<PAGE 1> INTERNATIONAL SHIPHOLDING CORPORATION SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA (All Amounts in Thousands Except Share, Per Share Data and Ratios) Consistent Operating Results ($ In Millions) OPERATING YEAR EBITDA* INCOME - - ---- ------ --------- 1989 61.8 31.4 1990 73.0 34.9 1991 73.5 33.5 1992 75.2 30.9 1993 81.2 36.5 1994 79.5 37.9 1995 81.9 37.9 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. Year Ended December 31, 1995 1994 1993 1992 1991 ------------------------------------------------- INCOME STATEMENT DATA: Revenues $ 341,789 $ 342,333 $ 341,651 $ 324,608 $ 328,429 Gross Voyage Profits $ 64,536 $ 65,315 $ 64,318 $ 57,581 $ 61,303 Operating Income $ 37,921 $ 37,861 $ 36,486 $ 30,935 $ 33,457 Income Before Extraordinary Item and Cumulative Effect of Accounting Change $ 20,980 $ 13,051 $ 7,645 $ 6,499 $ 15,233 Extraordinary Item - - $ (1,716) - - Cumulative Effect of Accounting Change - - - $ (3,218) - Net Income $ 20,980 $ 13,051 $ 5,929 $ 3,281 $ 15,233 Earnings Per Common and Common Equivalent Shares: Before Extraordinary Item and Cumulative Effect of Accounting Change $ 3.14 $ 1.95 $ 1.01 $ 0.77 $ 2.13 Extraordinary Item - - $ (0.26) - - Cumulative Effect of Accounting Change - - - $ (0.50) - Net Income $ 3.14 $ 1.95 $ 0.75 $ 0.27 $ 2.13 * Earnings Before Interest, Taxes, Depreciation and Amortization $ 81,877 $ 79,482 $ 81,166 $ 75,209 $ 73,482 BALANCE SHEET DATA: Working Capital $ 13,407 $ 16,819 $ 17,649 $ 7,920 $ 28,327 Total Assets $ 647,580 $ 547,091 $ 531,372 $ 519,963 $ 496,994 Long-Term Debt (including Capital Lease Obligations) $ 289,495 $ 251,944 $ 240,132 $ 231,148 $ 200,472 Redeemable Preferred Stock - - - $ 13,548 $ 13,290 Common Stockholders' Investment $ 166,261 $ 146,316 $ 134,497 $ 124,004 $ 123,408 Ratio of Long-Term Debt and Capital Lease Obligations to Common Stockholders' Investment 1.74:1 1.72:1 1.79:1 1.86:1 1.62:1 Ratio of Long-Term Debt to Earnings Before Interest, Taxes, Depreciation and Amortization 3.54:1 3.17:1 2.96:1 3.07:1 2.73:1 Long-Term Debt as a Percentage of Sum of Long-Term Debt, Redeemable Preferred Preferred Stock and Common Stockholders' Investment 64% 63% 64% 63% 59% OTHER DATA: Cash Dividends Per Common Share $ 0.1825 $ 0.16 $ 0.16 $ 0.16 $ 0.16 Weighted Average of Common and Common Equivalent Shares: 6,682,887 6,682,887 6,525,259 6,423,583 6,406,933 [FN] All per share and weighted average share amounts have been restated for November 17, 1995 twenty-five percent stock dividend. <PAGE 2> TO THE SHAREHOLDERS Net profit for the fourth quarter ended December 31, 1995 was $14.845 Million or $2.23 per share compared to a net profit in the fourth quarter 1994 of $3.715 Million or $0.69 per share ($.55 per share after restatement for 25% stock Dividend). For the twelve months ended December 31, 1995, net profit was $20.980 Million or $3.14 per share compared with a net profit of $13.051 Million or $2.44 per share ($1.95 per share after restatement for 25% stock dividend) for the twelve months ended December 31, 1994. The fourth quarter 1995 and twelve months 1995 reflect an after tax gain of $11.3 Million on the sale of our 8% interest in Havtor A/S, a Norwegian shipowning company acquired by another Norwegian shipowner in an expansion of its interests in Liquified Petroleum Gas Carriers. The proceeds from this sale are available for reinvestment or retiring debt. Aside from the gain on the sale of Havtor A/S shares, our operating income for the year ended December 31, 1995 was $37.921 Million compared to $37.861 Million in 1994, $36.5 Million in 1993, $30.9 Million in 1992 and $33.5 Million in 1991. For the last five years, our Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) have run from $73.5 Million to $81.9 Million (average of $78.26 Million) providing conservative coverage for debt service. The book equity of the Company has grown from $123.408 Million in 1991 to $166.261 Million in 1995. Our conservative approach in the market place has enabled us to report 45 consecutive quarters without a loss. Forest Lines Trans-Atlantic LASH service completed another good year. If cargo offerings continue at the current favorable level, we expect to be able to add a third LASH vessel to the service by mid-year 1996. Waterman service between U.S. Gulf and Atlantic ports and South Asia had a down year in 1995, but a notable improvement in the fourth quarter. Freight rates have now increased slightly for some Eastbound cargoes along with better volume. We look forward to somewhat improved results for this service in 1996. During 1995, we continued our LASH vessels and two Multi-Purpose Ice-Strengthened vessels on medium term charters to the Military Sealift Command (MSC). Also, three RO/RO vessels continued to operate on long-term charter to MSC. Results were satisfactory. One of the Ice- Strengthened vessels, the "GREEN RIDGE", was redelivered at year's end and is now employed in the carriage of general cargo in the Atlantic Ocean area. We are now reviewing future employment opportunities for the two LASH vessels whose charters expire in May, 1996. They are potential candidates for renewal of charters with MSC and/or deployment in one of our other services. Our Cape-Size Bulk carrier, "AMAZON", was redelivered from a time charter in January, 1996 and is now employed carrying grain in the spot market. Freight rates in the bulk carrier markets have recently become depressed. We intend to utilize the "AMAZON" on short voyages until freight rates increase. The four specialized Car Carriers in our fleet continue to operate successfully on long-term charters to major Japanese and South Korean car manufacturers. The M.V. "SULPHUR ENTERPRISE" as of the end of 1995 has made 100 trips carrying a total of about 2.4 Million tons of molten sulphur since her delivery from the shipbuilders in October, 1994. She is performing under a long-term contract with a major mineral resource company. The M.V. "BALI SEA" and M.V. "BANDA SEA", two Float- On/Float-Off Heavy Lift vessels, together with 26 Special Purpose Barges, were all delivered to one of our subsidiary companies from Far Eastern shipyards between August, 1995 and December, 1995. These vessels have now begun service as of December, 1995, under a long-term contract providing ocean transportation of supplies to a large mining operation on Irian Jaya, Indonesia, from various ports in the South Pacific area. The S.S. "ENERGY ENTERPRISE", a 38,164 long ton deadweight capacity conveyor-belt equipped coal carrier finally completed shipyard work on February 6, 1996, shifted to Newport News, Virginia, and loaded her first coal cargo under our ownership and charter to a New England electric utility company. She thereby began employment under a 15- year charter carrying coal in the coastwise and near-sea trade. From time to time during this charter period, she will also perform service for other customers. During 1995, our river barge system carried a total of 3,200,000 tons of coal from loading points on the Ohio River to Florida via the Mississippi River Intracoastal Waterways and our coal transfer facility in Gulf County, Florida. After completion of the merger of Havtor A/S with Kvaerner Industries reported in our 1994 Annual Report, a further merger of the combined companies was effected with Bergesen A/S, another large Norwegian <PAGE 3> shipowning company. The surviving company, Bergesen, is now the world's largest owner of Liquified Petroleum Gas (LPG) Carriers in addition to a substantial fleet of Oil Tankers, a total of sixty-six (66) LPG Carriers and twenty (20) VLCC and ULCC Tankers. We accepted cash for our shares of Havtor A/S as reported above. 1995 was a relatively good year in the international dry bulk cargo markets. Rates peaked at highest level achieved in recent years in May; but as the year unfolded , rates began to decline. New large bulk carriers entered the market from Far Eastern shipyards before a sufficient number of obsolete vessels were sold for demolition. A total of about 16.8 million deadweight tons of ships were sold for demolition during the year, about 3.6 million deadweight tons less than 1994. Of the tonnage sold for scrapping in 1995, 12.3 million deadweight tons were tankers and combination carriers. The balance were dry cargo carriers, much less than necessary to offset newbuilding deliveries. As the new year begins, the dry bulk cargo markets enter another down cycle particularly for Cape-Size bulk carriers. The outlook, therefore, is for depressed freight rates for the rest of 1996 until more of the older ships are scrapped and cargo volumes increase to absorb scheduled newbuildings. However, lower freight rates should encourage older bulk carriers to be sold for scrapping. Since almost all of our business is medium to long-term contracts or market share in dedicated trades, we are not seriously impacted by the fluctuating bulk cargo markets. We, therefore, expect to ride out the 1996 depressed bulk market while expecting an upturn in 1997. In the meantime, the Company's strong financial position will enable it to take advantage of investing in new projects meeting our policy goals. At a regular meeting on January 24, 1996, the Board of Directors declared a quarterly dividend of $.0625 per share payable on March 15, 1996 to shareholders of record on March 1, 1996. Previously , the Board authorized a 25% stock dividend paid on November 17, 1995 and increased the quarterly dividend rate payable December 15, 1995 to the new rate of $.0625 per share. /s/Niels W. Johnsen Niels W. Johnsen Chairman /s/Erik F. Johnsen Erik F. Johnsen President <PAGE 4> INTERNATIONAL SHIPHOLDING CORPORATION REVIEW OF OPERATIONS International Shipholding Corporation, through its subsidiaries and associates, is engaged in various types of waterborne freight transportation-LASH (for Lighter Aboard Ship) carriage, Pure Car Carrier services, roll-on/roll-off, breakbulk and bulk carrier services, inland vessel and barge transportation-with emphasis on medium to long-term contracts and charters. The Company has offices in New York, New Orleans, Washington, D.C., and Houston, and maintains a network of marketing agents in major cities worldwide. Principal subsidiaries of the Company include Central Gulf Lines, Inc., Waterman Steamship Corporation, Forest Lines Inc., and LCI Shipholdings, Inc., who together operate a fleet of 29 modern vessels. LASH-The Company placed the world's first two LASH vessels in operation in 1969 and 1970, and has continued as a leading owner and operator of this type of ocean transportation. The Company's LASH system operations consist of 10 large ocean carriers, three ocean towed feeder LASH vessels, one self-propelled feeder LASH vessel, and a fleet of 1,650 LASH barges. The large LASH vessels each carry between 83 and 89 LASH barges and utilize additional spaces aboard ship for cargo not loaded into barges. The barges, all of a standard size with cargo capacity of 375 tons, are towed in ports and on inland waterways to various shipping points where they