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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NO. 2-63322
INTERNATIONAL SHIPHOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2989662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 POYDRAS STREET, NEW ORLEANS, LOUISIANA 70130
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(504) 529-5461
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $1 Par Value New York Stock Exchange
7 3/4% Senior Notes Due 2007 New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant.
DATE AMOUNT
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February 24, 2003 $24,957,871
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common stock, $1 par value......6,082,887 shares outstanding as of February 24, 2003
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated March 13,
2003, have been incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company, through its subsidiaries, operates a diversified fleet of
U.S. and foreign flag vessels that provide international and domestic maritime
transportation services to commercial and governmental customers primarily under
medium- to long-term charters or contracts. At December 31, 2002, the Company's
fleet, owned and/or operated, consisted of 36 ocean-going vessels, 919 LASH
(Lighter Aboard SHip) barges, 14 Special Purpose barges, and related shoreside
handling facilities. The Company also owns seven over the road Haul-Away Car
Carrying trucks.
The Company's fleet includes (i) four U.S. flag Pure Car/Truck Carriers
("PCTCs") specifically designed to transport fully assembled automobiles, trucks
and larger vehicles and two foreign flag PCTCs with the capability of
transporting heavy weight and large dimension trucks and buses, as well as
automobiles; (ii) one Ice Strengthened Multi-Purpose vessel, which is on charter
to the Military Sealift Command ("MSC") (iii) one Ice Strengthened
Breakbulk/Multi-Purpose vessel, two container vessels and one tanker vessel,
which are also used to transport supplies for the Indonesian operations of a
major mining company (iv) one U.S. flag Molten Sulphur Carrier, which is used to
carry molten sulphur from Louisiana and Texas to a processing plant on the
Florida Gulf Coast; (v) two Float-On/Float-Off Special Purpose Vessels ("SPVs")
which are used as Roll-On/Roll-Off vessels ("RO/ROs") to transport loaded rail
cars between Mobile, Alabama and Coatzacoalcos, Mexico; (vi) one U.S. flag
conveyer-equipped self-unloading Coal Carrier, which carries coal in the
coastwise and near-sea trade; (vii) three RO/RO vessels that permit rapid
deployment of rolling stock, munitions, and other military cargoes requiring
special handling; (viii) two container vessels the Company bareboat charters;
(ix) four Cape-Size Bulk Carriers in which the Company owns a 12.5% interest;
and (x) seven Cement Carriers and one Ice Strengthened Bulk Carrier in which the
Company owns a 30% interest.
The Company's fleet also includes three LASH vessels, one Dockship, and
919 LASH barges. In its transoceanic liner services, the Company uses the LASH
system primarily to gather cargo on rivers, in island chains, and in harbors
that are too shallow for traditional vessels.
The Company's fleet is deployed by its principal operating
subsidiaries, Central Gulf Lines, Inc. ("Central Gulf"), LCI Shipholdings, Inc.
("LCI") [including the Transatlantic Service doing business as Forest Lines],
Waterman Steamship Corporation ("Waterman"), and CG Railway, Inc. ("CG
Railway"). The Company also operates several other subsidiaries that provide
ship charter brokerage, agency, and other specialized services primarily to the
Company's operating segments.
The Company has five operating segments, Liner Services, Time Charter
Contracts, Contracts of Affreightment ("COA"), Rail-Ferry Service, and Other, as
described below. For additional information about the Company's operating
segments see Note K - Significant Operations of the Notes to the Consolidated
Financial Statements contained in this Form 10-K on page F-20.
Liner Services. A liner service operates a vessel or vessels on an
established trade route with regularly scheduled sailing dates. The Company
receives revenues for the carriage of cargo within the established trading area
and pays the operating and voyage expenses incurred. The Company's liner
services include a U.S. flag liner service between U.S. Gulf and East Coast
ports and ports in the Red Sea, Middle East, and South Asia and a foreign flag
transatlantic liner service operating between U.S. Gulf and East Coast ports and
ports in northern Europe.
Time Charter Contracts. Time Charters are contracts by which the
charterer obtains the right for a specified time period to direct the movements
and utilization of the vessel in exchange for payment of a specified daily rate,
but the Company retains operating control over the vessel. Typically, the
Company fully equips the vessel and is responsible for normal operating
expenses, repairs, crew wages, and insurance, while the charterer is responsible
for voyage expenses, such as fuel, port, and stevedoring expenses. The Company's
time charter contracts include those by which the MSC charters three RO/RO
vessels and an Ice Strengthened Multi-Purpose vessel for contracts of varying
terms. The contract with the Ice Strengthened Multi-Purpose vessel was extended
in December of 2002 through the first quarter of 2003. The Company is presently
working on further extensions. Also included in this segment are contracts with
car manufacturers for six PCTCs and with an electric utility for a
conveyor-equipped, self-unloading coal carrier. During 2001, the Company's
contract to provide transportation services to a major mining company at its
mine in West Irian Jaya, Indonesia was changed resulting in that service being
reclassed from the Contracts of Affreightment segment to the Time Charter
Contracts segment.
Contracts of Affreightment ("COA"). COAs are contracts by which the
Company undertakes to provide space on its vessel(s) for the carriage of
specified goods or a specified quantity of goods on a single voyage or series of
voyages over a given period of time between named ports or within certain
geographical areas in return for the payment of an agreed amount per unit of
cargo carried. Generally, the Company is responsible for all operating and
voyage expenses. The Company's COA segment includes a sulphur transportation
contract with a major sulphur producer. Prior to 2001, this
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segment included a contract to provide transportation services to a major mining
company at its mine in West Irian Jaya, Indonesia as discussed in the Time
Charter Contracts Segment.
Rail-Ferry Service. In the beginning of 2001, the Company began a new
service, under the name of CG Railway, Inc., carrying loaded rail cars between
Mobile, Alabama and Coatzacoalcos, Mexico. This service uses the Company's two
Float-On/Float-Off ships which were modified to enable them to carry standard
gauge railroad cars. Each vessel has a capacity for 60 standard rail cars.
Other. Other consists of operations that include more specialized type
services than the former four segments and results of several of the Company's
subsidiaries that provide ship charter brokerage and agency services.
BUSINESS STRATEGY
The Company's strategy is to (i) identify customers with high credit
quality and marine transportation needs requiring specialized vessels or
operating techniques, (ii) seek medium- to long-term charters or contracts with
those customers and, if necessary, modify, acquire or construct vessels to meet
the requirements of those charters or contracts and (iii) provide its customers
with reliable, high quality service at a reasonable cost. The Company believes
that its strategy has produced stable operating cash flows and valuable
long-term relationships with its customers. The Company plans to continue this
strategy by expanding its relationships with existing customers, seeking new
customers, and selectively pursuing acquisitions.
HISTORY
The Company was originally founded as Central Gulf Steamship
Corporation in 1947 by the late Niels F. Johnsen and his sons, Niels W. Johnsen,
the Company's current Chairman, and Erik F. Johnsen, its current President.
Central Gulf was privately held until 1971 when it merged with Trans Union
Corporation ("Trans Union"). In 1978, International Shipholding Corporation was
formed to act as a holding company for Central Gulf, LCI, and certain other
affiliated companies in connection with the 1979 spin-off by Trans Union of the
Company's common stock to Trans Union's stockholders. In 1986, the Company
acquired the assets of Forest Lines, and in 1989, the Company acquired the
ownership of Waterman. Since its spin-off from Trans Union, the Company has
continued to act solely as a holding company, and its only significant assets
consist of the capital stock of its subsidiaries.
COMPETITIVE STRENGTHS
Diversification. The Company has been successful in obtaining contracts
that contribute to a diversification of operations. These diverse operations
vary from chartering vessels to the government, to chartering vessels for the
transportation of automobiles and sport utility vehicles, transportation of
paper type products, steel, wood and wood/pulp type products, carriage of
supplies for a mining company, transporting molten sulphur, transporting coal
for use in generating electricity, and transporting standard railroad cars. In
preparing and conducting these operations, the Company has been successful in
upgrading its fleet, with the average age of the vessels involved being
approximately 13.3 years old. Because of the average age of the Company's fleet,
management believes that the outlook for fulfilling current contracts, obtaining
extensions through the exercise of options by current customers, and obtaining
new contracts is good.
Stable Cash Flow. The Company's historical cash flows have been
relatively stable because of the length and structure of the Company's contracts
with creditworthy customers, as well as the Company's diversified customer and
cargo bases. The Company's medium- to long-term charters provide for a daily
charter rate that is payable whether or not the charterer utilizes the vessel.
These charters generally require the charterer to pay certain voyage operating
costs, including fuel, port, and stevedoring expenses, and often include cost
escalation features covering certain of the Company's expenses. In addition, the
Company's medium- to long-term contracts of affreightment guarantee a minimum
amount of cargo for transportation. Furthermore, the Company's diversified cargo
and customer bases have contributed to the stability of the Company's operating
cash flow. The Company also believes that the high credit quality of its
customers and the length of its contracts help reduce the effects of cyclical
market conditions.
Long-standing Customer Relationships. The Company currently has medium-
to long-term time charters with, or contracts to carry cargo for, high credit
quality commercial customers that include International Paper Company, P.T.
Freeport Indonesia Company, Toyota Motor Corporation, and Hyundai Motor Company.
Most of these companies have been customers of the Company for over ten years.
Substantially all of the Company's current cargo contracts and charter
agreements are renewals or extensions of previous agreements. In recent years,
the Company has been successful in
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winning extensions or renewals of substantially all of the contracts rebid by
its commercial customers. Additionally, for over 30 years, the Company has been
operating vessels for the MSC. The Company believes that its long-standing
customer relationships are in part due to the Company's excellent reputation for
providing quality specialized maritime service in terms of on-time performance,
low cargo loss, minimal damage claims, and reasonable rates.
Experienced Management Team. The Company's management team has
substantial experience in the shipping industry. The Company's Chairman and
President have each served the Company in various management capacities since
its founding in 1947. In addition, the Company's two Executive Vice Presidents
and the Chief Financial Officer have over 89 years of collective experience with
the Company. The Company believes that the experience of its management team is
important to maintaining long-term relationships with its customers.
TYPES OF SERVICE
The Company, through its principal operating subsidiaries, provides
specialized maritime transportation services to its customers primarily under
medium- to long-term contracts. The Company's five operating segments, Liner
Services, Time Charter Contracts, Contracts of Affreightment, Rail-Ferry
Service, and Other are described below:
LINER SERVICES
LASH Vessels
- - Foreign Flag. The Company operates two foreign flag LASH vessels and a
self-propelled, semi-submersible feeder vessel on a scheduled
transatlantic liner service under the name "Forest Lines." One of the
two foreign flag LASH vessels is under an operating lease through 2007.
Each Forest Lines' LASH vessel normally makes 10 round trip sailings
per year between U.S. Gulf and East Coast ports and ports in northern
Europe. Prior to 2001, approximately one-half of the aggregate
eastbound cargo space had historically been reserved for International
Paper Company under a long-term contract. The remaining space was
provided on a voyage affreightment basis to various commercial
shippers. Over the last two years, the Company has continued to
diversify our eastbound cargo liftings among various commercial
shippers.
The Company has had ocean transportation contracts with
International Paper Company since 1969 when the Company had two LASH
ships built to accommodate International Paper Company's trade. The
Company's contract with International Paper Company is for the carriage
of wood pulp, liner board, and other forest products, the
characteristics of which are well suited for transportation by LASH
vessels. The Company's current contract with International Paper
Company was for a ten-year term ending in 2002, and has been extended
for an additional three-year period ending in 2005 with mutual options
to extend on a year-to-year basis.
Over the years, the Company has established a base of
commercial shippers to which it provides space on the westbound Forest
Lines service. The principal westbound cargoes are steel and other
metal products, high-grade paper and wood products, and other general
cargo. Over the last five years, the westbound utilization rate for
these vessels averaged approximately 85% per year.
- - U.S. Flag. Waterman previously operated a U.S. flag liner service
between U.S. Gulf and East Coast ports and ports in South Asia using
four U.S. flag LASH vessels, as well as one FLASH vessel that was used
as a feeder vessel in Southeast Asia. In June of 2001, the Company
adopted a plan to separate this service from the balance of its
operation and dispose of these assets. All of these vessels have been
sold as of December 31, 2002.
During the second quarter of 2002, the Company announced that
it was reviewing the possibility of reactivating a U.S. flag liner
service between the U.S. Gulf and South Asia due to several changes in
circumstances that have occurred since the Company's decision in the
second quarter of 2001 to suspend the previous service. The Company
believes that an adequate cargo volume to the service area for shipment
on U.S. flag vessels will be maintained. As a result, the Company has
recommissioned one of its foreign flag LASH vessels, which had been
idle and scheduled for disposal, together with a certain number of LASH
barges. After its upgrade, the foreign flag vessel entered the
Company's Forest Lines service in November of 2002, replacing one of
the vessels operating in that service. The replaced vessel transferred
to U.S. flag for use in the renewed U.S. flag liner service, which
commenced operation in November of 2002.
The Maritime Security Act of 1996 ("MSA"), which provides for
a subsidy program for certain U.S. flag vessels, was signed into law in
October of 1996. Under this program, the Maritime Security Program
("MSP"), each participating vessel is eligible to receive an annual
payment of $2.1 Million, subject to annual appropriations. The
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program expires in September 2005. As of December 31, 2002, the
Company's Waterman U.S. flag LASH vessel mentioned earlier and four
PCTCs included in the Time Charter Contracts segment have qualified for
participation. Additionally, during 2002, the Company reached
agreements to bareboat charter two vessels that allow the Company to
maintain two more MSP contracts. The two vessels are being operated
under a time charter arrangement.
TIME CHARTER CONTRACTS
Military Sealift Command Charters
The Company has had contracts with the MSC (or its predecessor) almost
continuously for over 30 years. Currently, one of the Company's subsidiaries
operates three RO/RO vessels under contract to the MSC. These vessels are
employed in the MSC's prepositioning programs, which strategically place
military equipment and supplies on board the vessels at various points
throughout the world. Additionally, one of the Company's Ice Strengthened
Multi-Purpose vessels' contract was extended in December of 2002 through the
first quarter of 2003. The Company is presently working on further extensions.
- - Roll-On/Roll-Off Vessels. In 1983, Waterman was awarded a contract to
operate three U.S. flag RO/RO vessels under time charters to the MSC
for use by the United States Navy in its maritime prepositioning ship
("MPS") program. These vessels represent three of the four MPS vessels
currently in the MSC's Atlantic fleet, which provides support for the
U.S. Marine Corps. These ships are designed primarily to carry rolling
stock and containers, and each can carry support equipment for 17,000
military personnel. Waterman sold the three vessels to unaffiliated
corporations shortly after being awarded the contract but retained the
right to operate the vessels under operating agreements. The MSC time
charters commenced in late 1984 and early 1985 for initial five-year
periods and were renewable at the MSC's option for additional five-year
periods up to a maximum of twenty-five years. In 1993, the Company
reached an agreement with the MSC to make certain reductions in future
charter hire payments in consideration of fixing the period of these
charters for the full 25 years. The charters and related operating
agreements will terminate in 2009 and 2010.
- - Ice Strengthened Multi-Purpose Vessel. The Company operates one of its
Ice Strengthened Multi-Purpose vessels on charter to MSC. This vessel
is capable of transporting containerized and break bulk cargo. This
vessel remains U.S. flag and was previously used to re-supply
scientific projects in the Arctic and Antarctic. The contract was
extended in December of 2002 through the first quarter of 2003. The
Company is presently working on further extensions.
Car/Truck Carriers
- - U.S. Flag. The Company currently operates four U.S. flag PCTCs. In
1986, the Company entered into multi-year charters to carry Toyota and
Honda automobiles from Japan to the United States. To service these
charters, the Company had constructed two car carriers that were
specially designed to carry 4,000 and 4,660 fully assembled
automobiles, respectively. Both vessels were built in Japan and were
registered under the U.S. flag. In 2000 and 2001, the Company replaced
these two vessels with larger PCTCs, which are under their initial
contracts through 2010 and 2011 with the same Japanese shipping
company. Both of these contracts have options to extend beyond the
initial term.
In 1998, the Company acquired a 1994-built U.S. flag PCTC.
Immediately after being delivered to the Company in April of 1998, this
vessel entered a long-term charter through 2008 to a major Japanese
shipping company. In 1999, the Company acquired the fourth, a newly
built U.S. flag PCTC, which immediately after being delivered to the
Company in September of 1999 entered a long-term charter through 2011
to the same major Japanese shipping company. Both of these contracts
provide the shipping company options to extend beyond the initial term.
These two PCTCs were subsequently sold to unaffiliated parties and
leased back under operating leases expiring in 2009 and 2013,
respectively.
- - Foreign Flag. In 1988, the Company had two new car carriers constructed
by a shipyard affiliated with Hyundai, each with a carrying capacity of
4,800 fully assembled automobiles, to transport Hyundai automobiles
from South Korea primarily to the United States and Europe under two
long-term charters. In 1998 and 1999, respectively, the Company sold
both of these car carriers and replaced them with two newly built
PCTCs, each with the capacity to carry heavy
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and large size rolling stock in addition to automobiles and trucks.
These vessels immediately entered into a long-term charter through 2018
and 2019 to a major Far Eastern company. One of these PCTCs was
subsequently sold to an unaffiliated party and leased back under an
operating lease through 2016, with an option to the Company to purchase
the vessel thereafter.
Under each of the Company's PCTC charters, the charterers are
responsible for voyage operating costs such as fuel, port, and
stevedoring expenses, while the Company is responsible for other
operating expenses including crew wages, repairs, and insurance. During
the terms of these charters, the Company is entitled to its full fee
irrespective of the number of voyages completed or the number of cars
carried per voyage.
In the fourth quarter of 2002, Hyundai Merchant Marine Co.
LTD, the charterer of the Company's foreign flag PCTCs, sold its Car
Carrier division to a joint venture controlled by Wallenis Lines AB and
Willhelm Willhelmsen ASA. The Company was not impacted by the
transaction as all terms and conditions of the charter parties remain
in effect.
Coal Carrier
In late 1995, the Company purchased an existing U.S. flag
conveyor-equipped, self-unloading Coal Carrier that it concurrently chartered to
a New England electric utility under a 15-year time charter to carry coal in the
coastwise and near-sea trade. Since the base charter provides approximately
two-thirds utilization, the ship will also be used, from time to time during
this charter period, to carry coal and other bulk commodities in the spot market
for the account of other charterers.
Southeast Asia Transportation Contract
The contract to transport supplies for a major mining company in
Indonesia is serviced by an Ice Strengthened Breakbulk/Multi-Purpose vessel, a
small tanker, and two Container vessels.
CONTRACTS OF AFFREIGHTMENT
Molten Sulphur
In 1994, the Company entered into a 15-year transportation contract
with Freeport-McMoRan Sulphur LLC, a major sulphur transporter for which it had
built a 28,000 DWT Molten Sulphur Carrier that carries molten sulphur from
Louisiana and Texas to a fertilizer plant on the Florida Gulf Coast. Under the
terms of this contract, the Company is guaranteed the transportation of a
minimum of 1.8 million tons of sulphur per year. The contract also gives the
charterer three five-year renewal options. The vessel was delivered and began
service during late 1994. During the second quarter of 2002, the contract was
assigned by Freeport-McMoRan Sulphur LLC to Gulf Sulphur Services Ltd. The terms
of the contract were not affected by the assignment.
RAIL-FERRY SERVICE
Mexican Service
Commencing in 2001, the Company began a new service, under the name of
CG Railway, Inc., carrying loaded rail cars between Mobile, Alabama and
Coatzacoalcos, Mexico. This new service uses the Company's two
Float-On/Float-Off ships, which were modified to enable them to carry standard
gauge railroad cars. Each vessel has a capacity of 60 standard rail cars. With
departures every four days from Coatzacoalcos and Mobile, respectively, it
offers with each vessel a three-day transit between these ports and provides
approximately 90 trips per year in each direction.
OTHER
LITCO Facility. The Company owns an all weather rapid cargo transfer
facility at the river port of Memphis, Tennessee, which handles LASH barges
transported by subsidiaries of the Company in its LASH liner services. LITCO
(LASH Intermodal Terminal Company) began operations in May of 1992 and provides
287,500 square feet of enclosed warehouse and loading/discharging stations for
LASH barge, rail, truck, and heavy-lift operations.
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Other Services. The Company has several other subsidiaries providing
ship charter brokerage, agency, and other specialized services to the Company's
subsidiaries and, in the case of ship charter brokerage and agency services, to
unaffiliated companies. The income produced by these services substantially
covers the related overhead expenses. These services facilitate the Company's
operations by allowing it to avoid reliance on third parties to provide these
essential shipping services. Also included in this segment is the Company's 50%
ownership in a car transportation truck company.
MARKETING
The Company maintains marketing staffs in New York and New Orleans, and
maintains a network of marketing agents in major cities around the world who
market the Company's liner, charter, and contract services. The Company markets
its Trans-Atlantic LASH liner service under the trade name "Forest Lines," and
its LASH liner service between the U.S. Gulf and Atlantic coast ports and South
Asia ports under the Waterman house flag. The Company markets its Rail-Ferry
Service under the name "CG Railway." The Company advertises its services in
trade publications in the United States and abroad.
INSURANCE
The Company maintains protection and indemnity ("P&I") insurance to
cover liabilities arising out of the ownership or operation of vessels with
Assuranceforeningen GARD and the Standard Steamship Owners' Protection &
Indemnity Association (Bermuda) Ltd., which are mutual shipowners' insurance
organizations commonly referred to as P&I clubs. Both clubs are participants in
and subject to the rules of their respective international group of P&I
associations. The premium terms and conditions of the P&I coverage provided to
the Company are governed by the rules of each club.
The Company maintains hull and machinery insurance policies on each of
its vessels in amounts related to the value of each vessel. This insurance
coverage, which includes increased value, freight, and time charter hire, is
maintained with a syndicate of hull underwriters from the U.S., British, French,
and Scandinavian insurance markets. The Company maintains war risk insurance on
each of the Company's vessels in an amount equal to each vessel's total insured
hull value. War risk insurance is placed through U.S., British, French, and
Scandinavian insurance markets and covers physical damage to the vessels and P&I
risks for which coverage would be excluded by reason of war exclusions under
either the hull policies or the rules of the applicable P&I club.
The P&I insurance also covers the Company's vessels against liabilities
arising from the discharge of oil or hazardous substances in U.S.,
international, and foreign waters.
The Company also maintains loss of hire insurance with U.S., British,
French, and Scandinavian markets to cover its loss of revenue in the event that
a vessel is unable to operate for a certain period of time due to loss or damage
arising from the perils covered by the hull and machinery policy.
Insurance coverage for shoreside property, shipboard consumables and
inventory, spare parts, workers' compensation, office contents, and general
liability risks is maintained with underwriters in U.S. and British markets.
Insurance premiums for the coverage described above vary from year to
year depending upon the Company's loss record and market conditions. In order to
reduce premiums, the Company maintains certain deductible and co-insurance
provisions that it believes are prudent and generally consistent with those
maintained by other shipping companies (See Note D - Self-Retention Insurance of
the Notes to the Consolidated Financial Statements contained in this Form 10-K
on page F-13).
