might be beneficial to us and our stockholders and might provide our
stockholders with the opportunity to sell their shares of our capital stock at a
premium over prevailing market prices.
AN EXCHANGE OF THE PREFERRED STOCK FOR NOTES MAY ADVERSELY AFFECT THE AFTER-TAX
YIELD ON YOUR INVESTMENT IN OUR SECURITIES.
If we exchange the preferred stock for notes, holders of the preferred
stock will no longer be entitled to receive quarterly dividend payments on the
preferred stock, but instead will be entitled to receive quarterly interest
payments on the notes. For most taxpayers, the U.S. federal income tax rate on
interest income is higher than the rate on dividend income. As a result, our
election to exchange the preferred stock for notes may reduce the after-tax
yield of your investment in our securities.
OUR CERTIFICATE OF INCORPORATION PERMITS OUR BOARD OF DIRECTORS TO RESTRICT THE
ACQUISITION OF OUR CAPITAL STOCK BY NON-U.S. CITIZENS AND ENTITIES, WHICH MAY
PREVENT OR DISCOURAGE A CHANGE IN CONTROL OF OUR COMPANY AND THE REMOVAL OF OUR
INCUMBENT MANAGEMENT.
Our certificate of incorporation contains provisions that permit our board
of directors to restrict the acquisition of our capital stock by non-U.S.
citizens (including corporations and other entities controlled by non-U.S.
citizens). See "Description of Common Stock -- Other Provisions -- Restrictions
on Foreign Ownership."
These provisions could prevent or discourage a merger, tender offer or
proxy contest involving us and a non-U.S. citizen, or could impede an attempt by
a non-U.S. citizen to acquire a significant or controlling interest in us, even
if such events might be beneficial to us and our stockholders and might provide
our stockholders with the opportunity to sell their shares of our capital stock
at a premium over prevailing market prices.
RISKS RELATED TO THE NOTES
THE NOTES ISSUABLE UPON OUR EXCHANGE OF THE PREFERRED STOCK WILL BE UNSECURED
AND SUBORDINATED TO OUR EXISTING AND FUTURE SECURED INDEBTEDNESS AND SENIOR
INDEBTEDNESS, AND WILL BE EFFECTIVELY SUBORDINATED TO ALL LIABILITIES AND
PREFERRED STOCK, IF ANY, OF OUR SUBSIDIARIES.
The notes issuable upon our exchange of the preferred stock will be
unsecured obligations and, as such,
- will be subordinate to all of our existing and future secured
indebtedness to the extent of the value of the assets securing such debt;
- will be subordinate to all of our existing and future senior and
unsecured debt; and
- will be effectively subordinated to all liabilities and preferred stock,
if any, of our subsidiaries.
As of September 30, 2004, after giving pro forma effect to this offering
and the application of the net proceeds, we would have had $95.2 million of
secured indebtedness (all of which was indebtedness of our subsidiaries), $102.7
million of unsecured indebtedness (including guarantees of indebtedness of our
23
subsidiaries of $31.8 million) and 800,000 outstanding shares of preferred stock
(plus any shares of preferred stock purchased by the underwriter pursuant to its
over-allotment option).
WE ARE A HOLDING COMPANY WHOSE ONLY SIGNIFICANT ASSETS ARE THE CAPITAL STOCK OF
OUR SUBSIDIARIES.
We conduct substantially all of our business through our subsidiaries.
Accordingly, the notes issuable upon our exchange of the preferred stock will be
effectively subordinated to all existing and future liabilities and preferred
stock, if any, of our subsidiaries. Any right of the company to participate in
any distribution of the assets of any of our subsidiaries upon the liquidation,
reorganization or insolvency of such subsidiary (and the consequent right of the
holders of the notes to participate in the distribution of those assets) will be
subject to the prior claims of the subsidiary's creditors and preferred
stockholders, if any, except to the extent that we otherwise have a claim
against such subsidiary as a creditor of such subsidiary.
UPON A CHANGE IN CONTROL OF OUR COMPANY, WE MAY NOT HAVE SUFFICIENT FUNDS WITH
WHICH TO PURCHASE THE NOTES TENDERED TO US.
Upon a change in control of our company, each holder of notes issuable upon
our exchange of the preferred stock will have the right to require us to
purchase for cash all or a portion of such holder's notes at a price equal to
100% of the principal amount of such notes, together with accrued and unpaid
interest to, but not including, the date of purchase. Even if the terms of the
instruments governing our other indebtedness allow us to purchase the notes,
there can be no assurance that sufficient funds will be available to us at the
time of a change in control to make any required repurchase of notes. See
"Description of the Notes -- Required Redemption on Change in Control."
THERE IS NO CURRENT MARKET FOR THE NOTES ISSUABLE UPON OUR EXCHANGE OF THE
PREFERRED STOCK, AND AN ACTIVE TRADING MARKET FOR THE NOTES MAY NOT DEVELOP.
The notes issuable upon our exchange of the preferred stock will be a new
issue of securities with no established trading market. While it is a condition
to our ability to exchange the preferred stock for notes that the notes be
listed on one or more of the New York Stock Exchange, the Nasdaq National
Market, the Nasdaq SmallCap Market, the American Stock Exchange or another
similar securities exchange or securities trading market, we cannot assure you
that a market for the notes will develop. An inactive or illiquid trading market
could adversely affect the trading price of the notes, and you may not be able
to sell the notes quickly or at the market price if the trading market for the
notes is inactive. Moreover, our ability to continue to list the notes, if and
when issued, on a securities exchange or securities trading market will depend
on our ability to meet such exchange or trading market's listing requirements.
A FINANCIAL FAILURE BY ONE OR MORE ENTITIES IN WHICH WE HAVE AN INTEREST MAY
HINDER THE PAYMENT OF THE NOTES ISSUABLE UPON OUR EXCHANGE OF THE PREFERRED
STOCK AND MAY RESULT IN THE ASSETS OF ANY OR ALL OF THOSE ENTITIES BECOMING
SUBJECT TO THE CLAIMS OF ALL CREDITORS OF THOSE ENTITIES.
A financial failure by one or more entities in which we have an interest
could affect payment of the notes issuable upon our exchange of the preferred
stock if a bankruptcy court were to "substantively consolidate" us and other
subsidiaries with such entities. If a bankruptcy court substantively
consolidated us and our subsidiaries with an entity in which we have an interest
but whose financial statements are not consolidated with ours, the assets of
each entity would be subject to the claims of creditors of all entities. This
would expose our creditors, including holders of the notes, to potential
dilution of the amount ultimately recoverable because of the larger creditor
base. The indenture governing the notes will not limit the ability of entities
whose financial statements are not consolidated with ours to incur debt, which
could increase this risk. Furthermore, forced restructuring of the notes could
occur through the "cram-down" provisions of the U.S. bankruptcy code. Under
those provisions, the notes could be restructured over the noteholders'
objections as to their general terms, primarily interest rate and maturity.
24
IF WE EXCHANGE THE PREFERRED STOCK FOR NOTES, THE EXCHANGE WILL BE TAXABLE BUT
WE WILL NOT PROVIDE ANY CASH TO YOU TO PAY ANY TAX LIABILITY YOU MAY INCUR.
An exchange of the preferred stock for notes will be a taxable event for
U.S. federal income tax purposes, which may result in tax liability for the
holder of the preferred stock without any corresponding receipt of cash by the
holder. In addition, the notes may be treated as having original issue discount,
a portion of which would generally be required to be included in the holder's
gross income over the term of the note even though the cash to which such income
is attributable would not be received until the maturity or redemption of the
note. We will not distribute any cash to you to pay these potential tax
liabilities. See "Material U.S. Federal Income Tax Considerations."
OTHER RISKS
THE TERRORIST ATTACKS IN THE UNITED STATES ON SEPTEMBER 11, 2001 AND THE
POTENTIAL FOR ADDITIONAL FUTURE TERRORIST ACTS HAVE CREATED ECONOMIC AND
POLITICAL UNCERTAINTIES THAT COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS
AND PROFITABILITY.
The terrorist attacks that took place on September 11, 2001 in the U.S.
have created many economic and political uncertainties, some of which may
materially impact our business. The long-term effects of those attacks on our
business are unknown. It is possible that further acts of terrorism may be
directed against the United States domestically or abroad and such acts of
terrorism could be directed against properties and personnel of U.S. companies
such as ours. The potential for future terrorist attacks, the national and
international response to terrorist attacks, and other acts of war or hostility
have created many economic and political uncertainties and uncertainties in the
world's financial and insurance markets, which could materially and adversely
affect our business for the short or long term in ways that cannot presently be
predicted.
ARTHUR ANDERSEN LLP, OUR FORMER AUDITORS, AUDITED CERTAIN FINANCIAL INFORMATION
INCLUDED IN THIS PROSPECTUS. IN THE EVENT SUCH FINANCIAL INFORMATION IS LATER
DETERMINED TO CONTAIN FALSE STATEMENTS, YOU MAY BE UNABLE TO RECOVER DAMAGES
FROM ARTHUR ANDERSEN LLP.
Arthur Andersen LLP completed its audit of our financial statements for the
year ended December 31, 2001 and issued its report with respect to such
financial statements on January 11, 2002. Subsequently, Arthur Andersen was
convicted of obstruction of justice for activities relating to its previous work
for Enron Corp.
In June 2002, our board of directors, at the recommendation of our audit
committee, approved the appointment of Ernst & Young LLP as our independent
public accountants to audit our financial statements for fiscal year 2002. Ernst
& Young replaced Arthur Andersen, which had served as our independent auditors
since our formation as International Shipholding Corporation in 1978. We had no
disagreements with Arthur Andersen on any matter of accounting principle or
practice, financial statement disclosure or auditing scope or procedure. Arthur
Andersen audited the financial statements as of and for the year ended December
31, 2001 that we incorporate by reference in this prospectus. We incorporate
these financial statements in reliance on the authority of Arthur Andersen as
experts in giving its reports.
Arthur Andersen has stopped conducting business before the SEC and has
limited assets available to satisfy the claims of creditors. As a result, you
may be limited in your ability to recover damages from Arthur Andersen under
federal or state law if it is later determined that there are false statements
contained in this prospectus relating to or contained in financial data audited
by Arthur Andersen.
25
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $37.9 million, after deducting the underwriting discount and the
financial advisory fee payable to the underwriter and our estimated offering
expenses, or $41.7 million if the underwriter exercises its over-allotment
option in full.
We intend to use approximately $20.0 million of the proceeds of this
offering to repay the $10.0 million drawn on our new $50 million revolving
credit facility in early December 2004 to purchase a used vessel and the
additional $10.0 million we expect to draw on the facility prior to the end of
2004 to purchase a second used vessel (see "Prospectus Summary -- Recent
Developments -- Vessel Purchase Agreement"). Once those amounts are repaid, they
will be available for future borrowing under the facility. We expect to use the
remaining proceeds of this offering to pay most of the estimated $20.0 million
cost of adding a second deck to each of the two vessels operating in our
rail-ferry service (see "Prospectus Summary -- Recent Developments -- Rail-Ferry
Service Expansion"). To the extent that the cost of adding the second decks
exceeds the remaining proceeds, we will draw on our new credit facility.
We will use any remaining proceeds of this offering and the proceeds from
any exercise of the underwriter's over-allotment option to acquire additional
new or used vessels, to satisfy our working capital requirements or for general
corporate purposes.
DIVIDEND POLICY
Any decision to pay a cash dividend on our common stock or the preferred
stock, and the amount of any dividend to be paid, will be made at the discretion
of our board of directors, subject to funds being legally available for the
payment of dividends and the restrictions imposed by the certificate of
designations that will govern the preferred stock, the indenture that will
govern the notes and certain of our debt agreements. The indenture governing our
7 3/4% senior notes due 2007 is the most restrictive of our debt agreements and
provides that we may pay cash dividends on our capital stock only to the extent
that we have a positive balance in our "restricted payments basket;" that is,
the proposed dividends, when aggregated with all other dividend payments and
other distributions made by us since January 1998, do not exceed the restricted
payments basket as determined under the indenture. For a more detailed
discussion of how we calculate the balance in our restricted payments basket
and, in turn, our capacity to pay dividends on our capital stock, see the
section of this prospectus entitled "Description of Indebtedness."
As of September 30, 2004, our restricted payments basket had a deficit
balance of approximately $2.9 million. Thus we were, and are currently,
prohibited by the indenture governing our 7 3/4% notes from paying cash
dividends on our capital stock. Pursuant to the indenture, the net proceeds from
the sale of capital stock, which would include the net proceeds of this
offering, are added to our restricted payments basket. As a result, upon the
completion of this offering (assuming the receipt of approximately $37.9 million
in net proceeds from this offering and no exercise of the underwriter's
over-allotment option), we estimate that our restricted payments basket will
have a positive balance of approximately $35.0 million.
However, notwithstanding any positive balance that may exist in our
restricted payments basket from time to time, the certificate of designations
that will govern the preferred stock and the indenture that will govern the
notes will each provide that we will not, prior to December 31, 2007, declare or
pay any dividend on our common stock. This prohibition will not apply to our
payment of dividends on the preferred stock. On and after December 31, 2007, we
will no longer be prohibited from paying dividends on our common stock, and the
payment of dividends on our common stock will again be made at the discretion of
our board of directors, subject to funds being legally available for the payment
of dividends, the other restrictions in the certificate of designations and any
restrictions in our then-existing debt agreements.
We have not paid cash dividends on our common stock since 2001 and do not
anticipate paying cash dividends on our common stock in the foreseeable future,
although we will consider paying cash dividends on our common stock once our
credit agreements, the certificate of designations that will govern the
preferred stock and the indenture that will govern the notes allow us to do so.
26
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the New York Stock Exchange (NYSE) under the
symbol "ISH." The following table sets forth the quarterly high and low sale
prices for our common stock as reported by NYSE for the periods indicated.
HIGH LOW
------ ------
FISCAL YEAR 2002
First Quarter............................................. $ 7.05 $ 6.37
Second Quarter............................................ 6.80 5.70
Third Quarter............................................. 7.05 6.40
Fourth Quarter............................................ 6.85 5.57
FISCAL YEAR 2003
First Quarter............................................. 6.70 5.80
Second Quarter............................................ 10.91 6.75
Third Quarter............................................. 12.95 9.70
Fourth Quarter............................................ 15.37 9.25
FISCAL YEAR 2004
First Quarter............................................. 15.59 13.60
Second Quarter............................................ 17.10 14.10
Third Quarter............................................. 16.90 13.40
Fourth Quarter (through December 9, 2004)................. 16.40 13.01
27
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2004:
- on an actual basis; and
- as adjusted to give effect to the sale of the preferred stock, assuming
no exercise of the underwriter's over-allotment option, and the
application of the estimated net proceeds as described in the section of
this prospectus entitled "Use of Proceeds."
You should read this table in conjunction with the sections of this
prospectus entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of Indebtedness," and the
consolidated financial statements and related notes included elsewhere in this
prospectus.
SEPTEMBER 30, 2004
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Cash and Cash Equivalents(1)................................ $ 11,931 $ 11,931
-------- --------
Current Maturities of Long-Term Debt........................ 13,815 13,815
Long-Term Debt:
7 3/4% Senior Notes Due 2007.............................. 70,916 70,916
Title XI Guaranteed Ship Financing Bonds.................. 1,336 1,336
Variable Rate Notes Payable
Due 2013............................................. 76,064 76,064
Due 2007............................................. 4,000 4,000
-------- --------
Total Long-Term Debt(2)................................ 152,316 152,316
-------- --------
Total Debt.................................................. 166,131 166,131
Stockholders' Investment:
Preferred Stock, Par Value $1.00 Per Share, 1,000,000
Shares Authorized; No Shares Issued and Outstanding
(800,000 Shares Issued and Outstanding As Adjusted for
the Pending Preferred Stock Offering).................. 0 800
Common Stock, Par Value $1.00 Per Share, 10,000,000 Shares
Authorized; 6,082,887 Shares Issued and Outstanding.... 6,756 6,756
Additional Paid-In Capital................................ 54,450 91,565
Retained Earnings......................................... 74,875 74,875
Treasury Stock............................................ (8,704) (8,704)
Accumulated Other Comprehensive Loss...................... (34) (34)
-------- --------
Total Stockholders' Investment....................... 127,343 165,258
-------- --------
Total Capitalization........................................ $293,474 $331,389
======== ========
---------------
(1) The amounts indicated do not include any restricted cash.
(2) Our long-term indebtedness as of September 30, 2004 of $181.7 million as
reflected elsewhere in this prospectus includes our total long-term debt as
of September 30, 2004 of $152.3 million and the long-term portion of our
guarantees as of September 30, 2004 of $29.4 million which are not reflected
on our balance sheet in accordance with generally accepted accounting
principles.
28
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth financial data for the years ended December
31, 2003, 2002, 2001, 2000 and 1999, which have been derived from our audited
financial statements, and for the nine months ended September 30, 2004 and 2003,
which have been derived from our unaudited interim financial statements. The
financial data for the nine months ended September 30, 2004 and 2003, in our
opinion, reflects all adjustments, consisting of only normal, recurring
adjustments, necessary for a fair presentation of such data and have been
prepared in accordance with the same accounting principles followed in the
presentation of our audited financial statements for the fiscal year ended
December 31, 2003. The historical results presented below are not necessarily
indicative of results that you can expect for any future period. You should read
the table in conjunction with the section of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and related notes and the
other financial information included elsewhere in this prospectus.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------------------
2004 2003 2003 2002 2001(1) 2000 1999(2)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS, FLEET CAPACITY DATA AND PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Revenues................. $ 199,483 $ 195,861 $ 257,813 $ 227,412 $ 304,370 $ 357,105 $ 373,209
Impairment Loss.......... -- -- -- 66 (81,038) -- --
Gross Voyage Profit
(Loss)................. 22,993 27,053 33,840 30,502 (53,808) 49,475 66,681
Operating Income
(Loss)................. 11,310 15,964 19,587 15,325 (73,885) 32,515 53,972
Net Income (Loss)........ 4,945 3,840 5,491 (136) (64,419) 836 14,623
Pro Forma Net Income
Available to Common
Stockholders(3)........
Basic Income (Loss) From
Continuing Operations
Per Common Share....... 1.86 2.62 3.22 2.52 (12.15) 5.35 8.40
Diluted Income (Loss)
From Continuing
Operations Per Common
Share.................. 1.86 2.62 3.22 2.52 (12.15) 5.35 8.40
Basic Net Income (Loss)
Per Common Share....... 0.81 0.63 0.90 (0.02) (10.59) 0.14 2.28
Diluted Net Income (Loss)
Per Common Share....... 0.81 0.63 0.90 (0.02) (10.59) 0.14 2.28
Pro Forma Basic Net
Income Per Common
Share(3)...............
Pro Forma Diluted Net
Income Per Common
Share(3)...............
Average Common Shares
Outstanding
Basic.................. 6,082,887 6,082,887 6,082,887 6,082,887 6,082,887 6,082,954 6,424,193
Diluted................ 6,092,536 6,082,887 6,082,887 6,082,887 6,082,887 6,082,954 6,424,193
Cash Dividends Declared
Per Common Share....... -- -- -- -- 0.125 0.250 0.250
BALANCE SHEET DATA:
Working Capital.......... 14,526 7,398 10,248 1,849 25,631 26,470 35,571
Total Assets............. 367,912 391,483 382,451 406,752 461,722 695,176 735,003
Long-Term Debt, Less
Current Maturities
(including Capital
Lease Obligations)..... 152,316 174,591 164,144 192,297 240,276 359,864 400,442
Stockholders'
Investment............. 127,343 119,983 121,367 115,227 114,905 181,532 182,484
OTHER FINANCIAL DATA:
Cash Flow From
Operations............. 14,473 28,409 38,616 18,439 21,318 41,059 33,083
Cash Flow From Investing
Activities............. 1,540 (687) 1,772 9,456 81,808 (5,664) (82,302)
Cash Flow From Financing
Activities............. (12,963) (24,146) (35,926) (48,626) (93,169) (37,150) 35,872
Depreciation and
Amortization Expense... 21,751 23,716 31,276 29,892 46,484 63,028 62,438
29
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------------------
2004 2003 2003 2002 2001(1) 2000 1999(2)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS, FLEET CAPACITY DATA AND PER SHARE AMOUNTS)
Capital Expenditures:
Vessel Acquisition and
Refurbishment
Costs................ -- 2,300 2,361 6,905 43,342 33,268 51,012
Barge Refurbishment
Costs................ -- -- -- 1,628(4) -- -- 1,372
Haul-Away Car Carrying
Trucks Costs......... 1,641 2,456 2,456 937 -- -- --
Other Assets........... 161 531 543 288 781 734 796
Drydocking, Positioning
and Other Costs........ 5,819 1,333 3,264 3,170 7,784 9,049 15,069
Ratio of Earnings to
Fixed Charges(5)....... 1.39x 1.33x 1.35x --(6) --(6) 1.02x 1.69x
Pro Forma Ratio of
Earnings to Fixed
Charges and Preferred
Stock Dividends(7).....
FLEET CAPACITY (at end of
period)
Vessels.................. 35 36 35 36 36 34 35
LASH Barges.............. 917 917 917 919 1,722 1,849 1,864
Other Barges and
Towboats............... -- -- -- 14 37 46 48
Haul-Away Car Carrying
Trucks................. 32 22 22 7 -- -- --
Carrying Capacity
(thousands of
deadweight tons)....... 1,090 1,097 1,084 1,398 1,137 1,021 1,094
---------------
(1) Results for 2001 reflect an impairment loss of approximately $81.0 million,
in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets." This non-cash charge was made to write down certain
assets to estimated market value as part of the reclassification of our U.S.
flag LASH Service, our Cape-Size Bulk Carrier and certain Special Purpose
barges to "Assets Held for Disposal" and impairment charges recorded on our
foreign flag LASH Liner Service.
(2) Results for 1999 include the proceeds from a settlement with Seminole
Electric Cooperative, Inc. resulting from its early termination of our coal
transportation contract. The reported gain from the settlement of
approximately $20.6 million was net of related expenses of approximately
$1.8 million.
(3) Pro forma results assume this offering had been consummated as of the
beginning of the period, assuming an annual dividend rate on the preferred
stock offered hereby of % of the liquidation preference and no exercise
of the underwriter's over-allotment option.
(4) Barge refurbishment costs include $1.2 million for the purchase of 318 LASH
barges that we had previously leased.
(5) For the ratio of earnings to fixed charges calculation, earnings consist of
income (loss) before provision (benefit) for income taxes and equity in net
income of unconsolidated entities plus distributions received from
unconsolidated entities. Fixed charges include interest, amortization of
financing charges and that portion of rent deemed representative of
interest.
(6) Earnings were insufficient to cover fixed charges by $28.6 million and
$132.9 million for the years ended December 31, 2002 and 2001, respectively.
We sustained a net loss from continuing operations of $0.8 million for 2002,
which included impairment losses of $0.5 million, and a net loss from
continuing operations of $99.4 million for 2001, which included impairment
losses of $81.0 million. These losses were inadequate to cover our fixed
charges of $27.8 million for 2002 and $33.5 million for 2001.
(7) Reflects the ratio of earnings to fixed charges and preferred stock
dividends as if this offering had been consummated as of the beginning of
the period, assuming an annual dividend rate on the preferred stock offered
hereby of % of the liquidation preference and no exercise of the
underwriter's over-allotment option. See note 5 above for a description of
the items constituting earnings and fixed charges.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the section of this prospectus entitled "Selected Historical Financial and
Operating Data" and the consolidated financial statements and related notes
included elsewhere in this prospectus.
GENERAL
Our vessels are operated under a variety of charters and contracts. The
nature of these arrangements is such that, without a material variation in gross
voyage profits (total revenues less voyage expenses and vessel and barge
depreciation), the revenues and expenses attributable to a vessel deployed under
one type of charter or contract can differ substantially from those attributable
to the same vessel if deployed under a different type of charter or contract.
Accordingly, depending on the mix of charters or contracts in place during a
particular accounting period, our revenues and expenses can fluctuate
substantially from one period to another even though the number of vessels
deployed, the number of voyages completed, the amount of cargo carried, and the
gross voyage profit derived from the vessels remain relatively constant. As a
result, fluctuations in voyage revenues and expenses are not necessarily
indicative of trends in profitability, and our management believes that gross
voyage profit is a more appropriate measure of operating performance than
revenues. Accordingly, the discussion below addresses variations in gross voyage
profits rather than variations in revenues.
CRITICAL ACCOUNTING ESTIMATES
Set forth below is a discussion of the accounting policies and related
estimates that we believe are the most critical to understanding our
consolidated financial statements, financial condition, and results of
operations and which require complex management judgments, uncertainties and/or
estimates. Information regarding our other accounting policies is included in
the notes to our consolidated financial statements included elsewhere in this
prospectus.
VOYAGE REVENUE AND EXPENSE RECOGNITION
Revenues and expenses relating to our liner and rail-ferry segments'
voyages are recorded over the duration of the voyage. Revenues and expenses
relating to our other segments' voyages are recorded when earned or incurred
during the reporting period. These segments require no estimates or assumptions
when reporting revenues and expenses. On our liner services, the voyage revenues
are known at the beginning of the vessel's voyage and are reported through the
date of the financial statements based on the relative transit time, which is
the time between the vessel's loading port to the vessel's discharge port.
Variances from initial revenue estimates are generally not material. Voyage
expenditures are estimated at the beginning of the vessel's voyage based on
historical cost standards and current estimates received from our vendors and
port agents. During the course of the vessel's voyage, typically 30 to 60 days,
actual costs replace the original estimates and become part of the historical
cost standards. Because of our on-going voyage review process, all variances
from our original revenue and expense estimates are reported timely and
generally are not material or recurring.
DEPRECIATION
Provisions for depreciation are computed on the straight-line method based
on estimated useful lives of our depreciable assets. Various methods are used to
estimate the useful lives and salvage values of our depreciable assets and due
to the capital intensive nature of our business and our large base of
depreciable assets, changes in such estimates could have a material effect on
our results of operations.
DRYDOCKING COSTS
We defer certain costs related to the drydocking of our vessels. Deferred
drydocking costs are capitalized as incurred and amortized on a straight-line
basis over the period between drydockings
31
(generally two to five years). Because drydocking charges can be material in any
one period, we believe that the acceptable deferred method provides a better
matching for the amortization of those costs over future revenue periods
benefiting from the drydocking of our vessel.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting
for Income Taxes." Provisions for income taxes include deferred income taxes
that are provided on items of income and expense, which affect taxable income in
one period and financial income in another. Certain foreign operations are not
subject to income taxation under pertinent provisions of the laws of the country
of incorporation or operation. However, pursuant to U.S. tax laws existing prior
to the changes effected by the Jobs Creation Act, earnings from certain foreign
operations are subject to U.S. income taxes. We had approximately $33 million of
unused foreign deficit carryforwards as of December 31, 2003. The evaluation of
the recoverability of these deferred tax assets requires management to make
estimates and assumptions with respect to our expected future taxable income.
While we expect to be able to utilize these net operating loss carryforwards
even after the effectiveness of the Jobs Creation Act, actual future taxable
income may differ from our estimates and as such we may be required to record
additional valuation allowances against these assets.
SELF-RETENTION INSURANCE
We maintain provisions for estimated losses under our self-retention
insurance based on estimates of the eventual claims settlement costs. Our policy
is to establish self-insurance provisions for each policy year based on
independent actuarial estimates, and to maintain the provisions at those levels
for the estimated run-off period, approximately two years from the inception of
that period. We believe most claims will be reported, or estimates for existing
claims will be revised, within this two-year period. Subsequent to this two-year
period, self-insurance provisions are adjusted to reflect our current estimate
of loss exposure for the policy year. Our estimates are determined based on
various factors, such as (1) severity of the injury (for personal injuries) and
estimated potential liability based on past judgments and settlements, (2)
advice from legal counsel based on its assessment of the facts of the case and
its experience in other cases, (3) probability of pre-trial settlement which
would mitigate legal costs, (4) historical experience on claims for each
specific type of cargo (for cargo damage claims), and (5) whether our seamen are
employed in permanent positions or temporary revolving positions. It is
reasonably possible that changes in our estimated exposure may occur from time
to time. However, if during this two-year period our estimate of loss exposure
exceeds the actuarial estimate, then additional loss provisions are recorded to
increase the self-insurance provisions to our estimate of the eventual claims'
settlement cost. The measurement of our exposure for self-insurance liability
requires management to make estimates and assumptions that affect the amount of
loss provisions recorded during the reporting period. Actual results could
differ materially from those estimates.
ASBESTOS CLAIMS
We maintain provisions for our estimated losses for asbestos claims based
on estimates of eventual claims settlement costs. Our policy is to establish
provisions based on a range of estimated exposure. We estimate this potential
range of exposure using input from legal counsel and internal estimates based on
the individual deductible levels for each policy year. We are also indemnified
for certain of these claims by the previous owner of one of our wholly-owned
subsidiaries. The measurement of our exposure for asbestos liability requires
management to make estimates and assumptions that affect the amount of the loss
provisions recorded during the period. Our estimates and assumptions are formed
from variables such as the maximum deductible levels in a claim year, the amount
of the indemnification recovery and the claimant's employment history with the
company. Actual results could differ from those estimates.
32
PENSION AND POSTRETIREMENT BENEFITS
Our pension and postretirement benefit costs are calculated using various
actuarial assumptions and methodologies as prescribed by SFAS No. 87,
"Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions." These assumptions include
discount rates, health care cost trend rates, inflation, rate of compensation
increases, expected return on plan assets, mortality rates, and other factors.
We believe that the assumptions utilized in recording the obligations under our
plans are reasonable based on input from our outside actuary and information as
to historical experience and performance. Differences in actual experience or
changes in assumptions may affect our pension and postretirement obligations and
future expense.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2003
EXECUTIVE SUMMARY
Our net income for the third quarter of 2004 was $220,000 as compared to a
net loss of $1.6 million for the third quarter of 2003. For the first nine
months of 2004, our net income was $4.9 million as compared to net income of
$3.8 million for the same period of 2003.
During the third quarter of 2004, our liner and rail-ferry services
operating out of the Gulf of Mexico experienced weather delays as a result of
hurricanes. These delays, along with higher than anticipated operating costs,
primarily from machinery deficiencies, caused the results of our rail-ferry
segment for the third quarter of 2004 to drop below the comparable 2003 period.
Our liner services segment managed to offset the impact of the weather delays
with increased cargo volumes in comparison to third quarter 2003 levels.
While the increased operating costs incurred by our liner services and
rail-ferry service segments during the first nine months of 2004 were not
anticipated, such costs were not extraordinary in nature. The equipment utilized
by the vessels in our liner services and rail-ferry service segments require
ordinary preventive and recurring maintenance. During the first nine months of
2004, some of the recurring maintenance anticipated to be done on the equipment
at a later date was accelerated in order to take advantage of vessel downtime.
Although we expect the cost of repairing the equipment utilized by our vessels
to increase as our vessels age, we expect that the maintenance performed during
the first nine months of 2004 will help offset this expected increase.
Our investments in a fleet of Cement Carriers and two Cape-Size Bulk
Carriers in the third quarter of 2004 showed improvements from the same quarter
of 2003 as a result of an increase in our investment in the two Cape-Size Bulk
Carriers, which currently represent a 50% interest in each ship versus our 12.5%
interest in four vessels in 2003, and continued firmness in the charter market
for these vessels.
For the first nine months of 2004, income from our liner services segment
improved over the comparable period of 2003 primarily as a result of improved
cargo volume in our foreign flag LASH service and in spite of higher fuel costs
and weather delays. However, during the same period we experienced a reduction
in the results of our time charter vessels, as our U.S. flag PCTCs carried lower
volumes of supplemental cargoes, which provide revenues in addition to those
provided by the time charter agreements. The results of our U.S. flag PCTCs were
further impacted by a casualty on one vessel resulting in 26 unplanned
out-of-service days during the first nine months of 2004. The results of our
U.S. flag Coal Carrier were impacted by an accelerated drydocking and other
repair work and upgrading which resulted in the vessel being out of service 43
days in 2004 versus full employment in 2003. Results for the first nine months
of 2004 for our rail-ferry segment were down from the first nine months of 2003
primarily as a result of higher operating costs due to unanticipated maintenance
problems, higher fuel costs, added rail hire, and weather delays.
Also contributing to our improved results for the 2004 nine month period
was the loss we incurred during the third quarter of 2003 on the early
extinguishment of debt. This resulted from a "make-whole" prepayment penalty and
a write-off of deferred financing charges associated with the prepayment of a
loan
33
on our U.S. flag Coal Carrier in order to correct a technical default, as
reported in our previous SEC filings.
Under current United States tax law, U.S. companies like us and their
domestic subsidiaries generally are taxed on all income, whether derived in the
United States or abroad. With respect to foreign subsidiaries in which we hold
more than a 50 percent interest (referred to in the tax laws as controlled
foreign corporations or "CFCs"), we are currently taxed on our pro rata share of
foreign shipping income. The recently enacted Jobs Creation Act, which becomes
effective for us on January 1, 2005, will change the United States tax treatment
of our domestic and foreign shipping operations. We intend to make an election
under the Jobs Creation Act to have most of our U.S. flag operations taxed under
a new "tonnage tax" regime rather than under the usual U.S. corporate income tax
regime. Once the election is effective, the only federal income tax on the
operations of those vessels will be based on their tonnage, rather than their
contribution to our income or profits. Also under the Jobs Creation Act, the
taxable income of our CFCs from foreign shipping operations will be deferred
until repatriated. For further information regarding the Jobs Creation Act and
its estimated effect on our results of operations, see the section of this
prospectus entitled "Business -- New Tax Legislation."
GROSS VOYAGE PROFIT
Gross voyage profit decreased 15% from $27.1 million in the first nine
months of 2003 to $23 million in the first nine months of 2004. The changes
associated with each of our segments are discussed below.
Liner Services. Gross voyage loss for this segment improved from a loss of
$1.7 million in the first nine months of 2003 to a loss of $429,000 in the first
nine months of 2004. The improvement was primarily due to higher cargo volumes
in the first nine months of 2004 compared to 2003 for both our U.S. flag LASH
Liner service and foreign flag LASH Liner service resulting primarily from the
repeal of steel tariffs which increased inbound steel tonnage, although our U.S.
flag LASH Liner service experienced a less profitable cargo mix in the third
quarter of 2004 as compared to the same period of 2003.
Time Charter Contracts. The decrease in this segment's gross voyage profit
from $25.5 million in the first nine months of 2003 to $22.1 million in the
first nine months of 2004 was attributable primarily to our U.S. flag PCTCs
carrying lower volumes of supplemental cargoes, which provide revenues in
addition to the revenues provided by the time charter agreements, during the
first nine months of 2004 as compared to the same period of 2003. Our U.S. flag
PCTCs carried lower volumes of supplemental cargoes during the first nine months
of 2004 because their voyages in 2004 did not place them in a position to
participate in the supplemental cargo market. The gross voyage profit from our
U.S. flag PCTCs declined by approximately $0.1 million from the comparable prior
period because of a casualty on one vessel that resulted in 26 unplanned
out-of-service days in the second quarter of 2004. The gross voyage profit from
our U.S. flag Coal Carrier was reduced approximately $1.2 million by an
accelerated drydocking due to required repair work and upgrading work resulting
in 43 out-of-service days during the second and third quarters of 2004.
Additionally, our Multi-Purpose vessel completed its charter with the MSC in
early 2003 and was sold shortly thereafter.
A vessel currently utilized under one of our MSP contracts is not owned by
us but qualifies for MSP contract utilization under the bareboat charter
agreement that we have entered into with the vessel's owner. As part of the MSP
program extension that will go into effect on October 1, 2005, all vessels that
were owned by us and under MSP contract on or before December 31, 2004 will be
grandfathered into the extended MSP program. Accordingly, in order to maintain
the MSP contract with respect to this vessel and be grandfathered into the
extended MSP program, we must purchase the vessel and place it into service by
December 31, 2004. We expect to purchase this vessel prior to the end of 2004.
However, if we are unable to purchase the vessel, we will not be eligible to
receive the annual subsidy payments under the extended MSP program for the
vessel of $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. See "Prospectus Summary -- Recent
Developments -- Vessel
34
Purchase Agreement" and "Prospectus Summary -- Recent Developments -- Maritime
Security Program Contracts."
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 resulting from 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 higher rail car lease costs
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 rates
accounted for $1 million of the difference. Reduced cost from the early
repayment of our 7 3/4% senior notes due 2007, as well as early debt
retirements, accounted for approximately $700,000 of the decrease.
Loss on early extinguishment of debt of $46,000 reported in the first nine
months of 2004 was due to the early retirement of debt associated with our
Molten Sulphur Carrier, as well as the retirement at a premium of $410,000 of
our 7 3/4% senior notes due 2007. The loss of $1.3 million in the first nine
months of 2003 resulted from a "make-whole" prepayment penalty and write-off of
deferred financing charges associated with the prepayment of the Coal Carrier
loan to cure a technical default as described in note 7 to our unaudited
financial statements included elsewhere in this prospectus. This was partially
offset by the retirement at a discount of approximately $10.7 million of our
7 3/4% senior notes due 2007.
INCOME TAXES
We had a tax provision of $1.3 million in the first nine months of 2004 and
$2.1 million for the first nine months of 2003 at the statutory rate of 35% for
both periods.
The recently-enacted Jobs Creation Act, which becomes effective for our
company on January 1, 2005, will change the United States tax treatment of our
U.S. flag vessels in foreign operations and foreign flag shipping operations.
For a discussion of the Jobs Creation Act and its estimated effect on our
results of operations, see the section of this prospectus entitled
"Business -- New Tax Legislation."
EQUITY IN NET INCOME OF UNCONSOLIDATED ENTITIES
Equity in net income of unconsolidated entities, net of taxes, increased
from $260,000 in the first nine months of 2003 to $3 million in the first nine
months of 2004. The improvement was primarily related to our 50% investment in a
company owning two newly built Cape-Size Bulk Carriers and our minority interest
in companies owning and operating Cement Carriers. Our 50% investment in the
Cape-Size Bulk Carrier company, which was acquired in November of 2003,
contributed $2.3 million net of taxes in 2004. Our 30% investment in the Cement
Carrier company contributed $693,000 net of taxes in the first nine months of
2004 compared to $260,000 net of taxes in the first nine months of 2003.
35
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED
DECEMBER 31, 2002
GROSS VOYAGE PROFIT
Gross voyage profit increased 10.9% from $30.5 million in 2002 to $33.8
million in 2003. The changes associated with each of our segments are discussed
below.
Liner Service. Gross voyage loss for this segment improved from a loss of
$4.9 million in 2002 to a loss of $4.2 million in 2003. Our U.S. flag LASH Liner
Service's gross voyage loss improved from a loss of $3.6 million in 2002 to a
profit of $131,000 in 2003 primarily due to expenses, included in 2002,
associated with winding down the four-vessel service, while 2003 results reflect
the current one-vessel operation. As a partial offset, our foreign flag LASH
Liner Service's gross voyage profit decreased from $2.7 million in 2002 to $1
million in 2003 primarily due to lower cargo volume and higher than anticipated
operating costs in 2003. Additionally, depreciation on this segment's assets and
operating lease expense increased from $3.7 million in 2002 to $5.4 million in
2003 due to upgrade work performed in late 2002 on one of our LASH vessels.
Time Charter Contracts. This segment's gross voyage profit decreased from
$34.5 million in 2002 to $33 million in 2003. Unanticipated vessel repairs
resulting from machinery deficiencies on one of our Multi-Purpose vessels in the
third quarter contributed to the decrease in gross voyage profit. The cost of
the repairs and resulting vessel downtime impacted this segment by approximately
$1.1 million. Additionally, vessel and barge depreciation increased resulting
from a reduction in the estimated useful life of one of our Multi-Purpose
vessels, which was sold during the fourth quarter of 2003. Partially offsetting
this decrease was our Coal Carrier operating on time charter to USGenNE, which
experienced higher results due to the vessel being utilized for all but two days
during 2003 under its basic time charter contract as compared to 2002 when it
was out of service thirty-three days for repairs and during which it operated 91
days in the spot market at lower rates as compared to its basic charter.
Contracts of Affreightment. Gross voyage profit decreased from $6 million
in 2002 to $5.5 million in 2003 primarily due to higher operating costs in 2003
and from a payment received in 2002 for loss of hire from an insurance claim
relating to pre-existing damages identified during a scheduled drydocking.
Rail-Ferry Service. Gross voyage loss for this segment improved from a
loss of $3.7 million in 2002 to a loss of $2.9 million in 2003. The improvement
was a result of higher cargo volume during 2003.
Other. This segment's gross voyage profit improved from a loss of $1.3
million in 2002 to a profit of $2.4 million in 2003. Contributing to the
improved results was the closing of our Singapore office, which operated at a
loss during 2002, and the improved results of our insurance subsidiary, which
operates solely to cover self-retained insurance risks. The results of 2003
benefited from a full year's operation of our 50% owned car transportation truck
company as well as the results of two chartered vessels that we are operating
under MSP contracts, which only operated for half of 2002.
OTHER INCOME AND EXPENSES
Gain on Sale of Vessels and Other Assets of $1.4 million in 2003 primarily
related to the sale of our Multi-Purpose vessel, which completed its commitment
under charter with the MSC and was no longer needed for operations, and the sale
of Special Purpose Barges no longer needed for current operations. The net gain
of $557,000 in 2002 primarily related to the sale of certain contract rights
that were no longer beneficial to us and the sale of certain assets no longer
needed for operations.
Interest expense decreased 29.3% from $17.7 million in 2002 to $12.5
million in 2003. Decreases due to lower outstanding debt balances and lower
interest rates accounted for $1.7 million of the total difference. Approximately
$3.5 million of the decrease resulted from the early repayment of our 9% senior
notes and repurchases of our 7 3/4% senior notes due 2007, which was partially
offset by the cost of new financings used to repurchase some of the notes.
Investment income increased 235.4% from $656,000 in 2002 to $2.2 million in
2003 primarily as a result of higher dividend income received in 2003 from our
investment in certain bulk carrier companies
36
accounted for under the cost method, and interest earned on a receivable which
resulted from the fourth quarter 2002 sale and leaseback of one of our foreign
flag LASH vessels. This was partially offset by lower invested balances and
lower interest rates earned on invested funds in the current period.
Other Income of $1.5 million in 2002 was a result of interest collected in
2002 on foreign tax refunds.
Loss on early extinguishment of debt of $1.3 million in 2003 resulted from
a "make-whole" prepayment penalty and write-off of deferred financing charges
associated with the necessary prepayment of our Coal Carrier loan to cure a
technical default (see the subsection entitled "USGenNE Bankruptcy Filing" in
"Liquidity and Capital Resources" below). This was partially offset by a
discount on the retirement of approximately $10.7 million of our 7 3/4% senior
notes due 2007. For further information, see note A to our consolidated
financial statements located elsewhere in this prospectus.
INCOME TAXES
We had a tax provision for federal income taxes of $2.8 million in 2003 and
a tax benefit of $170,000 in 2002. The statutory rate was 35% for both years.
EQUITY IN NET INCOME OF UNCONSOLIDATED ENTITIES
Equity in net income of unconsolidated entities, net of taxes, of $422,000
for 2003 and $555,000 for 2002, was primarily related to our investment in
companies owning and operating cement-carrying vessels. The decrease in the
equity in net income of 2003 was primarily due to a write off of an
uncollectable charterhire receivable by one of these companies.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED
DECEMBER 31, 2001
GROSS VOYAGE PROFIT
Gross voyage profit improved from a loss of $53.8 million in 2001 to a
profit of $30.5 million in 2002. The changes associated with each of our
segments are discussed below.
Liner Service. Gross voyage loss for this segment improved from a loss of
$90.3 million in 2001 to a loss of $4.9 million in 2002. In 2001, an impairment
loss of $78.7 million was recognized as a result of our plan to separate certain
of our vessels from our operations and dispose of these assets. Also
contributing to the improved results of this segment was an improvement of $4.8
million from the elimination of the four-vessel U.S. flag LASH Liner service.
Expenses associated with winding down the service were offset by the reduction
of loss provisions for insurance and other accruals during the year which are
discussed in more detail in the paragraphs below. Additionally, the commencement
of the renewed U.S. flag LASH service in November of 2002 contributed gross
voyage profit of approximately $800,000. Offsetting this improvement was lower
gross voyage profit from our foreign flag LASH Liner service of $5.9 million
resulting from lower rates for eastbound cargo and higher than normal towage
expenses for LASH barges as a result of high water on the Mississippi River and
higher interstate towage expenses. Additionally, in 2002, this service
experienced a drop in cargo volume as a result of lower westbound cargo volumes
due to sanctions imposed by the President on steel imports.
We reduced our insurance provisions during 2002 resulting from a review of
our current estimate of our loss exposure for the policy year that reached the
end of its two-year period as well as from a reduction in the estimated total
remaining loss exposure related to the U.S. flag LASH Liner service. We
determined that the provisions for this policy year, which were based on
actuarial estimates, exceeded our loss exposure estimate, mainly as related to
personal injury claims. We routinely review our self-retention loss provisions
and make adjustments as we believe they are warranted. During 2002, we reduced
the estimated provision by approximately $3 million, of which $2.3 million was
related to the liner services segment.
We maintain accruals for amounts due to U.S. Customs related to repair work
performed on U.S. flag ships at foreign shipyards. U.S. Customs advised us
during the second quarter of 2002 that several claims
37
related to the U.S. flag LASH Liner service would be settled and would require
payment within a year. As a result, the portion of accruals associated with our
settlement estimate was reclassified from long-term to current liabilities as of
December 31, 2002.
Additionally in 2002, as a result of recent settlements, we revised our
estimates of amounts due to U.S. Customs, which resulted in an increase in gross
voyage profit of the liner services segment of approximately $1.5 million.
As a result of the discontinuation of the U.S. flag LASH Liner service, we
recognized expenses associated with the winding down of the service of $4
million during 2002.
Time Charter Contracts. This segment's gross voyage profit decreased from
$37.2 million in 2001 to $34.5 million in 2002. In 2001, an impairment loss of
$2.4 million was recognized on one of our LASH vessels that was sold while held
for disposal. The decrease in gross voyage profit resulted from the sale and
leaseback of two of our PCTCs during the second half of 2001, renegotiated lease
terms on another PCTC that resulted in different accounting treatment, and
offhire time for repair work on our Coal Carrier. The contracts under which the
three PCTCs operate were not affected by the aforementioned lease transactions.
However, because the leases now qualify for treatment as operating leases, the
lease payments of $14.1 million were included in voyage expenses during 2002.
The resulting increase in voyage expenses approximates the depreciation and
interest charges recorded on these vessels during 2001, which were eliminated by
the lease transactions. Also contributing to the decrease was the sale of our
Cape-Size Bulk Carrier in 2001.
The decrease was partially offset by an increase of approximately $2.2
million in revenue earned by our PCTCs due to carrying more supplemental cargoes
during 2002 and by $862,000 related to the reduction of loss provisions for
insurance and other accruals during the year discussed previously.
One of our Multi-Purpose vessels, which is included in this segment,
operated under charter to the MSC re-supplying scientific projects in the Arctic
and Antarctic. Gross voyage profit associated with this contract was comparable
to the prior year. The contract with the MSC was extended in December of 2002
through the first quarter of 2003. The vessel was sold during the fourth quarter
of 2003.
