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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM......... TO.............
COMMISSION FILE NO. 2-63322
INTERNATIONAL SHIPHOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2989662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 POYDRAS STREET, NEW ORLEANS, LOUISIANA 70130
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (504) 529-5461
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $1 Par Value New York Stock Exchange
7 3/4% Senior Notes Due 2007 New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant, as of the last business day of the
registrant's most recently completed second fiscal quarter.
DATE AMOUNT
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June 30, 2003 $44,515,094
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common stock, $1 par value..........6,082,887 shares outstanding
as of February 24, 2004
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated March 9,
2004, have been incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
In this report, the terms "we," "us," "our," and "the Company" refer to
International Shipholding Corporation and its subsidiaries. The Company, through
its subsidiaries, operates 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 or contracts. At December 31, 2003, our fleet, owned and/or operated,
consisted of 35 ocean-going vessels, 917 LASH (Lighter Aboard SHip) barges, and
related shoreside handling facilities. We also own 22 over the road Haul-Away
Car Carrying trucks.
Our fleet includes (i) four U.S. flag Pure Car/Truck Carriers ("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; (ii)
one Breakbulk/Multi-Purpose vessel, two container vessels and one tanker vessel,
which are also used to transport supplies for the Indonesian operations of a
major mining company; (iii) 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; (iv) two Special Purpose vessels modified as
Roll-On/Roll-Off vessels ("RO/ROs") to transport loaded rail cars between
Mobile, Alabama and Coatzacoalcos, Mexico; (v) one U.S. flag conveyer-equipped
self-unloading Coal Carrier, which carries coal in the coastwise and near-sea
trade; (vi) three RO/RO vessels that permit rapid deployment of rolling stock,
munitions, and other military cargoes requiring special handling; (vii) two
container vessels we bareboat charter; (viii) two Cape-Size Bulk Carriers in
which we own a 50% interest; and (ix) eight Cement Carriers and one Bulk Carrier
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 Lines, Inc. ("Central Gulf"), LCI Shipholdings, Inc. ("LCI") [including the
Transatlantic Service doing business as Forest Lines], Waterman Steamship
Corporation ("Waterman"), and CG Railway, Inc. ("CG Railway"). We also operate
several other subsidiaries that provide ship charter brokerage, agency, and
other specialized services primarily to our operating segments.
The Company has five operating segments, Liner Services, Time Charter
Contracts, Contracts of Affreightment ("COA"), Rail-Ferry Service, and Other, as
described below. For additional information about our operating segments see
Note K - Significant Operations of the Notes to the Consolidated Financial
Statements contained in this Form 10-K on page F-23. In addition to our five
operating segments, we also have investments in several unconsolidated entities
which we own 50% or less and do not exercise significant influence over
operating and financial activities.
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 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. Time Charters are contracts by which the
charterer obtains the right for a specified time period to direct the movements
and utilization of the vessel in exchange for payment of a specified daily rate,
but the Company retains 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 RO/RO vessels to the Military Sealift
Command ("MSC") for varying terms. Also included in this segment are contracts
with car manufacturers for six PCTCs and with an electric utility for a
conveyor-equipped, self-unloading coal carrier. Additionally, our contract to
provide transportation services to a major mining company at its mine in Papua,
Indonesia is included in this segment.
Contracts of Affreightment ("COA"). COAs are contracts by which we
undertake to 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 major sulphur producer.
Rail-Ferry Service. In the beginning of 2001, we began a new service,
under the name of CG Railway, Inc., carrying loaded rail cars between Mobile,
Alabama and Coatzacoalcos, Mexico. This service uses our two Special Purpose
vessels, which were modified to enable them to carry standard gauge railroad
cars. Each vessel has a capacity for 60 standard rail cars.
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Other. Other consists of operations that include more specialized type
services than the former four segments and results of several of our
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 eight Cement Carriers and one Bulk Carrier. We also have a 50%
investment in a company owning two newly built Cape-Size Bulk Carriers. In
addition, we have a 50% investment in a company, which operates a terminal in
Coatzacoalcos, Mexico for our Rail-Ferry Service.
BUSINESS STRATEGY
Our strategy is to (i) identify customers with high credit quality and
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) provide our customers
with reliable, high quality service at a reasonable cost. We believe that our
strategy has produced stable operating cash flows 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, the Chairman and Chief Executive
Officer of the Company. 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 the Company's common stock to Trans Union's stockholders. In
1986, the Company acquired the assets of Forest Lines, and in 1989, the Company
acquired the ownership of Waterman. Since its spin-off from Trans Union, the
Company has continued to act solely as a holding company, and its only
significant assets consist of the capital stock of its subsidiaries.
COMPETITIVE STRENGTHS
Diversification. We have been successful in obtaining 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 type products, steel, wood and wood/pulp type products, carriage of
supplies for a mining company, transporting molten sulphur, transporting coal
for use in generating electricity, and transporting standard gauge railroad
cars. In preparing and conducting these operations, we have been successful in
upgrading our fleet, with the average age of our vessels involved being
approximately 13.7 years old. Because of the average age of our fleet, 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. Our historical cash flows have been relatively stable
because of the length and structure of our contracts with creditworthy
customers, as well as our diversified customer and cargo bases. Our medium- to
long-term 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 contract of affreightment guarantees a
minimum amount of cargo for transportation. Furthermore, 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 cyclical market conditions.
Long-Standing Customer Relationships. We currently have medium- to
long-term time charters with, or contracts to carry cargo for, high credit
quality commercial customers that include International Paper Company, P.T.
Freeport Indonesia, Toyota Motor Corporation, and Hyundai Motor Company. 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. Additionally, for over 30 years, we have been
operating vessels for the MSC. We believe that our long-standing 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. The Company's Chairman has served the
Company in various management capacities since its founding in 1947. In
addition, the Company's President, the Executive Vice President, and the Chief
Financial Officer have over 92 years of collective
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experience with the Company. We believe that the experience of our management
team is important to maintaining long-term relationships with our customers.
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 liftings among
various commercial shippers.
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
Company 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 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
for the service to be maintained. As a result, we 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 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 Maritime Security Act of 1996 ("MSA"), which provides for a
subsidy program for certain U.S. flag vessels, was signed into law in
October of 1996. Under this program, the Maritime Security Program ("MSP"),
each participating vessel is eligible to receive an annual payment of $2.1
Million, which are 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 $2.6 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 December 31, 2003, our
Waterman U.S. flag LASH vessel mentioned earlier and four PCTCs included in
the TIME CHARTER CONTRACTS segment have qualified for participation.
Additionally, during 2003, we bareboat chartered two vessels that allowed
us to maintain two more MSP contracts. The two vessels are being operated
under a time charter arrangement.
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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 four MPS vessels currently in the MSC's
Atlantic fleet, which provides support for 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, the Company 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 terminate 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 have options to extend beyond the initial term.
