UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D. C.
20549
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Form
10-K
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(Mark One)
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[X]
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year ended December
31, 2007
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or
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[ ]
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period from
. . . . . . . . . . . . to . . . . . . . . . . . . .
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Commission File No. 2-63322
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International Shipholding
Corporation
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(Exact
name of registrant as specified in its
charter)
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Delaware
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36-2989662
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification
No.)
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11 North Water
St. Suite 18290 Mobile,
AL
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36602
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (251)
243-9100
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Securities
registered pursuant to Section 12(b) of the
Act:
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Title of each
class
Common Stock, $1 Par Value
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Name of each exchange
on which registered
New York Stock
Exchange
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Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ☐ No
☑
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ☐ No
☑
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 ☑ 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. ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated
filer ☐ Accelerated
filer ☑
Non-accelerated filer ☐ Small
reporting company ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ☐ No
☑
State the
aggregate market value of the voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or
the average bid and asked price of such common equity, as of the last business
day of the registrant’s most recently completed second fiscal
quarter.
Date
Amount
June
30,
2007 $96,267,951
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. . . . . . . . 7,675,142 shares outstanding as of March 5,
2008
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the registrant's definitive
proxy statement have been incorporated by reference into Part III of this Form
10-K.
INTERNATIONAL SHIPHOLDING
CORPORATION
TABLE OF
CONTENTS
PART I 2
PART II
10
PART III 21
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Matters
21
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PART IV 22
PART
I
ITEM 1. BUSINESS
General
In this report, the terms “we,” “us,”
“our,” and “the Company” refer to International Shipholding Corporation and its
subsidiaries. Through our subsidiaries, we operate a diversified
fleet of U.S. and foreign flag vessels that provide international and domestic
maritime transportation services to commercial and governmental customers
primarily under medium to long-term charters or contracts. At
February 29, 2008, we owned or operated 27 ocean-going vessels and related
shoreside handling facilities.
Our current operating fleet includes
(i) six U.S. flag Pure Car/Truck Carriers (“PCTCs”) specifically designed to
transport fully assembled automobiles, trucks and larger vehicles; (ii) four
foreign flag PCTCs with the capability of transporting heavy weight and large
dimension trucks and buses, as well as automobiles; (iii) two
Breakbulk/Multi-Purpose vessels, three Container vessels and one Tanker vessel,
which are used to transport supplies for the Indonesian operations of a mining
company; (iv) one U.S. flag Molten Sulphur vessel, which is used to carry molten
sulphur from Louisiana and Texas to a processing plant on the Florida Gulf
Coast; (v) two Special Purpose vessels modified as Roll-On/Roll-Off vessels
(“RO/ROs”) to transport loaded rail cars between the U.S. Gulf and Mexico; (vi)
one U.S. flag conveyor-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; and (viii) two Capesize Bulk Carriers and two
Panamax Bulk Carriers in which we own a 50% interest.
Our fleet is deployed by our principal
operating subsidiaries, Central Gulf Lines, Inc. (“Central Gulf”), LCI
Shipholdings, Inc. (“LCI”), Waterman Steamship Corporation (“Waterman”), CG
Railway, Inc. (“CG Railway”), and Enterprise Ship Company, Inc.
(“ESC”). Other of our subsidiaries provide ship charter brokerage,
agency and other specialized services.
We have four operating segments, Time Charter Contracts, Contracts
of Affreightment (“COA”), Rail-Ferry Service, and Other, as described
below. Most of our revenues and gross voyage profits are contributed
by our time charter contracts segment.
For additional information about our
operating segments see Note L - Significant
Operations of the Notes to the Consolidated Financial Statements contained in
this Form 10-K on page
F-16. In addition to our four operating segments, we have
investments in several unconsolidated entities of which we own 50% or less and
have the ability to exercise significant influence over operating and financial
activities. A fifth operating segment, Liner Services, was
discontinued in 2007. As of December 31, 2007, one LASH vessel and
235 barges remained for this segment, with the assets classified as held for
disposal. During the first two months of 2008, we sold the one
remaining LASH vessel and the majority of LASH barges with the remaining LASH
barges under contract to be sold by the end of the first quarter of 2008. (See Note Q – Discontinued
Operations on page F-19).
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
we retain operating control over the vessel. Typically, we fully
equip the vessel and are responsible for normal operating expenses, repairs,
crew wages, and insurance, while the charterer is responsible for voyage
expenses, such as fuel, port, and stevedoring expenses. Our Time
Charter Contracts include charters of three RO/RO vessels to the United States
Navy’s Military Sealift Command (“MSC”) for varying terms. Other
vessels operating in this segment are our ten PCTCs; a conveyor-equipped,
self-unloading Coal Carrier under contract with an electric utility; two
Multi-Purpose vessels, one Tanker, and three Container vessels providing
transportation services to a mining company at its mine in Papua,
Indonesia..
Contract of Affreightment
(“COA”). COAs are contracts by which we undertake to provide
space on our vessels for the carriage of specified goods or a specified quantity
of goods on a single voyage or series of voyages over a given period of time
between named ports or within certain geographical areas in return for the
payment of an agreed amount per unit of cargo carried. Generally, we
are responsible for all operating and voyage expenses. Our COA
segment includes one contract, which is for the transportation of molten
sulphur.
Rail-Ferry
Service. This service uses our two Special Purpose vessels,
which carry loaded rail cars between the U.S. Gulf and Mexico. We
began operations out of our new terminal in Mobile, Alabama and the upgraded
terminal in Mexico during the third quarter of 2007. The upgrades to
the Mexican terminal were made to accommodate the second decks, which were added
to our vessels in the second and third quarters of 2007 to double the capacity
of the vessels. (See Item 1a. Risk Factors for a
description of material risks relating to this service on page
7).
Other. This
segment consists of operations that include more specialized services than the
above mentioned three segments, and ship charter brokerage and agency
services.
Unconsolidated
Entities. We have a 50% interest in a company owning two
Capesize Bulk Carriers and two Panamax Bulk Carriers. We also have a
49% interest in a company that operates the rail terminal in Coatzacoalcos,
Mexico that is used by our Rail-Ferry Service, and a 50% interest in a
company that owns and operates a transloading and rail and truck service
warehouse storage facility in New Orleans, Louisiana.
Business Strategy
Our
strategy is to (i) identify customers with high credit quality and marine
transportation needs requiring specialized vessels or operating techniques, (ii)
seek medium- to long-term charters or contracts with those customers and, if
necessary, modify, acquire or construct vessels to meet the requirements of
those charters or contracts, and (iii) provide our customers with reliable, high
quality service at a reasonable cost. We plan to continue this
strategy by expanding our relationships with existing customers, seeking new
customers, and selectively pursuing acquisitions.
Because
our strategy is to seek medium- to long-term contracts and because we have
diversified customer and cargo bases, we are generally insulated from the
cyclical nature of the shipping industry. However, of our four
operating segments, our Rail-Ferry Service segment is
impacted by, among other things, fuel oil cost and the seasonal demands for
certain cargoes.
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 and Erik F. Johnsen, both
directors of the Company. Central Gulf was privately held until 1971
when it merged with Trans Union Corporation (“Trans Union”). In 1978,
International Shipholding Corporation was formed to act as a holding company for
Central Gulf, LCI, and certain other affiliated companies in connection with the
1979 spin-off by Trans Union of our common stock to Trans Union’s
stockholders. In 1986, we acquired the assets of Forest Lines, and in
1989, we acquired Waterman. Since our spin-off from Trans Union, we
have continued to act solely as a holding company, and our only significant
assets are the capital stock of our subsidiaries.
Competitive
Strengths
Diversification. Our strategy
for many years has been to seek and obtain contracts that contribute to a
diversification of operations. These diverse operations vary from
chartering vessels to the United States government, to chartering vessels for
the transportation of automobiles and military vehicles, transportation of
paper, steel, wood and wood pulp products, carriage of supplies for a mining
company, transporting molten sulphur, transporting coal for use in generating
electricity, and transporting standard size railroad cars. As a
result, our management believes our outlook is favorable for fulfilling current
contracts, obtaining extensions through the exercise of options by current
customers, and obtaining new contracts.
Consistent Operating Cash
Flows. We believe that our operations have consistently generated cash
flows sufficient to cover operating expenses, including the recurring drydocking
requirements of our fleet, and our debt service requirements. The
length and structure of our contracts, the creditworthiness of our customers,
and our diversified customer and cargo bases all contribute to our ability to
consistently meet such requirements in an industry that tends to be cyclical in
nature. Our medium- to long-term charters provide for a daily charter
rate that is payable whether or not the charterer utilizes the
vessel. These charters generally require the charterer to pay certain
voyage operating costs, including fuel, port, and stevedoring expenses, and
often include cost escalation features covering certain of our
expenses. In addition, our COA operations guarantee a minimum amount
of cargo for transportation. Our cash flow from operations was
approximately $20.2 million, $23.0 million and $23.8 million for the years ended
December 31, 2007, 2006 and 2005, respectively, after deducting cash used for
drydocking payments of $9.8 million, $8.4 million, and $5 million for each of
those years, respectively. Scheduled repayment of debt was $10.3
million, $10.3 million, and $9.6 million for the years ended December 31, 2007,
2006, and 2005, respectively. In the fourth quarter of 2007, we
retired all of the remaining 7 3/4% Senior Unsecured Notes, resulting in a
payment of $43.5 million.
Longstanding Customer
Relationships. We currently have medium- to long-term charters
with, or contracts to carry cargo for, the MSC (15.7% of our fiscal year 2007
revenues) and a variety of high credit quality commercial
customers. Most of these companies have been customers of ours for
over ten years. Substantially all of our current cargo contracts and
charter agreements are renewals or extensions of previous
agreements. In recent years, we have been successful in winning
extensions or renewals of substantially all of the contracts rebid by our
commercial customers, and we have been operating vessels for the MSC for more
than 30 years. We believe that our longstanding customer
relationships are in part due to our excellent reputation for providing quality
specialized maritime service in terms of on-time performance, minimal cargo
damage claims and reasonable rates.
Experienced Management
Team. Our management team has substantial experience in
the shipping industry. Our Chairman, President, and Chief Financial
Officer have over 97 years of collective experience with the
Company. We believe that the experience of our management team is
important to maintaining long-term relationships with our
customers.
Types of Service
Through
our principal operating subsidiaries, we provide specialized maritime
transportation services to our customers primarily under medium- to long-term
contracts. Our four operating segments, Time Charter Contracts, Contract of
Affreightment, Rail-Ferry Service, and Other are described
below. For further information on the amount of revenues and gross
voyage profits contributed by each segment, please see Item 7 of this
report.
We
elected during 2007 to discontinue both the International flag LASH Liner
service and the U.S. flag LASH Liner service, which comprised the company’s
Liner segment. In our accompanying financial statements, we
have reflected our LASH operations as discontinued operations and all assets
associated with this segment have been sold. (See Note Q – Discontinued
Operations on page F-19)
I. Time
Charter Contracts
Military
Sealift Command Charters
We have had contracts with the MSC (or
its predecessor) almost continuously for over 30 years. In 1983,
Waterman was awarded a contract to operate three U.S. flag RO/RO vessels under
time charters to the MSC for use by the United States Navy in its maritime
prepositioning ship (“MPS”) program. These vessels currently
represent three of the sixteen MPS vessels in the MSC’s worldwide fleet and
provide support to the U.S. Marine Corps. These ships are designed
primarily to carry rolling stock and containers, and each can carry support
equipment for 17,000 military personnel. Waterman sold the three
vessels to unaffiliated corporations shortly after being awarded the contract
but retained the right to operate the vessels under operating
agreements. The MSC time charters commenced in late 1984 and early
1985 for initial five-year periods and were renewable at the MSC’s option for
additional five-year periods up to a maximum of twenty-five years. In
1993, 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 expire in the fourth quarter of 2009 and the first four months
of 2010.
Pure
Car/Truck Carriers
U.S.
Flag. Our fleet includes six U.S. flag PCTCs, of which five
are owned by us and one is leased. In 1986, we entered into
multi-year charters to carry Toyota and Honda automobiles from Japan to the
United States. To service these charters, we had constructed two car
carriers that were specially designed to carry 4,000 and 4,660 fully assembled
automobiles, respectively. Both vessels were built in Japan and were
registered under the U.S. flag. In 2000 and 2001, we replaced these
two vessels with larger PCTCs, which are operating under the initial term of
their contracts through 2010 and 2011 with a Japanese shipping company, which
had been designated by Toyota Motor Corporation as our vessels’ time
charterer. Both of these contracts may be extended beyond the initial
term at the option of the shipping company.
In 1998, we acquired a 1994-built U.S.
flag PCTC. After being delivered to us in April of 1998, this vessel
entered a long-term charter through 2008, with options extending through 2014,
with the aforementioned Japanese shipping company. In 1999, we
acquired a newly built U.S. flag PCTC, which immediately after being delivered
to us in September of 1999 entered a long-term charter through 2011 also with
the same Japanese shipping company. Both of these contracts may be
extended beyond the initial term at the option of the shipping
company. We have sold one of these PCTCs to an unaffiliated party and
leased it back under an operating lease expiring in 2009.
In 2005, we acquired a 1998-built U.S.
flag PCTC. Immediately after being delivered to us in September of
2005, this vessel entered a charter through 2015 with the same Japanese shipping
company.
In 2007, we acquired a 2007-built U.S.
flag PCTC. Immediately after being delivered to us in September of
2007, this vessel entered a charter through 2010 with a Hong Kong based shipping
company, which holds an option to purchase the vessel at the end of the
contract. We have entered into a ship sales contract for the
construction of one new PCTC, to be delivered in early 2010.
Foreign Flag. Our fleet
includes four foreign flag PCTCs, of which one is owned by us, one is leased,
and two are time chartered. In 1988, we had two new car carriers
constructed by a shipyard affiliated with Hyundai Motor Company, each with a
carrying capacity of 4,800 fully assembled automobiles, to transport Hyundai
automobiles from South Korea primarily to the United States and Europe under two
long-term charters. In 1998 and 1999, we sold these car carriers and
replaced them with two newly built PCTCs, each with the capacity to carry heavy
and large size rolling stock in addition to automobiles and
trucks. We immediately entered into long-term charters of these
vessels through 2018 and 2019 to a Korean shipping company. One of
these PCTCs was subsequently sold to an unaffiliated party and leased back under
an operating lease through 2016, and we have an option to purchase the vessel
thereafter.
During 2006, we chartered two foreign
flag car carriers and subsequently chartered-out the vessels. The
terms of these lease agreements are through February 2010 with an option to
extend for one additional year.
Under each of our PCTC contracts, the
charterers are responsible for voyage operating costs such as fuel, port, and
stevedoring expenses, while we are responsible for other operating expenses
including crew wages, repairs, and insurance. During the terms of
these charters, we are entitled to our full fee irrespective of the number of
voyages completed or the number of cars carried per voyage.
Coal
Carrier
In 1995,
we purchased an existing U.S. flag conveyor-equipped, self-unloading Coal
Carrier that was chartered to a New England electric utility under a 15-year
time charter expiring in 2010 to carry coal in the coastwise and near-sea trade.
The charter has subsequently been assumed by a third party. Since the
base charter provides approximately 60% utilization, the ship can 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 mining company in Indonesia is serviced by two Breakbulk/Multi-Purpose
vessels, a small Tanker, and three Container vessels. The contract
was renewed through 2010 and has options to extend thereafter on a year-to-year
basis.
Container
Vessels
In 2004, we purchased two Container
vessels that have been chartered to a third party since that time. In
our charter agreement there is a replacement vessel provision effective by the
end of the first quarter of 2008 to replace the two Container vessels with two
other Container vessels and extend the Time Charter contract to
2015. By the end of the first quarter of 2008 these vessels will be
reflagged under a foreign flag and chartered out and operated under a new three
year time charter agreement.
II. Contract of
Affreightment
In
1994, we entered into a 15-year transportation contract with Freeport-McMoRan
Sulphur LLC, a sulphur transporter for which we had built a 28,000 DWT Molten
Sulphur Carrier that carries molten sulphur from Louisiana and Texas to a
fertilizer plant on the Florida Gulf Coast. Under the terms of this
contract, we are guaranteed the transportation of a minimum of 1.8 million tons
of molten sulphur per year. The contract also gives the charterer
three five-year renewal options. The vessel was delivered and began
service during late 1994. In 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.
III. Rail-Ferry
Service
This
service uses our two Special Purpose vessels, which carry loaded rail cars
between the U.S. Gulf and Mexico. The service provides departures
every four days from Mexico and the U.S. Gulf Coast, respectively, for a
three-day transit between ports. We began operations out of our new
terminal in Mobile, Alabama and the upgraded terminal in Mexico during the third
quarter of 2007. The upgrades to the Mexican terminal were made to
accommodate the second decks, which were added to our vessels in the second and
third quarters of 2007 to double the capacity of the vessels. (See Item 1a. Risk Factors for a
description of material risks relating to this service on page
7).
IV. Other
Several
of our subsidiaries provide ship charter brokerage, agency, and other
specialized services to our operating subsidiaries and, in the case of ship
charter brokerage and agency services, to unaffiliated companies. The
income produced by these services substantially covers the related overhead
expenses. These services facilitate our operations by allowing us to
avoid reliance on third parties to provide these essential shipping
services.
Marketing
We
maintain marketing staffs in New York, Mobile, and Shanghai and a network of
marketing agents in major cities around the world who market our charter and
contract services. We market our Rail-Ferry Service under the
name “CG Railway.” We advertise our services in trade publications in
the United States and abroad.
Insurance
We
maintain protection and indemnity (“P&I”) insurance to cover liabilities
arising out of our ownership and operation of vessels with the Standard
Steamship Owners’ Protection & Indemnity Association (Bermuda) Ltd., which
is a mutual shipowners’ insurance organization commonly referred to as a P&I
club. The club is a participant in and subject to the rules of its
respective international group of P&I associations. The premium
terms and conditions of the P&I coverage provided to us are governed by the
rules of the club.
We maintain hull and machinery
insurance policies on each of our vessels in amounts related to the value of
each vessel. This insurance coverage, which includes increased value
and time charter hire, is maintained with a syndicate of hull underwriters from
the U.S., British, Norwegian, Japanese and French insurance
markets. We maintain war risk insurance on each of our vessels in an
amount equal to each vessel’s total insured hull value. War risk
insurance is placed through U.S., British, Norwegian and French insurance
markets and covers physical damage to the vessels and P&I risks for which
coverage would be excluded by reason of war exclusions under either the hull
policies or the rules of the P&I club. Our war risk insurance
also covers liability to third parties caused by war or terrorism, but does not
cover damages to our land-based assets caused by war or terrorism.
The P&I insurance also covers our
vessels against liabilities arising from the discharge of oil or hazardous
substances in U.S., international, and foreign waters.
We also maintain loss of hire insurance
with U.S., British, Norwegian and French insurance markets to cover our loss of
revenue in the event that a vessel is unable to operate for a certain period of
time due to loss or damage arising from the perils covered by the hull and
machinery policy and war risk policy.
Insurance coverage for shoreside
property, shipboard consumables and inventory, spare parts, workers’
compensation, office contents, and general liability risks is maintained with
underwriters in U.S. and British markets.
Insurance premiums for the coverage
described above vary from year to year depending upon our loss record and market
conditions. In order to reduce premiums, we maintain certain
deductible and co-insurance provisions that we believe are prudent and generally
consistent with those maintained by other shipping companies. Certain
exclusions under our insurance policies could limit our ability to receive
payment for our losses. (See Note E– Self-Retention Insurance on page
F-11).
Tax Matters
Under
United States tax laws in effect prior to 2005, U.S. companies such as ours and
their domestic subsidiaries generally were taxed on all income, which in our
case includes income from shipping operations, whether derived in the United
States or abroad. With respect to any foreign subsidiary in which we
hold more than a 50 percent interest (referred to in the tax laws as a
controlled foreign corporation, or “CFC”), we were treated as having received a
current taxable distribution of our pro rata share of income derived from
foreign shipping operations when earned.