Contracts of Affreightment. Gross voyage profit decreased slightly from
$6.3 million in 2001 to $6 million in 2002. The transportation contract under
which our Molten Sulphur Carrier operates was assigned by Freeport-McMoRan
Sulphur LLC to Gulf Sulphur Services Ltd., LLP during the second quarter of
2002. The terms of the contract were not affected by the assignment.
Rail-Ferry Service. This segment's gross voyage loss of approximately $3.7
million in 2002 improved from a loss of $7.5 million in 2001. The improvement
resulted primarily from an increase in rail cars shipped in 2002 compared with
2001.
Other. This segment's gross voyage profit decreased from a profit of
$449,000 in 2001 to a loss of $1.3 million in 2002 as a result of the
discontinuation of the previous four-vessel U.S. flag LASH Liner Service, which
decreased the results of certain of our specialized subsidiaries in 2002.
OTHER INCOME AND EXPENSES
Administrative and general expenses decreased 33.3% from $23.6 million in
2001 to $15.7 million in 2002 primarily due to savings resulting from staff
reductions, slightly offset by related severance payments. Additionally, we
retained an unrelated third party during 2001 to provide ship management
services that were previously provided by one of our wholly-owned subsidiaries.
The costs for these services of approximately $1.4 million were included in
voyage expenses in 2002, while the expenses of the subsidiary were included in
administrative and general expenses in 2001.
Gain on Sale of Vessels and Other Assets of $557,000 in 2002 primarily
related to the sale of certain contract rights that were no longer beneficial to
us and the sale of other assets no longer needed for operations. The net gain of
$3.5 million in 2001 was related to gains on the sale of one of our PCTCs, which
was replaced by a newer PCTC, and the sale of additional contract rights no
longer required by us,
38
partially offset by a loss on the sale of two of our LASH vessels, which
completed their commitment under charter with the MSC and were no longer needed
for operations.
Interest expense decreased 33.8% from $26.7 million in 2001 to $17.7
million in 2002. The early repayment of the debt associated with the two PCTCs
sold and leased back during 2001 under operating leases, and the
reclassification of another PCTC lease from a capital lease to an operating
lease due to a change in lease terms accounted for approximately $4.9 million of
the decrease. Regularly scheduled payments on outstanding debt and lower
interest rates contributed $2.2 million to the decrease. Additionally, interest
expense decreased because our line of credit had a lower balance drawn
throughout 2002 as compared to 2001, and we repurchased $39.1 million of our 9%
senior notes and $1.1 million of our 7 3/4% senior notes due 2007 during 2002.
These decreases were partially offset by interest incurred during 2002 on the
financing of a new PCTC purchased in the second half of 2001, additional
financing on our Molten Sulphur Carrier in July of 2002, and new financing on
two of our LASH vessels in November of 2002.
Other Income of $1.5 million in 2002 resulted from interest earned by us on
overpayments of foreign taxes made in prior years that were previously refunded.
INCOME TAXES
Our tax benefit for federal income taxes was $170,000 in 2002 and $34.6
million in 2001. The statutory rate was 35% for both years.
EQUITY IN NET INCOME OF UNCONSOLIDATED ENTITIES
Equity in net income of unconsolidated entities, net of taxes, of $555,000
for 2002 and $463,000 for 2001, was primarily related to our investment in
companies owning and operating cement-carrying vessels.
LIQUIDITY AND CAPITAL RESOURCES
The dividends that will accrue on the preferred stock being offered hereby
will affect our liquidity on a quarterly basis. We anticipate funding the
preferred stock dividends with operating cash flow. However, we may not be
permitted to pay cash dividends on the preferred stock and holders of the
preferred stock will not be able to compel us to pay them. See "Description of
the Preferred Stock -- Dividends." For further information regarding the pro
forma effect of the preferred stock dividends on our historical earnings, see
the section of this prospectus entitled "Selected Historical Financial and
Operating Data."
The following discussion should be read in conjunction with the more
detailed consolidated balance sheets and consolidated statements of cash flows
included elsewhere in this prospectus.
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
Our working capital increased from $10.2 million at December 31, 2003 to
$14.5 million at September 30, 2004. Of the $43.3 million in current liabilities
at September 30, 2004, $13.8 million related to current maturities of long-term
debt. Cash and cash equivalents increased during the first nine months of 2004
by $3 million from $8.9 million at December 31, 2003 to $11.9 million at
September 30, 2004. The increase was due to cash provided by operating
activities of $14.5 million and investing activities of $1.5 million, partially
offset by cash used for financing activities of $13 million.
Operating activities generated positive cash flow after adjusting net
income of $4.9 million for non-cash provisions such as depreciation and
amortization. Cash provided by operating activities also included a decrease in
accounts receivable of $6.9 million primarily due to the timing of collections
of receivables from the MSC and U.S. Department of Transportation, slightly
offset by a decrease in accounts payable and accrued liabilities of $6.2 million
primarily due to the timing of payments to U.S. Customs in 2004. Also included
was cash used of $5.8 million primarily to cover payments for vessel drydocking
costs in 2004.
39
Cash provided by investing activities of $1.5 million was primarily related
to cash distributions received from our investments in unconsolidated entities,
partially offset by purchases of non-vessel related assets used by our car
transportation truck company and purchases of short-term investments.
Cash used for financing activities of $13 million included $8.9 million
used for regularly scheduled payments of debt, $1 million used to repay draws on
our line of credit made during the same period, $2.5 million used for early
repayment of one of our debt obligations, and $1.5 million used for an
additional payment on our Title XI loan, which was partially offset by draws on
our line of credit of $1 million.
As of September 30, 2004, $14.7 million was available on our $15 million
revolving credit facility which was to expire in April of 2006. In early
December 2004, we replaced this facility with a new $50 million revolving credit
facility. See "Description of Indebtedness." This new credit facility, which we
drew $10.0 million on in early December 2004 to purchase a used vessel and which
we expect to draw an additional $10.0 million on prior to the end of 2004 to
purchase a second used vessel (see "Prospectus Summary -- Recent
Developments -- Vessel Purchase Agreement"), will give us additional flexibility
to make capital investments and to prepay debt if market conditions warrant,
among other options.
Debt and Lease Obligations. We have several vessels under operating
leases, including three PCTCs, a LASH vessel, a Breakbulk/Multi-Purpose vessel,
a Container vessel and a Tanker vessel. We also conduct certain of our
operations from leased office facilities and use certain transportation and
other equipment under operating leases. Our obligations associated with these
leases are summarized in the table below.
The following is a summary of the scheduled maturities by period of our
outstanding debt and lease obligations as of September 30, 2004:
FOURTH QUARTER OF
2004 2005 2006 2007 2008 THEREAFTER
----------------- ------- ------- ------- ------- ----------
(IN THOUSANDS)
Long-Term Debt
(including Current
Maturities)........ $ 5,265 $12,366 $10,804 $80,001 $ 7,468 $ 51,793
Operating Leases..... 6,119 19,060 19,073 18,948 16,893 91,558
------- ------- ------- ------- ------- --------
Total by Period.... $11,384 $31,426 $29,877 $98,949 $24,361 $143,351
======= ======= ======= ======= ======= ========
Debt Covenant Compliance Status. As of September 30, 2004, we met all of
the financial covenants under our various debt agreements, the most restrictive
of which include the working capital, leverage ratio, minimum net worth and
interest coverage ratios, and believe we will continue to meet them throughout
2004, although we can give no assurance to that effect.
If our cash flow and capital resources are not sufficient to fund our debt
service obligations, we may be forced to reduce or delay capital expenditures,
sell assets, obtain additional equity capital, enter into additional financings
of our unencumbered vessels or restructure debt.
Mexican Rail-Ferry Service Results. Our rail-ferry service provides a
unique combination of rail and water ferry service between the U.S. Gulf and
Mexico. As with any innovative venture, we expected and have experienced an
adjustment period for the market to embrace our alternative service. However,
since the inception of the service in 2001, it has experienced an overall
improvement in gross revenues and operating cash flows. Low operating profit
margins are inherent in the rail-ferry business. Accordingly, high cargo volumes
are necessary to achieve meaningful levels of cash flow and profitability. The
capacity of the vessels operating in our rail-ferry service has limited the
revenues and, in turn, the cash flow and gross profits that can be generated by
our rail-ferry service segment.
We intend to use a portion of the proceeds of this offering to add a second
deck to each of the two vessels operating in our rail-ferry service in order to
essentially double their capacity. We believe that these additions will
significantly reduce our cost per unit of cargo carried and significantly
increase our cash flow,
40
but only if we are able to book substantially all of the additional capacity,
and we can give no assurance at this time that we will be successful in doing
so. If market conditions adversely affect those expectations, we believe we
could find alternative placement for the two vessels supporting the service. We
hope to conclude the necessary shipyard modification contracts shortly and
expect the vessels to begin shipyard work in mid-2005 and return to service in
the second half of 2005.
Vessel Purchase Agreement. In November 2004, we entered into an agreement
to purchase two used vessels. We took delivery of one of these vessels in early
December 2004 and expect to take delivery of the second vessel prior to the end
of 2004. These vessels will enable us to maintain two of our MSP contracts. We
drew on our new $50 million revolving credit facility (see "Description of Other
Indebtedness") to purchase the delivered vessel and expect to draw on our new
credit facility to purchase the second vessel. We intend to use a portion of the
proceeds of this offering to repay the amounts drawn. See "Prospectus
Summary -- Recent Developments -- Vessel Purchase Agreement."
Maritime Security Program Contracts. In 2003, Congress authorized an
extension of the MSP through 2015, increased the number of ships industry-wide
eligible to participate in the program from 47 to 60, and increased MSP payments
to companies in the program, all to be effective on October 1, 2005. Annual
payments for each vessel in the new MSP program will be $2.6 million in years
2006 to 2008, $2.9 million in years 2009 to 2011, and $3.1 million in years 2012
to 2015. On October 15, 2004, we filed applications to extend our seven MSP
contracts for another 10 years, all of which were effectively grandfathered in
the MSP reauthorization. Simultaneously, we offered additional ships for
participation in the MSP. MarAd is expected to announce MSP contract awards on
January 14, 2005, and we have no way of knowing at this time whether we will be
awarded contracts for the additional ships.
Dividend Payments. In order to comply with certain financial covenants
under our debt agreements, the suspension of quarterly cash dividend payments on
our common stock remains in effect. See "Description of Indebtedness."
Environmental Issues. We have not been notified that we are a potentially
responsible party in connection with any environmental matters, and we have
determined that we have no known risks for which assertion of a claim is
probable that are not covered by third party insurance, provided for in our
self-retention insurance reserves or otherwise indemnified. Our environmental
risks primarily relate to oil pollution from the operation of our vessels. We
have pollution liability insurance coverage with a limit of $1 billion per each
occurrence, with a deductible amount of $25,000 for each incident.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2003
Our working capital increased from $1.8 million at December 31, 2002, to
$10.2 million at December 31, 2003. Of the $50.6 million in current liabilities
at December 31, 2003, $14.9 million related to the current maturities of
long-term debt. Cash and cash equivalents increased during 2003 by $4.5 million
to a total of $8.9 million. This increase was due to cash provided by operating
activities of $38.6 million and by investing activities of $1.8 million,
partially offset by cash used for financing activities of $35.9 million.
Operating activities generated a positive cash flow after adjusting the net
income of $5.5 million for non-cash provisions such as depreciation and
amortization. Cash provided by operating activities also included an increase in
accounts receivable of $7.4 million primarily due to the timing of collections
of receivables from the MSC and U.S. Department of Transportation, offset by an
increase in accounts payable and accrued liabilities of $3.5 million primarily
due to U.S. Customs accruals recorded in late 2003. Also included was cash used
of $2.2 million primarily to cover payments for vessel drydocking costs in 2003.
Cash used for financing activities of $35.9 million included $9.1 million
used to repurchase $10.7 million of our 7 3/4% senior notes due 2007 at a
discount, $18.6 million used for regularly scheduled payments of debt, $16.7
million used for prepayment of the Coal Carrier loan (see the subsection
entitled "USGenNE Bankruptcy Filing" below), $6.0 million for an additional
payment on our Sulphur Carrier
41
loan, $83.6 million used for prepayments of outstanding debt obligations on
three of our vessels that were consolidated into one loan, and $39 million used
to repay draws on our line of credit. These uses were partially offset by
proceeds of $38 million from draws on our line of credit, the financing of $10
million used for the prepayment of the aforementioned Coal Carrier loan, and $91
million in secured financing used for the prepayment and consolidation of the
aforementioned debt on three of our vessels.
At December 31, 2003, $14.3 million was available on our $15 million
revolving credit facility, which expires in April of 2006.
Debt and Lease Obligations. We have several vessels under operating
leases, including three PCTCs, one LASH vessel, one Ice Strengthened
Breakbulk/Multi Purpose vessel, a Container vessel and a Tanker vessel. We also
conduct certain of our operations from leased office facilities and use certain
transportation and other equipment under operating leases. Our obligations
associated with these leases are disclosed in the table below.
The following is a summary of the scheduled maturities by period of our
outstanding debt and lease obligations as of December 31, 2003:
2004 2005 2006 2007 2008 THEREAFTER
------- ------- ------- ------- ------- ----------
(IN THOUSANDS)
Long-Term Debt (including
Current Maturities)...... $14,866 $12,366 $12,253 $80,411 $ 7,468 $ 51,793
Operating Leases........... 24,477 19,060 19,073 18,948 16,893 91,558
------- ------- ------- ------- ------- --------
Total by Period.......... $39,343 $31,426 $31,326 $99,359 $24,161 $143,351
======= ======= ======= ======= ======= ========
Debt Covenant Compliance Status. We have met all of the financial
covenants under our various debt agreements, the most restrictive of which
include the working capital, leverage ratio, minimum net worth, and interest
coverage ratio, among others, after these were amended for the full year 2002.
We also met, as of December 31, 2003, the more restrictive financial covenants
that became effective in 2003, and believe we will continue to meet them
throughout 2004, although we can give no assurance to that effect.
If our cash flow and capital resources are not sufficient to fund our debt
service obligations or if we are unable to meet covenant requirements, we may be
forced to reduce or delay capital expenditures, sell assets, obtain additional
equity capital, enter into additional financings of our unencumbered vessels or
restructure debt.
Mexican Service Results. We expect the results of the Mexican Service to
continue to improve and contribute to our cash flows. If market conditions
adversely impact those projections, we believe we could find alternative
placement for the two vessels supporting the service.
USGenNE Bankruptcy Filing. As previously discussed, we charter our Coal
Carrier to USGenNE, an indirect subsidiary of PG&E. On July 8, 2003, USGenNE
filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and
subsequently requested an extension of time to submit its bankruptcy plan until
March 4, 2004, and an extension until May 3, 2004, to solicit acceptance to its
plan. Upon the acquisition of our vessel, we had issued $50 million in notes,
which had an outstanding balance of approximately $17 million at the time of the
bankruptcy filing. Although the notes were non-recourse to the Company, the
indenture under which they were issued provided that USGenNE's bankruptcy filing
was an event of default on the notes as well as a cross-default on certain of
our other credit facilities. We secured alternative financing, which was used to
pay the notes in full in addition to a "make-whole" prepayment penalty. The
payment of the notes cured the cross-defaults under the other credit facilities.
Therefore, we are no longer in default under any of our credit facilities.
Dividend Payments. As a result of the impairment loss recognized on
certain of our assets during 2001, and its impact on certain financial covenants
under our debt agreements, the suspension of quarterly dividend payments on our
common shares of stock remains in effect.
42
Environmental Issues. We have not been notified that we are a potentially
responsible party in connection with any environmental matters, and we have
determined that we have no known risks for which assertion of a claim is
probable that are not covered by third party insurance, provided for in our
self-retention insurance reserves or otherwise indemnified. Our environmental
risks primarily relate to oil pollution from the operation of our vessels. We
carry pollution liability insurance coverage with a limit of $1 billion per each
occurrence, with a deductible amount of $25,000 for each incident.
DISCLOSURES ABOUT MARKET RISK
In the ordinary course of our business, we are exposed to foreign currency,
interest rate, and commodity price risks. We utilize derivative financial
instruments including forward exchange contracts, interest rate swap agreements,
and commodity swap agreements to manage certain of these exposures. We hedge
only firm commitments or anticipated transactions and do not use derivatives for
speculation. We neither hold nor issue financial instruments for trading
purposes.
INTEREST RATE RISK
The fair value of our cash and short-term investment portfolio at September
30, 2004 approximated carrying value due to its short-term duration. The
potential decrease in fair value resulting from a hypothetical 10% increase in
interest rates at September 30, 2004 for our investment portfolio is not
material.
The fair value of our long-term debt at September 30, 2004, including
current maturities, was estimated to be $169.0 million compared to a carrying
value of $166.1 million. The potential increase in fair value resulting from a
hypothetical 10% decrease in the average interest rates applicable to our long-
term debt at September 30, 2004 would be approximately $1.5 million or 0.9% of
the carrying value.
COMMODITY PRICE RISK
During 2003, we hedged a portion of our 2003 fuel requirements for our
liner services and rail-ferry service segments. These commodity swap agreements
contributed a net positive adjustment to voyage expense of $2.2 million in 2003.
As of September 30, 2004, we have no commodity swap agreements to manage our
exposure to price risk related to the purchase of the estimated 2004 fuel
requirements for our liner services or rail-ferry service segment.
We are exposed to price risks with respect to the fuel we consume in our
liner and rail-ferry operations. A 20% increase in the price of fuel for the
period October 1, 2003 through September 30, 2004 would have resulted in an
increase of approximately $2.7 million in our fuel costs for the same period,
and in a corresponding decrease of approximately $0.44 in our earnings per share
based on the shares of our common stock outstanding as of September 30, 2004,
assuming that none of the price increase could have been passed on to our
customers through fuel cost surcharges during the same period.
FOREIGN EXCHANGE RATE RISK
We have entered into foreign exchange contracts to hedge certain firm
purchase and sale commitments with varying maturities. The potential fair value
of these contracts that would have resulted from a hypothetical 10% adverse
change in the exchange rates applicable to these contracts as of December 31,
2003 was a liability of approximately $295,000. As of September 30, 2004, there
had been no material changes in our market risk exposure relating to these
contracts.
NEW ACCOUNTING PRONOUNCEMENTS
In January of 2003, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Series Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by the primary beneficiary of the entity,
where the company is subject to a majority of the risk of loss from the variable
interest entity's activities or
43
entitled to receive a majority of the entity's residual returns, or both. In
general, a variable interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (1) does not have
equity investors with voting rights or (2) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN 46 also requires disclosures about variable interest entities that the
company is not required to consolidate but in which it has a significant
variable interest. We have investments in certain unconsolidated entities in
which we have less than 100% ownership. We have evaluated these investments and
determined that we do not have any investments in variable interest entities.
Therefore, the adoption of FIN 46 as of January 1, 2004 did not have an impact
on our financial statements.
In December of 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The revised statement retains
the disclosure requirements of the original statement and requires additional
annual disclosures including information describing the types of plan assets,
investment strategy, measurement dates, plan obligations, and cash flows. In
addition to expanded annual disclosures, the revised statement requires the
components of net periodic benefit cost to be disclosed in interim periods. This
statement is effective for financial statements with fiscal years ended after
December 15, 2003, and the interim period disclosures are effective for interim
periods beginning after December 15, 2003. The additional annual disclosures
required by the revised statement are included in the notes to our consolidated
financial statements included elsewhere in this prospectus.
Also in December of 2003, the Medicare Prescription Drug, Improvements, and
Modernization Act of 2003 (the "Act") was signed into law. In addition to
including numerous other provisions that have potential effects on an employer's
retiree health plan, the Medicare law included a special subsidy for employers
that sponsor retiree health plans with prescription drug benefits that are at
least as favorable as the new Medicare Part D benefit. In May of 2004, the FASB
issued FASB Staff Position 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvements, and Modernization Act
of 2003" ("FSP 106-2"), that provides guidance on the accounting for the effects
of the Act for employers that sponsor postretirement health care plans that
provide drug benefits. We are still evaluating whether our plan is actuarially
equivalent, although its impact on our financial position and results of
operations is not material.
44
BUSINESS
COMPANY OVERVIEW
The company was originally founded as Central Gulf Steamship Corporation in
1947 by the late Niels F. Johnsen and his sons, Niels W. Johnsen, a director of
the company, and Erik F. Johnsen, our Chairman and Chief Executive Officer.
Central Gulf was privately held until 1971 when it merged with Trans Union. In
1978, International Shipholding Corporation was formed to act as a holding
company for Central Gulf, LCI, and certain other affiliated companies in
connection with the 1979 spin-off by Trans Union of our common stock to Trans
Union's stockholders. In 1986 we acquired the assets of Forest Lines, and in
1989 we acquired the ownership of Waterman. Since our spin-off from Trans Union,
we have continued to act solely as a holding company, and our only significant
assets are the capital stock of our subsidiaries.
Through our subsidiaries, we operate a diversified fleet of U.S. and
foreign flag vessels that provide international and domestic maritime
transportation services to commercial and governmental customers primarily under
medium- to long-term charters and contracts. At September 30, 2004, our fleet
consisted of 35 ocean-going vessels, of which 11 were 100% owned by us, nine
were 30% owned by us, two were 50% owned by us, seven were leased by us, and six
were operated by us under operating contracts. We also own 917 LASH barges and
32 over-the-road haul-away car carrying trucks that are leased to a company in
which we have a 50% interest.
Our fleet includes the following:
- four U.S. flag PCTCs specifically designed to transport fully assembled
automobiles, trucks and larger vehicles; and two foreign flag PCTCs with
the capability of transporting heavy weight and large dimension trucks
and buses, as well as automobiles;
- one Breakbulk/Multi-Purpose vessel, two Container vessels and one Tanker
vessel, which are used to transport supplies for the Indonesian
operations of a mining company;
- one U.S. flag Molten Sulphur Carrier and a Tanker, which are used to
carry molten sulphur from Louisiana and Texas to a processing plant on
the Florida Gulf Coast;
- two Special Purpose vessels modified as RO/ROs to transport loaded rail
cars between the U.S. Gulf and Mexico;
- one U.S. flag conveyer-equipped self-unloading Coal Carrier, which
carries coal in the coastwise and near-sea trade;
- three RO/RO vessels that permit rapid deployment of rolling stock,
munitions, and other military cargoes requiring special handling;
- two container vessels we bareboat charter;
- two Cape-Size Bulk Carriers in which we own a 50% interest; and
- nine Cement Carriers in which we own a 30% interest.
Our fleet also includes three LASH vessels, one Dockship, and 917 LASH
barges. In our transoceanic liner services, we use the LASH system primarily to
gather cargo on rivers, in island chains, and in harbors that are too shallow
for traditional vessels.
Our fleet is deployed by our principal operating subsidiaries, Central
Gulf, LCI (including a transatlantic liner service doing business as "Forest
Lines"), Waterman, and CG Railway. Other of our subsidiaries provide ship
charter brokerage, agency and other specialized services primarily to our
operating segments.
We have five operating segments: Liner Services, Time Charter Contracts,
COAs, Rail-Ferry Service, and Other. In addition to our five operating segments,
we have investments in several unconsolidated entities of which we own 50% or
less and do not exercise significant influence over operating and financial
45
activities. For additional information about our operating segments, see note K
of the notes to our consolidated financial statements included elsewhere in this
prospectus.
During the year ended December 31, 2003 and the nine months ended September
30, 2004, those segments made the following contributions to our revenues, gross
voyage profit or loss and segment profit or loss:
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2004 DECEMBER 31, 2003
---------------------------------------- ----------------------------------------
GROSS VOYAGE SEGMENT GROSS VOYAGE SEGMENT
REVENUES PROFIT (LOSS) PROFIT (LOSS) REVENUES PROFIT (LOSS) PROFIT (LOSS)
-------- ------------- ------------- -------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Liner Services............ $ 71,332 $ (429) $(1,043) $ 75,635 $(4,199) $(5,238)
Time Charter Contracts.... 87,086 22,144 17,611 129,685 33,048 26,378
Contracts of
Affreightment........... 12,048 3,737 2,597 16,189 5,495 3,695
Rail-Ferry Service........ 11,923 (3,382) (4,858) 15,537 (2,926) (5,248)
Other..................... 17,094 923 757 20,767 2,422 3,132
-------- ------- ------- -------- ------- -------
Total................... $199,483 $22,993 $15,064 $257,813 $33,840 $22,719
======== ======= ======= ======== ======= =======
Liner Services. In our liner services segment we operate four vessels,
including one "dockship" that positions barges for pick-up and discharge, on
established trade routes with regularly scheduled sailing dates. We receive
revenues for the carriage of cargo within the established trading areas and pay
the operating and voyage expenses incurred. Our liner services include a U.S.
flag service between U.S. Gulf and East Coast ports and ports in the Red Sea and
Middle East, and a foreign flag transatlantic service operating between U.S.
Gulf and East Coast ports and ports in northern Europe.
Time Charter Contracts. Time charters are contracts by which our charterer
obtains the right for a specified period to direct the movements and utilization
of the vessel in exchange for payment of a specified daily rate, but we retain
operating control over the vessel. Typically, we fully equip the vessel and are
responsible for normal operating expenses, repairs, crew wages, and insurance,
while the charterer is responsible for voyage expenses, such as fuel, port and
stevedoring expenses. Our time charter contracts include charters of three
Roll-On/Roll-Off vessels to the MSC for varying terms. Also included in this
segment are contracts with car manufacturers for six PCTCs, with an electric
utility for a conveyor-equipped, self-unloading coal carrier and with a mining
company to provide transportation services at its mine in Papua, Indonesia.
Contracts of Affreightment. COAs are contracts by which we undertake to
provide space on our vessels for the carriage of specified goods or a specified
quantity of goods on a single voyage or series of voyages over a given period of
time between named ports or within certain geographical areas in return for the
payment of an agreed amount per unit of cargo carried. Generally, we are
responsible for all operating and voyage expenses. Our COA segment includes a
molten sulphur transportation contract with a sulphur transporter.
Rail-Ferry Service. In the beginning of 2001, we began a new service,
through our subsidiary CG Railway, carrying loaded rail cars between the U.S.
Gulf and Mexico. This service uses our two Special Purpose vessels, which were
modified to enable them to carry standard size railroad cars. Each vessel has a
capacity for 60 standard size rail cars.
Other. This segment consists of operations that include more specialized
services than the former four segments and subsidiaries that provide ship
charter brokerage and agency services. Also included in this segment is our 50%
ownership in a car transportation truck company.
Unconsolidated Entities. We have a 30% interest in a company owning and
operating nine Cement Carriers. We also have a 50% interest in a company owning
two newly built Cape-Size Bulk Carriers and a 50% interest in a company that
operates a terminal in Coatzacoalcos, Mexico for our Rail-Ferry Service.
46
BUSINESS STRATEGY
Our strategy is to
- identify customers with high credit quality and marine transportation
needs requiring specialized vessels or operating techniques;
- seek medium- to long-term charters or contracts with those customers and,
if necessary, modify, acquire or construct vessels to meet the
requirements of those charters or contracts; and
- provide our customers with reliable, high quality service at a reasonable
cost.
Because our strategy is to seek medium- to long-term contracts and because
we have diversified customer and cargo bases, we are generally insulated from
the cyclical nature of the shipping industry. However, of our five operating
segments, our liner service and rail-ferry service segments are the most
susceptible to the shipping industry's cyclical nature and are impacted by,
among other things, fluctuations in the worldwide supply of and demand for
vessel capacity and the seasonal demands for certain cargoes that we ship.
We believe that our strategy has produced relatively stable operating cash
flows for an industry that tends to be cyclical and valuable long-term
relationships with our customers. We plan to continue this strategy by expanding
our relationships with existing customers, seeking new customers and selectively
pursuing acquisitions.
TYPES OF SERVICE
Through our principal operating subsidiaries, we provide specialized
maritime transportation services to our customers primarily under medium- to
long-term contracts. Our five operating segments, Liner Services, Time Charter
Contracts, Contracts of Affreightment, Rail-Ferry Service, and Other are
described below:
LINER SERVICES
LASH Vessels
Foreign Flag. We operate two foreign flag LASH vessels and a
self-propelled, semi-submersible feeder vessel on a scheduled transatlantic
liner service under the name "Forest Lines." One of the two foreign flag LASH
vessels is under an operating lease through 2007. Each Forest Lines LASH vessel
normally makes 10 round trip sailings per year between U.S. Gulf and East Coast
ports and ports in northern Europe. Prior to 2001, approximately one-half of the
aggregate eastbound cargo space had historically been reserved for International
Paper Company under a long-term contract. The remaining space was provided on a
voyage affreightment basis to various commercial shippers. Over the last three
years, we have continued to diversify our eastbound cargo among various
commercial shippers and now carry significant quantities of rice and petroleum
coke as well as paper products.
We have had ocean transportation contracts with International Paper Company
since 1969 when we had two LASH ships built to accommodate International Paper
Company's trade. Our contract with International Paper is for the carriage of
wood pulp, liner board, and other forest products, the characteristics of which
are well suited for transportation by LASH vessels. Our current contract with
International Paper Company was for a ten-year term ending in 2002, and was
extended for an additional three-year period ending in 2005 with mutual options
to extend on a year-to-year basis.
Over the years, we have established a base of commercial shippers to which
we provide space on the westbound Forest Lines service. The principal westbound
cargoes are steel and other metal products, high-grade paper and wood products,
and other general cargo. Over the last five years, the westbound utilization
rate for these vessels averaged approximately 85% per year.
U.S. Flag. Waterman previously operated a U.S. flag liner service between
U.S. Gulf and East Coast ports and ports in South Asia using four U.S. flag LASH
vessels, as well as one FLASH vessel that was
47
used as a feeder vessel in Southeast Asia. In June of 2001, we adopted a plan to
separate this service from the balance of our operations and dispose of these
assets. All of these vessels were sold by the end of 2002.
During 2002, we reactivated a U.S. flag liner service between the U.S. Gulf
and East Coast ports and ports in the Red Sea and Middle East due to several
changes in circumstances that occurred after our decision in 2001 to suspend the
previous service. We concluded that there would be adequate cargo volume for
shipment on U.S. flag vessels to the service area to justify maintaining the
service. As a result, we recommissioned one of our foreign flag LASH vessels,
which had been idle and scheduled for disposal, together with a number of LASH
barges. After its upgrade, the foreign flag vessel entered our Forest Lines
service in November of 2002, replacing one of the vessels operating in that
service. The replaced vessel transferred to U.S. flag for use in the renewed
U.S. flag liner service, which commenced operation in November of 2002.
The MSA, which provides a subsidy program for certain U.S. flag vessels,
was signed into law in October of 1996. Under this MSP, each participating
vessel is eligible to receive an annual payment of $2.1 million, which is
subject to annual appropriation and not guaranteed. In 2003, Congress authorized
an extension of the MSP through 2015, increased the number of ships eligible to
participate in the program from 47 to 60, and increased the annual payment per
vessel, all to be effective on October 1, 2005. Annual payments for each vessel
in the new program are $2.6 million in years 2006 through 2008, $2.9 million in
years 2009 through 2011, and $3.1 million in years 2012 through 2015. As of
December 31, 2003, our Waterman U.S. flag LASH vessel mentioned earlier and four
PCTCs included in our time charter contracts segment had qualified for
participation. During 2003, we bareboat chartered two vessels under a time
charter arrangement, allowing us to qualify for two additional MSP contracts. As
a result, as of September 30, 2004, we had MSP contracts with respect to seven
of our vessels, the terms of which were extended in October 2004 through
September 30, 2015. Also in October 2004, we offered additional vessels for
participation in the program, although we have no way of predicting whether any
of those vessels will be allowed to participate in the program.
TIME CHARTER CONTRACTS
Military Sealift Command Charters
We have had contracts with the MSC (or its predecessor) almost continuously
for over 30 years. In 1983, Waterman was awarded a contract to operate three
U.S. flag RO/RO vessels under time charters to the MSC for use by the United
States Navy in its maritime prepositioning ship ("MPS") program. These vessels
represent three of the sixteen MPS vessels currently in the MSC's worldwide
fleet providing support to the U.S. Marine Corps. These ships are designed
primarily to carry rolling stock and containers, and each can carry support
equipment for 17,000 military personnel. Waterman sold the three vessels to
unaffiliated corporations shortly after being awarded the contract but retained
the right to operate the vessels under operating agreements. The MSC time
charters commenced in late 1984 and early 1985 for initial five-year periods and
were renewable at the MSC's option for additional five-year periods up to a
maximum of twenty-five years. In 1993, we reached an agreement with the MSC to
make certain reductions in future charter hire payments in consideration of
fixing the period of these charters for the full 25 years. The charters and
related operating agreements will expire in 2009 and 2010.
Pure Car/Truck Carriers
U.S. Flag. We currently operate four U.S. flag PCTCs. In 1986, we entered
into multi-year charters to carry Toyota and Honda automobiles from Japan to the
United States. To service these charters, we had constructed two car carriers
that were specially designed to carry 4,000 and 4,660 fully assembled
automobiles, respectively. Both vessels were built in Japan and were registered
under the U.S. flag. In 2000 and 2001, we replaced these two vessels with larger
PCTCs, which are under their initial contracts through 2010 and 2011 with the
same Japanese shipping company. Both of these contracts may be extended beyond
the initial term at the option of the shipping company.
48
In 1998, we acquired a 1994-built U.S. flag PCTC. Immediately after being
delivered to us in April of 1998, this vessel entered a long-term charter
through 2008 with a Japanese shipping company. In 1999, we acquired the fourth
vessel, a newly built U.S. flag PCTC, which immediately after being delivered to
us in September of 1999 entered a long-term charter through 2011 with the same
Japanese shipping company. Both of these contracts may be extended beyond the
initial term at the option of the shipping company. These last two PCTCs were
subsequently sold to unaffiliated parties and leased back under operating leases
expiring in 2009 and 2013, respectively.
Foreign Flag. In 1988, we had two new car carriers constructed by a
shipyard affiliated with Hyundai, each with a carrying capacity of 4,800 fully
assembled automobiles, to transport Hyundai automobiles from South Korea
primarily to the United States and Europe under two long-term charters. In 1998
and 1999, we sold these car carriers and replaced them with two newly built
PCTCs, each with the capacity to carry heavy and large size rolling stock in
addition to automobiles and trucks. We immediately entered into a long-term
charter of these vessels through 2018 and 2019 to a Far Eastern company. One of
these PCTCs was subsequently sold to an unaffiliated party and leased back under
an operating lease through 2016, and we have an option to purchase the vessel
thereafter.
Under each of our PCTC charters, the charterers are responsible for voyage
operating costs such as fuel, port, and stevedoring expenses, while we are
responsible for other operating expenses including crew wages, repairs, and
insurance. During the terms of these charters, we are entitled to our full fee
irrespective of the number of voyages completed or the number of cars carried
per voyage.
In the fourth quarter of 2002, Hyundai Merchant Marine Co. LTD, the
charterer of our foreign flag PCTCs, sold its Car Carrier division to a joint
venture controlled by Wallenis Lines AB and Willhelm Willhelmsen ASA. We were
not impacted by the transaction as all terms and conditions of the charter
parties remain in effect.
Coal Carrier
In late 1995, we purchased an existing U.S. flag conveyor-equipped,
self-unloading Coal Carrier that was chartered to a New England electric utility
under a 15-year time charter expiring in 2010 to carry coal in the coastwise and
near-sea trade. Since the base charter provides approximately 60% utilization,
the ship may also be used, from time to time during this charter period, to
carry coal and other bulk commodities in the spot market for the account of
other charterers. The utility company filed for bankruptcy protection in July
2003. For information regarding the bankruptcy proceeding and its effect on this
charter, please see the section of this prospectus entitled "Risk
Factors -- Risks Related to Our Business -- One of our time charter customers
has filed for bankruptcy, the outcome of which could adversely affect our
results of operations."
Southeast Asia Transportation Contract
The contract to transport supplies for a mining company in Indonesia is
serviced by an Ice Strengthened Breakbulk/Multi-Purpose vessel, a small Tanker,
and two Container vessels.
CONTRACTS OF AFFREIGHTMENT
In 1994, we entered into a 15-year transportation contract with
Freeport-McMoRan Sulphur LLC, a sulphur transporter for which we had built a
28,000 DWT Molten Sulphur Carrier that carries molten sulphur from Louisiana and
Texas to a fertilizer plant on the Florida Gulf Coast. Under the terms of this
contract, we are guaranteed the transportation of a minimum of 1.8 million tons
of sulphur per year. The contract also gives the charterer three five-year
renewal options. The vessel was delivered and began service during late 1994.
During the second quarter of 2002, the contract was assigned by Freeport-
McMoRan Sulphur LLC to Gulf Sulphur Services Ltd. The terms of the contract were
not affected by the assignment.
49
RAIL-FERRY SERVICE
Commencing in 2001, we began a new service, through our subsidiary CG
Railway, carrying loaded rail cars between the U.S. Gulf and Mexico. This new
service uses our two Special Purpose vessels, which were modified to enable them
to carry standard size railroad cars. Each vessel has a capacity of 60 standard
size rail cars. With departures every four days from Coatzacoalcos and Mobile,
respectively, it offers with each vessel a three-day transit between these ports
and provides approximately 90 trips per year in each direction.
OTHER
We lease a cargo transfer facility at the river port of Memphis, Tennessee,
and several of our subsidiaries provide ship charter brokerage, agency, and
other specialized services to our operating subsidiaries and, in the case of
ship charter brokerage and agency services, to unaffiliated companies. The
income produced by these services substantially covers the related overhead
expenses. These services facilitate our operations by allowing us to avoid
reliance on third parties to provide these essential shipping services. Also
included in this segment is our 50% ownership in a car transportation truck
company.
CUSTOMERS AND CARGO
Historically, our cash flow has been relatively stable, considering the
cyclical nature of the shipping industry, principally due to the structure and
length of our medium- to long-term contracts with creditworthy customers, as
well as our diversified customer and cargo bases. We define contracts and
charters with a duration of three to five years as medium-term contracts and
those with a duration in excess of five years as long-term contracts. Most of
our medium- to long-term charters provide for a daily charter rate that is
payable whether or not the charterer utilizes the vessel. In addition, most of
these medium- to long-term contracts guarantee a minimum amount of cargo for
transportation and require the charterer to pay certain voyage operating costs,
including fuel, port and stevedoring expenses, and often include cost escalation
features covering certain of our expenses.
Substantially all of our current cargo contracts and charter agreements
with commercial customers are renewals or extensions of previous agreements. In
recent years, we have been successful in winning extensions or renewals of
substantially all of the contracts rebid by our commercial customers, and we
have been operating vessels for the MSC under charters or contracts for more
than 30 years. Moreover, our contracts with the MSC contributed approximately
14%, 15% and 12% of our total revenues for fiscal years 2003, 2002 and 2001,
respectively.
As a result of the length of our contracts and charter agreements, at
September 30, 2004, 62% of our aggregate vessel capacity was firmly committed
for fiscal year 2005, and approximately 50% of our aggregate vessel capacity was
firmly committed for all periods through 2009.
As of September 30, 2004, seven of our vessels operated under MSP
contracts, the terms of which were extended in October 2004 through September
30, 2015. Each participating vessel is eligible to receive an annual subsidy
payment of $2.1 million through the government's fiscal year 2005. Annual
payments for each vessel in the MSP are $2.6 million in years 2006 to 2008, $2.9
million in years 2009 to 2011, and $3.1 million in years 2012 to 2015. However,
payments under this program are subject to annual appropriation by Congress and
are not guaranteed. See "Risk Factors -- Risks Related to Our Business -- If
sufficient appropriations under the Maritime Security Act of 1996 are not made
in any fiscal year, we may not continue to receive annual subsidy payments with
respect to certain of our vessels."
We believe that the high credit quality of our customers and the length of
our contracts help reduce competitive pressures and the effects of cyclical
market conditions. We believe that our longstanding customer relationships are
in part due to our reputation for providing specialized quality service in terms
of ontime performance, low cargo loss, minimal damage claims and reasonable
rates.
In addition, we believe our customers' diversified cargoes have further
insulated us from cyclical market conditions and contributed to our relatively
stable historical cash flow. The following table sets
50
forth the percentage of our total revenues by cargo type for the nine months
ended September 30, 2004 and each of the years ended December 31, 2003 and
December 31, 2002.
% OF TOTAL % OF TOTAL % OF TOTAL
REVENUES REVENUES REVENUES
FOR THE NINE FOR THE YEAR FOR THE YEAR
MONTHS ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
CARGO TYPE 2004 2003 2002
---------- ------------- ------------ ------------
General Cargo.................................. 34% 35% 29%
Automobiles.................................... 17% 18% 20%
Military Cargo................................. 15% 19% 19%
Iron and Steel Products........................ 13% 2% 9%
Coal........................................... 6% 6% 8%
Agricultural Products.......................... 5% 9% 4%
Forest Products................................ 4% 5% 4%
Sulphur........................................ 6% 6% 7%
----- ----- -----
Total.......................................... 100.0% 100.0% 100.0%
===== ===== =====
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VESSEL DEPLOYMENT
The following table sets forth information about each of the ocean-going
vessels owned (or bareboat chartered) or operated by us.
CONSTRUCTION/
SERVICE TYPE AND VESSEL LIFE EXTENSION CARRYING
VESSEL NAME TYPE FLAG COMPLETION DATE CAPACITY
---------------- ------ ---- --------------- --------
LINER SERVICES
Atlantic Forest........ LASH U.S. 1984 82 LASH Barges
Rhine Forest........... LASH Marshall Islands 1972/1990/1996 83 LASH Barges
Hickory................ LASH Panama 1989 82 LASH Barges
Spruce................. Dockship Marshall Islands 1975/1978 15 LASH Barges
MILITARY SEALIFT
COMMAND
Pfc. E. A. Obregon..... Roll On/Roll Off U.S. 1985 25,476 DWT
Sgt. Matej Kocak....... Roll On/Roll Off U.S. 1985 25,476 DWT
Maj. Stephen W. Roll On/Roll Off U.S. 1985 25,476 DWT
Pless................
PURE CAR/TRUCK CARRIERS
Green Lake............. PCTC U.S. 1998 5055 Autos
Green Point............ PCTC U.S. 1994 5120 Autos
Green Cove............. PCTC U.S. 1994 4148 Autos
Green Dale............. PCTC U.S. 1999 4148 Autos
Asian King............. PCTC Panama 1998 6402 Autos
Asian Emperor.......... PCTC Panama 1999 6402 Autos
SPECIAL PURPOSE VESSELS
Bali Sea............... Float On/Float Off Singapore 1982/1995 22,000 DWT
Banda Sea.............. Float On/Float Off Singapore 1982/1995 22,000 DWT
Java Sea............... Container/ Singapore 1988 5,000 Containers
Breakbulk
DOMESTIC SERVICES
Sulphur Enterprise..... Molten Sulphur U.S. 1994 24,000 DWT
Energy Enterprise...... Coal Carrier U.S. 1983 38,000 DWT
MARKETING
We maintain marketing staffs in New York and New Orleans, and a network of
marketing agents in major cities around the world who market our liner, charter,
and contract services. We market our transatlantic LASH liner service under the
trade name "Forest Lines," and our U.S. flag LASH liner service between the U.S.
Gulf and East Coast ports and ports in the Red Sea and Middle East under the
Waterman house flag. We market our Rail-Ferry Service under the name "CG
Railway." We advertise our services in trade publications in the United States
and abroad.
52
INSURANCE
We maintain protection and indemnity ("P&I") insurance to cover liabilities
arising out of our ownership and operation of vessels with the Standard
Steamship Owners' Protection & Indemnity Association (Bermuda) Ltd., which is a
mutual shipowners' insurance organization commonly referred to as a P&I club.
The club is a participant in and subject to the rules of its respective
international group of P&I associations. The premium terms and conditions of the
P&I coverage provided to us are governed by the rules of the club.
We maintain hull and machinery insurance policies on each of our vessels in
amounts related to the value of each vessel. This insurance coverage, which
includes increased value, freight, and time charter hire, is maintained with a
syndicate of hull underwriters from the U.S., British, and French insurance
markets. We maintain war risk insurance on each of our vessels in an amount
equal to each vessel's total insured hull value. War risk insurance is placed
through U.S., British, and French insurance markets and covers physical damage
to the vessels and P&I risks for which coverage would be excluded by reason of
war exclusions under either the hull policies or the rules of the P&I club. Our
war risk insurance also covers liability to third parties caused by war or
terrorism and damages to our land-based assets caused by war, but does not cover
damage to our land-based assets caused by terrorism.
The P&I insurance also covers our vessels against liabilities arising from
the discharge of oil or hazardous substances in U.S., international, and foreign
waters.
We also maintain loss of hire insurance with U.S., British, and French
insurance markets to cover our loss of revenue in the event that a vessel is
unable to operate for a certain period of time due to loss or damage arising
from the perils covered by the hull and machinery policy and war risk policy.
Insurance coverage for shoreside property, shipboard consumables and
inventory, spare parts, workers' compensation, office contents, and general
liability risks is maintained with underwriters in U.S. and British markets.
Insurance premiums for the coverage described above vary from year to year
depending upon our loss record and market conditions. In order to reduce
premiums, we maintain certain deductible and co-insurance provisions that we
believe are prudent and generally consistent with those maintained by other
shipping companies (see note D to our consolidated financial statements located
elsewhere in this prospectus).
NEW TAX LEGISLATION
Under current United States tax law, U.S. companies like us and their
domestic subsidiaries generally are taxed on all income, including in our case
income from shipping operations, whether derived in the United States or abroad.
With respect to any foreign subsidiary in which we hold more than a 50 percent
interest (referred to in the tax laws as a controlled foreign corporation, or
"CFC"), we are treated as having received a current taxable distribution of our
pro rata share of income derived from foreign shipping operations.
The recently-enacted Jobs Creation Act, which becomes effective for our
company on January 1, 2005, will change the United States tax treatment of our
U.S. flag vessels in foreign operations and foreign flag shipping operations.
We intend to make an election under the Jobs Creation Act to have our U.S.
flag operations (other than those of two ineligible vessels used exclusively in
United States coastwise commerce) taxed under a new "tonnage tax" regime rather
than under the usual U.S. corporate income tax regime. As a result of that
election, our gross income for United States income tax purposes with respect to
our eligible U.S. flag vessels will not include (1) income from qualifying
shipping activities in U.S. foreign trade (i.e., transportation between the U.S.
and foreign ports or between foreign ports), (2) income from cash, bank deposits
and other temporary investments that are reasonably necessary to meet the
working capital
53
requirements of our qualifying shipping activities, and (3) income from cash or
other intangible assets accumulated pursuant to a plan to purchase qualifying
shipping assets.
Under the tonnage tax regime, our taxable income with respect to the
operations of our eligible U.S. flag vessels will be based on a "daily notional
taxable income," which will be taxed at the highest corporate income tax rate.
The daily notional taxable income from the operation of a qualifying vessel will
be 40 cents per 100 tons of the net tonnage of the vessel (up to 25,000 net
tons), and 20 cents per 100 tons of the net tonnage of the vessel in excess of
25,000 net tons. The taxable income of each qualifying vessel will be the
product of its daily notional taxable income and the number of days during the
taxable year that the vessel operates in United States foreign trade.