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 major Japanese shipping company. In
1999, we acquired the fourth, 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 major Japanese shipping
company. Both of these contracts provide the shipping company options to
extend beyond the initial term. These 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, respectively, we sold both of 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. These vessels immediately entered into a long-term
charter through 2018 and 2019 to a major Far Eastern company. One of these
PCTCs was subsequently sold to an unaffiliated party and leased back under
an operating lease through 2016, with an option to us 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 concurrently chartered to a New England
electric utility under a 15-year time charter to carry coal in the coastwise and
near-sea trade. Since the base charter provides approximately 60% utilization,
the ship will 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 of
2003. For information regarding the bankruptcy proceeding and its effect on this
charter, please see the Risk Factors section - US Gen New England, Inc.
("USGenNE").
Southeast Asia Transportation Contract
The contract to transport supplies for a major mining company in
Indonesia is serviced by an Ice Strengthened Breakbulk/Multi-Purpose vessel, a
small tanker, and two Container vessels.
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CONTRACTS OF AFFREIGHTMENT
Molten Sulphur
In 1994, we entered into a 15-year transportation contract with
Freeport-McMoRan Sulphur LLC, a major 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.
RAIL-FERRY SERVICE
Mexican Service
Commencing in 2001, we began a new service, under the name of CG
Railway, Inc., carrying loaded rail cars between Mobile, Alabama and
Coatzacoalcos, Mexico. This new service uses our two Special Purpose vessels,
which were modified to enable them to carry standard gauge railroad cars. Each
vessel has a capacity of 60 standard gauge 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
LITCO Facility. We own an all weather rapid cargo transfer facility at
the river port of Memphis, Tennessee, which handles LASH barges transported by
our subsidiaries in our LASH liner services. LITCO (LASH Intermodal Terminal
Company) began operations in May of 1992 and provides 287,500 square feet of
enclosed warehouse and loading/discharging stations for LASH barge, rail, truck,
and heavy-lift operations.
Other Services. We have several other subsidiaries providing ship
charter brokerage, agency, and other specialized services to our 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.
MARKETING
We maintain marketing staffs in New York and New Orleans, and maintain
a network of marketing agents in major cities around the world who market our
liner, charter, and contract services. We market our Trans-Atlantic 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.
INSURANCE
We maintain protection and indemnity ("P&I") insurance to cover
liabilities arising out of the ownership or 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.
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.
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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.
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 - Self-Retention Insurance of the Notes to the
Consolidated Financial Statements contained in this Form 10-K on page F-16).
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 Oil Pollution Act of 1990, and the Comprehensive
Environmental Response Compensation and Liability Act, 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 (the "Act") 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 Maritime Security Act of 1996,
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 Maritime Security Act of 1996
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 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 $2.6 Million in years 2006
to 2008, $2.9 Million in years 2009 to 2011, and $3.1 Million in years 2012 to
2015.
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 of 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 common stock held of record by non-U.S. citizens. In April of 1996, our
shareholders amended our charter and stock transfer procedures to limit the
acquisition of our common stock by non-U.S. citizens. Under the amendment, any
transfer of our common stock that would
7
result in non-U.S. citizens owning more than 23% (the "permitted amount") of the
total voting power of the Company would be void and ineffective against the
Company. With respect to any shares owned by non-U.S. citizens in excess of the
permitted amount, the voting rights will be denied and the dividends will be
withheld. Furthermore, we are authorized to redeem shares of common stock owned
by non-U.S. citizens in excess of the permitted amount to reduce ownership 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") has mandated that
vessels documented under the laws of its member countries, including the United
States, develop and implement quality and safety programs by July 1, 1998, or
July 1, 2002, depending on the type of vessels. Vessels operating without the
required compliance certificates could either be fined or denied entry into or
detained in the ports of those countries that are members of the IMO. Our ship
management subsidiary, LMS Shipmanagement, Inc., received certification in
January of 1998 that our Quality Management System was approved as meeting the
ISO 9002 Quality Standard. We implemented a comprehensive program to obtain
timely IMO certification for all of our vessels, which has been accomplished.
The Maritime Transportation Security Act ("MTSA") was enacted in 2002,
and requires companies in the maritime industry to implement various security
measures for the protection of U.S. ports and waterways. We have conducted the
required security assessments and submitted security plans to the federal
government for review and approval, and we believe we are in compliance in all
material respects with other MTSA safety and security requirements.
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 19% of our revenue is generated by contracts with the MSC
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 Ned
Lloyd, APL, and Maersk-Sea Land Service, Inc. for the MSC work and the Public
Law-480 cargo. Additionally, our principal foreign competitors include Hoegh
Lines, Star Shipping, 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 receive subsidy payments on these ships.
RISK FACTORS
Substantial Leverage. We are highly leveraged and devote a substantial
portion of our operating income to debt service. To date, we have been able to
generate sufficient cash from operations, including planned sales of assets and
sale leaseback transactions, to meet interest and principal payments on our
indebtedness. Our ability to satisfy our debt
8
obligations will depend upon our future operating performance, which will be
affected by prevailing economic conditions and financial, business and other
factors, some of which are beyond our control. If our cash flow and capital
resources are insufficient 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 our debt. Although we expect our operating cash flows to be
sufficient to service our debt we can give no such assurance. Subject to
compliance with various financial and other covenants imposed by debt
instruments governing the indebtedness of the Company and our subsidiaries, we
may incur additional indebtedness from time to time. 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, and are in compliance with these
requirements as of December 31, 2003. We believe we will continue to meet these
requirements throughout 2004, although we can give no assurances to that effect.
The degree to which we are leveraged could have important consequences.
Among other things, high leverage may: (i) impair our ability to obtain
additional financing for working capital, capital expenditures, vessel and other
acquisitions, and general corporate purposes; (ii) require us to dedicate a
substantial portion of our cash flow from operations to the payment of principal
and interest; (iii) place us at a competitive disadvantage to less
highly-leveraged competitors; and (iv) make us more vulnerable to economic
downturns and limit our ability to withstand competitive pressures.
US Gen New England, Inc. ("USGenNE"). We charter our Coal Carrier to
USGenNE, an indirect subsidiary of PG&E Corporation ("PG&E"). 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 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
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.
Contractual Cross Defaults. 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.
Regulation. 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, 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.
Subsidy Payments. The Maritime Security Act of 1996, which provides for
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 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
9
vessel in the new MSP program 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
December 31, 2003, our Waterman U.S. flag LASH vessel and four PCTCs qualified
for participation. Additionally, during 2002, we reached agreements to bareboat
charter two vessels that allowed us to maintain two more MSP contracts
throughout 2003. The two vessels are being operated under a time charter
arrangement. Payments under this program are subject to annual appropriation by
Congress and are not guaranteed. If Congress does not make sufficient
appropriations in any fiscal year with respect to this program, we would be
permitted to reflag our vessels under foreign registry.