The
American Jobs Creation Act of 2004 (“Jobs Creation Act”), which
became effective for us on January 1, 2005, changed the United States tax
treatment of the foreign operations of our U.S. flag vessels and the operations
of our foreign flag vessels. As permitted under the Jobs Creation Act
we have elected to have our U.S. flag operations (other than those of two
ineligible vessels used exclusively in United States coastwise commerce) taxed
under a new “tonnage tax” regime rather than under the usual U.S. corporate
income tax regime.
Because
we made the tonnage tax election referred to above, our gross income for United
States income tax purposes with respect to our eligible U.S. flag vessels for
2005 and subsequent years does not include (1) income from qualifying shipping
activities in U.S. foreign trade (such as transportation between the U.S. and
foreign ports or between foreign ports), (2) income from cash, bank deposits and
other temporary investments that are reasonably necessary to meet the working
capital requirements of our qualifying shipping activities, and (3) income from
cash or other intangible assets accumulated pursuant to a plan to purchase
qualifying shipping assets. Our taxable income with respect to the
operations of our eligible U.S. flag vessels is based on a “daily notional
taxable income,” which is taxed at the highest corporate income tax
rate. The daily notional taxable income from the operation of a
qualifying vessel is 40 cents per 100 tons of the net tonnage of the vessel up
to 25,000 net tons, and 20 cents per 100 tons of the net tonnage of the vessel
in excess of 25,000 net tons. The taxable income of each qualifying
vessel is the product of its daily notional taxable income and the number of
days during the taxable year that the vessel operates in United States foreign
trade. Also as a result of the Jobs Creation Act, the taxable income
from the shipping operations of CFCs will generally no longer be subject to
United States income tax until that income is repatriated. We have a
plan to re-invest indefinitely some of our foreign earnings, and accordingly
have not provided deferred taxes against those earnings.
On
July 13, 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Tax—an Interpretation of FASB Statement No. 109. FIN 48
addresses how companies must treat (i.e., recognize, measure, and
disclose) uncertain tax positions for financial reporting
purposes. We adopted FIN 48 as of January 1, 2007 and the
adoption had no effect on our consolidated financial position or results of
operations.
Regulation
Our operations between the United
States and foreign countries are subject to the Shipping Act of 1984 (the
“Shipping Act”), which is administered by the Federal Maritime Commission, and
certain provisions of the Federal Water Pollution Control Act, the Oil Pollution
Act of 1990, the Act to Prevent Pollution from Ships, and the Comprehensive
Environmental Response Compensation and Liability Act, all of which are
administered by the U.S. Coast Guard and other federal agencies, and certain
other international, federal, state, and local laws and regulations, including
international conventions and laws and regulations of the flag nations of our
vessels. On October 16, 1998, the Ocean Shipping Reform Act of 1998
was enacted, which amended the Shipping Act to promote the growth and
development of United States exports through certain reforms in the regulation
of ocean transportation. This legislation, in part, repealed 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 required 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 Maritime Security Program (MSP) and authorized the payment of $2.1
million per year per ship for 47 U.S. flag ships through the fiscal year ending
September 30, 2005. This program eliminated 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 operating agreements with the United States
Maritime Administration (“MarAd”), and Central Gulf entered into three MSP
operating agreements with MarAd. We also participate in the Voluntary
Intermodal Sealift Agreement (“VISA”) program administered by
MarAd. Under this VISA program, and as a condition of participating
in the MSP, we have committed to providing vessel and commercial intermodal
capacity for the movement of military and other cargoes in times of war or
national emergency. By law, the MSP is subject to annual
appropriations from Congress. 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 participants, such as Waterman and
Central Gulf, to re-flag their vessels under foreign registry
expeditiously. In 2003, Congress authorized an extension of the MSP
through 2015, increased the number of ships eligible to participate in the
program from 47 to 60, and increased MSP payments to companies in the program,
all made effective on October 1, 2005. Authorized annual payments per
fiscal year for each vessel for the current MSP program are $2.6 million for
years 2007 and 2008, $2.9 million for years 2009 to 2011, and $3.1 million for
years 2012 to 2015, subject to annual appropriation by the Congress, which is
not assured. On October 15, 2004, Waterman and Central Gulf each
filed applications to extend their MSP operating agreements for another 10 years
through September 30, 2015, all seven of which were effectively grandfathered in
the MSP reauthorization. Simultaneously, we offered additional ships
for participation in the MSP. On January 12, 2005, MarAd awarded
Central Gulf four MSP operating agreements and Waterman four MSP operating
agreements, effective October 1, 2005, for a net increase of one MSP operating
agreement.
Under the Merchant Marine Act, U.S.
flag vessels are subject to requisition or charter by the United States whenever
the President declares that the national security requires such
action. The owners of any such vessels must receive just compensation
as provided in the Merchant Marine Act, but there is no assurance that lost
profits, if any, will be fully recovered. In addition, during any
extension period under each MSC charter or contract, the MSC has the right to
terminate the charter or contract on 30 days’ notice. However, terms
of our RO/RO operating contracts, which are currently our only contracts with
the MSC, call for significant early termination penalties.
Certain laws governing our operations,
as well as our molten sulphur transportation contract, require us to be as much
as 75% owned by U.S. citizens. We monitor our stock ownership to
verify our continuing compliance with these requirements. Our
certificate of incorporation allows our board of directors to restrict the
acquisition of our capital stock by non-U.S. citizens. Under our
certificate of incorporation, our board of directors may, in the event of a
transfer of our capital stock that would result in non-U.S. citizens owning more
than 23% (the “permitted amount”) of our total voting power, declare such
transfer to be void and ineffective. In addition, our board of
directors may, in its sole discretion, deny voting rights and withhold dividends
with respect to any shares of our capital stock owned by non-U.S. citizens in
excess of the permitted amount. Furthermore, our board of directors
is entitled under our certificate of incorporation to redeem shares owned by
non-U.S. citizens in excess of the permitted amount in order to reduce the
ownership of our capital stock by non-U.S. citizens to the permitted
amount.
We are required by various governmental
and quasi-governmental agencies to obtain permits, licenses, and certificates
with respect to our vessels. The kinds of permits, licenses, and
certificates required depend upon such factors as the country of registry, the
commodity transported, the waters in which the vessel operates, the nationality
of the vessel’s crew, the age of the vessel, and the status of the Company as
owner or charterer. We believe that we have, or can readily obtain,
all permits, licenses, and certificates necessary to permit our vessels to
operate.
The International Maritime Organization
(“IMO”) amended the International Convention for the Safety of Life at Sea
(“SOLAS”), to which the United States is a party, to require nations that are
parties to SOLAS to implement the International Safety Management (“ISM”)
Code. The ISM Code requires that responsible companies, including
owners or operators of vessels engaged on foreign voyages, develop and implement
a safety management system to address safety and environmental protection in the
management and operation of vessels. Companies and vessels to which
the ISM Code applies are required to receive certification and documentation of
compliance. Vessels operating without such certification and
documentation in the U.S. and ports of other nations that are parties to SOLAS
may be denied entry into ports, detained in ports or fined. We
implemented a comprehensive safety management system and obtained timely IMO
certification and documentation for our companies and all of our
vessels. In addition, our ship management subsidiary, LMS
Shipmanagement, Inc., is certified under the ISO 9002 Quality
Standard.
More recently, in 2003, SOLAS was again
amended to require parties to the convention to implement the International Ship
and Port Facility Security (“ISPS”) Code. The ISPS Code requires
owners and operators of vessels engaged on foreign voyages to conduct
vulnerability assessments and to develop and implement company and vessel
security plans, as well as other measures, to protect vessels, ports and
waterways from terrorist and criminal acts. In the U.S., these
provisions were implemented through the Maritime Transportation Security Act of
2002 (“MTSA”). These provisions became effective on July 1,
2004. As with the ISM Code, companies and vessels to which the ISPS
Code applies must be certificated and documented. Vessels operating
without such certification and documentation in the U.S. and ports of other
nations that are parties to SOLAS may be denied entry into ports, detained in
ports or fined. Vessels subject to fines in the U.S. are liable in
rem, which means vessels may be subject to arrest by the U.S.
government. For U.S. flag vessels, company and vessel security plans
must be reviewed and approved by the U.S. Coast Guard. We have
conducted the required security assessments and submitted plans for review and
approval as required, and we believe that we are in compliance in all material
respects with all ISPS Code and MTSA security requirements.
The Coast Guard and Maritime
Transportation Act of 2004, signed into law on August 9, 2004, amended the Oil
Pollution Act of 1990 (“OPA”) to require owners or operators of all non-tank
vessels of 400 gross tons or greater to develop and submit plans for responding,
to the maximum extent practicable, to worst case discharges and substantial
threats of discharges of oil from these vessels. This statute extends
to all types of vessels of 400 gross tons or greater the vessel response
planning requirements of the OPA that had previously only applied to tank
vessels. We have submitted response plans timely for our vessels, and
have received Coast Guard approval for all of our vessels.
Also, under the OPA, vessel owners,
operators and bareboat charterers are responsible parties that are jointly,
severally and strictly liable for all response costs and other damages arising
from oil spills from their vessels in waters subject to U.S. jurisdiction, with
certain limited exceptions. Other damages include, but are not
limited to, natural resource damages, real and personal property damages, and
other economic damages such as net loss of taxes, royalties, rents, profits or
earning capacity, and loss of subsistence use of natural
resources. For non-tank vessels, the OPA limits the liability of
responsible parties to the greater of $600 per gross ton or
$500,000. The limits of liability do not apply if it is shown that
the discharge was proximately caused by the gross negligence or willful
misconduct of, or a violation of a federal safety, construction or operating
regulation by, the responsible party, an agent of the responsible party or a
person acting pursuant to a contractual relationship with the responsible
party. Further, the limits do not apply if the responsible party
fails or refuses to report the incident, or to cooperate and assist in oil spill
removal activities. Additionally, the OPA specifically permits
individual states to impose their own liability regimes with regard to oil
discharges occurring within state waters, and some states have implemented such
regimes.
The Comprehensive Environmental
Response, Compensation, and Liability Act (“CERCLA”) also applies to owners and
operators of vessels, and contains a similar liability regime for cleanup and
removal of hazardous substances and natural resource
damages. Liability under CERCLA is limited to the greater of $300 per
gross ton or $5 million per vessel.
Under the OPA, vessels are required to
establish and maintain with the U.S. Coast Guard evidence of financial
responsibility sufficient to meet the highest limit of their potential liability
under the act. Under Coast Guard regulations, evidence of financial
responsibility may be demonstrated by insurance, surety bond, self-insurance or
guaranty. An owner or operator of more than one vessel must
demonstrate financial responsibility for the entire fleet in an amount equal to
the financial responsibility of the vessel having greatest maximum liability
under the OPA and CERCLA. We insure each of our vessels with
pollution liability insurance in the amounts required by law. A
catastrophic spill could exceed the insurance coverage available, in which event
our financial condition and results of operations could be adversely
affected.
Many countries have ratified and follow
the liability plan adopted by the IMO as set out in the International Convention
on Civil Liability for Oil Pollution Damage of 1969 (the “1969 Convention”) and
the Convention for the Establishment of an International Fund for Oil Pollution
of 1971. Under these conventions, the registered owner of a vessel is
strictly liable for pollution damage caused in the territorial seas of a state
party by the discharge of persistent oil, subject to certain complete
defenses. Liability is limited to approximately $183 per gross
registered ton (a unit of measurement of the total enclosed spaces in a vessel)
or approximately $19.3 million, whichever is less. If a country is a
party to the 1992 Protocol to the International Convention on Civil Liability
for Oil Pollution Damage (the “1992 Protocol”), the maximum liability limit is
$82.7 million. The limit of liability is tied to a unit of account
that varies according to a basket of currencies. The right to limit
liability is forfeited under the 1969 Convention when the discharge is caused by
the owner's actual fault, and under the 1992 Protocol, when the spill is caused
by the owner's intentional or reckless misconduct. Vessels operating
in waters of states that are parties to these conventions must provide evidence
of insurance covering the liability of the owner. In jurisdictions
that are not parties to these conventions, various legislative schemes or common
law govern. We believe that our pollution insurance policy covers the
liability under the IMO regimes.
Competition
The shipping industry is intensely
competitive and is influenced by events largely outside the control of shipping
companies. Varying economic factors can cause wide swings in freight
rates and sudden shifts in traffic patterns. Vessel redeployments and
new vessel construction can lead to an overcapacity of vessels offering the same
service or operating in the same market. Changes in the political or
regulatory environment can also create competition that is not necessarily based
on normal considerations of profit and loss. Our strategy is to
reduce competitive pressures and the effects of cyclical market conditions by
operating specialized vessels in niche market segments and deploying a
substantial number of our vessels under medium- to long-term charters or
contracts with creditworthy customers and on trade routes where we have
established market share. We also seek to compete effectively in the
traditional areas of price, reliability, and timeliness of service.
Our Rail-Ferry Service is
affected more by competitive factors compared to our other
segments. Our Time
Charter Contracts and Contract of Affreightment
segments primarily include medium and long-term contracts with specific
customers. While our PCTCs in our Time Charter Contracts
segment operate worldwide in markets where foreign flag vessels with foreign
crews predominate, we believe that our U.S. flag PCTCs can compete effectively
in obtaining renewals of existing contracts if we continue to participate in the
MSP and receive cooperation from our seamen’s unions in controlling
costs.
Our Rail-Ferry Service faces
competition principally from companies who transport cargo over land rather than
water, including railroads that cross land borders and trucking
companies.
Employees
As of
December 31, 2007, we employed approximately 384 shipboard personnel and 141
shoreside personnel. We consider relations with our employees to be
excellent.
With only
minor exceptions, all of our shipboard personnel are covered by collective
bargaining agreements. Some of these agreements relate to particular
vessels and have terms corresponding with the terms of their respective vessel’s
charter. In addition, Central Gulf, Waterman, and other U.S. shipping
companies are subject to collective bargaining agreements for shipboard
personnel. We have experienced no strikes or other significant labor
problems during the last ten years.
Available
Information
Our
internet address is www.intship.com. We make available free of charge
through our website our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. The information found on our website is not
part of this or any other report.
Unless
otherwise indicated, information contained in this annual report and other
documents filed by us under the federal securities laws concerning our views and
expectations regarding the marine transportation industry are based on estimates
made by us using data from industry sources, and on assumptions made by us based
on our management’s knowledge and experience in the markets in which we operate
and the marine transportation industry generally. We believe these
estimates and assumptions are accurate of the date made. However,
this information may prove to be inaccurate because it cannot always be verified
with certainty. You should be aware that we have not independently
verified data from industry or other third-party sources and cannot guarantee
its accuracy or completeness. Our estimates and assumptions involve
risks and uncertainties and are subject to change based on various factors,
including those discussed immediately below in Item 1A of this annual
report.
ITEM 1a. RISK FACTORS
Our business and operations are
highly-regulated. Our business is materially affected by
government regulation in the form of international conventions, national, state
and local laws and regulations, and laws and regulations of the flag nations of
our vessels, including laws relating to the discharge of materials into the
environment. Because such conventions, laws and regulations are often
revised, we are unable to predict the ultimate costs of
compliance. In addition, we are required by various governmental and
quasi-governmental agencies to obtain and maintain certain permits, licenses and
certificates with respect to our operations. In certain instances,
the failure to obtain or maintain such permits, licenses or certificates could
have a material adverse effect on our business. In the event of war
or national emergency, our U.S. flag vessels are subject to requisition by the
United States without any guarantee of compensation for lost profits, although
the United States government has traditionally paid fair compensation in such
circumstances.
If
sufficient appropriations under the Maritime Security Act of 1996 are not made
in any fiscal year, we may not continue to receive annual payments with respect
to certain of our vessels. Under the MSP program discussed earlier in
the Regulation section, each participating vessel is eligible to receive an
annual payment of $2.6 million in years 2007 and 2008, $2.9 million in years
2009 to 2011, and $3.1 million in years 2012 to 2015. As of December
31, 2007, eight of our vessels operated under MSP contracts. Payments
under this program are subject to annual appropriations by Congress and are not
guaranteed. Congress may not make sufficient appropriations under the
program in one or more fiscal years and, as a result, we can provide no
assurance as to our continued receipt, in full or in part, of the annual
payments. For the program’s fiscal year 2007, each participating
vessel was eligible to receive annual payments of $2.6 million.
An increase in the supply of vessels
without a corresponding increase in demand for vessels could cause our charter
and cargo rates to decline, which could have a material adverse effect on our
revenues and earnings. Historically, the shipping industry has been
cyclical. The profitability and asset values of companies in the
industry have fluctuated in part because of changes in the supply and demand of
vessels. The supply of vessels generally increases with deliveries of
new vessels and decreases with the scrapping of older vessels. If the number of
new vessels delivered exceeds the number of vessels being scrapped, vessel
capacity will increase. If the supply of vessels increases and the
demand for vessels does not, the charter and cargo rates for our vessels could
decline significantly. A decline in our charter and cargo rates could
have a material adverse effect on our revenues and earnings.
Our Rail-Ferry Service has been
unprofitable, and we can give no assurance as to its future
profitability. Our Rail-Ferry Service began
operating in February of 2001. The introduction of this service in a
competitive market contributed $7.5 million to our net loss in 2001, and the
service had losses totaling $10.9 million for the years ended December 31, 2002,
2003 and 2004. The service had losses of $6.7 million for the year
ended December 31, 2005, although $2.5 million was directly related to losses
from Hurricane Katrina. In 2006, the service had losses of $5.1
million, net of a $8.9 million impairment loss related to the Service’s
terminal. Although, as discussed further in Item 7 below, our losses
from this service have narrowed in recent periods as a result of capital
improvements, we cannot give assurances that this service will become or remain
profitable in the future.
We are subject to the risk of
continuing high prices, and increasing prices, of the fuel we consume in our
Rail-Ferry operations. We are exposed to
commodity price risks with respect to fuel consumption in our Rail-Ferry operations, and we
can give no assurance that we will be able to offset higher fuel costs due to
the competitive nature of these operations. Although we currently
have fuel surcharges in place, a material increase in current fuel prices that
we cannot recover through these fuel cost surcharges could adversely affect our
results of operations and financial condition. For an analysis of the
effect on our operating costs and earnings per share of an increase in fuel
prices, see Item 7a.
Quantitative and Qualitative Disclosures About Market Risk on page
19.
We operate in a highly competitive
industry. The shipping industry is intensely competitive and
can be influenced by economic and political events that are outside the control
of shipping companies. There can be no assurance that we will be able
to renew expiring charters on economically attractive terms, maintain attractive
freight rates, pass cost increases through to our customers or otherwise
successfully compete against our competitors.
We are subject to the control of our
principal stockholders. Four of our directors, Niels W.
Johnsen, Erik F. Johnsen, Niels M. Johnsen and Erik L. Johnsen, and their family
members and affiliated entities, beneficially owned an aggregate of 25.2% of our
common stock as of February 29, 2008. Niels M. Johnsen and Erik L.
Johnsen are also executive officers of the Company, and their respective fathers
are former executive officers who continue to provide consulting services to
us. As a result, the Johnsen family may have significant influence
over the election of directors and other corporate actions requiring shareholder
approval.
Operating hazards may increase our
operating costs; our insurance coverage is limited. Our
vessels are subject to operating risks such as: (i) catastrophic marine
disaster; (ii) adverse weather conditions; (iii) mechanical failure; (iv)
collisions; (v) hazardous substance spills; (vi) war, terrorism and piracy; and
(vii) navigation and other human errors. The occurrence of any of
these events may result in damage to or loss of our vessels and our vessels'
cargo or other property, damage to other vessels and the environment, and injury
to personnel. Such occurrences may also result in a significant
increase in our operating costs or liability to third parties. In
addition, such occurrences may result in our company being held strictly liable
for pollution damages under the Oil Pollution Act of 1990, the Comprehensive
Environmental Response Compensation and Liability Act or one of the
international conventions to which our vessels operating in foreign waters may
be subject.
We
maintain insurance coverage against certain of these risks, which our management
considers to be customary in the industry. We cannot assure you,
however, that we will be able to renew our existing insurance coverage at
commercially reasonable rates or that such coverage will be adequate to cover
future claims that may arise.