Under the Jobs Creation Act, the taxable income from the shipping
operations of our CFCs will generally no longer be subject to current United
States income tax but will be deferred until repatriated. Although we are still
analyzing the Jobs Creation Act, we currently estimate that it will result in a
$11.5 million reduction of our deferred tax provision which will be recorded and
reflected in our results of operations for the period in which our election
under the Jobs Creation Act is made. We are awaiting guidance from the Internal
Revenue Service as to the earliest time this election can be made for our 2005
taxable year. In addition, we project that, as a result of the Jobs Creation
Act, our effective tax rate will be reduced to approximately 25% in fiscal years
2005 and 2006 with a further reduction to approximately 8% in fiscal years
thereafter so long as the Jobs Creation Act remains in effect.
REGULATION
Our operations between the United States and foreign countries are subject
to the Shipping Act of 1984 (the "Shipping Act"), which is administered by the
Federal Maritime Commission, and certain provisions of the Federal Water
Pollution Control Act, the OPA, the Act to Prevent Pollution from Ships, and
CERCLA, all of which are administered by the U.S. Coast Guard and other federal
agencies, and certain other international, federal, state, and local laws and
regulations, including international conventions and laws and regulations of the
flag nations of our vessels. Pursuant to the requirements of the Shipping Act,
we have on file with the Federal Maritime Commission tariffs reflecting the
outbound and inbound rates currently charged by us to transport cargo between
the United States and foreign countries as a common carrier in connection with
our liner services. These tariffs are filed by us either individually or in
connection with our participation as a member of rate or conference agreements,
which are agreements that (upon becoming effective following filing with the
Federal Maritime Commission) permit the members to agree concertedly upon rates
and practices relating to the carriage of goods in U.S. and foreign ocean
commerce. Tariffs filed by a company unilaterally or collectively under rate or
conference agreements are subject to Federal Maritime Commission approval. Once
a rate or conference agreement is filed, rates may be changed in response to
market conditions on 30 days' notice, with respect to a rate increase, and one
day's notice, with respect to a rate decrease. On October 16, 1998, the Ocean
Shipping Reform Act of 1998 was enacted, and it amended the Shipping Act of 1984
to promote the growth and development of United States exports through certain
reforms in the regulation of ocean transportation. This legislation, in part,
repeals the requirement that a common carrier or conference file tariffs with
the Federal Maritime Commission, replacing it with a requirement that tariffs be
open to public inspection in an electronically available, automated tariff
system. Furthermore, the legislation requires that only the essential terms of
service contracts be published and made available to the public.
On October 8, 1996, Congress adopted the MSA, which created the MSP and
authorized the payment of $2.1 million per year per ship for 47 U.S. flag ships
through fiscal year 2005. This program eliminates the trade route restrictions
imposed by the previous federal program and provides flexibility to operate
freely in the competitive market. On December 20, 1996, Waterman entered into
four MSP contracts with MarAd, and Central Gulf entered into three MSP contracts
with MarAd. By law, the MSP is subject to annual appropriations. In the event
that sufficient appropriations are not made for the MSP by Congress in any
fiscal year, the MSA permits MSP contractors, such as Waterman and Central Gulf,
to re-flag their vessels under foreign registry expeditiously. In 2003, Congress
authorized an extension of the MSP through 2015, increased the number of ships
industry-wide eligible to participate in the program
54
from 47 to 60, and increased MSP payments to companies in the program, all to be
effective on October 1, 2005. Annual payments for each vessel in the new MSP
program will be $2.6 million in years 2006 to 2008, $2.9 million in years 2009
to 2011, and $3.1 million in years 2012 to 2015. On October 15, 2004, Waterman
and Central Gulf each filed applications to extend their MSP contracts for
another 10 years (i.e., through September 30, 2015), all seven of which were
effectively grandfathered in the MSP reauthorization. Simultaneously, we offered
additional ships for participation in the MSP. MarAd is expected to announce MSP
contract awards on January 14, 2005, and we have no way of knowing at this time
whether Waterman or Central Gulf will be awarded contracts for the additional
ships.
Our Molten Sulphur Carrier was constructed with the aid of Title XI loan
guarantees administered by MarAd, the receipt of which obligates us to comply
with various dividend and other financial restrictions. Recipients of Title XI
loan guarantees must pay an annual fee of up to 1% of the loan amount.
Under the Merchant Marine Act, U.S. flag vessels are subject to requisition
or charter by the United States whenever the President declares that the
national security requires such action. The owners of any such vessels must
receive just compensation as provided in the Merchant Marine Act, but there is
no assurance that lost profits, if any, will be fully recovered. In addition,
during any extension period under each MSC charter or contract, the MSC has the
right to terminate the charter or contract on 30 days' notice. However, terms of
our RO/RO operating contract call for significant early termination penalties.
Certain laws governing our operations, as well as our molten sulphur
transportation contract and our Title XI financing arrangements, require us to
be as much as 75% owned by U.S. citizens. We monitor our stock ownership to
verify our continuing compliance with these requirements and have never had more
than 1% of our capital stock held of record by non-U.S. citizens (including
corporations or other entities controlled by non-U.S. citizens). In April of
1996, we amended our certificate of incorporation to allow our board of
directors to restrict the acquisition of our capital stock by non-U.S. citizens.
Under our certificate of incorporation, our board of directors may, in the event
of a transfer of our capital stock that would result in non-U.S. citizens owning
more than 23% (the "permitted amount") of our total voting power, declare such
transfer to be void and ineffective. In addition, our board of directors may, in
its sole discretion, deny voting rights and withhold dividends with respect to
any shares of our capital stock owned by non-U.S. citizens in excess of the
permitted amount. Furthermore, our board of directors is entitled under our
certificate of incorporation to redeem shares owned by non-U.S. citizens in
excess of the permitted amount in order to reduce the ownership of our capital
stock by non-U.S. citizens to the permitted amount.
We are required by various governmental and quasi-governmental agencies to
obtain permits, licenses, and certificates with respect to our vessels. The
kinds of permits, licenses, and certificates required depend upon such factors
as the country of registry, the commodity transported, the waters in which the
vessel operates, the nationality of the vessel's crew, the age of the vessel,
and the status of the Company as owner or charterer. We believe that we have, or
can readily obtain, all permits, licenses, and certificates necessary to permit
our vessels to operate.
The International Maritime Organization ("IMO") amended the International
Convention for the Safety of Life at Sea ("SOLAS"), to which the United States
is a party, to require nations that are parties to SOLAS to implement the
International Safety Management ("ISM") Code. The ISM Code requires that
responsible companies, including owners and/or operators of vessels engaged on
foreign voyages, develop and implement a safety management system to address
safety and environmental protection in the management and operation of vessels.
Companies and vessels to which the ISM Code applies are required to receive
certification and documentation of compliance. Vessels operating without such
certification and documentation in the U.S. and ports of other nations that are
parties to SOLAS may be denied entry into ports, detained in ports or fined. We
implemented a comprehensive safety management system and obtained timely IMO
certification and documentation for our companies and all of our vessels. In
addition, our ship management subsidiary, LMS Shipmanagement, Inc., received
certification in January 1998 under the ISO 9002 Quality Standard.
55
More recently, in 2003, SOLAS was again amended to require parties to the
convention to implement the International Ship and Port Facility Security
("ISPS") Code. The ISPS Code requires owners and operators of vessels engaged on
foreign voyages to conduct vulnerability assessments and to develop and
implement company and vessel security plans, as well as other measures, to
protect vessels, ports and waterways from terrorist and criminal acts. In the
U.S., these provisions were implemented through the Maritime Transportation
Security Act of 2002 ("MTSA"). These provisions became effective on July 1,
2004. As with the ISM Code, companies and vessels to which the ISPS Code applies
must be certificated and documented. Vessels operating without such
certification and documentation in the U.S. and ports of other nations that are
parties to SOLAS may be denied entry into ports, detained in ports or fined.
Vessels subject to fines in the U.S. are liable in rem, which means vessels may
be subject to arrest by the U.S. government. For U.S. flag vessels, company and
vessel security plans must be reviewed and approved by the U.S. Coast Guard. We
have conducted the required security assessments and submitted plans for review
and approval as required, and we believe that we are in compliance in all
material respects with all ISPS Code and MTSA security requirements.
The Coast Guard and Maritime Transportation Act of 2004, signed into law on
August 9, 2004, amended the Oil Pollution Act of 1990 to require owners or
operators of all non-tank vessels of 400 gross tons or greater to develop and
submit plans for responding, to the maximum extent practicable, to worst case
discharges and substantial threats of discharges of oil from these vessels. This
statute extends to all types of vessels of 400 gross tons or greater the vessel
response planning requirements of the Oil Pollution Act that had previously only
applied to tank vessels. The statute requires plans to be submitted by August 9,
2005. We are awaiting regulations implementing this requirement, and expect to
comply in all respects.
Also, under the OPA, vessel owners, operators and bareboat charterers are
responsible parties that are jointly, severally and strictly liable for all
response costs and other damages arising from oil spills from their vessels in
waters subject to U.S. jurisdiction, with certain limited exceptions. Other
damages include, but are not limited to, natural resource damages, real and
personal property damages, and other economic damages such as net loss of taxes,
royalties, rents, profits or earning capacity, and loss of subsistence use of
natural resources. For non-tank vessels, the OPA limits the liability of
responsible parties to the greater of $600 per gross ton or $500,000. The limits
of liability do not apply if it is shown that the discharge was proximately
caused by the gross negligence or willful misconduct of, or a violation of a
federal safety, construction or operating regulation by, the responsible party,
an agent of the responsible party or a person acting pursuant to a contractual
relationship with the responsible party. Further, the limits do not apply if the
responsible party fails or refuses to report the incident, or to cooperate and
assist in oil spill removal activities. Additionally, the OPA specifically
permits individual states to impose their own liability regimes with regard to
oil discharges occurring within state waters, and some states have implemented
such regimes.
CERCLA also applies to owners and operators of vessels, and contains a
similar liability regime for cleanup and removal of hazardous substances and
natural resource damages. Liability under CERCLA is limited to the greater of
$300 per gross ton or $5 million.
Under the OPA, vessels are required to establish and maintain with the U.S.
Coast Guard evidence of financial responsibility sufficient to meet the highest
limit of their potential liability under the act. Under Coast Guard regulations,
evidence of financial responsibility may be demonstrated by insurance, surety
bond, self-insurance or guaranty. An owner or operator of more than one vessel
must demonstrate financial responsibility for the entire fleet in an amount
equal to the financial responsibility of the vessel having greatest maximum
liability under the OPA and CERCLA. We insure each of our vessels with pollution
liability insurance in the amounts required by law. A catastrophic spill could
exceed the insurance coverage available, in which event our financial condition
and results of operations could be adversely affected.
While the U.S. is not a party, for our vessels operating in foreign waters,
many countries have ratified and follow the liability plan adopted by the IMO as
set out in the International Convention on Civil
56
Liability for Oil Pollution Damage of 1969 (the "1969 Convention") and the
Convention for the Establishment of an International Fund for Oil Pollution of
1971. Under these conventions, the registered owner of a vessel is strictly
liable for pollution damage caused in the territorial seas of a state party by
the discharge of persistent oil, subject to certain complete defenses. Liability
is limited to approximately $183 per gross registered ton (a unit of measurement
of the total enclosed spaces in a vessel) or approximately $19.3 million,
whichever is less. If a country is a party to the 1992 Protocol to the
International Convention on Civil Liability for Oil Pollution Damage (the "1992
Protocol"), the maximum liability limit is $82.7 million. The limit of liability
is tied to a unit of account that varies according to a basket of currencies.
The right to limit liability is forfeited under the 1969 Convention when the
discharge is caused by the owner's actual fault, and under the 1992 Protocol,
when the spill is caused by the owner's intentional or reckless misconduct.
Vessels operating in waters of states that are parties to these conventions must
provide evidence of insurance covering the liability of the owner. In
jurisdictions that are not parties to these conventions, various legislative
schemes or common law govern. We believe that our pollution insurance policy
covers the liability under the IMO regimes.
COMPETITION
The shipping industry is intensely competitive and is influenced by events
largely outside the control of shipping companies. Varying economic factors can
cause wide swings in freight rates and sudden shifts in traffic patterns. Vessel
redeployments and new vessel construction can lead to an overcapacity of vessels
offering the same service or operating in the same market. Changes in the
political or regulatory environment can also create competition that is not
necessarily based on normal considerations of profit and loss. Our strategy is
to reduce competitive pressures and the effects of cyclical market conditions by
operating specialized vessels in niche market segments and deploying a
substantial number of our vessels under medium- to long-term charters or
contracts with creditworthy customers and on trade routes where we have
established market share. We also seek to compete effectively in the traditional
areas of price, reliability, and timeliness of service. Competition principally
comes from numerous break bulk vessels and, occasionally, container ships.
Approximately 16% of our revenue is generated by contracts with the
Military Sealift Command and contracts to transport Public Law-480 U.S.
government-sponsored cargo, a cargo preference program requiring that 75% of all
foreign aid "Food for Peace" cargo must be transported on U.S. flag vessels, if
they are available at reasonable rates. We compete with all U.S. flag companies,
including P&O Nedlloyd, APL Limited, and Maersk Sealand Service, Inc. for the
MSC work and the Public Law-480 cargo. Additionally, our principal foreign
competitors include Hoegh Lines, Star Shipping AS, Wilhelmsen Lines, and the
Shipping Corporation of India.
Our LASH liner services face competition from foreign flag liner operators
and, to a lesser degree, from U.S. flag liner operators. In addition, during
periods in which we participate in conference agreements or rate agreements,
competition includes other participants with whom we may agree to charge the
same rates and non-participants charging lower rates.
Because our LASH barges are used primarily to transport large unit size
items, such as forest products, natural rubber, and steel that cannot be
transported as efficiently in container ships, our LASH fleet often has a
competitive advantage over these vessels for this type of cargo. In addition, we
believe that the ability of our LASH system to operate in shallow harbors and
river systems and our specialized knowledge of these harbors and river systems
give us a competitive advantage over operators of container ships and break bulk
vessels that are too large to operate in these areas.
Our PCTCs operate worldwide in markets where foreign flag vessels with
foreign crews predominate. We believe that our U.S. flag PCTCs can continue to
compete effectively if we continue to receive the cooperation of our seamen's
unions in controlling costs and if we continue to receive subsidy payments on
these ships.
57
PROPERTIES
VESSELS AND BARGES
Of the 35 ocean-going vessels in our fleet at September 30, 2004, 11 were
100% owned by us, nine were 30% owned by us, two were 50% owned by us, seven
were leased by us, and six were operated by us under operating contracts. Of the
917 LASH barges we own, 856 are operated in conjunction with our LASH vessels.
The remaining 61 barges are not required for current vessel operations. All of
our LASH barges are registered under the U.S. flag. Also included in our fleet
are 32 over-the-road haul-away car carrying trucks that are leased to a company
in which we have a 50% interest.
All of the vessels owned, operated, or leased by us are in good condition
except for the 61 LASH barges not required for current vessel operations. Under
governmental regulations, insurance policies, and certain of our financing
agreements and charters, we are required to maintain our vessels in accordance
with standards of seaworthiness, safety, and health prescribed by governmental
regulations or promulgated by certain vessel classification societies. We have
implemented the quality and safety management program mandated by the IMO and
have obtained certification of all vessels currently required to have a Safety
Management Certificate. Vessels in the fleet are maintained in accordance with
governmental regulations and the highest classification standards of the
American Bureau of Shipping, Norwegian Veritas, or Lloyd's Register
classification societies.
Certain of the vessels and barges owned by our subsidiaries are mortgaged
to various lenders to secure such subsidiaries' long-term debt. For further
information, see note C to our consolidated financial statements located
elsewhere in this prospectus.
OTHER PROPERTIES
We lease our corporate headquarters in New Orleans, our administrative and
sales office in New York, and office space in Nashville and Shanghai.
Additionally, we lease a totally enclosed multi-modal cargo transfer terminal in
Memphis, Tennessee, under a lease that expires in May 2008. In 2003, the
aggregate annual rental payments under these operating leases totaled
approximately $1.7 million.
We own a facility in Jefferson Parish, Louisiana that is used primarily for
the maintenance and repair of barges.
EMPLOYEES
As of September 30, 2004, we employed 177 shoreside personnel and had
approximately 410 shipboard personnel employed on our vessels. We consider
relations with our employees to be excellent.
All of our shipboard personnel and certain of our shoreside personnel are
covered by collective bargaining agreements. Some of these agreements relate to
particular vessels and have terms corresponding with the terms of their
respective vessel's charter, including agreements relating to two of our vessels
that are up for renewal in mid-2005. Moreover, the collective bargaining
agreements covering seven of our vessels operated under MSP contracts will be
subject to renegotiation in 2006. In addition, Central Gulf, Waterman, and other
U.S. shipping companies are subject to collective bargaining agreements for
shipboard personnel in which the shipping companies servicing U.S. Gulf and East
Coast ports also must make contributions to pension plans for dockside workers.
We have experienced no strikes or other significant labor problems during
the last ten years.
LEGAL PROCEEDINGS
We have been named as a defendant in numerous lawsuits claiming damages
related to occupational diseases, primarily related to asbestos and hearing
loss. We believe that most of these claims are without merit, and that insurance
and the indemnification of a previous owner of one of our subsidiaries should
mitigate our exposure.
58
In the normal course of our operations, we become involved in various
litigation matters including, among other things, claims by third parties for
alleged property damage, personal injuries and other matters. While the outcome
of such claims cannot be predicted with certainty, we believe that our insurance
coverage and reserves with respect to such claims are adequate and that such
claims should not have a material adverse effect on our business or financial
condition. For further information, see note H of the notes to our consolidated
financial statements included elsewhere in this prospectus.
59
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about our executive
officers and directors as of September 30, 2004. Our executive officers and
directors will hold office until their successors are duly elected and
qualified, or until their earlier death or removal or resignation from office.
Unless otherwise indicated, each of our directors has been engaged in the
principal occupation shown for the past five years.
NAME AGE TITLE
---- --- -----
Erik F. Johnsen........................... 79 Chairman of the Board, Director and Chief
Executive Officer
Niels M. Johnsen.......................... 59 President and Director
Erik L. Johnsen........................... 47 Executive Vice President and Director
Gary L. Ferguson.......................... 64 Vice President and Chief Financial Officer
Niels W. Johnsen.......................... 82 Director
Harold S. Grehan, Jr...................... 76 Director
Raymond V. O'Brien, Jr.................... 77 Director
Edwin Lupberger........................... 68 Director
Edward K. Trowbridge...................... 75 Director
H. Merritt Lane, III...................... 42 Director
Erik F. Johnsen is our Chairman and Chief Executive Officer. He served as
our President, Chief Operating Officer, and a director from the commencement of
operations in 1979 until April 2003 when he assumed his current position. Until
April 1997, Mr. Johnsen also served as the President and Chief Operating Officer
of each of our principal subsidiaries, except Waterman, for which he served as
Chairman of the Executive Committee. Along with his brother, Niels W. Johnsen,
he was one of the founders of Central Gulf in 1947 and served as its President
from 1966 until April 1997.
Niels M. Johnsen is our President. Mr. Johnsen has served as a director of
the company since April 1988. He joined Central Gulf on a full time basis in
1970 and held various positions with the company until April 1997, when he was
named Executive Vice President of the company and Chairman and Chief Executive
Officer of each of the company's principal subsidiaries, except Waterman, where
he served as President. He was named President of the company in April 2003. In
2002, he became a director of Atlantic Mutual Companies. He is the son of Niels
W. Johnsen.
Erik L. Johnsen is our Executive Vice President. He joined Central Gulf in
1979 and held various positions with the company before being named Executive
Vice President in April 1997. He has served as a director of the company since
1994. He has also served as the President of each of our principal subsidiaries,
except Waterman, since April 1997, and as Executive Vice President of Waterman
since September 1989. He is responsible for all operations of our vessel fleet
and leads our Ship Management Group. He is the son of Erik F. Johnsen.
Gary L. Ferguson is our Vice President and Chief Financial Officer. He
joined Central Gulf in 1968 where he held various positions prior to being named
Controller in 1977, and Vice President and Chief Financial Officer of the
company in 1989.
Niels W. Johnsen is a director of the company. He served as our Chairman
and Chief Executive Officer from its commencement of operations in 1979 until
April 2003, and served as Chairman and Chief Executive Officer of each of our
principal subsidiaries until April 1997. He previously served as Chairman of
Trans Union's ocean shipping group of companies from December 1971 through May
1979. He was one of the founders of Central Gulf in 1947 and held various
positions with Central Gulf until Trans Union acquired Central Gulf in 1971. He
is also a former director of Reserve Fund, Inc., a money market fund, and a
former Trustee of Atlantic Mutual Companies, an insurance company. He is the
brother of Erik F. Johnsen.
60
Harold S. Grehan, Jr. is a director of the company. He joined Central Gulf
in 1958 and became Vice President in 1959, Senior Vice President in 1973 and
Executive Vice President and a director in 1979. Mr. Grehan retired from the
company at the end of 1997, and has continued to serve as a director of the
company since that time.
Raymond V. O'Brien, Jr. has served as a director of the company since 1979,
and in early 2003 was named Chairman of the Compensation Committee of our Board
of Directors. He is a former director of Emigrant Savings Bank. He served as
Chairman of the Board and Chief Executive Officer of the Emigrant Savings Bank
from January 1978 through December 1992.
Edwin Lupberger has served as a director of the company since April 1988,
and in early 2003 was named Chairman of the Audit Committee of our Board of
Directors. He is the President of Nesher Investments, LLC. Mr. Lupberger served
as the Chairman of the Board and Chief Executive Officer of Entergy Corporation
from 1985 to 1998.
Edward K. Trowbridge has served as a director of the company since April
1994, and in early 2003 was named Chairman of the Nominating and Governance
Committee of our Board of Directors. He served as Chairman of the Board and
Chief Executive Officer of the Atlantic Mutual Companies from July of 1988
through November 1993.
H. Merritt Lane, III was appointed as a director of the company by the
Board of Directors in March 2004. He has served as President and Chief Executive
Officer of Canal Barge Company, Inc. since January 1994 and as director of that
company since 1988.
NYSE DIRECTOR INDEPENDENCE RULES
In November 2003, the New York Stock Exchange adopted a requirement that a
majority of the members of the boards of directors, and all members of the
audit, compensation and nominating and corporate governance committees, of
companies, like us, with securities listed on the NYSE satisfy certain
independence requirements. For the period from effectiveness of the new NYSE
rule until November 4, 2004, the rule required that a company apply the
independence criteria over a one-year "look-back" period. Using this one-year
look-back period, our board of directors determined that our board and board
committees satisfied the NYSE independence requirements.
However, beginning November 4, 2004, the NYSE rules impose a three-year
look-back period to determine independence, rather than the one-year look-back
that was previously applicable. Using the three-year look-back period, one of
our directors, H. Merritt Lane III, as of November 4, 2004, no longer qualified
as an "independent" director because he is an executive officer and director of
a company with which our company conducted business and to which we made
payments in 2001 in excess of the threshold amount stated in the NYSE
independence criteria. All of our other independent directors who were
independent for purposes of the one-year look-back period continue to be
independent under the three-year look-back period.
We have notified the NYSE of our temporary non-compliance with the
requirement that a majority of our directors be independent and that we expect
that Mr. Lane will again qualify as independent beginning January 1, 2005. While
Mr. Lane continues as a member of our board of directors, he resigned from our
compensation, audit and nominating and corporate governance committees effective
November 3, 2004. We have discussed this matter with representatives of the NYSE
and we expect that our non-compliance will be cured without further action
within a period of less than two months. In addition, we filed a Current Report
on Form 8-K with the SEC on November 4, 2004 to report our temporary non-
compliance.
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EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended December 31,
2003, 2002, and 2001, the compensation paid to our Chief Executive Officer and
the three other executive officers employed at the end of fiscal year 2003.
Additionally, one former executive officer is included who was no longer
employed by us at December 31, 2003, but who otherwise would have been included
in the table. The five individuals included in the table represent all of our
executive officers during 2003.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- -------- ------- ------------
Erik F. Johnsen.............................. 2003 330,000 -- 17,132(2)
Chairman of the Board and Chief Executive 2002 330,000 -- 17,132(2)
Officer of the Corporation 2001 442,500(1) -- 17,132(2)
Niels M. Johnsen............................. 2003 272,950 20,996 1,000(3)
President of the Corporation 2002 265,000 -- 1,000(3)
2001 265,000 -- 1,000(3)
Erik L. Johnsen.............................. 2003 221,450 17,350 1,000(3)
Executive Vice President of the Corporation 2002 215,000 -- 1,000(3)
2001 215,000 -- 1,000(3)
Gary L. Ferguson............................. 2003 164,800 12,677 1,000(3)
Vice President and Chief Financial Officer 2002 160,000 -- 1,000(3)
of the Corporation 2001 160,000 -- 1,000(3)
Niels W. Johnsen............................. 2003 165,000 -- 50,000(5)
Formerly Chairman of the Board and Chief 2002 330,000 -- --
Executive Officer of the Corporation(4) 2001 442,500(1) -- --
---------------
(1) The annual salary was $330,000; however, a one-time payment made pursuant to
a commitment entered into in prior years applicable to year 2000 in the
amount of $112,500 was made in January 2001.
(2) We have an agreement with Erik F. Johnsen whereby his estate will be paid
approximately $626,000 upon his death. To fund this death benefit, we
maintain a life insurance policy at an annual cost of $17,132.
(3) Consists of our contributions to our 401(k) plan on behalf of the employee.
(4) We have an agreement with Niels W. Johnsen whereby his estate will be paid
approximately $822,000 upon his death. We have reserved amounts sufficient
to fund this death benefit.
(5) Niels W. Johnsen has served as a consultant for our company since his
retirement on June 30, 2003, for an annual fee of $100,000. He earned
consulting fees of $50,000 for the period from July 1, 2003 through December
31, 2003.
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STOCK INCENTIVE PLAN
The following table presents information with respect to stock option
exercises and values under our Stock Incentive Plan. No stock option grants
occurred in 2003. The two individuals named in the Summary Compensation Table
that are not listed below, Niels W. Johnsen and Erik F. Johnsen, have never been
granted options under the Stock Incentive Plan.
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 2003 AND FISCAL
YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF
NUMBER OF UNDERLYING UNEXERCISED UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY
ACQUIRED ON VALUE DECEMBER 31, 2003 OPTIONS AT
NAME EXERCISE REALIZED EXERCISABLE/ UNEXERCISABLE DECEMBER 31, 2003
---- ----------- -------- -------------------------- -----------------
Niels M. Johnsen........... 0 0 200,000/0 $125,000
Erik L. Johnsen............ 0 0 200,000/0 $125,000
Gary L. Ferguson........... 0 0 75,000/0 $ 46,875
PENSION PLAN
We have in effect a defined benefit pension plan, in which all of our
employees and employees of our domestic subsidiaries who are not covered by
union sponsored plans may participate after one year of service. Computation of
benefits payable under the plan is based on years of service, up to thirty
years, and the employee's highest sixty consecutive months of compensation,
which is defined as a participant's base salary plus overtime, excluding
incentive pay, bonuses or other extra compensation, in whatever form. The
following table reflects the estimated annual retirement benefits (assuming
payment in the form of a straight life annuity) an executive officer can expect
to receive upon retirement at age 65 under the plan, assuming the years of
service and compensation levels indicated below:
YEARS OF SERVICE
------------------------------------------
EARNINGS 15 20 25 30 OR MORE
-------- ------- -------- -------- ----------
$100,000................................... $20,237 $ 26,983 $ 33,729 $ 40,475
150,000................................... 32,612 43,483 54,354 65,225
200,000................................... 44,987 59,983 74,979 89,975
250,000................................... 57,362 76,483 95,604 114,725
300,000................................... 69,737 92,983 116,229 139,475
350,000................................... 82,112 109,483 136,854 164,225
This table does not reflect the fact that the benefit provided by our
retirement plan's formula is subject to certain constraints under the Internal
Revenue Code. For 2004, the maximum annual benefit generally is $165,000 under
Code Section 415. Furthermore, under Code Section 401(a)(17), the maximum annual
compensation that may be used to calculate benefits in 2004 is $205,000. These
dollar limits are subject to cost of living increases in future years. Each of
the individuals named in the Summary Compensation Table set forth above is a
participant in the plan and, for purposes of the plan, was credited during 2003
with a salary of $200,000, except that Mr. Ferguson and Mr. Niels W. Johnsen
were credited with their actual salaries. At December 31, 2003, such individuals
had 51, 33, 24, 35, and 56 credited years of service, respectively, under the
plan. The plan benefits shown in the above table are not subject to deduction or
offset by Social Security benefits.
COMPENSATION OF DIRECTORS
Each non-officer director receives fees of $16,000 per year plus $1,000 for
each meeting of our board of directors or a committee thereof attended.
63
Upon his retirement as Chairman of the Board and Chief Executive Officer,
Niels W. Johnsen entered into a consulting arrangement with our company for a
term of one year to be automatically extended on a month-by-month basis
thereafter for which he will be paid an annual fee of $100,000 for providing
services in the areas of vessel chartering and finance.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors has delegated the power to set the salaries of the
executive officers, other than himself, to Erik F. Johnsen. The members of our
compensation committee, meeting in executive session, participate in discussions
concerning the compensation of Erik F. Johnsen. The members of our compensation
committee for fiscal year 2003 were Raymond V. O'Brien, Jr. (Chair), Edwin
Lupberger and Edward K. Trowbridge.
None of our executive officers served during the last fiscal year as a
director, or member of the compensation committee of another entity, one of
whose executive officers served as a director of our company.
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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
This table shows the shares of our common stock beneficially owned as of
September 30, 2004 by our directors and named executive officers (as defined in
the Exchange Act) as well as the owners of more than 5 percent of our
outstanding common stock based on filings with the SEC and information available
to us. Unless otherwise indicated, all shares shown below are held with sole
voting and investment power.
NUMBER OF
SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF PERSON OWNED CLASS(1)
-------------------------- ------------ ----------
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Niels W. Johnsen............................................ 920,107(2) 15.13%
One Whitehall Street
New York, New York 10004
Erik F. Johnsen............................................. 644,753(3) 10.60%
650 Poydras Street
New Orleans, Louisiana 70130
Niels M. Johnsen............................................ 561,353(4) 8.93%
One Whitehall Street
New York, New York 10004
Erik L. Johnsen............................................. 311,540(5) 4.96%
Harold S. Grehan, Jr........................................ 95,518 1.57%
Gary L. Ferguson............................................ 75,012(6) 1.22%
Edwin Lupberger............................................. 1,728 *
Raymond V. O'Brien, Jr...................................... 1,000 *
Edward K. Trowbridge........................................ 625(7) *
H. Merritt Lane III......................................... 0 *
Directors and Named Executive Officers as a Group (10
persons).................................................. 2,386,974 36.40%
OTHER BENEFICIAL OWNERS
T. Rowe Price Associates, Inc............................... 887,062(8) 14.58%
100 E. Pratt Street
Baltimore, Maryland 21202
Franklin Resources, Inc..................................... 480,000(9) 7.89%
One Franklin Parkway
San Mateo, California 94403
Dimensional Fund Advisors Inc............................... 315,524(10) 5.19%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
---------------
* Ownership is less than 1%.
(1) Based on 6,082,887 shares of our common stock outstanding as of September
30, 2004. Shares subject to currently exercisable options are deemed to be
outstanding for purposes of computing the percentage of outstanding common
stock owned by the person holding such options and by all directors and
executive officers as a group but are not deemed to be outstanding for the
purpose of computing the individual ownership percentage of any other
person.
(2) Includes 224,622 shares owned by a corporation of which Niels W. Johnsen is
the controlling shareholder, President, and a director.
(3) Includes 133,908 shares held by the Erik F. Johnsen Family Limited
Partnership of which Mr. Johnsen is General Partner and 8,875 shares owned
by the estate of Erik F. Johnsen's deceased wife. Also includes 43,812
shares owned by the Erik F. Johnsen Family Foundation of which he claims no
beneficial ownership, but maintains voting and disposition rights.
65
(4) Includes 2,968 shares held in trust for Niels M. Johnsen's child of which
he is a trustee, 224,622 shares owned by a corporation of which Mr. Johnsen
is a Vice President and director, and 200,000 shares that Mr. Johnsen has
the right to acquire pursuant to currently exercisable stock options.
(5) Includes 11,500 shares held in trust for Mr. Johnsen's children of which he
is a trustee, and 200,000 shares that Mr. Johnsen has the right to acquire
pursuant to currently exercisable stock options.
(6) Includes 75,000 shares Mr. Ferguson has the right to acquire upon the
exercise of currently exercisable stock options.
(7) Mr. Trowbridge's shares are owned jointly with his spouse.
(8) Based on information contained in a Schedule 13G/A filed with the SEC on
February 5, 2004, filed jointly with T. Rowe Price Small-Cap Value Fund,
Inc. (which holds sole voting power with respect to 695,000 shares,
representing 11.43% of the shares outstanding). T. Rowe Price Associates,
Inc. ("Price Associates") serves as investment advisor with power to direct
investments with respect to all reported shares and also holds sole voting
power with respect to 40,100 shares. For purposes of the reporting
requirements of the Exchange Act, Price Associates is deemed to be a
beneficial owner of such securities; however, Price Associates expressly
disclaims that it is, in fact, the beneficial owner of such securities.
(9) Based on information contained in a joint Schedule 13G/A filed with the SEC
on February 9, 2004, by Franklin Resources, Inc. ("FRI"), Charles B.
Johnson, Rupert H. Johnson, Jr., and Franklin Advisory Services, LLC.
Franklin Advisory Services, LLC, has sole voting and dispositive power with
respect to all 480,000 shares. FRI is the parent holding company of
Franklin Advisory Services, LLC, an investment advisor. Charles B. Johnson
and Rupert H. Johnson, Jr., are principal shareholders of FRI. FRI, Charles
B. Johnson, Rupert H. Johnson, Jr. and Franklin Advisory Services, LLC
disclaim any economic interest or beneficial ownership in any of the
shares.
(10) Based on information contained in a Schedule 13G/A filed with the SEC on
February 6, 2004. Dimensional Fund Advisors Inc. ("Dimensional"), a
registered investment advisor, furnishes investment advice to four
registered investment companies, and serves as investment manager to
certain other investment vehicles, including commingled group trusts and
separate accounts. Dimensional disclaims beneficial ownership of the
securities.
66
CERTAIN RELATIONSHIPS AND TRANSACTIONS
R. Christian Johnsen, a son of Erik F. Johnsen, our Chairman of the Board,
serves as our Secretary and is a partner in the law firm of Jones, Walker,
Waechter, Poitevent, Carrere and Denegre, which has represented the company
since its inception. H. Hughes Grehan, a son of Harold S. Grehan, Jr., a
director of the company, serves as an Assistant Secretary of the company and is
a partner in the same law firm. Fees paid to the firm for legal services
rendered to the company during 2003 were $1,030,000. We believe that these
services are provided on terms at least as favorable to the company as could be
obtained from unaffiliated third parties.
James M. Baldwin, a son-in-law of Erik F. Johnsen, our Chairman of the
Board, and brother-in-law of Erik L. Johnsen, our Executive Vice President, is
employed by the company in a non-executive officer position and received
compensation for the year ended December 31, 2003, of $138,700. Brooke Y.
Grehan, a son of Harold S. Grehan, Jr., a director of the company, is also
employed by the company in a non-executive officer position and received
compensation for the year ended December 31, 2003, of $85,400. Compensation
includes annual salaries and bonuses earned during 2003.
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DESCRIPTION OF THE PREFERRED STOCK
The following description is a summary of the material terms of the
preferred stock. It does not purport to be complete. The complete terms of the
preferred stock will be set forth in the certificate of designations to be filed
with the Secretary of State of the State of Delaware on or about ,
2004, a form of which will be filed as an exhibit to the registration statement
of which this prospectus forms a part. We urge you to read the certificate of
designations because it, and not this description, defines your rights as a
holder of shares of the preferred stock. As used in this description, the words
"we," "us," "our," "the company" or "ISH" do not include any current or future
subsidiary of ISH.
GENERAL
Our board of directors has the authority, without stockholder approval, to
issue up to 1,000,000 shares of preferred stock, $1.00 par value per share, in
one or more series and to determine the rights, privileges and limitations of
the preferred stock. At our next annual meeting of stockholders, we intend to
request stockholder approval of an amendment to our restated certificate of
incorporation to authorize additional shares of preferred stock. The rights,
preferences, powers and limitations of different series of our preferred stock
may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund provisions
and other matters.
Pursuant to its authority, our board of directors has designated the
800,000 shares that we are offering for sale pursuant to this prospectus, plus
an additional 80,000 shares of the preferred stock which the underwriter may
purchase, in full or in part, pursuant to its over-allotment option, as the
% convertible exchangeable preferred stock (the "preferred stock"). The
shares of the preferred stock, when issued and sold in the manner contemplated
by this prospectus, will be duly authorized, validly issued, fully paid and
nonassessable. As a holder of the preferred stock, you will not have any
preemptive rights if we issue other series of preferred stock or other capital
stock. The preferred stock has a perpetual maturity and may remain outstanding
indefinitely, subject to your right to convert the preferred stock or require
our redemption of the preferred stock and our right to exchange or redeem the
preferred stock, as discussed in further detail below. Any of the preferred
stock converted, exchanged, redeemed, purchased or acquired by us will, upon
cancellation, have the status of authorized but unissued shares of preferred
stock. We will be able to reissue these cancelled shares of preferred stock.
Immediately prior to this offering, no shares of the preferred stock were
outstanding.
No "sinking fund" will be provided for the preferred stock, which means
that we will not be required to set aside funds for the redemption or retirement
of the preferred stock, nor will we be required to redeem or retire the
preferred stock periodically.
RANKING
The preferred stock, with respect to dividend rights and rights upon our
liquidation, winding up and dissolution, ranks:
- junior to all of our existing and future debt obligations;
- junior to our "senior stock," which is each class or series of our
capital stock other than:
- our common stock,
- any other class or series of our capital stock, the terms of which
provide that such class or series will rank junior to the preferred
stock, and
- any other class or series of our capital stock, the terms of which
provide that such class or series will rank on a parity with the
preferred stock;
- on a parity with our "parity stock," which is any class or series of our
capital stock, the terms of which provide that such class or series will
rank on a parity with the preferred stock;
68
- senior to our "junior stock," which is our common stock and each class or
series of our capital stock, the terms of which provide that such class
or series will rank junior to the preferred stock; and
- effectively junior to all of our subsidiaries' existing and future
liabilities and capital stock, if any, held by others.
The terms "senior stock," "parity stock" and "junior stock," include,
respectively, warrants, rights, calls, options and other securities exercisable
or exchangeable for, or convertible into, that type of stock. We have no senior
stock or parity stock outstanding.
DIVIDENDS
When, as and if declared by our board of directors out of legally available
funds, you will be entitled to receive cash dividends at an annual rate of
% of the $50 liquidation preference of the preferred stock. Dividends will
be payable quarterly on , , and ,
beginning , 2005. If any dividends are not declared, they will accrue
and be paid at such later date, if any, as determined by our board of directors.
Dividends on the preferred stock will be cumulative from the most recent date as
to which dividends will have been paid or, if no dividends have been paid, from
the date of issuance. Dividends will be payable to holders of record as they
appear on our stock books at the close of business on , ,
and of each year or on a record date that may be fixed by
our board of directors and that will be not more than 60 days nor less than 10
days preceding the payment date. Dividends payable on the preferred stock for
any period greater or less than a full dividend period will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Dividends on the
shares of the preferred stock will be payable in cash. Accrued and unpaid
dividends will not bear interest.
If we do not pay or set aside cumulative dividends in full on the preferred
stock and any other of our capital stock ranking equally as to dividends or
liquidation rights, all dividends declared upon shares of the preferred stock
and any such other capital stock will be declared on a pro rata basis until all
accrued dividends are paid in full. For these purposes, "pro rata" means that
the ratio of the amount of dividends declared per share on the preferred stock
to the amount of dividends declared per share on any such other capital stock
ranking equally as to dividends or liquidation rights shall equal the ratio of
the amount of accrued and unpaid dividends per share of the preferred stock to
the amount of accrued and unpaid dividends per share of such other capital
stock. We will not be able to pay or set aside dividends on, or redeem, purchase
or otherwise acquire, any of our capital stock ranking equally as to dividends
or liquidation rights to the preferred stock unless we have paid or set aside
for payment full cumulative dividends, if any, accrued and unpaid on all
outstanding shares of the preferred stock.
Prior to December 31, 2007, we may not:
- declare, pay or set aside for payment dividends or other distributions on
our common stock or any other of our capital stock ranking junior to the
preferred stock as to dividends (excluding dividends or distributions of
shares, options, warrants or rights to purchase our common stock or other
capital stock ranking junior to the preferred stock as to dividends) or
liquidation rights; or
- redeem, purchase or otherwise acquire any of our common stock or other
capital stock ranking junior to the preferred stock as to dividends or
liquidation rights, except in limited circumstances.
On and after December 31, 2007, we may declare, pay or set aside for
payment dividends or other distributions on our common stock or any of our other
capital stock ranking junior to the preferred stock as to dividends or
liquidation rights and redeem, purchase or otherwise acquire any of our common
stock or other capital stock ranking junior to the preferred stock as to
dividends or liquidation rights so long as we have paid, or set aside for
payment, full cumulative dividends, if any, accrued and unpaid on the preferred
stock and any other of our capital stock ranking equally as to dividends or
liquidation rights.
69
Under Delaware law, we may only make dividends or distributions to our
stockholders from:
- our surplus; or
- the net profits for the current fiscal year or the fiscal year before
which the dividend or distribution is declared under certain
circumstances.
Our ability to pay dividends and make other distributions will depend upon
our financial results, liquidity and financial condition. As a holder of the
preferred stock, you will not be entitled to participate in any dividends or
other distributions that may be paid on any other class of our capital stock,
including our common stock.
CONVERSION
CONVERSION RIGHTS
Unless earlier redeemed by us, you may convert your shares of the preferred
stock (or a portion thereof) at any time into a number of shares of our common
stock determined by dividing the $50 liquidation preference by the initial
conversion price of $ , subject to adjustment as described below. This
initial conversion price represents an initial conversion rate of approximately
shares of our common stock for each share of preferred stock. We will
not make any adjustment to the conversion price for accrued and unpaid dividends
upon conversion, and we will not issue fractional shares of our common stock
upon conversion. Instead, we will pay cash for each fractional share based upon
the closing price of our common stock on the last trading day prior to the
conversion date.
If we call the preferred stock for redemption as described below under the
captions "-- Optional Redemption" and "-- Optional Redemption on Change in
Control," or you accept a change in control offer as described below under the
caption "-- Required Redemption on Change in Control," your right to convert the
preferred stock will expire at the close of business on the business day
immediately preceding the date fixed for redemption, unless we fail to pay the
redemption price together with accrued and unpaid dividends to (but not
including) the redemption date, in which case you will be permitted to convert
the preferred stock until we pay the redemption price and accrued and unpaid
dividends to (but not including) the redemption date.
In order to convert your shares of the preferred stock, you must either:
- deliver your preferred stock certificate to the transfer agent along with
a duly signed and completed notice of conversion; or
- if the preferred stock is held in global form, comply with the procedures
established by The Depository Trust Company ("DTC") for conversion, which
you may obtain from your broker or another DTC participant.
The conversion date will be the date you deliver your preferred stock
certificate and the duly signed and completed notice of conversion to the
transfer agent or, if your shares of the preferred stock are held in global
form, the date your shares are surrendered for conversion in accordance with the
procedures established by DTC. You will not be required to pay any U.S. federal,
state or local issuance taxes, or duties or costs incurred by us, in connection
with the conversion of the preferred stock or the issuance of the common stock
issuable upon conversion. You will, however, be required to pay any tax or other
governmental charge payable as a result of the common stock issuable upon
conversion being issued other than in your name, and we will not issue the
common stock unless all such taxes and charges, if any, have been paid by the
holder of the converted preferred stock.
If you convert your shares of the preferred stock after a dividend record
date and prior to the next dividend payment date, you will receive the dividend
payable on your shares of the preferred stock on the next dividend payment date
notwithstanding the conversion. However, if you convert your shares of the
preferred stock after a dividend record date and prior to the next dividend
payment date, you will have to pay us, upon conversion of your shares of the
preferred stock, an amount equal to the dividend to be paid
70
on such dividend payment date unless the preferred stock has been called for
redemption, as described below under the captions "-- Optional Redemption" and
"-- Optional Redemption on Change in Control," or you have accepted a change in
control offer as described below under the caption "-- Required Redemption on
Change in Control."
We will at all times reserve and keep available, free from preemptive
rights, out of our authorized but unissued shares or treasury shares, for
issuance upon the conversion of shares of the preferred stock, a number of
shares of our authorized but unissued common stock that will from time to time
be sufficient to permit the conversion of all outstanding shares of the
preferred stock.
Before the delivery of any securities that we will be obligated to deliver
upon conversion of the preferred stock, we will comply with all applicable
federal and state laws and regulations that require action to be taken by us.
All of our common stock delivered upon conversion of the preferred stock will
upon delivery be duly authorized, validly issued, fully paid and nonassessable,
free of all liens and charges and not subject to any preemptive rights.
CONVERSION PRICE ADJUSTMENT
The conversion price of $ will be adjusted if:
(1) we pay a dividend in shares of our common stock or make a
distribution of shares of our common stock to all holders of our common
stock;
(2) we subdivide our common stock into a greater number of shares of
common stock or combine our common stock into a smaller number of shares of
common stock;
(3) we issue to all holders of our common stock certain rights or
warrants to purchase our common stock at less than the then-current market
price of our common stock;
(4) we dividend or distribute to all holders of our common stock
shares of our capital stock or evidences of indebtedness, cash or other
assets, excluding:
- those rights, warrants, dividends and distributions referred to in (1)
and (3) above, or
- dividends and distributions paid exclusively in cash;
(5) we pay a dividend or make a distribution consisting exclusively of
cash to all holders of our common stock (excluding any dividend or
distribution in connection with our liquidation, dissolution or winding up
or a dividend or distribution referred to in clause (4) above) that, when
combined with all such other cash dividends paid and cash distributions
made during such calendar year, exceeds on a per-share basis the greater of
$0.50 or three percent (3%) of the closing price of our common stock on the
last trading day prior to the declaration date of such dividend or
distribution;
(6) we, or one of our subsidiaries, purchase our common stock pursuant
to a tender offer, except to the extent that the purchase price per share
is equal to or less than the then-current market price per share of our
common stock; or
(7) a person other than us or any of our subsidiaries makes a tender
offer or exchange offer and, as of the closing of the offer, our board of
directors is not recommending rejection of the offer. We will only make
this adjustment if the tender or exchange offer increases a person's
ownership to more than 25% of our outstanding common stock and only if the
purchase price per share exceeds the then-current market price of our
common stock. We will not make this adjustment if the offering documents
disclose our plan to engage in any consolidation, merger, or transfer of
all or substantially all of our properties and if certain conditions are
met.
We do not currently have a stockholder rights plan. If we implement a
stockholder rights plan, this new rights plan must provide that, upon conversion
of the preferred stock, unless prior to conversion the rights have expired,
terminated or been redeemed, the holders will receive, in addition to the common
stock issuable upon such conversion, the rights under such rights plan
regardless of whether the rights have
71
separated from the common stock on or before the time of conversion. The
distribution of rights or warrants pursuant to a stockholder rights plan will
not result in an adjustment to the conversion price of the preferred stock until
a specified triggering event under such plan occurs.