REGULATION
The Company's operations between the United States and foreign
countries are subject to the Shipping Act of 1984 (the "Shipping Act"), which is
administered by the Federal Maritime Commission, and certain provisions of the
Federal Water Pollution Control Act, the Oil Pollution Act of 1990, and the
Comprehensive Environmental Response Compensation and Liability Act, all of
which are administered by the U.S. Coast Guard and other federal agencies, and
certain other international, federal, state, and local laws and regulations,
including international conventions and laws and regulations of the flag nations
of its vessels. Pursuant to the requirements of the Shipping Act, the Company
has on file with the Federal Maritime Commission tariffs reflecting the outbound
and inbound rates currently charged by the Company to transport cargo between
the United States and foreign countries as a common carrier in connection with
its liner services. These tariffs are filed by the Company either individually
or in connection with its participation as a member of rate or conference
agreements, which are agreements that (upon becoming effective following filing
with the Federal Maritime Commission)
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permit the members to agree concertedly upon rates and practices relating to the
carriage of goods in U.S. and foreign ocean commerce. Tariffs filed by a company
unilaterally or collectively under rate or conference agreements are subject to
Federal Maritime Commission approval. Once a rate or conference agreement is
filed, rates may be changed in response to market conditions on 30 days' notice,
with respect to a rate increase, and one day's notice, with respect to a rate
decrease. On October 16, 1998, the Ocean Shipping Reform Act of 1998 (the "Act")
was enacted, and it amended the Shipping Act of 1984 to promote the growth and
development of United States exports through certain reforms in the regulation
of ocean transportation. This legislation, in part, repeals the requirement that
a common carrier or conference file tariffs with the Federal Maritime
Commission, replacing it with a requirement that tariffs be open to public
inspection in an electronically available, automated tariff system. Furthermore,
the legislation requires that only the essential terms of service contracts be
published and made available to the public.
On October 8, 1996, Congress adopted the Maritime Security Act of 1996,
which created the MSP and authorized the payment of $2.1 million per year per
ship for 47 U.S. flag ships through fiscal year 2005. This program eliminates
the trade route restrictions imposed by the previous federal program and
provides flexibility to operate freely in the competitive market. On December
20, 1996, Waterman entered into four MSP contracts with MarAd, and Central Gulf
entered into three MSP contracts with MarAd. By law, the MSP is subject to
annual appropriations. In the event that sufficient appropriations are not made
for the MSP by Congress in any fiscal year, the Maritime Security Act of 1996
permits MSP contractors, such as Waterman and Central Gulf, to re-flag their
vessels under foreign registry expeditiously.
The Company's Molten Sulphur Carrier was constructed with the aid of
Title XI loan guarantees administered by MarAd, the receipt of which obligates
the Company to comply with various dividend and other financial restrictions.
Recipients of Title XI loan guarantees must pay an annual fee of up to 1% of the
loan amount.
Under the Merchant Marine Act, U.S. flag vessels are subject to
requisition or charter by the United States whenever the President declares that
the national security requires such action. The owners of any such vessels must
receive just compensation as provided in the Merchant Marine Act, but there is
no assurance that lost profits, if any, will be fully recovered. In addition,
during any extension period under each MSC charter or contract, the MSC has the
right to terminate the charter or contract on 30 days' notice. However, terms of
the Company's RO/RO operating contract call for significant early termination
penalties.
Certain of the Company's operations, as well as the Company's molten
sulphur transportation contract and its Title XI financing arrangements, require
the Company to be as much as 75% owned by U.S. citizens. The Company monitors
its stock ownership to verify its continuing compliance with these requirements
and has never had more than 1% of its common stock held of record by non-U.S.
citizens. In April of 1996, the Company's shareholders amended the Company's
charter and stock transfer procedures to limit the acquisition of its common
stock by non-U.S. citizens. Under the amendment, any transfer of the Company's
common stock that would result in non-U.S. citizens owning more than 23% (the
"permitted amount") of the total voting power of the Company would be void and
ineffective against the Company. With respect to any shares owned by non-U.S.
citizens in excess of the permitted amount, the voting rights will be denied and
the dividends will be withheld. Furthermore, the Company is authorized to redeem
shares of common stock owned by non-U.S. citizens in excess of the permitted
amount to reduce ownership by non-U.S. citizens to the permitted amount.
The Company is required by various governmental and quasi-governmental
agencies to obtain permits, licenses, and certificates with respect to its
vessels. The kinds of permits, licenses, and certificates required depend upon
such factors as the country of registry, the commodity transported, the waters
in which the vessel operates, the nationality of the vessel's crew, the age of
the vessel, and the status of the Company as owner or charterer. The Company
believes that it has, or can readily obtain, all permits, licenses, and
certificates necessary to permit its vessels to operate.
The International Maritime Organization ("IMO") has mandated that
vessels documented under the laws of its member countries, including the United
States, develop and implement quality and safety programs by July 1, 1998, or
July 1, 2002, depending on the type of vessels. Vessels operating without the
required compliance certificates could either be fined or denied entry into or
detained in the ports of those countries that are members of the IMO. The
Company's ship management subsidiary, LMS Shipmanagement, Inc., received
certification in January of 1998 that its Quality Management System was approved
as meeting the ISO 9002 Quality Standard. The Company implemented a
comprehensive program to obtain timely IMO certification for all of its vessels,
which has been accomplished.
COMPETITION
The shipping industry is intensely competitive and is influenced by
events largely outside the control of shipping companies. Varying economic
factors can cause wide swings in freight rates and sudden shifts in traffic
patterns. Vessel redeployments and new vessel construction can lead to an
overcapacity of vessels offering the same service or operating in the same
market. Changes in the political or regulatory environment can also create
competition that is not necessarily based on normal considerations of profit and
loss. The Company's strategy is to reduce competitive pressures and the
8
effects of cyclical market conditions by operating specialized vessels in niche
market segments and deploying a substantial number of its vessels under medium-
to long-term charters or contracts with creditworthy customers and on trade
routes where it has established market shares. The Company also seeks to compete
effectively in the traditional areas of price, reliability, and timeliness of
service. Competition principally comes from numerous break bulk vessels and,
occasionally, container ships.
Approximately 23% of the Company's revenue is generated by contracts
with the MSC and contracts to transport Public Law-480 U.S. government-sponsored
cargo, a cargo preference program requiring that 75% of all foreign aid "Food
for Peace" cargo must be transported on U.S. flag vessels, if they are available
at reasonable rates. The Company competes with all U.S. flag companies,
including P&O Ned Lloyd, APL, and Maersk-Sea Land Service, Inc. for the MSC work
and the Public Law-480 cargo. Additionally, the Company's principal foreign
competitors include Hoegh Lines, Star Shipping, Wilhelmsen Lines, and the
Shipping Corporation of India.
The Company's LASH liner services face competition from foreign flag
liner operators and, to a lesser degree, from U.S. flag liner operators. In
addition, during periods in which the Company participates in conference
agreements or rate agreements, competition includes other participants with whom
the Company may agree to charge the same rates and non-participants charging
lower rates.
Because the Company's LASH barges are used primarily to transport large
unit size items, such as forest products, natural rubber, and steel, that cannot
be transported as efficiently in container ships, the Company's LASH fleet often
has a competitive advantage over these vessels for this type of cargo. In
addition, the Company believes that the ability of its LASH system to operate in
shallow harbors and river systems and its specialized knowledge of these harbors
and river systems give it a competitive advantage over operators of container
ships and break bulk vessels that are too large to operate in these areas.
The Company's PCTCs operate worldwide in markets where foreign flag
vessels with foreign crews predominate. The Company believes that its U.S. flag
PCTCs can continue to compete effectively if it continues to receive the
cooperation of its seamen's unions in controlling costs.
RISK FACTORS
Substantial Leverage. The Company is highly leveraged and devotes a
substantial portion of its operating income to debt service. To date, the
Company has been able to generate sufficient cash from operations, including
planned sales of assets and sale leaseback transactions, to meet interest and
principal payments on its indebtedness. The Company's ability to satisfy its
debt obligations will depend upon its future operating performance, which will
be affected by prevailing economic conditions and financial, business and other
factors, some of which are beyond its control. If the Company's cash flow and
capital resources are insufficient to fund its debt service obligations, the
Company may be forced to reduce or delay capital expenditures, sell assets,
obtain additional equity capital, enter into additional financings of its
unencumbered vessels or restructure its debt. Although the Company expects its
operating cash flows to be sufficient to service its debt it can give no such
assurance. Subject to compliance with various financial and other covenants
imposed by debt instruments governing the indebtedness of the Company and its
subsidiaries, the Company and its subsidiaries may incur additional indebtedness
from time to time. The Company has consistently met the minimum working capital
and net worth requirements and has not exceeded the leverage requirement during
the period covered by the agreements, once amended effective June of 2001 and
March of 2002, and is in compliance with these requirements as of December 31,
2002. Management is closely monitoring the results of the first quarter of 2003
in order to maintain continued compliance.
The degree to which the Company is leveraged could have important
consequences. Among other things, high leverage may: (i) impair the Company's
ability to obtain additional financing for working capital, capital
expenditures, vessel and other acquisitions, and general corporate purposes;
(ii) require the Company to dedicate a substantial portion of its cash flow from
operations to the payment of principal and interest; (iii) place the Company at
a competitive disadvantage to less highly-leveraged competitors; and (iv) make
the Company more vulnerable to economic downturns and limit its ability to
withstand competitive pressures.
Regulation. The Company's business is materially affected by government
regulation in the form of international conventions, national, state, and local
laws and regulations, and laws and regulations of the flag nations of the
Company's vessels, including laws relating to the discharge of materials into
the environment. Because such conventions, laws, and regulations are often
revised, the Company is unable to predict the ultimate costs of compliance. In
addition, the Company is required by various governmental and quasi-governmental
agencies to obtain and maintain certain permits, licenses, and certificates with
respect to its operations. In certain instances, the failure to obtain or
maintain such permits, licenses or certificates could have a material adverse
effect on the Company's business. In the event of war or national emergency, the
Company's U.S. flag vessels are subject to requisition by the United States
without any guarantee of compensation for lost profits, although the United
States government has traditionally paid fair compensation in such
circumstances.
9
Subsidy Payments. The Maritime Security Act of 1996, which provides for
a subsidy program for certain U.S. flag vessels, was signed into law in October
of 1996. Under this program, each participating vessel is eligible to receive an
annual subsidy payment of $2.1 million through the government's fiscal year
2005. As of December 31, 2002, the Company's Waterman U.S. flag LASH vessel and
four PCTCs have qualified for participation. Additionally, during 2002, the
Company reached agreements to bareboat charter two vessels that allow the
Company to maintain two more MSP contracts. The two vessels are being operated
under a time charter arrangement. Payments under this program are subject to
annual appropriation by Congress and are not guaranteed. If Congress does not
make sufficient appropriations in any fiscal year with respect to this program,
the Company would be permitted to reflag its vessels under foreign registry.
Dependence on Government Charters and Contracts. The Company has
various charters or contracts with agencies of the United States government.
Companies engaged in government contracting are subject to certain unique
business risks. Among these risks are dependence on congressional appropriations
and administrative allotment of funds, and changing policies and regulations.
Because the government contracts are usually awarded for relatively short
periods of time and are subject to renewal options in favor of the government,
the stability and continuity of this type of business depends on the periodic
exercise by the government of contract renewal options. Further, the government
contracting laws provide that the United States government is to do business
only with responsible contractors. In this regard, federal agencies have the
authority under certain circumstances to suspend or debar a contractor from
further government contracting for a certain period of time in order to protect
the government's interest. The Company has never been suspended or debarred from
government contracting, nor has it ever been the subject of any proceeding for
such a purpose.
CG Railway, Inc. The Company's newly established railcar ferry service
began operating in February of 2001. The introduction of this new service in a
competitive market, although successful, contributed to the Company's loss in
2001. The service improved in 2002, but still contributed a loss. The Company
expects this service to be profitable in 2003; however, it can give no certain
assurances that this will occur.
Commodity Price. The Company is exposed to commodity price risk related
to purchases it must make during the course of business for its fuel
consumption. The Company has been successful in hedging a portion of the fuel
purchases during the year. However for the portions that are not hedged, the
Company can give no assurance that it will be able to offset its higher fuel
cost due to competitive conditions in the business.
Competition. The shipping industry is intensely competitive and can be
influenced by economic and political events that are outside the control of
shipping companies. There can be no assurance that the Company will be able to
renew expiring charters on economically attractive terms, maintain attractive
freight rates, or otherwise successfully compete against its competitors.
Control by Principal Stockholders. Niels W. Johnsen, the Chairman of
the Board and Chief Executive Officer of the Company, Erik F. Johnsen, the
President and Chief Operating Officer of the Company (and the brother of Niels
W. Johnsen) and their spouses, children and grandchildren (collectively, the
"Johnsen Family"), beneficially owned an aggregate of 41.87% (which includes
current exercisable options to acquire 400,000 shares) of the common stock of
the Company as of December 31, 2002. By virtue of such ownership, the Johnsen
Family may continue to have the power to determine many of the policies of the
Company and its subsidiaries, the election of the Company's directors and
officers, and the outcome of various corporate actions requiring shareholder
approval.
US Gen New England, Inc. ("US GenNE"). The Company charters its Coal
Carrier to USGenNE, an indirect subsidiary of PG&E Corporation ("PG&E"). In
November of 2002, the Company learned that PG&E's wholly owned subsidiary, PG&E
National Energy Group ("PG&E NEG"), which is the parent company of USGenNE, had
defaulted on a loan payment. US GenNE's charter with the Company is current in
all material aspects. The Company has not been notified that the reported events
will in any way affect USGenNE's contractual obligations under the time charter,
and representatives of PG&E have not provided the Company with any information
other than that contained in their public documents. The Company cannot predict
the outcome of PG&E NEG's restructuring plans or the consequences of a
bankruptcy filing, but if such a filing included USGenNE, it is possible that
the time charter for the Coal Carrier could be rejected. In the event of a
rejection, the Company might take back the vessel and seek other commercial uses
for it. While it might be difficult to redeploy the vessel on the same terms as
those contained in the current time charter, if the Company were unable to
redeploy the vessel on satisfactory commercial terms, the Company would always
have the option to sell the vessel. The current debt associated with the vessel
is non-recourse to the Company and its affiliates.
EMPLOYEES
As of December 31, 2002, the Company employed approximately 428
shipboard personnel and 142 shoreside personnel. The Company considers relations
with its employees to be excellent.
All of the Company's shipboard personnel and certain shoreside
personnel are covered by collective bargaining agreements. Central Gulf,
Waterman, and other U.S. shipping companies are subject to collective bargaining
agreements
10
for shipboard personnel in which the shipping companies servicing U.S. Gulf and
East Coast ports also must make contributions to pension plans for dockside
workers. The Company has experienced no strikes or other significant labor
problems during the last ten years.
ITEM 2. PROPERTIES
Vessels and Barges. Of the 36 ocean-going vessels in the Company's
fleet at December 31, 2002, 12 are owned by the Company, eight are 30% owned by
the Company, four are 12.5% owned by the Company, seven are leased under charter
contracts, and five are operated under operating contracts. Of the 919 LASH
barges the Company owns, 885 are operated in conjunction with the Company's LASH
vessels. The remaining 34 LASH barges owned by the Company are not required for
current vessel operations. All of the Company's LASH barges are registered under
the U.S. flag. Also included in the Company's fleet are seven Haul-Away car
carrying trucks, in which the Company has a 50% interest.
All of the vessels owned, operated, or leased by the Company are in
good condition except for the 34 LASH barges not required for current vessel
operations. Under governmental regulations, insurance policies, and certain of
the Company's financing agreements and charters, the Company is required to
maintain its vessels in accordance with standards of seaworthiness, safety, and
health prescribed by governmental regulations or promulgated by certain vessel
classification societies. The Company has implemented the quality and safety
management program mandated by the IMO and has obtained certification of all
vessels currently required to have a Safety Management Certificate. In addition,
the Company has undertaken an aggressive certification schedule with all vessels
in the fleet requiring certification completed in advance of the IMO deadline.
Vessels in the fleet are maintained in accordance with governmental regulations
and the highest classification standards of the American Bureau of Shipping,
Norwegian Veritas, or Lloyd's Register classification societies.
Certain of the vessels and barges owned by the Company's subsidiaries
are mortgaged to various lenders to secure such subsidiaries' long-term debt
(See Note C - Long-Term Debt of the Notes to the Consolidated Financial
Statements contained in this Form 10-K on page F-12).
Other Properties. The Company leases its corporate headquarters in New
Orleans, and its administrative and sales office in New York. Additionally, the
Company leases a totally enclosed multi-modal cargo transfer terminal in
Memphis, Tennessee, under a lease that expires in June of 2003, with one
five-year renewal option. In 2002, the aggregate annual rental payments under
these operating leases totaled approximately $2.1 Million.
The Company owns a facility in Jefferson Parish, Louisiana that is used
primarily for the maintenance and repair of barges. The Company also owns a bulk
coal transfer terminal in Gulf County, Florida, which in September of 2002 was
placed up for sale.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in numerous lawsuits claiming
damages related to occupational diseases, primarily related to asbestos and
hearing loss. The Company believes that most of these claims are without merit,
and that insurance and the indemnification of a previous owner of one of the
Company's subsidiaries mitigate the Company's exposure.
In the normal course of its operations, the Company becomes involved in
various litigation matters including, among other things, claims by third
parties for alleged property damages, personal injuries and other matters. While
the outcome of such claims cannot be predicted with certainty, the Company
believes that its insurance coverage and reserves with respect to such claims
are adequate and that such claims will not have a material adverse effect on the
Company's business or financial condition (See Note H - Commitments and
Contingencies of the Notes to the Company's Consolidated Financial Statements
contained in this Form 10-K on page F-18).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below is information concerning the directors and executive
officers of the Company. Directors are elected by the shareholders for one-year
terms. Executive officers serve at the pleasure of the Board of Directors.
11
Name Current Position
---------------------- -----------------------------------------------
Niels W. Johnsen Chairman and Chief Executive Officer
Erik F. Johnsen President, Chief Operating Officer and Director
Niels M. Johnsen Executive Vice President and Director
Erik L. Johnsen Executive Vice President and Director
Gary L. Ferguson Vice President and Chief Financial Officer
Harold S. Grehan, Jr Director
Raymond V. O'Brien, Jr Director
Edwin Lupberger Director
Edward K. Trowbridge Director
Niels W. Johnsen, 80, has been the Chairman and Chief Executive Officer
of the Company since its commencement of operations in 1979 and served as
Chairman and Chief Executive Officer of each of the Company's principal
subsidiaries until April of 1997. He previously served as Chairman of Trans
Union's ocean shipping group of companies from December of 1971 through May of
1979. He was one of the founders of Central Gulf in 1947 and held various
positions with Central Gulf until Trans Union acquired Central Gulf in 1971. He
is also a former director of Reserve Fund, Inc., a money market fund and a
former Trustee of Atlantic Mutual Companies, an insurance company. He is the
brother of Erik F. Johnsen.
Erik F. Johnsen, 77, has been the President, Chief Operating Officer,
and Director of the Company since its commencement of operations in 1979. Until
April of 1997, Mr. Johnsen also served as the President and Chief Operating
Officer of each of the Company's principal subsidiaries, except Waterman, for
which he served as Chairman of the Executive Committee. Along with his brother,
Niels W. Johnsen, he was one of the founders of Central Gulf in 1947 and served
as its President from 1966 until April of 1997. He is the brother of Niels W.
Johnsen.
Niels M. Johnsen, 57, is Executive Vice President of the Company. Mr.
Johnsen has served as a Director of the Company since April of 1988. He joined
Central Gulf on a full time basis in 1970 and held various positions with the
Company before being named Executive Vice President in April of 1997. He has
also served as chairman of each of the Company's principal subsidiaries, except
Waterman, since April of 1997. He is also President of Waterman and N. W.
Johnsen & Co., Inc., subsidiaries of the Company engaged in LASH liner service
and ship and cargo charter brokerage, respectively. In 2002, he became a
director of Atlantic Mutual Companies. He is the son of Niels W. Johnsen.
Erik L. Johnsen, 45, is Executive Vice President of the Company. He
joined Central Gulf in 1979 and held various positions with the Company before
being named Executive Vice President in April of 1997. He has served as a
Director of the Company since 1994. He has also served as the President of each
of the Company's principal subsidiaries, except Waterman, since April of 1997,
and as Executive Vice President of Waterman since September of 1989. He is
responsible for all operations of the Company's vessel fleet and leads the
Company's Ship Management Group. He is the son of Erik F. Johnsen.
Gary L. Ferguson, 62, is Vice President and Chief Financial Officer of
the Company. He joined Central Gulf in 1968 where he held various positions with
the Company prior to being named Controller in 1977, and Vice President and
Chief Financial Officer in 1989.
Harold S. Grehan, Jr., 75, is a Director of the Company. He joined
Central Gulf in 1958 and became Vice President in 1959, Senior Vice President in
1973 and Executive Vice President and Director in 1979. Mr. Grehan retired from
the Company at the end of 1997, and continued to serve as a Director since that
time.
Raymond V. O'Brien, Jr., 75, has served as a Director of the Company
since 1979 and in early 2003 was named Chairman of the Compensation Committee of
the Board of Directors. He is also a director of Emigrant Savings Bank. He
served as Chairman of the Board and Chief Executive Officer of the Emigrant
Savings Bank from January of 1978 through December of 1992.
Edwin Lupberger, 66, has served as a Director of the Company since
April of 1988 and in early 2003 was named Chairman of the Audit Committee of the
Board of Directors. He is the President of Nesher Investments, LLC. Mr.
Lupberger served as the Chairman of the Board and Chief Executive Officer of
Entergy Corporation from 1985 to 1998.
12
Edward K. Trowbridge, 74, has served as a Director of the Company since
April of 1994 and in early 2003 was named Chairman of the Nominating and
Governance Committee of the Board of Directors. He served as Chairman of the
Board and Chief Executive Officer of the Atlantic Mutual Companies from July of
1988 through November of 1993.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
COMMON STOCK PRICES AND DIVIDENDS
FOR EACH QUARTERLY PERIOD OF 2001 AND 2002
(Source: New York Stock Exchange)
Dividends
2001 High Low Paid
- ----------- ----- ---- ------------
1st Quarter 8.30 6.13 .0625/Share
2nd Quarter 9.55 7.12 .0625/Share
3rd Quarter 10.00 6.90 N/A
4th Quarter 7.50 6.20 N/A
Dividends
2002 High Low Paid
- ----------- ---- ---- ----------
1st Quarter 7.05 6.37 N/A
2nd Quarter 6.80 5.70 N/A
3rd Quarter 7.05 6.40 N/A
4th Quarter 6.85 5.57 N/A
Approximate Number of Common Stockholders of Record at February 24, 2003: 582
13
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
The following summary of selected consolidated financial data is not
covered by the auditors' report appearing elsewhere herein. However, in the
opinion of management, the summary of selected consolidated financial data
includes all adjustments necessary for a fair representation of each of the
years presented.