are loaded with cargo and returned to the ocean going vessel. They are hoisted aboard by a special ship-board gantry-type crane and transported overseas where the process is reversed. The LASH ships do not require special docks or terminals, and are generally worked at anchor in river, roadsteads and light traffic port areas. LASH cargo rarely requires transshipment, moving from origin to destination under one bill of lading. Waterman Steamship Corporation operates four of the large U.S. Flag LASH vessels on subsidized liner service between the U.S. Gulf and Atlantic coasts and the Middle East, East Africa, the Indian Sub-Continent, and southeast Asia. A variety of general, bulk and project cargo is transported outbound, while large amounts of rubber, coffee and general cargo are carried inbound. Waterman also operates a fifth large U.S. Flag LASH vessel under charter to the U.S. Navy's Military Sealift Command (MSC). Two of the Company's large international flag LASH vessels are being operated in the Trans-Atlantic service by the Company's subsidiary, Forest Lines Inc. Outbound the vessels carry a variety of cargoes and have medium to long- term contracts with several major shippers; inbound they carry various general cargoes, primarily steel, from European ports to the United States. Central Gulf Lines, Inc. operates the other three large U.S. Flag LASH vessels under time charters to the Military Sealift Command. FLASH-The three 8-LASH barge capacity, ocean towed, float- on/float-off feeder LASH (FLASH) units are being operated between various southeast Asian ports as an integral part of the Waterman service. DOCKSHIP-The 15-LASH barge capacity float-on/float-off DOCKSHIP is being operated in conjunction with Forest Lines' Trans-Atlantic LASH service to facilitate movement of LASH barges between European ports. PURE CAR CARRIERS-Central Gulf Lines, Inc. continued the operation during 1995 of its two U.S. Flag Pure Car Carriers, M/V "GREEN LAKE" and M/V "GREEN BAY", under contracts with Toyota Motor Corporation and Honda Motor Co., Ltd. to transport automobiles between Japan and North America. The Company, through its LCI Shipholdings, Inc. subsidiary, also continued the operation of its two 4,800- car capacity Pure Car Carriers, M/V "CYPRESS PASS" and M/V "CYPRESS TRAIL", transporting automobiles from the Far East to the United States and Europe for the account of Hyundai. BREAKBULK SERVICES-The Company's U.S. Flag Semi-Submersible Barge (SSB), "CAPS EXPRESS", is being operated in the open market on a cargo offered basis. ROLL-ON/ROLL-OFF SERVICES-The Company, through its Waterman Steamship Corporation subsidiary, is operating three modern U.S. Flag Roll-On/Roll-Off vessels, <PAGE 5> S.S. "SGT. MATEJ KOCAK", S.S. "PFC. E.A. OBREGON", AND S.S. "MAJ. S.W. PLESS", under long-term charters to the Military Sealift Command. ICE STRENGTHENED MULTI-PURPOSE VESSELS-During 1995 the Company's two U.S. Flag Ice Strengthened Multi-Purpose vessels, M/V "GREEN WAVE" and M/V "GREEN RIDGE", continued to be operated under medium term charters to the Military Sealift Command. The "GREEN RIDGE" was redelivered from its MSC charter in December 1995, and is currently employed in the carriage of general cargo. CAPE-SIZE BULK CARRIER-The Company's 148,000 DWT. Cape-Size Bulk Carrier, M/V "AMAZON", was redelivered from a time charter in January, 1996 and is now employed in the spot market carrying grain. SULPHUR CARRIER-The M/V "SULPHUR ENTERPRISE" continued to carry molten sulphur from Louisiana to U.S. Gulf ports under its long-term contract with a large mineral resource company. FLOAT-ON/FLOAT-OFF SPECIAL PURPOSE VESSEL (SPV)-The Company in 1995 acquired two semi-submersible barge-carrying vessels and had them converted to carry newbuilt special purpose barges under a long-term contract with a major copper and gold mining company to provide ocean transportation of supplies to its mining operation in Indonesia. The two Float-On/Float-Off SPV's, renamed M/V "BALI SEA" and M/V "BANDA SEA", together with 26 special purpose barges, commenced work on the contract in December, 1995. COAL CARRIER-The Company took title in September of 1995 to the S.S. "ENERGY INDEPENDENCE", a self-unloading, conveyor- belt equipped U.S. Flag Coal Carrier eligible for U.S. domestic trade. The 38,164 DWT, vessel, renamed "ENERGY ENTERPRISE", completed shipyard work and commenced service in February, 1996 under a long-term charter to a New England electric utility company, carrying coal in the coastwise and near-sea trade. <PAGE 6> FLEET STATISTICS Total Dead- Total Dead- Weight Carrying Weight Carrying Owned vessels Number Capacity (ea.) Capacity - - ---------------------------------------------------------- LASH 3 47,500 L.T. 142,500 L.T. LASH 6 46,150 276,900 LASH 1 39,493 39,493 PURE CAR CARRIERS 2 10,500 21,000 PURE CAR CARRIERS 2 12,700 25,400 FLASH 3 3,600 10,800 DOCKSHIP 1 6,800 6,800 RO/RO 3* 25,476 76,428 ICE STRENGTHENED MULTI-PURPOSE 2 12,820 25,640 CAPE-SIZE BULK CARRIER 1 148,000 148,000 MOLTEN SULPHUR CARRIER 1 29,000 29,000 SEMI-SUBMERSIBLE BARGE (SSB) 1 14,894 14,894 FLOAT-ON/FLOAT- OFF SPECIAL PURPOSE VESSELS (SPV) 2 21,880 43,760 COAL CARRIER 1 38,164 38,164 JUMBO RIVER BARGES 111* 3,100 344,100 RIVER BARGES 18 1,500 27,000 - - ------------------------------------------------- FLEET CAPACITY - 1995 1,269,879 VESSELS 29* LASH BARGES 1,650* RIVER BARGES 129* SPECIAL PURPOSE BARGES 26 TOWBOATS 15* *Includes leased equipment. DOMESTIC TRANSPORTATION-Central Gulf Lines, Inc. has a long- term contract with a Florida based electric utility for the transportation of coal from Mt. Vernon, Indiana to the Company's coal transfer facility at Port St. Joe, Florida, where the coal is trans-loaded into railcars and moved to the utility's plant site at Palatka, FL. The Company is responsible for the waterborne movement of the coal from the loading point on the Ohio River to the discharge point at the terminal and for unloading the barges there and transferring the coal into railcars. The Company operates 111 hopper barges, 15 towboats and certain terminal transfer equipment in carrying out the requirements of the contract. LITCO TERMINAL COMPLEX-The Company's LITCO (LASH Intermodal Terminal Company) Terminal at Memphis is in its fourth year of operation and has continued to experience satisfactory utilization. The terminal is the only totally enclosed multi-modal cargo transfer facility in the United States, providing 287,000 sq. ft. of enclosed warehouse and loading/discharging stations for LASH barge, rail, truck, and heavy-lift operations. LITCO is strategically located to move cargo on just-in- time scheduling between major inland markets and world ports, and is contributing positively to the performance of both Forest Lines and Waterman services by improved turn- around time of the Company's LASH barge fleet. <PAGE 7> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's vessels are operated under a variety of charters and contracts. The nature of these arrangements is such that, without a material variation in gross voyage profits (total revenues less voyage expenses and vessel and barge depreciation), the revenues and expenses attributable to a vessel deployed under one type of charter or contract can differ substantially from those attributable to the same vessel if deployed under a different type of charter or contract. Accordingly, depending on the mix of charters or contracts in place during a particular accounting period, the Company's revenues and expenses can fluctuate substantially from one period to another even though the number of vessels deployed, the number of voyages completed, the amount of cargo carried and the gross voyage profit derived from the vessel remain relatively constant. As a result, fluctuations in voyage revenues and expenses are not necessarily indicative of trends in profitability, and management believes that gross voyage profit is a more appropriate measure of operating performance than revenues. Accordingly, the discussion below addresses variations in gross voyage profits rather than variations in revenues. RESULTS OF OPERATIONS Year ended December 31, 1995 Compared to Year Ended December 31, 1994 GROSS VOYAGE PROFIT. Gross voyage profit decreased 12% to $64.5 million in 1995 as compared to $65.3 million in 1994. Gross voyage profit was negatively impacted by lower freight rates and higher operating costs for the Company's LASH vessels employed in liner service between ports on the U.S. Gulf/U.S. Atlantic Coast and South Asia (Trade Routes 18 and 17). Also impacting 1995 results was a scheduled rate reduction on one of the Company's vessels chartered to the Military Sealift Command (the "MSC"). Partially offsetting these reductions was the addition of a molten sulphur carrier in early fourth quarter of 1994. The Company currently charters eight vessel to the MSC. A new charter with an initial period of seventeen months with two seventeen month option periods began in early 1995 for one of the Company's LASH vessels. During 1995, the MSC exercised the second of two seventeen month option periods which extends through early 1997 on another of the Company's LASH vessels. The two remaining LASH vessels on charter to the MSC are operating under charters which expire in mid- 1996 and future employment opportunities for these vessels are being reviewed. During 1995, the MSC also exercised the first of two seventeen month option periods on one of the Company's two ice strengthened multi-purpose vessels which extends into mid-1996. The MSC did not exercise its option to renew the charter of the Company's other ice strengthened multi-purpose carrier when it expired in late 1995. This vessel is now being operated in the open market on a cargo offered basis. The three Roll-On/Roll-Off vessels on charter to the Military Prepositioning Service are fixed on MSC charters that will terminate in the years 2009 and 2010. Vessel and barge depreciation increased by 6.3% to $24.7 million during 1995 as compared to $23.3 million in 1994 primarily due to the addition of a molten sulphur carrier in early fourth quarter of 1994. This increase was partially offset by the life extension of two LASH vessels which were purchased in 1994 upon the termination of the capital lease of these vessels. OTHER INCOME AND EXPENSES. Administrative and general expenses decreased 2.7% to $26.6 million during 1995 as compared to $27.4 million in 1994 stemming from a continuing cost reduction program. Interest expense increased 18.1% to $25.6 million in 1995 as compared to $21.7 million in 1994 primarily due to interest incurred on the following: the financing of a molten sulphur carrier that delivered in October 1994, interest rate conversion agreements, and financing received in early 1995 for general corporate purposes in the amount of $12.0 million. This increase was partially offset by regularly scheduled debt payments of $28.5 million. Investment income decreased slightly from $2.8 million in 1994 to $2.7 million in 1995 reflecting a