Dependence 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.
Among these risks are dependence on congressional appropriations and
administrative allotment of funds, and changing policies and regulations.
Because the 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, the 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 a certain period of time in order to protect
the government's interest. We have never been suspended or debarred from
government contracting, nor have we ever been the subject of any proceeding for
such a purpose.
CG Railway, Inc. Our railcar ferry service began operating in February
of 2001. The introduction of this service in a competitive market, although
successful, contributed to our loss in 2001. The service improved in 2002 and
2003, but still contributed a loss. We expect this service to continue to
improve in 2004; however, we can give no assurances that this will occur.
Commodity Price. We are exposed to commodity price risk related to
purchases we must make during the course of business for our fuel consumption.
We can give no assurance that we will be able to offset our higher fuel cost due
to the competitive nature of the industry.
Competition. 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, or otherwise successfully compete against our competitors.
Control by Principal Stockholders. Niels W. Johnsen, a director of the
Company, Erik F. Johnsen, the Chairman of the Board and Chief Executive Officer
of the Company (and the brother of Niels W. Johnsen) and their spouses, children
and grandchildren (collectively, the "Johnsen Family"), beneficially owned an
aggregate of 38.67% (which includes currently exercisable options to acquire
400,000 shares) of the common stock of the Company as of December 31, 2003. By
virtue of such ownership, the Johnsen Family may continue to have the power to
determine many of the policies of the Company and its subsidiaries, the election
of the Company's directors and officers, and the outcome of various corporate
actions requiring shareholder approval.
EMPLOYEES
As of December 31, 2003, we employed approximately 431 shipboard
personnel and 166 shoreside personnel. We consider relations with our employees
to be excellent.
All of our shipboard personnel and certain shoreside personnel are
covered by collective bargaining agreements. 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.
ITEM 2. PROPERTIES
Vessels and Barges. Of the 35 ocean-going vessels in our fleet at
December 31, 2003, 11 are owned, nine are 30% owned, two are 50% owned, seven
are leased under charter contracts, and six are operated under operating
contracts. Of the 917 LASH barges we own, 864 are operated in conjunction with
our LASH vessels. The remaining 53 LASH barges we own 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 22 Haul-Away car carrying trucks, in which
we have a 50% interest.
All of the vessels owned, operated, or leased by us are in good
condition except for the 53 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
10
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. In addition, we have undertaken an aggressive
certification schedule with all vessels in the fleet requiring certification
completed in advance of the IMO deadline. 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 (See
Note C - Long-Term Debt of the Notes to the Consolidated Financial Statements
contained in this Form 10-K on page F-15).
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 of
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.
ITEM 3. 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 mitigate
our exposure.
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 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 will not have a material adverse effect on our business or financial
condition (See Note H - Commitments and Contingencies of the Notes to the
Company's Consolidated Financial Statements contained in this Form 10-K on page
F-20).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4a. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below is information concerning the directors and executive
officers of the Company. Directors are elected by the shareholders for one-year
terms. Executive officers serve at the pleasure of the Board of Directors.
Name Current Position
---- ----------------
Erik F. Johnsen Chairman and Chief Executive Officer
Niels M. Johnsen President and Director
Erik L. Johnsen Executive Vice President and Director
Gary L. Ferguson Vice President and Chief Financial Officer
Niels W. Johnsen Director
Harold S. Grehan, Jr. Director
Raymond V. O'Brien, Jr. Director
Edwin Lupberger Director
Edward K. Trowbridge Director
H. Merritt Lane, III Director (Appointed by Board of Directors in March of 2004)
Erik F. Johnsen, 78, is the Chairman and Chief Executive Officer of the
Company. He served as the President, Chief Operating Officer, and Director of
the Company since its commencement of operations in 1979 until April of 2003
when he assumed his current position. Until April of 1997, Mr. Johnsen also
served as the President and Chief Operating Officer of each of the Company's
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 of 1997.
Niels M. Johnsen, 58, is President of the Company. Mr. Johnsen has
served as a Director of the Company since April of 1988. He joined Central Gulf
on a full time basis in 1970 and held various positions with the Company before
being named President in April of 2003. He has also served as chairman of each
of the Company's principal subsidiaries,
11
except Waterman, since April of 1997. He is also President of Waterman and N. W.
Johnsen & Co., Inc., subsidiaries of the Company engaged in LASH liner service
and ship and cargo charter brokerage, respectively. In 2002, he became a
director of Atlantic Mutual Companies. He is the son of Niels W. Johnsen.
Erik L. Johnsen, 46, is Executive Vice President of the Company. He
joined Central Gulf in 1979 and held various positions with the Company before
being named Executive Vice President in April of 1997. He has served as a
Director of the Company since 1994. He has also served as the President of each
of the Company's principal subsidiaries, except Waterman, since April of 1997,
and as Executive Vice President of Waterman since September of 1989. He is
responsible for all operations of the Company's vessel fleet and leads the
Company's Ship Management Group. He is the son of Erik F. Johnsen.
Gary L. Ferguson, 63, is Vice President and Chief Financial Officer of
the Company. He joined Central Gulf in 1968 where he held various positions with
the Company prior to being named Controller in 1977, and Vice President and
Chief Financial Officer in 1989.
Niels W. Johnsen, 81, is a Director of the Company. He served as the
Chairman and Chief Executive Officer of the Company from its commencement of
operations in 1979 until April of 2003 and served as Chairman and Chief
Executive Officer of each of the Company's principal subsidiaries until April of
1997. He previously served as Chairman of Trans Union's ocean shipping group of
companies from December of 1971 through May of 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.
Harold S. Grehan, Jr., 76, 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 Director in 1979. Mr. Grehan retired from
the Company at the end of 1997, and continued to serve as a Director since that
time.
Raymond V. O'Brien, Jr., 76, has served as a Director of the Company
since 1979 and in early 2003 was named Chairman of the Compensation Committee of
the 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 of 1978 through December of 1992.
Edwin Lupberger, 67, has served as a Director of the Company since
April of 1988 and in early 2003 was named Chairman of the Audit Committee of the
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, 75, has served as a Director of the Company since
April of 1994 and in early 2003 was named Chairman of the Nominating and
Governance Committee of the 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 of 1993.