This summary should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere in this annual
report.
(All Amounts in Thousands Except Share and Per Share Data)
Year Ended December 31,
------------------------------------------------------------------------
2002 2001(1) 2000 1999(2) 1998
INCOME STATEMENT DATA: ---------- ---------- ---------- ---------- ----------
Revenues $ 227,412 $ 304,370 $ 357,105 $ 373,209 $ 384,148
Impairment Loss $ 66 $ (81,038) $ -- $ -- $ (7,000)
Gross Voyage Profit (Loss) $ 30,502 $ (53,808) $ 49,475 $ 66,681 $ 57,791
Operating Income (Loss) $ 15,325 $ (73,885) $ 32,515 $ 53,972 $ 39,147
(Loss) Income Before Extraordinary Item $ (178) $ (64,434) $ 148 $ 14,623 $ 7,305
Extraordinary Item $ 42 $ 15 $ 688 $ -- $ (1,029)
Net (Loss) Income $ (136) $ (64,419) $ 836 $ 14,623 $ 6,276
Basic and Diluted Earnings Per Share:
(Loss) Income Before Extraordinary Item $ (0.03) $ (10.59) $ 0.03 $ 2.28 $ 1.09
Extraordinary Item $ 0.01 $ -- $ 0.11 $ -- $ (0.15)
Net (Loss) Income $ (0.02) $ (10.59) $ 0.14 $ 2.28 $ 0.94
BALANCE SHEET DATA:
Working Capital $ 9,055 $ 26,820 $ 28,183 $ 35,571 $ 44,914
Total Assets $ 406,752 $ 461,722 $ 695,176 $ 735,003 $ 689,804
Long-Term Debt (including Capital
Lease Obligations) $ 192,297 $ 240,276 $ 359,864 $ 400,442 $ 361,425
Stockholders' Investment $ 115,227 $ 114,905 $ 181,532 $ 182,484 $ 177,108
OTHER DATA:
Cash Flow From Operations $ 26,794 $ 22,568 $ 49,469 $ 47,580 $ 63,984
EBITDA (3) $ 46,606 $ 54,100 $ 95,469 $ 116,325 $ 109,049
Cash Dividends Per Share of Common Stock (4) $ -- $ 0.125 $ 0.25 $ 0.25 $ 0.25
Weighted Average Shares of Common
Stock Outstanding 6,082,887 6,082,887 6,082,954 6,424,193 6,682,216
(1) Results for 2001 reflect an Impairment Loss of approximately $81.0
million, in accordance with FASB Statement No. 121, "Accounting for the
Impairment of Long-lived Assets". This non-cash charge was made to write down
certain assets to estimated market value as part of the reclassification of the
Company's U.S. Flag LASH Service, its Cape-Size Bulk Carrier and certain Special
Purpose barges to "Assets Held for Disposal" and impairment charges recorded on
the Company's Foreign Flag LASH Liner service.
(2) Results for 1999 include the proceeds from a settlement with Seminole
Electric Cooperative, Inc. ("Seminole") resulting from its early termination of
the Company's coal transportation contract. The reported settlement of
approximately $20.6 Million was net of related expenses of approximately $1.8
Million.
(3) EBITDA (Earnings Before Interest, Taxes, Depreciation, and
Amortization), as presented above, which includes gains and losses on sales of
assets, represents income before interest expense and provision (benefit) for
income taxes, plus depreciation, amortization of deferred charges and acquired
contract costs, and impairment losses. EBITDA is not presented as an alternative
to net income or cash flow as an indicator of the Company's operating
performance or liquidity, but rather to provide additional information related
to debt service capacity. Certain reclassifications have been made to prior
period amounts in order to conform to current year presentation.
(4) For 2001, cash dividends represent payments applicable for only first
and second quarters due to the Board of Directors' decision to suspend quarterly
dividend payments on Common Shares of stock thereafter.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this report or elsewhere by, or on behalf
of, the Company that are not based on historical facts are intended to be
forward-looking statements within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, and as such may involve
known and unknown risks, uncertainties, and other factors that may cause the
Company's actual results to be materially different from the anticipated future
results expressed or implied by such forward-looking statements.
Such statements include, without limitation, statements regarding (1)
estimated fair values of capital assets, the recoverability of the cost of those
assets, the estimated future cash flows attributable to those assets, and the
appropriate discounts to be applied in determining the net present values of
those estimated cash flows; (2) estimated scrap values of assets held for
disposal; (3) anticipated reductions in administrative and operating expenses;
(4) estimated fair values of financial instruments, such as interest rate and
commodity swap agreements; (5) estimated losses (including independent actuarial
estimates) under self-insurance arrangements, as well as estimated losses on
certain contracts, trade routes, lines of business or asset dispositions; (6)
estimated obligations, and the timing thereof, to U.S. Customs relating to
foreign repair work; (7) the adequacy and availability of capital resources on
commercially acceptable terms; (8) the Company's ability to remain in compliance
with its debt covenants; (9) anticipated trends in government sponsored cargoes;
(10) the Company's ability to maintain its government subsidies; and (11) the
anticipated improvement in the profitability of the Company's Mexican service.
Important factors that could cause the actual results of the Company to
differ materially from the Company's expectations may include, without
limitation, the Company's ability to (i) identify customers with marine
transportation needs requiring specialized vessels or operating techniques; (ii)
secure financing on satisfactory terms to acquire, modify, or construct vessels
if such financing is necessary to service the potential needs of current or
future customers; (iii) obtain new contracts or renew existing contracts which
would employ certain of its vessels or other assets upon the expiration of
contracts currently in place, on favorable economic terms; (iv) manage the
amount and rate of growth of its general and administrative expenses and costs
associated with crewing certain of its vessels; (v) and manage its growth in
terms of implementing internal controls and information systems and hiring or
retaining key personnel, among other things.
Other factors include (vi) changes in cargo, charterhire, fuel, and
vessel utilization rates which could increase or decrease the Company's gross
voyage profit from its liner services; (vii) the rate at which competitors add
or scrap vessels in the markets in which the Company operates; (viii) changes in
interest rates which could increase or decrease the amount of interest the
Company incurs on borrowings with variable rates of interest, and the
availability and cost of capital to the Company; (ix) the impact on the
Company's financial statements of nonrecurring accounting charges that may
result from the Company's ongoing evaluation of business strategies, asset
valuations, and organizational structures; (x) changes in accounting policies
and practices adopted voluntarily or as required by accounting principles
generally accepted in the United States; (xi) changes in laws and regulations
such as those related to government assistance programs and tax rates; (xii) the
frequency and severity of claims against the Company, and unanticipated outcomes
of current or possible future legal proceedings; (xiii) unplanned maintenance
and out-of-service days on the Company's vessels; (xiv) the ability of customers
to fulfill obligations with the Company; (xv) the performance of unconsolidated
subsidiaries; and (xvi) other economic, competitive, governmental, and
technological factors which may affect the Company's operations.
The Company cautions readers that it assumes no obligation to update or
publicly release any revisions to forward-looking statements made in this report
or elsewhere by, or on behalf of, the Company.
CRITICAL ACCOUNTING POLICIES
Set forth below is a discussion of the accounting policies and related
estimates that the Company believes are the most critical to understanding its
consolidated financial statements, financial condition, and results of
operations and which require complex management judgments, uncertainties and/or
estimates. Information regarding the Company's other accounting policies is
included in the Notes to Consolidated Financial Statements.
VOYAGE REVENUE AND EXPENSE RECOGNITION
Revenues and expenses relating to voyages are recorded over the
duration of the voyage (including all inland moves, for which revenues and
expenses are fully recognized upon completion of the mother-vessel voyage).
Provisions for loss voyages are recorded when contracts for the voyages are
fixed and when losses become apparent for voyages in
15
progress. Voyage revenue and expense recognition requires management to make
estimates and assumptions that affect the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
DRYDOCKING COSTS
The Company defers certain costs related to the drydocking of its
vessels. Deferred drydocking costs are capitalized as incurred and amortized on
a straight-line basis over the period between drydockings (generally two to five
years).
INCOME TAXES
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.
SELF-RETENTION INSURANCE
The Company maintains provisions for its estimated losses under its
self-retention insurance based on estimates of the eventual claims settlement
costs. The Company's policy is to establish self-insurance provisions for each
policy year based on independent actuarial estimates, and to maintain the
provisions at those levels for the estimated run-off period, approximately two
years from the inception of that period. The Company believes most claims will
be reported, or estimates for existing claims will be revised, within this
two-year period. Subsequent to this two-year period, self-insurance reserves are
adjusted to reflect the Company's current estimate of its loss exposure for the
policy year. However, if during this two-year period the Company's estimate of
its loss exposure exceeds the actuarial estimate, then additional loss
provisions are recorded to increase the self-insurance reserves to the Company's
estimate of the eventual claims' settlement cost. The measurement of the
Company's exposure for self-insurance liability requires management to make
estimates and assumptions that affect the amount of loss provisions recorded
during the reporting period. Actual results could differ from those estimates.
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 vessels remain relatively
constant. As a result, fluctuations in voyage revenues and expenses are not
necessarily indicative of trends in profitability, and management believes that
gross voyage profit is a more appropriate measure of operating performance than
revenues. Accordingly, the discussion below addresses variations in gross voyage
profits rather than variations in revenues.
YEAR ENDED DECEMBER 31, 2002
COMPARED TO YEAR ENDED DECEMBER 31, 2001
GROSS VOYAGE PROFIT
Gross voyage profit before depreciation and impairment loss decreased
14.8% from $58.2 Million in 2001 to $49.6 Million in 2002. The changes
associated with each of the Company's segments are discussed below.
Liner Service: The decrease in gross voyage profit before depreciation
and impairment loss for this segment from a loss of $1 Million in 2001 to a loss
of $1.3 Million in 2002 was primarily due to lower gross voyage profit from the
Company's foreign flag LASH Liner service of $5.9 Million resulting from lower
rates for eastbound cargo and higher than normal towage expenses for LASH barges
as a result of high water on the Mississippi River and higher interstate towage
expenses. Additionally, in 2002, this service experienced a drop in cargo volume
as a result of lower westbound cargo volumes due to sanctions recently imposed
by the President on steel imports. Partially offsetting the decrease in gross
voyage profit before depreciation and impairment loss was an improvement of $4.8
Million from the elimination of the four-vessel U.S. flag LASH Liner service.
Expenses associated with winding down the service were offset by the reduction
of loss provisions for insurance and other accruals during the year which are
discussed in more detail in the paragraphs below.
16
Additionally, the commencement of the renewed U.S. flag LASH service in November
of 2002 contributed gross voyage profit of approximately $800,000.
The Company reduced its insurance provisions during 2002 resulting from
a review of the Company's current estimate of its loss exposure for the policy
year that reached the end of its two-year period as well as from a reduction in
the estimated total remaining loss exposure related to the U.S. flag LASH Liner
service. The Company determined that the provisions for this policy year, which
were based on actuarial estimates, exceeded the Company's loss exposure
estimate, mainly as related to personal injury claims. The Company routinely
reviews its self-retention loss provisions and makes adjustments as it believes
they are warranted. During 2002, the Company reduced the estimated provision by
approximately $3 Million, of which $2.3 Million was related to the LINER
SERVICES segment.
The Company maintains accruals for amounts due to U.S. Customs related
to repair work performed on U.S. flag ships at foreign shipyards. U.S. Customs
advised the Company during the second quarter of 2002 that several claims
related to the U.S. flag LASH Liner service would be settled and would require
payment within a year. As a result, the portion of accruals associated with the
Company's settlement estimate was reclassified from long-term to current
liabilities as of December 31, 2002. Additionally in 2002, as a result of recent
settlements, the Company revised its estimates of amounts due to U.S. Customs,
which resulted in an increase in gross voyage profit of the LINER SERVICES
segment of approximately $1.5 Million.
As a result of the discontinuation of the U.S. flag LASH Liner service,
the Company recognized expenses associated with the winding down of the service
of $4 Million during 2002.
Time Charter Contracts: This segment's gross voyage profit before
depreciation and impairment loss decreased from $53.9 Million in 2001 to $44.2
Million in 2002. The decrease resulted from the sale and leaseback of two of the
Company's PCTCs during the second half of 2001, renegotiated lease terms on
another PCTC that resulted in different accounting treatment, and offhire time
for repair work on the Company's Coal Carrier. The contracts under which the
three PCTCs operate were not affected by the aforementioned lease transactions.
However, because the leases now qualify for treatment as operating leases, the
lease payments of $14.1 Million were included in voyage expenses during 2002.
The resulting increase in voyage expenses approximates the depreciation and
interest charges recorded on these vessels during 2001, which were eliminated by
the lease transactions. Also contributing to the decrease was the sale of the
Company's Cape-Size Bulk Carrier in 2001.
The decrease was partially offset by an increase of approximately $2.2
Million in revenue earned by the Company's PCTCs due to carrying more
supplemental cargoes during 2002 and by $862,000 related to the reduction of
loss provisions for insurance and other accruals during the year discussed
previously.
One of the Company's Ice-Strengthened Multi-Purpose vessels, which is
included in this segment, operated under charter to the MSC re-supplying
scientific projects in the Arctic and Antarctic. Gross voyage profit associated
with this contract was comparable to the prior year. The contract with the MSC
was extended in December of 2002 through the first quarter of 2003. The Company
is presently working on further extensions.
Contracts of Affreightment: Gross voyage profit before depreciation
decreased slightly from $8.7 Million in 2001 to $8.4 Million in 2002. The
transportation contract under which the Company's Molten Sulphur Carrier
operates was assigned by Freeport-McMoRan Sulphur LLC to Gulf Sulphur Services
Ltd., LLP during the second quarter of 2002. The terms of the contract were not
affected by the assignment.
Rail-Ferry Service: This segment's gross voyage loss before
depreciation of approximately $1 Million in 2002 improved from a loss of $4.6
Million in 2001. The improvement resulted primarily from an increase in rail
cars shipped in 2002 compared with 2001.
Other: This segment's gross voyage profit before depreciation decreased
$2.1 Million as a result of the discontinuation of the previous four-vessel U.S.
flag LASH Liner Service, which decreased the results of certain of the Company's
specialized subsidiaries.
VESSEL AND BARGE DEPRECIATION
Vessel and barge depreciation decreased 38.2% from $31 Million in 2001
to $19.1 Million in 2002 primarily due to the reclassification of the U.S. flag
LASH Liner service, Cape-Size Bulk Carrier, and certain Special Purpose barges
to Assets Held for Disposal in June of 2001, and subsequent sale of most of
these assets, as described later in the "Impairment Loss on Assets Held for
Disposal" section. The lease transactions related to the PCTCs discussed earlier
in the "Gross Voyage Profit - Time Charter Contracts" section and the sale for
scrap during 2001 of two of the Company's LASH vessels previously chartered to
the MSC also contributed to this decrease.
OTHER INCOME AND EXPENSES
Administrative and general expenses decreased 33.3% from $23.6 Million
in 2001 to $15.7 Million in 2002 primarily due to savings resulting from the
staff reductions discussed later in the "Impairment Loss on Assets Held for
Disposal" section, slightly offset by related severance payments. Additionally,
the Company retained an unrelated third
17
party during 2001 to provide ship management services that were previously
provided by a wholly-owned subsidiary of the Company. The costs for these
services of approximately $1.4 Million were included in voyage expenses in 2002
while the expenses of the subsidiary were included in administrative and general
expenses in 2001.
Gain on Sale of Vessels and Other Assets of $557,000 in 2002 primarily
related to the sale of certain contract rights that were no longer beneficial to
the Company and the sale of other assets no longer needed for operations. The
net gain of $3.5 Million in 2001 was related to gains on the sale of one of the
Company's PCTCs, which was replaced by a newer PCTC, and the sale of additional
contract rights no longer required by the Company, partially offset by a loss on
the sale of two of the Company's LASH vessels, which completed their commitment
under charter with the MSC and were no longer needed for operations
Interest expense decreased 33.8% from $26.7 Million in 2001 to $17.7
Million in 2002. The early repayment of the debt associated with the two PCTCs
sold and leased back during 2001 under operating leases, and the
reclassification of another PCTC lease from a capital lease to an operating
lease due to a change in lease terms accounted for approximately $4.9 Million of
the decrease. Regularly scheduled payments on outstanding debt and lower
interest rates contributed $2.2 Million to the decrease. Additionally, interest
expense decreased because the Company's line of credit had a lower balance drawn
throughout 2002 as compared to 2001, and the Company repurchased $39.1 Million
of its 9% Senior Notes and $1.1 Million of its 7 3/4% Senior Notes during 2002.
These decreases were partially offset by interest incurred during 2002 on the
financing of a new PCTC purchased in the second half of 2001, additional
financing on the Company's Molten Sulphur Carrier in July of 2002, and new
financing on two of the Company's LASH vessels in November of 2002.
Impairment Loss on Investment of $598,000 in 2002 resulted from a
write-down of an investment in a Norwegian shipping company.
Investment income decreased from $1.2 Million in 2001 to $656,000 in
2002 due to a lower average balance of invested funds and lower interest rates.
Other Income of $1.5 Million in 2002 resulted from interest earned by
the Company on overpayments of foreign taxes made in prior years that were
previously refunded.
INCOME TAXES
The Company's tax benefit was $193,000 for 2002 and $34.7 Million for
2001. The statutory rate was 35% for both years.
EQUITY IN NET INCOME OF UNCONSOLIDATED ENTITIES
Equity in net income of unconsolidated entities, net of taxes, of
$555,000 for 2002 and $463,000 for 2001, was primarily related to the Company's
investment in companies owning and operating cement-carrying vessels.
YEAR ENDED DECEMBER 31, 2001
COMPARED TO YEAR ENDED DECEMBER 31, 2000
GROSS VOYAGE PROFIT
Gross voyage profit before depreciation and impairment loss decreased
34.1% from $88.2 Million in 2000 to $58.2 Million in 2001. The changes
associated with each of the Company's segments are discussed below.
Liner Service: This segment's gross voyage profit before depreciation
and impairment loss decreased $14.0 Million, which resulted from the Waterman
service that had 228 out-of-service days from unplanned maintenance on two of
its vessels and scheduling realignments as a result of those unplanned
maintenance periods. In addition, the service experienced a drop in its inbound
tonnage volume as a result of market conditions.
Contracts of Affreightment: This segment had a drop in its gross voyage
profit of $3.9 Million reflecting the change in one of the Company's contracts,
the Freeport Indonesian service, which resulted in the contract being accounted
for in the TIME CHARTERS CONTRACT segment in 2001. For the year 2000, this
segment included a contract for a Molten Sulphur Carrier and the Freeport
Indonesian service contract. For the year 2001, this segment only included the
contract for the Molten Sulphur Carrier.
Time Charter Contracts: This segment, excluding the results from the
above reclassification, decreased $10.3 Million resulting from the completion of
charters to the MSC for four of the Company's vessels. Three of these vessels
were at the end of their economic lives and were scrapped in March, May, and
July of 2001, and the other vessel is under an operating lease agreement now
employed in the Freeport Indonesian Service. The three RO/RO vessels, operating
under charter with the MSC, had fewer operating days in 2001 as a result of
required drydockings.
The Freeport Indonesian service contract which previously included two
Float-On/Float-Off SPV's, along with one Container/Breakbulk vessel now includes
one of the vessels previously chartered to the MSC, a small tanker and two
Container vessels. In the beginning of 2001, the two SPVs previously employed in
this trade were modified to enable them
18
to carry standard gauge railroad cars and are now employed in the Mexican
Service, included below in the RAIL-FERRY SERVICE segment.
Rail-Ferry Service: This segment's gross voyage profit before
depreciation resulted in a loss of $4.6 Million as a result of the start-up
losses from the Company's Mexican Service, which transports loaded rail cars
between Mobile, Alabama and Coatzacoalcos, Mexico.
IMPAIRMENT LOSS ON ASSETS HELD FOR DISPOSAL
In June of 2001, the Company adopted a plan to separate the LASH
service (the Liner Services segment), its Cape-Size Bulk Carrier (the Time
Charter Contracts segment) and certain Special Purpose barges (the Other
segment), from the balance of its operations and dispose of these assets. In
December of 2001, the Company reclassified its foreign flag LASH service
(operating under the name "Forest Lines") assets which are comprised of two LASH
vessels, one Dockship and 599 barges, as assets held for use as a result of
extended cargo commitments from a major shipper.
During 2001, in accordance with SFAS No. 121, the Company recognized an
impairment loss of $81,038,000 comprised of $60.6 Million on the U.S. flag LASH
liner service, one Cape-Size Bulk Carrier, and 28 Special Purpose barges; $18.1
Million on its foreign flag LASH service; and $2.4 Million on one of its LASH
vessels that was sold while held for disposal. This vessel completed its
commitment under charter with the MSC, reached the end of its economic life, and
was sold for scrap. The impairment loss on the U.S. and foreign flag LASH
service was measured as the amount by which the carrying value of the asset
exceeded its estimated fair value. The fair value of the Foreign flag LASH
service assets was estimated by determining the present value of its expected
future cash flows using a discount rate believed to be commensurate with the
Company's borrowing rate. The impairment loss on the U.S. flag LASH on charter
to MSC was measured as the amount by which the carrying value of the vessel
exceeded its estimated fair value at time of sale. The fair value of the vessel
was estimated by determining the scrap value per lightweight ton.
For accounting purposes, the U.S. flag LASH liner service assets were
reclassified in the Company's balance sheet as "Current Assets Held for
Disposal" and "Assets Held for Disposal," and the foreign flag LASH service
assets are included within "Vessels, Property and Other Equipment."
"Assets Held for Disposal" in the Liner Services segment as of December
31, 2001, include four U.S. flag LASH vessels, one Foreign flag LASH vessel, one
FLASH unit, and 1,200 LASH barges. This service transported cargo between the
U.S. Gulf and Atlantic coasts and the Middle East, East Africa, the Indian
sub-continent and Southeast Asia and operated under the name "Waterman." The
past several years have reflected a downward trend in the Liner Services segment
as a result of higher operating cost, disruptions in service due to unplanned
maintenance and changes in market conditions.
During the third quarter of 2001, the Company sold the Cape-Size Bulk
Carrier previously reflected in the Company's Balance Sheet under "Current
Assets Held for Disposal." This asset was sold for a loss of approximately
$400,000 in excess of the original write-down amount.
"Assets Held for Disposal" in the Other segment as of December 31,
2001, include certain Special Purpose barges. Those assets are no longer in use
due to a restructuring of the contract with a major mining company in the fourth
quarter of 2000 which allowed the Company to deploy its two special purpose
vessels, the Bali Sea and Banda Sea, on a service between Mobile, Alabama and
Coatzacoalcos, Mexico. The Special Purpose barges were written down to $574,000
reflecting a value close to current scrap value. The Company has no debt
specifically attributable to these assets.
In anticipation of the disposal of the U.S. flag LASH service, a staff
reduction of approximately 31% of the Company's shore base staff was effected
early in the third quarter of 2001 and in January of 2002.