The occurrence and magnitude of certain of the adjustments described above
is dependent upon the then-current market price of our common stock. For these
purposes, "current market price" generally means the lesser of:
- the closing sale price of our common stock on the date in question; and
- the average of the closing sale prices of our common stock for the ten
trading day period immediately prior to the date in question.
In the event of:
- any reclassification or change of our common stock;
- a consolidation, merger or combination involving us as a result of which
holders of our common stock will be entitled to receive stock, other
securities, other property, assets or cash for their common stock; or
- a sale or conveyance to another person or entity of all or substantially
all of our assets as a result of which holders of our common stock will
be entitled to receive stock, other securities, other property, assets or
cash for their common stock;
you will be entitled to receive, upon conversion of the preferred stock, the
same type of consideration that you would have been entitled to receive if you
had converted the preferred stock into our common stock immediately prior to any
of these events. We may not become a party to any such transaction unless its
terms are consistent with the foregoing.
You may in certain situations be deemed to have received a distribution
subject to United States federal income tax as a dividend in the event of any
taxable distribution to holders of our common stock or in certain other
situations requiring a conversion rate adjustment. See "Material U.S. Federal
Income Tax Considerations."
We may, from time to time, increase the conversion rate (i.e., decrease the
conversion price) if our board of directors has made a determination that this
increase would be in our best interests. Any such determination by our board
will be conclusive. In addition, we may increase the conversion rate (i.e.,
decrease the conversion price) if our board of directors deems it advisable to
avoid or diminish any income tax to holders of our common stock resulting from
any stock or rights distribution. See "Material U.S. Federal Income Tax
Considerations."
We will not be required to make an adjustment in the conversion rate unless
the adjustment would require a change of at least 1% in the conversion rate.
However, we will carry forward any adjustments that are less than 1% of the
conversion rate. Except as described above in this section, we will not adjust
the conversion rate for any issuance of our common stock or any securities or
any rights convertible, exchangeable or exercisable for shares of our common
stock. We will also not adjust the conversion rate for any repurchases of our
common stock not expressly described above, such as open market stock
repurchases or repurchases of our common stock or repurchases of options to
purchase our common stock granted to our employees.
LIQUIDATION RIGHTS
In the event of our voluntary or involuntary dissolution, liquidation, or
winding up, you shall receive a liquidation preference of $50 per share plus all
accrued and unpaid dividends with respect to your shares through the
distribution date. Holders of any class or series of our capital stock ranking
equally to the preferred stock as to liquidation rights or dividends shall also
be entitled to receive the full respective liquidation preferences and any
accrued and unpaid dividends through the distribution date. Only after the
preferred stock holders and the holders of any other class or series of our
capital stock ranking equally as
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to liquidation rights or dividends have received their liquidation preference
and any accrued and unpaid dividends will we distribute assets to our common
stock holders and the holders of any of our other capital stock ranking junior
to the preferred stock as to liquidation rights or dividends. If upon such
dissolution, liquidation or winding up, we do not have enough assets to pay in
full the amounts due on the preferred stock and any other capital stock ranking
equally as to liquidation rights or dividends, you and the holders of such other
capital stock will share ratably in any such distributions of our assets:
- first in proportion to your respective liquidation preferences until the
preferences are paid in full; and
- then in proportion to your respective amounts of accrued and unpaid
dividends.
After we pay the liquidation preference of your shares of the preferred
stock and any accrued and unpaid dividends, you will not be entitled to
participate as a holder of the preferred stock any further in the distribution
of our assets. The following events will not be deemed to be a dissolution,
liquidation or winding up of ISH:
- the sale of all or substantially all of our assets;
- our merger or consolidation into or with any other corporation; or
- our liquidation, dissolution, winding up or reorganization immediately
followed by a reincorporation or reorganization as another corporation or
other entity.
We are not required to set aside any funds to protect the liquidation
preference of the shares of the preferred stock.
OPTIONAL REDEMPTION
The preferred stock is not redeemable at our option prior to ,
2006 except in the event of a change in control as described under "-- Optional
Redemption on Change in Control." On or after that date, we may redeem the
preferred stock out of legally available funds, at our option, in whole or in
part from time to time, for cash at the redemption prices listed below together
with accrued and unpaid dividends to, but not including, the date of redemption,
provided that prior to , 2007, we may redeem the preferred stock only
if the closing price of our common stock has exceeded 150% of the conversion
price of the preferred stock for at least 20 trading days during any 30-day
trading period ending within five trading days prior to notice of redemption.
REDEMPTION
YEAR PRICE
---- ----------
Beginning on , 2006 and ending on , 2007.... $
Beginning on , 2007 and ending on , 2008....
Beginning on , 2008 and thereafter..................
In the case of any partial redemption, we will select the shares to be
redeemed by lot, on a pro rata basis or by another method we deem fair and
appropriate in our sole discretion. If a portion of a holder's shares of the
preferred stock is selected for partial redemption and such holder converts a
portion of its shares prior to the redemption date, such converted portion shall
be deemed to be taken from the portion selected for redemption.
OPTIONAL REDEMPTION ON CHANGE IN CONTROL
A "change in control" shall be deemed to have occurred at the time, after
the original issuance of the preferred stock:
- that any person or group of persons (within the meaning of Sections 13(d)
or 14(a) of the Exchange Act) shall have acquired beneficial ownership
(within the meaning of Rule 13d-3
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promulgated by the SEC under the Exchange Act) of 50% or more of the
voting capital stock of ISH; or
- within a period of twelve (12) consecutive calendar months, that
individuals who were directors of ISH on the first day of such period
(together with any new directors whose election to our board of directors
or whose nomination for election, was approved by a vote of a majority of
the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) shall cease to constitute a majority of our board
of directors.
Holders of the preferred stock will not be entitled to have the preferred
stock redeemed at a premium price in the event of a change in control of our
company. Rather, upon the occurrence of a change in control, we will have the
right, by way of notice to the holders of the preferred stock mailed at least 30
days and not more than 60 days prior to the date fixed for redemption (which
redemption date shall not be later than 60 days following the effective date of
the event or circumstance resulting in the change in control) and in preference
to the repurchase rights of the holders of the preferred stock as described
below under the caption "-- Required Redemption on Change in Control," to redeem
the preferred stock, in whole but not in part, for cash at the redemption prices
set forth below, together with accrued and unpaid dividends, if any, to, but
excluding, the redemption date.
IF THE CHANGE IN CONTROL OCCURS WITHIN THE
TWELVE MONTHS PRECEDING , REDEMPTION PRICE
------------------------------------------ ----------------
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
MECHANICS OF OPTIONAL REDEMPTION
In the event of an optional redemption, we will:
- send a written notice of such redemption by first class mail to each
holder of record of the preferred stock at such holder's registered
address, not fewer than 30 nor more than 60 days prior to the redemption
date, stating, among other things:
- in the case of an optional redemption on change in control, that a
change in control has occurred and describing the event or circumstance
that has or may result in a change in control and, in any case, that we
have exercised our right to redeem the outstanding shares of preferred
stock;
- the number of shares to be redeemed;
- the redemption date;
- the redemption price;
- that on the redemption date, the redemption price and accrued and unpaid
dividends (if any) will become due and payable and that dividends shall
cease to accrue with respect to shares of the preferred stock that are
redeemed;
- the conversion price then in effect and the date on which the right to
convert the preferred stock into our common stock will expire; and
- certain other information and the procedures that a holder of the
preferred stock must follow to accept a change in control offer or to
withdraw such acceptance;
- issue a press release announcing the redemption;
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- publish such information once in a daily newspaper printed in the English
language and of general circulation in the Borough of Manhattan, City of
New York, New York; and
- publish such information on our website on the World Wide Web.
If we give notice of redemption, then we shall, on the redemption date,
before 12:00 p.m., New York City time, to the extent funds are legally
available, with respect to:
- shares of the preferred stock to be redeemed held by DTC or its nominees,
deposit or cause to be deposited, irrevocably with DTC, cash sufficient
to pay the redemption price and accrued and unpaid dividends to (but not
including) the redemption date, and give DTC irrevocable instructions and
authority to pay such amounts to holders of such shares of the preferred
stock upon book-entry delivery of such shares; and
- shares of the preferred stock to be redeemed held in certificated form,
deposit or cause to be deposited, irrevocably with the transfer agent,
cash sufficient to pay the redemption price and accrued and unpaid
dividends to (but not including) the redemption date, and give the
transfer agent irrevocable instructions and authority to pay such amounts
to holders of such shares of the preferred stock upon surrender of their
certificates evidencing their shares of the preferred stock.
If on the redemption date, DTC and the transfer agent hold cash sufficient
to pay the redemption price for the shares of the preferred stock delivered for
redemption, together with accrued and unpaid dividends to (but not including)
the redemption date, in accordance with the terms of the certificate of
designations, dividends will cease to accrue on those shares of the preferred
stock called for redemption and all rights of holders of such shares will
terminate except for the right to receive the redemption price and accrued and
unpaid dividends to (but not including) the redemption date without interest
thereon.
Payment of the redemption price for the shares of the preferred stock is
conditioned upon book-entry transfer of or physical delivery of certificates
representing the preferred stock, together with any necessary endorsements, to
the transfer agent, or to the transfer agent's account at DTC, at any time after
delivery of the redemption notice. Payment of the redemption price for the
preferred stock will be made:
- if book-entry transfer of or physical delivery of the preferred stock has
been made by or on the redemption date, on the redemption date; or
- if book-entry transfer of or physical delivery of the preferred stock has
not been made by or on such date, at the time of book-entry transfer of
or physical delivery of the preferred stock.
If the redemption date falls after a dividend record date and on or before
the related dividend payment date, holders of the shares of preferred stock to
be redeemed at the close of business on that dividend record date will be
entitled to receive the dividend payable on those shares on the corresponding
dividend payment date. The redemption price payable on such redemption date will
not include any amount in respect of dividends declared and payable on such
dividend payment date.
REQUIRED REDEMPTION ON CHANGE IN CONTROL
To the extent we do not elect to redeem all of the outstanding shares of
the preferred stock upon a change in control as described above under the
caption "-- Optional Redemption on Change in Control" and to the extent we have
funds legally available therefor, as a holder of the preferred stock, you will
have the right, subject to the certificate of designations, to require us to
redeem your shares of the preferred stock, in whole or in part, at a redemption
price in cash equal to 100% of the liquidation price thereof, together with
accrued and unpaid dividends to, but not including, the date fixed for
redemption, pursuant to an offer (a "change in control offer") made in
accordance with the procedures described below and the other provisions in the
certificate of designations.
If the change in control redemption date falls after a dividend record date
and on or before the related dividend payment date, holders of shares of the
preferred stock to be redeemed at the close of business on that dividend record
date will be entitled to receive the dividend payable on those shares on
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the corresponding dividend payment date. The redemption price payable on such
redemption date will not include any amount in respect of dividends declared and
payable on such dividend payment date.
Within 30 days following the effective date of the event or circumstance
resulting in a change in control, we shall send to each holder of the preferred
stock, by first-class mail, postage prepaid, at such holder's address appearing
in the records of ISH, a notice stating, among other things:
- that a change in control has occurred and that, as a result, the holders
of shares of the preferred stock have certain redemption rights;
- the redemption date, which shall be 45 days from the date such notice is
mailed (or if such day is not a business day then the next succeeding
business day);
- the date by which the redemption right must be exercised;
- the redemption price;
- that on the redemption date, if the redemption right is timely exercised,
the redemption price and accrued and unpaid dividends (if any) to (but
not including) the redemption date will become due and payable and that
dividends shall cease to accrue with respect to shares of the preferred
stock that are redeemed;
- the conversion price then in effect and that shares of the preferred
stock for which written notice requesting redemption has been received
may be converted into common stock only to the extent that such notice
has been withdrawn; and
- certain other information and the procedures that a holder of the
preferred stock must follow to accept a change in control offer or to
withdraw such acceptance.
In addition, we will:
- issue a press release announcing the change in control;
- publish such information once in a daily newspaper printed in the English
language and of general circulation in the Borough of Manhattan, City of
New York, New York; and
- publish such information on our website on the World Wide Web.
We shall, before 12:00 p.m., New York City time on the change in control
redemption date, to the extent funds are legally available, with respect to:
- shares of the preferred stock to be redeemed held by DTC or its nominees,
deposit or cause to be deposited, irrevocably with DTC, cash sufficient
to pay the redemption price and accrued and unpaid dividends to (but not
including) the change in control redemption date, and give DTC
irrevocable instructions and authority to pay such amounts to holders of
such shares of the preferred stock upon book-entry delivery of such
shares; and
- shares of the preferred stock to be redeemed held in certificated form,
deposit or cause to be deposited, irrevocably with the transfer agent,
cash sufficient to pay the redemption price and accrued and unpaid
dividends to (but not including) the change in control redemption date,
and give the transfer agent irrevocable instructions and authority to pay
such amounts to holders of such shares of the preferred stock upon
surrender of their certificates evidencing their shares of the preferred
stock.
To exercise your right to require us to redeem your shares of the preferred
stock, you must deliver a written notice to the transfer agent prior to the
close of business on the business day immediately before the redemption date.
The notice must state:
- if certificated shares of preferred stock have been issued, the preferred
stock certificate numbers, or if not, such information as may be required
under applicable DTC procedures;
- the number of preferred shares to be redeemed; and
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- that we are to redeem such preferred stock pursuant to the applicable
provisions of the certificate of designations.
You may withdraw any change in control redemption notice by a written
notice of withdrawal delivered to the transfer agent prior to the close of
business on the business day before the change in control redemption date. The
notice of withdrawal must state:
- the number of the withdrawn shares of the preferred stock;
- if certificated shares of the preferred stock have been issued, the
preferred stock certificate numbers, or if not, such information as may
be required under applicable DTC procedures; and
- the number, if any, of shares of the preferred stock that remain subject
to your change in control redemption notice.
A holder must either effect book-entry transfer or deliver certificates
representing the preferred stock to be redeemed, together with any necessary
endorsements, to the transfer agent after delivery of the change in control
redemption notice to receive payment of the change in control redemption price
and accrued and unpaid dividends to (but not including) the change in control
redemption date. You will receive payment in cash on the later of the change in
control redemption date or the time of book-entry transfer or physical delivery
of the preferred stock.
If on the change in control redemption date DTC and the transfer agent hold
cash sufficient to pay the change in control redemption price of the preferred
stock to be redeemed, together with accrued and unpaid dividends to (but not
including) the change in control redemption date, in accordance with the terms
of the certificate of designations, dividends will cease to accrue on those
shares of the preferred stock to be redeemed and all rights of holders of such
shares will terminate except for the right to receive the redemption price and
accrued and unpaid dividends to (but not including) the change in control
redemption date without interest thereon.
We will comply, to the extent applicable, with the requirements of Rule
13e-4 and Rule 14e-1 promulgated under the Exchange Act and other securities
laws or regulations in connection with the redemption of the preferred stock as
described above.
The change in control provisions may in certain circumstances make more
difficult or discourage a takeover of us and the removal of our incumbent
management. See "Risk Factors." The change in control redemption provisions,
however, are not the result of our knowledge of any specific effort:
- to accumulate shares of our common stock;
- to obtain control of ISH by means of a merger, tender offer, solicitation
or otherwise; or
- by management to adopt a series of anti-takeover provisions.
Our indebtedness imposes limitations on our ability to enter into certain
transactions which may constitute a change in control. Moreover, the exercise by
the holders of the preferred stock of their right to require us to redeem their
shares of the preferred stock could cause a default under such indebtedness,
even if the change in control itself does not, due to the financial effect of
such redemption on us.
In addition, our ability to pay cash to redeem the preferred stock upon a
change in control may be limited by our then-existing financial resources, the
amount of funds we have legally available for redemptions, the terms of our debt
agreements and, since we are a holding company, our ability to obtain funds
through dividends from our subsidiaries. Any future credit agreements or other
agreements relating to our indebtedness may contain provisions prohibiting the
redemption of the preferred stock under certain circumstances, or expressly
prohibit our redemption of the preferred stock upon a change in control or may
provide that a change in control constitutes an event of default under that
agreement. If a change in control occurs at a time when we are prohibited by our
debt agreements from redeeming shares of the preferred stock for cash, we could
seek the consent of our lenders to redeem the preferred stock or attempt
77
to refinance such debt. If we do not obtain such consent, we would not be
permitted to redeem the preferred stock.
We will not be required to redeem shares of the preferred stock upon the
occurrence of a change in control if:
- a third party agrees to purchase the shares of the preferred stock upon
the occurrence of a change in control in the manner, at the times and
otherwise in compliance with the requirements set forth in the
certificate of designations applicable to a redemption of shares of the
preferred stock upon the occurrence of a change in control; and
- the third party purchases the shares of the preferred stock on such
basis.
If we have insufficient funds to redeem all of the shares of the preferred
stock tendered to us, we will select the shares to be redeemed from those
tendered for redemption by lot, on a pro rata basis or by another method we deem
fair and appropriate in our sole discretion. There can be no assurance that
sufficient funds will be available when necessary to make any required
redemption. See "Risk Factors."
Notwithstanding the occurrence of a change in control, we will not be
required to redeem shares of the preferred stock pursuant to a change in control
offer in the event we have exercised our right to redeem all of the shares of
the preferred stock pursuant to our optional redemption rights as described
above under the captions "-- Optional Redemption" and "-- Optional Redemption on
Change in Control."
EXCHANGE
We may exchange the preferred stock in whole, but not in part, for the
notes on any dividend payment date, beginning on , 2005 and prior to
, 2014, at the rate of $50 principal amount of the notes for each
outstanding share of the preferred stock. We refer to the date fixed for
exchange of the preferred stock for notes as the "exchange date." On the
exchange date, your rights as a stockholder of ISH will cease. Your shares of
the preferred stock will no longer be outstanding, and will only represent the
right to receive the notes and any accrued and unpaid dividends to, but not
including, the exchange date, without interest. We may not exercise our option
to exchange the preferred stock for the notes if:
- full cumulative dividends on the preferred stock to the exchange date
have not been paid or set aside for payment;
- an event of default under the indenture would occur on exchange, or has
occurred and is continuing; and
- the notes shall not be listed or approved for listing upon issuance on
the Nasdaq National Market, the Nasdaq SmallCap Market, the New York
Stock Exchange, the American Stock Exchange or another similar national
securities exchange or securities trading market.
We will need to give you notice that we are exercising our exchange right
before we can determine whether the conditions to exercise set forth above are
satisfied. Accordingly, if any of the conditions to exercise are not satisfied
as of the exchange date, we will be prohibited from making the exchange and will
not consummate the exchange. In such case, we will issue a press release
announcing that such conditions have not been satisfied and that the exchange
will not be consummated, and will publish such information on our website on the
World Wide Web. Thereafter, we again will have the right to exercise the
exchange right in accordance with the certificate of designations.
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If we exercise our exchange right, we will provide notice to the trustee,
the transfer agent and each holder of record of the preferred stock not less
than 30 nor more than 60 days preceding the exchange date providing:
- our election to exercise the exchange right;
- a description of the notes and the amount thereof to be delivered in
respect of the preferred stock, the place or places where certificates
for shares of preferred stock are to be surrendered for exchange,
including any procedures applicable to exchanges to be accomplished
through book-entry transfers;
- the exchange date; and
- that dividends on the preferred stock will cease to accrue on the
exchange date whether or not shares of the preferred stock are
surrendered for exchange on the exchange date.
In addition, we will:
- issue a press release announcing the exchange;
- publish such information once in a daily newspaper printed in the English
language and of general circulation in the Borough of Manhattan, City of
New York, New York; and
- publish such information on our website on the World Wide Web.
We will cause the notes to be delivered to the trustee in preparation for
the exchange no later than five business days prior to the exchange date.
If we exercise the exchange right, delivery of the notes to the holders of
the preferred stock to be exchanged, together with payment of any accrued and
unpaid dividends to (but not including) the exchange date, will be conditioned
upon physical delivery of certificates representing such preferred stock or
book-entry transfer of such preferred stock (together with any necessary
endorsements) to the trustee at any time (whether prior to, on or after the
exchange date) after notice of the exercise of the exchange right is given. In
such event, such notes will be delivered to each holder of the preferred stock
to be exchanged no later than the later of:
- the exchange date; or
- the time of physical delivery or book-entry transfer of such holder's
shares of the preferred stock to the trustee.
If, following any exercise of the exchange right, the trustee holds notes
in respect of all the outstanding preferred stock, then at the close of business
on such exchange date, whether or not the certificates representing, or other
indicia of ownership of, the preferred stock are delivered to the trustee:
- we will become the owner and record holder of such preferred stock;
- the holders of such preferred stock shall have no further rights with
respect to the preferred stock other than the right to receive the notes
upon delivery of the certificates representing, or other indicia of
ownership of, the preferred stock, together with accrued and unpaid
dividends to (but not including) the exchange date;
- dividends on the preferred stock to be exchanged shall cease to accrue
whether or not certificates for shares of the preferred stock are
surrendered for exchange on the exchange date; and
- DTC, as the record holder of the preferred stock held in global form,
will exchange the global certificate or certificates representing the
preferred stock for a global certificate or certificates representing the
notes to be delivered upon such exchange.
In the event that delivery of the notes due on the exchange date is
improperly withheld or is refused and not made by the trustee or by us,
dividends on the preferred stock will continue to accrue from the exchange date
to the actual date of delivery.
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In addition, if you deliver a notice of conversion to us with respect to
all or a part of your shares of the preferred stock prior to the close of
business on the exchange date along with book-entry transfer or physical
delivery of such shares, then the exchange will not become effective as to such
shares, but rather the conversion of such shares of the preferred stock into
shares of our common stock will become effective in accordance with the
certificate of designations.
Dividends with respect to the preferred stock which are due on the dividend
payment date which is the exchange date will be payable to the holders of the
preferred stock on the corresponding dividend record date, and the amount
payable to holders of the preferred stock on the exchange date will not include
any amount in respect of dividends declared and payable on such dividend payment
date.
The aggregate principal amount of the notes will be limited to the
aggregate liquidation preference of the preferred stock outstanding on the
effective date of the exchange. Notes will be issuable in denominations of $50
and integral multiples of $50. See the section of this prospectus entitled
"Description of the Notes" below. If the exchange results in an amount of notes
that is not an integral multiple of $50, we will pay in cash the amount in
excess of the closest integral multiple of $50.
The exchange of the preferred stock for the notes will be a taxable event,
since holders will be exchanging their preferred stock for debt and we will not
make any related cash payment to the holder. See the section of this prospectus
entitled "Material U.S. Federal Income Tax Considerations" below.
VOTING RIGHTS
You will have no voting rights as a holder of the preferred stock except as
described below or as required by law. Shares of the preferred stock held by us
or any entity controlled by us will not have any voting rights.
If we have not paid dividends on the preferred stock or on any outstanding
shares of our capital stock ranking equally as to dividends or liquidation
rights with the preferred stock in an aggregate amount equal to at least six
quarterly dividends whether or not consecutive, we will increase the size of our
board of directors by two additional directors and holders of the preferred
stock, voting separately as a class with the holders of our capital stock
ranking equally as to dividends or liquidation rights and having like voting
rights, will be entitled to elect two additional directors at any meeting of our
stockholders at which directors are to be elected. These voting rights will
terminate when we have declared and either paid or set aside for payment all
accrued and unpaid dividends on the preferred stock and any other outstanding
shares of our capital stock ranking equally as to dividends or liquidation
rights with the preferred stock. The terms of office of all directors so elected
will terminate immediately upon the termination of these voting rights.
Without the vote or consent of the holders of at least 66 2/3% of the
outstanding shares of the preferred stock and any of our other capital stock
ranking equally with the preferred stock as to dividends or liquidation rights
and having like voting rights, voting separately as a class, we may not:
- adversely change the rights, preferences and limitations of the preferred
stock by modifying our certificate of incorporation or bylaws; or
- create, authorize, issue, reclassify any of our authorized capital stock
into, increase the authorized amount of, or authorize or issue any
convertible obligation or security or right to purchase, any class of
stock that ranks senior to the preferred stock as to dividends or
liquidation rights.
In addition, without the vote or consent of the holders of at least 66 2/3%
of the outstanding shares of the preferred stock and any of our other capital
stock ranking equally with the preferred stock as to dividends or liquidation
rights and having like voting rights, voting separately as a class, we may not:
- enter into a share exchange that affects the preferred stock;
- consolidate with or merge into another entity; or
- permit another entity to consolidate with or merge into us;
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unless the preferred stock would remain outstanding and its rights, privileges
and preferences are unaffected or it is converted into or exchanged for
preferred or other capital stock of the surviving entity having rights,
preferences and limitations substantially similar to, but no less favorable
than, the preferred stock.
No vote of holders of the preferred stock will be required (except as
otherwise required by law or resolution of our board of directors) in connection
with the authorization, issuance or increase in the authorized amount of any
shares of capital stock ranking equally with or junior to the preferred stock
both as to the payment of dividends and as to distribution of assets upon our
liquidation, dissolution or winding up, whether voluntary or involuntary,
including our common stock.
If a record date for a meeting of our stockholders to be held after you
elect to convert your shares of the preferred stock has been fixed and falls
prior to your conversion date (see "-- Conversion -- Conversion Rights" above),
you will not have any voting rights at that meeting with respect to your common
stock issuable upon conversion of the preferred stock.
BOOK-ENTRY ISSUANCE
The preferred stock will only be issued in the form of global securities
held in book-entry form. DTC or its nominee will be the sole registered holder
of the preferred stock. Owners of beneficial interests in the preferred stock
represented by the global securities will hold their interests pursuant to the
procedures and practices of DTC. As a result, beneficial interests in any such
securities will be shown on, and transfers will be effected only through,
records maintained by DTC and its direct and indirect participants and any such
interest may not be exchanged for certificated securities, except in the limited
circumstances described below. Owners of beneficial interests must exercise any
rights in respect of their interests, including any right to convert or require
repurchase of their interests in the preferred stock, in accordance with the
procedures and practices of DTC. Beneficial owners will not be holders and will
not be entitled to any rights provided to the holders of the preferred stock
under the global securities or the certificate of designations. Our company and
any of our agents may treat DTC as the sole holder and registered owner of the
global securities.
DTC has advised us as follows: DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
facilitates the settlement of transactions among its participants through
electronic computerized book-entry changes in participants' accounts,
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and dealers, including the underwriters,
banks, trust companies, clearing corporations and other organizations, some of
whom and/or their representatives own DTC. Access to DTC's book-entry system is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly.
EXCHANGE OF GLOBAL SECURITIES
The preferred stock, represented by the global security, will be
exchangeable for certificated securities with the same terms only if:
- DTC is unwilling or unable to continue as depositary or if DTC ceases to
be a clearing agency registered under the Exchange Act and a successor
depositary is not appointed by us within 90 days; or
- we decide to discontinue use of the system of book-entry transfer through
DTC (or any successor depositary).
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LISTING OF PREFERRED STOCK
We will make an application to list the preferred stock on the New York
Stock Exchange under the symbol "ISH Pr."
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company will act as transfer agent and
registrar for the preferred stock. Its address is 59 Maiden Lane, Plaza Level,
New York, NY 10038, and its telephone number is (212) 936-5100.
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DESCRIPTION OF THE NOTES
If we elect to issue the notes in exchange for the preferred stock, we will
issue the notes under an indenture between us and The Bank of New York, as
trustee, to be dated on or about , 2004. The following description is
a summary of the material provisions of the indenture and the form of note
attached thereto. It does not purport to be complete. The complete terms of the
indenture and the notes will be set forth in the form of indenture and the form
of note attached thereto which will be filed as an exhibit to the registration
statement of which this prospectus forms a part. We urge you to read the
indenture, including the form of note attached thereto, because it, and not this
description, defines your rights as a holder of the notes. If we elect to
exchange the preferred stock, the issuance of the notes will not be subject to
the registration requirements of the Securities Act. As used in this
description, the words "we," "us," "our," "the company" or "ISH" do not include
any current or future subsidiary of ISH.
GENERAL
If we elect to issue the notes in exchange for the preferred stock, we will
issue the notes at a rate of $50 principal amount of notes for each share of
preferred stock that we exchange. The notes will be general, unsecured,
subordinated obligations of ISH, and will be convertible into shares of our
common stock as described under "-- Conversion Rights" below. The notes will be
limited to an aggregate principal amount equal to the aggregate liquidation
value of the outstanding preferred stock, excluding any accrued and unpaid
dividends payable upon liquidation. The notes will mature on , 2014,
regardless of the date of issuance, unless earlier converted by a holder or
redeemed by us at our option beginning on , 2006, at our option upon
the occurrence of a change in control, or at the option of the holder upon the
occurrence of a change in control, as discussed in further detail below.
Upon exchange, the notes will be issued in denominations of $50 and any
integral multiple of $50 equal to the number of shares of the preferred stock
for which the notes are exchanged. You will not be required to pay a service
charge for registration of transfer or exchange of the notes. We may, however,
require you to pay any tax or other governmental charge payable as a result of
the common stock issued upon conversion being issued other than in your name.
Principal will be payable, and the notes may be presented for conversion,
redemption, registration of transfer or exchange, without service charge, at our
office or agency in New York City, which shall initially be the office or agency
of the trustee in New York, New York.
No "sinking fund" will be provided for the notes, which means that the
indenture will not require us to set aside funds for the redemption or
retirement of the notes, nor will we be required to redeem or retire the notes
periodically. We may not redeem the notes if there is a default under the
indenture. See "-- Events of Default and Remedies" below.
We are not restricted by the indenture from incurring additional
indebtedness or repurchasing our capital stock, and we are not subject to any
financial covenants under the indenture. We are, however, restricted by the
indenture from paying dividends on our common stock under certain circumstances
as described above in the sections of this prospectus entitled "Description of
the Preferred Stock -- Dividends" and "Dividend Policy."
INTEREST
The notes will bear interest from the date of issuance at the rate of
% per year. Interest will be paid on , , and
of each year to the record holder on the preceding ,
, , and , respectively, beginning on the first
interest payment date after the issuance of the notes, and on the maturity date
of , 2014 to the holder to whom we pay the principal amount of the
notes. Interest will be computed on the basis of a 360-day year consisting of
twelve 30-day months. We may, at our option, pay interest on the notes by check
mailed to the holders of the notes. However, holders of more than $2,000,000 in
principal amount of notes may be paid by wire transfer in immediately available
funds at the holder's election. Interest will cease to accrue on a note
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upon its maturity, conversion, redemption by us, or purchase by us upon a change
in control of our company. We will not have the right to defer interest payments
or to accrete the principal amount of the notes.
MATURITY
Unless earlier redeemed or converted, the notes will mature on ,
2014.
CONVERSION RIGHTS
Unless earlier redeemed by us, at any time prior to the close of business
on , 2014, holders of notes may convert their notes (or portions
thereof) into a number of shares of our common stock determined by dividing each
$50 principal amount of the notes by the initial conversion price of $ ,
subject to adjustment as described in the section of this prospectus entitled
"Description of the Preferred Stock -- Conversion -- Conversion Price
Adjustment." This initial conversion price represents an initial conversion rate
of approximately shares of our common stock for each $50 principal
amount of the notes. Holders may convert notes only in denominations of $50 and
multiples of $50. We will not issue fractional shares of our common stock upon
conversion of notes. Instead, we will pay a cash adjustment based upon the
closing price of our common stock on the last trading day prior to the date of
conversion.
We will not make any adjustment to the conversion price upon conversion for
accrued and unpaid interest on the notes. Our delivery to the holder of the full
number of shares of our common stock into which a note is convertible, together
with any cash payment for such holder's fractional shares, will be deemed to
satisfy our obligation to pay the principal amount of the note and any accrued
and unpaid interest. Any accrued and unpaid interest will be deemed paid in full
rather than canceled, extinguished or forfeited.
If you convert your notes after an interest record date and prior to the
next interest payment date, you will receive the interest payable on such notes
on the next interest payment date, notwithstanding the conversion. However, upon
surrender of your notes for conversion, you will have to pay us an amount equal
to the amount of interest payable on the next interest payment date in respect
of the notes that were surrendered for conversion unless:
- the notes have been called for redemption, as described below under the
captions "-- Optional Redemption" and "-- Optional Redemption on Change
in Control;"
- you have accepted a change in control offer as described below under the
caption "-- Required Redemption on Change in Control;" or
- at the time of conversion, there has been a default in the payment of
interest on the notes and we have not cured such default.
In order to convert your notes, you must either:
- deliver the note to the specified office of a conversion agent, along
with a duly signed and completed notice of conversion and any interest
payment that may be required as described in the preceding paragraph; or
- if the note is held in global form, comply with the procedures
established by DTC for conversion, which you may obtain from your broker
or another DTC participant.
The conversion date shall be the date on which you deliver your notes, a
duly signed and completed notice of conversion and any required interest payment
to the conversion agent or, if your notes are held in global form, the date your
notes are surrendered for conversion in accordance with the procedures
established by DTC.
If the notes are called for redemption, in whole or in part, or you accept
a change in control offer with respect to all or part of your notes, as
discussed in further detail below, your conversion rights with respect to such
notes will expire at the close of business on the business day immediately
preceding the
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redemption date, unless we default in the payment of the redemption price
together with accrued and unpaid interest to (but not including) the redemption
date, in which case you will be permitted to convert the notes until we pay the
redemption price and accrued and unpaid interest to (but not including) the
redemption date.
You will not be required to pay any U.S. federal, state or local issuance
taxes, or duties or costs incurred by us, in connection with the conversion of
the notes or the issuance of the common stock issuable upon conversion. You
will, however, be required to pay any tax or other governmental charge payable
as a result of the common stock issuable upon conversion being issued in a name
other than your name. We will not issue or deliver the common stock unless all
such taxes and charges, if any, have been paid by the holder of the converted
note.
We will at all times reserve and keep available, free from preemptive
rights, out of our authorized but unissued shares or treasury shares, for
issuance upon the conversion of the notes, a number of shares of our authorized
but unissued common stock that will from time to time be sufficient to permit
the conversion of all outstanding notes.
Before the delivery of any securities that we will be obligated to deliver
upon conversion of the notes, we will comply with all applicable federal and
state laws and regulations that require action to be taken by us. All of our
common stock delivered upon conversion of the notes will upon delivery be duly
authorized, validly issued, fully paid and nonassessable, free of all liens and
charges and not subject to any preemptive rights.
Except as described in this section, the conversion provisions of the notes
will be identical to the conversion provisions of the preferred stock. See the
section of this prospectus entitled "Description of the Preferred
Stock -- Conversion -- Conversion Rights" above for more information.
SUBORDINATION
The notes will be our unsecured and subordinated obligations. The notes
will rank on a parity in right of payment with all of our existing and future
unsecured and subordinated indebtedness. The notes will be subordinate to all of
our existing and future senior and unsecured indebtedness, and subordinate to
our secured debt to the extent of the value of our assets securing such debt. In
addition, the notes will be effectively subordinate to all existing and future
liabilities and preferred stock, if any, of our subsidiaries.
If payment of the notes is accelerated as a result of an event of default,
holders of all of our senior indebtedness will be entitled to payment in full in
cash before the holders of the notes will be entitled to receive any payment on
the notes. We are required to promptly notify holders of our senior indebtedness
if payment of the notes is accelerated because of an event of default.
We may not make any payment on the notes if a default in the payment of
senior indebtedness occurs and is continuing beyond any grace period.
We may resume making payments on the notes:
- in the case of a payment default, upon the date on which such default is
cured or waived or ceases to exist; and
- in the case of any other default, the earlier of the date on which such
other default is cured or waived or ceases to exist or 179 days after
receipt of the payment blockage notice, unless the maturity of any senior
indebtedness is accelerated.
No new period of payment blockage arising due to a default other than a
payment default may be commenced unless:
- 365 days have elapsed since the effectiveness of the immediately prior
payment blockage notice; and
- all scheduled payments on the notes have been paid in full in cash.
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No default other than a payment default that existed or was continuing on
the date of delivery of any payment blockage notice to the trustee shall be the
basis for a subsequent payment blockage notice.
By reason of the subordination provisions, in the event of our bankruptcy,
dissolution or reorganization, holders of senior indebtedness may receive more,
and holders of the notes may receive less, than our other creditors. These
subordination provisions will not prevent the occurrence of any event of default
under the indenture.
"Senior indebtedness" means the principal, premium, if any, and interest on
any indebtedness of ISH, including bankruptcy interest, or any other payment on
indebtedness, whether outstanding on the date of the indenture or thereafter
created, incurred, assumed, guaranteed or in effect guaranteed by us, including
all deferrals, renewals, extensions, refundings, amendments, modifications or
supplements thereto. However, senior indebtedness does not include indebtedness
evidenced by the notes, any liability for federal, state, local or other taxes
owed or owing by us, our indebtedness to any of our subsidiaries, any of our
trade payables incurred in the ordinary course of business, and any indebtedness
in which the instrument creating or evidencing the same or the assumption or
guarantee thereof expressly provides that such indebtedness shall not be senior
in right of payment to, or is on the same basis with, or is subordinated or
junior to, the notes. Included in "senior indebtedness" are our currently
outstanding 7 3/4% senior notes due 2007.
"Indebtedness" means:
(1) all obligations, whether or not contingent:
- for borrowed money, whether or not evidenced by a note, debenture,
bond, or other written instrument,
- evidenced by a note, debenture, bond or other written instrument,
- under a lease required to be capitalized on the balance sheet of the
lessee under generally accepted accounting principles or under any
lease or related document (including a purchase agreement) that
provides that we are contractually obligated to purchase or cause a
third party to purchase and thereby guarantee a minimum residual value
of the leased property to the lessor, and our obligations under such
lease or related document to purchase or to cause a third party to
purchase such leased property,
- in respect of letters of credit, bank guarantees or bankers'
acceptances (including reimbursement obligations with respect to any
of the foregoing),
- with respect to indebtedness secured by a mortgage, pledge, lien,
encumbrance, charge or adverse claim affecting title or an encumbrance
to which our property or assets are subject, whether or not the
obligation secured thereby shall have been assumed by, or shall
otherwise be, our legal liability,
- in respect of the balance of the deferred and unpaid purchase price of
any property or assets, and
- under interest rate or currency swap agreements, cap, floor and collar
agreements, spot and forward contracts and similar agreements and
arrangements;
(2) with respect to any obligation of others of the type described in
clause (1) above or under clause (3) below assumed by or guaranteed in any
manner by us or in effect guaranteed by us through an agreement to
purchase, contingent or otherwise, and our obligations under any such
assumptions, guarantees or other such arrangements; and
(3) any and all indebtedness constituting deferrals, renewals,
extensions, refinancings and refundings of, or amendments, modifications or
supplements to, any of the foregoing.
If the trustee or any holder of notes receives any payment or distribution
of our assets of any kind in contravention of the indenture, then this payment
or distribution will be held by the recipient in trust for
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the benefit of the holders of senior indebtedness and will be immediately paid
or delivered to the holders of senior indebtedness or their representatives.
The notes are exclusively our obligations. The payment of dividends and the
making of loans and advances to us by any of our current or future subsidiaries
may be subject to statutory or contractual restrictions, will depend upon the
earnings of those subsidiaries and are subject to various business
considerations.
Our operations are conducted primarily through our subsidiaries. Our right
to receive the assets of any of our subsidiaries upon their liquidation or
reorganization (and the consequent right of the holders of the notes to
participate in those assets) is effectively subordinated to the claims of that
subsidiary's creditors (including trade creditors) and the holders of that
subsidiary's preferred stock, if any, except to the extent that we are
recognized as a creditor of that subsidiary, in which case our claims would
still be subordinate to any security interests in the assets of that subsidiary
and any indebtedness of that subsidiary senior to that held by us.
As of September 30, 2004, we had approximately $70.9 million of
indebtedness outstanding that would have constituted senior indebtedness,
including our currently outstanding 7 3/4% senior notes due 2007, and
approximately $201.4 million of indebtedness and other liabilities outstanding
to which the notes would have been effectively subordinated (including trade and
other payables). The indenture will not limit the amount of additional
indebtedness, including senior indebtedness, which we can create, incur, assume
or guarantee, nor will the indenture limit the amount of indebtedness or other
liabilities that any subsidiary can create, incur, assume or guarantee.
OPTIONAL REDEMPTION
The notes are not redeemable at our option prior to , 2006 except
in the event of a change in control as described in the section of this
prospectus entitled "Description of the Preferred Stock -- Optional Redemption
on Change in Control." On or after that date, we may redeem the notes, at our
option, in whole or in part from time to time, for cash at the redemption prices
listed below together with accrued and unpaid interest to, but not including,
the date fixed for redemption, provided that prior to , 2007, we may
redeem the notes only if the closing price of our common stock has exceeded 150%
of the conversion price of the notes for at least 20 trading days during any
30-day trading period ending within five trading days prior to notice of
redemption.
REDEMPTION
YEAR PRICE
---- ----------
Beginning on , 2006 and ending on , 2007.... $
Beginning on , 2007 and ending on , 2008....
Beginning on , 2008 and thereafter..................
If fewer than all the notes are to be redeemed, the trustee will select the
notes or portions thereof to be redeemed in principal amounts of $50 or integral
multiples thereof by lot, on a pro rata basis or by another method the trustee
deems fair and appropriate. If a portion of a holder's notes is selected for
partial redemption and such holder converts a portion of its notes prior to the
redemption date, such converted portion shall be deemed to be taken from the
portion selected for redemption. If any note is to be redeemed in part only, a
new note or notes in a principal amount equal to the unredeemed principal
portion will be issued.
OPTIONAL REDEMPTION ON CHANGE IN CONTROL
Holders of the notes will not be entitled to have the notes redeemed at a
premium price in the event of a change in control of our company. Rather, upon
the occurrence of a change in control as described in the section of this
prospectus entitled "Description of the Preferred Stock -- Optional Redemption
on Change in Control," we will have the right, in preference to the repurchase
rights of the holders of the notes as described in the subsection entitled
"-- Required Redemption on Change in Control" below, to
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redeem the notes, in whole but not in part, by notice to the holders of the
notes mailed at least 30 days and not more than 60 days prior to the date fixed
for redemption (which redemption date shall not be later than 60 days following
the effective date of the event or circumstance resulting in the change in
control), for cash at the redemption prices set forth below, together with
accrued and unpaid interest, if any, to, but excluding, the redemption date.
IF THE CHANGE IN CONTROL OCCURS WITHIN THE
TWELVE MONTHS PRECEDING , REDEMPTION PRICE
------------------------------------------ ----------------
2005.................................................
2006.................................................
2007.................................................
2008.................................................
2009.................................................
MECHANICS OF OPTIONAL REDEMPTION
The mechanics of an optional redemption of the notes will be substantially
similar to the mechanics of an optional redemption of the preferred stock. See
"Description of the Preferred Stock -- Mechanics of Optional Redemption."
REQUIRED REDEMPTION ON CHANGE IN CONTROL
To the extent we do not elect to redeem all of the outstanding notes upon a
change in control as described in the subsection entitled "-- Optional
Redemption on Change in Control" above, each holder of notes shall have the
right to require us to redeem such holder's notes, in whole or in part, in
integral multiples of $50, at a redemption price in cash equal to 100% of the
aggregate principal amount thereof, together with accrued and unpaid interest
to, but not including, the date fixed for redemption, pursuant to an offer (a
"change in control offer") made in accordance with the procedures described
below and the other provisions in the indenture.
If the change in control redemption date falls after an interest record
date and on or before the related interest payment date, holders of the notes to
be redeemed at the close of business on that interest record date will be
entitled to receive the interest payable on the notes on the corresponding
interest payment date. The redemption price payable on such redemption date will
not include any amount in respect of interest payable on such interest payment
date.
The mechanics of a required redemption of the notes upon a change in
control will be substantially similar to the mechanics of a required redemption
of the preferred stock upon a change in control. For a description of these
mechanics and for a discussion of other considerations relevant to a required
redemption of the notes upon a change in control, see the section of this
prospectus entitled "Description of the Preferred Stock -- Required Redemption
on Change in Control."
The change in control provisions may in certain circumstances make more
difficult or discourage a takeover of us and the removal of our incumbent
management. See "Risk Factors." The change in control redemption provisions,
however, are not the result of our knowledge of any specific effort:
- to accumulate shares of our common stock;
- to obtain control of ISH by means of a merger, tender offer, solicitation
or otherwise; or
- by management to adopt a series of anti-takeover provisions.
Our indebtedness imposes limitations on our ability to enter into certain
transactions which may constitute a change in control. Moreover, the exercise by
the holders of the notes of their right to require us to redeem their notes
could cause a default under such indebtedness, even if the change in control
itself does not, due to the financial effect of such redemption on us.
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In addition, our ability to pay cash to redeem the notes upon a change in
control may be limited by our then-existing financial resources, the terms of
our debt agreements and, since we are a holding company, our ability to obtain
funds through dividends from our subsidiaries. Any future credit agreements or
other agreements relating to our indebtedness may contain provisions prohibiting
the redemption of the notes under certain circumstances, or expressly prohibit
our redemption of the notes upon a change in control or may provide that a
change in control constitutes an event of default under that agreement. If a
change in control occurs at a time when we are prohibited by our debt agreements
from redeeming the notes for cash, we could seek the consent of our lenders to
redeem the notes or attempt to refinance such debt. If we do not obtain such
consent, we would not be permitted to redeem the notes.
We will not be required to redeem the notes upon the occurrence of a change
in control if:
- a third party agrees to purchase the notes upon the occurrence of a
change in control in the manner, at the times and otherwise in compliance
with the requirements set forth in the indenture applicable to a
redemption of the notes upon the occurrence of a change in control; and
- the third party purchases the notes on such basis.
If we have insufficient funds to redeem all of the notes tendered to us,
the trustee will select the notes to be redeemed in principal amounts of $50 or
integral multiples thereof from those tendered for redemption by lot, on a pro
rata basis or by another method the trustee deems fair and appropriate in its
sole discretion. There can be no assurance that sufficient funds will be
available when necessary to make any required redemption. See "Risk Factors."
Notwithstanding the occurrence of a change in control, we will not be
required to redeem the notes pursuant to a change in control offer in the event
we have exercised our right to redeem all of the notes pursuant to our optional
redemption rights as described above under the captions "-- Optional Redemption"
and "-- Optional Redemption on Change in Control."
VOTING RIGHTS
Holders of the preferred stock have limited voting rights under certain
circumstances as described above in the section of this prospectus entitled
"Description of the Preferred Stock -- Voting Rights." As a holder of the notes
you will not have the right to vote in the election of our directors or on other
matters presented to our stockholders prior to your receipt of our common stock
upon conversion of the notes. If a record date for a meeting of our stockholders
to be held after you elect to convert your notes has been fixed and falls prior
to your conversion date (see "-- Conversion Rights" above), you will not have
any voting rights at that meeting with respect to your common stock issuable
upon conversion of the notes.