We are subject to risks associated
with operating internationally. Our international shipping
operations are subject to risks inherent in doing business in countries other
than the United States. These risks include, among others: (i)
economic, political and social instability; (ii) potential vessel seizure,
expropriation of assets and other governmental actions, which are not covered by
our insurance; (iii) currency restrictions and exchange rate fluctuations; (iv)
potential submission to the jurisdiction of a foreign court or arbitration
panel; and (v) import and export quotas, the imposition of increased
environmental and safety regulations and other forms of public and governmental
regulation. Many of these risks are beyond our control, and we cannot
predict the nature or the likelihood of any such events. However, if
such an event should occur, it could have a material adverse effect on our
financial condition and results of operations.
Our vessels could be seized by
maritime claimants, which could result in a significant loss of earnings and
cash flow for the related off-hire period. Crew members,
suppliers of goods and services to a vessel, shippers of cargo and other parties
may be entitled to a maritime lien against a vessel for unsatisfied debts or
claims for damages. In many jurisdictions, a maritime lienholder may
enforce its lien by either arresting or attaching a vessel through foreclosure
proceedings. The arrest or attachment of one or more of our vessels
could result in a significant loss of earnings and cash flow for the related
off-hire period.
In
addition, international vessel arrest conventions and certain national
jurisdictions allow so-called “sister ship” arrests, that allow the arrest of
vessels that are within the same legal ownership as the vessel which is subject
to the claim or lien. Certain jurisdictions go further, permitting
not only the arrest of vessels within the same legal ownership, but also any
“associated” vessel. In nations with these laws, an “association” may
be recognized when two vessels are owned by companies controlled by the same
party. Consequently, a claim may be asserted against us, any of our
subsidiaries or our vessels for the liability of one or more of the other
vessels we own. While we have insurance coverage for these type of
claims, we cannot guarantee it will cover all of our exposure.
A substantial number
of our employees are unionized; in the event of a strike or other work stoppage
our business and operations may be adversely affected. As of
December 31, 2007, with only minor exceptions, all of our shipboard personnel
were covered by collective bargaining agreements. While we have experienced no
strikes, work stoppages or other significant labor problems during the last ten
years, we cannot assure you that such events will not occur in the
future. In the event we experience one or more strikes, work
stoppages or other labor problems, our business and operations and, in turn, our
results of operations, may be materially and adversely affected.
We may not be able to renew our time
charters and contracts
when they expire. There can be no assurance that any of our
existing time or bareboat charters or contract of affreightment will be renewed
or, if renewed, that they will be renewed at favorable rates. If upon
expiration of our existing charters and contracts, we are unable to obtain new
charters or contracts at rates comparable to those received under the expired
charters or contracts, our revenues and earnings may be adversely
affected.
Older vessels have higher operating
costs and are less desirable to charterers. The average age of
the vessels in our fleet that we own or lease is approximately 16 years,
including the average age of our owned and leased Pure Car/Truck Carrier Fleet,
which is approximately 10 years and our International Flag Bulk Carrier Fleet,
which is approximately 8 years. In general, capital expenditures and
other costs necessary for maintaining a vessel in good operating condition
increase as the age of the vessel increases. Accordingly, it is
likely that the operating costs of our older vessels will
increase. In addition, changes in governmental regulations and
compliance with classification society standards may require us to make
expenditures for new equipment. In order to add such equipment, we
may be required to take our vessels out of service, thereby reducing our
revenues. Moreover, customers generally prefer modern vessels over
older vessels, which places the older vessels at a competitive disadvantage,
especially in weak markets. There can be no assurance that market
conditions will justify the expenditures necessary to maintain our older vessels
in good operating condition or enable us to operate our older vessels profitably
during the remainder of their estimated useful lives.
We face periodicdrydocking costs for our vessels,
which can be substantial. Vessels must be drydocked
periodically. The cost of repairs and renewals required at each
drydock are difficult to predict with certainty and can be substantial and our
insurance does not cover these costs.
A default under one of our debt
agreements may result in a default under one or more of our other debt
agreements. Our debt obligations are represented by separate
agreements with different lenders. A default under any agreement can
result in the acceleration of principal and interest, and in some cases
penalties, under that agreement. In some cases, a default under one
agreement may create an event of default under other agreements, resulting in
the acceleration of principal, interest and penalties under such other
agreements even though we are otherwise in compliance with all payment and other
obligations under those agreements. Thus, an event of default under a
single agreement, including one that is technical in nature or otherwise not
material, may create an event of default under multiple lending agreements,
which could result in the acceleration of significant indebtedness under
multiple agreements that we may not be able to pay or refinance at that
time.
As a holding company, we rely on
payments from our operating companies to meet our
obligations. As a holding company, substantially all of our
income and operating cash flow is dependent upon the earnings of our
subsidiaries and the distribution of those earnings to, or upon loans or other
payments of funds by those subsidiaries to us. As a result, we rely
upon our subsidiaries to generate the funds necessary to meet our obligations,
including the payment of amounts owed under our long-term debt. Our
subsidiaries are separate and distinct legal entities and have no obligation to
pay any amounts owed by us or, subject to limited exceptions for tax-sharing
purposes, to make any funds available to us to repay our obligations, whether by
dividends, loans or other payments. Moreover, our rights to
receive assets of any subsidiary upon its liquidation or reorganization will be
effectively subordinated to the claims of creditors of that subsidiary,
including trade creditors. The footnotes to our consolidated
financial statements included elsewhere herein describe these matters in
additional detail.
The agreements governing certain of
our debt instruments impose restrictions on our business. The
agreements governing certain of our debt instruments contain a number of
covenants imposing restrictions on our business. The restrictions these
covenants place on us include limitations on our ability to: (i) consolidate or
merge; (ii) incur new debt; (iii) engage in transactions with affiliates; and
(iv) create or permit to exist liens on our assets. These agreements
also require us to meet a number of financial ratios. As a result of
these covenants, our ability to respond to changes in business and economic
conditions and to secure additional financing, if needed, may be significantly
restricted, and we may be prevented from engaging in transactions that otherwise
might be considered beneficial to the Company and our common
stockholders.
In
addition, the breach of any of these covenants could result in a default under
several other of these agreements that could lead the lenders to declare all
amounts outstanding to be immediately due and payable. If we were
unable to repay those amounts, such lenders could proceed against the collateral
securing that indebtedness. If amounts outstanding under such
agreements were to be accelerated, there can be no assurance that our assets
would be sufficient to generate sufficient cash flow to repay the accelerated
indebtedness.
ITEM 1b. UNRESOLVED STAFF COMMENTS
We have
one unresolved comment from the Staff of the SEC dated January 8, 2008, related
to filing of an amended Form 10-K for 2006, to include financial statements for
an entity in which we owned a minority interest. We accounted for
this as an unconsolidated equity interest which we sold in November of 2006. The
staff’s position is that based on Rule 3-09 of Regulation SX, we should amend
our 2006 Form 10-K to include audited financial statements for the period ended
December 2005, and unaudited financial statements for the periods ended December
2004 and September 2006. On December 11, 2007, we filed an amended Form 10-K for
2006, which included audited financial statements for 2005 and unaudited Income
Statements and Balance Sheets for periods ended December 2004 and September
2006. Our position is that we filed all of the information that was available at
the time and that the new owners have refused to provide us with additional
information. We have requested a waiver from filing any additional
information with the SEC’s Office of Chief Accountant and are waiting on a
decision on this request.
ITEM 2. PROPERTIES
Vessels and
Barges
Of the 27 ocean-going vessels in our
fleet at February 29, 2008, twelve were 100% owned by us, four were 50% owned by
us, eight were leased or Time Chartered by us, and three were operated by us
under operating contracts. In 2007, we elected to discontinue our
International LASH service. During the first two months of 2008, we
sold the one remaining LASH vessel and the majority of LASH barges, with the
remaining LASH barges under contract to be sold by the end of the first quarter
of 2008.
Under governmental regulations,
insurance policies, and certain of our financing agreements and charters, we are
required to maintain our vessels in accordance with standards of seaworthiness,
safety, and health prescribed by governmental regulations or promulgated by
certain vessel classification societies. We have implemented the quality and
safety management program mandated by the IMO and have obtained certification of
all vessels currently required to have a Safety Management
Certificate. Vessels in the fleet are maintained in accordance with
governmental regulations and the highest classification standards of the
American Bureau of Shipping, Det Norske Veritas, or Lloyd's Register
classification societies.
Certain of the vessels and barges owned
by our subsidiaries are mortgaged to various lenders to secure such
subsidiaries’ long-term debt (See Note D - Long-Term Debt on page
F-11).
Other Properties
We lease our corporate headquarters in
Mobile, AL, our administrative and sales office in New York, and office space in
Shanghai. In 2007, the aggregate annual rental payments under these
operating leases totaled approximately $1.7 million.
ITEM 3. LEGAL PROCEEDINGS
We have been named as a defendant in
numerous lawsuits claiming damages related to occupational diseases, primarily
related to asbestos and hearing loss. We believe that most of these
claims are without merit, and that insurance and the indemnification of a
previous owner of one of our subsidiaries mitigate our exposure.
In the
normal course of our operations, we become involved in various litigation
matters including, among other things, claims by third parties for alleged
property damages, personal injuries and other matters. While the
outcome of such claims cannot be predicted with certainty, we believe that our
insurance coverage and reserves with respect to such claims are adequate and
that such claims should not have a material adverse effect on our business or
financial condition (See Note I – Commitments and
Contingencies on page F-15).
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 as of February 29, 2008. Directors are elected by the
shareholders for one-year terms. Executive officers serve at the
pleasure of the Board of Directors (“the Board”).
Name Current
Position
Niels M.
Johnsen Chairman
and Chief Executive Officer
Erik L.
Johnsen President
and Director
Manuel G.
Estrada Vice
President and Chief Financial Officer
Niels W.
Johnsen
Director
Erik F.
Johnsen
Director
Harold S. Grehan,
Jr.
Director
Raymond V. O'Brien,
Jr. Director
Edwin A.
Lupberger Director
Edward K.
Trowbridge Director
H. Merritt Lane
III Director
Niels M. Johnsen, 62, is the
Chairman and Chief Executive Officer of the Company. Niels M. Johnsen
has served as a Director of the Company since April of 1988. Niels M.
Johnsen joined Central Gulf on a full time basis in 1970 and held various
positions with the Company, including President between April of 2003 and April
of 2007, when he assumed his current positions as Chairman and Chief Executive
Officer. He also serves as chairman of each of the Company’s
principal subsidiaries, except N. W. Johnsen & Co., Inc., which he serves as
President. In 2002, he became a trustee and director of Atlantic
Mutual Companies. He is the son of Niels W.
Johnsen.
Erik L. Johnsen, 50, is
President of the Company. Erik L. Johnsen has served as a Director of
the Company since 1994. He joined Central Gulf in 1979 and held
various positions with the Company, including Executive Vice President between
April of 1997 and April of 2007, when he assumed his current position as
President. He also serves as the President of each of the Company’s
principal subsidiaries. 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.
Manuel G. Estrada, 53, is
Vice President and Chief Financial Officer of the Company. He joined
Central Gulf in 1978 and held various positions with the Company prior to being
named Vice President and Controller in 1996, and Vice President and Chief
Financial Officer in 2005.
Niels W. Johnsen, 85, is a
Director of the Company. He served as the Chairman and Chief
Executive Officer of the Company from its commencement of operations in 1979
until April of 2003 and served as Chairman and Chief Executive Officer of each
of the Company's principal subsidiaries until April of 1997. He
previously served as Chairman of Trans Union’s ocean shipping group of companies
from December of 1971 through May of 1979. He was one of the founders
of Central Gulf in 1947 and held various positions with Central Gulf until Trans
Union acquired Central Gulf in 1971. He is the brother of Erik F.
Johnsen.
Erik F. Johnsen, 82, is a
Director of the Company. He served as the President, Chief Operating
Officer, and Director of the Company from its commencement of operations in 1979
until April of 2003, and Chairman and Chief Executive Officer of the Company
between April of 2003 and April of 2007. 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.
Harold S. Grehan, Jr., 80, 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 in 1997, and has continued
to serve as a Director since that time. In early 2008, Mr. Grehan
announced his intention to retire effective April 30, 2008, the date of our
Shareholders Meeting. Upon approval of our shareholders, Mr. T. Lee
Robinson, Jr. will replace Mr. Grehan.
Raymond V. O'Brien, Jr., 80, has served as a
Director of the Company since 1979 and in 2003 was named Chairman of the
Compensation Committee of the Board of Directors. He served as
Chairman of the Board and Chief Executive Officer of the Emigrant Savings Bank
from January of 1978 through December of 1992. Mr. O’Brien has
notified the Board that he intends to retire as a director during the second
half of 2008.
Edwin A Lupberger, 71, has
served as a Director of the Company since 1988 and in 2003 was named Chairman of
the Audit Committee of the Board of Directors. He is the President of
Nesher Investments, LLC. Mr. Lupberger served as the Chairman of the
Board and Chief Executive Officer of Entergy Corporation from 1985 to
1998.
Edward K. Trowbridge, 79, has
served as a Director of the Company since 1994 and in 2003 was named Chairman of
the Nominating and Governance Committee of the Board of Directors. He
served as Chairman of the Board and Chief Executive Officer of the Atlantic
Mutual Companies from July of 1988 through November of 1993.
H. Merritt Lane III, 46, has
served as a Director of the Company since 2004. He has served as
President and Chief Executive Officer of Canal Barge Company, Inc. since 1994
and as director of that company since 1988.
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
|
COMMON
STOCK PRICES AND DIVIDENDS FOR EACH QUARTERLY
PERIOD OF 2006 AND 2007
|
|||||||||
|
(Source: New
York Stock Exchange)
|
|||||||||
|
Dividends
|
|||||||||
|
2006
|
High
|
Low
|
Paid
|
||||||
|
1st
Quarter
|
15.90
|
15.10
|
N/A
|
||||||
|
2nd
Quarter
|
15.39
|
12.25
|
N/A
|
||||||
|
3rd
Quarter
|
13.60
|
11.91
|
N/A
|
||||||
|
4th
Quarter
|
13.80
|
12.01
|
N/A
|
||||||
|
Dividends
|
|||||||||
|
2007
|
High
|
Low
|
Paid
|
||||||
|
1st
Quarter
|
18.66
|
13.35
|
N/A
|
||||||
|
2nd
Quarter
|
23.54
|
18.40
|
N/A
|
||||||
|
3rd
Quarter
|
22.57
|
15.03
|
N/A
|
||||||
|
4th
Quarter
|
26.67
|
20.60
|
N/A
|
||||||
|
Approximate
Number of Common Stockholders of Record at March 3,
2008: 450
|
|||||||||
Performance Graph
The following graph compares the
cumulative total shareholder return of our Common Stock to that of the S&P
500 Index and an Industry Peer Group (which consists of Overseas Shipholding
Group, Stolt-Nielsen, Sea Containers Limited, and Alexander and Baldwin) for the
Corporation's last five fiscal years.
*Assumes
$100 invested at the close of trading on the last trading day in 2002 in ISH
common stock, the S&P 500, and the Industry Peer Group. Also
assumes reinvestment of dividends.
December 31,
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|||||||||||||||||||
|
ISH
--♦--
|
$ |
100.00
|
$ |
241.79
|
$ |
244.22
|
$ |
254.89
|
$ |
221.14
|
$ |
356.89
|
||||||||||||
|
S&P
--■--
|
$ |
100.00
|
$ |
128.68
|
$ |
142.67
|
$ |
149.65
|
$ |
173.28
|
$ |
182.81
|
||||||||||||
|
Peer
Group --▲--
|
$ |
100.00
|
$ |
161.37
|
$ |
227.74
|
$ |
238.85
|
$ |
216.86
|
$ |
274.96
|
||||||||||||
In accordance with New York Stock
Exchange rules, Niels M. Johnsen, our Chief Executive Officer, has certified to
the NYSE that, as of May 11, 2007, he was not aware of any violation by us of
the NYSE’s corporate governance listing standards. The
certification is to be submitted to the NYSE each year no later than 30 days
after our annual stockholders meeting.
The Chief Executive Officer and Chief
Financial Officer certifications required for 2007 by Section 302 of the
Sarbanes-Oxley Act of 2002 are included as exhibits to this Form
10-K. The certifications required for 2006 were included as exhibits
to our 2006 Form 10-K.
Equity Compensation
Plans
See Item 12 of this annual report for
information on our equity compensation plan.
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,
|
|||||||||||||||||||
|
2007
|
2006
(1)
|
2005
|
2004
(2)
|
2003
|
||||||||||||||||
|
Income Statement Data
(3):
|
||||||||||||||||||||
|
Revenues
|
$ |
197,110
|
$ |
185,464
|
$ |
168,791
|
$ |
163,451
|
$ |
179,666
|
||||||||||
|
Impairment
Loss
|
-
|
8,866
|
-
|
-
|
-
|
|||||||||||||||
|
Gross
Voyage Profit
|
28,776
|
19,054
|
24,789
|
27,071
|
35,421
|
|||||||||||||||
|
Operating
Income
|
10,630
|
1,445
|
10,104
|
10,305
|
20,856
|
|||||||||||||||
|
Income
from Continuing Operations
|
11,792
|
18,194
|
6,393
|
10,996
|
6,639
|
|||||||||||||||
|
Net
Income Available to Common Stockholders
|
15,016
|
14,648
|
4,629
|
12,785
|
5,491
|
|||||||||||||||
|
Basic
and Diluted Earnings Per Common Share – Continuing
Operations
|
||||||||||||||||||||
|
Net
Income Available to Common Stockholders - Basic
|
1.48
|
2.58
|
0.66
|
1.81
|
1.09
|
|||||||||||||||
|
Net
Income Available to Common Stockholders - Diluted
|
1.41
|
2.24
|
0.66
|
1.80
|
1.09
|
|||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Working
Capital
|
23,189
|
3,024
|
16,120
|
17,650
|
10,248
|
|||||||||||||||
|
Total
Assets
|
440,655
|
428,042
|
449,507
|
385,048
|
382,451
|
|||||||||||||||
|
Long-Term
Debt, Less Current Maturities
|
||||||||||||||||||||
|
(including
Capital Lease Obligations)
|
130,523
|
98,984
|
161,720
|
168,622
|
164,144
|
|||||||||||||||
|
Convertible
Exchangeable Preferred Stock
|
37,554
|
37,554
|
37,554
|
-
|
-
|
|||||||||||||||
|
Stockholders'
Investment
|
172,141
|
153,736
|
140,714
|
135,454
|
121,367
|
|||||||||||||||
|
Other
Data:
|
||||||||||||||||||||
|
Net
Cash Provided by Operating Activities
|
20,231
|
22,981
|
23,778
|
28,989
|
38,616
|
|||||||||||||||
|
Net
Cash (Used) Provided by Investing Activities
|
(2,180 | ) |
27,532
|
(61,208 | ) | (25,589 | ) |
1,772
|
||||||||||||
|
Net
Cash (Used) Provided by Financing Activities
|
(48,221 | ) | (22,418 | ) |
43,095
|
(1,768 | ) | (35,926 | ) | |||||||||||
|
Cash
Dividends Per Share of Common Stock
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Weighted
Average Shares of Common Stock Outstanding:
|
||||||||||||||||||||
|
Basic
|
6,360,208
|
6,116,036
|
6,083,005
|
6,082,887
|
6,082,887
|
|||||||||||||||
|
Diluted
|
8,369,473
|
8,122,578
|
6,114,510
|
6,092,302
|
6,082,887
|
|||||||||||||||
|
(1)
|
Results
for 2006 reflect an Impairment Loss of approximately $8.9
million. This non-cash charge was made to write down our
investment in the terminal located in New Orleans, Louisiana utilized in
our Rail-Ferry Service. That service relocated its U.S.
operations during 2007 to Mobile, Alabama, where a new terminal has been
constructed.
|
|
(2)
|
Results
for 2004 were significantly favorably impacted by certain income tax
adjustment relating to the Jobs Creation Act of
2004.
|
|
(3)
|
During
2007, the decision was made to discontinue our LASH Liner
service. As a result, the LASH Liner service results were
removed from continuing operations and reclassified into Discontinued
Operations for all years presented
above.