H. Merritt Lane, III, 42, was appointed a Director of the Company by
the Board of Directors in March of 2004. He has served as President and Chief
Executive Officer of Canal Barge Company, Inc. since January of 1994 and as
director of that company since 1988.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
COMMON STOCK PRICES AND DIVIDENDS
FOR EACH QUARTERLY PERIOD OF 2002 AND 2003
(Source: New York Stock Exchange)
Dividends
2002 High Low Paid
- ----------- ---- ---- ---------
1st Quarter 7.05 6.37 N/A
2nd Quarter 6.80 5.70 N/A
3rd Quarter 7.05 6.40 N/A
4th Quarter 6.85 5.57 N/A
Dividends
2003 High Low Paid
- ----------- ---- ---- ---------
1st Quarter 6.70 5.80 N/A
2nd Quarter 10.91 6.75 N/A
3rd Quarter 12.95 9.70 N/A
4th Quarter 15.37 9.25 N/A
Approximate Number of Common Stockholders of Record at February 24, 2004: 531
13
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
The following summary of selected consolidated financial data is not
covered by the auditors' report appearing elsewhere herein. However, in the
opinion of management, the summary of selected consolidated financial data
includes all adjustments necessary for a fair representation of each of the
years presented.
This summary should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere in this annual
report.
(All Amounts in Thousands Except Share and Per Share Data)
Year Ended December 31,
2003 2002 2001 (1) 2000 1999 (2)
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Revenues $ 257,813 $ 227,412 $ 304,370 $ 357,105 $ 373,209
Impairment Loss $ - $ 66 $ (81,038) $ - $ -
Gross Voyage Profit (Loss) $ 33,840 $ 30,502 $ (53,808) $ 49,475 $ 66,681
Operating Income (Loss) $ 19,587 $ 15,325 $ (73,885) $ 32,515 $ 53,972
Net Income (Loss) $ 5,491 $ (136) $ (64,419) $ 836 $ 14,623
Basic and Diluted Earnings (Loss) Per Share:
Net Income (Loss) $ 0.90 $ (0.02) $ (10.59) $ 0.14 $ 2.28
BALANCE SHEET DATA:
Working Capital $ 16,838 $ 9,945 $ 33,160 $ 28,183 $ 35,571
Total Assets $ 382,451 $ 406,752 $ 461,722 $ 695,176 $ 735,003
Long-Term Debt, Less Current Maturities
(including Capital Lease Obligations) $ 164,144 $ 192,297 $ 240,276 $ 359,864 $ 400,442
Stockholders' Investment $ 121,367 $ 115,227 $ 114,905 $ 181,532 $ 182,484
OTHER DATA:
Cash Flow From Operations $ 40,826 $ 21,345 $ 28,907 $ 49,469 $ 47,580
Cash Dividends Per Share of Common Stock (3) $ - $ - $ 0.125 $ 0.25 $ 0.25
Basic and Diluted Weighted Average Shares of
Common Stock Outstanding 6,082,887 6,082,887 6,082,887 6,082,954 6,424,193
(1) Results for 2001 reflect an Impairment Loss of approximately $81.0 Million,
in accordance with FASB Statement 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 settlement of approximately $20.6 Million
was net of related expenses of approximately $1.8 Million.
(3) For 2001, cash dividends represent payments applicable for only first and
second quarters due to the Board of Directors' decision to suspend quarterly
dividend payments on Common Shares of stock thereafter.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made by us or on our behalf in this report or
elsewhere that are not based on historical facts are intended to be
forward-looking statements within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, and as such may involve
known and unknown risks, uncertainties, and other factors that may cause our
actual results to be materially different from the anticipated future results
expressed or implied by such forward-looking statements.
Such statements include, without limitation, statements regarding (1)
estimated fair values of capital assets, the recoverability of the cost of those
assets, the estimated future cash flows attributable to those assets, and the
appropriate discounts to be applied in determining the net present values of
those estimated cash flows; (2) estimated scrap values of assets held for
disposal; (3) estimated fair values of financial instruments, such as interest
rate and commodity swap agreements; (4) estimated losses (including independent
actuarial estimates) under self-insurance arrangements, as well as estimated
losses on certain contracts, trade routes, lines of business or asset
dispositions; (5) estimated losses of asbestos claims; (6) estimated
obligations, and the timing thereof, to U.S. Customs relating to foreign repair
work; (7) the adequacy and availability of 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 our government subsidies; and (11) the anticipated
improvement in the results of our Mexican service.
Important factors that could cause our actual results to differ
materially from our expectations may include, without limitation, our ability to
(i) identify customers with marine transportation needs requiring specialized
vessels or operating techniques; (ii) secure financing on satisfactory terms to
acquire, modify, or construct vessels if such financing is necessary to service
the potential needs of current or future customers; (iii) obtain new contracts
or renew existing contracts which would employ certain of our vessels or other
assets upon the expiration of contracts currently in place, on favorable
economic terms; (iv) manage the amount and rate of growth of our general and
administrative expenses and costs associated with operating certain of our
vessels; (v) and manage our growth in terms of implementing internal controls
and information systems and hiring or retaining key personnel, among other
things.
Other factors include (vi) changes in cargo, charterhire, fuel, and
vessel utilization rates which could increase or decrease our gross voyage
profit from our liner services; (vii) the rate at which competitors add or scrap
vessels in the markets in which we operate; (viii) changes in interest rates
which could increase or decrease the amount of interest we incur on borrowings
with variable rates of interest, and the availability and cost of capital to us;
(ix) the impact on our financial statements of nonrecurring accounting charges
that may result from our ongoing evaluation of business strategies, asset
valuations, and organizational structures; (x) changes in accounting policies
and practices adopted voluntarily or as required by accounting principles
generally accepted in the United States; (xi) changes in laws and regulations
such as those related to government assistance programs and tax rates; (xii) the
frequency and severity of claims against us, and unanticipated outcomes of
current or possible future legal proceedings; (xiii) unplanned maintenance and
out-of-service days on our vessels; (xiv) the ability of customers to fulfill
obligations with us; (xv) the performance of unconsolidated subsidiaries; (xvi)
the uncertain future of our Coal Carrier contract; (xvii) our ability to
effectively handle our substantial leverage by servicing and meeting the
covenant requirements in each of our debt instruments, thereby avoiding any
defaults under those instruments and avoiding cross defaults under others; and
(xviii) other economic, competitive, governmental, and technological factors
which may affect our operations.
We caution readers that we assume no obligation to update or publicly
release any revisions to forward-looking statements made in this report or
elsewhere by us or on our behalf.
CRITICAL ACCOUNTING POLICIES
Set forth below is a discussion of the accounting policies and related
estimates that we believe are the most critical to understanding our
consolidated financial statements, financial condition, and results of
operations and which require complex management judgments, uncertainties and/or
estimates. Information regarding our other accounting policies is included in
the Notes to Consolidated Financial Statements.
VOYAGE REVENUE AND EXPENSE RECOGNITION
Revenues and expenses relating to voyages are recorded over the
duration of the voyage (including all inland moves, for which revenues and
expenses are fully recognized upon completion of the mother-vessel voyage).