VESSEL AND BARGE DEPRECIATION
Vessel and barge depreciation decreased 20.2% from $38.7 Million in
2000 to $31.0 Million in 2001 primarily due to the sale of one of the Company's
Ice Strengthened Multi-Purpose vessels, the scrapping of three of the Company's
LASH vessels, and the write-down of the assets included in the LINER SERVICES
segment, the TIME CHARTER CONTRACTS segment and the OTHER segment (See Section
"Impairment Loss on Assets Held for Disposal" above) partially offset by the
purchase of a PCTC. The Assets Held for Disposal are not being further
depreciated as they have been written down to estimated realizable value. The
depreciation expense related to these assets for 2000 was $16.7 Million.
19
OTHER INCOME AND EXPENSES
Administrative and general expenses increased 3.1% from $22.9 Million
in 2000 to $23.6 Million in 2001 primarily reflecting increases associated with
the start-up of the Mexican Service and severance payments as a result of a
reduction of approximately 20% of the Company's shore base staff.
Gain on Sale of Vessels and Other Assets of $3.5 Million in 2001 was
related to the sale of one of the Company's PCTCs, which was replaced by a newer
PCTC, and the sale of additional contract rights no longer required by the
Company after being partially offset by a loss on the sale of two of the
Company's LASH vessels, which completed their commitment under charter with the
MSC and were no longer needed for operations. The gain of $5.9 Million in 2000
was related to the sale of one of the Company's PCTCs, which was replaced by a
newer and larger PCTC, the sale of tugboats no longer needed for operations,
offset slightly by the loss on the sale of one of the Company's LASH vessels no
longer needed for operations.
Interest expense was $26.7 Million for 2001 as compared to $33.8
Million for 2000. This decrease is primarily due to the partial repurchase of
the Company's 9% and 7.75% Senior Notes in the second half of 2000 and in 2001
partially offset by the financing associated with the acquisition of the PCTC in
June of 2000 and the refinancing of two PCTCs.
Investment income decreased from $2.1 Million in 2000 to $1.2 Million
in 2001 due to a lower average balance of invested funds.
INCOME TAXES
The Company had a tax benefit of $34.7 Million for 2001 and a provision
of $545,000 for 2000 for Federal income taxes at the statutory rate of 35%.
EQUITY IN NET INCOME (LOSS) OF UNCONSOLIDATED ENTITIES
Equity in net income (loss) of unconsolidated entities, net of taxes,
of $463,000 for 2001 and ($74,000) for 2000, was primarily related to the
Company's investment in companies owning and operating cement-carrying vessels.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion should be read in conjunction with the more
detailed Consolidated Balance Sheets and Consolidated Statements of Cash Flows
included elsewhere herein as part of the Company's Consolidated Financial
Statements.
The Company's working capital decreased from $26.8 Million at December
31, 2001, to $9.1 Million at December 31, 2002, after provision for current
maturities of long-term debt and capital lease obligations of $21.4 Million.
Cash and cash equivalents decreased during 2002 by $15.3 Million to a total of
$3.6 Million. This decrease resulted from cash used for financing activities of
$48.6 Million, partially offset by cash provided by operating activities of
$26.8 Million and by investing activities of $6.6 Million.
Operating activities generated a positive cash flow after adjusting the
net loss for non-cash provisions such as depreciation and amortization. Cash
flows from investing were generated primarily from the sale of assets held for
disposal and were partially offset by payments for drydocking and upgrading
expenses, and additional investments in unconsolidated entities.
Cash used for financing activities of $48.6 Million included $90
Million for repayment of debt and capital lease obligations, which was offset by
draws on the Company's line of credit of $19.5 Million, financing of $12 Million
secured by a second mortgage on the Company's Molten Sulphur Carrier, and
financing of $10 Million secured by a first mortgage on two of the Company's
LASH vessels. The $90 Million for repayment of debt and capital lease
obligations consisted of $38.6 Million to repurchase the remainder of the
Company's 9% Senior Notes as discussed below; $10.6 Million to repay the capital
lease obligations associated with two of the U.S. flag LASH vessels sold in
2002; $22.3 Million for regularly scheduled payments on debt and capital lease
obligations; and $18.5 Million to repay draws on the Company's line of credit
made during the same period.
Senior Notes - As of December 31, 2002, the Company's 9% Senior Notes
due 2003 were fully repaid. The outstanding balance at December 31, 2002 of the
Company's 7 3/4% Senior Notes due 2007 was $81.9 Million.
Debt and Lease Obligations - As discussed earlier, the Company sold and
leased back two PCTCs during 2001 and one LASH vessel in 2002, and renegotiated
the terms of the lease agreement for another of its PCTCs at the end of 2001.
The PCTCs are operated under fixed charter agreements covering the periods of
the respective leases. For accounting purposes, the leases qualify for treatment
as operating leases. The Company's obligations associated with these and other
operating leases are disclosed in the table below.
The following is a summary of the Company's debt and lease obligations
as of December 31, 2002:
20
DEBT AND LEASE OBLIGATIONS (000'S) 2003 2004 2005 2006 2007 THEREAFTER
- ---------------------------------- ------- ------- ------- ------- -------- ----------
Long-term debt $21,362 $20,043 $19,809 $18,496 $ 95,448 $ 38,501
Operating leases 24,172 24,125 18,728 18,747 18,782 108,318
------- ------- ------- ------- -------- --------
Total by period $45,534 $44,168 $38,537 $37,243 $114,230 $146,819
======= ======= ======= ======= ======== ========
At December 31, 2002, the Company had available a line of credit
totaling $10,000,000 used to meet short-term requirements when fluctuations
occur in working capital. As of December 31, 2002, the Company had $1,000,000
drawn. The Company expects to repay these draws on its line of credit with cash
flows from operations.
Debt Covenant Compliance Status - The Company continues to meet all of
its financial covenants under its various debt agreements, the most restrictive
of which include the working capital, leverage ratio, minimum net worth, and
interest coverage ratio, among others, after these were amended for the year
2002. The Company believes it will be able to meet its more restrictive
financial covenants that become effective in 2003, although it can give no
assurance to that effect. Management is closely monitoring the results of the
first quarter of 2003 in order to maintain continued compliance.
If the Company's cash flow and capital resources are not sufficient to
fund its debt service obligations or if the Company is unable to meet covenant
requirements, the Company may be forced to reduce or delay capital expenditures,
sell assets, obtain additional equity capital, enter into additional financings
of its unencumbered vessels or restructure debt.
Reactivation of U.S. Flag LASH Liner Service - During the second
quarter of 2002, the Company announced that it was reviewing the possibility of
reactivating its U.S. flag LASH Liner service between the U.S. Gulf and South
Asia due to several changes in circumstances that have occurred since the
Company's decision in the second quarter of 2001 to discontinue this service.
The Company believes an adequate cargo volume to the service area for shipment
on U.S. flag vessels will be maintained. As a result, the Company has
recommissioned one of its foreign flag LASH vessels, which had been idle and
scheduled for disposal, together with a certain number of LASH barges. After its
upgrade, the foreign flag vessel entered the Company's Forest Lines service in
November of 2002, replacing one of the vessels operating in that service. The
replaced vessel transferred to U.S. flag for use in the renewed U.S. flag liner
service, which commenced operation in November of 2002.
The cost of the upgrade and reflagging was $9.6 Million, with $6.9
Million paid as of December 31, 2002. In November of 2002, the Company sold the
aforementioned upgraded foreign flag LASH vessel and leased the vessel back
under an operating lease. The sale was for $10 Million, of which $5 Million was
received in cash and $5 Million in the form of a five-year promissory note. The
lease is for five years with options to continue for further periods with
approximately $1.9 Million annual lease payments. The proceeds were used to
partially pay for the upgrade and reflagging costs.
Early Buyout of Capital Lease Obligations - As of June 30, 2002, the
Company reported a capital lease obligation of approximately $2.5 Million
related to a group of LASH barges, of which $1.8 Million was due within one year
with the remainder due in the second half of 2003. Early in the third quarter of
2002, the Company paid $2.8 Million to the lessor, which approximated the
remaining lease payments and accrued interest, in fulfillment of an agreement to
terminate the lease earlier than scheduled. Additionally, the Company signed a
promissory note for $1.3 Million due in July of 2003 for the purchase from the
lessor of the LASH barges associated with this obligation and another group of
LASH barges previously leased from the same party. These LASH barges will be
used in the renewed U.S. flag LASH Liner service. The $1.3 Million promissory
note is secured by LASH barges currently operating in the Company's foreign flag
LASH Liner service.
Self-Retention Insurance Program - Due to the effect of the events of
September 11, 2001, on the reinsurance market, along with the discontinuation of
the U.S. flag LASH Liner service, the Company revised its self-retention
insurance program for the policy year beginning June 27, 2002. The Company's
current estimates indicate additional cost of approximately $2 Million annually
to maintain a comparable level of risk exposure under this new program. Under
the revised insurance program, the Company is self-insured for Hull and
Machinery and Loss of Hire claims in the aggregate up to $2 Million. If the
claim amounts exceed $2 Million, the additional claims are recoverable from
underwriters. Furthermore, the Company reduced its Protection and Indemnity
deductible to $25,000 each accident for all vessels.
Mexican Service Profitability - The Company's Mexican Service, which
has contributed to the Company's positive cash flows from operations, is
projected to generate a profit for the year 2003. If market conditions make
those projections unattainable, the Company believes it could find alternative
placement for the two vessels supporting the service.
Dividend Payments - In view of the impairment loss recognized during
2001, and to comply with certain financial covenants under the Company's debt
agreements, the suspension of quarterly dividend payments on its common shares
of stock remains in effect.
Environmental Issues - The Company has not been notified that it is a
potentially responsible party in connection with any environmental matters.
21
NEW ACCOUNTING PRONOUNCEMENTS
In August of 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supersedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This
statement revised guidance with respect to the process for measuring impairment
of long-lived assets. The provisions of this statement are required to be
applied for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The reclassification of certain of the Company's
assets to Assets Held for Disposal during 2001 was made prior to the Company's
adoption of SFAS No. 144. Therefore, these assets continued to be accounted for
under SFAS No. 121 until final disposal. The Company adopted SFAS No. 144 on
January 1, 2002, which had no material impact on the Company's financial
statements.
In April of 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" which is effective for fiscal years beginning after May 15, 2002.
This statement, among other matters, revises current guidance with respect to
gains and losses on early extinguishment of debt. Under SFAS No. 145, gains and
losses on early extinguishment of debt will no longer be treated as
extraordinary items unless they meet the criteria for extraordinary treatment in
Accounting Principles Board ("APB") Opinion No. 30. The Company adopted SFAS No.
145 effective January 1, 2003, and is required to reclassify gains and losses on
early extinguishment of debt reported in prior period income statements as those
amounts will no longer qualify for extraordinary treatment under SFAS No. 145.
The Company reported extraordinary gains related to early extinguishment of debt
of $42,000, $15,000 and $688,000, net of taxes, for the years ended December 31,
2002, 2001, and 2000, respectively. The adoption of SFAS No. 145 did not have a
material effect on the Company's financial position.
In July of 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supersedes Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit or disposal
plan. The provisions of SFAS No. 146 are effective for exit and disposal
activities that are initiated after December 31, 2002. The Company does not
anticipate that adoption of SFAS No. 146 will have a material effect on its
financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of its business, the Company is exposed to
foreign currency, interest rate, and commodity price risk. The Company utilizes
derivative financial instruments including interest rate swap agreements,
forward exchange contracts and commodity swap agreements to manage certain of
these exposures. The Company hedges only firm commitments or anticipated
transactions and does not use derivatives for speculation. The Company neither
holds nor issues financial instruments for trading purposes.
INTEREST RATE RISK. The fair value of the Company's cash and short-term
investment portfolio at December 31, 2002, approximated carrying value due to
its short-term duration. The potential decrease in fair value resulting from a
hypothetical 10% increase in interest rates at year-end for the Company's
investment portfolio is not material.
The fair value of long-term debt, including current maturities, was
estimated to be $216.4 Million compared to a carrying value of $213.7 Million.
The potential increase in fair value resulting from a hypothetical 10% adverse
change in the borrowing rates applicable to the Company's long-term debt at
December 31, 2002, would be approximately $2.9 Million or 1.4% of the carrying
value.
The Company entered into two interest rate swap agreements with
commercial banks, one in December of 1998 and another in September of 1999, in
order to reduce the possible impact of higher interest rates in the long-term
market by utilizing the fixed rate available with the swap. In August of 2001,
the Company terminated its swap agreement entered into in December of 1998. For
the remaining agreement, the fixed rate payor is the Company, and the floating
rate payor is the commercial bank. While the arrangement is structured to reduce
the Company's exposure to increases in interest rates, it also limits the
benefit the Company might otherwise receive from any decreases in interest
rates.
The fair value of the remaining agreement at December 31, 2002,
estimated based on the amount that the banks would receive or pay to terminate
the swap agreement at the reporting date, taking into account current market
conditions and interest rates, is a liability of $2 Million. A hypothetical 10%
decrease in interest rates as of December 31, 2002 would have resulted in a
$55,000 increase in the fair value of the liability.
22
FOREIGN EXCHANGE RATE RISK. The Company has entered into foreign
exchange contracts to hedge certain firm sale commitments with varying
maturities throughout 2003. The exchange rates at which these hedges were
entered into did not materially differ from the exchange rates in effect at
December 31, 2002. The potential fair value of these contracts that would have
resulted from a hypothetical 10% adverse change in the exchange rates applicable
to these contracts at December 31, 2002, is a liability of approximately
$186,000.
COMMODITY PRICE RISK. During November of 2002, the Company entered into
three commodity swap agreements to manage the Company's exposure to price risk
related to the purchase of a portion of the estimated 2003 fuel requirements for
its LINER SERVICES segment. The agreement locked in the price the Company would
pay per ton of fuel for 2003 at a specific price for a specified quantity. While
this arrangement is structured to reduce the Company's exposure to increases in
fuel prices, it also limits the benefit the Company might otherwise receive from
any price decreases associated with this commodity.
The fair value of these agreements at December 31, 2002, estimated
based on the difference between year-end price per ton of fuel and the contract
delivery price per ton of fuel times the quantity applicable to the agreements,
is an asset of $603,000. A hypothetical 10% decrease in the fuel prices as of
December 31, 2002 would have resulted in a $535,000 decrease in the fair value
of the asset.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by Item 8 begins on page F-1 of this Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated herein by
reference to Item 4a, Executive Officers and Directors of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is included on pages 7, 8, 9, and
10 of the Company's definitive proxy statement dated March 13, 2003, filed
pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is included on pages 2, 3, 4, and
5 of the Company's definitive proxy statement dated March 13, 2003, filed
pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is
incorporated herein by reference.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is included on pages 2, 3, 4, 5,
10, and 11 of the Company's definitive proxy statement dated March 13, 2003
filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to filing this report, the Company
conducted an evaluation of the effectiveness of its "disclosure controls and
procedures," as that phrase is defined in Rules 13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934. The evaluation was carried out under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO").
Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information required to be disclosed in the Company's periodic
filings with the Securities and Exchange Commission ("SEC"), and in ensuring
that the information required to be disclosed in those filings is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
Subsequent to the date of the evaluation, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect the internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following financial statements, schedules and exhibits are filed as
part of this report:
(a) 1. Financial Statements
The following financial statements and related notes are included on
pages F-1 through F-27 of this Form 10-K.
Report of Independent Public Accountants
Consolidated Statements of Income for the years ended December 31,
2002, 2001, and 2000
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Investment for the
years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001, and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules The following financial statement
schedules are included on pages S-1 through S-6 of this Form 10-K.
Report of Independent Public Accountants on Supplemental Schedules
Schedule I - Condensed Financial Information of the Registrant
24
3. Exhibits
(3) Restated Certificate of Incorporation, as amended, and By-Laws
of the Registrant (filed with the Securities and Exchange
Commission as Exhibit 3 to the Registrant's Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein
by reference)
(4) Specimen of Common Stock Certificate (filed as an exhibit to
the Company's Form 8-A filed with the Securities and Exchange
Commission on April 25, 1980, and incorporated herein by
reference)
(4.3) Form of Indenture between the Company and the Bank of New
York, Inc., as Trustee, with respect to 7 3/4% Senior Notes
due October 15, 2007 (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated January 22, 1998, and
incorporated herein by reference).
(4.4) Form of 7 3/4% Senior Note due October 15, 2007 (included in
Exhibit 4.3 hereto and incorporated herein by reference).
(10) $25,000,000 Credit Agreement dated as of January 22, 1998, by
and among the Company, as Borrower, Certain Lenders, as
signatories thereto, Citicorp Securities, Inc., as Arranger,
and Citibank, N.A., as Administrative Agent (filed as Exhibit
10.1 to the Company's Registration Statement on Form S-4
(Registration No. 333-46317) and incorporated herein by
reference.)
(10.1) First Amended and Restated Credit Agreement dated as of March
31, 1998, by and among the Company, as Borrower, Certain
Lenders, as signatories thereto, Citicorp Securities, Inc., as
Arranger, and Citibank, N.A., as Administrative Agent (filed
as Exhibit 10.1 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1999, and incorporated herein by
reference).
(10.2) Second Amended and Restated Credit Agreement dated as of May
4, 1999, by and among the Company, as Borrower, Certain
Lenders, as signatories thereto, Citicorp Securities, Inc., as
Arranger, and Citibank, N.A., as Administrative Agent (filed
as Exhibit 10.2 to the Registrant's Form 10-K for the fiscal
year ended December 31, 1999, and incorporated herein by
reference).
(10.3) Amendment No. 1 dated as of September 3, 1999, by and among
the Company, as Borrower, Certain Lenders, as signatories
thereto, Citicorp Securities, Inc., as Arranger, and Citibank,
N.A., as Administrative Agent (filed as Exhibit 10.3 to the
Registrant's Form 10-K for the fiscal year ended December 31,
1999, and incorporated herein by reference).
(21) Subsidiaries of International Shipholding Corporation
(b) The Company filed a Form 8-K on November 25, 2002, to report the
default of a loan payment of one of the Company's customers that
charters its coal carrier.
(c) The Index of Exhibits and required Exhibits are included following the
certifications beginning at page 30 of this Report.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL SHIPHOLDING CORPORATION
(REGISTRANT)
March 12, 2003 By /s/ Gary L. Ferguson
----------------------------
Gary L. Ferguson
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
INTERNATIONAL SHIPHOLDING CORPORATION
(REGISTRANT)
March 12, 2003 By /s/ Niels W. Johnsen
-------------------------------------
Niels W. Johnsen
Chairman of the Board, Director and
Chief Executive Officer
March 12, 2003 By /s/ Erik F. Johnsen
-------------------------------------
Erik F. Johnsen
President and Director
March 12, 2003 By /s/ Niels M. Johnsen
-------------------------------------
Niels M. Johnsen
Executive Vice President and Director
March 12, 2003 By /s/ Erik L. Johnsen
-------------------------------------
Erik L. Johnsen
Executive Vice President and Director
March 12, 2003 By /s/ Harold S. Grehan, Jr.
-------------------------------------
Harold S. Grehan, Jr.
Director
March 12, 2003 By /s/ Raymond V. O'Brien, Jr
-------------------------------------
Raymond V. O'Brien, Jr.
Director
26
March 12, 2003 By /s/ Edwin Lupberger
-------------------------------------
Edwin Lupberger
Director
March 12, 2003 By /s/ Edward K. Trowbridge
-------------------------------------
Edward K. Trowbridge
Director
March 12, 2003 By /s/ Gary L. Ferguson
-------------------------------------
Gary L. Ferguson
Vice President and Chief Financial Officer
March 12, 2003 By /s/ Manny G. Estrada
-------------------------------------
Manny G. Estrada
Vice President and Controller
27
CERTIFICATION
I, Niels W. Johnsen, certify that:
1. I have reviewed this annual report on Form 10-K of International
Shipholding Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 12, 2003
/s/ Niels W. Johnsen
- --------------------------------------------------------------
Niels W. Johnsen
Chairman of the Board of Directors and Chief Executive Officer
International Shipholding Corporation
28
CERTIFICATION
I, Gary L. Ferguson, certify that:
1. I have reviewed this annual report on Form 10-K of International
Shipholding Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 12, 2003
/s/ Gary L. Ferguson
- ------------------------------------------
Gary L. Ferguson
Vice President and Chief Financial Officer
International Shipholding Corporation
29
EXHIBIT INDEX
Exhibit
Number
- --------
(3) Restated Certificate of Incorporation, as amended, and By-Laws of the
Registrant (filed with the Securities and Exchange Commission as
Exhibit 3 to the Registrant's Form 10-Q for the quarterly period ended
June 30, 1996, and incorporated herein by reference).
(4) Specimen of Common Stock Certificate (filed as an exhibit to the
Company's Form 8-A filed with the Securities and Exchange Commission on
April 25, 1980, and incorporated herein by reference).
(4.3) Form of Indenture between the Company and the Bank of New York, Inc.,
as Trustee, with respect to 7 3/4% Senior Notes due October 15, 2007
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated
January 22, 1998, and incorporated herein by reference).
(4.4) Form of 7 3/4% Senior Note due October 15, 2007 (included in Exhibit
4.3 hereto and incorporated herein by reference).
(10) $25,000,000 Credit Agreement dated as of January 22, 1998, by and among
the Company, as Borrower, Certain Lenders, as signatories thereto,
Citicorp Securities, Inc., as Arranger, and Citibank, N.A., as
Administrative Agent (filed as exhibit 10.1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-46317) and
incorporated herein by reference.)
(10.1) First Amended and Restated Credit Agreement dated as of March 31, 1998,
by and among the Company, as Borrower, Certain Lenders, as signatories
thereto, Citicorp Securities, Inc., as Arranger, and Citibank, N.A., as
Administrative Agent (filed as Exhibit 10.1 to the Registrant's Form
10-K for the fiscal year ended December 31, 1999, and incorporated
herein by reference).
(10.2) Second Amended and Restated Credit Agreement dated as of May 4, 1999,
by and among the Company, as Borrower, Certain Lenders, as signatories
thereto, Citicorp Securities, Inc., as Arranger, and Citibank, N.A., as
Administrative Agent. (filed as Exhibit 10.2 to the Registrant's Form
10-K for the fiscal year ended December 31, 1999, and incorporated
herein by reference).
(10.3) Amendment No. 1 dated as of September 3, 1999, by and among the
Company, as Borrower, Certain Lenders, as signatories thereto, Citicorp
Securities, Inc., as Arranger, and Citibank, N.A., as Administrative
Agent (filed as Exhibit 10.3 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1999, and incorporated herein by
reference).