EVENTS OF DEFAULT AND REMEDIES
The following events are "events of default" under the indenture:
- we fail to pay the principal or premium, if any, on the notes when due;
- we fail to pay interest on the notes when due and such failure continues
for 30 days;
- we fail to provide timely notice of a change in control;
- we fail to deliver our common stock, together with cash in lieu of any
fractional shares, when such common stock and cash is required to be
delivered upon conversion of notes and such failure continues for 10
business days;
- we fail to perform any covenant in the indenture and such failure
continues for 45 days after notice is given in accordance with the
indenture;
- we, or any of our current or future subsidiaries, fails to pay at
maturity, including any applicable grace period, an amount of
indebtedness in excess of $5.0 million and such failure continues for 30
days after notice given in accordance with the indenture;
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- a default by us, or any of our current or future subsidiaries, on any
indebtedness that results in the acceleration of indebtedness in an
amount in excess of $5.0 million, without the indebtedness being
discharged or the acceleration being rescinded or annulled for 30 days
after notice given in accordance with the indenture; or
- events involving the bankruptcy, insolvency or reorganization of us or
any of our current or future subsidiaries, as described in the indenture.
The trustee is required to give notice to holders of the notes of all
uncured defaults known to the trustee within 90 days after the occurrence of the
default. However, the trustee may withhold this notice if it determines in good
faith that it is in the best interest of holders of the notes, except notice of
a default in the payment of the principal or premium, if any, or interest on the
notes, either at maturity, in connection with any redemption or purchase, by
acceleration or otherwise.
ACCELERATION
If an event of default has occurred and is continuing, the trustee or the
holders of not less than 25% in aggregate principal amount of the outstanding
notes may declare the principal and premium, if any, on the notes and accrued
and unpaid interest on the notes to be immediately due and payable. However, if
we cure all defaults, except payment defaults on the notes as a result of the
acceleration, and we meet certain conditions, this acceleration declaration may
be canceled and past defaults may be waived by the holders of a majority of the
aggregate principal amount of the outstanding notes. If an event of default
resulting from events of bankruptcy, insolvency or reorganization were to occur,
all unpaid principal and accrued and unpaid interest on the outstanding notes
will become due and payable immediately without any declaration or other act on
the part of the trustee or any holders of notes, subject to certain limitations.
Holders of a majority of the aggregate principal amount of the outstanding
notes may, subject to certain limitations, direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee. The trustee shall be entitled to
receive from holders reasonable security or indemnity against any costs,
expenses and liabilities incurred by the trustee. Before you may institute a
proceeding which respect to the indenture, each of the following must occur:
- you must have given the trustee written notice of a continuing event of
default;
- the holders of at least 25% of the aggregate principal amount of the
outstanding notes must make a written request of the trustee to take
action because of the default;
- holders of the notes must have offered reasonable indemnification to the
trustee against the cost, expenses and liabilities of taking action;
- the trustee must not have received, from the holders of a majority of the
aggregate principal amount of the outstanding notes, a direction
inconsistent with such written request; and
- the trustee must not have taken action for 60 days after the receipt of
such notice and offer of indemnification.
These limitations do not apply to a suit for the enforcement of payment of
the principal of or premium, if any, or interest on a note, or the right to
convert the note into shares of our common stock in accordance with the
indenture.
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Generally, the holders of not less than a majority of the aggregate
principal amount of the outstanding notes may waive any default or event of
default, except if:
- we fail to pay the principal, premium or interest on any note when due;
- we fail to convert any note delivered for conversion into our common
stock in accordance with the indenture; or
- we fail to comply with any of the provisions of the indenture that would
require the consent of the holder of each outstanding note affected.
We will send the trustee annually a statement as to whether we are in
default and the nature of any default under the indenture.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
We may not consolidate with or merge with or into another person or sell,
lease, convey or transfer all or substantially all of our assets on a
consolidated basis, whether in a single or series of related transactions, to
another person or group of affiliated persons, unless:
- either (1) we are the surviving entity or (2) the resulting entity is a
U.S. corporation and expressly assumes in writing all of our obligations
under the notes and the indenture;
- no default or event of default exists or shall occur immediately after
giving effect to the transaction; and
- other conditions specified in the indenture are satisfied.
MODIFICATIONS OF THE INDENTURE
Modification Without Consent of Holders. We and the trustee may enter into
supplemental indentures without the consent of the holders of the notes to,
among other things:
- make provision with respect to the conversion rights of the holders of
the notes upon the occurrence of an event involving our common stock or
the matters described in the section of this prospectus entitled
"-- Limitation on Merger, Sale or Consolidation;"
- secure the notes;
- evidence the assumption by a successor entity of our obligations;
- add covenants for the protection of the holders of the notes;
- provide for the issuance under the indenture of notes in coupon form and
provide for the exchange of such notes with the notes issued under the
indenture in fully registered form;
- cure any ambiguity or correct any defect or inconsistency;
- evidence the acceptance of appointment by a successor trustee; and
- modify, eliminate or add to provisions of the indenture to the extent
necessary to effect the qualification of the indenture under the Trust
Indenture Act of 1939.
Modification With Consent of Holders. We and the trustee, with the consent
of the holders of not less than a majority in aggregate principal amount of the
outstanding notes, may add any provisions to, or change in any manner or
eliminate any of the provisions of, the indenture or modify in any manner the
rights of the holders of the notes. However, we and the trustee may not make any
of the following changes to the notes without the consent of each holder that
would be affected by such change:
- extend the maturity date of any note;
- reduce the rate or extend the time for payment of interest on any note;
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- reduce the principal amount or any premium of any note;
- reduce any amount payable upon redemption of any note;
- change our obligation to redeem any note on a redemption date in a manner
adverse to the holders of the notes;
- adversely change our obligation to redeem any note upon a change in
control;
- impair or adversely affect a holder's right to institute suit for the
payment of principal, premium or interest on any note;
- change the currency in which the notes are payable;
- impair or adversely change the right to convert the notes into shares of
our common stock;
- reduce the number of shares of our common stock or other property
receivable by a holder of a note upon conversion;
- adversely modify the subordination provisions of the notes; or
- reduce the percentage required to consent to modifications, amendments
and waivers of defaults.
Up to and prior to the close of business on the date of our exchange of the
preferred stock for the notes, only the holders of shares of the preferred stock
shall be entitled to approve any amendments or supplements to the indenture. Any
such vote of the holders of shares of the preferred stock shall require the
affirmative vote or consent of the holders of at least 66 2/3% (unless a higher
percentage shall then be required by applicable law, the certificate of
designations or the indenture) of all outstanding shares of the preferred stock
voting separately as a class.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will generally cease to be of any further effect with respect
to the notes if:
- we have delivered to the trustee for cancellation all outstanding notes
(with certain limited exceptions); or
- all outstanding notes have become due and payable or are by their terms
to become due and payable within one year, or all outstanding notes are
to be called for redemption within one year, and, in either case, we have
deposited with the trustee, in trust, funds sufficient to pay at maturity
or upon redemption all of the notes not previously delivered to the
trustee for cancellation, including principal and premium, if any, and
interest due or to become due to such date of maturity or redemption, as
the case may be;
provided that we shall remain obligated (1) until the maturity date of the
notes, to issue shares of our common stock upon conversion as described above in
the section of this prospectus entitled "-- Conversion Rights," and (2) to pay
or cause to be paid all other sums payable under the indenture by us.
BOOK-ENTRY ISSUANCE
The notes, if and when issued, will be represented by one or more global
notes registered in the name of DTC or its nominee as described in the section
of this prospectus entitled "Description of the Preferred Stock -- Book-Entry
System." The owner of a beneficial interest in a note shall be entitled to
exchange any notes represented by the global certificate registered in the name
of DTC or its nominee for certificated securities with the same terms only (1)
if an event of default with respect to such notes has occurred and is continuing
or (2) under other limited circumstances set forth in the indenture.
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TAXATION OF NOTES
You should read the section of this prospectus entitled "Material U.S.
Federal Income Tax Considerations" below for a discussion of the U.S. federal
income tax consequences that may apply to you as a note holder.
GOVERNING LAW
The indenture and the notes will be governed by the laws of the State of
New York.
LISTING OF NOTES
It is a condition to our ability to exchange the preferred stock for notes
that the notes be listed on one of the following markets: the Nasdaq National
Market, the Nasdaq SmallCap Market, the American Stock Exchange, the New York
Stock Exchange or another similar securities exchange or securities trading
market.
TRUSTEE
We have accepted The Bank of New York as the trustee, paying agent,
conversion agent, registrar and custodian for the notes. We may maintain deposit
accounts and conduct other banking transactions with the trustee or its
affiliates in the ordinary course of business. In addition, the trustee and its
affiliates have provided, and may in the future provide, banking and other
services to us in the ordinary course of their business. If there is an event of
default under the indenture, the trustee will:
- exercise the rights and powers given to the trustee under the indenture;
and
- use the same degree of care and skill in its exercise of such rights and
powers as a prudent person would exercise under the circumstances in the
conduct of the person's own affairs.
If the trustee becomes one of our creditors, the indenture and the Trust
Indenture Act of 1939 may limit the trustee from obtaining payment of claims in
certain cases or realizing on certain property received by the trustee.
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DESCRIPTION OF INDEBTEDNESS
At September 30, 2004, our consolidated outstanding indebtedness aggregated
$197.9 million (including guarantees of indebtedness of our subsidiaries of
$31.8 million). Such amount included (1) $70.9 million of our 7 3/4% senior
notes; (2) $5.7 million in Title XI loans guaranteed by the U.S. government
bearing interest at fixed rate of 8.30% per annum; and (3) $89.5 million in
loans bearing interest at variable rates ranging from 3.00% to 3.09% per annum
and averaging 3.08% per annum.
Six vessels with an aggregate net book value of $161.6 million as of
September 30, 2004, and 550 of our LASH barges having an aggregate net book
value of $3.8 million as of September 30, 2004, are mortgaged as security for
certain of our debt agreements. Additional collateral includes a security
interest in certain of our operating contracts and receivables, which accounted
for approximately 30.7% of our total revenues in 2003. Our remaining
indebtedness is unsecured.
Most of our debt agreements impose defined minimum working capital and net
worth requirements, leverage requirements, and prohibit us from incurring,
without prior written consent, additional debt or lease obligations, subject to
certain exceptions.
The indenture governing our 7 3/4% senior notes prohibits various
categories of restricted payments, including, without limitation, the
declaration or payment of dividends, unless (1) no default of event of default
has occurred and is continuing, (2) immediately before and after giving effect
to such payment, on a pro forma basis, we could incur $1.00 of additional
indebtedness under the provisions of the indenture (other than permitted
indebtedness), and (3) the aggregate amount of all restricted payments declared
or made after January 22, 1998, may not exceed the sum of (a) 50% (or, in case
of a loss, minus 100%) of our consolidated net income during the period from
January 1, 1998 through the last day of the fiscal quarter ending prior to the
date of the proposed payment, plus (b) the aggregate net proceeds received after
January 22, 1998 by us as capital contributions, plus (c) the aggregate net
proceeds received after January 22, 1998 by us from the issuance or sale of
shares of capital stock or options or warrants to purchase shares of capital
stock, plus (d) the aggregate net proceeds received after January 22, 1998 by us
upon the exercise of any options or warrants to purchase shares of capital
stock, plus (e) the aggregate net proceeds received after January 22, 1998 by us
from debt securities that have been converted into or exchanged for capital
stock, plus (f) $10,000,000.
Certain of our loan agreements also restrict the ability of our
subsidiaries to pay dividends or make loans or advances to us. The most
restrictive of those agreements is the agreement governing our Title XI loan to
Sulphur Carriers, Inc. That agreement prohibits Sulphur Carriers, Inc., our
wholly-owned subsidiary, from paying dividends or making loans or advances to
us, unless certain financial conditions are met and certain financial ratios are
maintained. As long as these conditions are met and ratios are maintained, there
is no restriction on loans or advances to us from that subsidiary, but dividends
are restricted to 40% of undistributed earnings. However, because we will repay
the loan prior to the end of 2004, those restrictions will be eliminated at the
time of repayment.
Certain other loan agreements restrict the ability of our subsidiaries to
dispose of collateralized assets or any other asset which is substantial in
relation to our assets taken as a whole without the approval from the lender.
For further information, see note C to our consolidated financial statements
included elsewhere in this prospectus.
At September 30, 2004, we had a $15 million line of credit available to
meet short-term requirements when fluctuations occur in our working capital. As
of September 30, 2004, we had $14.7 million available on this line of credit. On
December 6, 2004, we replaced this facility with a new $50 million revolving
credit facility, which we drew $10.0 million on in early December 2004 to
purchase a used vessel and which we expect to draw an additional $10.0 million
on prior to the end of 2004 to purchase a second used vessel (see "Prospectus
Summary -- Recent Developments -- Vessel Purchase Agreement"). Whitney National
Bank and Hibernia National Bank are the lenders under our new credit facility,
which is currently secured by one of our vessels, its earnings and insurances,
and a pledge of the stock of a company of which we own 30%. A second vessel and
its earnings and insurances will be pledged to secure
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the credit facility in early 2005. Interest on all borrowings under the credit
facility is based upon the one-month London Interbank Offered Rate (LIBOR) plus
1.5% or 2.0% per annum (determined based upon a financial ratio). Our new credit
facility, which will expire on December 6, 2009, contains affirmative and
negative covenants customary for a secured credit facility, as well as customary
financial maintenance covenants and events of default. Upon the occurrence of an
event of default under our new credit facility, all amounts payable under the
facility may be accelerated and/or the lenders' commitments may be terminated.
As of the date of this prospectus, we had $40.0 million available under our new
credit facility. A copy of our new credit facility is filed as an exhibit to the
registration statement of which this prospectus forms a part.
Under certain of the loan agreements described above, deposits were made
into bank retention accounts to meet the requirements of the applicable
agreements. Amounts deposited at September 30, 2004 totaled $202,265.
Additionally, under certain operating lease agreements of one of our
subsidiaries, deposits were made into bank reserve accounts to meet the
requirements of the lease agreements. The owners of the vessels have the ability
to draw on these amounts to cover operating lease payments if such payments
become overdue. The amounts in the reserve accounts totaled $6,340,561 at
September 30, 2004. We had no commodity swap agreements in place at September
30, 2004.
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DESCRIPTION OF COMMON STOCK
GENERAL
As of the date of this prospectus, our certificate of incorporation
authorized us to issue up to 10,000,000 shares of common stock, par value $1.00
per share, and up to 1,000,000 shares of preferred stock, par value $1.00 per
share. As of September 30, 2004, 6,082,887 shares of our common stock and no
shares of preferred stock were outstanding. In addition, as of September 30,
2004, options to purchase an aggregate 475,000 shares of our common stock were
outstanding, all of which had an exercise price of $14.125 per share. Our common
stock is listed on the New York Stock Exchange under the symbol "ISH."
VOTING RIGHTS
Each holder of our common stock is entitled to one vote for each share of
common stock held of record on all matters as to which stockholders are entitled
to vote. Holders of our common stock may not cumulate votes for the election of
directors.
DIVIDENDS
Subject to the preferences accorded to the holders of any series of
preferred stock if and when issued by our board of directors, including the
preferred stock being offered hereby, holders of our common stock are entitled
to dividends at such times and in such amounts as our board of directors may
determine, subject to funds being legally available for the payment of dividends
and the restrictions imposed by certain of our debt agreements, including the
indenture governing our 7 3/4% senior notes due 2007. In addition, the
certificate of designations that will govern the preferred stock and the
indenture that will govern the notes will prohibit us from declaring or paying
dividends on our common stock prior to December 31, 2007. See "Dividend Policy."
We have not paid cash dividends on our common stock since 2001 and do not
anticipate paying cash dividends on our common stock in the foreseeable future,
although we will consider paying cash dividends on our common stock once the
certificate of designations governing the preferred stock, the indenture
governing the notes, our credit agreements and our earnings levels allow us to
do so.
OTHER RIGHTS
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of our company, prior to any distributions to the holders of our
common stock, our creditors and the holders of the preferred stock being offered
hereby and the holders of any additional series of our preferred stock that may
be outstanding at the time, will receive any payments to which they are entitled
in preference to any payments with respect to our common stock. Subsequent to
those payments, the holders of our common stock will share ratably, according to
the number of shares held by them, in our remaining assets, if any.
Shares of our common stock are not redeemable and have no subscription,
conversion or preemptive rights.
OTHER PROVISIONS
Restrictions on Foreign Ownership. Our certificate of incorporation
contains provisions that permit our board of directors to restrict the
acquisition of our capital stock by non-U.S. citizens (including corporations
and other entities controlled by non-U.S. citizens). The purpose of these
provisions is to ensure our continued compliance with certain laws governing our
operations, our molten sulphur transportation contract and our Title XI
financing arrangements, which require us to be as much as 75% owned by U.S.
citizens. Under these provisions, our board of directors may, in the event of a
transfer of our capital stock that would result in non-U.S. citizens owning more
than 23% (the "permitted amount") of our total voting power, declare such
transfer to be void and ineffective. In addition, our board of directors may, in
its sole discretion, deny voting rights and withhold dividends with respect to
any shares of
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our capital stock owned by non-U.S. citizens in excess of the permitted amount.
Furthermore, our board of directors is entitled under our certificate of
incorporation to redeem shares owned by non-U.S. citizens in excess of the
permitted amount in order to reduce the ownership of our capital stock by
non-U.S. citizens to the permitted amount.
These provisions could prevent or discourage a merger, tender offer or
proxy contest involving us and a non-U.S. citizen, and could impede an attempt
by a non-U.S. citizen to acquire a significant or controlling interest in us,
even if such events might be beneficial to us and our stockholders and might
provide our stockholders with the opportunity to sell their shares of our
capital stock at a premium over prevailing market prices.
Delaware Section 203. We are subject to Section 203 of the Delaware
General Corporation Law, which imposes a three-year moratorium on the ability of
Delaware corporations to engage in a wide range of specified transactions with
any interested stockholder. An interested stockholder includes, among other
things, any person other than the corporation and its majority-owned
subsidiaries who owns 15 percent or more of any class or series of stock
entitled to vote generally in the election of directors. However, the moratorium
will not apply if, among other things, the transaction is approved by:
- the corporation's board of directors prior to the date the interested
stockholder became an interested stockholder; or
- the holders of two-thirds of the outstanding shares of each class or
series of stock entitled to vote generally in the election of directors,
not including those shares owned by the interested stockholder.
Special Meetings of the Stockholders. Our bylaws provide that special
meetings of stockholders may be called only by either (1) the Chairman of our
board of directors, (2) our President, (3) our Secretary or (4) by a vote of the
majority of our board of directors. Our stockholders do not have the power to
call a special meeting.
Limitation of Directors' Liability. Our certificate of incorporation
contains provisions eliminating the personal liability of our directors to our
company and our stockholders for monetary damages for breaches of their
fiduciary duties as directors to the fullest extent permitted by Delaware law.
Under Delaware law and our certificate of incorporation, our directors will not
be liable for a breach of his or her duty except for liability for:
- a breach of his or her duty of loyalty to our company or our
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- dividends or stock repurchases or redemptions that are unlawful under
Delaware law; and
- any transaction from which he or she receives an improper personal
benefit.
These provisions pertain only to breaches of duty by directors as directors
and not in any other corporate capacity, such as officers. In addition, these
provisions limit liability only for breaches of fiduciary duties under Delaware
corporate law and not for violations of other laws such as the federal
securities laws.
As a result of these provisions in our certificate of incorporation, our
stockholders may be unable to recover monetary damages against directors for
actions taken by them that constitute negligence or gross negligence or that are
in violation of their fiduciary duties. However, our stockholders may obtain
injunctive or other equitable relief for these actions. These provisions also
reduce the likelihood of derivative litigation against directors that might have
benefited our company.
We believe that these provisions are necessary to attract and retain
qualified individuals to serve as our directors. In addition, these provisions
will allow directors to perform their duties in good faith without concern for
monetary liability if a court determines that their conduct was negligent or
grossly negligent.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material U.S. federal income tax consequences
of acquiring, owning and disposing of the preferred stock, the notes and our
common stock is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, court decisions, and Internal Revenue Service
("IRS") rulings and pronouncements now in effect, all of which are subject to
differing interpretations and which are subject to change, possibly on a
retroactive basis.
This summary assumes that the preferred stock is acquired at its original
offering at its original issue price and that the preferred stock, the notes and
our common stock are held as capital assets, within the meaning of section 1221
of the Code. This summary does not address all of the tax consequences that may
be relevant to particular holders in light of their personal circumstances, or
to certain types of holders (such as banks, financial institutions, dealers in
securities or commodities, traders in securities that elect to use a mark to
market method of accounting for their holdings, insurance companies, regulated
investment companies, personal holding companies, corporations subject to the
alternative minimum tax, tax-exempt organizations, pension funds, certain U.S.
expatriates, partnerships or other entities classified as partnerships for U.S.
federal income tax purposes, certain hybrid entities and their owners, U.S.
holders who have a "functional currency" other than the U.S. dollar, persons who
own 10% or more of our voting stock, or persons who hold the preferred stock,
the notes or our common stock as positions in a "straddle" or as part of a
"hedging," "conversion" or "constructive sale" transaction for United States
federal income tax purposes). Also not addressed are the consequences under
estate, state, local and foreign tax laws or the tax consequences to subsequent
holders of the preferred stock, the notes or our common stock.
We have not sought and will not seek any rulings from the IRS concerning
the tax consequences of the acquisition, ownership or disposition of the
preferred stock, the notes or the common stock. Accordingly, the IRS may
successfully challenge the tax consequences described below. Prospective
purchasers are advised to consult their own tax advisors regarding the tax
consequences of acquiring, holding, or disposing of the preferred stock, the
notes or our common stock in light of their own investment circumstances.
CHARACTERIZATION OF THE PREFERRED STOCK AND THE NOTES
Under section 385(c) of the Code, our characterization of the preferred
stock as "stock" and the notes as "debt" is binding upon us and all holders of
the preferred stock and the notes, other than holders who disclose on their tax
returns that they are treating the preferred stock and/or the notes in a manner
inconsistent with such characterization. Although our characterization of the
preferred stock and the notes is not binding upon the IRS or any court, this
summary assumes that the preferred stock and the notes will be treated in a
manner consistent with our characterization. Holders should be aware that if the
preferred stock is treated as "debt" for federal income tax purposes, the tax
consequences of acquiring, holding and disposing of the preferred stock will
differ materially from the tax consequences described in this prospectus.
Similarly, if the notes are treated as "stock" for federal income tax purposes,
the tax consequences of acquiring, holding and disposing of the notes will
differ materially from the tax consequences described in this prospectus.
DISTRIBUTIONS ON THE PREFERRED STOCK AND OUR COMMON STOCK
Distributions with respect to the preferred stock and our common stock will
constitute dividends, to the extent that we have current or accumulated earnings
and profits for federal income tax purposes as of the end of the tax year of the
distribution. Dividends paid to non-corporate U.S. holders in taxable years
beginning prior to January 1, 2009, will be subject to tax as net capital gain
at the maximum rate of 15% if the holder has held the shares of stock for more
than 60 days during the 121-day period beginning 60 days before the ex-dividend
date and other requirements applicable to "qualified dividend income" are
satisfied. Dividends paid to corporations will generally be eligible for the 70%
dividends-received deduction under section 243 of the Code, subject to the
limitations contained in sections 246 and 246A of the Code.
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In general, the dividends-received deduction is available only if the stock
in respect of which a dividend is paid has been held for at least 46 days during
the 90-day period beginning on the date which is 45 days before the ex-dividend
date, or at least 91 days during the 180-day period beginning on the date which
is 90 days before the ex-dividend date in the case of a dividend paid with
respect to preferred stock and which is attributable to a period or periods
aggregating more than 366 days. A taxpayer's holding period for these purposes
is reduced by periods during which the taxpayer's risk of loss with respect to
the stock is considered diminished by reason of the existence of options,
contracts to sell or other similar transactions. The dividends-received
deduction will not be available to the extent that the taxpayer is under an
obligation to make related payments with respect to positions in substantially
similar or related property. The dividends-received deduction is limited to
specified percentages of the holder's taxable income and may be reduced or
eliminated if the holder has indebtedness "directly attributable to [its]
investment" in the stock. Prospective corporate purchasers of the preferred
stock should consult their own tax advisors to determine whether these
limitations might apply to them. No assurance can be given that we will have
sufficient earnings and profits for federal income tax purposes to cause all or
even any distributions from ISH to be taxable as dividends. As a result, no
assurance can be given that any distribution on the preferred stock or our
common stock will be treated as a dividend for which the dividends-received
deduction will be available.
If distributions with respect to the preferred stock or our common stock
exceed our current and accumulated earnings and profits, the excess will be
applied against and reduce the holder's basis in the preferred stock or our
common stock, as applicable. Any amount in excess of the amount of the dividend
and the amount applied against basis will be treated as capital gain.
EXTRAORDINARY DIVIDENDS
If a corporate holder of the preferred or our common stock receives an
"extraordinary dividend" from ISH with respect to stock which it has not held
for more than two years before the dividend announcement date, the basis of the
stock will be reduced (but not below zero) by the portion of the dividend which
is not taxable because of the dividends-received deduction. If, because of the
limitation on reducing basis below zero, any amount of the non-taxable portion
of an extraordinary dividend has not been applied to reduce basis, such amount
will be treated as gain from the sale or exchange of stock in the taxable year
in which the extraordinary dividend is received. An "extraordinary dividend" on
the preferred or our common stock would include a dividend that (1) equals or
exceeds 5%, in the case of the preferred stock, or 10%, in the case of the
common stock, of the holder's adjusted basis in the stock, treating all
dividends having ex-dividend dates within an 85-day period as one dividend, or
(2) exceeds 20% of the holder's adjusted basis in the stock, treating all
dividends having ex-dividend dates within a 365-day period as one dividend. A
holder may elect to use the fair market value of the stock rather than its
adjusted basis for purposes of applying the 5%, 10% or 20% limitation if the
holder is able to establish such fair market value to the satisfaction of the
IRS. An "extraordinary dividend" also includes any amount treated as a dividend
in the case of a redemption of the preferred stock or our common stock that is
not pro rata to all shareholders, irrespective of the holder's holding period of
the stock.
Special rules apply with respect to "qualified preferred dividends." A
qualified preferred dividend is any fixed dividend payable with respect to stock
which (1) provides for fixed preferred dividends payable no less often than
annually and (2) is not in arrears as to dividends when acquired, provided the
actual rate of return on such stock does not exceed 15%. For this purpose, the
actual rate of return is determined solely by taking into account dividends
during such holding period and by using the lesser of the adjusted basis or the
liquidation preference in respect of such preferred stock. Where a qualified
preferred dividend exceeds the 5% or 20% limitation described above, the
extraordinary dividend rules will not apply if the taxpayer holds the stock for
more than five years. If the taxpayer disposes of the stock before it has been
held for more than five years, the aggregate reduction in basis will not exceed
the excess of the qualified preferred dividends paid on such stock during the
period held by the taxpayer over the qualified preferred dividends that would
have been paid during such period on the basis of the stated rate of return as
determined under section 1059(e)(3) of the Code. The length of time that a
taxpayer is deemed to have
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held stock for this purpose is determined under principles similar to those
applicable for purposes of the dividends-received deduction discussed above.
Any loss on the sale or exchange of stock with respect to which an
individual holder receives an extraordinary dividend that is also qualified
dividend income (see "-- Distributions on the Preferred Stock and our Common
Stock" above) will be treated as long-term capital loss to the extent of the
dividend. The deductibility of capital losses is limited.
REDEMPTION PREMIUM
If (1) preferred stock is, like the preferred stock, redeemable at the
issuer's option, (2) the facts and circumstances on the issue date indicate that
redemption is more likely than not to occur, and (3) the redemption price of the
preferred stock as of the most likely redemption date exceeds the issue price
(so that there is a "redemption premium"), then the redemption premium may be
taxable as a constructive dividend to the extent of the issuing corporation's
current or accumulated earnings and profits over the period from issuance to the
most likely redemption date. If a redemption premium is subject to the foregoing
treatment, a holder of the preferred stock would take the amount of the premium
into income under an economic accrual method similar to the method described
under "Original Issue Discount and Premiums on the Notes," below. Under
applicable Treasury regulations, a redemption premium is not subject to the
foregoing treatment if it will be paid "as a result of changes in economic or
market conditions over which neither the issuer nor the holder has legal or
practical control" and is "solely in the nature of a penalty for premature
redemption." The Treasury regulations also provide a "safe harbor," pursuant to
which a redemption will not be treated as more likely than not to occur, as to a
given holder, if (1) the issuer and the holder are not "related" under certain
tests prescribed by the Code, (2) the issuer is not effectively required or
compelled by any plan, arrangement, or agreement to redeem the stock, and (3)
redemption would not reduce the yield of the stock. Because the foregoing tests
are based upon an evaluation of all facts and circumstances surrounding the
issuance and redemption of preferred stock, the conclusion cannot be entirely
certain; however, it is ISH's belief that no part of the premium payable upon
redemption of the preferred stock will be treated as a constructive dividend to
the holders of the preferred stock. It is also possible that upon an actual
redemption, the redemption premium would, together with the other redemption
proceeds, be treated as a dividend for federal income tax purposes. See
"-- Redemption of the Preferred Stock for Cash" below.
REDEMPTION OF THE PREFERRED STOCK FOR CASH
A redemption of shares of the preferred stock by ISH for cash will be
treated as a distribution taxable as a dividend (and, possibly, an
"extraordinary dividend") (see "-- Distributions on the Preferred Stock and our
Common Stock" and "-- Extraordinary Dividends" above) to redeeming shareholders
to the extent of ISH's current or accumulated earnings and profits unless the
redemption:
- results in a complete termination of the shareholder's interest in ISH
(within the meaning of section 302(b)(3) of the Code);
- is "substantially disproportionate" (within the meaning of section
302(b)(2) of the Code) with respect to the holder; or
- is "not essentially equivalent to a dividend" (within the meaning of
section 302(b)(1) of the Code).
In determining whether any of these tests has been met, shares considered to be
owned by the holder by reason of the constructive ownership rules set forth in
section 318 of the Code, as well as shares actually owned, will be taken into
account. If any of the foregoing tests is met, the redemption of shares of the
preferred stock for cash will result in taxable gain or loss equal to the
difference between the amount of cash received (except cash attributable to
accrued, unpaid, declared dividends, which will be taxable as a dividend
described above), and the holder's basis in the redeemed shares. Any such gain
or loss will be capital gain or loss and will be long-term capital gain or loss
if the holding period exceeds one year.
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Long-term capital gains are taxable at a maximum rate of 15% in the case of
individuals and 35% in the case of corporations. The deductibility of capital
losses is subject to limitations.
EXCHANGE FOR THE NOTES
An exchange of shares of the preferred stock for notes will also be subject
to the rules of section 302 of the Code described in "-- Redemption of the
Preferred Stock for Cash" above. Since a holder of notes will be treated under
the constructive ownership rules as owning our common stock into which the notes
are convertible, the exchange would not by itself satisfy the "complete
termination" test or the "substantially disproportionate" test described above.
The "not essentially equivalent to a dividend" test could be met only if the
exchange were regarded as resulting in a meaningful reduction in the holder's
proportionate interest in ISH. If none of these tests is met, the fair market
value of the notes received upon the exchange will be taxable as a dividend
(and, in the case of a corporate holder, as an "extraordinary dividend" -- see
above) to the extent of ISH's current or accumulated earnings and profits and
then would be treated as a return of capital to the extent of the holder's basis
in the preferred stock. If the fair market value of the notes exceeds the
amounts treated as a dividend and as a return of capital, any such excess would
be treated as capital gain.
In the event that receipt of the notes is taxable as a dividend, the basis
of the notes will be equal to their fair market value as of the date of the
exchange. If the holder retains any stock in ISH, the remaining basis in the
preferred stock will be transferred to such retained stock. If the holder
retains no stock in ISH, it is unclear whether the remaining basis in the
preferred stock would be transferred to the notes or would be lost. Under
Proposed Treasury regulations, the remaining basis would be treated as a loss
recognized on a disposition of the redeemed stock on the date of the redemption,
which loss might be taken into account at a later date. These proposed Treasury
regulations would only apply to transactions occurring after the date these
regulations are finalized and published. For purposes of determining the
recognition of gain under the extraordinary dividend basis reduction rules
described above, only the basis of the shares of the preferred stock exchanged
for the notes would be taken into account.
Prospective purchasers should consult their own tax advisors regarding
satisfaction of the section 302 tests in their particular circumstances,
including the possibility that a sale of a part of the holder's shares of the
preferred stock or the notes received might be regarded as reducing the holder's
interest in ISH, thereby satisfying one of the tests of section 302(b); in such
a case, the shareholder would recognize capital gain or loss on the exchange.
For purposes of determining gain or loss, the amount realized by a shareholder
would be the issue price of the notes received (see "Original Issue Discount and
Premium on the Notes"). Any such gain or loss will be capital gain or loss and
will be long-term capital gain or loss if the holding period exceeds one year.
Long-term capital gains are taxable at a maximum rate of 15% in the case of
individuals and 35% in the case of corporations. The deductibility of capital
losses is subject to limitations. The installment method will not be available
for reporting such gain in the event that the preferred stock, the notes, or our
common stock into which the notes are convertible are traded or readily tradable
on an established securities market.
ORIGINAL ISSUE DISCOUNT AND PREMIUM ON THE NOTES
Stated interest on the notes will be includable in income in accordance
with the holder's method of accounting. There is also a risk that the notes will
be treated as having original issue discount taxable as interest income as
discussed below.
If the preferred stock is exchanged for notes at a time when the stated
redemption price at maturity of the notes exceeds their issue price by an amount
equal to or greater than one-fourth of one percent of the stated redemption
price at maturity multiplied by the number of complete years to maturity, the
notes will be treated as having original issue discount equal to the entire
amount of such excess.
Whether or not the exchange of the preferred stock for notes is treated as
a dividend under the section 302 tests, the issue price of the notes will depend
upon whether the preferred stock or the notes are or will be traded on an
established securities market. If the notes are listed on an exchange or are
101
otherwise considered, under Treasury regulations issued under section 1273 of
the Code, to be traded on an established securities market at any time during
the 60-day period ending 30 days after the date of the exchange, the issue price
of the notes will be their fair market value as determined as of the date of the
exchange. If the notes are not listed on an exchange or otherwise considered to
be traded on an established securities market within such time period, but the
preferred stock is so listed or traded, the issue price of the notes will be the
fair market value of the preferred stock as of the date of the exchange. If
neither the preferred stock nor the notes are listed on an exchange or otherwise
considered to be traded on an established securities market within the requisite
time period, the issue price of the notes will be their stated principal amount,
assuming that the notes bear "adequate stated interest" within the meaning of
section 1274 of the Code. If the notes do not bear adequate stated interest, the
issue price will be equal to their "imputed principal amount" as determined
under section 1274 of the Code.
A holder of a note would generally be required to include in gross income
(irrespective of the holder's method of accounting) a portion of the original
issue discount for each year during which it holds the note even though the cash
to which such income is attributable would not be received until maturity or
redemption of the note. The amount of any original issue discount included in
income for each year would be calculated under a constant yield to maturity
formula that would result in the allocation of less original issue discount to
the early years of the term of the note and more original issue discount to
later years.
If the preferred stock is exchanged for notes whose issue price exceeds the
amount payable at maturity (or earlier call date, if appropriate), such excess
(excluding the amount thereof attributable to the conversion feature) will be
deductible by the holder of the notes as amortizable bond premium over the term
of the notes (taking into account earlier call dates, as appropriate), under a
yield to maturity formula, if an election by the taxpayer under section 171 of
the Code is in effect or is made. Such election would apply to all obligations
owned or subsequently acquired by the taxpayer during or after the taxable year
in which the election is made. The amortizable bond premium will be treated as
an offset to stated interest on the notes to the extent thereof and any excess
will be allowable as a deduction subject to the following limitation. The amount
of any amortized bond premium deduction will be limited to the excess of the
holder's interest income inclusions on the note in prior accrual periods over
bond premium deductions allowed the holder in such prior periods, and any amount
in excess of such limitation will be carried forward as additional bond premium
in the next accrual period.
If the exchange of the preferred stock for notes is treated as a dividend
under the section 302 tests, the basis of the notes will equal their fair market
value as of the date of the exchange. If this basis is less than its stated
redemption price at maturity, it would appear that a holder will recognize
capital gain upon satisfaction of the note at maturity. If the basis of a note
exceeds the amounts payable at maturity, a holder should be able to elect to
amortize bond premium under the rules discussed above.
REDEMPTION OR SALE OF THE NOTES
Generally a redemption or sale of the notes will result in taxable gain or
loss equal to the difference between the amount of cash and fair market value of
other property received and the holder's basis in the notes. To the extent that
the amount received is attributable to accrued interest, however, that amount
will be taxed as ordinary income. The basis of a holder who received the notes
in exchange for shares of the preferred stock will generally be equal to the
fair market value of the notes at the time of exchange plus any original issue
discount included in the holder's income or minus any premium previously allowed
as an offset to interest income on the notes. Such gain or loss will be capital
gain or loss and will be long-term gain or loss if the holding period for the
notes exceeds one year. Long-term capital gains are taxable at a maximum rate of
15% in the case of individuals and 35% in the case of corporations. The
deductibility of capital losses is subject to limitations.
If the notes are issued with original issue discount and ISH were found to
have had an intention at the time the notes were issued to call them before
maturity, any gain realized on a sale, exchange or redemption of notes prior to
the maturity would be considered ordinary income to the extent of any
unamortized original issue discount for the period remaining to the stated
maturity of the notes. ISH
102
cannot predict whether it would have an intention, when and if the notes are
issued, to call the notes before their maturity.
CONVERSION OF THE PREFERRED STOCK OR THE NOTES INTO OUR COMMON STOCK
No gain or loss will generally be recognized upon conversion of shares of
the preferred stock or notes into shares of our common stock, except that (1)
gain or loss will be recognized to the extent of the difference between the cash
paid in lieu of fractional shares of our common stock and the basis of the
preferred stock or notes allocable to such fractional shares, (2) ordinary
income will be recognized on the conversion of notes to the extent of the shares
of our common stock attributable to accrued interest, and (3) if the conversion
of the preferred stock takes place when there is a dividend arrearage on the
preferred stock and the fair market value of our common stock exceeds the issue
price of the preferred stock, a portion of our common stock received might be
taxable as a dividend, return of capital or capital gain (see "-- Distributions
on the Preferred Stock and our Common Stock" and "-- Extraordinary Dividends"
above). Assuming the conversion is not treated as resulting in the payment of a
dividend, the basis of our common stock received upon conversion will be equal
to the basis of the shares of the preferred stock or the notes converted (less
the amount of basis allocable to any fractional share of our common stock for
which cash is received), and the holding period of our common stock will include
the holding period of the shares of the preferred stock or the notes converted.
The basis of any common stock treated as a dividend will be equal to its fair
market value on the date of the distribution and its holding period will begin
on the day after the conversion.
ADJUSTMENT OF CONVERSION PRICE
Holders of the preferred stock, the notes or our common stock may be deemed
to have received constructive distributions where the conversion ratio or
conversion price is adjusted to reflect property distributions with respect to
our common stock into which such preferred stock or notes are convertible.
Adjustments to the conversion ratio or conversion price made pursuant to a bona
fide reasonable adjustment formula which has the effect of preventing the
dilution of the interest of the holders of the preferred stock or notes,
however, will generally not be considered to result in a constructive
distribution of stock. Certain of the possible adjustments provided in the
preferred stock and the notes may not qualify as being pursuant to a bona fide
reasonable adjustment formula. If such adjustments were made, the holders of the
preferred stock or notes might be deemed to have received constructive
distributions taxable as a dividend, return of capital or capital gain in
accordance with the general rules for the income tax treatment of distributions
discussed above in "-- Distributions on the Preferred Stock and our Common
Stock" and "-- Extraordinary Dividends."
BACKUP WITHHOLDING
Under the backup withholding provisions of the Code and applicable Treasury
regulations, a holder of the preferred stock, the notes or our common stock may
be subject to backup withholding at the rate of 28% with respect to dividends or
interest (including original issue discount) paid on, or the proceeds of a sale,
exchange or redemption of, the preferred stock, the notes or our common stock,
unless (1) such holder is a corporation or comes within certain other exempt
categories and when required demonstrates this fact or (2) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding for interest and dividends and otherwise complies with applicable
requirements of the backup withholding rules. The amount of any backup
withholding from a payment to a holder will be allowed as a credit against the
holder's federal income tax liability and may entitle such holder to a refund,
provided that the required information is timely furnished to the IRS.
SPECIAL TAX RULES APPLICABLE TO FOREIGN HOLDERS
For purposes of the following discussion, a "Foreign Holder" is any holder
who is not (1) a citizen or resident of the United States, (2) a corporation or
partnership (including any entity treated as a corporation or partnership for
U.S. federal income tax purposes) created or organized in or under the laws
103
of the United States, any State or any political subdivision thereof, (3) an
estate the income of which is subject to United States federal income taxation
regardless of source, or (4) a trust if such trust elects to be treated as a
U.S. person for U.S. federal income tax purposes, or a trust (a) over the
administration of which a court within the United States is able to exercise
primary supervision and (b) all substantial decisions of which one or more
United States persons have the authority to control.
Income received by a Foreign Holder in the form of dividends on the
preferred stock or our common stock or interest and original issue discount on
the notes will be subject to a United States federal withholding tax at a 30%
rate upon the actual payment of the dividends, interest or principal
representing original issue discount except as described below and except where
an applicable tax treaty provides for the reduction or elimination of such
withholding tax. Dividends paid to Foreign Holders outside the United States
that are subject to the withholding tax described above will generally be exempt
from United States backup withholding tax but will be subject to United States
information reporting requirements. Pursuant to a tax treaty or other agreement,
this information may also be made available to the tax authorities in the
country in which the Foreign Holder resides. A Foreign Holder generally will be
taxable in the same manner as a United States person with respect to dividend,
interest and original issue discount income if such income is effectively
connected with the conduct of a trade or business in the United States, and if
provided in a tax treaty, attributable to a permanent establishment in the
United States. Such effectively connected income received by a Foreign Holder
that is a corporation may in certain circumstances be subject to an additional
"branch profits tax" at a 30% rate, or if applicable, a lower treaty rate. In
order to claim the benefit of a tax treaty or to claim exemption from
withholding because the income is effectively connected with the conduct of a
trade or business in the U.S., a Foreign Holder must provide a properly executed
IRS Form W-8BEN for treaty benefits or W-8ECI for effectively connected income
(or such successor form as the IRS designates), prior to the payment of
dividends. These forms must be periodically updated. Foreign Holders may obtain
a refund of any excess amounts withheld by timely filing an appropriate claim
for refund. If a Foreign Holder holds the preferred stock or our common stock
through a foreign partnership or a foreign intermediary, the foreign partnership
or foreign intermediary will also be required to comply with certain
certification requirements. The rules regarding withholding are complex, are
subject to change, and vary depending on your particular situation. We suggest
that you consult with your tax advisor regarding the application of such rules
to your situation.
Payments of interest and principal representing original issue discount on
the notes received by a Foreign Holder will not be subject to United States
federal withholding tax provided that (1) the Foreign Holder does not actually
or constructively own 10% or more of the total combined voting power of all
classes of stock of ISH entitled to vote, and (2) the holder is not a controlled
foreign corporation that is related to ISH through stock ownership, and in
general, either (a) ISH or its paying agent can reliably associate the payment
with documentation upon which it can rely to treat the payment as made to a
foreign beneficial owner under Treasury regulations issued under section 1441 of
the Code; (b) ISH or its paying agent can reliably associate the payment with a
withholding certificate from a person claiming to be a withholding foreign
partnership and the foreign partnership can reliably associate the payment with
documentation upon which it can rely to treat the payment as made to a foreign
beneficial owner in accordance with such Treasury regulations; (c) ISH or its
paying agent can reliably associate the payment with a withholding certificate
from a person representing to be a "qualified intermediary" that has assumed
primary withholding responsibility under such Treasury regulations and the
qualified intermediary can reliably associate the payment with documentation
upon which it can rely to treat the payment as made to a foreign beneficial
owner in accordance with its agreement with the IRS; or (d) ISH or its paying
agent receives a statement, under penalties of perjury from an authorized
representative of a financial institution stating that the financial institution
has received from the beneficial owner a withholding certificate described in
such Treasury regulations or that it has received from another financial
institution a similar statement that it, or another financial institution acting
on behalf of the beneficial owner, has received such a withholding certificate
from the beneficial owner. In general, it will not be necessary for a Foreign
Holder to obtain or furnish a United States taxpayer identification number to
ISH or its paying agent in order to claim the foregoing exemption from United
States withholding tax on payments of interest and original issue discount.
104
Provided that ISH is not, and has not been, a "United States real property
holding corporation" within the meaning of section 897(c) of the Code, a Foreign
Holder generally will not be subject to United States federal income or
withholding tax on gain realized on the sale or exchange of the preferred stock,
our common stock, or the notes unless (1) the holder is an individual who is
present in the United States for 183 days or more during the taxable year and as
to whom such gain is from United States sources or (2) the gain is effectively
connected with a United States trade or business of the holder, and if required
by a tax treaty, attributable to a permanent establishment in the United States.
Upon a redemption of the preferred stock for cash or an exchange of the
preferred stock for notes, ISH may be required to withhold tax on the entire
amount of the proceeds at a 30% rate or lower treaty rate applicable to
dividends unless a Foreign Holder is able to demonstrate to the satisfaction of
ISH that such redemption or exchange satisfies the section 302 tests discussed
above with respect to such Foreign Holder (see "Redemption of the Preferred
Stock for Cash" and "Exchange for the Notes" above). In the case of an exchange
of the preferred stock for the notes, this would result in a Foreign Holder
receiving a reduced principal amount of the notes.
The payment of the proceeds of the sale of the preferred stock, our common
stock or the notes to or through the United States office of a broker will be
subject to information reporting and possible backup withholding at a rate of
28% unless the owner certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption in accordance with applicable
Treasury regulations. The payment of the proceeds of the sale of the preferred
stock, our common stock or the notes to or through the foreign office of a
foreign broker generally will not be subject to information reporting or backup
withholding. In the case of the payment of proceeds from the disposition of the
preferred stock, our common stock or the notes through a foreign office of a
broker that is a United States person or a "United States related person," the
applicable Treasury regulations require information reporting, but not backup
withholding, on the payment unless the broker has documentary evidence in its
files that the owner is a non-United States person and the broker has no actual
knowledge to the contrary. For this purpose, a "United States related person" is
(1) a "controlled foreign corporation" for United States federal income tax
purposes, (2) a foreign person 50% or more of whose gross income from all
sources for a specified period is derived from activities that are effectively
connected with the conduct of a United States trade or business or (3) a foreign
partnership that, at any time during its taxable year, is more than 50% owned by
United States persons or is engaged in the conduct of a United States trade or
business. Any amounts withheld under the backup withholding rules from a payment
to a Foreign Holder will be allowed as a refund or a credit against such Foreign
Holder's United States federal income tax, provided that the required
information is timely furnished to the IRS.
105
UNDERWRITING
We have entered into an underwriting agreement with Ferris, Baker Watts,
Incorporated, which is referred to in this section and elsewhere in this
prospectus as "the underwriter." Subject to the terms and conditions contained
in the underwriting agreement between us and the underwriter, we have agreed to
sell to the underwriter, and the underwriter has agreed to purchase from us, all
of the 800,000 shares of the preferred stock being offered pursuant to this
prospectus.