Provisions for loss voyages are recorded when contracts for the voyages are
fixed and when losses become apparent for voyages in progress. Voyage revenue
and expense recognition requires our management to make estimates and
assumptions that affect the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
15
DEPRECIATION
Provisions for depreciation are computed on the straight-line method
based on estimated useful lives of our depreciable assets. Various methods are
used to estimate the useful lives and salvage values of our depreciable assets
and due to the capital intensive nature of our business and our large base of
depreciable assets, changes in such estimates could have a material effect on
our results of operations.
DRYDOCKING COSTS
We defer certain costs related to the drydocking of our vessels.
Deferred drydocking costs are capitalized as incurred and amortized on a
straight-line basis over the period between drydockings (generally two to five
years).
INCOME TAXES
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Provisions for income taxes include deferred income taxes that are provided on
items of income and expense, which affect taxable income in one period and
financial income in another. Certain foreign operations are not subject to
income taxation under pertinent provisions of the laws of the country of
incorporation or operation. However, pursuant to existing U.S. Tax Laws,
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, 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. 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 INSURANCE
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. Actual results could
differ from those estimates.
PENSION AND POSTRETIREMENT BENEFITS
Our pension and postretirement benefit costs are calculated using
various actuarial assumptions and methodologies as prescribed by SFAS No. 87,
"Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions." These assumptions include
discount rates, health care cost trend rates, inflation, rate of compensation
increases, expected return on plan assets, mortality rates, and other factors.
We believe that the assumptions utilized in recording the obligations under our
plans are reasonable based on input from our outside actuary and information as
to historical experience and performance. Differences in actual experience or
changes in assumptions may affect our pension and postretirement obligations and
future expense.
RESULTS OF OPERATIONS
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),
16
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.
EXECUTIVE SUMMARY
The year 2003 was an eventful and difficult year. In March of 2003, the
President of the United States ordered the military to unseat Saddam Hussein.
"Iraqi Freedom" commenced that effort and was successful by May in defeating the
Iraqi army. During and after these hostilities, we participated in delivery,
through our vessels, of some of the military hardware needed by our forces.
We continued to meet our goal of reducing debt as in the first and
second quarters of 2003, we repurchased approximately $10.7 Million of our 7
3/4% Senior Notes scheduled to mature in 2007 realizing a before tax gain of
approximately $1.4 Million. This brought our Notes repurchased to date to a
total of $38.6 Million par value leaving outstanding $71.4 Million par value.
Our total net repayment of borrowed debt in 2003 was approximately $34.7
Million.
Early in the third quarter of 2003, USGenNE, the charterer of our U.S.
flag Coal Carrier, filed a petition for bankruptcy. Even though USGenNE has
continued to comply with the charters terms, its bankruptcy created an event of
default under the financing arrangements related to the Coal Carrier and
required us to obtain alternate financing to immediately retire the existing
debt along with a pre-payment penalty and associated costs of $2.6 Million.
USGenNE has until the second quarter of 2004 to decide whether to maintain or
reject our charter as they emerge from bankruptcy. In addition to the $2.6
Million impacting earnings, a further impact of approximately $2 Million of
unanticipated vessel repair costs and accelerated deferred charge write-offs
also occurred in the third quarter.
As we entered the fourth quarter of 2003, President Bush rescinded the
punitive steel tariffs that he had put in place in March of 2002. The
elimination of the steel tariffs and the continuing weak dollar in relationship
to most foreign currencies found international trade once again having to
respond to significant events in the marketplace. Finally, the marketplace for
all types of dry cargoes carried by container vessels and/or dry bulk carriers
of various sizes now is reacting to the economic growth in China and the
reviving U.S. economy. We are pleased to report going into 2004, that these
markets remain firm. As evident in the 2003 year, we will continue to have to be
vigilant in approaching the immediate future with a positive but continued
conservative approach.
As a result of the preceding issues, some of our segments suffered,
however, overall we met our 2003 objectives. For the twelve months ended
December 31, 2003, we reported a net profit of $5.5 Million compared to a net
loss of $136,000 for the year 2002. Operating income for the year ended December
31, 2003, was $19.6 Million compared to operating income of $15.3 Million for
the year 2002.
Our foreign flag LASH Liner Service had disappointing results. It was
impacted by low volume both eastbound and westbound. Throughout 2003, the trade
patterns were adversely affected by the U.S. steel tariffs and the weak dollar.
The dollar remains weak, particularly against the Euro, but in spite of this,
with the U.S. economy on the rebound, we are optimistic for this service going
into 2004 as the termination of the steel tariffs has brought some improvement
in volume late in the fourth quarter carrying over to 2004.
While our U.S. flag LASH Liner Service had some early year
unanticipated expenses, cargo volume has held and we have seen improved
performance in the second half of the year.
Our three U.S. flag RO/RO vessels chartered to the MSC had satisfactory
results during the year. These three vessels will continue on charter until
2010. The charter for our Multi-Purpose vessel expired in the first quarter of
2003 and operated on a commercial voyage from the U.S. Gulf to the Middle East.
The vessel was sold for a small gain during the fourth quarter of 2003.
Our four U.S. flag and two foreign flag PCTCs operated with improved
results during the year. Also, our contract with a major mining company in
Indonesia produced satisfactory results carrying supplies in Papua. This
contract has an additional three years to run.
Although the charterer of our Coal Carrier filed the petition for
bankruptcy, operationally we are pleased to report that the vessel was used by
USGenNE without interruption for the entire year, producing operating profit
about equal to that which would have been obtained from employment at current
market rates on alternative business.
Our Molten Sulphur Carrier operated satisfactorily during the year. It
continues on long-term charter.
Our Rail-Ferry Service between Mobile, Alabama and Coatzacoalcos,
Mexico continues to improve. We are pleased at the continued broadening support
from our clients in both directions. Our volume continues to increase.
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In the third and fourth quarters of 2003, we sold our 12.5% interest in
four newly-built Capesize Bulk Carriers (each about 170,000 ton total
dead-weight carrying capacity) for about breakeven. We simultaneously purchased
a 50% interest in each of two of the vessels. The vessels will continue to
operate in an international ship pool composed of twenty vessels owned by pool
members and between 15 to 20 chartered vessels of similar size. The charter
market for Capesize vessels firmed in the second half of 2003 and remains firm
going into 2004.
We own a 30% interest in an international company owning eight
specialized Cement Carriers and one Ice-Strengthened Bulk Carrier. All of these
vessels operated satisfactorily in 2003.
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
vessel, 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 Maritime Security Program 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, which was partially offset by
the cost of new financings used to repurchase some of the Notes.
Investment income increased 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 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
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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 USGenNE Bankruptcy Filing in Liquidity and Capital
Resources). This was partially offset by a discount on the retirement of
approximately $10.7 Million of our 7 3/4% Senior Notes due in 2007 (See Note A -
Summary of Significant Accounting Policies of the Notes to the Consolidated
Financial Statements contained in this Form 10-K on page F-9).