(21) Subsidiaries of International Shipholding Corporation
30
INDEX OF FINANCIAL STATEMENTS
Report of Independent Auditors...............................................................................F-2
Consolidated Statements of Income for the years ended
December 31, 2002, 2001, and 2000.........................................................................F-3
Consolidated Balance Sheets at December 31, 2002 and 2001....................................................F-4
Consolidated Statements of Changes in Stockholders' Investment
for the years ended December 31, 2002, 2001 and 2000......................................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000.........................................................................F-7
Notes to Consolidated Financial Statements...................................................................F-8
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
International Shipholding Corporation
We have audited the accompanying consolidated balance sheet of International
Shipholding Corporation and subsidiaries as of December 31, 2002, and the
related consolidated statements of income, changes in stockholders' investment
and cash flows for the year then ended. 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 audit. The financial
statements of International Shipholding Corporation as of December 31, 2001 and
for the two years in the period then ended were audited by other auditors who
have ceased operations and whose report dated January 11, 2002, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of International
Shipholding Corporation and subsidiaries at December 31, 2002, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.
As discussed above, the financial statements of International Shipholding
Corporation as of December 31, 2001 and for the two years in the period then
ended were audited by other auditors who have ceased operations. As described
in Note K, the Company has changed the composition of reportable segments in
2002 and the 2001 financial statements have been revised to conform to the 2002
composition of reportable segments. We audited the adjustments that were
applied to revise the disclosures of reportable segments reflected in the 2001
financial statements. In our opinion, such adjustments are appropriate and have
been properly applied. However, we were not engaged to audit, review, or apply
any procedures to the 2001 financial statements of the Company other than with
respect to such adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 financial statements taken as a whole.
/s/ Ernst & Young LLP
New Orleans, Louisiana
January 17, 2003
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with International Shipholding Corporation's filing on Form 10-K for
the fiscal year ended December 31, 2001. This audit report has not been reissued
by Arthur Andersen LLP in connection with this filing on Form 10-K for the
fiscal year ended December 31, 2002.
To the Stockholders of International Shipholding Corporation:
We have audited the accompanying consolidated balance sheets of
International Shipholding Corporation (a Delaware corporation) and subsidiaries
(the Company) as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in stockholders' investment and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Shipholding Corporation and subsidiaries as of December 31, 2001
and 2000, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
New Orleans, Louisiana
January 11, 2002
F-2A
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(All Amounts in Thousands Except Share Data)
Year Ended December 31,
2002 2001 2000
--------- --------- ---------
Revenues $ 215,884 $ 289,911 $ 342,388
Subsidy Revenue 11,528 14,459 14,717
--------- --------- ---------
227,412 304,370 357,105
--------- --------- ---------
Operating Expenses:
Voyage Expenses 177,836 246,180 268,857
Vessel and Barge Depreciation 19,140 30,960 38,773
Impairment Loss (66) 81,038 --
--------- --------- ---------
Gross Voyage Profit (Loss) 30,502 (53,808) 49,475
--------- --------- ---------
Administrative and General Expenses 15,734 23,578 22,871
Gain on Sale of Vessels and Other Assets (557) (3,501) (5,911)
--------- --------- ---------
Operating Income (Loss) 15,325 (73,885) 32,515
--------- --------- ---------
Interest and Other:
Interest Expense 17,706 26,737 33,764
Impairment Loss on Investment 598 -- --
Investment Income (656) (1,157) (2,118)
Other Income (1,498) -- --
--------- --------- ---------
16,150 25,580 31,646
--------- --------- ---------
(Loss) Income Before (Benefit) Provision for Income Taxes,
Equity in Net Income (Loss) of Unconsolidated Entities,
and Extraordinary Item (825) (99,465) 869
--------- --------- ---------
(Benefit) Provision for Income Taxes:
Current -- 47 2,212
Deferred (193) (34,698) (1,667)
State 101 83 102
--------- --------- ---------
(92) (34,568) 647
--------- --------- ---------
Equity in Net Income (Loss) of Unconsolidated
Entities (Net of Applicable Taxes) 555 463 (74)
--------- --------- ---------
(Loss) Income Before Extraordinary Item (178) (64,434) 148
--------- --------- ---------
Extraordinary Gain on Early Extinguishment of Debt
(Net of Income Tax Provision of $22, $8
and $370, Respectively) 42 15 688
--------- --------- ---------
Net (Loss) Income $ (136) $ (64,419) $ 836
========= ========= =========
Basic and Diluted (Loss) Earnings Per Share:
(Loss) Income Before Extraordinary Item $ (0.03) $ (10.59) $ 0.03
Extraordinary Gain 0.01 -- 0.11
--------- --------- ---------
Net (Loss) Income $ (0.02) $ (10.59) $ 0.14
========= ========= =========
The accompanying notes are an integral part of these statements.
F-3
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(All Amounts in Thousands)
DECEMBER 31, December 31,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 3,529 $ 18,811
Restricted Cash 8,096 7,529
Marketable Securities 2,211 3,059
Accounts Receivable, Net of Allowance for Doubtful Accounts
of $332 and $603 in 2002 and 2001, Respectively:
Traffic 16,341 24,979
Agents' 4,343 2,873
Claims and Other 10,759 15,289
Federal Income Taxes Receivable 5,755 100
Deferred Income Taxes 576 1,419
Net Investment in Direct Financing Lease 1,944 1,774
Other Current Assets 4,861 4,590
Material and Supplies Inventory, at Lower of Cost or Market 3,492 2,932
Current Assets Held for Disposal 2,762 5,022
--------- ---------
Total Current Assets 64,669 88,377
--------- ---------
Assets Held for Disposal -- 9,916
--------- ---------
Marketable Equity Securities 200 88
--------- ---------
Investment in Unconsolidated Entities 8,251 7,857
--------- ---------
Net Investment in Direct Financing Lease 51,264 53,209
--------- ---------
Vessels, Property, and Other Equipment, at Cost:
Vessels and Barges 336,755 333,037
Other Equipment 5,507 4,709
Terminal Facilities 336 13,460
Land -- 1,038
Furniture and Equipment 9,042 12,099
--------- ---------
351,640 364,343
Less - Accumulated Depreciation (110,535) (106,010)
--------- ---------
241,105 258,333
--------- ---------
Other Assets:
Deferred Charges, Net of Accumulated Amortization
of $13,572 and $16,580 in 2002 and 2001, Respectively 14,628 14,240
Acquired Contract Costs, Net of Accumulated Amortization
of $19,976 and $18,520 in 2002 and 2001, Respectively 10,550 12,006
Due from Related Parties 2,609 611
Other 13,476 17,085
--------- ---------
41,263 43,942
--------- ---------
$ 406,752 $ 461,722
========= =========
The accompanying notes are an integral part of these statements.
F-4
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(All Amounts in Thousands Except Share Data)
DECEMBER 31, December 31,
2002 2001
------------ ------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current Maturities of Long-Term Debt $ 21,362 $ 15,346
Accounts Payable and Accrued Liabilities 34,252 40,970
Current Maturities of Capital Lease Obligations on Assets Held for Disposal -- 5,241
-------- --------
Total Current Liabilities 55,614 61,557
-------- --------
Billings in Excess of Income Earned and Expenses Incurred 1,207 1,765
-------- --------
Long-Term Capital Lease Obligations on Assets Held for Disposal,
Less Current Maturities -- 9,795
-------- --------
Long-Term Debt, Less Current Maturities 192,297 230,481
-------- --------
Other Long-Term Liabilities:
Deferred Income Taxes 14,358 9,709
Claims and Other 28,049 33,510
-------- --------
42,407 43,219
-------- --------
Commitments and Contingent Liabilities
Stockholders' Investment:
Common Stock, $1.00 Par Value, 10,000,000 Shares
Authorized, 6,756,330 Shares Issued at
December 31, 2002 and 2001 6,756 6,756
Additional Paid-In Capital 54,450 54,450
Retained Earnings 64,439 64,575
Less - 673,443 Shares of Common Stock in Treasury,
at Cost, at December 31, 2002 and 2001 (8,704) (8,704)
Accumulated Other Comprehensive Loss (1,714) (2,172)
-------- --------
115,227 114,905
-------- --------
$406,752 $461,722
======== ========
The accompanying notes are an integral part of these statements.
F-5
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
(All Amounts in Thousands)
Accumulated
Additional Other
Common Paid-In Retained Treasury Comprehensive
Stock Capital Earnings Stock Income (Loss) Total
------ ---------- -------- -------- ------------- ---------
Balance at December 31, 1999 $6,756 $54,450 $130,440 ($8,654) ($ 508) $ 182,484
Comprehensive Income:
Net Income for Year Ended
December 31, 2000 -- -- 836 -- -- 836
Other Comprehensive Loss:
Unrealized Holding Loss on
Marketable Securities,
Net of Deferred Taxes of ($117) -- -- -- -- (217) (217)
---------
Total Comprehensive Income 619
Treasury Stock -- -- -- (50) -- (50)
Cash Dividends -- -- (1,521) -- -- (1,521)
------ ------- -------- ------- ------- ---------
Balance at December 31, 2000 $6,756 $54,450 $129,755 $(8,704) $ (725) $ 181,532
------ ------- -------- ------- ------- ---------
Comprehensive Loss:
Net Loss for Year Ended
December 31, 2001 -- -- (64,419) -- -- (64,419)
Other Comprehensive Income (Loss):
Unrealized Holding Loss on
Marketable Securities,
Net of Deferred Taxes of ($76) -- -- -- -- (144) (144)
Cumulative Effect of Adoption
of SFAS No.133, Net of Deferred
Taxes of $135, on January 1, 2001 250 250
Unrealized Holding Loss on
Derivatives, Net of Deferred
Taxes of ($836) -- -- -- -- (1,553) (1,553)
---------
Total Comprehensive Loss (65,866)
Cash Dividends -- -- (761) -- -- (761)
------ ------- -------- ------- ------- ---------
Balance at December 31, 2001 $6,756 $54,450 $ 64,575 $(8,704) $(2,172) $ 114,905
------ ------- -------- ------- ------- ---------
COMPREHENSIVE INCOME:
NET LOSS FOR YEAR ENDED
DECEMBER 31, 2002 -- -- (136) -- -- (136)
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED HOLDING LOSS ON
MARKETABLE SECURITIES,
NET OF DEFERRED TAXES OF ($194) -- -- -- -- (362) (362)
RECOGNITION OF UNREALIZED HOLDING LOSS
ON MARKETABLE SECURITIES, NET OF -- -- -- -- 461 461
DEFERRED TAXES OF $248
UNREALIZED HOLDING GAIN ON
DERIVATIVES, NET OF DEFERRED
TAXES OF $193 -- -- -- -- 359 359
---------
TOTAL COMPREHENSIVE INCOME 322
------ ------- -------- ------- ------- ---------
BALANCE AT DECEMBER 31, 2002 $6,756 $54,450 $ 64,439 $(8,704) $(1,714) $ 115,227
====== ======= ======== ======= ======= =========
The accompanying notes are an integral part of these statements.
F-6
INTERNATIONAL SHIPHOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
Year Ended December 31,
2002 2001 2000
--------- --------- ---------
Cash Flows from Operating Activities:
Net (Loss) Income $ (136) $ (64,419) $ 836
Adjustments to Reconcile Net (Loss) Income to Net Cash
Provided by Operating Activities:
Depreciation 20,123 32,580 41,716
Amortization of Deferred Charges and Other Assets 7,994 11,311 18,002
Benefit for Deferred Income Taxes (193) (34,698) (1,667)
Equity in Net (Income) Loss of Unconsolidated Entities (555) (463) 74
Gain on Sale of Vessels and Other Assets (557) (3,501) (5,868)
Impairment Loss (66) 81,038 --
Impairment Loss on Investment 598 -- --
Extraordinary Gain (42) (15) (688)
Changes in:
Accounts Receivable 13,188 20,763 (1,898)
Inventories and Other Current Assets 954 3,790 (1,213)
Other Assets 8,485 (5,493) 3,595
Accounts Payable and Accrued Liabilities (15,054) (13,851) (117)
Federal Income Taxes Payable (564) 982 (586)
Billings in Excess of Income Earned and Expenses Incurred (558) (4,109) 379
Other Long-Term Liabilities (6,823) (1,347) (3,096)
--------- --------- ---------
Net Cash Provided by Operating Activities 26,794 22,568 49,469
--------- --------- ---------
Cash Flows from Investing Activities:
Net Investment in Direct Financing Leases 1,775 2,540 3,482
Purchase of Vessels and Other Property (8,558) (40,171) (34,002)
Additions to Deferred Charges (2,906) (7,589) (8,410)
Proceeds from Sale of Vessels and Other Property 18,110 126,011 21,741
Purchase of and Proceeds from Short Term Investments 327 2,824 5,021
Investment in Unconsolidated Entities (2,151) (3,627) (1,906)
Partial Sale of Unconsolidated Entities 110 -- 511
Net Increase in Restricted Cash Account (567) (5,815) (1,142)
Other Investing Activities 410 46 (511)
--------- --------- ---------
Net Cash Provided (Used) by Investing Activities 6,550 74,219 (15,216)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from Issuance of Debt and Capital Lease Obligations 41,500 56,300 137,400
Repayment of Debt and Capital Lease Obligations (89,976) (148,513) (174,217)
Additions to Deferred Financing Charges (264) (195) (639)
Purchase of Treasury Stock -- -- (50)
Common Stock Dividends Paid -- (761) (1,521)
Other Financing Activities 114 -- 1,877
--------- --------- ---------
Net Cash Used by Financing Activities (48,626) (93,169) (37,150)
--------- --------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (15,282) 3,618 (2,897)
Cash and Cash Equivalents at Beginning of Year 18,811 15,193 18,090
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 3,529 $ 18,811 $ 15,193
========= ========= =========
The accompanying notes are an integral part of these statements.
F-7
INTERNATIONAL SHIPHOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of International Shipholding Corporation (a Delaware corporation) and
its majority-owned subsidiaries (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 the equity
method to account for investments in entities in which it holds a 20% to 50%
voting interest and in which the Company cannot exercise significant influence
over operating and financial activities.
Certain reclassifications have been made to the prior period financial
information in order to conform to current year presentation.
NATURE OF OPERATIONS
The Company, through its subsidiaries, operates a diversified fleet of
U.S. and international flag vessels that provide domestic and international
maritime transportation services to commercial customers and agencies of the
United States government primarily under medium- to long-term charters or
contracts. At December 31, 2002, the Company's fleet consisted of 36
ocean-going vessels, 14 Special Purpose barges, 919 LASH (Lighter Aboard SHip)
barges, 7 Haul-Away car carrying trucks, 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
VOYAGE REVENUE AND EXPENSE RECOGNITION
Revenues and expenses relating to voyages are recorded over the
duration of the voyage (including all inland moves, for which revenues and
expenses are fully recognized upon completion of the mother-vessel voyage).
Provisions for loss voyages are recorded when contracts for the voyages are
fixed and when losses become apparent for voyages in progress. Voyage revenue
and expense recognition requires management to make estimates and assumptions
that affect the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
SUBSIDY AGREEMENTS
The Maritime Security Act ("MSA"), which provides for a subsidy
program for certain U.S. flag vessels, was signed into law in October of 1996.
As of December 31, 2002, the Company's U.S. Flag LASH vessel, four of the
Company's Pure Car/Truck Carriers ("PCTCs"), and two vessels operating under a
bareboat charter were qualified and received contracts for MSA participation.
The MSA provides for annual subsidy payments of $2,100,000 per year per vessel
through September 30, 2005. These payments are subject to appropriation each
year and are not guaranteed. The Company recognizes subsidy revenue on a
monthly basis over the duration of the qualifying contracts.
INVENTORIES
Inventories are stated at the lower of cost or market. The base-stock
method is used for the Company's vessels, and the first-in, first-out ("FIFO")
method is used for fuel.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers highly liquid debt instruments with a maturity
of three months or less to be cash equivalents. The Company has categorized all
marketable securities as available-for-sale. The carrying amount approximates
fair value for each of these instruments.
F-8
PROPERTY
For financial reporting purposes, vessels are depreciated over their
estimated useful lives using the straight-line method. Estimated useful lives
of Vessels, Other Equipment, Terminal Facilities, and Furniture and Equipment
are as follows:
Years
-----
2 LASH Vessels 30
3 Pure Car/Truck Carriers 20
1 Coal Carrier 15
6 Other Vessels * 25
Other Equipment 3-12
Terminal Facilities 5-10
Furniture and Equipment 3-10
* Includes one Ice Strengthened Multi-Purpose vessel, two Float-On/Float-Off
Special Purpose vessels, a Dockship, a Molten Sulphur Carrier, and a Container
vessel.
At December 31, 2002, the Company's fleet of 36 vessels also included
(i) three Roll-On/Roll-Off ("RO/RO") vessels which it operates, (ii) an Ice
Strengthened Breakbulk/Multi-Purpose, a Tanker and a Container vessel which it
charters in for one of its services, (iii) three PCTCs which it charters in for
its Time Charter contracts, (iv) two Container vessels under a bareboat
agreement, (v) one LASH vessel which it charters in for its Transatlantic
service, (vi) four Cape-Size Bulk Carriers in which the Company owns a 12.5%
interest, and (vii) seven Cement Carriers and one Ice Strengthened Bulk Carrier
in which the Company owns a 30% interest. The Company, through its 50%
ownership in a car transportation truck company, owns seven Haul-Away car
carrying trucks.
Costs of all major property additions and betterments are capitalized.
Ordinary maintenance and repair costs are expensed as incurred. Interest and
finance costs relating to vessels, barges, and other equipment under
construction are capitalized to properly reflect the cost of assets acquired.
No interest was capitalized in 2002, 2001 or 2000.
Assets under capital leases were recorded on the consolidated balance
sheets under the caption Assets Held for Disposal in 2001. There are no assets
under capital leases as of December 31, 2002. (See Note I).
At December 31, 2002, the Company's fleet also includes 919 LASH
barges and 14 Special Purpose barges. The Company groups its LASH barges,
excluding those held for disposal, into pools with estimated useful lives
corresponding to the remaining useful lives of the vessels with which they are
utilized. Major barge refurbishments are capitalized and included in the
aforementioned group of barge pools. From time to time, 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.
The Company monitors all of its fixed assets for impairment and
performs an impairment analysis in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," when triggering events or circumstances
indicate a fixed asset may be impaired.
DRYDOCKING COSTS
The Company defers certain costs related to the drydocking of its
vessels. Deferred drydocking costs are capitalized as incurred and amortized on
a straight-line basis over the period between drydockings (generally two to
five years) (See Note J).
DEFERRED FINANCING CHARGES AND ACQUIRED CONTRACT COSTS
The Company amortizes its deferred financing charges and acquired
contract costs on a straight-line basis over the estimated useful lives of the
terms of the related financing and contracts (See Note J).
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 F).
FOREIGN CURRENCY TRANSACTIONS
Certain of the Company's revenues and expenses are converted into or
denominated in foreign currencies, primarily Singapore Dollar, Indonesian
Rupiah, Euro, British Pound, Mexican Peso and Indian Rupee. All exchange
adjustments are
F-9
charged or credited to income in the year incurred. Exchange losses of
$227,000, and $54,000 and an exchange gain of $483,000 were recognized for the
years ended December 31, 2002, 2001, and 2000, respectively.
DIVIDEND POLICY
The Board of Directors declared and paid dividends of 6.25 cents per
share for each quarter in 2000 and for the first and second quarter in 2001. In
June of 2001, the Board of Directors elected to suspend future quarterly
dividend payments indefinitely as those payments would have exceeded the
restricted payments amount as defined in the Company's debt covenants (See Note
C).
NET INCOME PER COMMON SHARE
Earnings per common share are based on the weighted average number of
common shares outstanding during the period. The weighted average number of
common shares outstanding was 6,082,887 for the years ended December 31, 2002
and 2001, and 6,082,954 for the year ended December 31, 2000. Basic and diluted
weighted average common shares outstanding were the same for each of these
years. The effect of 475,000 stock options granted during 1998, which were
terminated and reissued in 1999, was anti-dilutive for all periods (See Note
E).
SELF-RETENTION INSURANCE
The Company maintains reserves for its estimated liability under its
self-retention insurance program based on estimates of the eventual claims'
settlement costs. The Company establishes reserves for each policy year based
on actuarial estimates and maintains reserves at those levels for approximately
two years. The Company believes most claims will be reported, or estimates for
existing claims will be revised, within this two-year period. Subsequent to
this two-year period, self-insurance reserves are adjusted to reflect the
Company's current estimate of its loss exposure for the policy year. However,
if during this two-year period the Company's estimate of its loss exposure
exceeds the actuarial estimate, then additional loss provisions are recorded to
increase the self-insurance reserves to the Company's estimate of the eventual
claims' settlement cost. The measurement of the Company's exposure for
self-insurance liability requires management to make estimates and assumptions
that affect the amount of loss provisions recorded during the reporting period.
Actual results could differ from those estimates (See Note D).
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, in order to consider a derivative instrument as a
hedge, (i) the Company must designate the instrument as a hedge of future
transactions, and (ii) the instrument must reduce the Company's exposure to the
applicable risk. If the above criteria are not met, the Company must record the
market value of the instrument at the end of each month and recognize a related
gain or loss through earnings. If the instrument qualifies as a hedge, net
settlements under the agreement are recognized as an adjustment to earnings,
while changes in the fair market value of the hedge are recorded through
Stockholders' Investment in Other Comprehensive Income. The Company recognizes
the fair market value of the hedge through earnings at the time of maturity,
sale or termination of the hedge.
The Company adopted SFAS No. 133, as amended, on January 1, 2001, which
resulted in a cumulative effect of an accounting change to earnings of $16,000
and an increase in Other Comprehensive Income included in Stockholder's
Investment of $385,000. The Company employs interest rate swap agreements,
foreign currency contracts, and commodity swap contracts (See Note N).
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense is recognized for employee
stock options issued under the Stock Incentive Plan if the exercise price of
the options equals the market price of the Company's stock on the date of grant
(See Note E).
NEW ACCOUNTING PRONOUNCEMENTS
In August of 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, which supersedes FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." This statement revised guidance with respect to the process for measuring
impairment of long-lived assets. The provisions of this statement are required
to be applied for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. The reclassification of certain of the
Company's assets to Assets Held for Disposal during 2001 was made prior to the
Company's adoption of SFAS No. 144. Therefore, these assets continued to be
accounted for under SFAS No. 121 until final disposal. The Company adopted SFAS
No. 144 on January 1, 2002, which had no material impact on the Company's
financial statements.
F-10
In April of 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" which is effective for fiscal years beginning after May 15, 2002.
This statement, among other matters, revises current guidance with respect to
gains and losses on early extinguishment of debt. Under SFAS No. 145, gains and
losses on early extinguishment of debt will no longer be treated as
extraordinary items unless they meet the criteria for extraordinary treatment
in APB Opinion No. 30. The Company adopted SFAS No. 145 effective January 1,
2003, and is required to reclassify gains and losses on early extinguishment of
debt reported in prior period income statements as those amounts will no longer
qualify for extraordinary treatment under SFAS No. 145. The Company reported
extraordinary gains related to early extinguishment of debt of $42,000, $15,000
and $688,000, net of taxes, for the years ended December 31, 2002, 2001, and
2000, respectively. The adoption of SFAS No. 145 did not have a material effect
on the Company's financial position.