reduction in the average balance of invested funds. Additionally, investment income in 1994 reflected the recognition of interest on a promissory note related to the sale of an investment in an unconsolidated entity. This promissory note was acquired by the Company in the first half of 1995. The Company's equity in net income of unconsolidated entities was $0.3 million in 1995 as compared to equity in losses of $0.1 million in 1994. The Company's interest in these entities was liquidated in 1995. As of December 31, 1994, the Company held an approximate 12.6% interest including both direct and indirect interests in Havtor AS, a publicly listed company on the Oslo Stock Exchange. The Company also held a 14.2% interest in A/S Havtor Management, a privately held Norwegian ship management company affiliated with Havtor AS. As of December 31, 1994, the Company held a 50% interest in a foreign entity, Bulkowner's 1984, which was formed to own and operate two combination dry cargo/petroleum products, PROBO vessels. The Company also held a 10% interest in a limited partnership with certain Norwegian interests to construct and own a Liquified Petroleum Gas carrier which delivered in 1993. During the first half of 1995, A/S Havtor Management and the gas carrier activities of Kvaerner, an unrelated Norwegian company, merged into Havtor AS. In addition, Havtor AS agreed to acquire other vessels and vessel interests, including the 50% interest held by the Company in two PROBO vessels and the 10% interest held in a Liquified Petroleum Gas carrier. Subsequent to the merger, the Company's interest including both direct and indirect interests in Havtor AS approximated 7.7%. During November 1995 the Company sold this 7.7% interest in Havtor AS for approximately $48 million. The sale resulted in a before tax gain of approximately $17 million. INCOME TAXES. The Company provided $11.4 million and $6.6 million for Federal income taxes at the statutory rate of 35% for 1995 and 1994, respectively. Income of unconsolidated entities is shown net of applicable taxes. <PAGE 8> Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 GROSS VOYAGE PROFIT. Gross voyage profit increased 1.6% to $65.3 million in 1994 as compared to $64.3 million in 1993. Positively affecting 1994 results were improved freight rates and increased volume in the Company's Trans- Atlantic LASH liner service. Also contributing to the increased gross voyage profit in 1994 was the addition in early fourth quarter of a newly built vessel employed carrying molten sulphur under a long-term contract with a major sulphur producer. Results for 1994 also reflected only 79 days out-of-service for drydocking, an unusually low number, as compared to 292 days in 1993. These increases were partially offset by reduced freight rates on the Eastbound leg of the Company's LASH vessels employed in liner service between ports on the U.S. Gulf/U.S. Atlantic Coast and South Asia (Trade Routes 18 and 17). Also impacting 1994 results were scheduled reductions in rates earned on some of the Company's MSC charter operations, primarily reflecting negotiated adjustments for three Roll- On/Roll-Off vessels in consideration of fixing the period of these charter for the full 25 years. Scheduled rate reductions were also implemented upon the exercise of the first option periods for two LASH vessels. Vessel and barge depreciation decreased by 2.8% to $23.3 million during 1994 as compared to $23.9 million in 1993 primarily due to the life extension of two LASH vessels which were purchased in 1994 upon the termination of the capital lease of these vessels. The reduction was partially offset by the amortization of costs associated with the Company's barge refurbishment program and costs associated with upgrade work on a breakbulk vessel. OTHER INCOME AND EXPENSES. Administrative and general expenses decreased 3.0% to $27.4 million during 1994 as compared to $28.2 million in 1993. This reduction resulted primarily from the expensing in 1993 of approximately $1.0 million in costs that related to a proposed acquisition that was not consummated. Interest expense increased to $21.7 million in 1994 as compared to $21.2 million in 1993 primarily due to interest incurred on the Company's $100 million, 9% Senior Notes issued in July, 1993, interest incurred on the financing of a molten sulphur carrier that delivered in October 1994, and higher interest rates on variable rate loans. This increase was partially offset by regularly scheduled debt payments of $37.1 million in 1994 and prepayment of $58.9 million of debt during 1993 from the proceeds of the $100 million Senior Notes. Investment income increased from $1.7 million in 1993 to $2.8 million in 1994. This increase reflected higher interest rates earned on invested funds and the recognition of interest earned on a promissory note related to the sale of an 18.5% interest in A/S Havtor as further discussed below. Additionally impacting the favorable variance was a higher average balance of invested funds during 1994. The Company's equity in losses of unconsolidated entities decreased from $2.3 million in 1993 to $0.1 million in 1994, primarily resulting from the sale during 1994 of interests the Company held in A/S Havtor and A/S Havtor Management. During 1993 the Company sold an 18.5% direct interest in A/S Havtor for $7.6 million, of which $2.8 million was received in cash and $4.8 million was received in the form of a promissory note. The transaction reduced the Company's direct interest in A/S Havtor to 14.8% and resulted in a gain after taxes of approximately $.9 million. A provision for doubtful accounts was recorded in 1993 to reflect the deferral of the gain until receipt of the proceeds from the promissory note, which was scheduled to mature in mid-1996. In 1994, A/S Havtor and associated Norwegian companies merged with a publicly listed company the on Oslo Stock Exchange. This new public company, Havtor AS, operated mainly Liquified Petroleum Gas (LPG) carriers. In substitution for the A/S Havtor stock held as collateral under the aforementioned promissory note, shares of Havtor AS were pledged. Due to the liquidity and market value of these shares, deferral of the gain was no longer necessary; therefore during 1994 the related allowance was reversed resulting in income after tax of $0.9 million. INCOME TAXES. The Company provided $6.6 million for Federal income taxes at the statutory rate of 35% for both years 1994 and 1993. OPERATING DIFFERENTIAL SUBSIDY. For the years ended December 31, 1995, 1994 and 1993, the Company received aggregate operating differential subsidy payments of $22.7 million, $21.7 million and $19.3 million, respectively. The Company's subsidy agreement expires on December 31, 1996, and all other subsidy agreements with U.S. flag operators expire on December 31, 1997. It is not clear at this point whether the subsidies will be renewed. If the subsidy program is not renewed, the Company will be required to consider various options for its U.S. Flag vessels receiving operating differential subsidy, including vessel modifications that would increase fuel efficiency, reduction of crew size and wages to more closely approximate those of non-subsidized vessels, reduction of other operating expenses, and/or transfer to foreign flag operations with foreign crews. ____________________________________________________________ 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 the Company's Consolidated Financial Statements. The Company's working capital decreased from $16.8 million at December 31, 1994 to $13.4 million at December 31, 1995 after provision for current maturities of long-term debt of $40.8 million and capital lease obligations of $1.5 million. Cash and cash equivalents increased during 1995 by $24.7 million to a total of $54.3 million. Positive cash flows were achieved from operating activities during 1995 in the amount of $54.0 million. The major source of cash from operations was net income, adjusted for noncash provisions such as depreciation, amortization and gains and losses on the sale of assets. <PAGE 9> Net cash used for investing activities amounted to $79.2 million during 1995. Capital investments included $65.4 million for the purchase of a U.S. flag coal carrier, $53.6 million for the purchase and conversion of two semi- submersible vessels and related cargo barges, $2.6 million for upgrades to information systems, $2.6 million for the purchase of a towboat and $3.7 million in other miscellaneous items. Also, the Company added $11.7 million of deferred charge items, primarily drydocking and vessel survey expenditures. The Company received approximately $48.6 million from the sale of the Company's interest in Havtor AS and $2.8 million from the liquidation of securities. Net cash used for other investing activities amounted to $9.1 million and included $3.1 million previously placed in escrow for the purchase of a coal carrier which was delivered in 1995 and $5.6 million previously held as collateral for a letter of credit related to the construction of 26 barges which were delivered in 1995. Net cash provided by financing activities amounted to $49.9 million. Proceeds from the issuance of debt obligations of $105.7 million included $50.0 million received from a medium-term loan used for the purchase of a U.S. flag coal carrier, $29.2 million received from a long- term loan associated with the acquisition and conversion of two semi-submersible barge carrying vessels and related cargo barges, $14.5 million drawn under lines of credit, and $12.0 million from a medium-term loan which was used for general corporate purposes. These proceeds were partially offset by regularly scheduled principal payments of $28.5 million and repayment of $24.5 million drawn under lines of credit and $0.9 million to prepay a portion of the Senior Notes issued in 1993. The Company also added $0.6 million in deferred financing charges. Additionally, $1.2 million was used to meet common stock dividend requirements. The Company has entered into a long-term contract to provide ocean transportation services to a major mining company producing copper concentrates at its mine in West Irian Jaya, Indonesia. The Company has acquired two semi- submersible barge carrying vessels and constructed 26 cargo barges to be used with the aforementioned vessels. The cost of these capital expenditures is expected to approximate $80.1 million of which $55.6 million was paid during 1995. The remaining $24.5 million will be paid during 1996 with a major portion to be financed through a long-term loan from commercial banks on a variable rate basis. During the third quarter of 1995, the Company acquired a U.S. Flag Coal Carrier at which time the vessel entered a shipyard to undergo work to meet classification requirements and for preventative maintenance. The vessel completed shipyard work in early 1996 and began employment under a 15 year charter carrying coal in the coastwise and near-sea trade and from time to time during this charter period will also perform service for other customers. The Company obtained medium-term financing on a variable rate basis with a commercial bank for $50 million to cover a major portion of the combined cost of the acquisition and subsequent shipyard requirement totaling approximately $73 million. In late 1995, the Company received a commitment for long-term refinancing of the $50 million through the private placement market at more favorable terms. In the third quarter of 1988, the Board of Directors declared a quarterly dividend of $.05 per share and has continued quarterly dividends in the same amount for each quarterly period through the third quarter of 1995. The Board increased the dividend to $.0625 per share in the fourth quarter of 1995 and has expressed its intent to continue to declare similar quarterly dividends in the future, subject to the ability of the Company's operating subsidiaries to continue to achieve satisfactory earnings. During fourth quarter of 1995, the Company distributed a twenty-five percent stock split effected in the form of a stock dividend. Cash dividends on common stock during 1995 amounted to approximately $1.2 million. The Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of", during 1995. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Measurement of the impairment loss should be based on the fair value of the asset. Adoption of the statement, which is required in 1996, is not anticipated to have a material effect on the Company's financial position or results of operations. However, there can be no assurance that current circumstances and market values of the Company's long-lives assets will not change. Management believes that normal operations will provide sufficient working capital and cash flows to meet debt service and dividend requirements during the foreseeable future. To meet short-term requirements when fluctuations occur in working capital, the Company has available four lines of credit totaling $35 million, none of which were drawn as of December 31, 1995. The Company has not been notified that it is a potentially responsible party in connection with any environmental matters. <PAGE 10> INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED BALANCE SHEETS (All Amounts in Thousands) December 31, December 31, ASSETS 1995 1994 ------------ ------------ Current Assets: Cash and Cash Equivalents $ 54,281 $ 29,611 Marketable Securities 4,630 7,096 Accounts Receivable, Net of Allowance for Doubtful Accounts of $409 and $404 in 1995 and 1994, Respectively: Traffic 30,659 28,952 Agents' 10,352 10,087 Claims and Other 5,823 7,805 Net Investment in Direct Financing Leases 2,104 2,186 Other Current Assets 3,521 3,847 Material and Supplies Inventory, At Cost 10,545 8,954 ------- ------- Total Current Assets 121,915 98,538 ------- ------- Investments in and Advances to Unconsolidated Entities: At Cost - 13,152 At Equity - 20,008 ------- ------- - 33,160 ------- ------- Net Investment in Direct Financing Leases 24,482 26,588 ------- ------- Vessel, Property and Other Equipment, At Cost: Vessels and Barges 634,905 481,814 Other Marine Equipment 7,570 7,745 Terminal Facilities 18,126 17,925 Land 2,317 2,317 Furniture and Equipment 15,892 13,056 ------- ------- 678,810 522,857 Less - Accumulated Depreciation (243,929) (214,395) -------- -------- 434,881 308,462 -------- -------- Other Assets: Deferred Charges in Process of Amortization 26,952 30,613 Acquired Contract Costs, Net of Accumulated Amortization of $16,496 and $14,044 in 1995 and 1994, Respectively 21,733 24,185 Due from Related Parties 535 6,174 Other 17,082 19,371 ------- ------- 66,302 80,343 ------- ------- $ 647,580 $ 547,091 ======= ======= [FN] The accompanying notes are an integral part of these statements. <PAGE 11> LIABILITIES AND STOCKHOLDERS' INVESTMENT (ALL AMOUNTS IN THOUSANDS EXCEPT SHARE DATA) December 31, December 31, 1995 1994 ------------ ------------ Current Liabilities: Current Maturities of Long-Term Debt $ 40,785 $ 26,755 Current Maturities of Capital Lease Obligations 1,469 1,329 Accounts Payable and Accrued Liabilities 77,481 53,061 Federal Income Tax Payable 6,520 260 Current Deferred Income Tax Liability 1,283 314 Current Liabilities to be Refinanced (19,030) - -------- ------- Total Current Liabilities 108,508 81,719 -------- ------- Current Liabilities to be Refinanced 19,030 - -------- ------- Billings in Excess of Income Earned and Expenses Incurred 4,639 4,471 -------- ------- Long-Term Capital Lease Obligations, Less Current Maturitites 19,623 21,092 -------- ------- Long-Term Debt, Less Current Maturities 269,872 230,852 -------- ------- Reserves and Deferred Credits: Deferred Income Taxes 38,668 39,414 Claims and Other 20,979 23,227 ------- ------- 59,647 62,641 ------- ------- Stockholders' Investment: Common Stock, $1.00 Par Value, 10,000,000 Shares Authorized, 6,756,330 and 5,405,366 Shares Issued at December 31, 1995 and 1994, Respectively 6,756 5,405 Additional Paid-in Capital 54,450 54,450 Retained Earnings 106,158 87,757 Less - 73,443 and 58,755 Shares of Common Stock in Treasury, at cost, at December 31, 1995 and 1994, Respectively (1,133) (1,133) Unrealized Holding Gain (Loss) on Marketable Securities 30 (163) ------- ------- 166,261 146,316 ------- ------- $ 647,580 $ 547,091 ========= ========== [FN] The accompanying notes are an integral part of these statements. <PAGE 12> INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF INCOME (All Amounts in Thousands Except Per Share Data) Year Ended December 31, 1995 1994 1993 --------- --------- --------- Revenues $ 319,084 $ 320,585 $ 322,313 Operating Differential Subsidy 22,705 21,748 19,338 --------- --------- --------- 341,789 342,333 341,651 --------- --------- --------- Operating Expenses: Voyage Expenses 252,506 253,729 253,386 Vessel and Barge Depreciation 24,747 23,289 23,947 --------- --------- --------- Gross Voyage Profit 64,536 65,315 64,318 --------- --------- --------- Administrative and General Expenses 26,622 27,371 28,206 Gain(Loss) on Sale of Assets 7 (83) 374 --------- --------- --------- Operating Income 37,921 37,861 36,486 --------- --------- --------- Interest: Interest Expense 25,561 21,650 21,245 Investment Income (2,676) (2,826) (1,748) --------- --------- --------- 22,885 18,824 19,497 --------- --------- --------- Gain on Sale of Investments 17,409 - - --------- --------- --------- Unconsolidated Entities (Net of Applicable Taxes): Equity in Net Income (Loss) of Unconsolidated Entities 331 (124) (2,289) Gain on Sale of Equity Interests - - 900 Provision for Doubtful Accounts - 900 (900) --------- --------- --------- 331 776 (2,289) --------- --------- --------- Income Before Provision for Income Taxes and Extraordinary Item 32,776 19,813 14,700 --------- --------- --------- Provision for Income Taxes: Current 11,296 4,961 714 Deferred 94 1,621 5,851 State 406 180 490 --------- --------- --------- 11,796 6,762 7,055 --------- --------- --------- Income Before Extraordinary Item $ 20,980 $ 13,051 $ 7,645 --------- --------- --------- Extraordinary Loss on Early Extinguishment of Debt (Net of Income Tax Benefit of $924) - - (1,716) --------- --------- --------- Net Income $ 20,980 13,051 5,929 Less: Preferred Stock Dividends - - 868 Accretion of Discount on Preferred Stock - - 202 --------- --------- --------- Net Income Applicable to Common and Common Equivalent Shares $ 20,980 $ 13,051 $ 4,859 ========= ========= ========= Earnings Per Share: Income Before Extraordinary Loss $ 3.14 $ 1.95 $ 1.01 Extraordinary Loss $ - $ - $ (0.26) --------- --------- --------- Net Income $ 3.14 $ 1.95 $ 0.75 ========= ========= ========= [FN] The accompanying notes are an integral part of these statements. <PAGE 13> INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT Net (All Amounts in Additional Unrealized Thousands Except Common Paid-In Retained Treasury Holding Share Data) Stock Capital Earnings Stock Gain/(Loss) Total ----------------------------------------------------- Balance at December 31,1992 $4,978 $48,216 $71,943 ($1,133) $ - $124,004 Net Income for Year Ended December 31, 1993 - - 5,929 - - 5,929 Preferred Stock Dividends - - (868) - - (868) Accretion of Discount on Preferred Stock - - (202) - - (202) Cash Dividends - - (1,027) - - (1,027) Issuance of Stock, 427,500 Shares Pursuant to Exercise of Warrants 427 6,234 - - - 6,661 ------ ------- ---------- -------- ----------- -------- Balance at December 31,1993 $5,405 $54,450 $ 75,775 ($ 1,133) $ - $134,497 ====== ======= ========== ========= ========== ======== Net Income for Year Ended December 31, 1994 - - 13,051 - - 13,051 Cash Dividends - - (1,069) - - (1,069) Unrealized Holding Loss on Marketable Securities, Net of Deferred Taxes - - - - (163) (163) ------- ------- ---------- --------- ----------- ------- Balance at December 31,1994 $ 5,405 $54,450 $ 87,757 ($1,133) ($163) $146,316 ======= ======= ========== ========= =========== ======== Net Income for Year Ended December 31, 1995 - - 20,980 - - 20,980 Cash Dividends - - ( 1,228) - - (1,228) 25% Stock Dividend 1,351 - ( 1,351) - - - Unrealized Holding Gain on Marketable Securities, Net of Deferred Taxes - - - - 193 193 ----- ------- --------- --------- ----------- ------- Balance at December 31,1995 $6,756 $54,450 $106,158 ($1,133) $ 30 $166,261 ====== ======= ========== ========= =========== ======== [FN] The accompanying notes are an integral part of these statements. <PAGE 14> INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1995 1994 1993 (All Amounts in Thousands) ------- ------- -------- Cash Flows from Operating Activities: Net Income $20,980 $13,051 $ 5,929 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 26,653 24,516 24,895 Amortization of Deferred Charges and Other Assets 17,310 17,105 19,785 Provision for Deferred Income Taxes 94 1,568 5,851 Equity in Unconsolidated Subsidiaries (331) (776) 2,289 Loss (Gain) on Sale of Vessel and Other Property (7) 83 (374) Gain on Sale of Investment in Havtor AS (17,409) - - Extraordinary Loss - - 1,716 Changes in: Accounts Receivable 543 (466) (534) Net Investment in Direct Financing Leases 2,188 2,258 2,314 Other Assets 2,599 1,138 3,267 Inventories and Other Current Assets (1,334) 1,718 (1,551) Accounts Payable and Accrued Liabilities (694) (634) 11,989 Federal Income Taxes Payable 6,084 - - Unearned Income 168 45 (6,431) Reserve for Claims and Other Deferred Credits (2,866) (772) (5,926) -------- ---------- --------- Net Cash Provided by Operating Activities 53,978 58,834 63,219 -------- ---------- --------- Cash Flows from Investing Activities: Purchase of Vessels and Other Property (127,942) (56,977) (12,044) Additions to Deferred Charges (11,682) ( 6,188) (19,612) Proceeds from Sale of Vessels and Other Property 7 710 3,201 Proceeds from (Purchase of) Short-Term Investments 2,763 12,182 (19,278) Investment in and Advances to Unconsolidated Entities - 1,447 377 Purchase of LITCO - - (1,606) Proceeds from Sale of Havtor AS 48,621 - - Other Investing Activities 9,067 (7,983) - --------- --------- --------- Net Cash Used