This offering will be underwritten on a firm commitment basis. The
underwriter proposes to offer shares of the preferred stock directly to the
public at the public offering price set forth on the cover page of this
prospectus. Any shares sold by the underwriter to securities dealers will be
sold at the public offering price less a selling concession not in excess of
$ per share. The underwriter may allow, and these selected dealers may
re-allow, a concession of not more than $ per share to other brokers and
dealers. After the shares of the preferred stock are released for sale to the
public, the offering price and other selling terms may, from time to time, be
changed by the underwriter.
The underwriter's obligations to purchase shares of the preferred stock are
subject to conditions contained in the underwriting agreement. The underwriter
is obligated to purchase all of the shares of the preferred stock that it has
agreed to purchase under the underwriting agreement, other than those covered by
the over-allotment option, if it purchases any shares. The offering of the
shares of the preferred stock is made for delivery when, as and if accepted by
the underwriter and subject to prior sale and to withdrawal, cancellation and
modification of the offering without notice. The underwriter reserves the right
to reject any order for the purchase of shares of the preferred stock.
Except for this offering and the related financial advisory services
described below, the underwriter has not engaged in any investment banking or
other commercial dealings with us.
UNDERWRITING DISCOUNT AND FINANCIAL ADVISORY FEE
The following table summarizes the underwriting discount and financial
advisory fee to be paid to the underwriter by us:
TOTAL, WITHOUT TOTAL, WITH
OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE EXERCISE EXERCISE
--------- -------------- --------------
Underwriting Discount.......................... $ $ $
Financial Advisory Fee......................... $ $ $
We have agreed to pay the financial advisory fee to the underwriter for
services provided to us in connection with evaluating financing alternatives and
consulting regarding our capital structure.
OVER-ALLOTMENT OPTION
We have granted to the underwriter an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to an aggregate of 80,000
additional shares of the preferred stock at the public offering price, less the
underwriting discount and financial advisory fee payable to the underwriter,
listed on the cover page of this prospectus solely to cover over-allotments, if
any. To the extent that the underwriter exercises the option, the underwriter
will become obligated, as long as the conditions of the underwriting agreement
are satisfied, to purchase such additional shares of the preferred stock. We
will be obligated, pursuant to the option, to sell such additional shares of the
preferred stock to the underwriter to the extent the option is exercised. If any
additional shares of the preferred stock are purchased pursuant to the option,
the underwriter will offer the additional shares on the same terms as those on
which the other shares are being offered hereby.
LOCK-UP AGREEMENTS
We and our directors and executive officers have agreed that, for a period
of 60 days from the date of this prospectus, we and they will not, without the
prior written consent of the underwriter, dispose of or
106
hedge any shares of our common stock or any securities convertible into or
exchangeable for our common stock. The underwriter in its sole discretion may
release any of the securities subject to these lock-up agreements at any time
without notice.
INDEMNIFICATION
We have agreed to indemnify the underwriter against certain civil
liabilities, including certain civil liabilities under the Securities Act of
1933, or to contribute to payments the underwriter may be required to make in
respect of any of these liabilities.
STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
In connection with the offering, the underwriter may engage in
over-allotment, syndicate-covering transactions, stabilizing transactions and
penalty bids or purchases for the purpose of stabilizing, maintaining or
otherwise affecting the price of the preferred stock.
These syndicate-covering transactions, stabilizing transactions and penalty
bids may have the effect of raising or maintaining the market price of the
preferred stock above that which might otherwise prevail in the open market or
preventing or retarding a decline in the market price of the preferred stock.
The imposition of a penalty bid may also affect the price of the preferred stock
to the extent that it discourages resales. These transactions may be effected on
the New York Stock Exchange or otherwise and, if commenced, may be discontinued
at any time.
Neither we nor the underwriter make any representation or prediction as to
the magnitude or effect of any such transaction. In addition, neither we nor the
underwriter make any representation that the underwriter will engage in these
stabilizing transactions or that any transaction, once commenced, will not be
discontinued without notice.
LEGAL MATTERS
Certain legal matters with respect to the preferred stock, the notes and
our common stock will be passed upon for us by Jones, Walker, Waechter,
Poitevent, Carrere & Denegre, L.L.P., New Orleans, Louisiana. Certain legal
matters in connection with this offering will be passed upon for the underwriter
by Venable LLP, Baltimore, Maryland.
EXPERTS
Our consolidated financial statements as of December 31, 2003 and 2002, and
for each of the two years in the period ended December 31, 2003, appearing in
this prospectus and the registration statement of which this prospectus forms a
part have been audited by Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
Our consolidated financial statements as of and for the year ended December
31, 2001 have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report appearing herein.
In June 2002, our board of directors, at the recommendation of our audit
committee, approved the appointment of Ernst & Young LLP as our independent
registered public accounting firm to audit our financial statements for fiscal
year 2002. Ernst & Young LLP replaced Arthur Andersen, which served as our
independent auditors since our formation as International Shipholding
Corporation in 1978. The decision to change auditors was not the result of any
disagreement between Arthur Andersen and us on any matter of accounting
principle or practice, financial statement disclosure or auditing scope or
procedure. For a discussion of certain risks associated with Arthur Andersen's
audit of our consolidated financial statements, see the section of this
prospectus entitled "Risk Factors -- Other Risks."
107
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You can read and copy that information at the public
reference room of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. You
may call the SEC at 1-800-SEC-0330 for more information about the public
reference room. The SEC also maintains an Internet site that contains reports,
proxy and information statements and other information regarding registrants,
like us, that file reports with the SEC electronically. The SEC's Internet
address is http://www.sec.gov. Our website is located at www.intship.com. The
information on our website is not part of this prospectus.
108
GLOSSARY
Aggregate Vessel Capacity -- The aggregate gross tonnage carrying capacity
of our fleet, excluding its LASH barges and its towboats.
Bareboat Charter -- A "net lease" in which the charterer takes full
operational control over the vessel for a specified period of time (usually
medium- to long-term) for a specified daily rate that is generally paid monthly
to the vessel owner. The bareboat charterer is solely responsible for the
operation and management of the vessel and must provide its own crew and pay all
operating and voyage expenses.
Breakbulk Vessel -- An ocean-going vessel that transports general cargo in
its hold without first loading such cargo in separate containers. Loading and
unloading of a breakbulk vessel requires shoreside assistance.
Bulk Cargo -- Cargo stowed unpackaged in a vessel's hold, not enclosed in
any container such as a box, bale, bag or cask and not subject to mark or count.
Cape-Size Bulk Carrier -- A vessel defined as having a moulded breadth
(beam) in excess of 32.2 meters and a size exceeding 80,000 DWT. A vessel that
exceeds those size limitations cannot make use of the Panama Canal and therefore
may cross South America only by rounding Cape Horn.
Container Ships -- Vessels that are designed to transport multi-purpose
standard sized cargo containers that can also be transported by trucks or rail
cars.
Contract of Affreightment -- A contract by which the vessel owner
undertakes to provide space on a vessel for the carriage of specified goods or a
specified quantity of goods on a single voyage or series of voyages over a given
period of time between named ports (or within certain geographical areas) in
return for the payment of an agreed amount per unit of cargo carried. Generally,
the vessel owner is responsible for all operating and voyage expenses.
Drydock -- A large, submersible dock in the form of a basin from which the
water can be emptied, into which a ship is taken for cleaning and repair of
underwater surfaces.
DWT -- Deadweight tons; the aggregate weight of the cargo, fuel and ballast
that a vessel may legally carry.
FLASH Vessel -- A non-self propelled LASH vessel used to move LASH barges
between a large LASH vessel and locations other than the main loading and
unloading ports.
Gross Voyage Profit -- Total revenues less voyage expenses and vessel and
barge depreciation.
Jobs Creation Act -- The American Jobs Creation Act of 2004.
LASH Vessel -- An ocean-going vessel that can pick up and drop off barges
(or lighters) with its own gantry crane and without assistance from shoreside
facilities.
Liner Service -- Operation of a vessel on an established trade route with
regularly scheduled sailing dates. The vessel owner receives revenue for the
carriage of cargo within the established trading area and pays the operating and
voyage expenses incurred.
Long-Term Charter/Long-Term Contract -- A charter or contract with a
duration of more than five years.
MarAd -- U.S. Maritime Administration, an agency of the U.S. Department of
Transportation.
Medium-Term Charter/Medium-Term Contract -- A charter or contract with a
duration of three to five years.
MSA -- The Maritime Security Act of 1996.
MSC -- Military Sealift Command, a branch of the U.S. Department of Defense
that awards contracts for the transportation of military supplies.
G-1
MSP -- Maritime Security Program; a subsidy program for U.S. flag vessels
pursuant to the Maritime Security Act of 1996.
Multi-Purpose Vessel -- A vessel capable of transporting both containerized
and bulk cargo.
Pure Car/Truck Carrier (or PCTC) -- A vessel specially designed to carry
automobiles, trucks and other rolling stock.
Roll-On/Roll-Off Vessel (or RO/RO) -- An ocean-going vessel designed to
load and unload vehicles by driving them on and off the vessel. Generally a
roll-on/roll-off vessel can also carry containers.
SPVs -- Special purpose vessels.
Time Charter -- A contract in which the charterer obtains the right for a
specified period to direct the movements and utilization of the vessel in
exchange for payment of a specified daily rate, generally paid semi-monthly, but
the vessel owner retains operational control over the vessel. Typically, the
owner fully equips the vessel and is responsible for normal operating expenses,
repairs, wages and insurance, while the charterer is responsible for voyage
expenses, such as fuel, port and stevedoring expenses.
Title XI Guaranteed Loan -- A loan for the purchase or construction of
marine equipment, the repayment of which is guaranteed by the United States
government in return for a small fee. Such guarantee is secured by vessel
mortgages in favor of the government. Because of the government guarantee, such
loans are issued at lower interest rates than would otherwise be available.
G-2
INDEX TO FINANCIAL STATEMENTS
PAGE
----
UNAUDITED FINANCIAL STATEMENTS
Consolidated Condensed Statements of Income for the Three
Months Ended September 30, 2004 and September 30, 2003 and
Nine Months Ended September 30, 2004 and September 30,
2003...................................................... F-2
Consolidated Condensed Balance Sheets as of September 30,
2004 and December 31, 2003................................ F-3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and September 30, 2003........... F-5
Notes to Consolidated Condensed Financial Statements........ F-6
AUDITED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm..... F-13
Report of Independent Public Accountants.................... F-14
Consolidated Statements of Income for the Years Ended
December 31, 2003, December 31, 2002 and December 31,
2001...................................................... F-15
Consolidated Balance Sheets as of December 31, 2003 and
December 31, 2002......................................... F-16
Consolidated Statements of Changes in Stockholders'
Investment for the Years Ended December 31, 2003, December
31, 2002 and December 31, 2001............................ F-18
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, December 31, 2002 and December 31,
2001...................................................... F-19
Notes to Consolidated Financial Statements.................. F-20
F-1
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(ALL AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
Revenues..................................... $ 68,797 $ 63,550 $ 199,483 $ 195,861
Operating Expenses:
Voyage Expenses............................ 58,675 51,905 162,436 153,729
Vessel and Barge Depreciation.............. 4,731 5,287 14,054 15,079
---------- ---------- ---------- ----------
Gross Voyage Profit.......................... 5,391 6,358 22,993 27,053
---------- ---------- ---------- ----------
Administrative and General Expenses.......... 3,903 3,561 11,676 11,379
(Gain) Loss on Sale of Other Assets.......... -- (247) 7 (290)
---------- ---------- ---------- ----------
Operating Income............................. 1,488 3,044 11,310 15,964
---------- ---------- ---------- ----------
Interest and Other:
Interest Expense........................... 2,574 2,962 7,922 9,614
Loss on Sale of Investment................. -- -- 623 --
Investment Income.......................... (177) (119) (506) (649)
Other Loss................................. -- 103 -- --
Loss on Early Extinguishment of Debt....... -- 2,570 46 1,310
---------- ---------- ---------- ----------
2,397 5,516 8,085 10,275
---------- ---------- ---------- ----------
(Loss) Income Before (Benefit) Provision for
Income Taxes and Equity in Net Income of
Unconsolidated Entities.................... (909) (2,472) 3,225 5,689
---------- ---------- ---------- ----------
(Benefit) Provision for Income Taxes:
Current.................................... (79) (164) 131 --
Deferred................................... (189) (661) 1,158 2,011
State...................................... 8 30 21 98
---------- ---------- ---------- ----------
(260) (795) 1,310 2,109
---------- ---------- ---------- ----------
Equity in Net Income of Unconsolidated
Entities (Net of Applicable Taxes)......... 869 33 3,030 260
---------- ---------- ---------- ----------
Net Income (Loss)............................ $ 220 $ (1,644) $ 4,945 $ 3,840
========== ========== ========== ==========
Basic and Diluted Earnings Per Share:
Net Income (Loss).......................... $ 0.04 $ (0.27) $ 0.81 $ 0.63
========== ========== ========== ==========
Weighted Average Shares of Common Stock
Outstanding:
Basic...................................... 6,082,887 6,082,887 6,082,887 6,082,887
Diluted.................................... 6,088,036 6,082,887 6,092,536 6,082,887
The accompanying notes are an integral part of these statements.
F-2
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
ASSETS
Current Assets:
Cash and Cash Equivalents................................. $ 11,931 $ 8,881
Restricted Cash........................................... -- 816
Marketable Securities..................................... 4,837 2,650
Accounts Receivable, Net of Allowance for Doubtful
Accounts of $288 and $327 in 2004 and 2003,
Respectively:
Traffic................................................ 18,463 23,070
Agents................................................. 5,935 4,119
Claims and Other....................................... 5,367 9,438
Federal Income Taxes Receivable........................... 327 --
Deferred Income Tax....................................... 144 144
Net Investment in Direct Financing Lease.................. 2,284 2,128
Other Current Assets...................................... 5,248 6,295
Material and Supplies Inventory, at Lower of Cost or
Market................................................. 3,216 3,177
Current Assets Held for Disposal.......................... 89 89
--------- ---------
Total Current Assets........................................ 57,841 60,807
--------- ---------
Investment in Unconsolidated Entities....................... 10,128 8,413
--------- ---------
Net Investment in Direct Financing Lease.................... 47,386 49,136
--------- ---------
Vessels, Property, and Other Equipment, at Cost:
Vessels and Barges........................................ 325,759 324,413
Other Equipment........................................... 7,082 5,233
Terminal Facilities....................................... 140 345
Furniture and Equipment................................... 3,839 4,304
--------- ---------
336,820 334,295
Less -- Accumulated Depreciation.......................... (124,968) (111,154)
--------- ---------
211,852 223,141
--------- ---------
Other Assets:
Deferred Charges, Net of Accumulated Amortization of
$15,541 and $14,614 in 2004 and 2003, Respectively..... 14,514 12,319
Acquired Contract Costs, Net of Accumulated Amortization
of $22,522 and $21,430 in 2004 and 2003,
Respectively........................................... 8,004 9,095
Restricted Cash........................................... 6,541 6,590
Due from Related Parties.................................. 2,535 2,535
Other..................................................... 9,111 10,415
--------- ---------
40,705 40,954
--------- ---------
Total Assets................................................ $ 367,912 $ 382,451
========= =========
The accompanying notes are an integral part of these statements.
F-3
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS -- (CONTINUED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Maturities of Long-Term Debt...................... $ 13,815 $ 14,866
Accounts Payable and Accrued Liabilities.................. 29,500 35,510
Federal Income Tax Payable................................ -- 183
-------- --------
Total Current Liabilities................................... 43,315 50,559
-------- --------
Billings in Excess of Income Earned and Expenses Incurred... 1,809 5,271
-------- --------
Long-Term Debt, Less Current Maturities..................... 152,316 164,144
-------- --------
Other Long-Term Liabilities:
Deferred Income Taxes..................................... 22,601 19,565
Other..................................................... 20,528 21,545
-------- --------
43,129 41,110
-------- --------
Commitments and Contingent Liabilities
Stockholders' Investment:
Common Stock.............................................. 6,756 6,756
Additional Paid-In Capital................................ 54,450 54,450
Retained Earnings......................................... 74,875 69,930
Less -- Treasury Stock.................................... (8,704) (8,704)
Accumulated Other Comprehensive Loss...................... (34) (1,065)
-------- --------
127,343 121,367
-------- --------
Total Liabilities and Stockholders' Investment.............. $367,912 $382,451
======== ========
The accompanying notes are an integral part of these statements.
F-4
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
-------- --------
(ALL AMOUNTS IN
THOUSANDS)
(UNAUDITED)
Cash Flows from Operating Activities:
Net Income................................................ $ 4,945 $ 3,840
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation........................................... 14,422 15,670
Amortization of Deferred Charges and Other Assets...... 5,735 5,657
Deferred Provision for Federal Income Taxes............ 1,158 2,011
Equity in Net Income of Unconsolidated Entities........ (3,030) (260)
Loss (Gain) on Sale of Other Assets.................... 7 (290)
Loss on Early Extinguishment of Debt................... 46 1,310
Loss on Sale of Investment............................. 623 --
Changes in:
Accounts Receivable.................................... 6,863 (381)
Inventories and Other Current Assets................... 522 (544)
Deferred Drydocking Charges............................ (5,751) (1,112)
Other Assets........................................... 1,049 2,126
Accounts Payable and Accrued Liabilities............... (6,245) 4,028
Federal Income Taxes Payable........................... (819) 2,791
Billings in Excess of Income Earned and Expenses
Incurred.............................................. (3,462) (707)
Other Long-Term Liabilities............................ (1,590) (5,730)
-------- --------
Net Cash Provided by Operating Activities................... 14,473 28,409
-------- --------
Cash Flows from Investing Activities:
Net Investment in Direct Financing Lease............... 1,594 1,437
Additions to Vessels and Other Assets.................. (1,802) (5,287)
Proceeds from Sale of Vessels and Other Assets......... -- 478
Purchase of and Proceeds from Short Term Investments... (2,273) 46
Proceeds from Sale of Marketable Equity Securities..... -- 200
Distributions from Unconsolidated Entities............. 3,043 128
Partial Sale of Unconsolidated Entities................ -- 1,921
Net Decrease in Restricted Cash Account................ 865 384
Other Investing Activities............................. 113 6
-------- --------
Net Cash Provided (Used) by Investing Activities............ 1,540 (687)
-------- --------
Cash Flows from Financing Activities:
Proceeds from Issuance of Debt......................... 1,000 41,000
Repayment of Debt...................................... (13,879) (64,728)
Additions to Deferred Financing Charges................ (68) (221)
Other Financing Activities............................. (16) (197)
-------- --------
Net Cash Used by Financing Activities....................... (12,963) (24,146)
-------- --------
Net Increase in Cash and Cash Equivalents................... 3,050 3,576
Cash and Cash Equivalents at Beginning of Period............ 8,881 4,419
-------- --------
Cash and Cash Equivalents at End of Period.................. $ 11,931 $ 7,995
======== ========
The accompanying notes are an integral part of these statements.
F-5
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1. BASIS OF PREPARATION
We have prepared the accompanying unaudited interim financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission,
and we have omitted certain information and footnote disclosures required by
generally accepted accounting principles for complete financial statements. The
condensed consolidated balance sheet as of December 31, 2003 has been derived
from the audited financial statements at that date. We suggest that you read
these interim statements in conjunction with the financial statements and notes
thereto included in our Form 10-K for the year ended December 31, 2003. We have
made certain reclassifications to prior period financial information in order to
conform to current year presentations.
The foregoing 2004 interim results are not necessarily indicative of the
results of operations for the full year 2004. Interim statements are subject to
possible adjustments in connection with the annual audit of our accounts for the
full year 2004. Management believes that all adjustments necessary, consisting
only of normal recurring adjustments, for a fair presentation of the information
shown have been made.
Our policy is to consolidate all subsidiaries in which we hold a greater
than 50% voting interest and to use the equity method to account for investments
in entities in which we hold a 20% to 50% voting interest. We use the cost
method to account for investments in entities in which we hold less than 20%
voting interest and in which we cannot exercise significant influence over
operating and financial activities.
We have eliminated all significant intercompany accounts and transactions.
NOTE 2. EMPLOYEE BENEFIT PLANS
The following table provides the components of net periodic benefit cost
for the pension plan:
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
--------------- ---------------
2004 2003 2004 2003
------ ------ ------- -----
(ALL AMOUNTS IN THOUSANDS)
Components of net periodic benefit cost:
Service cost....................................... $ 137 $ 117 $ 411 $ 351
Interest cost...................................... 308 298 924 894
Expected return on plan assets..................... (346) (300) (1,038) (900)
Amortization of prior service cost................. 2 2 6 6
Amortization of net actuarial loss................. 23 47 69 141
----- ----- ------- -----
Net periodic benefit cost.......................... $ 124 $ 164 $ 372 $ 492
===== ===== ======= =====
F-6
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the components of net periodic benefit cost
for the postretirement benefits plan:
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
--------------- ---------------
2004 2003 2004 2003
------ ------ ------ ------
(ALL AMOUNTS IN THOUSANDS)
Components of net periodic benefit cost:
Service cost............................................. $ 19 $ 16 $ 57 $ 48
Interest cost............................................ 147 149 441 447
Amortization of net actuarial loss....................... 25 17 75 51
---- ---- ---- ----
Net periodic benefit cost................................ $191 $182 $573 $546
==== ==== ==== ====
We contributed $143,000 to our pension plan in the first quarter of 2004.
We do not expect to make any further contributions to our pension plan in 2004
and we do not expect to make any contributions to our post retirement benefits
plan in 2004.
In December of 2003, the Medicare Prescription Drug, Improvements, and
Modernization Act of 2003 (the "Act") was signed into law. In addition to
including numerous other provisions that have potential effects on an employer's
retiree health plan, the Medicare law included a special subsidy for employers
that sponsor retiree health plans with prescription drug benefits that are at
least as favorable as the new Medicare Part D benefit. In May of 2004, the
Financial Accounting Standards Board ("FASB") issued FASB Staff Position 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvements, and Modernization Act of 2003," that provides guidance on
the accounting for the effects of the Act for employers that sponsor
postretirement health care plans that provide drug benefits. We are still
evaluating whether our plan is actuarially equivalent, although its impact on
our financial position and results of operations is not material.
NOTE 3. OPERATING SEGMENTS
Our four operating segments, Liner Services, Time Charter Contracts,
Contracts of Affreightment, and Rail-Ferry Service, are identified primarily by
the characteristics of the contracts and terms under which our vessels and
barges are operated. We report in the Other category results of several of our
subsidiaries that provide ship charter brokerage, agency, and other specialized
services primarily to our operating segments. We manage each reportable segment
separately, as each requires different resources depending on the nature of the
contract or terms under which each vessel within the segment operates.
We do not allocate administrative and general expenses, investment income,
other income, losses or gains on early extinguishment of debt, equity in net
income of unconsolidated entities, or income taxes to our segments. Intersegment
revenues are based on market prices and include revenues earned by subsidiaries
that provide specialized services to the operating segments.
F-7
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information about segment profit and loss for
the three months ended September 30, 2004 and 2003:
TIME
LINER CHARTER CONTRACTS OF RAIL-FERRY
SERVICES CONTRACTS AFFREIGHTMENT SERVICE OTHER ELIMINATION TOTAL
-------- --------- ------------- ---------- ------ ----------- -------
(ALL AMOUNTS IN THOUSANDS)
2004
Revenues from external
customers...................... $25,725 $29,585 $4,018 $ 3,939 $5,530 -- $68,797
Intersegment revenues............ -- -- -- -- 3,115 (3,115) --
Vessel and barge depreciation.... 859 2,332 604 729 207 -- 4,731
Gross voyage (loss) profit....... (1,191) 7,432 1,013 (1,664) (199) -- 5,391
Interest expense................. 188 1,487 370 480 49 -- 2,574
Segment (loss) profit............ (1,379) 5,945 643 (2,144) (248) -- 2,817
---------------------------------------------------------------------------------------------------------------------
2003
Revenues from external
customers...................... $18,340 $31,965 $3,991 $ 3,758 $5,496 -- $63,550
Intersegment revenues............ -- -- -- -- 3,297 (3,297) --
Vessel and barge depreciation.... 956 2,886 605 729 111 -- 5,287
Gross voyage (loss) profit....... (1,192) 6,271 1,619 (853) 513 -- 6,358
Interest expense................. 240 1,693 458 524 47 -- 2,962
Gain on sale of other assets..... -- -- -- -- 247 -- 247
Segment (loss) profit............ (1,432) 4,578 1,161 (1,377) 713 -- 3,643
The following table presents information about segment profit and loss for
the nine months ended September 30, 2004 and 2003:
TIME
LINER CHARTER CONTRACTS OF RAIL-FERRY
SERVICES CONTRACTS AFFREIGHTMENT SERVICE OTHER ELIMINATION TOTAL
-------- --------- ------------- ---------- ------- ----------- --------
(ALL AMOUNTS IN THOUSANDS)
2004
Revenues from external
customers.................... $71,332 $87,086 $12,048 $11,923 $17,094 -- $199,483
Intersegment revenues.......... -- -- -- -- 9,344 (9,344) --
Vessel and barge
depreciation................. 2,570 6,898 1,813 2,187 586 -- 14,054
Gross voyage (loss) profit..... (429) 22,144 3,737 (3,382) 923 -- 22,993
Interest expense............... 614 4,533 1,140 1,476 159 -- 7,922
Loss on sale of other assets... -- -- -- -- (7) -- (7)
Segment (loss) profit.......... (1,043) 17,611 2,597 (4,858) 757 -- 15,064
---------------------------------------------------------------------------------------------------------------------
2003
Revenues from external
customers.................... $58,290 $98,579 $12,008 $11,138 $15,846 -- $195,861
Intersegment revenues.......... -- -- -- -- 10,180 (10,180) --
Vessel and barge
depreciation................. 2,598 8,204 1,813 2,187 277 -- 15,079
Gross voyage (loss) profit..... (1,737) 25,508 4,100 (2,002) 1,184 -- 27,053
Interest expense............... 809 5,506 1,372 1,768 159 -- 9,614
Gain on sale of other assets... -- -- -- -- 290 -- 290
Segment (loss) profit.......... (2,546) 20,002 2,728 (3,770) 1,315 -- 17,729
F-8
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a reconciliation of the totals reported for the operating
segments to the applicable line items in the consolidated financial statements:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(ALL AMOUNTS IN THOUSANDS)
Total reportable segment profit.............. $ 2,817 $ 3,643 $ 15,064 $ 17,729
Unallocated amounts:
Administrative and general expenses........ (3,903) (3,561) (11,676) (11,379)
Loss on sale of investment................. -- -- (623) --
Investment income.......................... 177 119 506 649
Other loss................................. -- (103) -- --
Loss on early extinguishment of debt....... -- (2,570) (46) (1,310)
------- ------- -------- --------
(Loss) income before (benefit) provision for
income taxes and equity in net income of
unconsolidated entities.................... $ (909) $(2,472) $ 3,225 $ 5,689
======= ======= ======== ========
NOTE 4. UNCONSOLIDATED ENTITIES
In the fourth quarter of 2003, through our wholly-owned subsidiary, we
acquired a 50% investment in Dry Bulk Cape Holding Inc. ("Dry Bulk"), which owns
two cape-size bulk carrier vessels built in calendar years 2002 and 2003. We
account for our investment in Dry Bulk under the equity method, and as such our
share of the earnings or losses of Dry Bulk is reported, net of taxes, in our
consolidated statements of income. For the nine months ended September 30, 2004,
our portion of earnings, net of taxes, was $2.3 million. For the three months
ended September 30, 2004, our portion of earnings net of taxes was $593,000. In
April of 2004, we received a cash distribution of $1.6 million from Dry Bulk
representing first quarter earnings and in July of 2004, we received a cash
distribution of $1 million from Dry Bulk representing second quarter earnings,
which were both recorded as reductions of our investment in Dry Bulk.
At September 30, 2004, we guarantee a portion of the outstanding debt of
Dry Bulk. The guarantee is for the full remaining term of the associated debt,
which was approximately 7 years as of September 30, 2004. Performance by us
would be required under the guarantee in the event of default by Dry Bulk on its
third party debt. This represents non-recourse debt to us. The portion of the
outstanding debt that we guaranteed at September 30, 2004, was $30,697,000.
The unaudited combined condensed results of operations of Dry Bulk are
summarized below:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2004
------------- -------------
(AMOUNTS IN THOUSANDS)
Operating Revenue.......................................... $4,210 $14,138
Operating Income........................................... $2,634 $ 9,515
Net Income................................................. $1,822 $ 7,058
NOTE 5. EARNINGS PER SHARE
Basic and diluted earnings per share were computed based on the weighted
average number of common shares issued and outstanding during the relevant
periods. Stock options covering 475,000 shares
F-9
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
were included in the computation of diluted earnings per share in the three
months and nine months ended September 30, 2004, but were excluded from the
computation of diluted earnings per share in the three months and nine months
ended September 30, 2003, as the effect would have been antidilutive.
NOTE 6. COMPREHENSIVE INCOME (LOSS)
The following table summarizes components of comprehensive income (loss)
for the three months ended September 30, 2004 and 2003:
THREE MONTHS
ENDED SEPT. 30,
----------------
2004 2003
----- --------
(AMOUNTS IN
THOUSANDS)
Net Income (Loss)........................................... $220 $(1,644)
Other Comprehensive Income (Loss):
Unrealized Holding Gain on Marketable Securities, Net of
Deferred Taxes of $21 and $22, Respectively............ 40 41
Net Change in Fair Value of Derivatives, Net of Deferred
Taxes of $188 and $37, Respectively.................... 350 69
---- -------
Total Comprehensive Income (Loss)........................... $610 $(1,534)
==== =======
The following table summarizes components of comprehensive income (loss)
for the nine months ended September 30, 2004 and 2003:
NINE MONTHS
ENDED SEPT. 30,
---------------
2004 2003
------ ------
(AMOUNTS IN
THOUSANDS)
Net Income.................................................. $4,945 $3,840
Other Comprehensive Income (Loss):
Recognition of Unrealized Holding Loss on Marketable
Securities, Net of Deferred Taxes of $216.............. 402 --
Unrealized Holding (Loss) Gain on Marketable Securities,
Net of Deferred Taxes of ($28) and $120,
Respectively........................................... (52) 222
Net Change in Fair Value of Derivatives, Net of Deferred
Taxes of $367 and $374, Respectively................... 681 694
------ ------
Total Comprehensive Income.................................. $5,976 $4,756
====== ======
NOTE 7. COAL CARRIER CONTRACT
As previously reported, our wholly owned subsidiary, Enterprise Ship
Company, Inc. ("Enterprise"), time charters the U.S. flag coal carrier, Energy
Enterprise, to US Generating New England, Inc. ("USGenNE"), an indirect
subsidiary of PG&E Corporation. On July 8, 2003, USGenNE filed a petition for
bankruptcy protection under Chapter 11 of the United States Bankruptcy Code and
has subsequently filed with the court an extension of time to submit its
bankruptcy plan until March 1, 2005, and an extension of time until May 1, 2005,
to solicit acceptance to its plan. USGenNE is current in all of its obligations
to Enterprise under the time charter except for approximately $850,000 of
pre-petition invoices covering charter hire and related expenses. The $850,000
is an unsecured claim in the bankruptcy proceeding. Under the federal bankruptcy
laws, USGenNE has the right to either accept or reject the
F-10
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
charter. If USGenNE accepts the charter, it is then required to meet its
financial obligations under the charter including the $850,000 pre-petition
invoices. If USGenNE rejects the charter, then Enterprise would have a priority
administrative claim with respect to all amounts due it under the charter
related to the post-petition period. At this time, we cannot predict whether the
charter will be accepted or rejected; therefore, we have not provided an
allowance for the pre-petition invoices in our financial statements as of
September 30, 2004. In the event the charter is ultimately rejected, management
believes the vessel can be utilized in alternative employment without incurring
a material impairment to the vessel's carrying value, although we can give no
assurance at this time. Although USGenNE has continued to use the vessel in 2004
through the date of this report, we can give no assurance whether USGenNE will
continue to use the vessel through the end of the year.
NOTE 8. INCOME TAXES
Under current United States tax law, U.S. companies like us and their
domestic subsidiaries generally are taxed on all income, including in our case
income from shipping operations, whether derived in the United States or abroad.
With respect to any foreign subsidiary in which we hold more than a 50 percent
interest (referred to in the tax laws as controlled foreign corporations, or
"CFCs"), we are treated as having received a current taxable distribution of our
pro rata share of income derived from foreign shipping operations.
The recently-enacted American Jobs Creation Act of 2004 (the "Jobs Creation
Act"), which becomes effective for us on January 1, 2005, will change the United
States tax treatment of our U.S. flag vessels in foreign operations and foreign
flag shipping operations.
We intend to make an election under the Jobs Creation Act to have our U.S.
flag operations (other than those of two ineligible vessels used exclusively in
United States coastwise commerce) taxed under a new "tonnage tax" regime rather
than under the usual U.S. corporate income tax regime. As a result of that
election, our gross income for United States income tax purposes with respect to
our eligible U.S. flag vessels will not include (1) income from qualifying
shipping activities in U.S. foreign trade (i.e., transportation between the U.S.
and foreign ports or between foreign ports), (2) income from cash, bank deposits
and other temporary investments that are reasonably necessary to meet the
working capital requirements of our qualifying shipping activities, and (3)
income from cash or other intangible assets accumulated pursuant to a plan to
purchase qualifying shipping assets.
Under the tonnage tax regime, our taxable income with respect to the
operations of our eligible U.S. flag vessels will be based on a "daily notional
taxable income," which will be taxed at the highest corporate income tax rate.
The daily notional taxable income from the operation of a qualifying vessel will
be 40 cents per 100 tons of the net tonnage of the vessel (up to 25,000 net
tons), and 20 cents per 100 tons of the net tonnage of the vessel in excess of
25,000 net tons. The taxable income of each qualifying vessel will be the
product of its daily notional taxable income and the number of days during the
taxable year that the vessel operates in United States foreign trade.
Under the Jobs Creation Act, the taxable income from the shipping
operations of our CFCs will generally no longer be subject to current United
States income tax but will be deferred until repatriated. Although we are still
analyzing the Jobs Creation Act, we currently estimate that it will result in a
$11.5 million reduction of our deferred tax provision which will be recorded and
reflected in our results of operations in the period in which our election under
the Jobs Creation Act is made. We are awaiting guidance from the Internal
Revenue Service as to the earliest period this election can be made. In
addition, we project that our effective tax rate under the Jobs Creation Act
will be reduced to approximately 25% in fiscal years 2005 and 2006 with a
further reduction to approximately 8% in fiscal years thereafter that the Jobs
Creation Act remains in effect.
F-11
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
In January of 2003, the FASB issued Financial Accounting Series
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities."
FIN 46 requires a variable interest entity to be consolidated by the primary
beneficiary of the entity, where the company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns, or both. In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
also requires disclosures about variable interest entities that the company is
not required to consolidate but in which it has a significant variable interest.
We have investments in certain unconsolidated entities in which we have less
than 100% ownership. We have evaluated these investments and determined that we
do not have any investments in variable interest entities. Therefore, the
adoption of FIN No. 46 as of January 1, 2004 did not have an impact on the
financial statements.
F-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
International Shipholding Corporation
We have audited the accompanying consolidated balance sheets of
International Shipholding Corporation and subsidiaries as of December 31, 2003
and 2002, and the related consolidated statements of income, changes in
stockholders' investment and cash flows for the two years in the period ended
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of
International Shipholding Corporation as of December 31, 2001 and for the year
then ended were audited by other auditors who have ceased operations and whose
report dated January 11, 2002, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of International
Shipholding Corporation and subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the two years
in the period ended December 31, 2003, in conformity with U.S. generally
accepted accounting principles.
As discussed above, the financial statements of International Shipholding
Corporation as of December 31, 2001 and for the year then ended were audited by
other auditors who have ceased operations. As described in Note K, the Company
changed the composition of reportable segments in 2002 and the 2001 financial
statements have been revised to conform to the 2002 composition of reportable
segments. We audited the adjustments that were applied to revise the disclosures
of reportable segments reflected in the 2001 financial statements. In our
opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2001 financial statements of the Company other than with respect to such
adjustments and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 financial statements taken as a whole.
/s/ ERNST & YOUNG LLP
New Orleans, Louisiana
January 29, 2004
F-13
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH INTERNATIONAL SHIPHOLDING CORPORATION'S FILING ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED
BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2003.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of International Shipholding Corporation:
We have audited the accompanying consolidated balance sheets of
International Shipholding Corporation (a Delaware corporation) and subsidiaries
(the Company) as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in stockholders' investment and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of International
Shipholding Corporation and subsidiaries as of December 31, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
January 11, 2002
F-14
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
(ALL AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
Revenues................................................. $ 257,813 $ 227,412 $ 304,370
Operating Expenses:
Voyage Expenses........................................ 203,839 177,836 246,180
Vessel and Barge Depreciation.......................... 20,134 19,140 30,960
Impairment Loss........................................ -- (66) 81,038
---------- ---------- ----------
Gross Voyage Profit (Loss)............................... 33,840 30,502 (53,808)
---------- ---------- ----------
Administrative and General Expenses...................... 15,646 15,734 23,578
Gain on Sale of Vessels and Other Assets................. (1,393) (557) (3,501)
---------- ---------- ----------
Operating Income (Loss).................................. 19,587 15,325 (73,885)
---------- ---------- ----------
Interest and Other:
Interest Expense....................................... 12,514 17,706 26,737
Impairment Loss on Investment.......................... -- 598 --
Investment Income...................................... (2,162) (656) (1,157)
Other Income........................................... -- (1,498) --
Loss (Gain) on Early Extinguishment of Debt............ 1,310 (65) (23)
---------- ---------- ----------
11,662 16,085 25,557
---------- ---------- ----------
Income (Loss) Before Provision (Benefit) for Income Taxes
and Equity in Net Income of Unconsolidated Entities.... 7,925 (760) (99,442)
---------- ---------- ----------
Provision (Benefit) for Income Taxes:
Current................................................ 183 -- 47
Deferred............................................... 2,634 (170) (34,690)
State.................................................. 39 101 83
---------- ---------- ----------
2,856 (69) (34,560)
---------- ---------- ----------
Equity in Net Income of Unconsolidated Entities (Net of
Applicable Taxes)...................................... 422 555 463
---------- ---------- ----------
Net Income (Loss)........................................ $ 5,491 $ (136) $ (64,419)
========== ========== ==========
Basic and Diluted Earnings Per Share:
Net Income (Loss)...................................... $ 0.90 $ (0.02) $ (10.59)
========== ========== ==========
Basic and Diluted Weighted Average Shares of Common Stock
Outstanding............................................ 6,082,887 6,082,887 6,082,887
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-15
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
(ALL AMOUNTS IN THOUSANDS)
ASSETS
Current Assets:
Cash and Cash Equivalents................................. $ 8,881 $ 4,419
Restricted Cash........................................... 816 --
Marketable Securities..................................... 2,650 2,211
Accounts Receivable, Net of Allowance for Doubtful
Accounts of $327 and $332 in 2003 and 2002,
Respectively:
Traffic................................................ 23,070 16,341
Agents'................................................ 4,119 4,343
Claims and Other....................................... 9,438 9,408
Federal Income Taxes Receivable........................... -- 5,755
Deferred Income Tax....................................... 144 576
Net Investment in Direct Financing Lease.................. 2,128 1,944
Other Current Assets...................................... 6,295 6,212
Material and Supplies Inventory, at Lower of Cost or
Market................................................. 3,177 3,492
Current Assets Held for Disposal.......................... 89 2,762
--------- ---------
Total Current Assets........................................ 60,807 57,463
--------- ---------
Marketable Equity Securities................................ -- 200
--------- ---------
Investment in Unconsolidated Entities....................... 8,413 8,251
--------- ---------
Net Investment in Direct Financing Lease.................... 49,136 51,264
--------- ---------
Vessels, Property, and Other Equipment, at Cost:
Vessels and Barges........................................ 324,413 336,755
Other Equipment........................................... 5,233 5,507
Terminal Facilities....................................... 345 336
Furniture and Equipment................................... 4,304 9,042
--------- ---------
334,295 351,640
Less -- Accumulated Depreciation.......................... (111,154) (110,535)
--------- ---------
223,141 241,105
--------- ---------
Other Assets:
Deferred Charges, Net of Accumulated Amortization of
$14,614 and $13,572 in 2003 and 2002, Respectively..... 12,319 14,628
Acquired Contract Costs, Net of Accumulated Amortization
of $21,430 and $19,976 in 2003 and 2002,
Respectively........................................... 9,095 10,550
Restricted Cash........................................... 6,590 8,096
Due from Related Parties.................................. 2,535 2,609
Other..................................................... 10,415 12,586
--------- ---------
40,954 48,469
--------- ---------
Total Assets................................................ $ 382,451 $ 406,752
========= =========
The accompanying notes are an integral part of these statements.
F-16
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
(ALL AMOUNTS IN THOUSANDS
EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Maturities of Long-Term Debt...................... $ 14,866 $ 21,362
Accounts Payable and Accrued Liabilities.................. 35,510 34,252
Federal Income Tax Payable................................ 183 --
-------- --------
Total Current Liabilities................................... 50,559 55,614
-------- --------
Billings in Excess of Income Earned and Expenses Incurred... 5,271 1,207
-------- --------
Long-Term Debt, Less Current Maturities..................... 164,144 192,297
-------- --------
Other Long-Term Liabilities:
Deferred Income Taxes..................................... 19,565 14,358
Claims and Other.......................................... 21,545 28,049
-------- --------
41,110 42,407
-------- --------
Commitments and Contingent Liabilities
Stockholders' Investment:
Common Stock, $1.00 Par Value, 10,000,000 Shares
Authorized, 6,756,330 Shares Issued at December 31,
2003 and 2002.......................................... 6,756 6,756
Additional Paid-In Capital................................ 54,450 54,450
Retained Earnings......................................... 69,930 64,439
Less -- 673,443 Shares of Common Stock in Treasury, at
Cost, at December 31, 2003 and 2002.................... (8,704) (8,704)
Accumulated Other Comprehensive Loss...................... (1,065) (1,714)
-------- --------
121,367 115,227
-------- --------
Total Liabilities and Stockholders' Investment.............. $382,451 $406,752
======== ========
The accompanying notes are an integral part of these statements.
F-17
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) TOTAL
------ ---------- -------- -------- ------------- --------
(ALL AMOUNTS IN THOUSANDS)
Balance at December 31, 2000.................. $6,756 $54,450 $129,755 $(8,704) $ (725) $181,532
Comprehensive Loss:
Net Loss for Year Ended December 31, 2001... -- -- (64,419) -- -- (64,419)
Other Comprehensive Income (Loss):
Unrealized Holding Loss on Marketable
Securities, Net of Deferred Taxes of
($76).................................. -- -- -- -- (144) (144)
Cumulative Effect of Adoption of SFAS No.
133, Net of Deferred Taxes of $135, on
January 1, 2001........................ -- -- -- -- 250 250
Net Change in Fair Value of Derivatives,
Net of Deferred Taxes of ($836)........ -- -- -- -- (1,553) (1,553)
--------
Total Comprehensive Loss...................... (65,866)
Cash Dividends................................ -- -- (761) -- -- (761)
------ ------- -------- ------- ------- --------
Balance at December 31, 2001.................. $6,756 $54,450 $ 64,575 $(8,704) $(2,172) $114,905
------ ------- -------- ------- ------- --------
Comprehensive Income:
Net Loss for Year Ended December 31, 2002... -- -- (136) -- -- (136)
Other Comprehensive Income (Loss):
Unrealized Holding Loss on Marketable
Securities, Net of Deferred Taxes of
($194)................................. -- -- -- -- (362) (362)
Recognition of Unrealized Holding Loss on
Marketable Securities, Net of Deferred
Taxes of $248.......................... -- -- -- -- 461 461
Net Change in Fair Value of Derivatives Net
of Deferred Taxes of $193................ -- -- -- -- 359 359
--------
Total Comprehensive Income.................... 322
------ ------- -------- ------- ------- --------
Balance at December 31, 2002.................. $6,756 $54,450 $ 64,439 $(8,704) $(1,714) $115,227
------ ------- -------- ------- ------- --------
Comprehensive Income:
Net Income for Year Ended December 31,
2003..................................... -- -- 5,491 -- -- 5,491
Other Comprehensive Income (Loss):
Unrealized Holding Gain on Marketable
Securities, Net of Deferred Taxes of
$207................................... -- -- -- -- 387 387
Net Change in Fair Value of Derivatives, Net
of Deferred Taxes of $141................ -- -- -- -- 262 262
--------
Total Comprehensive Income.................... 6,140
------ ------- -------- ------- ------- --------
Balance at December 31, 2003.................. $6,756 $54,450 $ 69,930 $(8,704) $(1,065) $121,367
====== ======= ======== ======= ======= ========
The accompanying notes are an integral part of these statements.
F-18
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
--------- -------- ---------
(ALL AMOUNTS IN THOUSANDS)
Cash Flows from Operating Activities:
Net Income (Loss)........................................ $ 5,491 $ (136) $ (64,419)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation.......................................... 20,855 20,123 32,580
Amortization of Deferred Charges and Other Assets..... 7,525 7,994 11,311
Provision (Benefit) for Deferred Income Taxes......... 2,634 (170) (34,690)
Equity in Net Income of Unconsolidated Entities....... (422) (555) (463)
Gain on Sale of Other Assets.......................... (1,393) (557) (3,501)
Impairment Loss....................................... -- (66) 81,038
Impairment Loss on Investment......................... -- 598 --
Loss (Gain) on Early Extinguishment of Debt........... 1,310 (65) (23)
Changes in:
Accounts Receivable................................... (7,390) 14,540 20,763
Inventories and Other Current Assets.................. 231 (397) 3,790
Deferred Drydocking Charges........................... (2,210) (2,906) (7,589)
Other Assets.......................................... 2,668 3,035 846
Accounts Payable and Accrued Liabilities.............. 3,536 (15,054) (13,851)
Federal Income Taxes Payable.......................... 8,379 (564) 982
Billings in Excess of Income Earned and Expenses
Incurred............................................ 3,270 (558) (4,109)
Other Long-Term Liabilities........................... (5,868) (6,823) (1,347)
--------- -------- ---------
Net Cash Provided by Operating Activities.................. 38,616 18,439 21,318
--------- -------- ---------
Cash Flows from Investing Activities:
Net Investment in Direct Financing Leases................ 1,944 1,775 2,540
Additions to Vessels and Other Property.................. (5,360) (8,558) (40,171)
Proceeds from Sale of Vessels and Other Assets........... 3,299 18,110 126,011
Purchase of and Proceeds from Short Term Investments..... 126 327 2,824
Proceeds from Sale of Marketable Equity Securities....... 200 -- --
Investment in Unconsolidated Entities.................... (3,362) (2,151) (3,627)
Partial Sale of Investment in Unconsolidated Entities.... 4,223 110 --
Net Decrease (Increase) in Restricted Cash Account....... 690 (567) (5,815)
Other Investing Activities............................... 12 410 46
--------- -------- ---------
Net Cash (Used) Provided by Investing Activities........... 1,772 9,456 81,808
--------- -------- ---------
Cash Flows from Financing Activities:
Proceeds from Issuance of Debt........................... 139,000 41,500 56,300
Repayment of Debt and Capital Lease Obligations.......... (173,675) (89,976) (148,513)
Additions to Deferred Financing Charges.................. (1,054) (264) (195)
Common Stock Dividends Paid.............................. -- -- (761)
Other Financing Activities............................... (197) 114 --
--------- -------- ---------
Net Cash Used by Financing Activities...................... (35,926) (48,626) (93,169)
--------- -------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents....... 4,462 (20,731) 9,957
Cash and Cash Equivalents at Beginning of Year............. 4,419 25,150 15,193
--------- -------- ---------
Cash and Cash Equivalents at End of Year................... $ 8,881 $ 4,419 $ 25,150
========= ======== =========
The accompanying notes are an integral part of these statements.