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NOTICE REGARDING
FORWARD-LOOKING STATEMENTS
This
report on Form 10K and other documents filed or furnished by us under the
federal securities law include, and future oral or written statements or press
releases by us and our management may include, forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, and as such may involve known and unknown risks,
uncertainties, and other factors that may cause our actual results to be
materially different from the anticipated future results expressed or implied by
such forward-looking statements.
Such
statements include, without limitation, statements regarding (1) estimated fair
values of capital assets, the recoverability of the cost of those assets, the
estimated future cash flows attributable to those assets, and the appropriate
discounts to be applied in determining the net present values of those estimated
cash flows; (2) estimated scrap values of assets; (3) estimated proceeds from
sales of assets and the anticipated cost of constructing or purchasing new or
existing vessels ; (4) estimated fair values of financial instruments, such as
interest rate, commodity and currency swap agreements; (5) estimated losses
(including independent actuarial estimates) under self-insurance arrangements,
as well as estimated gains or losses on certain contracts, trade routes, lines
of business or asset dispositions; (6) estimated losses attributable to asbestos
claims; (7) estimated obligations, and the timing thereof, to the U.S. Customs
Service relating to foreign repair work; (8) the adequacy of our capital
resources and the availability of additional capital resources on commercially
acceptable terms; (9) our ability to remain in compliance with our debt
covenants; (10) anticipated trends in government sponsored cargoes; (11) our
ability to effectively service our debt; (12) financing opportunities and
sources (including the impact of financings on our financial position, financial
performance or credit ratings), (13) anticipated future operating and financial
performance, financial position and liquidity, growth opportunities and growth
rates, acquisition and divestiture opportunities, business prospects, regulatory
and competitive outlook, investment and expenditure plans, investment results,
pricing plans, strategic alternatives, business strategies, and other similar
statements of expectations or objectives, and (14) assumptions underlying any of
the foregoing. Forward-looking statements may include the words
“may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan” or
“anticipate” and other similar words.
Our
forward-looking statements are based upon our judgment and assumptions as of the
date such statements are made concerning future developments and events, many of
which are outside of our control. These forward looking statements,
and the assumptions upon which such statements are based, are inherently
speculative and are subject to uncertainties that could cause our actual results
to differ materially from such statements. Important factors that
could cause our actual results to differ materially from our expectations may
include, without limitation, our ability to (i) identify customers with marine
transportation needs requiring specialized vessels or operating techniques; (ii)
secure financing on satisfactory terms to acquire, modify, or construct vessels
if such financing is necessary to service the potential needs of current or
future customers; (iii) obtain new contracts or renew existing
contracts which would employ certain of our vessels or other assets upon the
expiration of contracts currently in place, on favorable economic terms; (iv)
manage the amount and rate of growth of our general and administrative expenses
and costs associated with operating certain of our vessels; (v) and manage our
growth in terms of implementing internal controls and information systems and
hiring or retaining key personnel, among other things.
Other factors include (vi) changes in
cargo, charterhire, fuel, and vessel utilization rates; (vii) the rate at which
competitors add or scrap vessels in the markets as well as demolition scrap
prices and the availability of scrap facilities in which we operate; (viii)
changes in interest rates which could increase or decrease the amount of
interest we incur on borrowings with variable rates of interest, and the
availability and cost of capital to us; (ix) the impact on our financial
statements of nonrecurring accounting charges that may result from our ongoing
evaluation of business strategies, asset valuations, and organizational
structures; (x) changes in accounting policies and practices adopted voluntarily
or as required by accounting principles generally accepted in the United States;
(xi) changes in laws and regulations such as those related to government
assistance programs and tax rates; (xii) the frequency and severity of claims
against us, and unanticipated outcomes of current or possible future legal
proceedings; (xiii) unplanned maintenance and out-of-service days on our
vessels; (xiv) the ability of customers to fulfill obligations with us; (xv) the
performance of unconsolidated subsidiaries; (xvi) our ability to effectively
handle our substantial leverage by servicing and meeting the covenant
requirements in each of our debt instruments, thereby avoiding any defaults
under those instruments and avoiding cross defaults under others; and (xvii)
other economic, competitive, governmental, and technological factors which may
affect our operations.
For additional information, see the
description of our business included above, as well as Item 7 of this
report. Due to these uncertainties, there can be no assurance that
our anticipated results will occur, that our judgments or assumptions will prove
correct, or that unforeseen developments will not occur. Accordingly,
you are cautioned not to place undue reliance upon any of our forward-looking
statements, which speak only as of the date made. Additional risks
that we currently deem immaterial or that are not presently known to us could
also cause our actual results to differ materially from those expected in our
forward-looking statements. We undertake no obligation to update or
revise for any reason any forward-looking statements made by us or on our
behalf, whether as a result of new information, future events or developments,
changed circumstances or otherwise.
CRITICAL ACCOUNTING
POLICIES
Set forth
below is a discussion of the accounting policies and related estimates that we
believe are the most critical to understanding our consolidated financial
statements, financial condition, and results of operations and which require
complex management judgments or estimates and entail material
uncertainties. Information regarding our other accounting policies is
included in the Notes to Consolidated Financial Statements.
Voyage Revenue and Expense
Recognition
Revenues and expenses relating to our
Rail-FerryService segments' voyages are
recorded over the duration of the voyage. Our voyage expenses are
estimated at the beginning of the voyages based on historical actual costs or
from industry sources familiar with those types of charges. As the
voyage progresses, these estimated costs are revised with actual charges and
timely adjustments are made. The expenses are ratably expensed over
the voyage based on the number of days in progress at the end of the
period. We believe there is no material difference between recording
estimated expenses ratably over the voyage versus recording expenses as
incurred. Revenues and expenses relating to our other segments'
voyages, which require no estimates or assumptions, are recorded when earned or
incurred during the reporting period.
Depreciation
Provisions for depreciation are
computed on the straight-line method based on estimated useful lives of our
depreciable assets. Various methods are used to estimate the useful
lives and salvage values of our depreciable assets and due to the capital
intensive nature of our business and our large base of depreciable assets,
changes in such estimates could have a material effect on our results of
operations.
Drydocking Costs
We defer certain costs related to the
drydocking of our vessels. Deferred drydocking costs are capitalized
as incurred and amortized on a straight-line basis over the period between
drydockings (generally two to five years). Because drydocking charges
can be material in any one period, we believe that the acceptable deferred
method provides a better matching for the amortization of those costs over
future revenue periods benefiting from the drydocking of our
vessel. We capitalize only those costs that are incurred to meet
regulatory requirements or upgrades, or that add economic life to the
vessel. Normal repairs, whether incurred as part of the drydocking or
not, are expensed as incurred.
Income Taxes
Income
taxes are accounted for in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Provisions
for income taxes include deferred income taxes that are provided on items of
income and expense, which affect taxable income in one period and financial
income in another. Certain foreign operations are not subject to
income taxation under pertinent provisions of the laws of the country of
incorporation or operation. However, pursuant to existing U.S. Tax
Laws, earnings from certain of our foreign operations are subject to U.S. income
taxes when those earnings are repatriated to the U.S. We have
indefinitely re-invested earnings of $7,130,000 of 2007 foreign earnings, and
accordingly, have not provided deferred taxes in the amount of $2,495,000
against those earnings. The Jobs Creation Act, which first applied to
us on January 1, 2005, changed the United States tax treatment of the foreign
operations of our U.S. flag vessels and our foreign flag shipping
operations. We made an election under the Jobs Creation Act to have
our qualifying U.S. flag operations taxed under a new “tonnage tax” rather than
under the usual U.S. corporate income tax regime.
On July
13, 2006, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN
48”), to create a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. We adopted FIN 48 on January 1, 2007.
Self-Retention
Insurance
As
explained further in Note E to the Notes to our Consolidated Financial
Statements contained elsewhere in this report, we maintain provisions for
estimated losses under our self-retention insurance based on estimates of the
eventual claims settlement costs. Our policy is to establish
self-insurance provisions for Hull and Machinery and Loss of Hire for each
policy year based on estimates from independent actuaries and management, and to
generally maintain the provisions at those levels for the estimated run-off
period, approximately two years from the inception of that period. We
also establish provisions for P&I insurance deductibles based on internal
estimates. We believe most claims will be reported, or estimates for
existing claims will be revised, within this two-year period. Subsequent to this
two-year period, self-insurance provisions are adjusted to reflect our current
estimate of loss exposure for the policy year. Our estimates are
determined based on various factors, such as (1) severity of the injury (for
personal injuries) and estimated potential liability based on past judgments and
settlements, (2) advice from legal counsel based on its assessment of the facts
of the case and its experience in other cases, (3) probability of pre-trial
settlement which would mitigate legal costs, (4) historical experience on claims
for each specific type of cargo (for cargo damage claims), and (5) whether our
seamen are employed in permanent positions or temporary revolving
positions. It is reasonably possible that changes in our estimated
exposure may occur from time to time. However, if during this
two-year period our estimate of loss exposure exceeds the actuarial estimate,
then additional loss provisions are recorded to increase the self-insurance
provisions to our estimate of the eventual claims' settlement
cost. The measurement of our exposure for self-insurance liability
requires management to make estimates and assumptions that affect the amount of
loss provisions recorded during the reporting period. Actual results
could differ materially from those estimates.
Asbestos Claims
We
maintain provisions for estimated losses for asbestos claims based on estimates
of eventual claims settlement costs. Our policy is to establish
provisions based on a range of estimated exposure. We estimate this
potential range of exposure using input from legal counsel and internal
estimates based on the individual deductible levels for each policy year. We are
also indemnified for certain of these claims by the previous owner of one of our
wholly-owned subsidiaries. The measurement of our exposure for asbestos
liability requires management to make estimates and assumptions that affect the
amount of the loss provisions recorded during the period. Our
estimates and assumptions are formed from variables such as the maximum
deductible levels in a claim year, the amount of the indemnification recovery
and the claimant's employment history with the company. Actual
results could differ materially from those estimates.
Pension and Postretirement
Benefits
Our pension and postretirement benefit
costs are calculated using various actuarial assumptions and methodologies as
prescribed by SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No.
106, “Employers’ Accounting for Postretirement Benefits Other than
Pensions.” These assumptions include discount rates, health care cost
trend rates, inflation, rate of compensation increases, expected return on plan
assets, mortality rates, and other factors. We believe that the
assumptions utilized in recording the obligations under our plans are reasonable
based on input from our outside actuary and information as to historical
experience and performance. Differences in actual experience or
changes in assumptions may affect our pension and postretirement obligations and
future expense.
In
September of 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and
132(R).” This statement requires balance sheet recognition of the
overfunded or underfunded status of pension and postretirement benefit
plans. Under SFAS No. 158, actuarial gains and losses, prior service
costs or credits, and any remaining transition assets or obligations that have
not been recognized under previous accounting standards must be recognized in
Other Comprehensive Income, net of tax effects, until they are amortized as a
component of net periodic benefit cost. In addition, the measurement
date, the date at which plan assets and the benefit obligation are measured, is
required to be the company’s fiscal year end. SFAS No. 158 does not
change the determination of net periodic benefit cost included in net
income. SFAS No. 158 was effective for fiscal years ending after
December 15, 2006.
RESULTS OF
OPERATIONS
Executive Summary
Our net
income for the year ended December 31, 2007 was $17.4 million, which included
net income of $5.6 million from our discontinued LASH Liner service. Net income
for the full year 2006 was $17.0 million, which included a gain of $17.9
million, net of taxes, from the sale of our minority investment in another
company, a pre-tax impairment loss of $8.9 million or $5.8 million,
net of taxes, on the write off of our former Rail-Ferry service terminal in New
Orleans, and a loss of $1.1 million, net of taxes, on our discontinued LASH
Liner service.
During
2007 our operating income was $10.6 million as compared to operating income of
$1.4 million for the year ended December 31, 2006. During 2006, our operating
income included the aforementioned impairment loss of $8.9 million.
Our operating results for 2007 were
slightly improved over 2006 primarily due to our Rail-Ferry service, which
increased its capacity with the installation of second decks on both vessels in
the second quarter of 2007. This improvement was partially offset by our Time
Charter segment, which reported lower results in 2007 as compared to 2006 mainly
due to higher operating cost associated with our U.S. flag Pure Car Truck
Carrier Fleet.
Depreciation expense increased in 2007
compared to 2006 as a result of the placement into service of the second decks
on the Rail-Ferry service vessels.
Our administrative and general
expenses increased in 2007 as compared to 2006, reflecting a one-time charge in
2007 associated with the termination of our lease on our New Orleans
office.
Interest expense for the twelve months
ended December 31, 2007 was lower than the comparable period in 2006 resulting
from the retirement of the Company’s 7 3/4% Senior Unsecured Notes in the fourth
quarter of 2007.
Our income tax benefit for 2007 was
$1.4 million as compared to a tax provision of $1.0 million in 2006. The 2006
tax provision reflects taxes on the gain on the sale of the minority investment
in another company partially offset by the loss from the write down of our New
Orleans Rail-Ferry terminal.
The results of the Company’s
unconsolidated entities, specifically the investment in a company that owns and
operates bulk carriers, showed improved results. The improved results in 2007 as
compared to 2006 reflect higher charter rates.
YEAR ENDED DECEMBER 31,
2007
COMPARED TO YEAR ENDED DECEMBER 31,
2006
|
Time
Charter
|
Rail-Ferry
|
|||||||||||||||||||
|
(All Amounts in
Thousands)
|
Contracts
|
COA
|
Service
|
Other
|
Total
|
|||||||||||||||
|
2007
|
||||||||||||||||||||
|
Revenues from External
Customers
|
$ |
157,333
|
$ |
16,652
|
$ |
21,235
|
$ |
1,890
|
$ |
197,110
|
||||||||||
|
Voyage
Expenses
|
116,825
|
10,940
|
18,406
|
841
|
147,012
|
|||||||||||||||
|
Gross Voyage Profit
(Loss)
|
25,198
|
4,100
|
(1,566 | ) |
1,044
|
28,776
|
||||||||||||||
|
2006
|
||||||||||||||||||||
|
Revenues
from External Customers
|
$ |
148,581
|
$ |
16,081
|
$ |
18,427
|
$ |
2,375
|
$ |
185,464
|
||||||||||
|
Voyage
Expenses
|
106,255
|
9,522
|
19,734
|
1,967
|
137,478
|
|||||||||||||||
|
Impairment
Loss
|
-
|
-
|
(8,866 | ) |
-
|
(8,866 | ) | |||||||||||||
|
Gross
Voyage Profit (Loss)
|
28,517
|
4,142
|
(14,002 | ) |
397
|
19,054
|
||||||||||||||
Gross
voyage profit increased from $19.1 million in 2006 to $28.8 million in
2007. The gross profit in 2006 included a pre-tax impairment loss of
$8.9 million on our investment in the Rail-Ferry Service’s terminal
in New Orleans. Excluding this loss, gross voyage profit increased
from $27.9 million in 2006 to the above mentioned $28.8 million in
2007. Revenues increased from $185.5 million in 2006 to $197.1
million in 2007. Voyage expenses increased from $137.5 million in
2006 to $ 147.0 million in 2007. The changes of revenue and expenses
associated with each of our segments are discussed within the gross voyage
analysis below.
Time Charter Contracts: The decrease in this
segment’s gross voyage profit from $28.5 million in 2006 to $25.2 million in
2007 was primarily due to an increase in operating expenses. These
increases were primarily wages and maintenance, including drydock amortization
charges on our U.S. flag Pure Car Truck Carriers. Revenues for the
segment increased from $148.6 million in 2006 to $157.3 million
in 2007. This improvement is a result of higher volumes of
supplemental cargoes in 2007 on our U.S. flag Pure Car Truck Carriers, higher
charter rates in 2007 on our Foreign flag Pure Car Truck Carriers and increased
charterhire days for our U.S. flag Jones Act Coal Carrier, which was in drydock
during the first and second quarters of 2006.
Contract of Affreightment:
Gross voyage profit of $4.1 million for this segment in 2007 was consistent with
2006. While this segment operated more voyages in 2007, higher port and fuel
costs eroded some of these positive results as compared to 2006.
Rail-Ferry
Service: Gross voyage results before impairment loss for this
segment improved from a loss of $5.1 million in 2006 to a loss of $1.6 million
in 2007. This improvement is primarily from higher cargo volumes due
to the installation of the second decks, which began operating in the third
quarter of 2007. Revenues for this segment increased from $18.4
million in 2006 to $21.2 million in 2007 due to the completion and operation of
the second deck cargo volume in 2007. The added volume caused
operating margins to improve, primarily in the fourth quarter of 2007. In the fourth quarter
of 2007, the rail-ferry service’s gross voyage profit was $1.6 million on
revenue of $7.9 million.
The
pre-tax impairment loss of $8.9 million recorded in the second quarter of 2006
was related to our investment in the Rail-Ferry Service’s terminal
in New Orleans located on the Mississippi River Gulf Outlet
(“MR-GO”). After Hurricane Katrina struck the Gulf Coast in 2005,
dredging of the MR-GO was indefinitely suspended by the Army Corps of Engineers,
effectively closing it to deep draft shipping.
Other: Gross voyage profit
for this segment increased from $397,000 in 2006 to $1.0 million in 2007
primarily due to nonrecurring expenses in 2006 of $1.9 million related to
terminating the lease of an intermodal terminal facility in Memphis,
Tennessee. The decrease in revenue for this segment was mainly due to
prior year income adjustments.
Other Income and
Expenses
Administrative and general expenses
increased 3.1% from $17.6 million in 2006 to $18.2 million in
2007. The increase was primarily associated with one-time costs
related to the termination of our lease agreement on our former New Orleans
office and an increase in audit fees related to the initial audit of our
internal control over financial reporting as required under Section 404 of The
Sarbanes-Oxley Act.
The following table shows the
significant A&G components for the twelve months ending December 31, 2007
and 2006 respectively:
|
(All amounts in
thousands)
|
Year
Ended December 31,
|
|||||||||||
|
A&G
Account
|
2007
|
2006
|
Variance
|
|||||||||
|
Salaries
and Wages
|
$ |
6,087
|
$ |
5,917
|
$ |
170
|
||||||
|
Group
Insurance
|
1,419
|
1,382
|
37
|
|||||||||
|
Special
Services
|
1,371
|
1,275
|
96
|
|||||||||
|
Accounting
& Audit Fees
|
790
|
591
|
199
|
|||||||||
|
Relocation
Expenses
|
4,993
|
838
|
4,155
|
|||||||||
|
Other
|
3,498
|
7,606
|
(4,108 | ) | ||||||||
|
TOTAL:
|
$ |
18,158
|
17,609
|
$ |
549
|
|||||||
Interest
expense decreased 11.7% from $11.1 million in 2006 to $9.8 million in
2007. The decrease was primarily due to the retirement of all the
remaining outstanding obligations of our 7¾% Senior Unsecured Notes (“Notes”) in
October of 2007.
The gain
on sale of investments decreased, as the 2006 results reflect the sale of our
26.1% investment in Belden Shipholding Pte Ltd (“BSH”), a company that owned and
operated cement carrier vessels. This sale generated a gain of $22.6 million in
November of 2006. In 2007, the gain on sale of investments of
$352,000 was related to the sale of stock from the portfolio of investments, at
the time held by our captive insurance company.
Investment income increased from $1.4
million in 2006 to $2.6 million in 2007 primarily as a result of higher interest
rates, and an increase in the overall average balance of funds invested during
the full year in 2007 compared to 2006.
Loss
on early extinguishment of debt of $248,000 reported in 2006 was due to the
early retirement of $12.5 million of our 7¾% Senior Notes at a slight
premium.