by Investing Activities (79,166) (56,809) (48,962) --------- --------- --------- Cash Flows from Financing Activities: Proceeds from Issuance of Debt and Capital Lease Obligations 105,651 90,538 146,748 Reduction of Debt and Capital Lease Obligations (53,930) (83,121) (154,224) Additions to Deferred Financing Charges (635) (388) (4,639) Preferred and Common Stock Dividends Paid (1,228) (1,069) (1,895) Proceeds from Issuance of Common Stock - - 4,250 Redemption of Preferred Stock - - (13,750) -------- --------- ---------- Net Cash Provided (Used) by Financing Activities 49,858 5,960 (23,510) -------- --------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents 24,670 7,985 (9,253) Cash and Cash Equivalents at Beginning of Period 29,611 21,626 30,879 -------- --------- ---------- Cash and Cash Equivalents at End of Period $ 54,281 $ 29,611 $ 21,626 ======== ========= ========== [FN] The accompanying notes are an integral part of these statements. <PAGE 15> NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements include the accounts of International Shipholding Corporation and its consolidated subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated. The Company uses the cost method to account for investments in entities in which it holds less than a 20% voting interest and in which the Company cannot exercise significant influence over operating and financial activities. The Company uses the equity method to account for investments in entities in which it holds a 20% to 50% voting interest. Certain reclassifications have been made to the prior period financial information in order to conform to current year presentation. NATURE OF OPERATIONS The Company, through its subsidiaries, operates a diversified fleet of U.S. and international flag vessels that provide international and domestic maritime transportation services to commercial customers and agencies of the United States government primarily under medium- to long-term charters or contracts. The Company's fleet consists of 29 ocean-going vessels, 15 towboats, 129 river barges, 26 special purpose barges, approximately 1,650 LASH barges and related shoreside handling facilities. The Company's 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. PERVASIVENESS OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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 ACCOUNTING Revenues and expenses relating to voyages are recorded on the percentage-of-completion method, except that provisions for loss voyages are recorded when contracts for the voyages are fixed or when losses become apparent for voyages in progress. Use of the percentage-of-completion method requires management to make estimates and assumptions that affect the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates. VESSELS AND OTHER PROPERTY 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. Capitalized interest totaled $2,721,000, $1,763,000, and $918,000 for the years ended December 31, 1995, 1994, and 1993, respectively. Assets under capital lease are recorded on the balance sheet under the caption Vessels, Property and Other Equipment (See Note G). For financial reporting purposes, vessels are generally depreciated over their estimated useful life of 25 years from construction using the straight-line method. As a result of major capital improvements during 1990, 1991, and early 1992, the useful lives of the Company's LASH vessels have been extended from 25 to 30 years. In late 1994, the Company purchased two previously leased LASH vessels at fair market value. The estimated useful lives from construction of each of these vessels is 30 years. The two pure car carriers along with the two SPLASH vessels and associated Fuel and Hopper barges are being depreciated over estimated useful lives of 20 years. The coal terminal is being depreciated over 22 years and the LITCO terminal is being depreciated over 11 years. Other marine equipment is being depreciated predominantly over a four year period. The Company groups all LASH barges 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. The estimated useful lives of the pools have been extended through 2003 in accordance with the extension of the vessel lives. The Company refurbished a major portion of these barges during 1990 through 1992 to allow utilization through 2003. From time to time, the Company disposes 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. INCOME TAXES Deferred income taxes 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 D). FOREIGN CURRENCY TRANSLATION All exchange adjustments are charged or credited to income in the year incurred. Exchange losses of $159,000, $119,000, and $359,000 were recognized for the years ended December 31, 1995, 1994, and 1993, respectively. <PAGE 16> DIVIDEND POLICY On November 17, 1995, the Company distributed a twenty- five percent stock split effected in the form of a stock dividend to shareholders of record at the close of business on November 3, 1995. Fractional shares were purchased by the Company at the reported last sale price per share on the record date, adjusted to reflect the dividend. All per share and weighted average share amounts have been restated to reflect the 25% dividend. The Board of Directors declared and paid dividends of $.05 per share ($.04 per share after giving effect to the 25% stock dividend) for the first, second, and third quarters in 1995 and for each quarter in 1994 and 1993. A dividend of $.0625 was declared and paid for the fourth quarter in 1995. Subsequent to year end a dividend of $.0625 per common share was declared to be paid in the first quarter of 1996. The payment of dividends is subject to restrictions set forth in certain of the Company's debt instruments. The Company paid dividends on its common stock of $1,228,000, $1,069,000, and $1,027,000 in 1995, 1994, and 1993, respectively. Such amounts did not exceed restrictions set forth in these agreements or its other debt instruments. NET INCOME PER COMMON SHARE Primary earnings per common share are based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect of stock warrants based on the average market price of common stock for the period. The primary weighted average number of common shares outstanding was 6,682,887, 6,682,887, and 6,525,259 for the years ended December 31, 1995, 1994, and 1993, respectively. Primary and fully diluted weighted average common shares outstanding were the same for each of these years. OPERATING DIFFERENTIAL SUBSIDY AGREEMENTS The Company operates a fleet of four U.S. Flag vessels under an operating differential subsidy ("ODS") agreement with the U.S. Maritime Administration ("MarAd"), an agency of the Department of Transportation ("DOT") under Title VI of the Merchant Marine Act of 1936, as amended. Under this agreement, MarAd agrees to pay the excess of certain vessel expenses over comparable vessel expenses of principal foreign competitors in each respective trade route through the scheduled termination date of December 31, 1996. These vessels are employed in a liner service between ports on the U.S. Gulf/U.S. Atlantic Coast and South Asia (Trade Routes 18 and 17). The Company's subsidy agreement expires on December 31, 1996, and all other subsidy agreements with U.S. flag operators expire on December 31, 1997. It is not clear at this point whether the subsidies will be renewed. If the subsidy program is not renewed the Company will be required to consider various options for its U.S. Flag vessels receiving ODS, including vessel modifications that would increase fuel efficiency, reduction of crew size and wages to more closely approximate those of non-subsidized vessels, reduction of other operating expenses, and/or transfer to foreign flag operations with foreign crews. Traffic accounts receivable include $4,949,000 and $3,080,000 due from MarAd under these ODS agreements at December 31, 1995 and 1994, respectively. Subsidy billings are based on rates furnished by MarAd. SELF-RETENTION INSURANCE Effective December 1, 1993, the Company became self- insured for most Personal Injury and Cargo claims under $1,000,000 and for Hull claims under $2,500,000. The Company maintains insurance for claims over the above amounts and maintains Stop Loss insurance to cover aggregate claims below $1,000,000 and $ 2,500,000.00. Under the Stop Loss insurance, the Company is responsible for all claims under $1,000,000 and $2,500,000 until the total amount of claims between primary deductibles and the above amounts reach $7,000,000 in the aggregate per year. Primary deductibles are $25,000 for Hull, Personal Injury and Cargo, and $1,000 for LASH barges. After the Company has retained $7,000,000 in the aggregate, all additional claims are recoverable from underwriters. From February 20, 1992 until December 1, 1993, the Company was self-insured for most personal injury and cargo claims under $250,000. Provisions for losses are recorded based on the Company's estimate of the eventual settlement costs. The current portions of these liabilities were $4,698,000 and $1,978,000 at December 31, 1995 and 1994, and the noncurrent portions of these liabilities were $5,459,000 and $5,789,000 at December 31, 1995 and 1994, respectively. NOTE B - LONG-TERM DEBT (All Amounts in Thousands) December 31, Balance at December 31, Description 1995 1994 Due 1995 1994 - - ----------- ----------- ----------- ---------- ------- ------- Unsecured Senior Notes - Fixed Rate 9.00% 9.00% 2003 $93,891 $94,800 Fixed Rate Notes Payable 8.25-10.50% 8.25-10.50% 1999-2002 52,926 67,707 Variable Rate Notes Payable 6.625-7.808% 6.6875-7.75% 1997-2005 113,479 39,824 U.S. Government Guaranteed Ship Financing Notes and Bonds - Fixed Rate 6.58-8.30% 6.58-8.30% 2000-2009 50,361 55,276 ------- ------- $310,657 $257,607 Less Current Maturities (40,785) (26,755) ------- ------- $269,872 $230,852 ======== ======== <PAGE 17> The aggregate principal payments required as of December 31, 1995 for each of the next five years are $40,785,000 in 1996, $35,035,000 in 1997, $32,804,000 in 1998, $28,876,000 in 1999, and $19,445,000 in 2000. Certain of the vessels and barges owned by the Company are mortgaged under certain debt agreements. Additional collateral includes a security interest in certain operating contracts and receivables. Most of these agreements, among other things, impose minimum working capital and net worth requirements, as defined, impose restrictions on the payment of dividends (see Note A), and prohibit the Company from incurring, without prior written consent, additional debt or lease obligations, except as defined. The Company has consistently met the minimum working capital and net worth requirements during the period covered by the agreements and is in compliance with these requirements as of December 31, 1995. Under the most restrictive of its credit agreements, the Company cannot declare or pay dividends unless (1) the total of (a) all dividends paid, distributions on or other payments made with respect to the Company's capital stock during the period beginning October 1, 1989 