In July of 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supersedes Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit or disposal
plan. The provisions of SFAS No. 146 are effective for exit and disposal
activities that are initiated after December 31, 2002. The Company does not
anticipate that adoption of SFAS No. 146 will have a material effect on its
financial position.
NOTE B - PROPERTY
In June of 2001, the Company adopted a plan to separate the LASH
service (the LINER SERVICES segment), its Cape-Size Bulk Carrier (the TIME
CHARTER CONTRACTS segment), and certain Special Purpose barges (the OTHER
segment) from the balance of its operations and dispose of these assets. The
past several years have reflected a downward trend in the LINER SERVICES
segment as a result of higher operating cost, disruptions in service due to
unplanned maintenance, and changes in market conditions. In December of 2001,
the Company reclassified its Foreign Flag LASH Service assets, which are
comprised of two LASH vessels, one Dockship, and a certain number of LASH
barges, as assets held for use as a result of extended cargo commitments from a
major shipper.
During the second quarter of 2002, the Company announced that it was
reviewing the possibility of reactivating a U.S. flag service between the U.S.
Gulf and South Asia due to several changes in circumstances that have occurred
since the Company's decision in the second quarter of 2001 to suspend the
previous service. The Company believes that an adequate cargo volume to the
service area for shipment on U.S. Flag vessels will be maintained. As a result,
the Company has recommissioned one of its foreign flag LASH vessels, which had
been idle and scheduled for disposal, together with a certain number of LASH
barges. After its upgrade, the foreign flag vessel entered the Company's
Foreign Flag LASH Liner Service in November of 2002, replacing one of the
vessels operating in that service. The replaced vessel transferred to U.S. Flag
for use in the renewed U.S. Flag LASH Liner Service, which commenced operation
in November of 2002.
During 2001, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
issued by the FASB, the Company recognized an impairment loss of $81,038,000
comprised of $60,553,000 on the U.S. Flag LASH service, one Cape-Size Bulk
Carrier, and 28 Special Purpose barges; $18,130,000 on its Foreign Flag LASH
service; and $2,355,000 on one of its LASH vessels that was sold while held for
disposal. This vessel completed its commitment under charter with the U.S.
Military Sealift Command ("MSC"), reached the end of its economic life, and was
sold for scrap. The impairment loss on the assets was measured as the amount by
which the carrying value of the asset exceeded its fair value. The fair value
of the Foreign Flag LASH service assets was estimated by determining the
present value of its expected future cash flows using a discount rate believed
to be commensurate with the Company's borrowing rate. The fair value of the
U.S. Flag LASH service assets was estimated by determining the scrap value per
lightweight ton.
During 2001, the Company sold its Cape-Size Bulk Carrier and 77 LASH
barges. During 2002, the Company sold four U.S. flag LASH vessels, its FLASH
unit, 803 LASH barges, and 14 Special Purposes Barges and recognized a net gain
of $66,000 on the sale of these assets. The Company is still in the process of
disposing of 19 LASH barges, which are not needed for current operations, and
the remainder of the Special Purpose barges. These assets are included in the
Company's balance sheet as Current Assets Held for Disposal.
The Company owns a coal transfer terminal facility, which it operated
for use with a coal transportation contract that terminated in December of
1998. Upon termination of the contract, the Company sought various business
options that would utilize the coal transfer terminal facility. In September of
2002, the Company decided to place the terminal facility and land up for sale
and accordingly reclassified these assets to Current Assets Held for Disposal.
Based on an appraisal of the terminal facility and land, the Company determined
that the fair value of these assets exceeded the net book value. Therefore, no
impairment loss was recognized upon reclassification of these assets.
F-11
During 2002, the Company recognized a net gain on sale of assets of
$557,000 primarily from a gain of $500,000 on the sale of certain contract
rights that were no longer beneficial to the Company and a gain of $57,000 on
the sale of other assets no longer needed for operations.
During 2001, the Company recognized a net gain of $3,501,000 including
a gain of $4,485,000 on the sale of one of the Company's PCTCs, which was
replaced by a newer and larger PCTC, a gain of $464,000 on the sale of
tugboats, and a gain of $930,000 on the sale of other assets no longer needed
for operations, offset by a loss of $2,378,000 on two of the Company's LASH
vessels, which completed their commitment under charter with the MSC and were
no longer needed for operations.
During 2000, the Company recognized a net gain of $5,911,000 primarily
including a gain of $6,063,000 on the sale of one of the Company's PCTCs, which
was replaced by a newer and larger PCTC, and a gain of $600,000 on the sale of
tugboats no longer needed for operations, offset by the loss of approximately
$1,000,000 on the sale of one of the Company's LASH vessels no longer needed
for operations.
NOTE C - LONG-TERM DEBT
(All Amounts in Thousands)
Interest Rate Total Principal Due
DECEMBER 31, December 31, Maturity DECEMBER 31, December 31,
Description 2002 2001 Date 2002 2001
------------ ------------ -------- ------------ ------------
Unsecured Senior Notes -
Fixed Rate 7.75% 7.75-9.00% 2007 $ 81,914 $121,508
Fixed Rate Notes Payable 6.70% 6.70% 2008 19,526 24,067
Variable Rate Notes Payable:
4.13% N/A 2006 11,000 --
3.3125% N/A 2007 9,500 --
3.4375% 3.15% 2009 35,485 38,775
2.40% 2.90% 2010 17,733 19,600
2.915% 4.6375% 2011 24,750 27,500
U.S. Government Guaranteed
Ship Financing Notes and
Bonds - Fixed Rate 8.30% 8.30% 2009 11,479 14,377
Promissory Note N/A N/A 2003 1,272 --
Line of Credit 2.98% N/A 2004 1,000 --
-------- --------
$213,659 $245,827
Less Current Maturities (21,362) (15,346)
-------- --------
$192,297 $230,481
======== ========
During 2002, the Company retired the remaining $39,085,000 of 9%
Senior Notes due 2003 at a slight discount and retired $1,052,000 of the 7 3/4%
Senior Notes at a discount. During 2001, the Company retired $3,105,000 of the
9% Senior Notes at a slight discount. Upon retirement of this indebtedness, the
Company recorded an Extraordinary Gain on Early Extinguishment of Debt for the
years ended December 31, 2002 and 2001 of approximately $42,000 and $15,000,
net of taxes, respectively.
The aggregate principal payments required as of December 31, 2002, for
each of the next five years are $21,362,000 in 2003, $20,043,000 in 2004,
$19,809,000 in 2005, $18,496,000 in 2006, and $95,448,000 in 2007 primarily due
to the maturity of the Company's 7 3/4% Senior Notes. The Company has seven
vessels and 318 LASH barges, with a net book value totaling $225,496,000,
mortgaged under certain of the Company's debt agreements. Additional collateral
includes a security interest in certain operating contracts and receivables.
The remaining indebtedness of the Company is unsecured. Most of these
agreements, among other things, impose defined minimum working capital and net
worth requirements, impose restrictions on the payment of dividends, 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, and has not exceeded
the leverage requirement during the period covered by the agreements, once
amended effective June of 2001 and March of 2002, and is in compliance with
these requirements as of December 31, 2002. The Company believes it will be
able to meet its more restrictive financial covenants that become effective in
2003. Management is closely monitoring the results of the first quarter of 2003
in order to maintain continued
F-12
compliance, which may include the possibility of reaching agreements with
various lending institutions to further amend the various debt covenants for
the year 2003.
The most restrictive of the Company's credit agreements prohibit the
declaration or payment of dividends unless (1) the total of (a) all dividends
paid, distributions on, or other payments made with respect to the Company's
capital stock during the period beginning January 1, 1999, and ending on the
date of dividend declaration or other payment and (b) all investments other
than Qualified Investments (as defined) of the Company and certain designated
subsidiaries do not exceed the sum of $10,000,000 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 of the Company's 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 prohibit payments of
dividends, loans, or advances to the Company from Sulphur Carriers, Inc., a
wholly-owned subsidiary of the Company, unless certain financial ratios are
maintained. As long as these ratios are maintained, there is no restriction on
loans or advances to the Company from that subsidiary, but dividends are
restricted to 40% of undistributed earnings. Certain other loan agreements
restrict the ability of the Company's subsidiaries to dispose of assets to such
a degree that the remaining assets' book values are less than the value of the
collateralized assets. The Company has consistently remained in compliance with
these loan agreements.
The amounts of potentially restricted net assets were as follows:
(All Amounts in Thousands)
DECEMBER 31, December 31,
2002 2001
------------ ------------
Enterprise Ship Company $ 45,385 $ 50,805
Sulphur Carriers, Inc. 21,588 32,699
-------- --------
Total Restricted Net Assets $ 66,973 $ 83,504
======== ========
At December 31, 2002 and 2001, the Company had available a line of
credit totaling $10,000,000 used to meet short-term requirements when
fluctuations occur in working capital. As of December 31, 2002, the balance
outstanding on this line of credit was $1,000,000. As of December 31, 2001, the
Company had no balance outstanding on this line of credit.
Under certain of the above described loan agreements, deposits are
made into bank retention accounts to meet the requirements of the applicable
agreements. These escrowed amounts totaled $513,000 at December 31, 2002 and
2001 and are included in Restricted Cash. Additionally, under certain operating
lease agreements of one of the Company's subsidiaries, deposits were made into
bank reserve accounts to meet the requirements of the lease agreements. The
owner of the vessels has the ability to draw on these amounts to cover
operating lease payments if such payments become overdue. The escrow amounts
totaled $6,640,000 and $6,340,000 at December 31, 2002 and 2001, respectively,
and are included in Restricted Cash. The remaining amounts in Restricted Cash
on the Company's Consolidated Balance Sheets are comprised of deposits required
to meet minimum working capital commitments of the Company's 12.5% interest in
the bulk carrier companies, and deposits representing performance bonds
required on certain of the Company's commodity swap agreements.
NOTE D - SELF-RETENTION INSURANCE
Due to the effect of the events of September 11, 2001, on the
reinsurance market, along with the discontinuation of the U.S. Flag LASH Liner
service, the Company revised its self-retention insurance program for the
policy year beginning June 27, 2002. Under the revised insurance program, the
Company is self-insured for Hull and Machinery claims between $150,000 and
$1,000,000 and Loss of Hire claims in excess of 14 days up to an aggregate stop
loss amount of $2,000,000. If the aggregate claim amounts exceed $2,000,000,
the Hull & Machinery deductible reverts to $150,000 for each claim and the Loss
of Hire claim level remains at 14 days. Protection and Indemnity claims are not
included in the revised self-retention insurance program, and the Company has
obtained third party insurance coverage for these claims with a deductible
level of $25,000 per incident for all vessels. The independent actuarial
estimates of the Company's self-insurance exposure are approximately $760,000
below the aggregate $2,000,000 stop loss amount for the policy year beginning
June 27, 2002.
For prior policy years, the Company is self-insured for most Personal
Injury and Cargo claims under $1,000,000, for Hull & Machinery claims under
$2,500,000, and for claims for Loss of Hire under 60 days. The Company
maintained insurance for individual claims over the above levels and maintained
Stop Loss insurance to cover aggregate claims between those levels and the
primary deductible levels. Primary deductibles per incident were $25,000 for
Hull, Personal Injury, and Cargo, $1,000 for LASH barges, and 10 days for Loss
of Hire. The Company is responsible for all claims under the primary
F-13
deductibles. Under the Stop Loss insurance, claim costs between the primary
deductible and $1,000,000 and $2,500,000, as applicable, are the responsibility
of the Company until the aggregate Stop Loss amount is met. The aggregate
annual Stop Loss, excluding primary deductibles, is $6,000,000 for the policy
years ending June 26, 2002 and 2001. After the Company has retained the
aggregate amounts, all additional claims up to an additional aggregate amount
of $6,000,000 are recoverable from underwriters. The Company is reserved at its
maximum stop loss level of $6,000,000 for these policy years.
The current portions of the liabilities for self-insurance exposure
were $6,657,000 and $7,884,000 at December 31, 2002 and 2001, respectively, and
the noncurrent portions of these liabilities were $433,000 and $2,483,000 at
December 31, 2002 and 2001, respectively.
NOTE E - EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS
The Company's defined benefit retirement plan covers all full-time
employees of domestic subsidiaries who are not otherwise covered under
union-sponsored plans. The benefits are based on years of service and the
employee's highest sixty consecutive months of compensation. 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 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' funded status and costs recognized by the Company:
Pension Plan Postretirement Benefits
----------------------------- ---------------------------
(All Amounts in Thousands) DECEMBER 31, December 31, DECEMBER 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 18,226 $ 17,129 $9,043 $7,943
Service cost 511 556 60 104
Interest cost 1,160 1,274 593 622
Actuarial (gain) loss (591) 1,008 34 995
Benefits paid (934) (819) (706) (628)
Curtailments & special termination benefits -- (894) -- 7
Expenses paid -- (28) -- --
-------- -------- ------- -------
Benefit obligation at end of year 18,372 18,226 9,024 9,043
-------- -------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 16,669 16,707 -- --
Actual loss on plan assets (1,295) (186) -- --
Employer contribution 1,095 995 706 628
Benefits paid (934) (819) (706) (628)
Expenses paid -- (28) -- --
-------- -------- ------- -------
Fair value of plan assets at end of year 15,535 16,669 -- --
-------- -------- ------- -------
Funded status (2,837) (1,558) (9,024) (9,043)
Unrecognized net actuarial loss 4,139 2,122 1,629 1,608
Unrecognized prior service cost 15 23 -- --
-------- -------- ------- -------
Prepaid (accrued) benefit cost $ 1,317 $ 587 $(7,395) $(7,435)
======== ======== ======= =======
F-14
Pension Plan Postretirement Benefits
----------------------------- --------------------------
(All Amounts in Thousands) DECEMBER 31, December 31, DECEMBER 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets 8.00% 8.00% N/A N/A
Rate of compensation increase 5.50% 5.50% N/A N/A
For the year ended December 31, For the year ended December 31,
2002 2001 2002 2001
----------- ----------- ----------- ------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 511 $ 556 $ 60 $ 104
Interest cost 1,160 1,274 593 622
Actual return on plan assets 1,295 186 -- --
Amortization of prior service cost 8 10 -- --
Amortization of unrecognized net actuarial (gain) loss (2,608) (1,489) 13 46
Curtailments & special termination benefits -- 87 -- 7
-------- -------- ----- -----
Net periodic benefit cost $ 366 $ 624 $ 666 $ 779
======== ======== ===== =====
For measurement purposes, the health and dental care cost trend rate
for employees under 65 was assumed to be 9.0% for 2002, decreasing steadily by
..50% per year over the next eight years to a long-term rate of 5%. The health
and dental care cost trend rate for employees over 65 was assumed to be 11%,
decreasing steadily by .50% per year over the next twelve years to a long-term
rate of 5%. A one percent change in the assumed health care cost trend rates
would have the following effects:
(All Amounts in Thousands) 1% Increase 1% Decrease
----------- -----------
Change in total service and interest cost components
for the year ended December 31, 2002 $ 62 $ (52)
Change in postretirement benefit obligation as of December 31, 2002 932 (791)
Crew members on the Company's U.S. flag vessels belong to
union-sponsored pension plans. The Company contributed approximately
$1,440,000, $1,712,000, and $2,066,000 to these plans for the years ended
December 31, 2002, 2001, and 2000, 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 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 reported obligation and annual expense.
401(K) SAVINGS PLAN
The Company provides a 401(k) tax-deferred savings plan to all
full-time employees who have completed at least 1,000 hours of service. The
Company matches 50% of the employee's first $2,000 contributed to the plan
annually. The Company contributed $171,000, $156,000, and $103,000 to the plan
for the years ended December 31, 2002, 2001, and 2000, respectively.
STOCK INCENTIVE PLAN
In April of 1998, the Company established a stock-based compensation
plan, the Stock Incentive Plan (the "Plan"). The purpose of the Plan is to
increase shareholder value and to advance the interest of the Company by
furnishing a variety of economic incentives designed to attract, retain, and
motivate key employees and officers and to strengthen the mutuality of
interests between such employees, officers, and the Company's shareholders.
Incentives consist of opportunities to purchase or receive shares of common
stock in the form of incentive stock options, non-qualified stock options,
restricted stock, or other stock-based awards. Under the Plan, the Company may
grant incentives to its eligible Plan participants for up to 650,000 shares of
common stock. The exercise price of each option equals the market price of the
Company's stock on the date of grant. In April of 1998, options to purchase
475,000 shares of common stock were granted to certain qualified participants
at an exercise price of $17.1875 per share. In July of 1999, these options were
terminated and reissued at an
F-15
exercise price of $14.125 per share. The stock options are due to expire on
April 14, 2008. All options vested immediately upon the grant date and were
exercisable at December 31, 2002. No options were granted, exercised or
forfeited during 2002, 2001, or 2000.
The Company accounts for stock-based compensation in accordance with
APB Opinion No. 25. Accordingly, no compensation expense has been recognized
for employee options granted under the Plan. If the Company had determined
compensation cost for the Plan based on the fair value at the grant dates for
awards under the Plan consistent with the method of SFAS No. 123 "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
for the years ended December 31, 2002, 2001, and 2000 would have agreed to the
actual amounts reported since no stock options were granted for these years.
LIFE INSURANCE
The Company has agreements with the Chairman and President of the
Company whereby their estates will be paid approximately $822,000 and $626,000,
respectively upon death. The Company reserved amounts to fund a portion of
these death benefits which amounted to $1,000,000 and holds an insurance policy
which covers the remainder. The cash surrender value of the insurance policy
was approximately $140,000 and $137,000 as of December 31, 2002 and 2001,
respectively.
NOTE F - 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 (losses)
earnings of foreign subsidiaries, which were ($606,000) in 2002, $791,000 in
2001, and $1,644,000 in 2000, are also included.
Prior to 1987, deferred income taxes were not provided on
undistributed foreign earnings of $6,689,000, all of which are expected to
remain invested abroad indefinitely. In accordance with the Tax Reform Act of
1986, commencing in 1987 shipping income, as defined under the U.S. Subpart F
income tax provisions, generated from profitable controlled foreign
subsidiaries are subject to Federal income taxes.
Components of the net deferred tax liability/(asset) are as follows:
DECEMBER 31, December 31,
(All Amounts in Thousands) 2002 2001
------------ ------------
Liabilities:
Fixed Assets $ 24,848 $ 21,527
Deferred Charges 8,634 5,359
Unterminated Voyage Revenue/Expense 1,719 1,441
Intangible Assets 3,693 4,202
Deferred Insurance Premiums 982 963
Deferred Intercompany Transactions 2,530 2,530
Other Liabilities 1,864 1,795
-------- --------
Total Liabilities 44,270 37,817
-------- --------
Assets:
Insurance and Claims Reserve (4,353) (4,234)
Deferred Intercompany Transactions (2,530) (2,530)
Post-Retirement Benefits (2,742) (2,742)
Alternative Minimum Tax Credit (4,507) (6,391)
Net Operating Loss Carryforward/
Unutilized Deficit (10,455) (8,994)
Valuation Allowance 879 879
Other Assets (6,780) (5,515)
-------- --------
Total Assets (30,488) (29,527)
-------- --------
Total Deferred Tax Liability, Net $ 13,782 $ 8,290
======== ========
F-16
The following is a reconciliation of the U.S. statutory tax rate to
the Company's effective tax rate-expense (benefit):
Year Ended December 31,
2002 2001 2000
------ ------ ------
Statutory Rate (35.00%) (35.00%) 35.00%
State Income Taxes 12.30% 0.10% 11.70%
Other, Primarily Non-deductible Expenditures 11.62% 0.00% 27.70%
------ ------ ------
(11.08%) (34.90%) 74.40%
====== ====== ======
The Company has available at December 31, 2002, unused operating loss
carryforwards of $677,000 and unused foreign deficits of $29,193,000. The
operating loss carryforwards will expire in 2007. The unused foreign deficits
are available only to offset foreign earnings and do not expire. Realization of
this tax asset is dependent upon generating future taxable income from foreign
operations. In addition, foreign tax credits of $3,974,000 can only be utilized
once the foreign deficit is eliminated. At that time, the credits will have a
five-year carry forward prior to expiration. The Company believes that it is
more likely than not it will realize these assets from future foreign
operations, but there is no guarantee that the Company will be able to do so.
Foreign income taxes of $754,000, $473,000, and $629,000 are included
in the Company's consolidated statements of income in the Provision for Income
Taxes for the years ended December 31, 2002, 2001, and 2000, respectively. The
Company pays foreign income taxes in Indonesia and Thailand.
The Company has not recognized a deferred tax liability of $463,000
for undistributed earnings of certain non-U.S. subsidiaries because it
considers those earnings to be indefinitely invested abroad. As of December 31,
2002, the undistributed earnings of these subsidiaries were $1,323,000.
NOTE G - TRANSACTIONS WITH RELATED PARTIES
The Company had receivables outstanding from a related party of
$92,000 and $148,000 at December 31, 2002 and 2001, respectively, relating to
the sales of subsidiaries to a former employee prior to 2000. These receivables
are due by the end of 2003, and the outstanding receivable at December 31,
2002, is included in Other Current Assets. Collections on the total receivable
were $55,000 and $74,000 for the years ended December 31, 2002 and 2001,
respectively. The payment due in December of 2002 was not received until early
January of 2003. Interest income on this receivable is earned at the rate of 6%
for the first five years and a variable rate of LIBOR plus 2% thereafter.
Interest income amounted to $10,000, $16,000, and $22,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.
A son of the President of the Company and a son of one of the
Company's Directors are partners of the legal firm of Jones, Walker, Waechter,
Poitevent, Carrere and Denegre, which has been utilized for various legal
services since the Company's inception. The Company made payments to the firm
totaling approximately $738,000, $1,114,000, and $1,296,000 for the years ended
December 31, 2002, 2001, and 2000 respectively. The Company believes these
payments represent the fair value of the services rendered.
During 1998, a wholly-owned subsidiary of the Company, LMS
Shipmanagement, Inc. ("LMS"), entered into agreements with Belden Shipping Pte.
Ltd. ("Belden") to provide ship management services beginning in 1999, from
which revenues earned were approximately $80,000 and $132,000 for the years
ended December 31, 2001 and 2000 respectively. In February of 2002, LMS
discontinued providing management services to Belden, who has subsequently
established its own shipmanagement group. The Company has a 30% interest in
Belden and Echelon Shipping, Inc. ("Echelon") (See Note L). The Company
acquired a 30.0% interest in Belden Cement Holding, Inc. ("BCH") in 2001 (See
Note L). The Company had long-term receivables from Echelon totaling
approximately $150,000 as of December 31, 2002 and 2001. The Company had
long-term receivables from Belden totaling approximately $21,000 as of December
31, 2001, which was paid off in 2002. The Company had long-term receivables
from BCH totaling approximately $2,385,000 and $167,000 as of December 31, 2002
and 2001. These long-term receivables are included in Due from Related Parties.