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.
19
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 makes 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 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.
20
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 a wholly-owned subsidiary of the
Company. 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, 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 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 following discussion should be read in conjunction with the more
detailed Consolidated Balance Sheets and Consolidated Statements of Cash Flows
included elsewhere herein as part of our Consolidated Financial Statements.
Our working capital increased from $9.9 Million at December 31, 2002,
to $16.8 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 $40.8 Million, partially offset by cash used for
investing activities of $438,000 and by 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 used for investing activities of $438,000 was primarily to
cover payments for vessel upgrade and purchases of non-vessel related assets.
Partially offsetting these additions is the sale of our Multi-Purpose vessel,
which had reached the end of its economic life and Special Purpose barges, which
had been held for disposal. Additionally, in 2003, we sold our 12.5% investment
in four Cape-size Bulk Carriers and simultaneously reinvested in two of these
vessels at a 50% level.
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 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 USGenNE Bankruptcy
Filing section below), $6.0 Million for an additional payment on our Sulphur
Carrier 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
21
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:
DEBT AND LEASE OBLIGATIONS (000'S) 2004 2005 2006 2007 2008 THEREAFTER
---------------------------------- ---- ---- ---- ---- ---- ----------
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 $ 24,361 $ 143,351
======== ======== ======== ======== ======== =========
Debt Covenant Compliance Status - We have met all of the financial
covenants under our various debt agreements, the most restrictive of which
include the working capital, leverage ratio, minimum net worth, and interest
coverage ratio, 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 United States
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.
Environmental Issues - We have not been notified that we are a
potentially responsible party in connection with any environmental matters.
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 Accounting Principles Board
("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 $1.3 Million 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
22
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF Issue No. 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit or
disposal plan. The provisions of SFAS No. 146 are effective for exit and
disposal activities that are initiated after December 31, 2002. We adopted SFAS
No. 146 effective January 1, 2003, which had no material effect on our financial
position 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 are effective for fiscal years ending after December 15, 2002. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. We
continue to apply APB No. 25, "Accounting for Stock Issued to Employees," in
accounting for our stock-based compensation. Therefore, the alternative methods
of transition referred to above do not apply. We have adopted the disclosure
requirements of SFAS No. 148. If compensation expense had been determined using
the fair value method in SFAS No. 123, our net income (loss) and earnings (loss)
per share for the 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 are 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
instruments for which the effective date has been deferred. Because we do not
have any such instruments outstanding, the adoption of SFAS No. 150 is not
expected to materially impact our financial position or results of operations.
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
23
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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of our business, we are exposed to foreign
currency, interest rate, and commodity price risk. We utilize derivative
financial instruments including interest rate swap agreements, forward exchange
contracts 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 December 31, 2003, 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 year-end for our investment
portfolio is not material.
The fair value of long-term debt, including current maturities, was
estimated to be $182.1 Million compared to a carrying value of $179 Million. The
potential increase in fair value resulting from a hypothetical 10% adverse
change in the borrowing rates applicable to our long-term debt at December 31,
2003, would be approximately $1.8 Million or 1% of the carrying value.
In September of 1999, we entered into an interest rate swap agreement
with a commercial bank in order to reduce the possible impact of higher interest
rates in the long-term market by utilizing the fixed rate available with the
swap. The fixed rate payor is the Company, and the floating rate payor is the
commercial bank. While the arrangement is structured to reduce our exposure to
increases in interest rates, it also limits the benefit we might otherwise
receive from any decreases in interest rates.
The fair value of the agreement at December 31, 2003, estimated based
on the amount that the banks would receive or pay to terminate the swap
agreement at the reporting date, taking into account current market conditions
and interest rates, is a liability of $1 Million. A hypothetical 10% decrease in
interest rates as of December 31, 2003 would have resulted in a $13,000 increase
in the fair value of the liability.
FOREIGN EXCHANGE RATE RISK. We have entered into foreign exchange
contracts to hedge certain firm purchase and sale commitments with varying
maturities throughout 2004. The exchange rates at which these hedges were
entered into did not materially differ from the exchange rates in effect at
December 31, 2003. 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 at December 31, 2003, is a liability of approximately
$295,000.
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 December 31, 2003, 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. If we had such an arrangement, it would be structured to reduce
our exposure to increases in fuel prices, however, it would also limit the
benefit we might otherwise receive from any price decreases associated with this
commodity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by Item 8 begins on page F-1 of this Form
10-K.
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9a. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this report, we conducted an
evaluation of the effectiveness of our "disclosure controls and procedures," as
that phrase is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934. The evaluation was carried out under the supervision and
with the participation of our management, including our Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO").
Based on that evaluation, the CEO and CFO have concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be disclosed in our periodic filings with the
Securities and Exchange Commission ("SEC"), and in ensuring that the information
required to be disclosed in those filings is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
(b) Subsequent to the date of the evaluation, there were no significant
changes in our internal controls or in other factors that could significantly
affect the internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We have adopted a written Code of Business Conduct and Ethics
applicable to all officers, directors and employees, including our principal
executive officer, principal financial officer and principal accounting officer.
Interested persons may obtain a copy of our Code of Business Conduct and Ethics
without charge by writing to International Shipholding Corporation, Attention:
Gary L. Ferguson, Vice President, 1700 Poydras Center, 650 Poydras Street, New
Orleans, LA 70130.
The information relating to Directors and Executive Officers called for
by Item 10 is incorporated herein by reference to Item 4a, Executive Officers
and Directors of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is included on pages 8, 9, 10,
and 11 of our definitive proxy statement dated March 9, 2004, filed pursuant to
Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is included on pages 2, 3, 4, and
5 of our definitive proxy statement dated March 9, 2004, filed pursuant to
Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is included on pages 2, 3, 4, 5,
11, and 12 of our definitive proxy statement dated March 9, 2004 filed pursuant
to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by Item 14 is included on pages 7 and 8 of
our definitive proxy statement dated March 9, 2004 filed pursuant to Section
14(a) of the Securities Exchange Act of 1934, and is incorporated herein by
reference.
25
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following financial statements, schedules and exhibits are filed as
part of this report:
(a) 1. Financial Statements
The following financial statements and related notes are included on
pages F-1 through F-31 of this Form 10-K.
Report of Independent Auditors
Report of Independent Public Accountants
Consolidated Statements of Income for the years ended December 31,
2003, 2002, and 2001
Consolidated Balance Sheets at December 31, 2003 and 2002
Consolidated Statements of Changes in Stockholders' Investment for the
years ended December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002, and 2001
Notes to Consolidated Financial Statements
3. Exhibits
(3) Restated Certificate of Incorporation, as amended, and By-Laws
of the Registrant (filed with the Securities and Exchange
Commission as Exhibit 3 to the Registrant's Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein
by reference)
(4) Specimen of Common Stock Certificate (filed as an exhibit to
the Company's Form 8-A filed with the Securities and Exchange
Commission on April 25, 1980, and incorporated herein by
reference)
(4.3) Form of Indenture between the Company and the Bank of New
York, Inc., as Trustee, with respect to 7 3/4% Senior Notes
due October 15, 2007 (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated January 22, 1998, and
incorporated herein by reference).