and ending on the date of dividend declaration or other payment and (b) all investments other than Qualified Investments (as defined) of the Company and certain designated subsidiaries will not exceed the sum of $3,000,000 plus 50% (or, in case of a loss, minus 100%) of the Company's consolidated net income during the period described above plus the net cash proceeds received from the issuance of common stock by the Company during the above period, and (2) no default or event of default has occurred. Certain loan agreements also restrict the ability of the Company's subsidiaries to make dividend payments, loans or advances, the most restrictive of which contain covenants that restrict payments of dividends, loans or advances to the Company from Central Gulf Lines, Inc., Waterman Steamship Corporation and Sulphur Carriers, Inc. unless certain financial ratios are maintained. As long as those ratios are maintained, there is no restriction on loans or advances to the Company from those subsidiaries; however, dividends generally are restricted to 40% of the most recent four quarters' net income of Central Gulf Lines, Inc., and Waterman Steamship Corporation. Dividends of Sulphur Carriers, Inc. are restricted to 40% of undistributed earnings. The amounts of restricted assets as of December 31, were as follows: (In Thousands) 1995 1994 -------- --------- New Combo, Inc. $ - $ 415 Cypress Auto Carriers,Inc. 9,264 8,625 Sulphur Carriers, Inc. 21,588 21,588 Waterman Steamship Corporation 65,136 69,674 Central Gulf Lines, Inc. 79,581 69,141 -------- -------- Total Restricted Net Assets $175,569 $169,443 ======== ======== The Company has available four lines of credit totaling $35,000,000. These lines were undrawn as of December 31, 1995, and two of these lines were fully drawn as of December 31, 1994 for an amount totaling $10,000,000. These lines of credit are used to meet short-term requirements when fluctuations occur in working capital. The Company is required to maintain a $375,000 compensating balance for one of the lines of credit. This balance is included in Cash and Cash Equivalents. Under certain of the above described loan agreements, deposits are made into bank retention accounts to meet the requirements of the applicable agreements. At December 31, 1995, these escrowed amounts totaled $4,867,000, which was included in Other Assets. At December 31, 1994, these escrowed amounts totaled $21,021,000 of which $1,000,000 was included in Cash and Other Cash Equivalents, $7,096,000 in Marketable Securities, and $12,925,000 in Other Assets. NOTE C - PENSION PLAN AND POSTRETIREMENT BENEFITS The Company's 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. The Company's funding policy is based on minimum contributions required under ERISA as determined through an actuarial computation. Plan assets consist primarily of investments in certain bank common trust funds of trust quality assets and money market holdings. The following table sets forth the plan's funded status and pension costs recognized by the Company at December 31, 1995 and 1994. Actuarial Present Value of Benefit Obligations: (All Amounts in Thousands) December 31, December 31, 1995 1994 ---------- ----------- Vested Benefit Obligation $ (9,680) $ (8,658) ========== =========== Accumulated Benefit Obligation $ (9,795) $ (8,784) ========== =========== Projected Benefit Obligation $ (10,886) $ (9,805) Plan Assets at Fair Value 12,306 10,172 ---------- ---------- Plan Assets in Excess of Projected Benefit Obligation 1,420 367 Unrecognized Net Gain (1,310) (373) Prior Service Cost Not Yet Recognized in Net Periodic Pension Cost 157 184 Unrecognized Net Obligation Being Recognized Over 15 Years 371 445 ---------- ----------- Accrued Pension Asset $ 638 $ 623 ========== =========== Net Periodic Pension Cost: 1995 1994 1993 ______ ______ ______ Service Cost $ 451 $ 469 $ 396 Interest Cost on Projected Benefit Obligation 752 701 630 Actual Return on Plan Assets (2,130) 150 (1,033) Net Amortization and Deferral (1,355) (922) 343 ------- ------ ------ Net Periodic Pension Cost $ 428 $ 398 $ 336 ======= ====== ====== Actuarial assumptions used to develop the components of pension expense for the years ended December 31, 1995, 1994 and 1993 were as follows: 1995 1994 1993 ----- ---- ---- Discount Rate 7.25% 8.0% 7.5% Rate of Increase in Future Compensation Levels 5.0% 6.0% 6.0% Expected Long-term Rate of Return on Assets 8.5% 8.5% 8.5% <PAGE 18> Crew members on the Company's U.S. flag vessels belong to union-sponsored pension plans. The Company contributed approximately $2,004,000, $2,106,000 and $2,495,000 to these plans for the years ended December 31, 1995, 1994 and 1993, 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 the Company to determine whether there may be unfunded vested benefits. The Company's 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' combined funded status reconciled with the amount included in the Company's balance sheet classification Reserves and Deferred Credits at December 31, 1995 and 1994 (All Amounts in Thousands): Accumulated Postretirement Benefit Obligation: 1995 1994 ________ ________ Retirees $ (4,638) $ (3,594) Fully eligible active plan participants (1,655) (1,345) Other active plan participants (1,265) (1,405) --------- --------- $ (7,558) $ (6,344) Plan Assets at Fair Value - - --------- --------- Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (7,558) (6,344) Unrecognized Experience Loss 1,685 799 --------- --------- Accrued Postretirement Benefit Cost in Balance Sheet $ (5,873) $ (5,545) ========= ========= Net postretirement benefit cost includes the following components: 1995 1994 _______ _______ Service Cost $ 100 $ 107 Interest Cost on Accumulated Postretirement Benefit Obligation 520 464 Net Amortization 37 71 ------- ------- Net Postretirement Benefit Cost $ 667 $ 642 ======= ======= The accumulated postretirement benefit obligation was computed using an assumed discount rate of 7.25%. The health and dental care cost trend rate was assumed to be 11% for 1996, then the trend rate was assumed to decline until the year 2003 at which time the rate remains 5.0%. If the health and dental care cost trend rate was increased one percent for all future years, the accumulated postretirement benefit obligation as of December 31, 1995 would have increased approximately $902,000 or 12%. The effect of this change in the net postretirement benefit cost for 1995 would have been an increase of approximately $73,000 or 11%. The Company continues to evaluate ways in which it 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 the reported obligation and annual expense. In November 1992, the Financial Accounting Standards Board issued Statement 112, "Employers' Accounting for Postemployment Benefits", which requires adoption for fiscal years beginning after December 15, 1993. The new standard requires an obligation to be recorded if the following four conditions are met: (1) the obligation is attributable to employees' services already rendered, (2) employees' rights to those benefits accumulate or vest, (3) payment of the benefit is probable and (4) the amount of the benefit can be reasonably estimated. This is a change from the Company's policy of recognizing these costs on a cash basis. Adoption did not have a material impact on the Company's financial position or results of operations. NOTE D - INCOME TAXES The Federal income tax returns of the Company are filed on a consolidated basis and include the results of operations of its wholly-owned U.S. subsidiaries. Pursuant to the Tax Reform Act of 1986, the earnings of foreign subsidiaries ($12,001,257 in 1995, $4,147,420 in 1994 and $11,904 in 1993) are also included. Prior to 1987, deferred income taxes were not provided on undistributed foreign earnings of $6,689,245, all of which are expected to remain invested indefinitely. In accordance with the Tax Reform Act of 1986, commencing in 1987 earnings generated from profitable controlled foreign subsidiaries are subject to Federal income taxes. In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which superseded accounting standards for income taxes which the Company adopted in 1988. The Company adopted Statement No. 109 effective January 1, 1993 and adoption had no impact on the Company's financial position or results of operations. Components of the net deferred tax liability/(asset) are as follows: December 31, December 31, (All Amounts in Thousands) 1995 1994 ------------ ------------ Gross Liabilities: Fixed Assets $ 31,939 $ 35,036 Deferred Charges 6,174 5,234 Unterminated voyage revenue/ expense 2,045 2,047 Intangible Assets 7,498 8,465 Other Liabilities 14,492 11,747 Gross Assets: Insurance and claims reserve (4,239) (5,394) Net operating loss carryforward/ unutilized deficit (1,838) (6,752) Valuation allowance 879 879 Other assets (16,999) (11,534) -------- -------- Total deferred tax liability, net $39,951 $39,728 ======== ======== Deferred tax liability increased during 1995 due to the recognition of the deferred federal income tax expense of $94,000, a deferred tax liability of $104,000 due to an unrealized holding gain on marketable securitites, and a prior year increase to deferred tax liability of $25,000. <PAGE 19> The following is a reconciliation of the U.S. statutory tax rate to the Company's effective tax rate: Year Ended December 31, ------------------------------ 1995 1994 1993 ----- ----- ----- Statutory Rate 35.0% 35.0% 35.0% State Income Taxes 1.2% .9% 3.3% (Income) Loss of Unconsolidated Entities -- (1.6%) 5.1% Tax Rate Adjustment -- -- 5.2% Other ( .3%) ( .2%) ( .6%) ------ ------ ------ 35.9% 34.1% 48.0% ====== ====== ====== The Company has available at December 31, 1995, unused operating loss carryforwards of $.4 million and unused foreign deficits of $4.9 million. The operating loss carryforwards will expire in 2001. NOTE E - TRANSACTIONS WITH RELATED PARTIES The Company was a party to agreements with certain corporations controlled by members of the Company's management to charter 39 river barges owned by such corporations for use in the Company's domestic and international operations. The Company paid $440,000 for the period ended April 30, 1993 in barge rentals under the agreements. The Company purchased these barges for $1,600,000 in the aggregate in May of 1993. Accordingly, there were no amounts due to related parties associated with these transactions at December 31, 1995 and 1994. During 1990, the Company sold one if its subsidiaries to a former employee at a sales price of $500,000. At the end of 1993, the Company sold another subsidiary to the same party for a sales price of $692,000. The receivables due from this related party totaled $591,000 and $665,000 at December 31, 1995 and 1994, respectively. The long-term portion of this receivable was included in Due From Related Parties and the current portion was included in Accounts Receivable - Claims and Other. Collections on the total receivable were $55,000 and $300,000 for the years ended December 31, 1995 and 