F-19
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
International Shipholding Corporation (a Delaware corporation) and its
majority-owned subsidiaries. In this report, the terms "we," "us," "our," and
"the Company" refer to International Shipholding Corporation and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Our policy is to consolidate all subsidiaries in which we hold a greater
than 50% voting interest or otherwise exercise significant influence over
operating and financial activities. We use the equity method to account for
investments in entities in which we hold a 20% to 50% voting interest and the
cost method to account for investments in entities in which we hold less than
20% voting interest and in which we cannot exercise significant influence over
operating and financial activities.
Certain reclassifications have been made to the prior period financial
information in order to conform to current year presentation.
NATURE OF OPERATIONS
Through our subsidiaries, we operate a diversified fleet of U.S. and
international flag vessels that provide domestic and international maritime
transportation services to commercial customers and agencies of the United
States government primarily under medium- to long-term charters or contracts. At
December 31, 2003, our fleet consisted of 35 ocean-going vessels, 917 LASH
(Lighter Aboard SHip) barges, 22 Haul-Away car carrying trucks, and related
shoreside handling facilities. Our strategy is to (i) identify customers with
marine transportation needs requiring specialized vessels or operating
techniques, (ii) seek medium- to long-term charters or contracts with those
customers and, if necessary, modify, acquire, or construct vessels to meet the
requirements of those charters or contracts, and (iii) secure financing for the
vessels predicated primarily on those charter or contract arrangements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
VOYAGE REVENUE AND EXPENSE RECOGNITION
Revenues and expenses relating to our liner and rail-ferry segments'
voyages are recorded over the duration of the voyage. Revenues and expenses
relating to our other segments' voyages are recorded when earned or incurred
during the reporting period. These segments require no estimates or assumptions
when reporting revenues and expenses. On our liner services, the voyage revenues
are known at the beginning of the vessel's voyage and are reported through the
date of the financial statements based on the relative transit time, which is
the time between the vessel's loading port to the vessel's discharge port.
Variances from initial revenue voyage estimates are generally not material.
Voyage expenditures are estimated at the beginning of the vessel's voyage based
on historical cost standards and current estimates received from our vendors and
port agents. During the course of the vessel's voyage, typically 30 to 60 days,
actual costs replace the original estimates and become part of the historical
cost standards. Because of our on-going voyage review process, material
variances from our original revenue and expense estimates are reported timely
and generally are not recurring.
F-20
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSIDY AGREEMENTS
The Maritime Security Act ("MSA"), which provides for a subsidy program,
the Maritime Security Program ("MSP"), for certain U.S. flag vessels, was signed
into law in October of 1996. As of December 31, 2003, our U.S. flag LASH vessel,
four of our Pure Car/Truck Carriers ("PCTCs"), and two vessels operating under a
bareboat charter were qualified and received contracts for MSA participation.
Under this program, each participating vessel is eligible to receive an annual
payment of $2,100,000, which is subject to annual appropriations and not
guaranteed. In 2003, Congress authorized an extension of the MSP through 2015,
increased the number of ships eligible to participate in the program from 47 to
60, and increased MSP payments to companies in the program, all to be effective
on October 1, 2005. Annual payments for each vessel in the new MSP program are
$2,600,000 in years 2006 to 2008, $2,900,000 in years 2009 to 2011, and
$3,100,000 in years 2012 to 2015. We recognize subsidy revenue on a monthly
basis over the duration of the qualifying contracts.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
We consider highly liquid debt instruments with a maturity of three months
or less to be cash equivalents. We have categorized all marketable securities as
available-for-sale. The carrying amount approximates fair value for each of
these instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. The base-stock
method is used for our vessels, and the first-in, first-out ("FIFO") method is
used for fuel.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We provide an allowance for doubtful accounts for accounts receivable
balances estimated to be non-collectible. These provisions are maintained based
on identified specific accounts, past experiences, and current trends, and
require management's estimates with respect to the amounts that are
non-collectible.
PROPERTY
For financial reporting purposes, vessels are depreciated over their
estimated useful lives using the straight-line method. Estimated useful lives of
Vessels and Barges, Other Equipment, Terminal Facilities, and Furniture and
Equipment are as follows:
YEARS
-----
2 LASH Vessels.............................................. 30
3 Pure Car/Truck Carriers................................... 20
1 Coal Carrier.............................................. 15
5 Other Vessels*............................................ 25
Other Equipment............................................. 3-12
Terminal Facilities......................................... 5-10
Furniture and Equipment..................................... 3-10
---------------
* Includes two Special Purpose vessels, a Dockship, a Molten Sulphur Carrier,
and a Container vessel.
At December 31, 2003, our fleet of 35 vessels also included (i) three
Roll-On/Roll-Off ("RO/RO") vessels, which we operate, (ii) an Ice Strengthened
Breakbulk/Multi-Purpose, a Tanker and a Container vessel, which we charter in
for one of our services, (iii) three PCTCs which we charter in for our Time
Charter contracts, (iv) two Container vessels under a bareboat agreement, (v)
one LASH vessel which we
F-21
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
charter in for our Transatlantic service, (vi) one Molten Sulphur Tanker, which
we charter in for our Contract of Affreightment, (vii) two Cape-Size Bulk
Carriers in which we own a 50% interest, and (viii) eight Cement Carriers and
one Ice Strengthened Bulk Carrier in which we own a 30% interest. Through our
50% ownership in a car transportation truck company, we own 22 Haul-Away car
carrying trucks.
Costs of all major property additions and betterments are capitalized.
Ordinary maintenance and repair costs are expensed as incurred. Interest and
finance costs relating to vessels, barges, and other equipment under
construction are capitalized to properly reflect the cost of assets acquired. No
interest was capitalized in 2003, 2002 or 2001.
At December 31, 2003, our fleet also included 917 LASH barges. We group our
LASH barges, excluding those held for disposal, into pools with estimated useful
lives corresponding to the remaining useful lives of the vessels with which they
are utilized. Major barge refurbishments are capitalized and included in the
aforementioned group of barge pools. From time to time, we dispose of barges in
the ordinary course of business. In these cases, proceeds from the disposition
are credited to the remaining net book value of the respective pool and future
depreciation charges are adjusted accordingly.
We monitor all of our fixed assets for impairment and perform an impairment
analysis in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," when
triggering events or circumstances indicate a fixed asset may be impaired.
DRYDOCKING COSTS
We defer certain costs related to the drydocking of our vessels. Deferred
drydocking costs are capitalized as incurred and amortized on a straight-line
basis over the period between drydockings (generally two to five years). Because
drydocking charges can be material in any one period, we believe that the
acceptable deferred method provides a better matching for the amortization of
those costs over future revenue periods benefiting from the drydocking of our
vessel. (See Note J).
DEFERRED FINANCING CHARGES AND ACQUIRED CONTRACT COSTS
We amortize our deferred financing charges and acquired contract costs on a
straight-line basis over the terms of the related financing and contracts. (See
Note J).
SELF-RETENTION INSURANCE
We maintain provisions for estimated losses under our self-retention
insurance based on estimates of the eventual claims settlement costs. Our policy
is to establish self-insurance provisions for each policy year based on
independent actuarial estimates, and to maintain the provisions at those levels
for the estimated run-off period, approximately two years from the inception of
that period. We believe most claims will be reported, or estimates for existing
claims will be revised, within this two-year period. Subsequent to this two-year
period, self-insurance provisions are adjusted to reflect our current estimate
of loss exposure for the policy year. Our estimates are determined based on
various factors, such as (1) severity of the injury (for personal injuries) and
estimated potential liability based on past judgments and settlements, (2)
advice from legal counsel based on its assessment of the facts of the case and
its experience in other cases, (3) probability of pre-trial settlement which
would mitigate legal costs, (4) historical experience on claims for each
specific type of cargo (for cargo damage claims), and (5) whether our seamen are
employed in permanent positions or temporary revolving positions. It is
reasonably possible that changes in our estimated exposure may occur from time
to time. However, if during this two-year period our estimate of loss exposure
exceeds the actuarial estimate, then additional
F-22
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loss provisions are recorded to increase the self-insurance provisions to our
estimate of the eventual claims' settlement cost. The measurement of our
exposure for self-insurance liability requires management to make estimates and
assumptions that affect the amount of loss provisions recorded during the
reporting period. Actual results could differ materially from those estimates.
(See Note D).
ASBESTOS CLAIMS
We maintain provisions for our estimated losses for asbestos claims based
on estimates of eventual claims settlement costs. Our policy is to establish
provisions based on a range of estimated exposure. We estimate this potential
range of exposure using input from legal counsel and internal estimates based on
the individual deductible levels for each policy year. We are also indemnified
for certain of these claims by the previous owner of one of our wholly-owned
subsidiaries. The measurement of our exposure for asbestos liability requires
management to make estimates and assumptions that affect the amount of the loss
provisions recorded during the period. Our estimates and assumptions are formed
from variables such as the maximum deductible levels in a claim year, the amount
of the indemnification recovery and the claimant's employment history with the
company. Actual results could differ from those estimates.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting
for Income Taxes." Provisions for income taxes include deferred income taxes
that are provided on items of income and expense, which affect taxable income in
one period and financial income in another.
Certain foreign operations are not subject to income taxation under
pertinent provisions of the laws of the country of incorporation or operation.
However, pursuant to existing U.S. Tax Laws, earnings from certain foreign
operations are subject to U.S. income taxes (See Note F).
FOREIGN CURRENCY TRANSACTIONS
Certain of our revenues and expenses are converted into or denominated in
foreign currencies, primarily Singapore Dollar, Indonesian Rupiah, Euro, British
Pound, Mexican Peso and Indian Rupee. All exchange adjustments are charged or
credited to income in the year incurred. Exchange losses of $96,000, $227,000,
and $54,000 were recognized for the years ended December 31, 2003, 2002, and
2001, respectively.
DIVIDEND POLICY
The Board of Directors declared and paid dividends of 6.25 cents per share
for the first and second quarter in 2001. In June of 2001, the Board of
Directors elected to suspend future quarterly dividend payments indefinitely as
those payments would have exceeded the restricted payments amount as defined in
our debt covenants (See Note C).
NET INCOME PER COMMON SHARE
Earnings per common share are based on the weighted average number of
common shares outstanding during the period. The weighted average number of
common shares outstanding was 6,082,887 for the years ended December 31, 2003,
2002 and 2001. Basic and diluted weighted average common shares outstanding were
the same for each of these years. The effect of 475,000 stock options granted
during 1999 was anti-dilutive for all periods (See Note E).
F-23
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, in order to consider a derivative instrument as a
hedge, (i) we must designate the instrument as a hedge of future transactions,
and (ii) the instrument must reduce our exposure to the applicable risk. If the
above criteria are not met, we must record the fair market value of the
instrument at the end of each period and recognize the related gain or loss
through earnings. If the instrument qualifies as a hedge, net settlements under
the agreement are recognized as an adjustment to earnings, while changes in the
fair market value of the hedge are recorded through Stockholders' Investment in
Other Comprehensive Income. We recognize the fair market value of the hedge
through earnings at the time of maturity, sale or termination of the hedge.
We adopted SFAS No. 133, as amended, on January 1, 2001, which resulted in
a cumulative effect of accounting change to earnings of $16,000 and an increase
in Other Comprehensive Income of $385,000. We employ interest rate swap
agreements, foreign currency contracts, and commodity swap contracts (See Note
N).
STOCK-BASED COMPENSATION
We account for stock-based compensation using Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
no compensation expense is recognized for employee stock options issued under
the Stock Incentive Plan if the exercise price of the options equals the market
price of our stock on the date of grant (See Note E).
PENSION AND POSTRETIREMENT BENEFITS
Our pension and postretirement benefit costs are calculated using various
actuarial assumptions and methodologies as prescribed by SFAS No. 87,
"Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions." These assumptions include
discount rates, health care cost trend rates, inflation, rate of compensation
increases, expected return on plan assets, mortality rates, and other factors.
We believe that the assumptions utilized in recording the obligations under our
plans are reasonable based on input from our outside actuary and information as
to historical experience and performance. Differences in actual experience or
changes in assumptions may affect our pension and postretirement obligations and
future expense.
NEW ACCOUNTING PRONOUNCEMENTS
In April of 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," which is effective for fiscal
years beginning after May 15, 2002. This statement, among other matters, revises
current guidance with respect to gains and losses on early extinguishment of
debt. Under SFAS No. 145, gains and losses on early extinguishment of debt are
no longer treated as extraordinary items unless they meet the criteria for
extraordinary treatment in APB Opinion No. 30. We adopted SFAS No. 145 effective
January 1, 2003, and reclassified gains and losses on early extinguishment of
debt reported in prior period income statements, as those amounts no longer
qualify for extraordinary treatment under SFAS No. 145. We reported losses
related to the early extinguishment of debt of $1,310,000 for the year ended
December 31, 2003 and gains of $65,000 and $23,000 for the years ended December
31, 2002 and 2001, respectively.
In July of 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supersedes Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
F-24
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF Issue No. 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit or
disposal plan. The provisions of SFAS No. 146 are effective for exit and
disposal activities that are initiated after December 31, 2002. We adopted SFAS
No. 146 effective January 1, 2003, which had no material effect on our financial
position or results of operations.
In December of 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS
No. 148 were effective for fiscal years ending after December 15, 2002. The
interim disclosure provisions were effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. We
continue to apply APB No. 25, "Accounting for Stock Issued to Employees," in
accounting for our stock-based compensation. Therefore, the alternative methods
of transition referred to above do not apply. We have adopted the disclosure
requirements of SFAS No. 148. If compensation expense had been determined using
the fair value method in SFAS No. 123, our net income (loss) and earnings (loss)
per share for the years ended December 31, 2003, 2002, and 2001 would have
agreed to the actual amounts reported due to all outstanding stock options being
fully vested and no options being granted during these periods.
In January of 2003, the FASB issued Financial Accounting Series
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities."
FIN 46 requires a variable interest entity to be consolidated by the primary
beneficiary of the entity, which the company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns, or both. In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
also requires disclosures about variable interest entities that the company is
not required to consolidate but in which it has a significant variable interest.
The provisions of FIN 46 were effective immediately for those variable interest
entities created after January 31, 2003. On December 24, 2003, the FASB issued a
revision to FIN 46, which among other things deferred the effective date for
certain variable interests. Application is required for interests in
special-purpose entities in the period ending after December 15, 2003 and
application is required for all other types of variable interest entities in the
period ending after March 31, 2004. We do not believe that we have a significant
interest in a variable interest entity; however, we are still evaluating the
effect of adoption of FIN 46.
In May of 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires an issuer to classify the following instruments as liabilities:
(a) a financial instrument issued in the form of shares that is mandatorily
redeemable that embodies an unconditional obligation requiring the issuer to
redeem it by transferring its assets at a specified date or upon an event that
is certain to occur, (b) a financial instrument other than an outstanding share
that embodies an obligation to repurchase the issuer's equity shares, or is
indexed to such an obligation, and that requires the issuer to settle the
obligation by transferring assets, and (c) a financial instrument that embodies
an unconditional obligation that the issuer must or may settle by issuing a
variable number of its equity shares. SFAS No. 150 does not apply to features
embedded in a financial instrument that is not a derivative in its entirety.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except with respect to certain
F-25
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
instruments for which the effective date has been deferred. Because we do not
have any such instruments outstanding, the adoption of SFAS No. 150 did not
materially impact our financial position or results of operations.
In September of 2003, the Securities and Exchange Commission approved a
Statement of Position ("SOP") on "Accounting for Certain Costs and Activities
Related to Property, Plant and Equipment." The SOP is expected to be presented
for FASB clearance early in 2004 and may be issued as a final standard shortly
thereafter. This proposed SOP provides guidance on accounting for certain costs
and activities relating to property, plant, and equipment ("PP&E") and
incorporates the following principles; (1) PP&E consists of one or more
components, which should be recorded at cost, (2) a PP&E component should be
depreciated over its expected useful life, and (3) the costs of a replacement
PP&E component and the component replaced should not concurrently be recorded as
assets. Costs related to PP&E that are incurred during the in-service stage
should be charged to expense as incurred unless the costs are incurred for the
acquisition or construction of additional components or the replacement of
existing components. Our current policy on drydocking costs is to defer these
costs and amortize them over the period between drydockings. As of December 31,
2003, unamortized drydocking costs were $9.8 Million. If this SOP is approved as
a final standard in its current form, we would have to recognize a cumulative
effect adjustment to expense all unamortized drydocking costs and we would
expense all future drydocking costs as incurred. The effective date of the
proposed SOP would be no sooner than fiscal years beginning after December 15,
2004.
In December of 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The revised statement retains
the disclosure requirements of the original statement and requires additional
annual disclosures including information describing the types of plan assets,
investment strategy, measurement dates, plan obligations, and cash flows. In
addition to expanded annual disclosures, the revised statement requires the
components of net periodic benefit cost to be disclosed in interim periods. This
statement is effective for financial statements with fiscal years ended after
December 15, 2003, and the interim period disclosures are effective for interim
periods beginning after December 15, 2003. The additional annual disclosures
required by the revised statement are included in this report.
NOTE B -- PROPERTY
In June of 2001, we adopted a plan to separate the LASH service (the Liner
Services segment), our Cape-Size Bulk Carrier (the Time Charter Contracts
segment), and certain Special Purpose barges (the Other segment) from the
balance of our operations and dispose of these assets. The past several years
had reflected a downward trend in the Liner Services segment as a result of
higher operating cost, disruptions in service due to unplanned maintenance, and
changes in market conditions. In December of 2001, we reclassified our foreign
flag LASH service assets, which are comprised of two LASH vessels, one Dockship,
and a certain number of LASH barges, as assets held for use as a result of
extended cargo commitments from a shipper.
During the second quarter of 2002, we announced that we were reviewing the
possibility of reactivating a U.S. flag service between the U.S. Gulf and East
Coast ports and ports in the Red Sea and Middle East due to several changes in
circumstances that have occurred since our decision in the second quarter of
2001 to suspend the previous service. We believe that an adequate cargo volume
to the service area for shipment on U.S. flag vessels will be maintained. As a
result, we have recommissioned one of our foreign flag LASH vessels, which had
been idle and scheduled for disposal, together with a certain number of LASH
barges. After its upgrade, the foreign flag vessel entered our foreign flag LASH
Liner Service in November of 2002, replacing one of the vessels operating in
that service. The replaced vessel transferred to
F-26
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. flag for use in the renewed U.S. flag LASH Liner Service, which commenced
operation in November of 2002.
During 2001, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
issued by the FASB, we recognized an impairment loss of $81,038,000 comprised of
$60,553,000 on the U.S. flag LASH service, one Cape-Size Bulk Carrier, and 28
Special Purpose barges; $18,130,000 on our foreign flag LASH service; and
$2,355,000 on one of our LASH vessels that was sold while held for disposal.
This vessel completed its commitment under charter with the U.S. Military
Sealift Command ("MSC"), reached the end of its economic life, and was sold for
scrap. The impairment loss on the assets was measured as the amount by which the
carrying value of the assets exceeded the fair value. The fair value of the
foreign flag LASH service assets was estimated by determining the present value
of its expected future cash flows using a discount rate believed to be
commensurate with our borrowing rate. The fair value of the U.S. flag LASH
service assets was estimated by determining the scrap value per lightweight ton.
During 2001, we sold our Cape-Size Bulk Carrier and 77 LASH barges. During
2002, we sold four U.S. flag LASH vessels, our FLASH unit, 803 LASH barges, and
14 Special Purposes barges and recognized a net gain of $66,000 on the sale of
these assets. We are still in the process of disposing of 18 LASH barges, which
are not needed for current operations. These assets are included in our balance
sheet as Current Assets Held for Disposal.
We owned a coal transfer terminal facility, which we operated for use with
a coal transportation contract that terminated in December of 1998. Upon
termination of the contract, we sought various business options that would
utilize the coal transfer terminal facility. In September of 2002, we decided to
place the terminal facility and land up for sale and accordingly reclassified
these assets to Current Assets Held for Disposal. Based on an appraisal of the
terminal facility and land, we determined that the fair value of these assets
exceeded the net book value. Therefore, no impairment loss was recognized upon
reclassification of these assets. We sold the land and facility in 2003
resulting in a gain of $40,000.
During 2003, we recognized a net gain on the sale of assets of $1,393,000
primarily as a result of a gain of $756,000 on the sale of the remaining Special
Purpose barges that were included in Current Assets Held for Disposal, a gain of
$482,000 from the sale of our Ice Strengthened Multi-Purpose vessel, which
completed its commitment under charter with the MSC and was no longer needed for
operations, a gain of $115,000 relating to the sale of certain of our
investments in unconsolidated entities, and the gain of $40,000 for the sale of
terminal land and facility described above.
During 2002, we recognized a net gain on sale of assets of $557,000
primarily as a result of a gain of $500,000 on the sale of certain contract
rights that were no longer beneficial to us and a gain of $57,000 on the sale of
certain assets no longer needed for operations.
During 2001, we recognized a net gain of $3,501,000 on sale of assets
primarily as a result of a gain of $4,485,000 on the sale of one of our PCTCs,
which was replaced by a newer and larger PCTC, a gain of $464,000 on the sale of
tugboats, and a gain of $930,000 on the sale of certain assets no longer needed
for operations, offset by a loss of $2,378,000 on two of our LASH vessels, which
completed their commitment under charter with the MSC and were no longer needed
for operations.
F-27
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- LONG-TERM DEBT
INTEREST RATE TOTAL PRINCIPAL DUE
-------------------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, MATURITY DECEMBER 31, DECEMBER 31,
DESCRIPTION 2003 2002 DATE 2003 2002
----------- ------------ ------------ -------- ------------ ------------
(ALL AMOUNTS IN THOUSANDS)
Unsecured Senior Notes -- Fixed
Rate.......................... 7.75% 7.75% 2007 $ 71,296 $ 81,914
Fixed Rate Notes Payable........ N/A 6.70% 2008 -- 19,526
Variable Rate Notes Payable..... 2.66% N/A 2013 89,133 --
3.92% 4.13% 2006 2,500 11,000
2.9375-3.00% 3.3125% 2007 7,500 9,500
N/A 3.4375% 2009 -- 35,485
N/A 2.40% 2010 -- 17,733
N/A 2.915% 2011 -- 24,750
U.S. Government Guaranteed Ship
Financing Notes and Bonds --
Fixed Rate.................... 8.30% 8.30% 2009 8,581 11,479
Promissory Note................. N/A N/A 2003 -- 1,272
Line of Credit.................. N/A 2.98% 2004 -- 1,000
-------- --------
$179,010 $213,659
Less Current Maturities............... (14,866) (21,362)
-------- --------
$164,144 $192,297
======== ========
During 2003, we retired $10,685,000 of the 7 3/4% Notes at a discount.
Additionally in 2003, we secured financing of $91,000,000, which was used to
retire certain of our outstanding debt, including a loan on our Coal Carrier on
which we incurred a make-whole premium upon retirement. During 2002, we retired
the remaining $39,085,000 of 9% Senior Notes due 2003 at a slight discount and
retired $1,052,000 of the 7 3/4% Senior Notes at a discount. Upon retirement of
this indebtedness, we recorded a net Loss on Early Extinguishment of Debt for
the year ended December 31, 2003, of approximately $1,310,000 and a Gain on
Early Extinguishment of Debt for the year ended December 31, 2002, of
approximately $65,000.
The aggregate principal payments required as of December 31, 2003, for each
of the next five years are $14,866,000 in 2004, $12,366,000 in 2005, $12,253,000
in 2006, $80,411,000 in 2007, primarily due to the maturity of our 7 3/4% Senior
Notes due 2007, and $7,468,000 in 2008. We have six vessels with a net book
value totaling $169,435,000, mortgaged under certain of our debt agreements.
Additional collateral includes a security interest in certain operating
contracts and receivables. Our remaining indebtedness is unsecured. Most of
these agreements, among other things, impose defined minimum working capital and
net worth requirements, impose leverage requirements, impose restrictions on the
payment of dividends, and prohibit us from incurring, without prior written
consent, additional debt or lease obligations, except as defined. We have
consistently met the minimum working capital and net worth requirements, and
have not exceeded the leverage requirement during the period covered by the
agreements, once amended effective June of 2001 and March of 2002. We have met,
as of December 31, 2003, the more restrictive financial covenants that became
effective in 2003, and believe we will continue to meet these requirements
throughout 2004, although we can give no assurance to that effect.
The most restrictive of our credit agreements prohibit the declaration or
payment of dividends unless (1) the total of (a) all dividends paid,
distributions on, or other payments made with respect to our capital
F-28
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock during the period beginning January 1, 1999, and ending on the date of
dividend declaration or other payment and (b) all investments other than our
Qualified Investments (as defined) and certain designated subsidiaries do not
exceed the sum of $10,000,000 plus 50% (or, in case of a loss, minus 100%) of
our consolidated net income during the period described above plus the net cash
proceeds received from our issuance of common stock during the above period, and
(2) no default or event of default has occurred.
Certain of our loan agreements also restrict the ability of our
subsidiaries to make dividend payments, loans, or advances, the most restrictive
of which contain covenants that prohibit payments of dividends, loans, or
advances to us from Sulphur Carriers, Inc., our wholly-owned subsidiary, unless
certain financial ratios are maintained. As long as these ratios are maintained,
there is no restriction on loans or advances to us from that subsidiary, but
dividends are restricted to 40% of undistributed earnings. Certain other loan
agreements restrict the ability of our subsidiaries to dispose of collateralized
assets or any other asset which is substantial in relation to our assets taken
as a whole without the approval from the lender. We have consistently remained
in compliance with these loan agreements.
The amounts of potentially restricted net assets were as follows:
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
(ALL AMOUNTS IN THOUSANDS)
Sulphur Carriers, Inc....................................... $26,553 $21,588
Enterprise Ship Company..................................... -- 45,385
------- -------
Total Restricted Net Assets............................... $26,553 $66,973
======= =======
At December 31, 2003 and 2002, we had available a line of credit totaling
$15,000,000 and $10,000,000, respectively, used to meet short-term requirements
when fluctuations occur in working capital. As of December 31, 2003, we had no
balance outstanding on this line of credit. As of December 31, 2002, the balance
outstanding on this line of credit was $1,000,000.
Under certain of the above described loan agreements, deposits were made
into bank retention accounts to meet the requirements of the applicable
agreements. These escrowed amounts totaled $513,000 at December 31, 2002 and are
included in Restricted Cash. No such amounts were deposited at December 31,
2003. Additionally, under certain operating lease agreements of one of our
subsidiaries, deposits were made into bank reserve accounts to meet the
requirements of the lease agreements. The owners of the vessels have the ability
to draw on these amounts to cover operating lease payments if such payments
become overdue. The escrow amounts totaled $6,590,000 and $6,640,000 at December
31, 2003 and 2002, respectively, and are included in Restricted Cash. We are
also required to record deposits representing performance bonds required on
certain of our commodity swap agreements. The amounts were $816,000 and $590,000
at December 31, 2003 and 2002, respectively. In January of 2004, these deposits
were returned to us, as there were no commodity swap agreements in place at
December 31, 2003. The additional amounts in Restricted Cash on our Consolidated
Balance Sheet at December 31, 2002, were comprised of deposits required to meet
minimum working capital commitments of our 12.5% interests in the bulk carrier
companies. These interests were sold in 2003, and therefore there are no related
amounts in Restricted Cash on our Consolidated Balance Sheet at December 31,
2003.
NOTE D -- SELF-RETENTION INSURANCE
Due to the effect of the events of September 11, 2001 on the reinsurance
market, along with the discontinuation of the four-vessel U.S. flag LASH Liner
Service, we revised our self-retention insurance program effective with the
policy year beginning June 27, 2002. Under the revised insurance program, we are
self-insured for Hull and Machinery claims between $150,000 and $1,000,000 and
Loss of Hire claims in excess of 14 days up to an aggregate stop loss amount of
$2,000,000. If the aggregate claim amounts
F-29
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exceed $2,000,000, the Hull and Machinery deductible reverts to $150,000 for
each claim and the Loss of Hire claim level remains at 14 days. We have obtained
third party coverage for individual Hull and Machinery claims exceeding
$1,000,000 and Loss of Hire claims exceeding 14 days. Protection and Indemnity
claims are not included in the revised self-retention insurance program, and we
have obtained third party insurance coverage for these claims with a deductible
level of $25,000 per incident for all vessels. The independent actuarial
estimates of our self-insurance exposure are approximately $672,000 and $652,000
below the aggregate $2,000,000 stop loss amount for each of the policy years
beginning June 27, 2003 and 2002, respectively.
For prior policy years, we are self-insured for most Personal Injury and
Cargo claims under $1,000,000, for Hull claims under $2,500,000, and for claims
for Loss of Hire under 60 days. We maintained insurance for individual claims
over the above levels and maintained Stop Loss insurance to cover aggregate
claims between those levels and the primary deductible levels. Primary
deductibles per incident were $25,000 for Hull, Personal Injury, and Cargo,
$1,000 for LASH barges, and 10 days for Loss of Hire. We are responsible for all
claims under the primary deductibles. Under the Stop Loss insurance, claim costs
between the primary deductible and $1,000,000 and $2,500,000, as applicable, are
our responsibility until the aggregate Stop Loss amount is met. The aggregate
annual Stop Loss, excluding primary deductibles, was $6,000,000 for the policy
year ending June 26, 2002. After we have retained the aggregate amounts, all
additional claims up to an additional aggregate amount of $6,000,000 are
recoverable from underwriters.
The current portions of the liabilities for self-insurance exposure were
$3,668,000 and $6,657,000 at December 31, 2003 and 2002, respectively, and the
noncurrent portions of these liabilities were $675,000 and $433,000 at December
31, 2003 and 2002, respectively.
NOTE E -- EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS
Our defined benefit retirement plan covers all full-time employees of
domestic subsidiaries who are not otherwise covered under union-sponsored plans.
The benefits are based on years of service and the employee's highest sixty
consecutive months of compensation. Our funding policy is based on minimum
contributions required under ERISA as determined through an actuarial
computation. Plan assets consist primarily of investments in equity and fixed
income mutual funds and money market holdings. The target asset allocation range
is 40% in fixed income investments and 60% in equity investments. The asset
allocation on December 31, 2003 was 36% in fixed income investments and 64% in
equity investments. The asset allocation on December 31, 2002 was 44% in fixed
income investments and 56% in equity investments. The plan's prohibited
investments include selling short, commodities and futures, letter stock,
unregistered securities, options, margin transactions, derivatives, leveraged
securities, and International Shipholding Corporation securities. The plan's
diversification strategy includes limiting equity securities in any single
industry to 25% of the equity portfolio market value, limiting the equity
holdings in any single corporation to 10% of the market value of the equity
portfolio, and diversifying the fixed income portfolio so that no one issuer
comprises more than 10% of the aggregate fixed income portfolio, except for
issues of the U.S. Treasury or other Federal Agencies. The plan's assumed future
returns are based primarily on the asset allocation and on the historic returns
for the plan's asset classes determined from both actual plan returns and, over
longer time periods, market returns for those asset classes. As of December 31,
2003, the plan has assets of $17,828,000 and a projected pension obligation of
$20,266,000.
F-30
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Our postretirement benefit plans currently provide medical, dental, and
life insurance benefits to eligible retired employees and their eligible
dependents. The following table sets forth the plans' changes in the benefit
obligations and fair value of assets and a statement of the funded status:
PENSION PLAN POSTRETIREMENT BENEFITS
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(ALL AMOUNTS IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.... $18,372 $18,226 $ 9,024 $ 9,043
Service cost............................... 469 511 67 60
Interest cost.............................. 1,194 1,160 595 593
Actuarial (gain) loss...................... 1,119 (591) 98 34
Benefits paid.............................. (888) (934) (634) (706)
Assumption change loss..................... -- -- 537 --
Curtailments & special termination
benefits................................. -- -- -- --
Expenses paid.............................. -- -- -- --
------- ------- ------- -------
Benefit obligation at end of year.......... 20,266 18,372 9,687 9,024
------- ------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year..................................... 15,535 16,669 -- --
Actual return (loss) on plan assets........ 3,181 (1,295) -- --
Employer contribution...................... -- 1,095 634 706
Benefits paid.............................. (888) (934) (634) (706)
Expenses paid.............................. -- -- -- --
------- ------- ------- -------
Fair value of plan assets at end of year... 17,828 15,535 -- --
------- ------- ------- -------
Funded status.............................. (2,438) (2,837) (9,687) (9,024)
Unrecognized net actuarial loss............ 3,090 4,139 2,198 1,629
Unrecognized prior service cost............ 7 15 -- --
------- ------- ------- -------
Prepaid (accrued) benefit cost............. $ 659 $ 1,317 $(7,489) $(7,395)
======= ======= ======= =======
KEY ASSUMPTIONS
Measurement date.................. DEC. 31, 2003 DEC. 31, 2002 DEC. 31, 2003 DEC. 31, 2002
------------- ------------- ------------- -------------
Discount rate..................... 6.25% 6.75% 6.25% 6.75%
Expected return on plan assets.... 8.00% 8.00% N/A N/A
Rate of compensation increase..... 5.50% 5.50% N/A N/A
The accumulated benefit obligation for the pension plan was $17,313,000 and
$15,104,000 at December 31, 2003 and 2002, respectively.
F-31
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the components of net periodic benefit cost
for the plans:
POSTRETIREMENT
BENEFITS
PENSION PLAN ---------------
------------------- FOR THE YEAR
FOR THE YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------- ---------------
COMPONENTS OF NET PERIODIC BENEFIT COST 2003 2002 2003 2002
--------------------------------------- -------- -------- ------ ------
Service cost................................................ $ 469 $ 511 $ 67 $ 60
Interest cost............................................... 1,194 1,160 595 593
Expected return on plan assets.............................. (1,201) (1,313) -- --
Amortization of prior service cost.......................... 8 8 -- --
Amortization of net actuarial loss.......................... 188 -- 67 13
Curtailments & special termination benefits................. -- -- -- --
------- ------- ---- ----
Net periodic benefit cost................................... $ 658 $ 366 $729 $666
======= ======= ==== ====
KEY ASSUMPTIONS
Measurement date.................. DEC. 31, 2003 DEC. 31, 2002 DEC. 31, 2003 DEC. 31, 2002
------------- ------------- ------------- -------------
Discount rate..................... 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets.... 8.00% 8.00% N/A N/A
Rate of compensation increase..... 5.50% 8.50% N/A N/A
For measurement purposes, the health and dental care cost trend rate was
assumed to be 8.5% for 2003, decreasing steadily by .50% per year over the next
seven years to a long-term rate of 5%. The health and dental care cost trend
rate for employees over 65 was assumed to be 10.5% decreasing steadily by .50%
per year over the next eleven years to a long-term rate of 5%. A one percent
change in the assumed health care cost trend rates would have the following
effects:
1% INCREASE 1% DECREASE
------------ ------------
(ALL AMOUNTS IN THOUSANDS)
Change in total service and interest cost components for the
year ended December 31, 2003.............................. $ 66 $ (56)
Change in postretirement benefit obligation as of December
31, 2003.................................................. 1,020 (864)
We expect to contribute approximately $143,000 to our pension plan in 2004.
Crew members on our U.S. flag vessels belong to union-sponsored pension
plans. We contributed approximately $1,472,000, $1,440,000, and $1,712,000 to
these plans for the years ended December 31, 2003, 2002, and 2001, respectively.
These contributions are in accordance with provisions of negotiated labor
contracts and generally are based on the amount of straight pay received by the
union members. Information from the plans' administrators is not available to
permit us to determine whether there may be unfunded vested benefits.
We continue to evaluate ways in which we can better manage these benefits
and control the costs. Any changes in the plan or revisions to assumptions that
affect the amount of expected future benefits may have a significant effect on
the amount of reported obligation and annual expense.
In December of 2003, the Medicare Prescription Drug, Improvements, and
Modernization Act of 2003 was signed into law. In addition to including numerous
other provisions that have potential effects on an employer's retiree health
plan, the Medicare law included a special subsidy for employers that sponsor
retiree health plans with prescription drug benefits that are at least as
favorable as the new Medicare
F-32
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Part D benefit. We have elected the delayed accounting treatment. Future FASB
action could affect amounts shown in this report.
401(K) SAVINGS PLAN
We provide a 401(k) tax-deferred savings plan to all full-time employees
who have completed at least 1,000 hours of service. We match 50% of the
employee's first $2,000 contributed to the plan annually. We contributed
$87,000, $171,000, and $156,000 to the plan for the years ended December 31,
2003, 2002, and 2001, respectively.
STOCK INCENTIVE PLAN
In April of 1998, we established a stock-based compensation plan, the Stock
Incentive Plan (the "Plan"). The purpose of the Plan is to increase shareholder
value and to advance the interest of the Company by furnishing a variety of
economic incentives designed to attract, retain, and motivate key employees and
officers and to strengthen the mutuality of interests between such employees,
officers, and our shareholders. Incentives consist of opportunities to purchase
or receive shares of common stock in the form of incentive stock options,
non-qualified stock options, restricted stock, or other stock-based awards.
Under the Plan, we may grant incentives to our eligible Plan participants for up
to 650,000 shares of common stock. The exercise price of each option equals the
market price of our stock on the date of grant. In July of 1999, options to
purchase 475,000 shares of common stock were granted to certain qualified
participants at an exercise price of $14.125 per share. The stock options are
due to expire on April 14, 2008. All options vested immediately upon the grant
date and were exercisable at December 31, 2003. No options were granted,
exercised or forfeited during 2003, 2002, or 2001.
We account for stock-based compensation in accordance with APB Opinion No.
25. Accordingly, no compensation expense has been recognized for employee
options granted under the Plan. If we had determined compensation cost for the
Plan based on the fair value at the grant dates for awards under the Plan
consistent with the fair value method included in SFAS No. 123 "Accounting for
Stock-Based Compensation," our net income and earnings per share for the years
ended December 31, 2003, 2002, and 2001 would have agreed to the actual amounts
reported since no stock options were granted for these years and all options
outstanding vested in 1999.
LIFE INSURANCE
We have agreements with the former Chairman and current Chairman of the
Company whereby their estates will be paid approximately $822,000 and $626,000,
respectively upon death. We reserved amounts to fund a portion of these death
benefits, which amounted to $1,000,000 and hold an insurance policy, which
covers any remaining liability. The cash surrender value of the insurance policy
was approximately $134,000 and $140,000 as of December 31, 2003 and 2002,
respectively.
NOTE F -- INCOME TAXES
Our Federal income tax returns are filed on a consolidated basis and
include the results of operations of our wholly-owned U.S. subsidiaries.
Pursuant to the Tax Reform Act of 1986, the earnings (losses) of foreign
subsidiaries, which were $553,000 in 2003, ($606,000) in 2002, and $791,000 in
2001, are also included.
Prior to 1987, deferred income taxes were not provided on undistributed
foreign earnings of $6,689,000, all of which are expected to remain invested
abroad indefinitely. In accordance with the Tax Reform Act of 1986, commencing
in 1987, shipping income, as defined under the U.S. Subpart F income tax
provisions, generated from profitable controlled foreign subsidiaries are
subject to Federal income taxes.
F-33
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of the net deferred tax liability/(asset) are as follows:
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
(ALL AMOUNTS IN THOUSANDS)
Liabilities:
Fixed Assets.............................................. $ 38,864 $ 24,848
Deferred Charges.......................................... 2,515 8,634
Unterminated Voyage Revenue/Expense....................... 1,182 1,719
Intangible Assets......................................... 3,183 3,693
Deferred Insurance Premiums............................... 691 982
Deferred Intercompany Transactions........................ 2,530 2,530
Other Liabilities......................................... 921 1,864
-------- --------
Total Liabilities........................................... 49,886 44,270
-------- --------
Assets:
Insurance and Claims Reserve.............................. (3,565) (4,353)
Deferred Intercompany Transactions........................ (2,530) (2,530)
Post-Retirement Benefits.................................. (2,581) (2,742)
Alternative Minimum Tax Credit............................ (4,596) (4,507)
Net Operating Loss Carryforward/Unutilized Deficit........ (11,706) (10,455)
Valuation Allowance....................................... 879 879
Other Assets.............................................. (6,366) (6,780)
-------- --------
Total Assets................................................ (30,465) (30,488)
-------- --------
Total Deferred Tax Liability, Net........................... $ 19,421 $ 13,782
======== ========
The following is a reconciliation of the U.S. statutory tax rate to our
effective tax rate -- expense (benefit):
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
----- ------ ------
Statutory Rate.............................................. 35.00% (35.00)% (35.00)%
State Income Taxes.......................................... 0.49% 12.30% 0.10%
Other, Primarily Non-deductible Expenditures................ 0.55% 13.66% 0.15%
----- ------ ------
36.04% (9.04)% (34.75)%
===== ====== ======
We have available at December 31, 2003, unused foreign deficits of
$33,445,000. The unused foreign deficits are available only to offset certain
foreign shipping earnings and do not expire. Realization of this tax asset is
dependent upon generating future taxable income from foreign operations. In
addition, foreign tax credits of $3,657,000 can only be utilized once the
foreign deficit is eliminated. At that time, the credits will have a five-year
carry forward prior to expiration. We believe that it is more likely than not we
will realize these assets from future foreign operations, but there is no
guarantee that we will be able to do so.
Foreign income taxes of $563,000, $754,000 and $473,000 are included in our
Consolidated Statements of Income in the Provision for Income Taxes for the
years ended December 31, 2003, 2002, and 2001, respectively. We pay foreign
income taxes in Indonesia.
F-34
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We have not recognized a deferred tax liability of $688,000 for
undistributed earnings of certain non-U.S. subsidiaries because we consider
those earnings to be indefinitely invested abroad. As of December 31, 2003, the
undistributed earnings of these subsidiaries were $1,967,000.
NOTE G -- TRANSACTIONS WITH RELATED PARTIES
We had receivables outstanding from a related party of $92,000 at December
31, 2002, relating to the sales of subsidiaries to a former employee prior to
2001. These receivables were paid in full at December 31, 2003. Collections on
the total receivable were $92,000, $55,000, and $74,000 for the years ended
December 31, 2003, 2002, and 2001, respectively. Interest income on this
receivable was earned at the rate of 6% for the first five years and a variable
rate of LIBOR plus 2% thereafter. Interest income amounted to $4,000, $10,000,
and $16,000 for the years ended December 31, 2003, 2002, and 2001, respectively.
During 1998, one of our wholly-owned subsidiaries, LMS Shipmanagement, Inc.
("LMS"), entered into agreements with Belden Shipping Pte. Ltd. ("Belden") to
provide ship management services beginning in 1999, from which revenues earned
were approximately $80,000 for the year ended December 31, 2001. In February of
2002, LMS discontinued providing management services to Belden, who has
subsequently established its own shipmanagement group. We have a 30% interest in
Belden, Echelon Shipping, Inc. ("Echelon"), and Belden Cement Holding, Inc.
("BCH") (See Note L). We had long-term receivables from Echelon totaling
approximately $150,000 as of December 31, 2003 and 2002. We had long-term
receivables from BCH totaling approximately $2,385,000 as of December 31, 2003
and 2002. These long-term receivables are included in Due from Related Parties.
Interest income on these receivables is earned at a rate of 6% per year.
We had long-term receivables, included in Due from Related Parties, from
LMS Manning, Inc. ("LMS Manning") in which we owned a 48.0% interest totaling
approximately $55,000 as of December 31, 2002. We sold our interest in LMS
Manning in 2003 and have an outstanding receivable at December 31, 2003, of
$30,000 included in Other Current Assets (See Note L).
A son of our Chairman of the Board and a son of one of our Directors are
partners of the legal firm of Jones, Walker, Waechter, Poitevent, Carrere and
Denegre, which has been utilized for various legal services since our inception.
We made payments to the firm totaling approximately $1,030,000, $738,000, and
$1,114,000 for the years ended December 31, 2003, 2002, and 2001, respectively.
We believe these payments represent the fair value of the services rendered.
NOTE H -- COMMITMENTS AND CONTINGENCIES
COMMITMENTS
As of December 31, 2003, 16 vessels that we own or operate were under
various contracts extending beyond 2003 and expiring at various dates through
2019. Certain of these agreements also contain options to extend the contracts
beyond their minimum terms.
At December 31, 2003, our unrestricted subsidiary, through its 50%
ownership, guarantees a portion of the outstanding debt of an invested bulk
carrier company. The guarantee is for the full remaining term of the associated
debt, which was 8 years as of December 31, 2003. Performance by our unrestricted
subsidiary would be required under the guarantee in the event of default by the
bulk carrier company on its third party debt. This represents non-recourse debt
to International Shipholding Corporation, the parent of the unrestricted
subsidiary. The portion of the outstanding debt that the unrestricted subsidiary
guaranteed at December 31, 2003, was $31,775,000. At December 31, 2002, our
ownership in the bulk carrier companies was 12.5% and the portion of the
outstanding debt guaranteed was $11,000,000. (See Note L for further discussion
of our investment in the bulk carrier companies).
F-35
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We also maintain lines of credit totaling approximately $728,000 to cover
standby letters of credit required on certain of the our contracts.
CONTINGENCIES
We have been named as a defendant in numerous lawsuits claiming damages
related to occupational diseases, primarily related to asbestos and hearing
loss. We believe that most of these claims are without merit, and that insurance
and the indemnification of a previous owner of one of our subsidiaries mitigate
our exposure. Our overall exposure to the numerous lawsuits in question has been
estimated by our lawyers and internal staff to be between approximately $450,000
and $1,500,000, and we believe that those estimates are reasonable. Our reserves
at December 31, 2003 of approximately $1,000,000 were within this estimated
range. There is a reasonable possibility that there will be additional claims
associated with occupational diseases asserted against us. However, we do not
believe that it is reasonably possible that our exposure from those claims will
be material because (1) the lawsuits filed since 1989 claiming damages related
to occupational diseases in which we have been named as a defendant have
primarily involved seamen that served on-board our vessels and the number of
such persons still eligible to file a lawsuit against us is diminishing and (2)
such potential additional claims, if pursued, would be covered under an
indemnification agreement with a previous owner of one of our subsidiaries
and/or under one or more of our existing insurance policies with deductibles
ranging from $5,000 to $25,000 per claim.