(4.4) Form of 7 3/4% Senior Note due October 15, 2007 (included in
Exhibit 4.3 hereto and incorporated herein by reference).
(10) $25,000,000 Credit Agreement dated as of January 22, 1998, by
and among the Company, as Borrower, Certain Lenders, as
signatories thereto, Citicorp Securities, Inc., as Arranger,
and Citibank, N.A., as Administrative Agent (filed as Exhibit
10.1 to the Company's Registration Statement on Form S-4
(Registration No. 333-46317) and incorporated herein by
reference.)
(10.1) First Amended and Restated Credit Agreement dated as of March
31, 1998, by and among the Company, as Borrower, Certain
Lenders, as signatories thereto, Citicorp Securities, Inc., as
Arranger, and Citibank, N.A., as Administrative Agent (filed
as Exhibit 10.1 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1999, and incorporated herein by
reference).
(10.2) Second Amended and Restated Credit Agreement dated as of May
4, 1999, by and among the Company, as Borrower, Certain
Lenders, as signatories thereto, Citicorp Securities, Inc., as
Arranger, and Citibank, N.A., as Administrative Agent (filed
as Exhibit 10.2 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1999, and incorporated herein by
reference).
(10.3) Amendment No. 1 dated as of September 3, 1999, by and among
the Company, as Borrower, Certain Lenders, as signatories
thereto, Citicorp Securities, Inc., as Arranger, and Citibank,
N.A., as Administrative Agent (filed as Exhibit 10.3 to the
Registrant's Form 10-K for the fiscal year ended December 31,
1999, and incorporated herein by reference).
26
(21) Subsidiaries of International Shipholding Corporation
(31.1) Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
(32.1) Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(32.2) Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) We filed a current report on Form 8-K on January 30, 2004 to furnish
the public announcement of fourth quarter and year ended December 31,
2003 earnings.
(c) The Index of Exhibits and required Exhibits are included following the
signatures beginning at page 30 of this Report.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL SHIPHOLDING CORPORATION
(REGISTRANT)
/s/ Gary L. Ferguson
March 5, 2004 By ---------------------------
Gary L. Ferguson
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
INTERNATIONAL SHIPHOLDING CORPORATION
(REGISTRANT)
/s/ Erik F. Johnsen
March 5, 2004 By ---------------------------
Erik F. Johnsen
Chairman of the Board, Director and
Chief Executive Officer
/s/ Niels M. Johnsen
March 5, 2004 By ---------------------------
Niels M. Johnsen
President and Director
/s/ Erik L. Johnsen
March 5, 2004 By ---------------------------
Erik L. Johnsen
Executive Vice President and Director
/s/ Niels W. Johnsen
March 5, 2004 By ---------------------------
Niels W. Johnsen
Director
/s/ Harold S. Grehan, Jr.
March 5, 2004 By ----------------------------------
Harold S. Grehan, Jr.
Director
/s/ Raymond V. O'Brien, Jr.
March 5, 2004 By ----------------------------------
Raymond V. O'Brien, Jr.
Director
28
/s/ Edwin Lupberger
March 5, 2004 By -----------------------------
Edwin Lupberger
Director
/s/ Edward K. Trowbridge
March 5, 2004 By ---------------------------------
Edward K. Trowbridge
Director
/s/ Gary L. Ferguson
March 5, 2004 By -----------------------------
Gary L. Ferguson
Vice President and Chief Financial Officer
/s/ Manny G. Estrada
March 5, 2004 By -----------------------------
Manny G. Estrada
Vice President and Controller
29
EXHIBIT INDEX
Exhibit
Number
(3) Restated Certificate of Incorporation, as amended, and By-Laws of the
Registrant (filed with the Securities and Exchange Commission as
Exhibit 3 to the Registrant's Form 10-Q for the quarterly period ended
June 30, 1996, and incorporated herein by reference)
(4) Specimen of Common Stock Certificate (filed as an exhibit to the
Company's Form 8-A filed with the Securities and Exchange Commission on
April 25, 1980, and incorporated herein by reference)
(4.3) Form of Indenture between the Company and the Bank of New York, Inc.,
as Trustee, with respect to 7 3/4% Senior Notes due October 15, 2007
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated
January 22, 1998, and incorporated herein by reference).
(4.4) Form of 7 3/4% Senior Note due October 15, 2007 (included in Exhibit
4.3 hereto and incorporated herein by reference).
(10) $25,000,000 Credit Agreement dated as of January 22, 1998, by and among
the Company, as Borrower, Certain Lenders, as signatories thereto,
Citicorp Securities, Inc., as Arranger, and Citibank, N.A., as
Administrative Agent (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-46317) and
incorporated herein by reference.)
(10.1) First Amended and Restated Credit Agreement dated as of March 31, 1998,
by and among the Company, as Borrower, Certain Lenders, as signatories
thereto, Citicorp Securities, Inc., as Arranger, and Citibank, N.A., as
Administrative Agent (filed as Exhibit 10.1 to the Registrant's Form
10-K for the fiscal year ended December 31, 1999, and incorporated
herein by reference).
(10.2) Second Amended and Restated Credit Agreement dated as of May 4, 1999,
by and among the Company, as Borrower, Certain Lenders, as signatories
thereto, Citicorp Securities, Inc., as Arranger, and Citibank, N.A., as
Administrative Agent (filed as Exhibit 10.2 to the Registrant's Form
10-K for the fiscal year ended December 31, 1999, and incorporated
herein by reference).
(10.3) Amendment No. 1 dated as of September 3, 1999, by and among the
Company, as Borrower, Certain Lenders, as signatories thereto, Citicorp
Securities, Inc., as Arranger, and Citibank, N.A., as Administrative
Agent (filed as Exhibit 10.3 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1999, and incorporated herein by
reference).
(21) Subsidiaries of International Shipholding Corporation
(31.1) Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(32.1) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(32.2) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
30
INDEX OF FINANCIAL STATEMENTS
Report of Independent Auditors.................................................. F-2
Report of Independent Public Accountants........................................ F-3
Consolidated Statements of Income for the years ended
December 31, 2003, 2002, and 2001............................................ F-4
Consolidated Balance Sheets at December 31, 2003 and 2002....................... F-5
Consolidated Statements of Changes in Stockholders' Investment
for the years ended December 31, 2003, 2002 and 2001......................... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001............................................ F-8
Notes to Consolidated Financial Statements...................................... F-9
F-1
REPORT OF INDEPENDENT AUDITORS
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 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 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 accounting principles
generally accepted in the United States.