1994, respectively. This receivable is for a period of ten years and bears interest at the rate of 6% for the first five years and a variable rate of LIBOR plus 2% thereafter. Since the Company's inception, the legal firm of Jones, Walker, Waechter, Poitevent, Carrere and Denegre has been utilized for various legal services. During 1992, a son of the President of the Company became a partner of the firm. The Company made payments to the firm totaling approximately $1,301,000, $1,525,000 and $1,781,000 for the years ending December 31, 1995, 1994 and 1993, respectively. Amounts due to the legal firm were $94,000 and $78,000 at December 31, 1995 and 1994, respectively, and were included in Accounts Payable and Accrued Liabilities. The total amount in Due From Related Parties at December 31, 1994 also included a receivable in the amount of $5,497,000 from a Norwegian interest, A/S Havfond, as further discussed in Note K. NOTE F - COMMITMENTS AND CONTINGENCIES During 1994, the Company entered into a long-term contract to provide ocean transportation services to a major mining company. The Company purchased and converted two semi-submersible barge carrying vessels and built 26 cargo barges to be used with the aforementioned vessels. The total cost of these capital expenditures is expected to approximate $80,131,000 of which $55,674,000 was paid as of December 31, 1995. The remaining cost of $24,457,000 is expected to be paid within one year and is included in Accounts Payable and Accrued Liabilities at December 31, 1995. A major portion of these costs will be funded through draws of approximately $16,849,000 remaining on a long-term loan with a commercial bank. As of December 31, 1995, 22 vessels that the Company owns or operates were under various contracts extending beyond 1995 and expiring at various dates through 2024. In addition the Company also operates 111 jumbo river barges, 15 towboats and certain terminal transfer equipment under a contract which expires in 2004. Certain of these agreements also contain options to extend the contracts beyond their minimum terms. The Company also maintains a $600,000 line of credit to cover standby letters of credit for membership in various shipping conferences. In late 1995, the Company committed to the refinancing in early 1996 of a $50,000,000 medium-term, commercial bank loan through the private placement market at more favorable terms. NOTE G - LEASES In 1988, the Company entered into direct financing leases of two foreign flag pure car carriers expiring in the year 2000. The schedule of future minimum rentals to be received under these direct financing leases in effect at December 31, 1995 is as follows: Receivables Under (All Amounts in Thousands) Financing Year Ended December 31, Leases ---------- 1996 $ 5,328 1997 4,972 1998 4,621 1999 4,265 2000 1,313 ---------- Total Minimum Lease Payments Receivable 20,499 Estimated Residual Values of Leased Properties 18,000 Less Unearned Income (11,913) ------------ Total Net Investment in Direct Financing Leases 26,586 Current Portion (2,104) ------------ Long-Term Net Investment in Direct Financing Leases at December 31, 1995 $ 24,482 ============ The Company was also a party to a capital lease agreement for two LASH vessels. The term of the lease was twenty years and expired in the Fourth Quarter of 1994. The Company purchased these previously leased capital assets at their fair market value. <PAGE 20> The Company entered into sale-leaseback agreements in 1991 and 1992 for a group of the Company's LASH barges. These leases meet the required criteria for a capital lease and are accounted for as such. The terms of the leases are 12 years. The aforementioned capital leases are included in Vessels, Property and Other Equipment as follows: (All Amounts in Thousands) 1995 1994 ------- ------- Vessels and LASH barges $24,950 $24,950 Less Accumulated Depreciation 8,224 6,134 ------- ------- Total $16,726 $18,816 ======= ======= The following is a schedule, by year, of future minimum lease payments under capital leases, together with the present value of the minimum payments as of December 31, 1995: Payments Under (All Amounts in Thousands) Capital Leases Year ended December 31, -------------- 1996 $ 3,705 1997 4,061 1998 4,450 1999 4,521 2000 4,528 Thereafter 10,638 ------- 31,903 Less - Amount Representing Interest (10,811) -------- Present Value of Future Minimum Payments (Based on a Weighted Average of 10.39%) $ 21,092 ========== The Company conducts certain of its operations from leased office facilities and uses certain data processing, transportation and other equipment under operating leases expiring at various dates to 2003. The following is a schedule, by year, of future minimum payments required under operating leases that have initial or remaining non- cancelable terms in excess of one year as of December 31, 1995: Payments Under (All Amounts in Thousands) Operating Year Ended December 31, Leases ---------- 1996 $ 2,375 1997 2,231 1998 1,466 1999 489 2000 489 Thereafter 1,338 ---------- Total Future Minimum Payments $ 8,388 ========== NOTE H - DEFERRED CHARGES AND ACQUIRED CONTRACT COSTS The Company defers certain costs related to the acquisition of vessel operating contracts, the cost of placing vessels in service, and the drydocking of vessels. The costs of acquiring vessel operating contracts and vessel prepositioning are amortized over the applicable contract periods. Deferred drydocking costs are amortized over the period between drydockings (generally two to five years). Financing charges are amortized over the life of the applicable debt involved. Deferred costs are comprised of the following: Year Ended December 31, -------------------- (All Amounts in Thousands) 1995 1994 -------- -------- Drydocking $ 13,567 $ 18,152 Prepositioning 4,826 4,487 Financing Charges and Other 8,559 7,974 -------- -------- $ 26,952 $ 30,613 ======== ======== The Company amortizes acquired contract costs over the contracts' useful lives using the straight-line method of amortization. The acquired contract cost represents the portion of the purchase price paid for Waterman Steamship Corporation applicable primarily to that company's maritime prepositioning ship contracts and operating differential subsidy agreements. These costs are being amortized over useful lives ranging from seven to twenty-one years from the acquisition date. NOTE I - SIGNIFICANT OPERATIONS The Company has several medium to long-term contracts related to the operations of various vessels (See Note F), from which revenues represent a significant amount of the Company's total revenue. Revenues from the contracts with the United States Military Sealift Command were $75,086,000, $75,137,000, and $82,239,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Additionally, the Company operates four U.S. Flag LASH vessels on subsidized liner service between the U.S. Gulf and South Asia (Trade Routes 18 and 17). Revenues, including ODS, from this operation were $129,067,000, $137,021,000, and $143,811,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company currently operates two international flag LASH vessels on a scheduled liner service between U.S. Gulf and East Coast ports and ports in Northern Europe. Revenues for these operations were $67,500,000, $68,287,000 and $58,455,000 for the years ended December 31, 1995, 1994, and 1993, respectively. A significant portion of the Company's traffic receivables are due from contracts with the U.S. Military Sealift Command 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, 1995 or 1994. The Company has operations in several principal markets including international service between the U.S. Gulf and East ports and ports in the Middle East, Far East, and northern Europe and domestic transportation and services along the Mississippi River and U.S. Gulf Coast. <PAGE 21> NOTE J - REDEEMABLE PREFERRED STOCK In 1987 and 1989, the Company issued 85,000 and 25,000 shares, respectively, of cumulative redeemable preferred stock, together with warrants to purchase shares of common stock. The coupon rate and warrants were adjustable under certain conditions. As of 1993, the coupon rate on the preferred stock ranged from 8.822% to 10.898%, and the number of shares of common stock purchasable under the warrants totaled 427,500. During 1993, the Company redeemed the remaining preferred stock outstanding of $13.750 million at a total redemption cost including accrued interest and prepayment penalties of $14.178 million. The warrant holders exercised their rights under the warrants to purchase the 427,500 shares of common stock at an exercise price of $10.12 per share. NOTE K - UNCONSOLIDATED ENTITIES As of December 31, 1994, the Company held an approximate 9% interest in Havtor AS, a publicly listed company on the Oslo Stock Exchange. In addition, shares which represented a 3.6% interest in Havtor AS were held by the Company as collateral for a promissory note which was scheduled to mature in mid-1996. The Company also held a 14.2% interest in A/S Havtor Management, a privately held Norwegian ship management company affiliated with Havtor AS. As of December 31, 1994, the Company held a 50% interest in a foreign entity, Bulkowners 1984, which was formed to own and operate two combination dry cargo/petroleum products, PROBO vessels. The Company also held a 10% interest in a limited partnership with certain Norwegian interests to construct and own a Liquified Petroleum Gas carrier which delivered in 1993. During the first half of 1995, A/S Havtor Management and the gas carrier activities of Kvaerner, an unrelated Norwegian company merged into Havtor AS. In addition, Havtor AS agreed to acquire other vessels and vessel interests, including the 50% interest held by the Company in two PROBO vessels and the 10% interest held in a Liquified Petroleum Gas carrier. Subsequent to the merger, the Company's interest in Havtor AS approximated 6.4%. During the second quarter of 1995, the Company purchased the Norwegian interest, A/S Havfond, which held the promissory note scheduled to mature in mid-1996 and collateralized by shares of Havtor AS. The acquisition was accounted for as a purchase and results for A/S Havfond have been included in the accompanying consolidated financial statements since the date of acquisition. After the acquisition, the Company's interest in Havtor AS approximated 7.7%. During November 1995 the Company sold this 7.7% interest in Havtor AS for approximately $48 million. The sale resulted in a before tax gain of approximately $17 million. At December 31, 1993, the Company held a 14.8% interest in A/S Havtor and a 14.2% interest in A/S Havtor Management. During 1994, A/S Havtor, certain associated companies, and a portion of A/S Havtor Management were merged into the publicly listed company, Havtor AS. No earnings were distributed from Havtor AS since the merger. No dividends were received from A/S Havtor Management during 1993, 1994 or 1995. Since the Company had no substantive control or input regarding the