Income Taxes
We
recorded a benefit for federal income taxes of $1.4 million on $3.8 million of
income from continuing operations before income from unconsolidated entities in
2007, reflecting tax losses on operations taxed at the U.S. corporate statutory
rate. For 2006, our provision was $1.0 million on our $14.5 million
income from continuing operations before income from unconsolidated
entities. Our tax benefit increased from the comparable prior year
primarily as a result of incurring taxes on the gain on sale of BSH in November
of 2006. In 2006, we were able to release $3.2 million of our
valuation allowance as a result of the generation of certain foreign
earnings. We have indefinitely re-invested $7,130,000 of 2007 foreign
earnings, and accordingly, have not provided deferred taxes of $2,495,000
against those earnings. Our qualifying U.S. flag operations continue
to be taxed under a “tonnage tax” regime rather than under the normal U.S.
corporate income tax regime.
Equity in Net Income of
Unconsolidated Entities
Equity in net income of unconsolidated
entities, net of taxes, increased from $4.7 million in 2006 to $6.6 million in
2007.
The
improved results came from our 50% investment in Dry Bulk Cape Holding Ltd (“Dry
Bulk”), a company owning two Capesize Bulk Carriers and two Panamax Bulk
Carriers, which contributed $6.7 million in 2007 compared to $4.2 million in
2006, primarily due to a stronger charter market for Dry Bulk
vessels.
During
the second quarter of 2007, Dry Bulk entered into a ship purchase agreement with
Mitsui & Co. of Japan for two newbuildings Handymax Bulk Carriers to be
delivered in the first half of 2012. Total investment in the
newbuildings is anticipated to be approximately $74.0 million, of which the
Company’s share would be 50% or approximately $37.0 million. We
expect to make our interim construction payments with cash generated from
operations. A decision on any long-term financing will be determined
at delivery. Our 50% share of the initial contract payment of
$750,000 was made in May of 2007.
Discontinued
Operations
In the third quarter of 2007, we
elected to discontinue our International LASH service by the end of
2007. During the first two months of 2008, we sold the one remaining
LASH vessel and the majority of LASH barges,with the remaining LASH barges under
contract to be sold by the end of the first quarter of 2008. The gain
of $9.9 million recorded in 2007 reflects a gain of $7.3 million on the sale of
two LASH Vessels and $2.6 million on the sale of LASH barges. During
2007, total revenues associated with the discontinued LASH services were $42.0
million, compared to $89.4 million for 2006. Losses from operations
before taxes were $4.2 million in 2007, compared to $8.4 million in
2006.
Our U.S. flag LASH service and
International LASH service were reported in “Continuing Operations” as a part of
our Liner segment in periods prior to June 30, 2007. The financial
results for all periods presented have been restated to remove the effects of
both of those operations from “Continuing Operations”.
YEAR ENDED DECEMBER 31,
2006
COMPARED TO YEAR ENDED DECEMBER 31,
2005
|
Time
Charter
|
Rail-Ferry
|
|||||||||||||||||||
|
(All Amounts in
Thousands)
|
Contracts
|
COA
|
Service
|
Other
|
Total
|
|||||||||||||||
|
2006
|
||||||||||||||||||||
|
Revenues
from External Customers
|
$ |
148,581
|
$ |
16,081
|
$ |
18,427
|
$ |
2,375
|
$ |
185,464
|
||||||||||
|
Voyage
Expenses
|
106,255
|
9,522
|
19,734
|
1,967
|
137,478
|
|||||||||||||||
|
Impairment
Loss
|
-
|
-
|
(8,866 | ) |
-
|
(8,866 | ) | |||||||||||||
|
Gross
Voyage Profit (Loss)
|
28,517
|
4,142
|
(14,002 | ) |
397
|
19,054
|
||||||||||||||
|
2005
|
||||||||||||||||||||
|
Revenues
from External Customers
|
$ |
138,177
|
$ |
16,693
|
$ |
11,051
|
$ |
2,870
|
$ |
168,791
|
||||||||||
|
Voyage
Expenses
|
99,394
|
9,584
|
14,205
|
1,924
|
125,107
|
|||||||||||||||
|
Gross
Voyage Profit (Loss)
|
25,853
|
4,692
|
(6,684 | ) |
928
|
24,789
|
||||||||||||||
Gross
voyage profit decreased from $24.8 million in 2005 to $19.1 million in
2006. The gross profit in 2006 included a pre-tax impairment loss of
$8.9 million on our investment in the Rail-Ferry Service’s terminal
in New Orleans. Excluding this loss, gross voyage profit increased
from $24.8 million in 2005 to $27.9 million in 2006. Revenues
increased from $168.8 million in 2005 to $185.5 million in
2006. Voyage expenses increased from $125.1 million in 2005 to $
137.5 million in 2006. The changes of revenue and expenses associated
with each of our segments are discussed within the gross voyage analysis
below.
Time Charter Contracts: The increase in this
segment’s gross voyage profit from $25.9 million in 2005 to $28.5 million in
2006 was primarily due to the addition of our fifth U.S. flag PCTC in September
of 2005 compared to a full year in 2006. The increase in gross voyage
profit was partially offset by our Coal Carrier being out of service for 170
days in 2006 for capital improvements and for a periodic special survey as
required for classification standards. The capital improvements were
necessary to replace some of the vessel’s steel as part of the special
survey. Additionally, the special survey, including drydocking, was
originally scheduled for 2007, but was instead performed concurrently with the
capital improvements for economic efficiency. The vessel returned to
service in June of 2006 and continued its firm time charter employment through
the end of the year. Although the vessel substantially fulfilled its
obligation under the time charter contract, it was not available for further
utilization by the charter or for commercial sub off-hire, as it was during
2005, due to the time out of service. Revenues increased for this
segment from $138.2 million in 2005 to $148.6 million in 2006 due to revenue
contributions for 12 full months in 2006 from the fifth U.S. flag PCTC, acquired
in September of 2005 and the start of an additional Foreign flag PCTC in
2006. Expenses increased for this segment from $99.4 million in 2005
to $106.3 million in 2006. This increase was mainly due to higher
operating costs, consisting primarily of wages and maintenance and additional
operating days.
Contract of
Affreightment:
Gross voyage profit for this segment decreased from $4.7 million in 2005
to $4.1 million in 2006. This segment, which consists of a contract
associated with our Molten Sulphur Carrier, was impacted by less available
tonnage above the contract minimum in 2006 as compared to 2005. The
$612,000 decrease of revenues for this segment was due to the vessel being in
drydock in the first quarter and part of the second quarter of
2006.
Rail-Ferry
Service: Gross voyage results before impairment loss for this
segment improved slightly from a loss of $6.7 million in 2005 to a loss of $5.1
million in 2006. Improved operations resulting from higher cargo
volumes were mostly offset by higher depreciation related to capital
improvements to the terminal in New Orleans, which began operating in the second
half of 2005, and to the vessels used in the service in late 2005 and early
2006. The increase in the depreciation of the terminal in New Orleans
only affected the first half of 2006 because the net investment in that terminal
was written-down to zero at the end of the second quarter of 2006 when we
determined that it was impaired. Revenues for this segment increased
from $11.1 million in 2005 to $18.4 million in 2006 due to both vessels being
out of service for repairs and steelwork and while awaiting repairs to the
terminal after Hurricane Katrina in 2005. Expenses for this segment
increased from $14.2 million in 2005 to $19.7 million in 2006. This
increase was a result of a large increase of operating days in 2006 compared to
the reduced operating days in 2005, which was adversely impacted by Hurricane
Katrina.
The
impairment loss of $8.9 million recorded in the second quarter of 2006 was
related to our investment in the Rail-Ferry Service’s terminal
in New Orleans located on the MR-GO. After Hurricane Katrina struck
the Gulf Coast in 2005, dredging of the MR-GO was indefinitely suspended by the
Army Corps of Engineers, effectively closing it to long-term deep draft
shipping. This resulted in our decision to relocate our Rail-Ferry Service’s U.S.
terminal operations from New Orleans to Mobile, Alabama. After
reviewing the options available to us for utilization of the assets that will
remain at the New Orleans terminal following the relocation, we determined that
our net investment of $8.9 million in those assets was impaired. The
cost and funding of the new terminal in Mobile are discussed in the Liquidity
and Capital Resources section.
Other: Gross voyage profit
for this segment decreased from $928,000 in 2005 to $397,000 in 2006 primarily
due to nonrecurring expenses in 2006 of $1.9 million related to terminating the
lease of an intermodal terminal facility in Memphis, Tennessee. The facility was
previously used in our Liner
Services segment. We have been monitoring the cargo being
processed through that facility and evaluating other uses for the facility, and
late in 2006, we decided to terminate the lease. Revenues
decreased $495,000 in 2006 compared to 2005, where as operating expenses
remained constant.
Other Income and
Expenses
Administrative and general expenses
increased 19.7% from $14.7 million in 2005 to $17.6 million in
2006. The increase was primarily associated with one-time costs
related to the relocation of our corporate headquarters, higher fees for
professional services, and employee bonus expenses.
The
following table shows the significant A&G components for the twelve months
ending December 31, 2006 and 2005 respectively:
|
(All amounts in
thousands)
|
Year
Ended December 31,
|
|||||||||||
|
A&G
Account
|
2006
|
2005
|
Variance
|
|||||||||
|
Salaries
and Wages
|
$ |
5,917
|
$ |
5,557
|
$ |
360
|
||||||
|
Group
Insurance
|
1,382
|
1,241
|
141
|
|||||||||
|
Special
Services
|
1,275
|
552
|
723
|
|||||||||
|
Accounting
& Audit Fees
|
591
|
456
|
135
|
|||||||||
|
Relocation
Expenses
|
838
|
-
|
838
|
|||||||||
|
Other
|
7,606
|
6,879
|
727
|
|||||||||
|
TOTAL:
|
$ |
17,609
|
$ |
14,685
|
$ |
2,924
|
||||||
Interest
expense increased 15.8% from $9.6 million in 2005 to $11.1 million in
2006. The increase was primarily due to new financing agreements
entered into in the fourth quarter of 2005 associated with the acquisition of a
PCTC and our share of the cost of the improvements to the New Orleans Rail-Ferry
terminal. Higher interest rates on our variable rate loans also
contributed to the increase during the year. Of our $149.2 million of
long-term debt outstanding as of December 31, 2006, $66.7 million is subject to
variable interest rates. Reductions in interest expense resulting
from the repurchase of $12.5 million of our 7¾% Senior Notes in 2006 and
regularly scheduled payments on outstanding debt partially offset the
increase.
The gain
on sale of investments in 2006 of $23.1 million was primarily related to the
sale of our 26.1% investment in Belden Shipholding Pte Ltd (“BSH”), a company
that owns and operates cement carrier vessels. In November of 2006, we sold our
investment in BSH for a gain of $22.6 million. In 2005, the gain on
sale of investments of $287,000 was related to the sale of stock from the
portfolio of investments held by our captive insurance company.
Investment income increased from $1.1
million in 2005 to $1.4 million in 2006 primarily as a result of higher interest
rates, partially offset by a decrease in the overall average balance of funds
invested during the full year in 2006.
Loss on early extinguishment of debt of
$248,000 reported in 2006 was due to the retirement of $12.5 million of our 7¾%
Senior Notes at a slight premium. The loss of $68,000 reported in
2005 was due to the early retirement of one of our loans, offset by the
retirement at a slight discount of $18.5 million of our 7¾% Senior
Notes.
Income Taxes
We
recorded a provision for federal income taxes of $1.0 million on $14.5 million
of income from continuing operations before income from unconsolidated entities
in 2006, reflecting taxes on the gain on the sale of BSH in November of 2006,
partially offset by tax losses on operations taxed at the U.S. corporate
statutory rate. For 2005, we had a tax benefit of $792,000 on our
$1.8 million of income from continuing operations before income from
unconsolidated entities. In 2006, we were also able to release $3.2
million of our valuation allowance as a result of the generation of certain
foreign earnings. Our qualifying U.S. flag operations continue to be
taxed under a “tonnage tax” regime rather than under the normal U.S. corporate
income tax regime.
Equity in Net Income of
Unconsolidated Entities
Equity in net income of unconsolidated
entities, net of taxes, increased from $3.8 million in 2005 to $4.7 million in
2006. Our 50% investment in a company owning two Capesize Bulk
Carriers and two Panamax Bulk Carriers contributed $4.2 million before taxes in
2006 compared to $3.1 million before taxes in 2005, reflecting higher charter
rates. After taxes, this investment contributed $4.1 million and $2
million during 2006 and 2005, respectively, which was net of taxes of $65,000 in
2006 and $1.1 million in 2005. During 2006, changes in tax
regulations resulted in the earnings from this investment being treated as
shipping income effective January 1, 2006, which allowed us to utilize our
foreign accumulated deficit for which an existing tax valuation allowance was
previously recorded. The earnings from this investment were treated
as personal holding income during 2005, and could not offset the foreign
accumulated deficit.
Our 26.1% investment in a Cement
Carrier company contributed $828,000 before taxes in 2006 compared to $2.5
million before taxes (including a pre-tax gain of $1.2 million from our share of
the sale of certain vessels) in 2005. After taxes, this investment
contributed $631,000 and $1.9 million during 2006 and 2005, respectively, which
was net of taxes of $197,000 in 2006 and $606,000 in 2005. In the
fourth quarter of 2006, we sold our investment in the Cement Carrier company as
discussed earlier.
Discontinued
Operations
In 2005, we sold the assets associated
with our over-the-road car transportation truck company. We sold
these assets primarily due to a decrease during 2005 in the volume of business
available to us due to the loss of market share by one of our customers and an
industry-wide shortage of drivers that caused underutilization of the
assets. The sale of these assets resulted in a net loss before taxes
of $769,000. Losses from operations before taxes were $1.1 million in
2005.
The over-the-road car transportation
truck company was reported in the “Other” segment in previous
periods. Financial information for all periods presented have been
restated to remove the effects of those operations from the “Other” segment to
reflect the reclassification from continuing to discontinued
operations.
Losses
from operations related to the discontinued Liner services for 2006 were $8.4
million, compared to losses of $1.6 million in 2005. The gain of $5.1
million recorded in 2006 was due to a sale of one of our LASH vessels and
certain LASH barges. In 2005, 67 LASH barges were sold that were no
longer needed for operations.
LIQUIDITY AND CAPITAL
RESOURCES
The following discussion should be read
in conjunction with the more detailed Consolidated Balance Sheets and
Consolidated Statements of Cash Flows included elsewhere herein as part of our
Consolidated Financial Statements.
Our working capital (which we define as
the difference between our total current assets and total current liabilities)
increased from $3.0 million at December 31, 2006, to $23.2 million at December
31, 2007. Cash and cash equivalents decreased during 2007 by $30.2
million to a total of $14.1 million. This decrease was primarily due
to the retirement of all the remaining outstanding obligations of our 7¾% Senior
Unsecured Notes (“Notes”) in October of 2007 of $41.9 million, cash used by
other financing activities of $6.3 million, and cash used for investing
activities of $2.2 million, partially offset by cash provided by operating
activities of $20.2 million. Of the $40.2 million in current
liabilities at December 31, 2007, $12.7 million related to current maturities of
long-term debt.
Operating activities generated positive
cash flow after adjusting net income of $17.4 million for non-cash provisions
such as depreciation, amortization and gains on sales of assets and
investments. Cash provided by operating activities of $20.2 million
for 2007 also included a decrease in accounts receivable of $1.3 million
primarily due to the timing of collections of receivables from the MSC and U.S.
Department of Transportation, offset by an decrease in accounts payable and
accrued liabilities of $4.9 million. Also included was $9.8 million
of cash used to cover payments for vessel drydocking costs in 2007, offset by
cash distributions of $4.4 million received from our investments in
unconsolidated entities.
Cash used
by investing activities of $2.2 million for 2007 included proceeds from the
sales of assets of $48.8 million, including $32.0 million on the sale of the
Molten Sulphur Carrier (discussed below) and $16.8 million on the sale of LASH
assets and our investment in our unconsolidated entity in Mexico
(TTG). These were offset by the use of $56.1 million of cash for the
purchase of capital assets, including $26.8 million for a U.S. flag PCTC, which
was previously under lease; $13.7 million for the first payment on the 6400 CEU
Newbuilding PCTC (discussed below); and $10.4 million for second deck
modifications on the Rail-Ferry vessels.
Cash used
for financing activities of $48.2 million for 2007 included regularly scheduled
debt payments of $8.3 million, and $41.9 million for the retirement of our 7¾%
Senior Notes, as well as $2.4 million for preferred stock dividend
payments. These uses of cash were partially offset by proceeds of
$5.7 million from the issuance of common stock pursuant to the exercise of stock
options by our Chairman and President.
In
January 2008, our board authorized open market repurchases of up to 1,000,000
shares of our common stock, subject to a variety of factors, including our cash
requirements, the market price of our stock, and general economic and market
conditions.
Following
the retirement of the company’s 7 ¾ % Senior Notes in October 2007, the company
reduced the borrowing capacity under the revolving line of credit from $50
million to $35 million. As of December 31, 2007, $6.3 million of the
$35 million revolving credit facility, which expires in December of 2009, was
pledged as collateral for a letter of credit, and the remaining $28.7 million
was available.
In
2007, we invested $43.5 million for the purchase of a Panamanian flagged
PCTC. The vessel was purchased with 100% financing and subsequently
leased to a third party under a financing lease arrangement. This
noncash transaction is not reflected in our Consolidated Statements of Cash
Flows.
We
frequently evaluate the possibility of acquiring additional vessels or
businesses. At any given time, we may be engaged in discussions or
negotiations regarding additional acquisitions. We generally do not
announce our acquisitions or dispositions until we have entered into a
preliminary or definitive agreement. We may require additional
financing in connection with any such acquisitions, the consummation of which
could have a material impact on our financial condition or
operations.
Preferred Stock
Offering
On February 4, 2008, we redeemed
our 800,000 outstanding shares of 6% Convertible Exchangeable Preferred
Stock. In lieu of the cash redemption, holders of 462,382 shares of
the Preferred Stock elected to convert their shares into approximately 1,155,955
shares of the Company’s common stock. The remaining 337,618 outstanding shares
of Preferred Stock were retired for cash (including accrued and unpaid dividends
to, but excluding, the redemption date), pursuant to the terms of the Preferred
Stock. Upon completion of the redemption, we no longer have any shares of our 6%
Convertible Exchangeable Preferred Stock outstanding. The total cash payment for
the redemption of the Preferred Stock including the accrued and unpaid dividends
was $17,306,299. We will have a charge to earnings of approximately
$1.4 million in the first quarter of 2008 from the redemption of the Preferred
Stock. However, eliminating the cash dividends from our preferred
stock will result in a $2.4 million gain per year going forward.
Debt and Lease
Obligations
As of
December 31, 2007, we held several vessels under operating leases, including two
Pure Car/Truck Carriers, one Breakbulk/Multi Purpose vessel, a Molten Sulphur
Carrier, a Container vessel and a Tanker vessel. We also conduct
certain of our operations from leased office facilities and use transportation
and other equipment under operating leases.
On August
24th, 2007 we entered
into a Memorandum of Agreement for the purchase of one 6400 CEU Panamanian
flagged PCTC, which was reflagged under the United States flag. On
September 10, 2007, we entered into a loan agreement for the financing of this
vessel by and among (1) Waterman Steamship Corporation (“WSC”), one of our
wholly-owned subsidiaries, as borrower, (2) International Shipholding
Corporation, as guarantor, and (3) DnB NOR Bank ASA, as facility agent and
security trustee. Under this loan agreement, the lenders agreed to
provide WSC with a term loan of up to Five Billion Yen (¥5,000,000,000), or
approximately $43.5 million based on exchange rates on the date of the loan
agreement. We purchased and took possession of the Vessel on
September 13, 2007. In late September, the Vessel was leased out
(“Time Chartered”) under a three-year agreement whose terms qualified as a
direct financing lease. All payments will be made in Yen and will be
recorded at current market value. This facility is a Yen-denominated
LIBOR based loan with an associated interest swap agreement that results in an
actual interest rate of 2%.
The loan
is secured by the Vessel, its charter hire and insurances, and is guaranteed by
the parent company, International Shipholding Corporation. The loan
originally entered into under a floating Libor to Yen interest rate component
has been swapped to a Yen fixed rate of 1.15% plus an applicable margin of
0.85%. The terms of the time charter provide for Yen denominated
payments covering 100% of the our Yen debt obligations.