In the normal course of our operations, we become involved in various
litigation matters including, among other things, claims by third parties for
alleged property damages, personal injuries, and other matters. While we believe
that we have meritorious defenses against these claims, our management has used
significant estimates in determining our potential exposure. Our estimates are
determined based on various factors, such as (1) severity of the injury (for
personal injuries) and estimated potential liability based on past judgments and
settlements, (2) advice from legal counsel based on its assessment of the facts
of the case and its experience in other cases, (3) probability of pre-trial
settlement which would mitigate legal costs, (4) historical experience on claims
for each specific type of cargo (for cargo damage claims), and (5) whether our
seamen are employed in permanent positions or temporary revolving positions. It
is reasonably possible that changes in our estimated exposure may occur from
time to time. As is true of all estimates based on historical experience, these
estimates are subject to some volatility. However, because our total exposure is
limited by our aggregate stop loss levels (see Note D for further discussion of
our self-retention insurance program), we believe that our exposure is within
our estimated levels. Where appropriate, we have recorded provisions, included
in Other Long-Term Liabilities: Claims and Other, to cover our potential
exposure and anticipated recoveries from insurance companies, included in Other
Assets. Although it is difficult to predict the costs of ultimately resolving
such issues, we have determined that our current insurance coverage is
sufficient to limit any additional exposure to an amount that would not be
material to our financial position. Therefore, we do not expect such changes in
these estimates to have a material effect on our financial position or results
of operations.
One of our subsidiaries time charters our U.S. flag Coal Carrier to US
Generating New England, Inc. ("USGenNE"), an indirect subsidiary of PG&E
Corporation. On July 8, 2003, USGenNE filed a petition for bankruptcy protection
under Chapter 11 of the United States Bankruptcy Code and subsequently requested
from the court an extension of time to submit its bankruptcy plan until March 4,
2004, and an extension of time until May 3, 2004, to solicit acceptance of its
plan. USGenNE is current in all of its obligations to us under the time charter
except for approximately $850,000 of pre-petition invoices covering charter hire
and related expenses. The $850,000 of pre-petition invoices owed to us is an
unsecured claim in the bankruptcy proceeding. Under the federal bankruptcy laws,
USGenNE has the right to accept or reject the time charter. If USGenNE accepts
the time charter, it is then required to meet its payment and financial
obligations under the time charter including the $850,000 pre-petition invoices.
If USGenNE rejects the time charter, then we would have a priority
administrative claim with respect to all amounts
F-36
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
due to us under the time charter that are related to the post-petition period,
but we would have no priority with respect to the pre-petition invoices. At this
time we cannot predict whether the time charter will be accepted or rejected.
Therefore, we have not provided an allowance for the pre-petition invoices in
our financial statements as of December 31, 2003. In the event the time charter
is ultimately rejected, our management believes the vessel can be utilized in
alternative employment without incurring a material impairment to the vessel's
carrying value, although we can give no assurance at this time. Further, even
though USGenNE was not obligated to use the vessel for the balance of charter
year number 8 (12/02-12/03), it utilized the vessel through the end of the year.
At this time we can give no assurance as to the extent of USGenNE's use of the
vessel beyond 2003; however, USGenNE has continued to use the vessel in 2004
through the date of this report.
NOTE I -- LEASES
DIRECT FINANCING LEASE
In 1999, we entered into a direct financing lease of a foreign flag PCTC
expiring in 2019. The schedule of future minimum rentals to be received under
this direct financing lease in effect at December 31, 2003, is as follows:
RECEIVABLES UNDER
FINANCING LEASE
-----------------
(ALL AMOUNTS IN
THOUSANDS)
Year Ended December 31,
2004...................................................... $ 8,455
2005...................................................... 8,432
2006...................................................... 8,431
2007...................................................... 8,431
2008...................................................... 8,455
Thereafter................................................ 74,874
--------
Total Minimum Lease Payments Receivable..................... 117,078
Estimated Residual Value of Leased Property................. 2,051
Less Unearned Income........................................ (67,865)
--------
Total Net Investment in Direct Financing Lease.............. 51,264
Current Portion........................................... (2,128)
--------
Long-Term Net Investment in Direct Financing Lease at
December 31, 2003......................................... $ 49,136
========
F-37
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The schedule of future minimum rentals to be received under this direct
financing lease in effect at December 31, 2002, is as follows:
RECEIVABLES UNDER
FINANCING LEASE
-----------------
(ALL AMOUNTS IN
THOUSANDS)
Year Ended December 31,
2003...................................................... $ 8,431
2004...................................................... 8,455
2005...................................................... 8,432
2006...................................................... 8,431
2007...................................................... 8,431
Thereafter................................................ 83,329
--------
Total Minimum Lease Payments Receivable..................... 125,509
Estimated Residual Value of Leased Property................. 2,051
Less Unearned Income........................................ (74,352)
--------
Total Net Investment in Direct Financing Lease.............. 53,208
Current Portion........................................... (1,944)
--------
Long-Term Net Investment in Direct Financing Lease at
December 31, 2002......................................... $ 51,264
========
CAPITAL LEASES
We entered into sale-leaseback agreements in 1991 and 1992 for a group of
our LASH barges. These leases met the required criteria for capital lease
treatment and were accounted for as such. The terms of the leases were 12 years.
During 2002, we purchased the barges thereby terminating the leases.
During 2000, we entered into a sale-leaseback agreement for two of our LASH
vessels. The gain on the sale-leaseback was deferred over the life of the lease.
The lease met the required criteria for capital lease treatment and was
accounted for as such. The term of the lease was 5 years. During 2001, the two
vessels were reclassified to Assets Held for Disposal and written down to their
estimated fair value. The resulting net loss after recognition of the deferred
gain was included in the Impairment Loss on our Consolidated Income Statement
for the year ended December 31, 2001. During 2002, the vessels were sold, and
the related capital lease obligation was paid off.
Additionally in 2000, we entered into a sale-leaseback agreement for one of
our PCTCs. At inception, the lease met the required criteria for capital lease
treatment and was accounted for as such. Subsequently in December of 2001, we
renegotiated the lease agreement, and the amended terms of the lease did not
meet the required criteria for capital lease treatment. The lease was
reclassified to an operating lease effective December 31, 2001, and has been
accounted for as such going forward.
There were no capital leases as of December 31, 2003 and 2002.
OPERATING LEASES
During 2000, we entered into a sale-leaseback agreement for one of our Ice
Strengthened Breakbulk/ Multi-Purpose vessels, which is classified as an
operating lease. During 2001, we entered into two sale-leasebacks, covering one
of our domestic PCTCs and one of our foreign flag PCTCs. The gains on these
sale-leasebacks are being deferred over the lives of the leases. We renegotiated
a capital lease agreement for one of our domestic PCTCs in December of 2001 and
subsequently reclassified the lease to an
F-38
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating lease. This reclassification resulted in a gain of $5,309,000, which
is being deferred over the remaining term life of the lease. During 2002, we
entered into a sale-leaseback for one of our LASH vessels, which was also
classified as an operating lease. The terms of the leases are 5 years for the
Breakbulk vessel, 12 years for the domestic PCTC, 15 years for the foreign flag
PCTC, 10 years for the domestic PCTC reclassified as an operating lease in 2001,
and 5 years for the LASH vessel.
Most of the operating lease agreements have a fair value renewal option and
a fair value purchase option, with the exception of the operating lease for the
Breakbulk vessel. Most of these agreements impose defined minimum working
capital and net worth requirements, impose restrictions on the payment of
dividends, and prohibit us from incurring, without prior written consent,
additional debt or lease obligations, except as defined. Certain agreements
require escrow deposits (See Note C). The vessels under these leases, with the
exception of the LASH vessel, are operated under fixed charter agreements
covering the terms of the respective leases. We also conduct certain of our
operations from leased office facilities and use certain transportation and
other equipment under operating leases expiring at various dates through 2008.
Rent expense related to operating leases totaled approximately $30,079,000,
$26,471,000, and $18,965,000, for the years ended December 31, 2003, 2002, and
2001, respectively. The following is a schedule, by year, of future minimum
payments required under operating leases that have initial non-cancelable terms
in excess of one year as of December 31, 2003:
PAYMENTS UNDER OPERATING LEASES
----------------------------------------------------------------
DOMESTIC FOREIGN FLAG LASH OTHER
BREAKBULK PCTCS PCTC VESSEL LEASES TOTAL
--------- -------- ------------ ------ ------ --------
(ALL AMOUNTS IN THOUSANDS)
Year Ended December 31,
2004............................ $ 940 $ 8,665 $ 6,340 $1,920 $1,148 $ 19,013
2005............................ 783 8,898 6,340 1,920 1,119 19,060
2006............................ -- 9,596 6,340 1,920 1,217 19,073
2007............................ -- 9,596 6,340 1,760 1,252 18,948
2008............................ -- 9,596 6,340 -- 957 16,893
Thereafter...................... -- 44,008 47,550 -- -- 91,558
------ ------- ------- ------ ------ --------
Total Future Minimum Payments..... $1,723 $90,359 $79,250 $7,520 $5,693 $184,545
====== ======= ======= ====== ====== ========
NOTE J -- DEFERRED CHARGES AND ACQUIRED CONTRACT COSTS
Deferred charges and acquired contract costs are comprised of the
following:
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
(ALL AMOUNTS IN THOUSANDS)
Drydocking Costs............................................ $ 9,765 $11,414
Financing Charges and Other................................. 2,554 3,214
Acquired Contract Costs..................................... 9,095 10,550
------- -------
$21,414 $25,178
======= =======
The Acquired Contract Costs represent the portion of the purchase price
paid for Waterman Steamship Corporation applicable primarily to that company's
three U.S. flag RO/RO vessels under maritime prepositioning ship contract
agreements, which expire in 2010.
F-39
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- SIGNIFICANT OPERATIONS
MAJOR CUSTOMERS
We have several medium- to long-term contracts related to the operations of
various vessels (See Note H), from which revenues represent a significant amount
of our total revenue. Revenues from the contracts with the MSC were $35,874,000,
$34,543,000, and $36,868,000 for the years ended December 31, 2003, 2002, and
2001, respectively.
Until early 2002, we operated four U.S. flag LASH vessels in a liner
service, of which three vessels were subsidized under the MSA (See Note
A -- "Subsidy Agreements"). These four vessels were sold during 2002. In
November of 2002, we began operating one U.S. flag LASH vessel on a subsidized
liner service (See Note B). Revenues, including subsidy revenue, from both
operations were $26,790,000, $19,466,000, and $91,595,000 for the years ended
December 31, 2003, 2002, and 2001, respectively.
We have four U.S. flag PCTCs, also under the MSA, which carry automobiles
from Japan to the United States for a Japanese charterer. Revenues, including
subsidy revenue, were $39,516,000, $38,566,000, and $37,950,000 for the years
ended December 31, 2003, 2002, and 2001, respectively.
We provide space on our westbound foreign flag LASH liner service to
several commercial shippers. The westbound cargoes included steel and other
metal products, high-grade paper and wood products, and other general cargo.
Revenues were $26,002,000, $26,306,000, and $29,448,000 for the years ended
December 31, 2003, 2002, and 2001, respectively.
CONCENTRATIONS
A significant portion of our traffic receivables are due from contracts
with the MSC and transportation of government sponsored cargo. There are no
other concentrations of receivables from customers or geographic regions that
exceed 10% of stockholders' investment at December 31, 2003 or 2002.
With only minor exceptions related to personnel aboard certain foreign flag
vessels, most of our shipboard personnel are covered by collective bargaining
agreements under multiple unions.
GEOGRAPHIC INFORMATION
We have operations in several principal markets, including international
service between the U.S. Gulf and East Coast ports and ports in the Middle East,
Far East, and northern Europe, and domestic transportation services along the
U.S. Gulf and East Coast. Revenues attributable to the major geographic areas of
the world are presented in the following table. Revenues for the Time Charter
Contracts, Contracts of Affreightment, Rail-Ferry Service, and Other are
assigned to regions based on the location of the customer. Revenues for the
Liner Services are presented based on the location of the ports serviced by
F-40
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
this segment. Because we operate internationally, most of our assets are not
restricted to specific locations. Accordingly, an allocation of identifiable
assets to specific geographic areas is not applicable.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
(ALL AMOUNTS IN THOUSANDS)
United States.......................................... $108,726 $ 88,230 $ 83,972
Asian countries........................................ 56,473 62,842 60,847
Rail-Ferry service operating between U.S. Gulf and
Mexico............................................... 15,537 11,240 6,207
Liner services operating between:
U.S. Gulf/East Coast ports and ports in Middle
East.............................................. 26,790 19,466 91,595
U.S. Gulf/East Coast ports and ports in Northern
Europe............................................ 48,845 44,837 57,245
Other countries........................................ 1,442 797 4,504
-------- -------- --------
Total Revenues....................................... $257,813 $227,412 $304,370
======== ======== ========
OPERATING SEGMENTS
Our operating segments are identified primarily based on the
characteristics of the contracts or terms under which the fleet of vessels and
barges are operated. Each of the reportable segments is managed separately as
each requires different resources depending on the nature of the contract or
terms under which each vessel within the segment operates. Our operating
segments are identified and described below.
LINER SERVICES: A liner service operates a vessel or vessels on an
established trade route with regularly scheduled sailing dates. We receive
revenues for the carriage of cargo within the established trading area and pay
the operating and voyage expenses incurred. Our Liner Services include a U.S.
flag liner service between the U.S. Gulf and East Coast ports and ports in the
Red Sea and Middle East, and a foreign flag transatlantic liner service
operating between U.S. Gulf and East Coast ports and ports in northern Europe.
TIME CHARTER CONTRACTS: These are contracts by which the charterer obtains
the right for a specified period to direct the movements and utilization of the
vessel in exchange for payment of a specified daily rate, but we retain
operational control over the vessel. Typically, we fully equip the vessel and
are responsible for normal operating expenses, repairs, wages and insurance,
while the charterer is responsible for voyage expenses, such as fuel, port and
stevedoring expenses. Our Time Charter Contracts include contracts with car
manufacturers for six PCTCs, with an electric utility for a conveyor-equipped,
self-unloading Coal Carrier, and with a mining company providing ocean
transportation services at its mine in West Irian Jaya, Indonesia. Also included
in this segment are contracts under which the MSC charters three RO/ROs that are
under an operating contract. The MSC's charter contract with the Ice
Strengthened Multi-Purpose vessel expired in December of 2002, but the vessel
continued to operate under charter to the MSC on a voyage-to-voyage basis until
the vessel was scrapped in December of 2003. Our Cape-Size Bulk Carrier, which
operated in the spot market, was included in this segment in 2001 until it was
sold in June of 2001.
CONTRACTS OF AFFREIGHTMENT ("COA"): These are contracts by which we
provide space on our vessel(s) for the carriage of specified goods or a
specified quantity of goods on a single voyage or series of voyages over a given
period of time between named ports or within certain geographical areas in
return for the payment of an agreed amount per unit of cargo carried. Generally,
we are responsible for all operating and voyage expenses. Our COA segment
includes a sulphur transportation contract with a sulphur producer.
F-41
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RAIL-FERRY SERVICE: This segment includes a service that began in January
of 2001 carrying loaded rail cars between the U.S. Gulf and Mexico. Our two
Special Purpose vessels are employed with this service, each having a capacity
for 60 standard gauge rail cars. With departures every four days from
Coatzacoalcos and Mobile, it offers with each vessel a three-day transit between
these ports and provides a total of 90 trips per year in each direction.
OTHER: This segment includes results of several of our subsidiaries that
provide ship charter brokerage, agency, and other specialized services primarily
to our operating segments described above, as well as our 50% ownership in a car
transportation truck company. Also included in the Other category are corporate
related items, results of insignificant operations, and income and expense items
not allocated to reportable segments.
The following table presents information about segment profit and loss and
segment assets. We do not allocate interest income, other income, losses or
gains on early extinguishment of debt, administrative and general expenses,
equity in unconsolidated entities, or income taxes to our segments. Intersegment
revenues are based on market prices and include revenues earned by our
subsidiaries that provide specialized services to the operating segments.
Expenditures for segment assets represent cash outlays during the periods
presented, including purchases of assets, improvements to assets, and drydock
payments.
TIME RAIL-
LINER CHARTER CONTRACTS OF FERRY
SERVICES CONTRACTS AFFREIGHTMENT SERVICE OTHER ELIMINATION TOTAL
-------- --------- ------------- -------- ------- ----------- --------
(ALL AMOUNTS IN THOUSANDS)
2003
Revenues from external
customers...................... $ 75,635 $129,685 $16,189 $ 15,537 $20,767 -- $257,813
Intersegment revenues............ -- -- -- -- 13,551 $(13,551) --
Depreciation and amortization.... 5,108 15,144 2,799 4,101 507 -- 27,659
Gross voyage (loss) profit....... (4,199) 33,048 5,495 (2,926) 2,422 -- 33,840
Interest expense................. 1,039 7,152 1,800 2,322 201 -- 12,514
Gain on sale of vessels and other
assets......................... -- 482 -- -- 911 -- 1,393
Segment (loss) profit before
administrative and general
expenses, investment income,
loss on early extinguishment of
debt, equity in unconsolidated
entities, and taxes............ (5,238) 26,378 3,695 (5,248) 3,132 -- 22,719
Segment assets................... 27,196 167,803 40,637 53,519 4,536 -- 293,691
Expenditures for segment
assets......................... 4,077 611 -- -- 2,882 -- 7,570
2002
Revenues from external
customers...................... $ 65,146 $128,279 $15,370 $ 11,240 $ 7,377 -- $227,412
Intersegment revenues............ -- -- -- -- 16,055 $(16,055) --
Depreciation and amortization.... 5,062 14,242 2,868 4,116 846 -- 27,134
Impairment loss.................. (52) -- -- -- 118 -- 66
Gross voyage (loss) profit....... (4,910) 34,465 5,962 (3,673) (1,342) -- 30,502
Interest expense................. 1,794 10,192 2,338 3,221 161 -- 17,706
Gain on sale of vessels and other
assets......................... -- -- -- -- 557 -- 557
Impairment loss on investment.... -- -- -- -- (598) -- (598)
F-42
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TIME RAIL-
LINER CHARTER CONTRACTS OF FERRY
SERVICES CONTRACTS AFFREIGHTMENT SERVICE OTHER ELIMINATION TOTAL
-------- --------- ------------- -------- ------- ----------- --------
(ALL AMOUNTS IN THOUSANDS)
Segment (loss) profit before
administrative and general
expenses, investment income,
gain on early extinguishment of
debt, other income, equity in
unconsolidated entities, and
taxes.......................... (6,704) 24,273 3,624 (6,894) (1,544) -- 12,755
Segment assets................... 29,507 184,196 43,784 57,224 2,836 -- 317,547
Expenditures for segment
assets......................... 7,997 985 1,193 47 1,242 -- 11,464
2001
Revenues from external
customers...................... $148,840 $129,845 $15,839 $ 6,207 $ 3,639 -- $304,370
Intersegment revenues............ -- -- -- -- 28,417 $(28,417) --
Depreciation and amortization.... 14,206 19,834 2,869 4,091 1,271 -- 42,271
Impairment loss.................. (78,683) (2,355) -- -- -- -- (81,038)
Gross voyage (loss) profit....... (90,259) 37,248 6,255 (7,501) 449 -- (53,808)
Interest expense................. 3,326 17,162 2,772 3,447 30 -- 26,737
Gain on sale of vessels and other
assets......................... -- 3,075 -- -- 426 -- 3,501
Segment (loss) profit before
administrative and general
expenses, investment income,
gain on early extinguishment of
debt, equity in unconsolidated
entities, and taxes............ (93,585) 23,161 3,483 (10,948) 845 -- (77,044)
Segment assets................... 39,531 198,202 45,151 60,693 9,149 -- 352,726
Expenditures for segment
assets......................... 1,990 40,817 11 4,445 692 -- 47,955
Following is a reconciliation of the totals reported for the operating
segments to the applicable line items in the consolidated financial statements:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
(ALL AMOUNTS IN THOUSANDS)
Profit or Loss:
Total profit (loss) for reportable segments.......... $ 22,719 $ 12,755 $(77,044)
Unallocated amounts:
Interest income.................................... 2,162 656 1,157
Other Income....................................... -- 1,498 --
(Loss) Gain on Early Extinguishment of Debt........ (1,310) 65 23
Administrative and general expenses................ (15,646) (15,734) (23,578)
-------- -------- --------
(Loss) income before income taxes, equity in net
income (loss) of unconsolidated entities and
extraordinary item................................. $ 7,925 $ (760) $(99,442)
======== ======== ========
F-43
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------ ------------ ------------
Assets:
Total assets for reportable segments............ $293,691 $317,547 $352,726
Unallocated amounts............................. 88,760 89,205 108,996
-------- -------- --------
$382,451 $406,752 $461,722
======== ======== ========
Other income of $1,498,000 in 2002 resulted from interest we earned on
overpayments of foreign taxes made in prior years that were previously refunded.
Unallocated assets primarily include Current Assets of $67,397,000,
$65,559,000, and $89,695,000, as of December 31, 2003, 2002, and 2001,
respectively. Also included in unallocated assets are Investment in
Unconsolidated Entities of $8,413,000, $8,251,000, and $7,857,000, as of
December 31, 2003, 2002, and 2001, respectively and Other Long-term Assets of
$10,415,000, $12,586,000, and $10,745,000, as of December 31, 2003, 2002, and
2001, respectively. We manage these unallocated assets on a corporate rather
than segment basis.
NOTE L -- UNCONSOLIDATED ENTITIES
CEMENT CARRIER COMPANIES
During 1998, we acquired a 37.5% interest in Belden, a cement carrier
management company, and three cement carrier companies, Echelon, Shining Star
Shipping, Inc. formerly known as Shining Star Malta Ltd. ("Shining"), and Carson
Shipping, Inc. ("Carson") for approximately $3,400,000. During 1999, we sold
7.5% of our 37.5% interest in each of the aforementioned companies for
approximately $806,000. During 2000, we acquired a 30% interest in another
cement carrier company, Yakuma Shipping Inc. ("Yakuma"), for $600,000. In
October of 2000, we sold our interest in Carson for approximately $511,000,
resulting in a loss of approximately $273,000.
During 2001, we acquired a 30% interest in four additional cement carrier
companies, Tilbury Shipping Inc. ("Tilbury"), Emblem Shipping Inc. ("Emblem"),
Mattea Shipping Inc. ("Mattea"), and Belden Management, Inc. ("Belden
Management"), a management company. Additionally in 2001, BCH, which is a
holding company for each of the aforementioned cement carrier companies, was
formed. In 2002, we acquired a 30% interest in a company, Minardi Shipping Inc.
("Minardi"), which owns an ice strengthened bulk carrier. In 2003, we acquired a
30% interest in two additional cement carrier companies, Chariot Shipping Inc.
("Chariot"), and Epson Shipping Inc. ("Epson"). Echelon, Shining, Yakuma,
Tilbury, Emblem, and Chariot each own and operate one cement-carrying vessel.
Mattea owns and operates two cement carriers. Minardi owns and operates an ice
strengthened bulk carrier. Epson obtained one cement carrying vessel in January
of 2004 and began operating the vessel at that time. All of these vessels
operate under medium- to long-term contracts, and Belden Management manages
these companies. Currently, we own a 30% interest in BCH, which owns 100% of
each of these companies.
These investments are accounted for under the equity method, and our share
of earnings or losses is reported in our consolidated statements of income net
of taxes. Our portion of the combined earnings of these investments, net of
taxes, was $339,000, $550,000 and $389,000 for the years ended December 31,
2003, 2002, and 2001, respectively. No distributions were made during 2003,
2002, and 2001. The aggregate amount of consolidated retained earnings that
represented undistributed earnings of these investments as of December 31, 2003
was approximately $1,200,000.
F-44
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited combined condensed financial position and results of
operations of the cement carrier companies are summarized below:
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
(AMOUNTS IN THOUSANDS)
Current Assets.............................................. $ 3,285 $ 5,522
Noncurrent Assets........................................... $63,027 $55,559
Current Liabilities......................................... $16,263 $ 9,509
Noncurrent Liabilities...................................... $39,094 $42,450
YEAR ENDED DECEMBER 31,
---------------------------
2003 2002 2001
------- ------- -------
(AMOUNTS IN THOUSANDS)
Operating Revenues...................................... $20,293 $18,822 $13,879
Operating Income........................................ $14,780 $13,969 $10,021
Net Income.............................................. $ 1,739 $ 2,782 $ 1,802
CAPE-SIZE BULK CARRIERS
During 2000, Cape Shipholding, Inc., our wholly-owned subsidiary, acquired
a 12.5% interest in Bulk Venture, Ltd. for approximately $1,280,000, which owned
two newly built cape-size bulk carrier vessels. During 2001, we made an
additional investment in Bulk Venture, Ltd. of approximately $376,000. We
received dividends of approximately $475,000, $56,000 and $113,000 in 2003, 2002
and 2001, respectively. During 2003, we sold our 12.5% interest in Bulk Venture,
Ltd. for approximately $1,906,000, resulting in a gain of approximately
$250,000. Additional funds of approximately $259,000 are expected to be received
in 2004 representing the remaining proceeds from the sale of our investment.
During 2001, Bulk Africa Shipholding, Inc., our wholly-owned subsidiary,
acquired a 12.5% interest in Bulk Africa, Ltd. for approximately $626,000, which
owned a newly built cape-size bulk carrier vessel. During 2002, we made an
additional investment in Bulk Africa, Ltd. of approximately $818,000. We
received dividends of approximately $388,000 in 2003. No dividends were received
during 2002 and 2001. During 2003, we sold our 12.5% interest in Bulk Africa,
Ltd. for approximately $1,191,000, resulting in a loss of approximately
$126,000. Additional funds of approximately $127,000 are expected to be received
in 2004 representing the remaining proceeds from the sale of our investment.
During 2001, Bulk Australia Shipholding, Inc., our wholly-owned subsidiary,
acquired a 12.5% interest in Bulk Australia, Ltd. for approximately $144,000,
which owned a newly built cape-size bulk carrier vessel. During 2002, we made an
additional investment in Bulk Australia Ltd. of approximately $1,333,000. During
2003, we received a partial refund for additional funding of $128,000. We
received dividends of approximately $300,000 in 2003. No dividends were received
during 2002 and 2001. During 2003, we sold our 12.5% interest in Bulk Australia,
Ltd. for approximately $1,111,000, resulting in a loss of approximately $9,000.
Additional funds of approximately $229,000 are expected to be received in 2004
representing the remaining proceeds from the sale of our investment.
The investments described above were accounted for under the cost method of
accounting and accordingly income is recognized only upon distribution of
dividends or sale of investment. However, the remaining proceeds from the sale
of our investments expected to be received in 2004 were recognized as dividend
income in 2003 due to the fact that the Board of Directors of the respective
companies declared dividends for these amounts in 2003, and therefore these
amounts were legally payable to us as of December 31, 2003.
F-45
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the fourth quarter of 2003, Cape Shipholding, Inc., our wholly-owned
subsidiary, acquired a 50% investment in Dry Bulk Cape Holding Inc. for
approximately $3,479,000, which owns two of the aforementioned newly built
cape-size bulk carrier vessels. This investment is accounted for under the
equity method, and our share of earnings or losses is reported in our
consolidated statements of income net of taxes. For the year ended December 31,
2003, our portion of earnings net of taxes was $80,000. No distributions were
made during 2003.
MANAGEMENT COMPANIES
During 1999, LMS acquired a 40% interest in LMS Manila, Inc. ("LMS Manila")
for $21,000. In 2002, we sold our interest in LMS Manila for approximately
$176,000, resulting in a gain of approximately $18,000.
During 1999, LMS acquired a 48% interest in LMS Manning for $6,000, which
provided us with ship management services. During 2003, we sold our 48% interest
in LMS Manning for approximately $15,000, resulting in a loss of approximately
$3,000.
During 2000, CG Railway, Inc., our wholly-owned subsidiary, acquired a 50%
interest in Terminales Transgolfo for $100,000, which operates a port in
Coatzacoalcos, Mexico, for our Rail-Ferry Service. During 2001, we made an
additional investment in Terminales Transgolfo of approximately $128,000. The
investment is accounted for under the equity method, and our share of earnings
or losses is reported in our consolidated statements of income net of taxes. No
distributions were made during 2003, 2002, and 2001.
NOTE M -- SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
---------------------------
2003 2002 2001
------- ------- -------
(ALL AMOUNTS IN THOUSANDS)
Cash Payments:
Interest Paid......................................... $12,339 $18,938 $27,669
Taxes Paid............................................ $ 482 $ 773 $ 982
During 2002, we entered into a sale-leaseback for one of our LASH vessels
for $10,000,000 of which $5,000,000 was received in cash and $5,000,000 in the
form of a five-year promissory note. A portion of the note, approximately
$2,000,000, is being repaid in twenty quarterly installments in addition to
approximately $3,000,000 being repaid at the end of the lease. Interest on the
note is at 4.845% for the first two years and 4.72% for each of the three years
thereafter.
During 2003, we sold our coal transfer terminal facility and related land
for $2,500,000 of which $500,000 was received in cash and $2,000,000 in the form
of a five-year promissory note. The note is being repaid in ten semi-annual
installments of $200,000, in addition to interest at 6%.
F-46
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES
The estimated fair values of our financial instruments and derivatives are
as follows (asset/(liability)):
DECEMBER 31, 2003 DECEMBER 31, 2002
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- --------- ----------
(ALL AMOUNTS IN THOUSANDS)
Interest Rate Swap Agreements.......... $ (1,050) $ (1,050) $ (2,045) $ (2,045)
Foreign Currency Contracts............. $ (46) $ (46) $ (49) $ (49)
Commodity Swap Contracts............... $ -- $ -- $ 603 $ 603
Long-Term Debt......................... $(179,010) $(182,057) $(213,659) $(216,378)
Disclosure of the fair value of all balance sheet classifications,
including but not limited to certain vessels, property, equipment, direct
financing leases, or intangible assets, which may have a fair value in excess of
historical cost, is not required. Therefore, this disclosure does not purport to
represent our fair value.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
INTEREST RATE SWAP AGREEMENTS
We enter into interest rate swap agreements to manage well-defined interest
rate risks. During September of 1999, we entered into an interest rate swap
agreement with a commercial bank to reduce the possible impact of higher
interest rates in the long-term market by utilizing the fixed rate available
with the swap. We are the fixed rate payor, and HSBC Bank plc is the floating
rate payor. The fixed rate was 7.7% at December 31, 2003 and 2002, and the
floating rates were 2.18% and 2.81% at December 31, 2003 and 2002, respectively.
The contract amount totaled $19,920,000 and $23,240,000 at December 31, 2003 and
2002, respectively, and will expire in September of 2004. We have designated
this interest rate swap agreement as an effective hedge. Settlements of this
agreement are made semi-annually and resulted in increases to interest expense
of $1,159,000 and $1,128,000 in 2003 and 2002, respectively.
FOREIGN CURRENCY CONTRACTS
We enter into forward exchange contracts to hedge certain firm purchase and
sale commitments denominated in foreign currencies. The purpose of our foreign
currency hedging activities is to protect us from the risk that the eventual
dollar cash inflows or outflows resulting from revenue collections from foreign
customers and purchases from foreign suppliers will be adversely affected by
changes in exchange rates. The term of the currency contracts is rarely more
than one year. Due to the immaterial nature of these contracts, we have not
designated the foreign currency contracts as hedges. Therefore, the changes in
the fair market value of these hedges are recorded through earnings.
During 2002, we entered into two forward purchases contracts. One contract
was for Mexican Pesos for $1,200,000 U.S. Dollar equivalents beginning in
January of 2003 and expired in December of 2003. The other contract was for
Indonesian Rupiah for $600,000 U.S. Dollar equivalents effective for one year
beginning January of 2003 and expired December of 2003. During 2003, we entered
into two forward purchase contracts. One contract is for Mexican Pesos for
$420,000 U.S. Dollar equivalents beginning in January of 2004 and is to expire
in July of 2004. The other contract is for Indonesian Rupiah for $600,000 U.S.
Dollar equivalents beginning in January of 2004 and is to expire in December of
2004. As of December 31, 2003 and 2002, we were a party to forward sales
contracts in various currencies totaling $2,974,000 and $1,822,000 U.S. Dollar
equivalents, respectively.
F-47
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMODITY SWAP CONTRACTS
We enter into commodity swap contracts for portions of our estimated fuel
purchases to manage the risk associated with changes in fuel prices. During
2001, we entered into two commodity swap agreements with an energy trading
corporation for a portion of our estimated 2002 fuel purchases. The contracts
were effective for one year beginning in January of 2002 and expired December
31, 2002, and were for 22,500 and 12,000 tons of fuel. The contracts required
that a payment be made for the difference between the contract rate of $106.50
and $99.50 per ton, respectively, and the market rate for the fuel on each
settlement date. These contracts covered approximately 49% of our Liner Service
segment's 2002 fuel purchases.
During November of 2002, we entered into three commodity swap agreements,
one with an energy trading corporation and two with financial institutions. The
contracts were effective for one year beginning in January of 2003 and expired
December 31, 2003. Two of the contracts were for 14,400, and the other was for
12,000 tons of fuel. The contracts required that a payment be made for the
difference between the contract rates of $116.25 to $118.83 per ton and the
market rate for the fuel on each settlement date. During 2003, we entered into
three commodity swap agreements, one with a financial institution and two with
an energy trading corporation. One of the contracts was effective for one year
beginning in January of 2003 and expired December 31, 2003 and was for 9,198
tons of fuel. The other two contracts were effective for nine months beginning
in April of 2003 and expired December 31, 2003 and were for 13,500 and 9,000
tons of fuel, respectively. The contracts required that a payment be made for
the difference between the contract rates of $124.00 to $158.75 per ton and the
market rate for the fuel on each settlement date. These contracts covered
approximately 92% of our Liner Service segment's 2003 fuel purchases and 79% of
our Rail-Ferry Service segment's 2003 fuel purchases. As of December 31, 2003,
there are no outstanding commodity swap contracts with respect to 2004 fuel
purchases.
We designated these commodity swap contracts as effective hedges. Monthly
settlements of these agreements are recorded as an adjustment to voyage
expenses. We made a net positive adjustment to voyage expense of $2,190,000 in
2003 and $1,024,000 in 2002.
LONG-TERM DEBT
The fair value of our debt is estimated based on the quoted market price
for the publicly listed Senior Notes and the current rates offered to us on
other outstanding obligations.
AMOUNTS DUE FROM RELATED PARTIES
The carrying amount of these notes receivable approximated fair market
value as of December 31, 2003 and 2002. Fair market value takes into
consideration the current rates at which similar notes would be made.
RESTRICTED CASH
The carrying amount of these investments approximated fair market value as
of December 31, 2003 and 2002, based upon current rates offered on similar
instruments.
F-48
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Following are the components of the consolidated balance sheet
classification Accounts Payable and Accrued Liabilities:
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
(ALL AMOUNTS IN THOUSANDS)
Accrued Voyage Expenses..................................... $19,260 $16,251
Trade Accounts Payable...................................... 5,374 3,425
Self-Insurance Liability.................................... 3,668 6,657
Accrued Customs Liability................................... 3,487 2,410
Accrued Interest............................................ 1,672 2,221
Other Short-Term Liabilities................................ 1,050 9
Accrued Salaries and Benefits............................... 999 591
Accrued Vessel Upgrade Costs................................ -- 2,688
------- -------
$35,510 $34,252
======= =======
NOTE P -- QUARTERLY FINANCIAL INFORMATION -- (UNAUDITED)
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ---------
(ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
2003
Revenue...................................... $64,806 $ 67,505 $63,550 $61,952
Expense...................................... 54,272 57,151 57,023 55,527
Gross Voyage Profit.......................... 10,534 10,354 6,527 6,425
Net Income (Loss)............................ 2,994 2,490 (1,644) 1,651
Basic and Diluted Earnings (Loss) per Common
Share:
Net Income (Loss).......................... 0.49 0.41 (0.27) 0.27
2002
Revenue...................................... $60,452 $ 56,664 $49,900 $60,396
Expense...................................... 54,523 47,587 44,318 50,548
Impairment Loss.............................. 54 (151) 3 28
Gross Voyage Profit.......................... 5,875 9,228 5,579 9,820
Net (Loss) Income............................ (920) 1,116 (1,125) 793
Basic and Diluted (Loss) Earnings per Common
Share:
Net (Loss) Income.......................... (0.15) 0.18 (0.18) 0.13
F-49
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ---------
(ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
2001
Revenue...................................... $80,399 $ 76,329 $78,236 $69,406
Expense...................................... 72,760 71,608 70,994 61,778
Impairment Loss.............................. 2,355 78,928 400 (645)
Gross Voyage Profit (Loss)................... 5,284 (74,207) 6,842 8,273
Net Loss..................................... (5,353) (57,399) (165) (1,502)
Basic and Diluted Loss per Common Share:
Net Loss................................... (0.88) (9.44) (0.03) (0.25)
F-50
800,000 SHARES
(ISC CORPORATION LOGO)
% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
---------------------
PROSPECTUS
---------------------
FERRIS, BAKER WATTS
Incorporated
, 2004
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount and the financial advisory fee payable to the underwriter,
payable by us in connection with the sale of our preferred stock being
registered. All amounts are estimates except the SEC registration fee.
SEC Registration Fee........................................ $ 5,575
NYSE Filing Fees............................................ 12,936
Printing Costs.............................................. 45,000
Legal Fees and Expenses..................................... 150,000
Accounting Fees and Expenses................................ 50,000
Transfer Agent and Registrar Fees........................... 3,500
Trustee Fees................................................ 5,000
Miscellaneous............................................... 12,989
--------
Total..................................................... $285,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or serves or served in these capacities for another enterprise,
if serving at the request of the corporation. Depending on the character of the
proceeding, a corporation may indemnify against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding if the person
indemnified acted in good faith and in a manner reasonably believed to be in or
not opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. In the case of an action by or in the right of the corporation, no
indemnification may be made in respect to any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine that despite the adjudication of liability
such person is fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper. Section 145 further provides that to the
extent a director or officer of a corporation has been successful in the defense
of any action, suit or proceeding referred to above or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Article VI of our certificate of incorporation provides that our board of
directors is expressly authorized to provide indemnification to the full extent
permitted by Delaware law.
In addition, Article II, Section 7 of our by-laws provides as follows:
(a) Right to Indemnification. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he, or a person for whom he is
the legal representative, is or was a director or officer of the company or
any of its subsidiaries (including nominees and designees who have not yet
taken office) or is or was serving at the request of the Company (including
any person who has not been duly elected or appointed) as a director,
officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans (the "Indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in
II-1
any other capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the Company to the fullest extent
authorized by the Delaware General Corporation Law ("GCL"), as presently
existing or as it may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Company to
provide broader indemnification rights than the GCL permitted the Company
to provide prior to such amendment), against any and all expenses,
liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties, amounts paid in connection with any arbitration
or investigation and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith. Indemnitee's
rights hereunder shall be contract rights and shall include the right to be
paid by the Company for expenses incurred in defending any such proceeding
in advance of its final disposition; provided, however, that the payment of
such expenses incurred by an Indemnitee in advance of the final disposition
of such proceeding, shall be made only upon delivery to the Company of an
undertaking in a form satisfactory to counsel for the Company, by or on
behalf of such Indemnitee, to repay all amounts so advanced if it should be
ultimately determined that such Indemnitee is not entitled to be
indemnified under this provision or otherwise. For purposes of this
provision on the term Company shall include any resulting or constituent
entities.
(b) Nonexclusivity of Rights. The rights conferred herein on any
person shall not be exclusive of any other right which such person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, by-law, contract or other agreement, vote of stockholders or
disinterested directors or otherwise.
(c) Insurance. The Company may maintain at its expense, to protect
itself and any such director (including nominees and designees who have not
yet taken office), officer, employee or agent of the Company or another
corporation, partnership, joint venture, trust or other enterprise
(including service with respect to employee benefit plans)against any
expense, liability or loss, whether or not the Company would have the power
to indemnify such person against such expense, liability or loss under the
GCL.
The underwriting agreement provides that the underwriter will indemnify our
directors, officers, employees and agents against certain liabilities, including
liabilities under the Securities Act of 1933, insofar as such liabilities arise
out of or are based on written information furnished to us by the underwriter.
Under an insurance policy maintained by us, our directors and officers are
insured, within the limits and subject to the limitations of the policy, against
certain expenses in connection with the defense of certain claims, actions,
suits or proceedings, and certain liabilities which might be imposed as a result
thereof, which may be brought against them by reason of their being or having
been directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None within three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
1.1 Form of Underwriting Agreement (this document will be filed
as an exhibit to an amendment to this registration
statement)
3.1 Restated Certificate of Incorporation of the Registrant
(filed with the Securities and Exchange Commission as
Exhibit 3.1 to the Registrant's Form 10-Q for the quarterly
period ended September 30, 2004 and incorporated herein by
reference)
3.2 By-Laws of the Registrant (filed with the Securities and
Exchange Commission as Exhibit 3.2 to the Registrant's Form
10-Q for the quarterly period ended September 30, 2004 and
incorporated herein by reference)
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3.3 Form of Certificate of Designations of the Registrant with
respect to the % Convertible Exchangeable Preferred Stock
of the Registrant (this document will be filed as an exhibit
to an amendment to this registration statement)
4.1 Specimen of Common Stock Certificate (filed as an exhibit to
the Registrant's Form 8-A filed with the Securities and
Exchange Commission on April 25, 1980 and incorporated
herein by reference)
4.2 Indenture between the Registrant and The Bank of New York,
as Trustee, with respect to the 7 3/4% Senior Notes due
October 15, 2007 (filed as Exhibit 4.2 to the Registrant's
Form 10-Q for the quarterly period ended September 30, 2004
filed with the Securities and Exchange Commission and
incorporated herein by reference)
4.3 Form of 7 3/4% Senior Note due October 15, 2007 (included in
Exhibit 4.2 hereto and incorporated herein by reference)
4.4 Indenture between the Registrant and The Bank of New York,
as Trustee, with respect to the % Convertible Subordinated
Notes due 2014 (this document will be filed as an exhibit to
an amendment to this registration statement)
4.5 Form of % Convertible Subordinated Note due , 2014
(included in Exhibit 4.4 hereto)
4.6 Specimen of % Convertible Exchangeable Preferred Stock
Certificate (this document will be filed as an exhibit to an
amendment to this registration statement)
4.7 Form of Certificate of Designations of the Registrant with
respect to the % Convertible Exchangeable Preferred Stock
of the Registrant (filed as Exhibit 3.3)
5.1 Opinion of Jones, Walker, Waechter, Poitevent, Carrere &
Denegre, L.L.P. as to the legality of the securities being
registered
10.1 Credit Agreement, dated as of November 14, 2002, by and
among LCI Shipholdings, Inc., as Borrower, the banks and
financial institutions listed therein, as Lenders, Den
Norske Bank ASA, as Arranger, Agent and Security Trustee,
and the Registrant, as Guarantor
10.2 Credit Agreement, dated as of September 30, 2003, by and
among LCI Shipholdings, Inc. and Central Gulf Lines, Inc.,
as Joint and Several Borrowers, the banks and financial
institutions listed therein, as Lenders, HSBC Bank PLC, as
Facility Agent, Den Norske Bank ASA, as Documentation Agent,
Deutsche Schiffsbank AG, as Security Trustee, and the
Registrant, as Guarantor
10.3 Credit Agreement, dated as of December 6, 2004, by and among
LCI Shipholdings, Inc., Central Gulf Lines, Inc. and
Waterman Steamship Corporation, as Borrowers, the banks and
financial institutions listed therein, as Lenders, Whitney
National Bank, as Administrative Agent, Security Trustee and
Arranger, and the Registrant, Enterprise Ship Company, Inc.,
Sulphur Carriers, Inc., Gulf South Shipping PTE Ltd. and CG
Railway, Inc., as Guarantors
12.1 Statement of Computation of Ratios of Earnings to Fixed
Charges and Preferred Stock Dividends (filed as Exhibit 12.1
to Pre-Effective Amendment No. 1 to this registration
statement filed with the Securities and Exchange Commission
on December 2, 2004 and incorporated herein by reference)
21.1 Subsidiaries of International Shipholding Corporation (filed
as Exhibit 21 to the Registrant's Form 10-K for the fiscal
year ended December 31, 2003 filed with the Securities and
Exchange Commission and incorporated herein by reference)
23.1 Consent of Independent Registered Public Accounting Firm
23.2 Consent of Jones, Walker, Waechter, Poitevent, Carrere &
Denegre, L.L.P. (included in Exhibit 5.1)
24.1 Powers of Attorney (included on the signature pages to this
registration statement)
25.1 Statement of Eligibility of Trustee (this document will be
filed as an exhibit to an amendment to this registration
statement)
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or
notes thereto beginning on page F-1 of the prospectus forming a part of
this registration statement.
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ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New Orleans, State of
Louisiana, on December 10, 2004.
INTERNATIONAL SHIPHOLDING CORPORATION
By: /s/ ERIK F. JOHNSEN
------------------------------------
Erik F. Johnsen
Chairman of the Board, Director and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ERIK F. JOHNSEN Chairman of the Board, Director December 10, 2004
------------------------------------------------ and Chief Executive Officer
Erik F. Johnsen (Principal Executive Officer)
/s/ GARY L. FERGUSON Vice President and Chief December 10, 2004
------------------------------------------------ Financial Officer
Gary L. Ferguson (Principal Financial Officer)
/s/ MANNY G. ESTRADA Vice President and Controller December 10, 2004
------------------------------------------------ (Principal Accounting Officer)
Manny G. Estrada
/s/ NIELS W. JOHNSEN* Director December 10, 2004
------------------------------------------------
Niels W. Johnsen
/s/ NIELS M. JOHNSEN* President and Director December 10, 2004
------------------------------------------------
Niels M. Johnsen
/s/ ERIK L. JOHNSEN* Executive Vice President and December 10, 2004
------------------------------------------------ Director
Erik L. Johnsen
/s/ HAROLD S. GREHAN, JR.* Director December 10, 2004
------------------------------------------------
Harold S. Grehan, Jr.
/s/ EDWIN LUPBERGER* Director December 10, 2004
------------------------------------------------
Edwin Lupberger
---------------
* Executed by Mr. Erik F. Johnsen pursuant to the power of attorney provided on
the signature page to the Registration Statement on Form S-1 filed with the
SEC on November 2, 2004.
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
5.1 Opinion of Jones, Walker, Waechter, Poitevent, Carrere &
Denegre, L.L.P. as to the legality of the securities being
registered
10.1 Credit Agreement, dated as of November 14, 2002, by and
among LCI Shipholdings, Inc., as Borrower, the banks and
financial institutions listed therein, as Lenders, Den
Norske Bank ASA, as Arranger, Agent and Security Trustee,
and the Registrant, as Guarantor
10.2 Credit Agreement, dated as of September 30, 2003, by and
among LCI Shipholdings, Inc. and Central Gulf Lines, Inc.,
as Joint and Several Borrowers, the banks and financial
institutions listed therein, as Lenders, HSBC Bank PLC, as
Facility Agent, Den Norske Bank ASA, as Documentation Agent,
Deutsche Schiffsbank AG, as Security Trustee, and the
Registrant, as Guarantor
10.3 Credit Agreement, dated as of December 6, 2004, by and among
LCI Shipholdings, Inc., Central Gulf Lines, Inc. and
Waterman Steamship Corporation, as Borrowers, the banks and
financial institutions listed therein, as Lenders, Whitney
National Bank, as Administrative Agent, Security Trustee and
Arranger, and the Registrant, Enterprise Ship Company, Inc.,
Sulphur Carriers, Inc., Gulf South Shipping PTE Ltd. and CG
Railway, Inc., as Guarantors
23.1 Consent of Independent Registered Public Accounting Firm