operations of Havtor AS or A/S Havtor Management, and its direct and indirect ownership in both was below 20%, the investments were accounted for under the cost method of accounting which permits recognition of income only upon distribution of dividends or sale of interests. At December 31, 1994, the Company held a 50% interest in Bulkowner's 1984 which was accounted for under the equity method. Following is a summary of the unaudited financial data of Bulkowner's 1984: (All Amounts in Thousands) 1994 ------- Current Assets $27,385 Non-current Assets 42,577 ------- Total Assets $69,962 ======= Current Liabilities $325 Non-current Liabilities 63,978 Equity 5,659 ------- Total Liabilities and Shareholder's Equity $69,962 ======= Twelve Months Ended October 31, ------------------ 1994 1993 ------ ------ Gross Revenues $9,052 $8,809 ====== ====== Gross Profit $4,132 $3,919 ====== ====== Net Income $1,840 $1,126 ====== ====== The Company has a 50% interest in a foreign entity, Marco Shipping Company, (PTE.) Ltd. ("Marco"), which acts in an agent capacity on behalf of the Company. The Company's investment in Marco at December 31, 1995 and 1994 had been fully written off through the recognition of losses generated from the entity. During 1993, the Company purchased the remaining 50% interest in a LASH barge intermodal company ("LITCO") for $1,900,000. The acquisition was accounted for as a purchase and the results of LITCO have been included in the accompanying consolidated financial statements since the date of acquisition. Income of foreign unconsolidated entities is recorded net of applicable taxes of approximately $201,000 and $32,000 in 1995 and 1994, respectively. In 1993 losses from unconsolidated entities were recorded net of applicable tax benefits of approximately $1,405,000. <PAGE 22> NOTE L - CASH FLOW INFORMATION Year Ended December 31, (All Amounts in Thousands) 1995 1994 1993 ------- ------- -------- Non-Cash Investing and Financing Activities: Accounts Payable to be Refinanced $19,030 $ - $ 340 Cash Payments: Interest Paid Net of Capitalized Interest 26,633 23,537 20,510 Taxes Paid 5,478 2,982 3,087 During 1993, the Company reacquired an 11% interest in a foreign entity, Bulkowner's 1984. Notes receivable from the sellers in the amount of $2,896,000 were canceled as a part of the purchase price. The Company also sold an interest in A/S Havtor in 1993 for $7,557,000 of which $2,777,000 was received in cash and $4,780,000 in the form of a promissory note which is included in Other Assets: Due from Related Parties at December 31, 1994. During 1995, the Company purchased A/S Havfond, the Norwegian interest which held this promissory note. For purposes of the accompanying statement of cash flows, the Company considers highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES 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: CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES The carrying amount approximates fair value for each of these instruments. INTEREST RATE CONVERSION AGREEMENTS The Company has only limited involvement with derivative financial instruments. They are used to manage well-defined interest rate risks and are not used for trading purposes. During 1993, the Company entered into interest rate conversion agreements with two commercial banks to reduce the possible impact of higher rates in the long-term market by utilizing potentially lower rates in the short-term market. The floating rate payor is the Company, and the commercial banks are the fixed rate payors. The floating rate and fixed rates at December 31, 1995 were 5.875% and 4.72%, respectively. The floating rate and fixed rates at December 31, 1994 were 5.125% and 4.72%, respectively. The contract amounts totaled $100,000,000 at December 31, 1995 and 1994 and will expire August 1996. The Company made payments under these agreements totaling $1,265,000 during 1995 and received payments totaling $1,146,000 during 1994. A payment of $620,000 was made under the agreements in early 1996. Net receipts or payments under the agreements are recognized as an adjustment to interest expense. The fair value of interest rate swaps is the estimated amount that the bank would receive or pay to terminate the swap agreements at the reporting date, taking into account current market conditions and interest rates. FOREIGN CURRENCY CONTRACTS The Company enters into forward exchange contracts to hedge certain firm purchase and sale commitments denominated in foreign currencies. The term of the currency derivatives is rarely more than one year. The purpose of the Company's foreign currency hedging activities is to protect the Company 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. As of December 31, 1995, the Company had entered into various forward purchase contracts for Singapore Dollars totaling $23,316,000 U.S. Dollar equivalents to hedge against future payments due to Singapore shipyards for conversion work on two float-on/float-off vessels. As of December 31, 1994, the Company had entered into various forward purchase contracts for Singapore Dollars totaling $24,048,000 U.S. Dollar equivalents to hedge against future payments due to Singapore shipyards for conversion work on two float- on/float-off vessels and drydocking cost of a bulk carrier. Gains or losses on forward exchange contracts which hedge exposures on firm foreign currency commitments are deferred and recognized as adjustments to the bases of those assets. As of December 31, 1995 and 1994, the Company was also a party to forward sales contracts in various currencies totaling $515,000 and $1,175,000 U.S. Dollar equivalents which approximated fair market value. Gains and losses on these contracts are recognized in net income of the period in which the exchange rate changes. LONG-TERM DEBT The fair value of the Company's debt is estimated based on quoted market prices for the publicly listed Senior Notes and the current rates offered to the Company on other outstanding obligations. INVESTMENTS IN UNCONSOLIDATED ENTITIES RECORDED UNDER THE COST METHOD OF ACCOUNTING The fair market value of some investments are estimated based on quoted market prices and for others are based on ship values collected from an independent broker with adjustments for value of freight contracts, management activity and ship pool participation as applicable. AMOUNTS DUE FROM RELATED PARTIES The carrying amount of these notes receivable approximated fair market value as of December 31, 1995 and 1994. Fair market value takes into consideration the current rates at which similar notes would be made and the market value of collateral underlying the notes. RESTRICTED INVESTMENTS The carrying amount of these investments, which were included in Other Assets, approximated fair market value as of December 31, 1995 and 1994 based upon current rates offered on similar instruments. <PAGE 23> The estimated fair values of the Company's financial instruments and derivatives are as follows (asset/(liability)): 1995 1994 ------------------- ------------------ Carrying Fair Carrying Fair (All Amounts in Amount Value Amount Value Thousands) --------- -------- --------- -------- Interest Rate Conversion Agreements - ($ 552) - $( 4,908) Forward Purchase Contracts - 54 - 318 Long-Term Debt ($310,657) (315,929) ($257,607)(251,429) Investments in Unconsolidated Entities Recorded at Cost - - 13,152 28,412 Disclosure of the fair value of all balance sheet classifications is not required, including but not limited to certain vessels, property, plant and equipment, direct financing leases or intangible assets which may have a fair value in excess of historical cost. Therefore, this disclosure does not purport to represent the fair value of the Company. NOTE N - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Detailed below are the components of the Consolidated Balance Sheet classification Accounts Payable and Accrued Liabilities for the periods indicated. (All Amounts in Thousands) 1995 1994 ------- ------- Trade Accounts Payable $11,278 $ 8,966 Accrued Salaries and Benefits 3,509 2,665 Accrued Voyage Expenses 27,571 31,573 Accrued Interest 10,666 7,257 Accrued Vessel Costs 24,457 2,600 Taxes Payable 6,520 260 ------- ------- $84,001 $53,321 ======= ======= NOTE O-QUARTERLY FINANCIAL INFORMATION - (Unaudited) Quarter Ended ------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- --------- --------- -------- (All amounts in thousands except per share data) 1995 Revenue $ 83,302 $ 84,844 $ 84,108 $ 89,535 Expense 68,332 69,780 68,533 70,608 Gross Voyage Profit 14,970 15,064 15,575 18,927 Net Income 2,086 2,020 2,029 14,845 Earnings per Common and Common Equivalent Share: Primary: Net Income 0.31* 0.30* 0.30* 2.23 1994 Revenue $ 83,361 $ 89,148 $ 81,568 $ 88,256 Expense 68,295 74,658 64,792 69,273 Gross Voyage Profit 15,066 14,490 16,776 18,983 Net Income 2,447 3,391 3,498 3,715 Earnings per Common and Common Equivalent Share: Primary: Net Income 0.37* 0.51* 0.52* 0.55* 1993 Revenue $ 83,997 $ 89,843 $ 82,214 $ 85,597 Expense 68,266 72,623 66,876 69,568 Gross Voyage Profit 15,731 17,220 15,338 16,029 Income Before Extraordinary Item 1,056 3,184 1,465 1,940 Extraordinary Item -- (1,703) 110 (123) Net Income 1,056 1,481 1,575 1,817 Earnings per Common and Common Equivalent Share: Primary: Income Before Extraordinary Item 0.10* 0.43* 0.19* 0.29* Extraordinary Item -- (0.26)* 0.02* (0.02)* Net Income 0.10* 0.17* 0.21* 0.27* [FN] *Restated for November 17, 1995, stock dividend of twenty-five percent for each one share of common stock outstanding. COMMON STOCK PRICES AND DIVIDENDS FOR EACH QUARTERLY PERIOD OF 1994 AND 1995 (Source: New York Stock Exchange) Cash Dividends 1994 High Low Paid ----------- -------- ------- ---------- 1st 18 1/2* 14 5/8* .04/Share* Quarter 2nd 18 1/8* 16* .04/Share* Quarter 3rd 17 3/8* 15 3/4* .04/Share* Quarter 4th 17 1/4* 15 5/8* .04/Share* Quarter Cash Dividends 1995 High Low Paid ----------- ------- ------- ---------- 1st 16 1/2* 15 3/8* .04/Share* Quarter 2nd 17 1/4* 16* .04/Share* Quarter 3rd 20 1/8* 16 5/8* .04/Share* Quarter 4th 21 3/4* 18 7/8 .0625/Share Quarter <FN> <FN1>Approximate Number of Common Stockholders of Record at March 1, 1996 - 900 <FN2>*Restated for November 17, 1995, stock dividend of twenty-five percent for each one share of common stock outstanding. <PAGE 24> REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Stockholders of International Shipholding Corporation: We have audited the accompanying consolidated balance sheets of International Shipholding Corporation (a Delaware corporation) and subsidiaries (the Company) as of December 31, 1995 and 1994, 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, 1995. 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 generally accepted auditing standards. 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 financial position of International Shipholding Corporation and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. New Orleans, Louisiana January 12, 1996 /S/ Arthur Andersen LLP Arthur Andersen LLP