On August
28, 2007, ISC-Sulphur Holding, Inc. (a wholly-owned subsidiary of Capital One)
purchased from Sulphur Carriers, Inc. (one of our wholly-owned subsidiaries) the
Molten Sulphur Carrier for $32.0 million under a sale/leaseback
arrangement. The lease is for ten years with an early buyout at the
end of year eight at our option. The lease qualifies as an operating
lease.
From the
proceeds of the aforementioned sale/leaseback, we purchased a US flagged PCTC
for approximately $26.8 million. This Vessel previously operated under a lease
agreement with payments of approximately $1.3 million per quarter.
On
September 21, 2007, our wholly-owned subsidiary, East Gulf Shipholding, Inc.
(“EGS”), entered into a SHIPSALES contract to purchase one 6400 CEU Newbuilding
PCTC. Upon signing of the agreement, East Gulf Shipholding paid an
initial 20% installment of approximately $13.7 million. The next two
installments of 10% each are due upon keel-laying of the Vessel and launching of
the Vessel, both of which are projected due in 2009. The final
payment of 60% is due upon delivery of the vessel, scheduled for
2010. The initial installment amount was recorded as Vessel, Property
& Other Equipment on the balance sheet and will not begin depreciating until
the vessel is placed in service.
Debt Covenant
In
the unanticipated event that our cash flow and capital resources are not
sufficient to fund our debt service obligations, we could be forced to reduce or
delay capital expenditures, sell assets, obtain additional equity capital, enter
into financings of our unencumbered vessels or restructure debt.
Contractual Obligations and Other
Commitments
The following is a summary of the
scheduled maturities by period of our debt and lease obligations that were
outstanding as of December 31, 2007:
|
Debt and lease obligations
(000’s)
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|||||||||||||||||||||
|
Long-term
debt (including current maturities)
|
$ |
143,204
|
$ |
12,681
|
$ |
12,649
|
$ |
48,440
|
$ |
10,590
|
$ |
22,980
|
$ |
35,864
|
||||||||||||||
|
Interest
payments
|
27,384
|
6,394
|
5,784
|
4,990
|
3,885
|
3,249
|
3,082
|
|||||||||||||||||||||
|
Operating
leases
|
128,484
|
16,166
|
15,611
|
15,033
|
15,042
|
15,042
|
51,590
|
|||||||||||||||||||||
|
Vessel
Commitments
|
54,800
|
-
|
13,700
|
41,100
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Exchangeable
Preferred Stock *
|
17,307
|
17,307
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Total
by period
|
$ |
371,179
|
$ |
52,548
|
$ |
47,744
|
$ |
109,563
|
$ |
29,517
|
$ |
41,271
|
$ |
90,536
|
||||||||||||||
*
Obligation represents actual cash paid in February 2008 to redeem Exchangeable
Preferred Stock.
The above contractual obligations table
does not include an approximate $17 million obligation to the Alabama State Port
Authority related to the terminal upgrades in Mobile, AL, to be paid by us over
the ten-year terminal lease. At this time, we do not have a payment
plan in place for this obligation.
Restructuring of Liner Services and
Disposition of Certain LASH Assets
The Board of Directors decided in the
fourth quarter of 2006 to dispose of certain LASH Liner Service
assets. The decision was based on the belief that we could generate
substantial cash flow and profit on the disposition of the assets, while
improving our future operating results. Accordingly, we sold our LASH
Feeder vessel and 114 barges in the first quarter of 2007. In the
second quarter of 2007 we sold our one remaining U.S. flag LASH vessel and 111
LASH barges. In the third quarter of 2007, the company elected to
discontinue its International LASH service by the end of 2007. During
the first two months of 2008, we sold the one remaining LASH vessel and the
majority of LASH barges, with the remaining LASH barges under contract to be
sold by the end of the first quarter of 2008. The gain of $9.9
million recorded in 2007 reflects a gain of $7.3 million on the sale of the LASH
Feeder Vessel and Liner Vessel, and $2.6 million on the sale of LASH
barges. During 2007, total revenues associated with the discontinued
LASH services were $42.0 million, compared to $89.4 million for
2006. Losses from operations before taxes were $4.2 million in 2007,
compared to $8.4 million in 2006.
Our
U.S. flag LASH service and International LASH service was reported in
“Continuing Operations” as a part of our Liner segment in periods prior to June
30, 2007. Financial information for all periods presented have been
restated to remove the effects of those operations from “Continuing
Operations”.
Rail-Ferry Service
Expansion
This
service provides a unique combination of rail and water ferry service between
the U.S. Gulf and Mexico. The low operating profit margin generated
by this service makes higher cargo volumes necessary to achieve meaningful
levels of cash flow and profitability. The capacity of the vessels
operating in our Rail-Ferry
Service defines the maximum revenues and, in turn, the cash flow and
gross profits that can be generated by the service. Accordingly we
have made investments that essentially double the capacity of the service
including the construction of second decks on each of the ships as well as
construction of new terminals in Mobile, AL and an upgraded terminal in
Coatzacoalcos, Mexico. We expect this expansion to reduce our cost
per unit of cargo carried and increase our cash flow if we are able to book
cargo for substantially all of the additional capacity. While we can
give no assurance at this time that we will be successful in doing so, we
believe that the market will sustain these vessels for the foreseeable
future. We believe that the Rail-Ferry Service’s strong
trade support warranted the program expansion.
The total
cost of adding the second decks is approximately $25 million, which we paid in
full through December 31, 2007. The installation of the second deck
on the first vessel was completed at the end of May 2007, while installation of
the second deck on the second vessel was completed at the end of July
2007. The utilization of the second deck capacity is directly related
to the terminal upgrades in Mobile, AL and Coatzacoalcos,
Mexico. Both terminal upgrades were substantially completed in July
2007 and became operational at that time. The estimated cost of the
Mobile terminal is approximately $27 million, of which $10 million was funded by
a grant from the State of Alabama. The remaining $17 million is being
financed with a loan from the Alabama State Port Authority and repaid
by us over the ten-year terminal lease. We estimate that our share of
the cost of the improvements to the terminal in Mexico will be approximately
$5.8 million. We have a 49% interest in the company that owns the
terminal in Mexico, and 30% of the advances to that company for our share of the
cost of the terminal are accounted for as capital contributions with the
remaining 70% accounted for as a loan to that company.
As of
December 31, 2007, the cost of our total investment in a joint venture that owns
a trans-loading and storage facility (RTI), which was used to support the
Rail-Ferry service in New Orleans included an equity investment in
unconsolidated entities of $1.7 million and an outstanding loan of approximately
$2.3 million due from our 50% partner in the venture. As a result of
our terminal operations moving from New Orleans to Mobile, an impairment test to
determine our loss exposure on this facility was required. As of
December 31 2007, no impairment was recorded as we expect to recover our total
investment.
Our
terminal lease with the Port of New Orleans was terminated during the second
quarter of 2007, when we transitioned to the Mobile terminal. As of
June 30, 2007, we wrote off both the cost of the New Orleans terminal of $17.0
million, funded by the State and City, which was recorded as a leasehold
improvement, and the reimbursements to us from the State and the City of $17.0
million that were recorded as deferred credits, resulting in no effect on net
income.
Our
investment in the New Orleans terminal was funded with the proceeds from a New
Market Tax Credit (NMTC) financing agreement. Under the NMTC
financing, the lender has the ability to utilize certain tax credits associated
with profitable operations at that location. With the relocation of
the operations to Mobile, Alabama, the lender has amended the
original application to the Federal agency that oversees the NMTC issuance to
include the Mobile terminal as eligible property for the usage of the tax
credits.
Relocation of Corporate
Headquarters
In
addition to the incentives for relocating our Rail-Ferry Service’s
terminal, the State of Alabama and the City and County of Mobile have provided
us with incentives totaling $6.7 million to relocate our corporate headquarters
from New Orleans to Mobile. As of December 2007, we have received
$6.3 million in incentive payments from the Alabama agencies.
In May of
2007, we reached an agreement to terminate the lease of our former corporate
headquarters in New Orleans. The cost of this termination was
approximately $700,000, which was reported in administrative and general
expenses in the second quarter of 2007.
Bulk Carriers
We have a 50% interest
in Dry Bulk, which owns two Capesize Bulk Carriers and two Panamax Bulk
Carriers. This investment is accounted for under the equity method
and our share of earnings or losses are reported in our consolidated statements
of income net of taxes. Dry Bulk has entered into a ship purchase
agreement with Mitsui & Co. of Japan for newbuilding two Handymax Bulk
Carriers, scheduled to be delivered in 2012. Total investment in the
newbuildings is anticipated to be approximately $74.0 million, of which our
share would be 50% or approximately $37 million. During the period of
construction up to delivery, where 50% of the projected overall costs will be
expended, Dry Bulk plans to finance these costs with equity contributions of up
to 15% with the 85% balance of the cost being financed. Upon
completion and delivery, Dry Bulk plans to establish permanent long-term
financing.
Dividend Payments
Our
preferred stock accrued cash dividends at a rate of 6.0% per annum from the date
of issuance in early January 2005 through January 31, 2008. All such
shares were either redeemed or converted into shares of our common stock on
February 1, 2008.
Environmental
Issues
As of
December 31, 2007, we have not been notified that we are a potentially
responsible party in connection with any environmental matters, and we have
determined that we have no known risks for which assertion of a claim is
probable that are not covered by third party insurance, third party
indemnification or our self-retention insurance reserves. Our
environmental risks primarily relate to oil pollution from the operation of our
vessels. We have pollution liability insurance coverage with a limit
of $1 billion per occurrence, with deductible amounts not exceeding $500,000 for
each incident.
In
January 2008 the company was notified that the United States Coast Guard was
conducting an investigation on the SS MAJOR STEPHEN W. PLESS of an alleged
discharge of untreated bilge water by one or more members of the
crew. The USCG has inspected the ship and interviewed various crew
members. The company is cooperating with the USCG's
investigation. The USCG has recently informed counsel for the Company
that while the investigation of a certain single individual is continuing, at
this time the Company is not a target of the investigation. If,
however, the Company is subject to an administrative or civil penalty from the
Coast Guard, we believe that such a fine would not be material.
New Accounting
Pronouncements
On July
13, 2006, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN
48”), to create a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. We adopted FIN 48 on January 1, 2007 and the adoption had
no effect on our consolidated financial position or results of
operations.
In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements” which is effective for fiscal years
beginning after November 15, 2007 and for interim periods within those
years. This statement defines fair value, establishes a framework for
measuring fair value and expands the related disclosure
requirements. We are currently evaluating the impact, if any, that
SFAS No. 157 will have on our financial position and results of
operation.
In February 2007, the FASB issued
Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Liabilities, including an amendment of FASB Statement No.
155 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to
measure many financial assets and financial liabilities, and certain
nonfinancial instruments that are similar to financial instruments, at fair
value. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. We have not yet determined the impact, if any, the
adoption of SFAS No. 159 will have on our consolidated financial position or
results of operations.
LIQUIDITY -
2006
The following discussion should be read
in conjunction with the more detailed Consolidated Balance Sheets and
Consolidated Statements of Cash Flows included elsewhere herein as part of our
Consolidated Financial Statements.
Our working capital decreased from
$16.1 million at December 31, 2005, to $3.0 million at December 31, 2006,
primarily due to the $40 million balance of our 7¾% Senior Notes due in October
of 2007 becoming a current liability in October of 2006, offset by cash proceeds
received during the fourth quarter of 2006 from asset and investment
sales. Cash and cash equivalents increased during 2006 by $28.1
million to a total of $44.3 million. This increase was due to cash
provided by operating activities of $23 million and by investing activities of
$27.5 million, partially offset by cash used for financing activities of $22.4
million. Of the $84.7 million in current liabilities at December 31, 2006, $50.3
million related to current maturities of long-term debt, including $40 million
for the 7¾% Senior Notes.
Operating activities generated positive
cash flow after adjusting net income of $17 million for non-cash provisions such
as depreciation, amortization, impairment loss and gains on sales of assets and
investments. Cash provided by operating activities of $23 million
also included a decrease in accounts receivable of $12.3 million primarily due
to the timing of collections of receivables from the MSC and U.S. Department of
Transportation, offset by an decrease in accounts payable and accrued
liabilities of $12.1 million primarily due to the timing of payments for
operating expenses and capital improvements accrued at December 31, 2005 that
were paid in 2006. Also included was $8.4 million of cash used to
cover payments for vessel drydocking costs in 2006, offset by cash distributions
of $1.5 million received from our investments in unconsolidated entities and
lease incentive obligations related to the relocation of corporate headquarters
of $2.8 million.
Cash
provided by investing activities of $27.5 million included proceeds from the
sales of assets, our investment in an unconsolidated entity and marketable
securities, a return of capital from one of our unconsolidated investments, and
the release of $6.5 million of restricted cash from escrow previously required
under an operating lease agreement that now is being satisfied with a letter of
credit. These sources of cash were offset by the use of $21.8 million
of cash for the purchase of a vessel and capital improvements to some of our
vessels and our Rail-Ferry
Service U.S. terminal. During 2006, the State of Louisiana and
City of New Orleans reimbursed $2.6 million of the cost of the terminal
improvements, some of which were incurred in 2005. As of December 31,
2006, the State of Louisiana and City of New Orleans had fulfilled their
obligation to us of $17 million for their portion of the cost of the New Orleans
terminal.
Cash used
for financing activities of $22.4 million included regularly scheduled debt
payments of $10.3 million, $10 million for repayment of draws on our line of
credit, $12.5 million for the repurchase of some of our 7¾% Senior Notes at a
small premium, and $2.4 million for preferred stock dividend
payments. These uses of cash were partially offset by $10 million
from draws on our line of credit, the $2.6 million received from the State of
Louisiana and City of New Orleans mentioned earlier, and proceeds of $465,000
from the issuance of common stock pursuant to the exercise of stock
options.
LIQUIDITY-2005
The following discussion should be read
in conjunction with the more detailed Consolidated Balance Sheets and
Consolidated Statements of Cash Flows included elsewhere herein as part of our
Consolidated Financial Statements.
Our working capital decreased from
$17.7 million at December 31, 2004, to $16.1 million at December 31,
2005. Cash and cash equivalents increased during 2005 by $5.7
million to a total of $16.2 million. This increase was due to cash
provided by operating activities of $23.8 million and by financing activities of
$43.1 million, partially offset by cash used for investing activities of $61.2
million. Of the $57.7 million in current liabilities at December 31, 2005, $10.3
million related to current maturities of long-term debt.
Operating activities generated a
positive cash flow after adjusting net income of $7 million for non-cash
provisions such as depreciation and amortization. Cash provided by
operating activities also included an increase in accounts receivable of $8.2
million primarily due to the timing of collections of receivables from the MSC
and U.S. Department of Transportation, slightly offset by an increase in
accounts payable and accrued liabilities of $1.8 million primarily from the
deferral of payroll tax payments until February of 2006, resulting from relief
provided to companies affected by Hurricane Katrina. Also included
was cash used of $5.0 million primarily to cover payments for vessel drydocking
costs in 2005, offset by cash distributions received from our investments in
unconsolidated entities.
Cash used
for investing activities of $61.2 million included the purchase of a PCTC vessel
in September of 2005 for approximately $32.1 million, upgrade work on our Rail-Ferry Service assets of
$35 million of which $14.3 million was reimbursed by the State of Louisiana and
City of New Orleans, and our investment of $1.6 million in a transloading and
storage facility related to our Rail-Ferry Service, in which
we have a 50% interest. These uses of cash were offset by the
proceeds from the sale of the over-the-road car transportation truck company
assets of approximately $3.0 million and certain of our LASH barges of
$700,000.
Cash
provided by financing activities of $43.1 million included proceeds from the
issuance of debt and preferred stock of $85.7 million. In January of
2005, we received proceeds of $37.7 million from our preferred stock
offering. We used $20 million of the proceeds to repay the draws on
our line of credit that were made in December of 2004 to purchase two container
ships, and we have been using the remaining proceeds to fund the addition of the
second decks to each of the two vessels operating in our Rail-Ferry
Service. We also received proceeds of $32.0 million from the
financing of a PCTC vessel that we acquired in 2005 and $14.0 million to fund a
portion of our costs associated with the improvements to the Louisiana terminal
and the transloading and storage facility related to our Rail-Ferry
Service. Cash provided by financing activities also included
$14.3 million for reimbursement of costs incurred for our Rail-Ferry Service
expansion. These sources of funds were offset by repayments of debt
of $54.1 million, of which $22.0 million was for repayment on the line of credit
draws, including the $20.0 million discussed earlier, $18.3 million used to
repurchase $18.5 million of our 7¾% Senior Notes at a discount, $4.0 million
used to prepay a loan, and regularly scheduled payments.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
In the
ordinary course of our business, we are exposed to foreign currency, interest
rate, and commodity price risk. We utilize derivative financial
instruments including interest rate swap agreements and forward exchange
contracts, and in the past we have also utilized commodity swap agreements to
manage certain of these exposures. We hedge only firm commitments or
anticipated transactions and do not use derivatives for
speculation. We neither hold nor issue financial instruments for
trading purposes.
Interest Rate
Risk
The fair
value of our cash and short-term investment portfolio at December 31, 2007,
approximated its carrying value due to its short-term duration. The
potential decrease in fair value resulting from a hypothetical 10% increase in
interest rates at year-end for our investment portfolio is not
material.
The fair value of long-term debt,
including current maturities, was estimated to be $143.2 million compared to a
carrying value of $143.2 million. The potential increase in fair
value resulting from a hypothetical 10% adverse change in the borrowing rates
applicable to our long-term debt at December 31, 2007 is not applicable due to
the retirement of all of the company’s remaining outstanding obligations of its
7¾% Senior Unsecured Notes in October of 2007.
We have
entered into five interest rate swap agreements with commercial banks, two in
September of 2005, one in November of 2005, one in September of 2007, and one in
November of 2007 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. For each of these agreements, the fixed rate payor is the
Company, and the floating rate payor is the commercial bank. While
these arrangements are structured to reduce our exposure to increases in
interest rates, it also limits the benefit we might otherwise receive from any
decreases in interest rates.
The fair
value of these agreements at December 31, 2007, estimated based on the amount
that the banks would receive or pay to terminate the swap agreements at the
reporting date, taking into account current market conditions and interest
rates, is a liability of $1.4 million. A hypothetical 10% decrease in
interest rates as of December 31, 2007 would have resulted in a $2.5 million
liability.
Commodity Price
Risk
As of December 31, 2007, we do not have
commodity swap agreements in place to manage our exposure to price risk related
to the purchase of the estimated 2008 fuel requirements for our Rail-Ferry Service
segment. We have fuel surcharges in place for our Rail-Ferry Service, which we
expect to effectively manage the price risk for those services during
2008. Revenues from fuel surcharges in 2007 for the Rail-Ferry Service was $1.8
million. If we had commodity swap agreements, they could be
structured to reduce our exposure to increases in fuel
prices. However, they would also limit the benefit we might otherwise
receive from any price decreases associated with this commodity. A
20% increase in the price of fuel for the period January 1, 2007 through
December 31, 2007 would have resulted in an increase of approximately $2.7
million in our fuel costs for the same period, and in a corresponding decrease
of approximately $0.42 in our basic earnings per share based on the shares of
our common stock outstanding as of December 31, 2007. However, we
believe that some or all of the price increase could have been passed on to our
customers through the aforementioned fuel surcharges during the same period but
might have been limited by our need to maintain competitive
rates. Our charterers in the Time Charter segment are responsible for
purchasing vessel fuel requirements; thus, we have no fuel price risk in this
segment.
Foreign Currency Exchange Rate
Risk
We have
entered into foreign exchange contracts to hedge certain firm purchase
commitments with varying maturities throughout 2007. The fair value
of these contracts at December 31, 2007, is a liability of
$2,000. The potential fair value of these contracts that would have
resulted from a hypothetical 10% adverse change in the exchange rates would be
immaterial
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.
ITEM 9a. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s Securities Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
As of
December 31, 2007, we conducted an evaluation of the effectiveness of our
disclosure controls and procedures. The evaluation was carried out
under the supervision and with the participation of our management, including
our Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”).