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-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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.
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-3
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(All Amounts in Thousands Except Share Data)
Year Ended December 31,
2003 2002 2001
---------- ---------- ----------
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-4
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(All Amounts in Thousands)
DECEMBER 31, December 31,
2003 2002
------------ ------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 8,881 $ 4,419
Restricted Cash 7,406 8,096
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 67,397 65,559
------------ ------------
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
Due from Related Parties 2,535 2,609
Other 10,415 12,586
------------ ------------
34,364 40,373
------------ ------------
$ 382,451 $ 406,752
============ ============
The accompanying notes are an integral part of these statements.
F-5
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(All Amounts in Thousands Except Share Data)
DECEMBER 31, December 31,
2003 2002
------------ ------------
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
------------ ------------
$ 382,451 $ 406,752
============ ============
The accompanying notes are an integral part of these statements.
F-6
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(All Amounts in Thousands)
Accumulated
Additional Other
Common Paid-In Retained Treasury Comprehensive
Stock Capital Earnings Stock Income(Loss) Total
---------- ---------- -------- --------- ------------- ---------
Balance at December 31,2000 $ 6,756 $ 54,450 $129,755 $ (8,704) $ (725) $ 181,532
Comprehensive Loss:
Net Loss for Year Ended December 31,
2001 - - (64,419) - - (64,419)
Other Comprehensive 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 Dividend - - (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-7
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
Year Ended December 31,
2003 2002 2001
----------- --------- -----------
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
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 40,826 21,345 28,907
----------- --------- ----------
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)
Additions to Deferred Charges (2,210) (2,906) (7,589)
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 (438) 6,550 74,219
----------- --------- ----------
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-8
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 voyages are recorded over the
duration of the voyage (including all inland moves, for which revenues and
expenses are fully recognized upon completion of the mother-vessel voyage).
Provisions for loss voyages are recorded when contracts for the voyages are
fixed and when losses become apparent for voyages in progress. Voyage revenue
and expense recognition requires management to make estimates and assumptions
that affect the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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.
F-9
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 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) (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).
F-10
SELF-RETENTION INSURANCE
We maintain provisions for our estimated losses under our
self-retention insurance program 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 our loss exposure for the policy
year. However, if during this two-year period our estimate of our 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
the loss provisions recorded during the reporting period. Actual results could
differ from those estimates (See Note D).
ASBESTOS INSURANCE
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. 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).
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.
F-11
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 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
F-12
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
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 major 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 U.S. flag for use in the
renewed U.S. flag LASH Liner Service, which commenced operation in November of
2002.
F-13
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-14
NOTE C - LONG-TERM DEBT
(All Amounts in Thousands)
Interest Rate Total Principal Due
DECEMBER 31, December 31, MATURITY DECEMBER 31, December 31,
Description 2003 2002 DATE 2003 2002
- --------------------------- ------------ ------------ -------- ------------ ------------
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 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
F-15
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:
(All Amounts in Thousands)
DECEMBER 31, December 31,
2003 2002
------------ ------------
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 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.
F-16
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.
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,
(All Amounts in Thousands) 2003 2002 2003 2002
------------ ------------ ------------ ------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected 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 - - - -
-------- -------- -------- --------
Projected 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
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
F-17
The accumulated benefit obligation for the pension plan was $17,313,000
and $15,104,000 at December 31, 2003 and 2002, respectively.
The following table provides the components of net periodic benefit
cost for the plans:
Pension Plan Postretirement Benefits
------------------------------- -------------------------------
For the year ended December 31, For the year ended December 31,
2003 2002 2003 2002
-------- -------- -------- --------
COMPONENTS OF NET PERIODIC BENEFIT COST
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
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:
(All Amounts in Thousands) 1% Increase 1% Decrease
----------- -----------
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 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
F-18
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.
Components of the net deferred tax liability/(asset) are as follows:
DECEMBER 31, December 31,
(All Amounts in Thousands) 2003 2002
------------ ------------
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
========== ==========
F-19
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.
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.
F-20
At December 31, 2003, our unrestricted subsidiary, through its 50%
ownership, guarantees a portion of the outstanding debt of an invested bulk
carrier company. 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, is $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).
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.
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. 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. It is reasonably possible that a change in
our estimate of exposure could occur. Although it is difficult to predict the
costs of ultimately resolving such issues, we do not expect such costs will 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 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.
F-21
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
(All Amounts in Thousands) Financing Lease
-----------------
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
==========
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 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.
F-22
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
Foreign
(All Amounts Domestic Flag LASH Other
in Thousands) Breakbulk PCTCs PCTC Vessel Leases Total
--------- -------- -------- -------- -------- --------
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,
(All Amounts in Thousands) 2003 2002
------------ ------------
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.
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.
F-23
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 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,
(All Amounts in Thousands) 2003 2002 2001
--------- --------- ---------
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 major 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 major sulphur producer.
RAIL-FERRY SERVICE: This segment includes a service that began in
January of 2001 carrying loaded rail cars between Mobile, Alabama and
Coatzacoalcos, Mexico. Our two Special Purpose vessels are employed with this
service,
F-24
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.
F-25
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
Liner Charter Contracts of Rail-Ferry
(All Amounts in Thousands) Services Contracts Affreightment Service Other Elimination Total
- -----------------------------------------------------------------------------------------------------------------------------------
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)
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
- -----------------------------------------------------------------------------------------------------------------------------------
F-26
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,
(All Amounts in Thousands) 2003 2002 2001
---------- ---------- ----------
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)
---------- ---------- ----------
Income (loss) before provision (benefit) for
income taxes and equity in net income of
unconsolidated entities $ 7,925 $ (760) $ (99,442)
========== ========== ==========
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,
F-27
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 unaudited combined condensed financial position and results of
operations of the cement carrier companies are summarized below:
DECEMBER 31, December 31,
(Amounts in Thousands) 2003 2002
------------ ------------
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,
(Amounts in Thousands) 2003 2002 2001
---------- ---------- ----------
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.
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.
F-28
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,
(All Amounts in Thousands) 2003 2002 2001
---------- ---------- ----------
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 $200,000, in addition to interest at 6%.
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES
The estimated fair values of our financial instruments and derivatives
are as follows (asset/(liability)):
DECEMBER 31, December 31,
2003 2002
------------------------------- ------------------------------
CARRYING FAIR Carrying Fair
(All Amounts in Thousands) AMOUNT VALUE Amount Value
---------- ---------- ---------- ----------
Interest Rate Swap Agreements ($ 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.
F-29
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.
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 a major 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 a major 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 a major 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-30
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,
(All Amounts in Thousands) 2003 2002
------------ ------------
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
- ----------------------------------------------------------------------------------------------------------------
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-31