The Company had long-term receivables, included in Due from Related
Parties, from LMS Manning, Inc. ("LMS Manning") in which it owns a 48.0%
interest totaling approximately $55,000 and $82,000 as of December 31, 2002 and
2001, respectively (See Note L). The Company also had long-term receivables,
included in Due from Related Parties, from LMS Manila, Inc. ("LMS Manila") in
which it owned a 40.0% interest totaling approximately $118,000 as of December
31, 2001. The Company sold its interest in LMS Manila in 2002 and collected
full payment on its receivable (See Note L).
F-17
NOTE H - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
As of December 31, 2002, 17 vessels that the Company owns or operates
were under various contracts extending beyond 2002 and expiring at various
dates through 2019. Certain of these agreements also contain options to extend
the contracts beyond their minimum terms.
The Company's unrestricted subsidiaries, through their 12.5%
ownership, guarantee a portion of the outstanding debt of the invested bulk
carrier companies. This represents non-recourse debt to International
Shipholding Corporation, the parent of the unrestricted subsidiaries. The
portion of the outstanding debt that the unrestricted subsidiaries guaranteed
at December 31, 2002 and 2001 was $11,000,000 and $7,157,000, respectively. The
debt matures at various times ranging from year 2011 to 2013.
The Company also maintains lines of credit totaling approximately
$380,000 to cover standby letters of credit required on certain of the
Company's contracts.
CONTINGENCIES
The Company has been named as a defendant in numerous lawsuits
claiming damages related to occupational diseases, primarily related to
asbestos and hearing loss. The Company believes that most of these claims are
without merit, and that insurance and the indemnification of a previous owner
of one of the Company's subsidiaries mitigate the Company's exposure.
In the normal course of its operations, the Company becomes involved
in various litigation matters including, among other things, claims by third
parties for alleged property damages, personal injuries, and other matters.
While the Company believes it has meritorious defenses against these claims,
management has used significant estimates in determining the Company's
potential exposure. Where appropriate, the Company has recorded provisions,
included in Other Long-Term Liabilities: Claims and Other, to cover its
potential exposure and anticipated recoveries from insurance companies,
included in Other Assets. It is reasonably possible that a change in the
Company's estimate of its exposure could occur. Although it is difficult to
predict the costs of ultimately resolving such issues, the Company does not
expect such costs will have a material effect on the Company's financial
position or results of operations.
NOTE I - LEASES
DIRECT FINANCING LEASES
In 1998, the Company entered into a direct financing lease of a
foreign flag PCTC that was to expire in 2018. Subsequently in 2001, the Company
terminated the direct financing lease when it sold this PCTC and leased it back
under an operating lease. The charter under which this vessel is operated was
not affected by this transaction. In 1999, the Company entered into another
direct financing lease of a foreign flag PCTC expiring in 2019. The schedule of
future minimum rentals to be received under this direct financing lease in
effect at December 31, 2002, is as follows:
Receivables Under
(All Amounts in Thousands) Financing Lease
-----------------
Year Ended December 31,
2003 $ 8,431
2004 8,455
2005 8,432
2006 8,431
2007 8,431
Thereafter 83,329
--------
Total Minimum Lease Payments Receivable 125,509
Estimated Residual Value of Leased Property 2,051
Less Unearned Income (74,352)
--------
Total Net Investment in Direct Financing Lease 53,208
Current Portion (1,944)
--------
Long-Term Net Investment in Direct
Financing Lease at December 31, 2002 $ 51,264
========
F-18
CAPITAL LEASES
The Company entered into sale-leaseback agreements in 1991 and 1992
for a group of the Company's LASH barges. These leases met the required
criteria for capital lease treatment and were accounted for as such. The terms
of the leases were 12 years. During 2002, the Company purchased the barges
thereby terminating the leases.
During 2000, the Company entered into a sale-leaseback agreement for
two of the Company's LASH vessels. The gain on the sale-leaseback was deferred
over the life of the lease. The lease met the required criteria for capital
lease treatment and was accounted for as such. The term of the lease was 5
years. During 2001, the two vessels were reclassified to Assets Held for
Disposal and written down to their estimated fair value. The resulting net loss
after recognition of the deferred gain was included in the Impairment Loss on
the Company's Consolidated Income Statement for the year ended December 31,
2001. During 2002, the vessels were sold and the related capital lease
obligation was paid off.
Additionally in 2000, the Company entered into a sale-leaseback
agreement for one of the Company's PCTCs. At inception, the lease met the
required criteria for capital lease treatment and was accounted for as such.
Subsequently in December of 2001, the Company renegotiated the lease agreement,
and the amended terms of the lease did not meet the required criteria for
capital lease treatment. The lease was reclassified to an operating lease
effective December 31, 2001, and has been accounted for as such going forward.
There are no capital leases as of December 31, 2002.
OPERATING LEASES
During 2000, the Company entered into a sale-leaseback agreement for
one of its Ice Strengthened Breakbulk/Multi-Purpose vessels, which is
classified as an operating lease. During 2001, the Company entered into two
sale-leasebacks covering one of the Company's domestic PCTCs and one of the
Company's foreign flag PCTCs. The gains on these sale-leasebacks are being
deferred over the lives of the leases. As discussed above, the Company
renegotiated its capital lease agreement for one of the Company's domestic
PCTCs in December of 2001 and subsequently reclassified the lease to an
operating lease. This reclassification resulted in a gain of $5,309,000, which
is being deferred over the remaining term life of the lease. During 2002, the
Company entered into a sale-leaseback for one of its LASH vessels, which was
also classified as an operating lease. The terms of the leases are 5 years for
the Breakbulk vessel, 12 years for the domestic PCTC, 15 years for the foreign
flag PCTC, 10 years for the domestic PCTC reclassified as an operating lease in
2001, and 5 years for the LASH vessel.
Most of the operating lease agreements have a fair value renewal
option and a fair value purchase option, with the exception of the operating
lease for the Breakbulk vessel. Most of these agreements impose defined minimum
working capital and net worth requirements, impose restrictions on the payment
of dividends, and prohibit the Company from incurring, without prior written
consent, additional debt or lease obligations, except as defined. Certain
agreements require escrow deposits (See Note C). The vessels under these
leases, with the exception of the LASH vessel, are operated under fixed charter
agreements covering the terms of the respective leases. The Company also
conducts certain of its operations from leased office facilities and uses
certain transportation and other equipment under operating leases expiring at
various dates through 2008.
Rent expense related to operating leases totaled approximately
$26,471,000, $18,965,000, and $9,819,000, for the years ended December 31,
2002, 2001, and 2000, respectively. The following is a schedule, by year, of
future minimum payments required under operating leases that have initial
non-cancelable terms in excess of one year as of December 31, 2002:
Payments Under Operating Leases
(All Amounts Domestic Foreign LASH Container/ Other
in Thousands) Breakbulk PCTCs Flag PCTC Vessel Tanker Leases Total
------------------------------------------------------------------------------
Year Ended
December 31,
2003 $ 940 $ 8,665 $ 6,340 $1,920 $ 5,464 $ 843 $ 24,172
2004 940 8,665 6,340 1,920 5,464 796 24,125
2005 783 8,898 6,340 1,920 -- 787 18,728
2006 -- 9,596 6,340 1,920 -- 891 18,747
2007 -- 9,596 6,340 1,920 -- 926 18,782
Thereafter -- 53,604 53,891 -- -- 823 108,318
------------------------------------------------------------------------------
Total Future
Minimum Payments $2,663 $99,024 $85,591 $9,600 $10,928 $5,066 $212,872
==============================================================================
F-19
NOTE J - DEFERRED CHARGES AND ACQUIRED CONTRACT COSTS
Deferred charges and acquired contract costs are comprised of the
following:
DECEMBER 31, December 31,
(All Amounts in Thousands) 2002 2001
-------- --------
Drydocking Costs $ 11,414 $ 10,126
Financing Charges and Other 3,214 4,114
Acquired Contract Costs 10,550 12,006
-------- --------
$ 25,178 $ 26,246
======== ========
Financing charges are amortized over the life of the applicable debt
involved. The Acquired Contract Costs represents the portion of the purchase
price paid for Waterman Steamship Corporation applicable primarily to that
company's maritime prepositioning ship contract agreements. The Company
amortizes the acquired contract cost using the straight-line method over the
contract's useful life of twenty-one years from the acquisition date.
NOTE K - SIGNIFICANT OPERATIONS
MAJOR CUSTOMERS
The Company has several medium- to long-term contracts related to the
operations of various vessels (See Note H), from which revenues represent a
significant amount of the Company's total revenue. Revenues from the contracts
with the MSC were $34,543,000, $36,868,000, and $65,494,000 for the years ended
December 31, 2002, 2001, and 2000, respectively. The drop in revenues from the
MSC from 2000 to 2001 is a result of the completion of contracts related to four
vessels under contract, which were all sold prior to July of 2001.
Until early 2002, the Company operated four U.S. flag LASH vessels on
a liner service, of which three vessels were subsidized under the MSA (See Note
A - "Subsidy Agreements"). These four vessels were sold during 2002. In
November of 2002, the Company began operating one U.S. flag LASH vessel on a
subsidized liner service (See Note B). Revenues, including subsidy revenue,
from both operations were $19,466,000, $91,595,000, and $120,110,000 for the
years ended December 31, 2002, 2001, and 2000, respectively.
The Company has four U.S. Flag PCTCs, also under the MSA, which carry
automobiles from Japan to the United States for a Japanese charterer. Revenues,
including subsidy revenue, were $38,566,000, $37,950,000, and $37,800,000 for
the years ended December 31, 2002, 2001, and 2000, respectively.
The Company provides space on its westbound Forest Lines service to
several commercial shippers. The westbound cargoes included steel and other
metal products, high-grade paper and wood products, and other general cargo.
Revenues were $26,306,000, $29,448,000, and $31,316,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.
CONCENTRATIONS
A significant portion of the Company's traffic receivables is due from
contracts with the MSC and transportation of government sponsored cargo. There
are no other concentrations of receivables from customers or geographic regions
that exceed 10% of stockholders' investment at December 31, 2002 or 2001.
With only minor exceptions related to personnel aboard certain foreign
flag vessels, most of the Company's shipboard personnel are covered by
collective bargaining agreements under multiple unions.
GEOGRAPHIC INFORMATION
The Company has operations in several principal markets, including
international service between the U.S. Gulf and East Coast ports and ports in
the Middle East, Far East, and northern Europe, and domestic transportation
services along the U.S. Gulf and East Coast. Revenues attributable to the major
geographic areas of the world are presented in the following table. Revenues
for the TIME CHARTER CONTRACTS, CONTRACTS OF AFFREIGHTMENT, RAIL-FERRY SERVICE,
and OTHER are assigned to regions based on the location of the customer.
Revenues for the LINER SERVICES are presented based on the location of the
ports serviced by this segment. Because the Company operates internationally,
most of its assets are not restricted to specific locations. Accordingly, an
allocation of identifiable assets to specific geographic areas is not
applicable.
F-20
For the year ended December 31,
------------------------------------
(All Amounts in Thousands) 2002 2001 2000
-------- -------- --------
United States $ 88,230 $ 83,972 $110,025
Asian countries 62,842 60,847 61,502
Rail-Ferry service operating between U.S. Gulf and Mexico 11,240 6,207 --
Liner services operating between:
U.S. Gulf / East Coast ports and ports in South Asia 19,466 91,595 120,112
U.S. Gulf / East Coast ports and ports in Northern Europe 44,837 57,245 59,044
Other countries 797 4,504 6,422
-------- -------- --------
Total Revenues $227,412 $304,370 $357,105
======== ======== ========
OPERATING SEGMENTS
The Company's operating segments are identified primarily based on the
characteristics of the contracts or terms under which the fleet of vessels and
barges are operated. Each of the reportable segments is managed separately as
each requires different resources depending on the nature of the contract or
terms under which each vessel within the segment operates. The Company's
operating segments are identified and described below.
LINER SERVICES: A liner service operates a vessel or vessels on an
established trade route with regularly scheduled sailing dates. The Company
receives revenues for the carriage of cargo within the established trading area
and pays the operating and voyage expenses incurred. The Company's LINER
SERVICES include a U.S. flag liner service between U.S. Gulf and East Coast
ports and ports in South Asia, and a foreign flag transatlantic liner service
operating between U.S. Gulf and East Coast ports and ports in northern Europe.
TIME CHARTER CONTRACTS: These are contracts by which the charterer
obtains the right for a specified period to direct the movements and
utilization of the vessel in exchange for payment of a specified daily rate,
but the Company retains operational control over the vessel. Typically, the
Company fully equips the vessel and is responsible for normal operating
expenses, repairs, wages and insurance, while the charterer is responsible for
voyage expenses, such as fuel, port and stevedoring expenses. The Company's
TIME CHARTER CONTRACTS include contracts with car manufacturers for six PCTCs
and with an electric utility for a conveyor-equipped, self-unloading Coal
Carrier. In the beginning of 2001, the Company's contract to provide ocean
transportation services to a major mining company at its mine in West Irian
Jaya, Indonesia changed to a TIME CHARTER CONTRACT as opposed to a CONTRACT OF
AFFREIGHTMENT contract. Also included in this segment are contracts of varying
terms under which the MSC charters three RO/ROs that are under an operating
contract and an Ice Strengthened Multi-Purpose vessel. The MSC's charter
contract with the Ice Strengthened Multi-Purpose vessel was extended in
December of 2002 through the first quarter of 2003. The Company is presently
working on further extensions. The Company's Cape-Size Bulk Carrier, which
operated in the spot market, was included in this segment in 2000 and 2001
until it was sold in June of 2001. Additionally, four of the Company's LASH
vessels, which had been on charter with the MSC were included in this segment
until they were sold at various times in 2000 and 2001.
CONTRACTS OF AFFREIGHTMENT ("COA"): These are contracts by which the
Company undertakes to provide space on its vessel(s) for the carriage of
specified goods or a specified quantity of goods on a single voyage or series
of voyages over a given period of time between named ports or within certain
geographical areas in return for the payment of an agreed amount per unit of
cargo carried. Generally, the Company is responsible for all operating and
voyage expenses. The Company's COA segment includes a sulphur transportation
contract with a major sulphur producer and for years prior to 2001, a contract
to provide ocean transportation services to a major mining company at its mine
in West Irian Jaya, Indonesia.
RAIL-FERRY SERVICE: This segment includes a service that began in
January of 2001 carrying loaded rail cars between Mobile, Alabama and
Coatzacoalcos, Mexico. The Company's two Float-On/Float-Off ships are employed
with this service, each having a capacity for 60 standard rail cars. With
departures every four days from Coatzacoalcos and Mobile, it offers with each
vessel a three-day transit between these ports and provides a total of 90 trips
per year in each direction.
OTHER: This segment includes results of several of the Company's
subsidiaries that provide ship charter brokerage, agency, and other specialized
services primarily to the Company's operating segments described above. Also
included in the OTHER category are corporate related items, results of
insignificant operations, and income and expense items not allocated to
reportable segments.
F-21
The following table presents information about segment profit and loss
and segment assets. The Company does not allocate interest income, other
income, administrative and general expenses, equity in unconsolidated entities,
or income taxes to its segments. Intersegment revenues are based on market
prices and include revenues earned by subsidiaries of the Company that provide
specialized services to the operating segments. Expenditures for segment assets
represent cash outlays during the periods presented, including purchases of
assets, improvements to assets, and drydock payments.
Time
Liner Charter Contracts of Rail-Ferry
(All Amounts in Thousands) Services Contracts Affreightment Service Other Elimination Total
- ----------------------------------------------------------------------------------------------------------------------------------
2002
REVENUES FROM EXTERNAL CUSTOMERS $ 65,146 $128,279 $ 15,370 $ 11,240 $ 7,377 -- $227,412
INTERSEGMENT REVENUES -- -- -- -- 16,055 $(16,055) --
GROSS VOYAGE (LOSS) PROFIT BEFORE
DEPRECIATION AND IMPAIRMENT LOSS (1,321) 44,189 8,379 (757) (914) -- 49,576
DEPRECIATION AND AMORTIZATION 5,062 14,242 2,868 4,116 846 -- 27,134
INTEREST EXPENSE 1,794 10,192 2,338 3,221 161 -- 17,706
SEGMENT (LOSS) PROFIT BEFORE IMPAIRMENT LOSS,
INTEREST INCOME, ADMINISTRATIVE AND GENERAL
EXPENSES, GAIN ON SALE OF ASSETS, EQUITY IN
UNCONSOLIDATED ENTITIES, AND TAXES (6,652) 24,273 3,624 (6,894) (1,621) -- 12,730
IMPAIRMENT LOSS (52) -- -- -- 118 -- 66
GAIN ON SALE OF OTHER ASSETS -- -- -- -- 557 -- 557
IMPAIRMENT LOSS ON INVESTMENT -- -- -- -- (598) -- (598)
SEGMENT (LOSS) PROFIT BEFORE INTEREST INCOME,
ADMINISTRATIVE AND GENERAL EXPENSES, EQUITY IN
UNCONSOLIDATED ENTITIES AND TAXES (6,704) 24,273 3,624 (6,894) (1,544) -- 12,755
SEGMENT ASSETS 29,507 184,196 43,784 57,224 2,836 -- 317,547
EXPENDITURES FOR SEGMENT ASSETS 7,997 985 1,193 47 1,242 -- 11,464
- ----------------------------------------------------------------------------------------------------------------------------------
2001
Revenues from external customers $148,840 $129,845 $ 15,839 $ 6,207 $ 3,639 -- $304,370
Intersegment revenues -- -- -- -- 28,417 $(28,417) --
Gross voyage (loss) profit before depreciation
and impairment loss (1,048) 53,943 8,672 (4,604) 1,227 -- 58,190
Depreciation and amortization 14,206 19,834 2,869 4,091 1,271 -- 42,271
Interest expense 3,326 17,162 2,772 3,447 30 -- 26,737
Segment (loss) profit before impairment loss,
interest income, administrative and general
expenses, gain on sale of assets, equity in
unconsolidated entities, and taxes (14,902) 22,441 3,483 (10,948) 419 -- 493
Impairment loss (78,683) (2,355) -- -- -- -- (81,038)
Gain on sale of vessels and other property -- 3,075 -- -- 426 -- 3,501
Segment (loss) profit before interest income,
administrative and general expenses, equity in
unconsolidated entities and taxes (93,585) 23,161 3,483 (10,948) 845 -- (77,044)
Segment assets 39,531 198,202 45,151 60,693 9,149 -- 352,726
Expenditures for segment assets 1,990 40,817 11 4,445 692 -- 47,955
- ----------------------------------------------------------------------------------------------------------------------------------
2000
Revenues from external customers $179,174 $141,197 $ 32,547 -- $ 4,187 -- $357,105
Intersegment revenues -- -- -- -- 29,027 $(29,027) --
Gross voyage profit before depreciation 12,957 60,504 12,523 -- 2,264 -- 88,248
Depreciation and amortization 21,212 26,183 8,156 -- 1,224 -- 56,775
Interest expense 5,221 20,459 7,323 -- 761 -- 33,764
Gain on sale of vessels and other property -- 5,664 -- -- 247 -- 5,911
Segment (loss) profit before interest income,
administrative and general expenses, equity in
unconsolidated entities and taxes (7,189) 28,755 (826) -- 882 -- 21,622
Segment assets 101,223 328,068 125,691 -- 13,746 -- 568,728
Expenditures for segment assets 3,261 34,308 4,646 -- 830 -- 43,045
- ----------------------------------------------------------------------------------------------------------------------------------
F-22
Following is a reconciliation of the totals reported for the operating
segments to the applicable line items in the consolidated financial statements:
(All Amounts in Thousands) For the year ended December 31,
------------------------------------
2002 2001 2000
-------- -------- --------
Profit or Loss:
Total profit (loss) for reportable segments $ 12,755 $(77,044) $ 21,622
Unallocated amounts:
Interest income 656 1,157 2,118
Other income 1,498 -- --
Administrative and general expenses (15,734) (23,578) (22,871)
-------- -------- --------
(Loss) income before (benefit) provision for income
taxes, equity in net income (loss) of unconsolidated
entities, and extraordinary item $ (825) $(99,465) $ 869
======== ======== ========
DECEMBER 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Assets:
Total assets for reportable segments $317,547 $352,726 $568,728
Unallocated amounts 89,205 108,996 126,448
-------- -------- --------
$406,752 $461,722 $695,176
======== ======== ========
Other income of $1,498,000 in 2002 resulted from interest earned by
the Company on overpayments of foreign taxes made in prior years that were
previously refunded.
Unallocated assets include Current Assets of $64,669,000, $88,377,000,
and $110,464,000, as of December 31, 2002, 2001, and 2000, respectively. Also
included in unallocated assets are Investment in Unconsolidated Entities of
$8,251,000, $7,857,000, and $3,538,000, as of December 31, 2002, 2001, and
2000, respectively and Other Long-term Assets of $13,476,000, $17,085,000, and
$11,627,000, as of December 31, 2002, 2001, and 2000, respectively. The Company
manages these unallocated assets on a corporate rather than segment basis.
NOTE L - UNCONSOLIDATED ENTITIES
CEMENT CARRIER COMPANIES
During 1998, the Company acquired a 37.5% interest in Belden, a cement
carrier management company, and three cement carrier companies, Echelon,
Shining Star Shipping, Inc. formerly known as Shining Star Malta Ltd.
("Shining"), and Carson Shipping, Inc. ("Carson") for approximately $3.4
Million. During 1999, the Company sold 7.5% of its 37.5% interest in each of
the aforementioned companies for approximately $806,000. In late 1999, the
Company acquired a 30% interest in another cement carrier company, Goodtime
Shipping Inc. ("Goodtime"), for approximately $633,000. During 2000, the
Company acquired a 30% interest in another cement carrier company, Yakuma
Shipping Inc. ("Yakuma"), for $600,000. In October of 2000, the Company sold
its interest in Carson for approximately $511,000, resulting in a loss of
approximately $273,000. Also, in late 2000, Goodtime was liquidated due to a
constructive total loss of its cement carrier for which the Company received
approximately $1,000,000, representing its portion of the insurance recovery on
the lost vessel. The liquidation resulted in a gain of approximately $295,000.
The proceeds were received in January of 2001.
During 2001, the Company acquired a 30% interest in four additional
cement carrier companies, Tilbury Shipping Inc. ("Tilbury"), Emblem Shipping
Inc. ("Emblem"), Mattea Shipping Inc. ("Mattea"), and Belden Management, Inc.,
a management company. Additionally in 2001, BCH, which is a holding company for
each of the aforementioned cement carrier companies, was formed. Echelon,
Shining, Yakuma, Tilbury, and Emblem each own and operate one cement carrying
vessel, and Mattea owns and operates two cement carriers under medium- to
long-term contracts. In late December of 2002, the Company acquired a 30%
interest in a company, Minardi Shipping Inc., which owns an ice strengthened
bulk carrier. These companies are managed by Belden. Currently, the Company
owns a 30% interest in BCH that owns 100% of each of these companies.
These investments are accounted for under the equity method of
accounting and the Company's share of earnings or losses are reported in the
Company's consolidated statements of income net of taxes. The Company's portion
of the combined earnings of these investments net of taxes was $550,000 and
$389,000 as of December 31, 2002 and 2001, respectively. The Company's portion
of their combined losses before taxes was $114,000 as of December 31, 2000. No
distributions were made during 2002 and 2001. No distributions were made during
2000, except for the sale of Carson and liquidation of Goodtime.