Based on
that evaluation as of such date, our CEO and CFO have concluded that our
disclosure controls and procedures have been effective in providing reasonable
assurance that they have been timely alerted of material information required to
be filed in this annual report. Since December 31, 2007, there have
been no significant changes in our internal controls or in other factors that
could significantly affect these controls. The design of any system
of controls is based in part upon certain assumptions about the likelihood of
future events and contingencies, and there can be no assurance that any design
will succeed in achieving our stated goals. Because of the inherent
limitations in any control system, you should be aware that misstatements due to
error or fraud could occur and not be detected.
Management’s Report on Internal
Control Over Financial Reporting
The
Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting. The Company’s
management has assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2007. In making this assessment, we
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control — Integrated Framework.
Based on our assessment we have concluded that, as of December 31, 2007,
the Company’s internal control over financial reporting is effective based on
those criteria. Our independent registered public accounting firm, Ernst &
Young LLP, has provided an attestation report on management’s assessment of the
Company’s internal control over financial reporting as of December 31,
2007.
Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial
Reporting
The Board of Directors and
Stockholders
International Shipholding
Corporation
We have
audited International Shipholding Corporation’s internal control over financial
reporting as of December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). International
Shipholding Corporation’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exits, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate International Shipholding
Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets
of International Shipholding Corporation as of December 31, 2007 and
2006, 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, 2007 of International Shipholding
Corporation and our report dated March 7, 2008 expressed an unqualified opinion
thereon.
|
|
|
|
|
|
|
|
|
|
||
|
|
/s/
Ernst & Young LLP
|
|
||
|
|
||||
New
Orleans, Louisiana
March 7,
2008
ITEM 9b. OTHER INFORMATION
-
None -
PART
III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
We have
adopted a written Code of Business Conduct and Ethics applicable to all
officers, directors and employees, including our principal executive officer,
principal financial officer and principal accounting officer. In
addition, (i) the audit, compensation and nominating and governance committees
of our board have each adopted written charters governing their operations and
(ii) our board has adopted written corporate governance
guidelines. Interested persons may obtain a copy of these materials
without charge by writing to International Shipholding Corporation, Attention:
Manuel G. Estrada, Vice President and Chief Financial Officer, 11 North Water
Street, RSA Battle House Tower, 18th Floor, Mobile,
Alabama 36602. Copies are also available on the Investor Relations
section of our website at www.intship.com.
The
information relating to Directors and Executive Officers called for by Item 10
is incorporated herein by reference to Item 4a, Executive Officers and Directors
of the Registrant. The remaining information called for by Item 10
will be included in our definitive proxy statement to be filed pursuant to
Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11
will be included in our definitive proxy statement to be 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
AND RELATED STOCKHOLDER MATTERS
Stock Repurchase
Plan
In
January 2008, our board authorized open market repurchases of up to 1,000,000
shares of our common stock, subject to a variety of factors, including our cash
requirements, the market price of our stock, and general economic and market
conditions. This authorization supercedes a predecessor program
authorized in 1999.
Equity Compensation
Plans
The
following table provides information about shares of our common stock authorized
for issuance under our existing equity compensation plan as of December 31,
2007.
|
Plan
category
|
(a)
Number
of securities to
be
issued upon conversion
of
outstanding options
|
(b)
Weighed-average
exercise
price of
outstanding
options
|
(c)
Number
of securities
remaining
available for
future
issuance under
plans
(excluding
securities
reflected in
column
(a))
|
|||||||||
|
Equity
compensation plans
approved
by security holders
|
-
|
$ |
-
|
175,000
|
||||||||
|
Equity
compensation plans not
approved
by security holders
|
-
|
-
|
-
|
|||||||||
|
Totals
|
-
|
$ |
-
|
175,000
|
||||||||
Other
The balance of the information called
for by Item 12 will be included in our definitive proxy statement to be filed
pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information called for by Item 13
will be included in our definitive proxy statement to be filed pursuant
to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by Item 14
will be included in our definitive proxy statement to be filed pursuant
to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated
herein by reference.
PART
IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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-21
of this Form 10-K.
Report of
Independent Registered Public Accounting Firm
Report of
Management, including its assessment of the effectiveness of its internal
controls over financial reporting
Report of
Independent Registered Public Accounting Firm on management’s assessment of, and
the effective operation of, internal controls over financial
reporting
Consolidated
Statements of Income for the years ended December 31, 2007, 2006, and
2005
Consolidated
Balance Sheets at December 31, 2007 and 2006
Consolidated
Statements of Changes in Stockholders' Investment for the years ended December
31, 2007, 2006, and 2005
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006, and
2005
Notes to
Consolidated Financial Statements
2. Financial Statement
Schedules
The
following financial statement schedules are included on pages S-1 through S-3 of
this Form 10-K.
Report of
Independent Registered Public Accounting Firm
Schedule
II -- Valuation and Qualifying Accounts and Reserves
All other
financial statement schedules are not required under the related instructions or
are inapplicable and therefore have been omitted.
3. Exhibits
|
(3.1)
|
Restated
Certificate of Incorporation of the Registrant (filed with the Securities
and Exchange Commission as Exhibit 3.1 to the Registrant's Form 10-Q for
the quarterly period ended September 30, 2004 and incorporated herein by
reference)
|
|
(3.2)
|
By-Laws
of the Registrant (filed with the Securities and Exchange Commission as
Exhibit 3.2 to the Registrant's Form 10-Q for the quarterly period ended
September 30, 2004 and incorporated herein by
reference)
|
|
(4.1)
|
Specimen
of Common Stock Certificate (filed as an exhibit to the Registrant's Form
8-A filed with the Securities and Exchange Commission on April 25, 1980
and incorporated herein by
reference)
|
|
(10.1)
|
Credit
Agreement, dated as of September 30, 2003, by and among LCI Shipholdings,
Inc. and Central Gulf Lines, Inc., as Joint and Several Borrowers, the
banks and financial institutions listed therein, as Lenders, Deutsche
Schiffsbank Aktiengesellschaft as Facility Agent and Security Trustee, DnB
NOR Bank ASA, as Documentation Agent, and the Registrant, as Guarantor
(filed with the Securities and Exchange Commission as Exhibit 10.2 to
Pre-Effective Amendment No. 2, dated December 10, 2004 and filed with the
Securities and Exchange Commission on December 10, 2004, to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-120161) and incorporated herein by
reference)
|
|
(10.2)
|
Credit
Agreement, dated as of December 6, 2004, by and among LCI Shipholdings,
Inc., Central Gulf Lines, Inc. and Waterman Steamship Corporation, as
Borrowers, the banks and financial institutions listed therein, as
Lenders, Whitney National Bank, as Administrative Agent, Security Trustee
and Arranger, and the Registrant, Enterprise Ship Company, Inc., Sulphur
Carriers, Inc., Gulf South Shipping PTE Ltd. and CG Railway, Inc., as
Guarantors (filed with the Securities and Exchange Commission as Exhibit
10.3 to Pre-Effective Amendment No. 2, dated December 10, 2004 and filed
with the Securities and Exchange Commission on December 10, 2004, to the
Registrant's Registration Statement on Form S-1 (Registration No.
333-120161) and incorporated herein by
reference)
|
|
(10.3)
|
Credit
Agreement, dated September 26, 2005, by and among Central Gulf Lines,
Inc., as Borrower, the banks and financial institutions listed therein, as
Lenders, DnB NOR Bank ASA, as Facility Agent and Arranger, and Deutsche
Schiffsbank Aktiengesellschaft, as Security Trustee and Arranger, and the
Registrant, as Guarantor (filed with the Securities and Exchange
Commission as Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated September 30, 2005 and incorporated herein by
reference)
|
|
(10.4)
|
Credit
Agreement, dated December 13, 2005, by and among CG Railway, Inc., as
Borrower, the investment company, Liberty Community Ventures III, L.L.C.,
as Lender, and the Registrant, as Guarantor (filed with the Securities and
Exchange Commission as Exhibit 10.4 to the Registrant's Form 10-K for the
annual period ended December 31, 2005 and incorporated herein by
reference)
|
|
(10.5)
|
Consulting
Agreement, dated January 1, 2006, between the Registrant and Niels W.
Johnsen (filed with the Securities and Exchange Commission as Exhibit 10.5
to the Registrant's Form 10-K for the annual period ended December 31,
2005 and incorporated herein by
reference)
|
|
(10.6)
|
Consulting
Agreement, dated April 30, 2007, between the Registrant and Erik F.
Johnsen *
|
|
(10.7)
|
International
Shipholding Corporation Stock Incentive Plan (filed with the Securities
and Exchange Commission as Exhibit 10.5 to the Registrant's Form 10-K for
the annual period ended December 31, 2004 and incorporated herein by
reference)
|
|
(10.8)
|
Form
of Stock Option Agreement for the Grant of Non-Qualified Stock Options
under the International Shipholding Corporation Stock Incentive Plan
(filed with the Securities and Exchange Commission as Exhibit 10.6 to the
Registrant's Form 10-K for the annual period ended December 31, 2004 and
incorporated herein by
reference)
|
|
(10.9)
|
Description
of Life Insurance Benefits Provided by the Registrant to Niels W. Johnsen
and Erik F. Johnsen Plan (filed with the Securities and Exchange
Commission as Exhibit 10.8 to the Registrant's Form 10-K for the annual
period ended December 31, 2004 and incorporated herein by
reference)
|
|
(10.10)
|
Memorandum
of Agreement of the Registrant, dated as of August 24, 2007, providing for
the Registrant’s purchase of one 6400 CEU Panamanian flagged pure car and
truck carrier (Confidential treatment requested on
certain portions of this exhibit. An unredacted version of this
exhibit has been filed separately with the Securities and Exchange
Commission.) *
|
|
(10.11)
|
Loan
Agreement, dated as of September 10, 2007, by and amongWaterman Steamship
Corporation, as borrower, the Registrant, as guarantor, DnB NOR Bank ASA,
as facility agent and security trustee.
*
|
|
(10.12)
|
SHIPSALES
Agreement, dated as of September 21, 2007, by and between East Gulf
Shipholding, Inc., as buyer, and Clio Marine Inc., as seller.
(Confidential treatment requested on certain portions of this
exhibit. An unredacted version of this exhibit has been filed
separately with the Securities and Exchange Commission.)
*
|
|
(10.13)
|
Facility
Agreement, dated as of January 23, 2008, by and among East Gulf
Shipholding, Inc., as borrower, the Registrant, as guarantor, the banks
and financial institutions party thereto, as lenders, DnB NOR Bank ASA, as
facility agent, and Deutsche Schiffsbank Aktiengesellschaft, as security
trustee. *
|
(21.1)Subsidiaries of International Shipholding Corporation *
|
(31.1)
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 *
|
|
(31.2)
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 *
|
|
(32.1)
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
|
|
(32.2)
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
|
|
|
*These
exhibits filed with this 10-K
report
|
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNATIONAL SHIPHOLDING
CORPORATION
(Registrant)
/s/ Manuel G. Estrada
March 13,
2008 By ______________________________
Manuel G. Estrada
Vice President and Chief Financial
Officer
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
INTERNATIONAL SHIPHOLDING
CORPORATION
(Registrant)
/s/ Niels M. Johnsen
March 13,
2008 By ____________________________
Niels M. Johnsen
Chairman
of the Board, Director and
Chief
Executive Officer
/s/ Erik L. Johnsen
March 13,
2008 By ____________________________
Erik L. Johnsen
President and Director
/s/ Niels W. Johnsen
March 13,
2008 By ____________________________
Niels W. Johnsen
Director
/s/
Erik F. Johnsen
March 13,
2008 By ____________________________
Erik F. Johnsen
Director
/s/
Harold S. Grehan, Jr.
March 13,
2008 By ____________________________
Harold S. Grehan, Jr.
Director
/s/ Raymond V. O’Brien,
Jr.
March 13,
2008 By ____________________________
Raymond V. O’Brien, Jr.
Director
/s/ Edwin A. Lupberger
March 13,
2008 By ____________________________
Edwin A. Lupberger
Director
/s/ Edward K. Trowbridge
March 13,
2008 By ____________________________
Edward K. Trowbridge
Director
/s/ H. Merritt Lane III
March 13,
2008 By ____________________________
H. Merritt Lane III
Director
/s/ Manuel G. Estrada
March 13,
2008 By ____________________________
Manuel G. Estrada
Vice President and Chief Financial
Officer
/s/ Kevin M. Wilson
March 13,
2008 By __________________________
Kevin M. Wilson
Controller
INDEX OF FINANCIAL
STATEMENTS
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
International
Shipholding Corporation
We have
audited the accompanying consolidated balance sheets of International
Shipholding Corporation as of December 31, 2007 and 2006, 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, 2007. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of International
Shipholding Corporation at December 31, 2007 and 2006, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of International Shipholding
Corporation's internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 7, 2008 expressed an unqualified opinion
thereon.
/s/ Ernst
& Young LLP
New
Orleans, Louisiana
March 7,
2008
|
INTERNATIONAL
SHIPHOLDING CORPORATION
|
||||||||||||
|
CONSOLIDATED STATEMENTS OF
INCOME
|
||||||||||||
|
(All Amounts in Thousands
Except Share Data)
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues
|
$ |
197,110
|
$ |
185,464
|
$ |
168,791
|
||||||
|
Operating
Expenses:
|
||||||||||||
|
Voyage
Expenses
|
147,012
|
137,478
|
125,107
|
|||||||||
|
Vessel
and Barge Depreciation
|
21,322
|
20,066
|
18,895
|
|||||||||
|
Impairment
Loss
|
-
|
8,866
|
-
|
|||||||||
|
Gross
Voyage Profit
|
28,776
|
19,054
|
24,789
|
|||||||||
|
Administrative
and General Expenses
|
18,158
|
17,609
|
14,685
|
|||||||||
|
Gain
on Sale of Other Assets
|
(12 | ) |
-
|
-
|
||||||||
|
Operating
Income
|
10,630
|
1,445
|
10,104
|
|||||||||
|
Interest
and Other:
|
||||||||||||
|
Interest
Expense
|
9,762
|
11,147
|
9,626
|
|||||||||
|
Gain
on Sale of Investment
|
(352 | ) | (23,058 | ) | (287 | ) | ||||||
|
Investment
Income
|
(2,592 | ) | (1,397 | ) | (1,111 | ) | ||||||
|
Loss
on Early Extinguishment of Debt
|
-
|
248
|
68
|
|||||||||
|
6,818
|
(13,060 | ) |
8,296
|
|||||||||
|
Income
from Continuing Operations Before (Benefit) Provision for
|
||||||||||||
|
Income
Taxes and Equity in Net Income of Unconsolidated Entities
|
3,812
|
14,505
|
1,808
|
|||||||||
|
(Benefit)
Provision for Income Taxes:
|
||||||||||||
|
Current
|
120
|
113
|
113
|
|||||||||
|
Deferred
|
(1,570 | ) |
919
|
(928 | ) | |||||||
|
State
|
86
|
4
|
23
|
|||||||||
| (1,364 | ) |
1,036
|
(792 | ) | ||||||||
|
Equity
in Net Income of Unconsolidated
|
||||||||||||
|
Entities
(Net of Applicable Taxes)
|
6,616
|
4,725
|
3,793
|
|||||||||
|
Income
from Continuing Operations
|
11,792
|
18,194
|
6,393
|
|||||||||
|
Loss
from Discontinued Operations:
|
||||||||||||
|
Loss
before benefits for income taxes
|
(4,238 | ) | (8,440 | ) | (1,646 | ) | ||||||
|
Gain
on Sale of Liner Assets
|
9,880
|
5,125
|
584
|
|||||||||
|
(Provision)
Benefit for Income Taxes
|
(18 | ) |
2,169
|
1,665
|
||||||||
|
Net
Income (Loss) from Discontinued Operations
|
5,624
|
(1,146 | ) |
603
|
||||||||
|
Net
Income
|
$ |
17,416
|
$ |
17,048
|
$ |
6,996
|
||||||
|
Preferred
Stock Dividends
|
2,400
|
2,400
|
2,367
|
|||||||||
|
Net
Income Available to Common Stockholders
|
$ |
15,016
|
$ |
14,648
|
$ |
4,629
|
||||||
|
Basic
and Diluted Earnings Per Common Share:
|
||||||||||||
|
Net
Income (Loss) Available to Common Stockholders
|
||||||||||||
|
Continuing
Operations
|
$ |
1.48
|
$ |
2.58
|
$ |
0.66
|
||||||
|
Discontinued
Operations
|
0.88
|
(0.18 | ) |
0.10
|
||||||||
| $ |
2.36
|
$ |
2.40
|
$ |
0.76
|
|||||||
|
Net
Income (Loss) Available to Common Stockholders - Diluted
|
||||||||||||
|
Continuing
Operations
|
$ |
1.41
|
$ |
2.24
|
$ |
0.66
|
||||||
|
Discontinued
Operations
|
0.67
|
(0.14 | ) |
0.09
|
||||||||
| $ |
2.08
|
$ |
2.10
|
$ |
0.75
|
|||||||
|
Weighted
Average Shares of Common Stock Outstanding:
|
||||||||||||
|
Basic
|
6,360,208
|
6,116,036
|
6,083,005
|
|||||||||
|
Diluted
|
8,369,473
|
8,122,578
|
6,114,510
|
|||||||||
The accompanying notes are an
integral part of these statements.
|
INTERNATIONAL
SHIPHOLDING CORPORATION
|
||||||||
|
CONSOLIDATED BALANCE
SHEETS
|
||||||||
|
(All Amounts in Thousands
Except Share Data)
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
ASSETS
|
2007
|
2006
|
||||||
|
Current
Assets:
|
||||||||
|
Cash
and Cash Equivalents
|
$ |
14,103
|
$ |
44,273
|
||||
|
Marketable
Securities
|
5,578
|
6,545
|
||||||
|
Accounts
Receivable, Net of Allowance for Doubtful Accounts
|
||||||||
|
of
$132 and $216 in 2007 and 2006:
|
||||||||
|
Traffic
|
9,637
|
10,540
|
||||||
|
Agents'
|
1,804
|
1,730
|
||||||
|
Other
|
9,233
|
8,613
|
||||||
|
Federal
Income Taxes Receivable
|
-
|
322
|
||||||
|
Deferred
Income Tax
|
-
|
67
|
||||||
|
Net
Investment in Direct Financing Leases
|
7,391
|
4,400
|
||||||
|
Other
Current Assets
|
2,327
|
1,115
|
||||||
|
Material
and Supplies Inventory
|
2,665
|
3,226
|
||||||
|
Assets
Held for Disposal
|
9,105
|
6,861
|
||||||
|
Total
Current Assets
|
61,843
|
87,692
|
||||||
|
Investment
in Unconsolidated Entities
|
16,326
|
12,409
|
||||||
|
Net
Investment in Direct Financing Leases
|
107,208
|
70,497
|
||||||
|
Vessels,
Property, and Other Equipment, at Cost:
|
||||||||
|
Assets
Held for Disposal
|
-
|
3,306
|
||||||
|
Vessels
and Barges
|
384,923
|
373,393
|
||||||
|
Leasehold
Improvements
|
29,530
|
20,054
|
||||||
|
Other
Equipment
|
2,077
|
2,074
|
||||||
|
Furniture
and Equipment
|
6,009
|
3,037
|
||||||
|
422,539
|
401,864
|
|||||||
|
Less
- Accumulated Depreciation
|
(196,896 | ) | (173,840 | ) | ||||
|
225,643
|
228,024
|
|||||||
|
Other
Assets:
|
||||||||
|
Deferred
Charges, Net of Accumulated Amortization
|
15,337
|
14,577
|
||||||
|
of
$9,781 and $11,114 in 2007 and 2006, Respectively
|
||||||||
|
Acquired
Contract Costs, Net of Accumulated Amortization
|
3,274
|
4,729
|
||||||
|
of
$27,251 and $25,796 in 2007 and 2006, Respectively
|
||||||||
|
Due
from Related Parties
|
5,897
|
4,015
|
||||||
|
Other
|
5,127
|
6,099
|
||||||
|
29,635
|
29,420
|
|||||||
| $ |
440,655
|
$ |
428,042
|
|||||
The accompanying notes are an integral
part of these statements.