F-23
The unaudited combined condensed financial position and results of
operations of the cement carrier companies are summarized below:
DECEMBER 31, December 31,
(Amounts in Thousands) 2002 2001
------------ ------------
Current Assets $ 5,522 $ 4,173
Noncurrent Assets $55,559 $58,975
Current Liabilities $ 9,509 $10,611
Noncurrent Liabilities $42,450 $45,398
Year Ended December 31,
(Amounts in Thousands) 2002 2001 2000
-------- -------- --------
Operating Revenues $ 18,822 $ 13,879 $ 9,557
Operating Income $ 13,969 $ 10,021 $ 1,361
Income Before Extraordinary Item $ 2,782 $ 1,802 $ 72
Net Income $ 2,782 $ 1,802 $ 72
CAPE-SIZE BULK CARRIERS
During 2000, Cape Shipholding, Inc., a wholly-owned subsidiary of the
Company, acquired a 12.5% interest in Bulk Venture, Ltd. for approximately
$1,280,000, which owns two newly built cape-size bulk carrier vessels. During
2001, the Company made an additional investment in Bulk Venture, Ltd. of
approximately $376,000. The Company received dividends of approximately $56,000
and $113,000 in 2002 and 2001, respectively. No dividends were received during
2000.
During 2001, Bulk Africa Shipholding, Inc., a wholly-owned subsidiary
of the Company, acquired a 12.5% interest in Bulk Africa, Ltd. for
approximately $626,000, which owns a newly built cape-size bulk carrier vessel.
During 2002, the Company made an additional investment in Bulk Africa Ltd. of
approximately $818,000. No dividends were received during 2002 and 2001.
During 2001, Bulk Australia Shipholding, Inc., a wholly-owned
subsidiary of the Company, acquired a 12.5% interest in Bulk Australia, Ltd.
for approximately $144,000, which owns a newly built cape-size bulk carrier
vessel. During 2002, the Company made an additional investment in Bulk
Australia Ltd. of approximately $1,333,000. No dividends were received during
2002 and 2001.
These investments are accounted for under the cost method of
accounting and accordingly income is recognized only upon distribution of
dividends or sale of investment.
SHIP MANAGEMENT COMPANIES
During 1999, LMS acquired a 40% interest in LMS Manila for $21,000. In
2002, the Company sold its interest in LMS Manila for approximately $176,000,
including repayment of a receivable (See Note G) resulting in a gain of
approximately $18,000.
During 1999, LMS acquired a 48% interest in LMS Manning for $6,000,
which provides ship management services for the Company. The investment is
accounted for under the equity method of accounting, and the Company's share of
earnings or losses is reported in the Company's consolidated statements of
income net of taxes. The Company's interest in the earnings from the date of
this investment through December 31, 2002, was immaterial.
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31,
(All Amounts in Thousands) 2002 2001 2000
------- ------- -------
Cash Payments:
Interest Paid $18,938 $27,669 $35,528
Taxes Paid $ 773 $ 982 $ 2,998
During 1998, the Company sold one of its foreign flag Pure Car
Carriers ("PCCs") for $18,200,000 of which $15,200,000 was received in cash and
$3,000,000 in the form of a five-year promissory note. In January of 2002, this
note was fully paid off earlier than its initial five-year term.
During 1999, the Company sold an additional foreign flag PCC for
$18,200,000 of which $15,200,000 was received in cash and $3,000,000 in the
form of a five-year promissory note. This note is being repaid in ten
semi-annual installments of $300,000 each, in addition to interest at LIBOR
plus 1%.
F-24
During 2000, the Company entered into a sale-leaseback for its Ice
Strengthened Breakbulk/Multi-Purpose vessel for $4,700,000 of which
approximately $1,000,000 was received in cash and approximately $3,700,000 in
the form of a five-year promissory note. The note is being repaid in sixty
monthly installments of $61,666, in addition to interest at 10%.
During 2002, the Company entered into a sale-leaseback for one of its
LASH vessels for $10,000,000 of which $5,000,000 was received in cash and
$5,000,000 in the form of a five-year promissory note. A portion of the note,
approximately $2,000,000, is being repaid in twenty quarterly installments in
addition to approximately $3,000,000 being repaid at the end of the lease.
Interest on the note is at 4.845% for the first two years and 4.72% for each of
the three years thereafter.
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES
The estimated fair values of the Company's financial instruments and
derivatives are as follows (asset/(liability)):
DECEMBER 31, December 31,
2002 2001
--------------------------- ---------------------------
CARRYING FAIR Carrying Fair
(All Amounts in Thousands) AMOUNT VALUE Amount Value
---------- --------- ---------- ---------
Interest Rate Swap Agreements $ (2,045) $ (2,045) $ (1,800) $ (1,800)
Foreign Currency Contracts $ (49) $ (49) $ (25) $ (25)
Commodity Swap Contracts $ 603 $ 603 $ (204) $ (204)
Long-Term Debt $(213,659) $(216,378) $(245,827) $(248,354)
Disclosure of the fair value of all balance sheet classifications,
including but not limited to certain vessels, property, equipment, direct
financing leases, or intangible assets which may have a fair value in excess of
historical cost, is not required. Therefore, this disclosure does not purport
to represent the fair value of the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements to manage
well-defined interest rate risks. In December of 1998, the Company entered into
an interest rate swap agreement with a commercial bank to reduce the possible
impact of higher interest rates in the long-term market by utilizing the fixed
rate available with the swap. In August of 2001, the Company paid off its
variable rate loan associated with this swap and therefore terminated the
interest rate swap agreement. The fixed rate payor was the Company, and the
floating rate payor was Citibank, N.A. The fixed rate was 5.275% at December
31, 2000, and the floating rate was 6.42% at December 31, 2000. The Company
received a settlement payment of $202,000 in August of 2001.
During September of 1999, the Company entered into an interest rate
swap agreement with a commercial bank to reduce the possible impact of higher
interest rates in the long-term market by utilizing the fixed rate available
with the swap. The fixed rate payor is the Company, and the floating rate payor
is HSBC Bank plc. The fixed rate was 7.7% at December 31, 2002 and 2001, and
the floating rates were 2.81% and 3.59% at December 31, 2002 and 2001,
respectively. The contract amount totaled $23,240,000 and $26,560,000 at
December 31, 2002 and 2001, respectively, and will expire in September of 2004.
The Company considers this interest rate swap agreement to be an effective
hedge. Settlements of this agreement are made semi-annually with an increase to
interest expense of $1,128,000 in 2002.
FOREIGN CURRENCY CONTRACTS
The Company enters into forward exchange contracts to hedge certain
firm purchase and sale commitments denominated in foreign currencies. 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. The
term of the currency contracts is rarely more than one year. Due to the
immaterial nature of these contracts, the Company has not designated the
foreign currency contracts as hedges. Therefore, the changes in the fair market
value of these hedges are recorded through earnings. The Company includes any
gains or losses on the maturity, sale, or termination in revenues in the period
the hedged transaction is recorded, though the Company does not anticipate the
sale or termination of these hedges.
During 2002, the Company entered into two forward purchases contracts.
One contract is for Mexican Pesos for $600,000 U.S. Dollar equivalents
effective January 15, 2003, and is to expire June 30, 2003. The other contract
is for Indonesian Rupiah for $600,000 U.S. Dollar equivalents and is effective
for one year beginning January 1, 2003. There were no forward purchase
contracts as of December 31, 2001. As of December 31, 2002 and 2001, the
Company was a
F-25
party to forward sales contracts in various currencies totaling $1,822,000 and
$1,651,000 U.S. Dollar equivalents, respectively. Gains and losses on these
contracts are recognized in net income of the period in which the exchange rate
changes.
COMMODITY SWAP CONTRACTS
The Company enters into commodity swap contracts for portions of its
estimated fuel purchases to manage the risk associated with changes in fuel
prices. During December of 2000, the Company entered into three commodity swap
agreements with a major energy trading corporation for a portion of its
estimated 2001 fuel purchases. The contracts were effective for one year
beginning in January of 2001 and expired December 31, 2001, and were for
18,000, 22,500, and 12,000 tons of fuel. The contracts required that a payment
be made for the difference between the contract rate of $127, $123, and $117
per ton, respectively, and the market rate for the fuel on each settlement
date. During September of 2001, the Company entered into an additional
commodity swap agreement for 7,500 tons of fuel which was effective for three
months beginning in October of 2001 and expired December 31, 2001. The contract
required that a payment be made for the difference between the contract rate of
$112 per ton and the market rate for the fuel on each settlement date. These
contracts covered approximately 33% of the Company's LINER SERVICE segment's
fuel purchases during 2001.
During 2001, the Company entered into two commodity swap agreements
with a major energy trading corporation for a portion of its estimated 2002
fuel purchases. The contracts were effective for one year beginning in January
of 2002 and expired December 31, 2002, and were for 22,500 and 12,000 tons of
fuel. The contracts required that a payment be made for the difference between
the contract rate of $106.50 and $99.50 per ton, respectively, and the market
rate for the fuel on each settlement date. These contracts covered
approximately 49% of the Company's LINER SERVICE segment's 2002 fuel purchases.
During November of 2002, the Company entered into three commodity swap
agreements, one with a major energy trading corporation, and two with financial
institutions. The contracts are effective for one year beginning in January of
2003. Two of the contracts are for 14,400, and the other is for 12,000 tons of
fuel. The contracts require that a payment be made for the difference between
the contract rates of $116.25 to $118.83 per ton and the market rate for the
fuel on each settlement date.
The Company considers these commodity swap contracts to be effective
hedges. Monthly settlements of these agreements are recorded as an adjustment
to voyage expenses. The Company made a net positive adjustment to voyage
expense of $1,024,000 in 2002 relating to settlements of these contracts.
LONG-TERM DEBT
The fair value of the Company's debt is estimated based on the quoted
market price for the publicly listed Senior Notes and the current rates offered
to the Company on other outstanding obligations.
AMOUNTS DUE FROM RELATED PARTIES
The carrying amount of these notes receivable approximated fair market
value as of December 31, 2002 and 2001. Fair market value takes into
consideration the current rates at which similar notes would be made.
RESTRICTED CASH
The carrying amount of these investments approximated fair market
value as of December 31, 2002 and 2001, based upon current rates offered on
similar instruments.
NOTE O - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Following are the components of the consolidated balance sheet
classification Accounts Payable and Accrued Liabilities for the periods
indicated.
DECEMBER 31, December 31,
(All Amounts in Thousands) 2002 2001
------------ ------------
Accrued Voyage Expenses $16,251 $17,595
Self-Insurance Liability 6,657 7,884
Trade Accounts Payable 3,425 10,062
Accrued Vessel Upgrade Costs 2,688 --
Accrued Customs Liability 2,410 --
Accrued Interest 2,221 4,593
Accrued Salaries and Benefits 591 632
Other Short Term Liabilities 9 204
------- -------
$34,252 $40,970
======= =======
F-26
NOTE P - QUARTERLY FINANCIAL INFORMATION - (Unaudited)
Quarter Ended
---------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(All amounts in thousands except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
2002 REVENUE $ 60,452 $ 56,664 $ 49,900 $ 60,396
EXPENSE 54,523 47,587 44,318 50,548
IMPAIRMENT LOSS 54 (151) 3 28
GROSS VOYAGE PROFIT 5,875 9,228 5,579 9,820
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (889) 1,116 (1,089) 684
EXTRAORDINARY ITEM (31) -- (36) 109
NET (LOSS) INCOME (920) 1,116 (1,125) 793
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE:
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (0.15) 0.18 (0.18) 0.11
EXTRAORDINARY ITEM (0.00) -- (0.00) 0.02
NET (LOSS) INCOME (0.15) 0.18 (0.18) 0.13
- --------------------------------------------------------------------------------------------------------------------------------
2001 Revenue $ 80,399 $ 76,329 $ 78,236 $ 69,406
Expense 72,760 71,608 70,994 61,778
Impairment Loss 2,355 78,928 400 (645)
Gross Voyage Profit (Loss) 5,284 (74,207) 6,842 8,273
Loss Before Extraordinary Item (5,353) (57,399) (165) (1,517)
Extraordinary Item -- -- -- 15
Net Loss (5,353) (57,399) (165) (1,502)
Basic and Diluted Loss per Common Share:
Loss Before Extraordinary Item (0.88) (9.44) (0.03) (0.25)
Extraordinary Item -- -- -- --
Net Loss (0.88) (9.44) (0.03) (0.25)
- --------------------------------------------------------------------------------------------------------------------------------
2000 Revenue $ 89,024 $ 88,937 $ 86,322 $ 92,822
Expense 79,849 75,638 73,023 79,120
Gross Voyage Profit 9,175 13,299 13,299 13,702
(Loss) Income Before Extraordinary Item (3,299) 2,942 176 329
Extraordinary Item -- -- 242 446
Net (Loss) Income (3,299) 2,942 418 775
Basic and Diluted (Loss) Earnings per Common Share:
(Loss) Income Before Extraordinary Item (0.54) 0.48 0.03 0.06
Extraordinary Item -- -- 0.04 0.07
Net (Loss) Income (0.54) 0.48 0.07 0.13
- --------------------------------------------------------------------------------------------------------------------------------
F-27
INDEX OF SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
Report of Independent Auditors..............................................................S-2
Schedule I - Condensed Financial Information of the Registrant..............................S-3
S-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
International Shipholding Corporation
We have audited the consolidated financial statements of International
Shipholding Corporation and subsidiaries (the Company) as of December 31, 2002
and for the year then ended, and have issued our report thereon dated January
17, 2003 (included elsewhere in this Form 10-K). Our audit also included the
financial statement schedule as of December 31, 2002 and for the year then
ended listed in Item 15(a) of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit.
The Company's consolidated financial statements and related financial statement
schedule as of December 31, 2001 and for the two years in the period then ended
were audited by other auditors who have ceased operations and whose report
dated January 11, 2002 indicated that such schedule as of December 31, 2001 and
for the two years in the period then ended fairly states, in all material
respects, the financial data required to be set forth therein in relation to
the Company's basic consolidated financial statements taken as a whole.
In our opinion, the financial statement schedule as of December 31, 2002 and
for the year then ended referred to above, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
New Orleans, Louisiana
January 17, 2003
S-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with International Shipholding Corporation's filing on Form 10-K for
the fiscal year ended December 31, 2001. This audit report has not been reissued
by Arthur Andersen LLP in connection with this filing on Form 10-K for the
fiscal year ended December 31, 2002.
We have audited, in accordance with auditing standards generally
accepted in the United States, the financial statements as of December 31, 2001
and 2000 and for each of the three years in the period ended December 31, 2001
included in International Shipholding Corporation's annual report to
stockholders included in this Form 10-K, and have issued our report thereon
dated January 11, 2002. Our audits were made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in the index
above is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
New Orleans, Louisiana,
January 11, 2002
S-2 A
INTERNATIONAL SHIPHOLDING CORPORATION (PARENT COMPANY)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(All Amounts in Thousands)
Year Ended December 31,
------------------------------------
2002 2001 2000
-------- -------- --------
Management Fee Revenue from Subsidiaries $ 11,518 $ 11,403 $ 10,292
Administrative and General Expenses 11,382 11,106 10,450
-------- -------- --------
Gross Profit (Loss) 136 297 (158)
-------- -------- --------
Interest:
Interest Expense 10,052 11,823 17,385
Investment Income 774 208 (750)
-------- -------- --------
10,826 12,031 16,635
-------- -------- --------
Equity in Net Income (Loss) of Consolidated
Subsidiaries (Net of Applicable Taxes) 6,838 (56,719) 11,330
-------- -------- --------
Loss Before (Benefit) Provision for Income
Taxes and Extraordinary Item (3,852) (68,453) (5,463)
-------- -------- --------
(Benefit) Provision for Income Taxes:
Current -- 154 --
Deferred (3,674) (4,173) (5,759)
-------- -------- --------
(3,674) (4,019) (5,759)
-------- -------- --------
(Loss) Income Before Extraordinary Item $ (178) $(64,434) $ 296
-------- -------- --------
Extraordinary Gain on Early Extinguishment of
Debt (Net of Income Tax Provision of $22, $8
and $299 respectively)
42 15 555
-------- -------- --------
Net (Loss) Income $ (136) $(64,419) $ 851
======== ======== ========
The "Notes to Consolidated Financial Statements of International Shipholding
Corporation and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
S-3
INTERNATIONAL SHIPHOLDING CORPORATION (PARENT COMPANY)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(All Amounts in Thousands)
DECEMBER 31, December 31,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 151 $ 7,298
Restricted Cash 590 --
Accounts Receivable 19 222
Federal Income Taxes Receivable 5,755 71
Other Current Assets 2,229 603
---------- ----------
Total Current Assets 8,744 8,194
---------- ----------
Deferred Federal Income Taxes 31,015 31,458
Investment in Consolidated Subsidiaries 252,357 297,059
Furniture and Equipment 3,882 4,219
Less - Accumulated Depreciation (2,769) (2,662)
---------- ----------
1,113 1,557
---------- ----------
Deferred Financing Charges, Net of Accumulated Amortization
of $1,182 and $2,245 in 2002 and 2001, Respectively 1,119 1,585
---------- ----------
$ 294,348 $ 339,853
========== ==========
DECEMBER 31, December 31,
2002 2001
------------ ------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accrued Interest Payable $ 1,377 $ 2,650
Accounts Payable and Accrued Liabilities 351 186
Note Payable to Subsidiary 5,889 7,196
---------- ----------
Total Current Liabilities 7,617 10,032
---------- ----------
Due to Subsidiaries 84,780 89,084
Long-Term Debt 84,464 123,556
Retirement Benefits and Other 2,260 2,276
Commitments and Contingent Liabilities
Stockholders' Investment:
Common Stock 6,756 6,756
Additional Paid-In Capital 54,450 54,450
Retained Earnings 64,439 64,575
Less - Treasury Stock (8,704) (8,704)
Accumulated Other Comprehensive Loss (1,714) (2,172)
---------- ----------
115,227 114,905
---------- ----------
$ 294,348 $ 339,853
========== ==========
The "Notes to Consolidated Financial Statements of International Shipholding
Corporation and Subsidiaries" are an integral part of these statements.
See Accompanying "Notes to Condensed Financial Information of Registrant."
S-4
INTERNATIONAL SHIPHOLDING CORPORATION (PARENT COMPANY)
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
Year Ended December 31,
-----------------------------------------
2002 2001 2000
--------- --------- ---------
Cash Flows from Operating Activities:
Net (Loss) Income $ (136) $ (64,419) $ 851
Adjustments to Reconcile Net (Loss) Income to Net Cash
Used by Operating Activities:
Depreciation 697 758 1,117
Amortization of Deferred Charges 327 394 592
Benefit for Deferred Income Taxes (3,674) (4,173) (5,759)
Net (Income) Loss of Consolidated Subsidiaries (6,838) 56,719 (11,330)
Gain on Sale of Furniture and Equipment (2) -- --
Extraordinary Gain (42) (15) (555)
Changes in:
Accounts Receivable 203 (102) (2)
Other Current Assets (1,626) (63) 85
Accounts Payable and Accrued Liabilities (1,108) (461) (3,376)
Federal Income Taxes Payable 101 1,586 (2,149)
Other (14) 95 (54)
--------- --------- ---------
Net Cash Used by Operating Activities (12,112) (9,681) (20,580)
--------- --------- ---------
Cash Flows from Investing Activities:
Purchase of Furniture and Equipment (196) (475) (293)
Additions to Deferred Charges -- -- --
Net Increase in Restricted Cash Accounts (590) -- --
--------- --------- ---------
Net Cash Used by Investing Activities (786) (475) (293)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from Issuance of Debt 19,500 27,000 56,000
Reduction of Debt (58,592) (48,060) (133,179)
Change in Due to/from Subsidiaries 44,629 35,972 98,222
Additions to Deferred Financing Charges -- (1) --
Repurchase of Treasury Stock -- -- (50)
Common Stock Dividends Paid -- (761) (1,520)
Other Financing Activities 214 31 1,660
--------- --------- ---------
Net Cash Provided by Financing Activities 5,751 14,181 21,133
--------- --------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (7,147) 4,025 260
Cash and Cash Equivalents at Beginning of Year 7,298 3,273 3,013
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 151 $ 7,298 $ 3,273
========= ========= =========
The "Notes to Consolidated Financial Statements of International Shipholding
Corporation and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant"
S-5
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 2002
Note 1. Basis of Preparation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the Condensed Financial Statements of the Registrant do not include
all of the information and notes normally included with financial statements
prepared in accordance with accounting principles generally accepted in the
United States. It is, therefore, suggested that these Condensed Financial
Statements be read in conjunction with the Consolidated Financial Statements
and Notes thereto included in this Form 10-K, Part II, Item 8, page 22.
Note 2. Cash Dividends of Subsidiaries
There were no cash dividends received from subsidiaries for the years
ended December 31, 2002, 2001, and 2000. International Shipholding Corporation
(the Parent Company) received dividends in the form of forgiveness of amounts
due to subsidiaries totaling $55,000,000, $10,000,000 and $12,000,000 in 2002,
2001, and 2000, respectively.
Note 3. Long-Term Debt
Long-term debt consists of the following:
(All Amounts in Thousands)
Interest Maturity DECEMBER 31, December 31,
Rate Date 2002 2001
-------- -------- ------------ ------------
Unsecured Senior Notes 7.75% 2007 $ 83,464 $ 84,471
Unsecured Senior Notes 9% 2003 -- 39,085
Lines of Credit 2.98% 2004 1,000 --
--------- ---------
$ 84,464 $ 123,556
========= =========
In addition to these Unsecured Senior Notes, the Parent Company
guarantees certain long-term debt of its subsidiaries, which amounted to
$87,468,000 and $96,443,000 at December 31, 2002 and 2001, respectively.
Additionally, the Parent Company's unrestricted subsidiaries, through their
12.5% ownership, guarantee a portion of the outstanding debt of certain
invested bulk carrier companies, which represents non-recourse debt to the
Parent Company. The portion of the outstanding debt that the unrestricted
subsidiaries guaranteed at December 31, 2002 and 2001 was $11,000,000 and
$7,157,000, respectively.
Note 4. Income Taxes
Pursuant to a tax sharing agreement, the Federal income tax returns of
the Parent Company and its subsidiaries are filed on a consolidated basis and
income is included in the consolidated Federal income tax return. The provision
(benefit) for Federal income taxes and related assets from the subsidiaries are
determined based on the subsidiary's effective book tax rate exclusive of
certain foreign earnings not subject to tax. Amounts determined to be due or to
be received are included in Due to/from Subsidiaries.
Note 5. Amounts Due to Subsidiaries
Amounts due to subsidiaries have no scheduled repayment terms, but it
is the intention of the Parent Company and its subsidiaries, which are wholly
owned and controlled by the Parent Company, that these amounts will not be
repaid within the next year.
S-6