|
INTERNATIONAL SHIPHOLDING
CORPORATION
|
||||||||
|
CONSOLIDATED BALANCE
SHEETS
|
||||||||
|
(All Amounts in Thousands
Except Share Data)
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
Maturities of Long-Term Debt
|
$ |
12,681
|
$ |
50,250
|
||||
|
Accounts
Payable and Accrued Liabilities
|
23,546
|
27,835
|
||||||
|
Current
Liabilities related to Assets Held for Disposal
|
2,427
|
6,583
|
||||||
|
Total
Current Liabilities
|
38,654
|
84,668
|
||||||
|
Billings
in Excess of Income Earned and Expenses Incurred
|
(363 | ) |
700
|
|||||
|
Long-Term
Debt, Less Current Maturities
|
130,523
|
98,984
|
||||||
|
Other
Long-Term Liabilities:
|
||||||||
|
Deferred
Income Taxes
|
9,072
|
11,837
|
||||||
|
Lease
Incentive Obligation
|
13,789
|
17,890
|
||||||
|
Other
|
37,724
|
22,673
|
||||||
|
60,585
|
52,400
|
|||||||
|
Commitments
and Contingent Liabilities
|
||||||||
|
Convertible
Exchangeable Preferred Stock
|
37,554
|
37,554
|
||||||
|
Stockholders'
Investment:
|
||||||||
|
Common
Stock, $1.00 Par Value, 10,000,000 Shares Authorized,
|
7,193
|
6,793
|
||||||
|
7,192,630
And 6,792,630 Shares Issued at December 31, 2007 and
|
||||||||
|
December
31, 2006, Respectively
|
||||||||
|
Additional
Paid-In Capital
|
60,177
|
54,927
|
||||||
|
Retained
Earnings
|
117,008
|
101,992
|
||||||
|
Less
- 673,443 Shares of Common Stock in Treasury, at Cost,
|
(8,704 | ) | (8,704 | ) | ||||
|
at
December 31, 2007 and 2006, Respectively
|
||||||||
|
Accumulated
Other Comprehensive Income (Loss)
|
(1,972 | ) | (1,272 | ) | ||||
|
173,702
|
153,736
|
|||||||
| $ |
440,655
|
$ |
428,042
|
|||||
The accompanying notes are an
integral part of these statements.
|
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' INVESTMENT
|
||||||||||||||||||||||||
|
(All Amounts in
Thousands)
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||||||
|
Common
|
Paid-In
|
Retained
|
Treasury
|
Comprehensive
|
||||||||||||||||||||
|
Stock
|
Capital
|
Earnings
|
Stock
|
(Loss)
Income
|
Total
|
|||||||||||||||||||
|
Balance
at December 31, 2004
|
$ |
6,756
|
$ |
54,450
|
$ |
82,715
|
$ | (8,704 | ) | $ |
237
|
$ |
135,454
|
|||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net
Income
|
-
|
-
|
6,996
|
-
|
-
|
6,996
|
||||||||||||||||||
|
Other
Comprehensive Income:
|
||||||||||||||||||||||||
|
Recognition
of Unrealized Holding Gain on Marketable
|
||||||||||||||||||||||||
|
Securities,
Net of Deferred Taxes of ($88)
|
-
|
-
|
-
|
-
|
(163 | ) | (163 | ) | ||||||||||||||||
|
Unrealized
Holding Gain on Marketable Securities,
|
||||||||||||||||||||||||
|
Net
of Deferred Taxes of $224
|
-
|
-
|
-
|
-
|
416
|
416
|
||||||||||||||||||
|
Net
Change in Fair Value of Derivatives, Net of
|
||||||||||||||||||||||||
|
Deferred
Taxes of ($91)
|
-
|
-
|
-
|
-
|
329
|
329
|
||||||||||||||||||
|
Total
Comprehensive Income
|
7,578
|
|||||||||||||||||||||||
|
Preferred
Stock Dividends
|
-
|
-
|
(2,367 | ) |
-
|
-
|
(2,367 | ) | ||||||||||||||||
|
Options
Exercised
|
4
|
45
|
-
|
-
|
-
|
49
|
||||||||||||||||||
|
Balance
at December 31, 2005
|
6,760
|
54,495
|
87,344
|
(8,704 | ) |
819
|
140,714
|
|||||||||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net
Income
|
-
|
-
|
17,048
|
-
|
-
|
17,048
|
||||||||||||||||||
|
Other
Comprehensive Income (Loss):
|
||||||||||||||||||||||||
|
Recognition
of Unrealized Holding Gain on Marketable
|
||||||||||||||||||||||||
|
Securities,
Net of Deferred Taxes of ($140)
|
-
|
-
|
-
|
-
|
(206 | ) | (206 | ) | ||||||||||||||||
|
Unrealized
Holding Gain on Marketable Securities,
|
||||||||||||||||||||||||
|
Net
of Deferred Taxes of $43
|
-
|
-
|
-
|
-
|
219
|
219
|
||||||||||||||||||
|
Net
Change in Fair Value of Derivatives, Net of
|
||||||||||||||||||||||||
|
Deferred
Taxes of $176
|
-
|
-
|
-
|
-
|
656
|
656
|
||||||||||||||||||
|
Total
Comprehensive Income
|
17,717
|
|||||||||||||||||||||||
|
Adjustment
to Initially Apply SFAS No. 158, Net of
|
||||||||||||||||||||||||
|
Deferred
Taxes of ($8)
|
-
|
-
|
-
|
-
|
(2,760 | ) | (2,760 | ) | ||||||||||||||||
|
Preferred
Stock Dividends
|
-
|
-
|
(2,400 | ) |
-
|
-
|
(2,400 | ) | ||||||||||||||||
|
Options
Exercised
|
33
|
432
|
-
|
-
|
-
|
465
|
||||||||||||||||||
|
Balance
at December 31, 2006
|
6,793
|
54,927
|
101,992
|
(8,704 | ) | (1,272 | ) |
153,736
|
||||||||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net
Income
|
-
|
-
|
17,416
|
-
|
-
|
17,416
|
||||||||||||||||||
|
Other Comprehensive Income
(Loss):
|
||||||||||||||||||||||||
|
Recognition of Unrealized
Holding Gain on Marketable
|
||||||||||||||||||||||||
|
Securities, Net of Deferred
Taxes of ($48)
|
-
|
-
|
-
|
-
|
(89 | ) | (89 | ) | ||||||||||||||||
|
Unrealized Holding Gain on
Marketable Securities,
|
||||||||||||||||||||||||
|
Net of Deferred Taxes of
($86)
|
-
|
-
|
-
|
-
|
(160 | ) | (160 | ) | ||||||||||||||||
|
Net Change in Fair Value of
Derivatives, Net of
|
||||||||||||||||||||||||
|
Deferred Taxes of
($325)
|
-
|
-
|
-
|
-
|
(2,177 | ) | (2,177 | ) | ||||||||||||||||
|
Change in Funding Status of
Benefit Plans, Net of Deferred Taxes of $12
|
-
|
-
|
-
|
-
|
1,726
|
1,726
|
||||||||||||||||||
|
Total Comprehensive
Income
|
16,716
|
|||||||||||||||||||||||
|
Preferred Stock
Dividends
|
-
|
-
|
(2,400 | ) |
-
|
-
|
(2,400 | ) | ||||||||||||||||
|
Options
Exercised
|
400
|
5,250
|
-
|
-
|
-
|
5,650
|
||||||||||||||||||
|
Balance at December 31,
2007
|
$ |
7,193
|
$ |
60,177
|
$ |
117,008
|
$ | (8,704 | ) | $ | (1,972 | ) | $ |
173,702
|
||||||||||
The accompanying notes are an
integral part of these statements.
|
|
||||||||||||
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
||||||||||||
|
(All Amounts in
Thousands)
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
Income
|
$ |
17,416
|
$ |
17,048
|
$ |
6,996
|
||||||
|
Adjustments
to Reconcile Net Income to Net Cash Provided by
|
||||||||||||
|
Operating
Activities:
|
||||||||||||
|
Depreciation
|
23,969
|
24,417
|
23,116
|
|||||||||
|
Amortization
of Deferred Charges and Other Assets
|
9,779
|
7,954
|
8,071
|
|||||||||
|
Benefit
for Deferred Federal Income Taxes
|
(1,468 | ) | (1,137 | ) | (3,245 | ) | ||||||
|
Impairment
Loss
|
-
|
8,866
|
-
|
|||||||||
|
Equity
in Net Income of Unconsolidated Entities
|
(6,616 | ) | (4,725 | ) | (3,793 | ) | ||||||
|
Distributions
from Unconsolidated Entities
|
4,400
|
1,450
|
3,280
|
|||||||||
|
Proceeds
from Lease Incentive Obligations
|
-
|
2,779
|
-
|
|||||||||
|
Gain
on Sale of Assets
|
(11,280 | ) | (5,125 | ) | (584 | ) | ||||||
|
Loss
on Sale of Assets from Discontinued Operations
|
-
|
-
|
769
|
|||||||||
|
Loss
on Early Extinguishment of Debt
|
-
|
248
|
68
|
|||||||||
|
Gain
on Sale of Investments
|
(352 | ) | (23,058 | ) | (287 | ) | ||||||
|
Payments
for Vessel Drydocking
|
(9,810 | ) | (8,432 | ) | (5,043 | ) | ||||||
|
Changes
in:
|
||||||||||||
|
Accounts
Receivable
|
1,322
|
12,349
|
(8,185 | ) | ||||||||
|
Inventories
and Other Current Assets
|
(856 | ) |
1,416
|
722
|
||||||||
|
Other
Assets
|
(187 | ) |
2,767
|
884
|
||||||||
|
Accounts
Payable and Accrued Liabilities
|
(4,868 | ) | (12,079 | ) |
1,802
|
|||||||
|
Federal
Income Taxes Payable
|
-
|
(544 | ) | (331 | ) | |||||||
|
Billings
in Excess of Income Earned and Expenses Incurred
|
(1,063 | ) | (3,362 | ) | (661 | ) | ||||||
|
Other
Long-Term Liabilities
|
(155 | ) |
2,149
|
199
|
||||||||
|
Net
Cash Provided by Operating Activities
|
20,231
|
22,981
|
23,778
|
|||||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||
|
Principal
payments received under Direct Financing Leases
|
5,129
|
3,668
|
(29,452 | ) | ||||||||
|
Capital
Improvements to Vessels, Leasehold Improvements, and Other
|
(56,072 | ) | (21,799 | ) | (35,000 | ) | ||||||
|
Proceeds
from Sale of Assets
|
48,750
|
12,026
|
3,756
|
|||||||||
|
Purchase
of and Proceeds from Short Term Investments
|
1,072
|
552
|
200
|
|||||||||
|
Investment
in Unconsolidated Entities
|
(1,004 | ) | (1,336 | ) | (1,647 | ) | ||||||
|
Return
of Capital of Unconsolidated Entity
|
-
|
2,480
|
-
|
|||||||||
|
Proceeds
from Sale of Unconsolidated Entity
|
-
|
27,490
|
-
|
|||||||||
|
Decrease
in Restricted Cash Account
|
-
|
6,541
|
-
|
|||||||||
|
Increase in
Related Party Note Receivables
|
(55 | ) | (2,090 | ) |
935
|
|||||||
|
Net
Cash (Used) Provided by Investing Activities
|
(2,180 | ) |
27,532
|
(61,208 | ) | |||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||
|
Proceeds
from Issuance of Preferred Stock
|
-
|
-
|
37,725
|
|||||||||
|
Proceeds
from Issuance of Common Stock
|
5,650
|
465
|
49
|
|||||||||
|
Proceeds
from Issuance of Debt
|
-
|
10,000
|
48,000
|
|||||||||
|
Repayment
of Debt
|
(50,253 | ) | (32,761 | ) | (54,095 | ) | ||||||
|
Additions
to Deferred Financing Charges
|
(590 | ) | (175 | ) | (421 | ) | ||||||
|
Preferred
Stock Dividends Paid
|
(2,400 | ) | (2,400 | ) | (2,367 | ) | ||||||
|
Reimbursements
for Leasehold Improvements
|
-
|
2,613
|
14,310
|
|||||||||
|
Other
Financing Activities
|
(628 | ) | (160 | ) | (106 | ) | ||||||
|
Net
Cash (Used) Provided by Financing Activities
|
(48,221 | ) | (22,418 | ) |
43,095
|
|||||||
|
Net
Increase (Decrease) in Cash and Cash
Equivalents
|
(30,170 | ) |
28,095
|
5,665
|
||||||||
|
Cash
and Cash Equivalents at Beginning of Year
|
44,273
|
16,178
|
10,513
|
|||||||||
|
Cash
and Cash Equivalents at End of Year
|
$ |
14,103
|
$ |
44,273
|
$ |
16,178
|
||||||
The accompanying notes are an
integral part of these statements.
NOTE A - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The accompanying consolidated financial
statements include the accounts of International Shipholding Corporation (a
Delaware corporation) and its majority-owned subsidiaries. In this
report, the terms “we,” “us,” “our,” and “the Company” refer to International
Shipholding Corporation and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Our policy is to consolidate all
subsidiaries in which we hold a greater than 50% voting interest or otherwise
control its operating and financial activities. We use the equity
method to account for investments in entities in which we hold a 20% to 50%
voting interest and have the ability to exercise significant influence over
their operating and financial activities, and the cost method to account for
investments in entities in which we hold less than 20% voting interest and in
which we cannot exercise significant influence over operating and financial
activities.
Certain reclassifications have been
made to the prior period financial information in order to conform to current
year presentation.
Nature of
Operations
Through our subsidiaries, we operate a
diversified fleet of U.S. and international flag vessels that provide domestic
and international maritime transportation services to commercial customers and
agencies of the United States government primarily under medium- to long-term
charters or contracts. At December 31, 2007, our fleet consisted of
28 ocean-going vessels (including our LASH vessel which was sold for scrap in
January 2008) and related shoreside handling facilities. Our strategy
is to (i) identify customers with high credit quality and marine transportation
needs requiring specialized vessels or operating techniques, (ii) seek medium-
to long-term charters or contracts with those customers and, if necessary,
modify, acquire, or construct vessels to meet the requirements of those charters
or contracts, (iii) secure financing for the vessels predicated primarily on
those charter or contract arrangements, and (iv) provide our customers with
reliable, high quality service at a reasonable cost.
Use of
Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Voyage Revenue and Expense
Recognition
Revenues and expenses relating to our
Rail-FerryService segments' voyages are
recorded over the duration of the voyage. Our voyage expenses are
estimated at the beginning of the voyages based on historical actual costs or
from industry sources familiar with those types of charges. As the
voyage progresses, these estimated costs are revised with actual charges and
timely adjustments are made. The expenses are ratably expensed over
the voyage based on the number of days in progress at the end of the
period. We believe there is no material difference between recording
estimated expenses ratably over the voyage versus recording expenses as
incurred. Revenues and expenses relating to our other segments'
voyages, which require no estimates or assumptions, are recorded when earned or
incurred during the reporting period.
Maritime Security
Program
The Maritime Security Act, which
established the Maritime Security Program (“MSP”), was signed into law in
October of 1996 and has been extended to 2015. As of December 31,
2007, six of our Pure Car/Truck Carriers (“PCTCs”), and two of our Container
vessels were qualified and received contracts for MSA
participation. Our U.S. LASH vessel was qualified and
received payments during the first two quarters of 2007, until the Liner Service
was discontinued in the second quarter. In the third quarter, the
sixth PCTC became qualified to receive payments. Annual payments for
each vessel in the MSP program are $2,600,000 in years 2007 and 2008, $2,900,000
in years 2009 to 2011, and $3,100,000 in years 2012 to 2015, which are subject
to annual appropriations and not guaranteed. We recognize MSP revenue
on a monthly basis over the duration of the qualifying contracts.
Cash and Cash
Equivalents
We
consider highly liquid debt instruments with a maturity of three months or less
to be cash equivalents. The carrying amount approximates fair value
for these instruments.
Inventories
Inventories aboard our vessels,
including fuel, are carried at the first-in, first-out method of
accounting. As of December 31, 2007, inventory included approximately
$1,710,000 for ordinary maintenance materials and parts and $955,000 for
operating supplies. As of
December 31, 2006, inventory included approximately $2,174,000 for ordinary
maintenance materials and parts and $1,052,000 for operating supplies.
Allowance for Doubtful
Accounts
We
provide an allowance for doubtful accounts for accounts receivable balances
estimated to be non-collectible. These provisions are maintained
based on identified specific accounts, past experiences, and current trends, and
require management’s estimates with respect to the amounts that are
non-collectible.
Property
For
financial reporting purposes, vessels are depreciated over their estimated
useful lives using the straight-line method. Estimated useful lives
of Vessels and Barges, Leasehold Improvements, Other Equipment, and Furniture
and Equipment are as follows:
|
Years
|
||||
|
1
LASH Vessel
|
30
|
|||
|
6
Pure Car/Truck Carriers
|
20
|
|||
|
1
Coal Carrier
|
15
|
|||
|
5
Other Vessels *
|
25
|
|||
|
Leasehold
Improvements
|
10-20
|
|||
|
Other
Equipment
|
3-12
|
|||
|
Furniture
and Equipment
|
3-10
|
*
Includes two Special Purpose vessels and three Container vessels.
At
December 31, 2007, our fleet of 28 vessels also included (i) three
Roll-On/Roll-Off (“RO/RO”) vessels, which we operate, (ii) a Molten Sulphur
Carrier, a Breakbulk/Multi-Purpose vessel, a Tanker and a Container vessel,
which we charter in one of our services, (iii) four PCTCs which we
charter in for our Time Charter contracts, (iv) two Capesize Bulk Carriers and
two Panamax Bulk Carriers in which we own a 50% interest.
Costs
of all major property additions and betterments are
capitalized. Ordinary maintenance and repair costs are expensed as
incurred. Interest and finance costs relating to vessels, barges, and
other equipment under construction are capitalized to properly reflect the cost
of assets acquired. Capitalized interest totaled $197,000 for the
year ended December 31, 2007 and $243,000 for the year ended December 31,
2005. Capitalized interest was calculated based on our weighted
average interest rate on our outstanding debt. No interest was
capitalized in 2006.
At December 31, 2007, our fleet also
included 235 LASH barges, which are reported at their estimated salvage
value. During the first two months of 2008, we sold the one remaining
LASH vessel and the majority of LASH barges, with the remaining LASH barges
under contract to be sold by the end of the first quarter of 2008.
We
monitor all of our fixed assets for impairment and perform an impairment
analysis in accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” when
triggering events or circumstances indicate a fixed asset may be
impaired. Events may include a decrease in the market price of the
long-lived asset (asset group) or a significant change in the way the asset is
being used. Once it is determined that an event may cause an
impairment, a comparison is done which shows the book value of the asset or
asset group against the estimated future cash flows the asset will generate over
the remaining useful life of the asset. It is possible that our asset
impairment review would include a determination of the asset’s fair value based
on a third-party evaluation or appraisal. An impairment loss is
measured as the amount by which the carrying amount of a long-lived asset (asset
group) exceeds its fair value. In 2007, we did not record any losses
with respect to recoverability of our long-lived assets.
Drydocking
Costs
We defer certain costs related to the
drydocking of our vessels. Deferred drydocking costs are capitalized
as incurred and amortized on a straight-line basis over the period between
drydockings (generally two to five years). Because drydocking charges
can be material in any one period, we believe that the acceptable deferred
method provides a better matching for the amortization of those costs over
future revenue periods benefiting from the drydocking of our
vessel. We capitalize only those costs that are incurred to meet
regulatory requirements or upgrades, or that add economic life to the
vessel. Normal repairs, whether incurred as part of the drydocking or
not, are expensed as incurred (See Note K – Deferred Charges and
Acquired Contract Costs on Page F-16).
Deferred Financing Charges
and Acquired Contract Costs
We
amortize our deferred financing charges and acquired contract costs over the
terms of the related financing agreements and contracts (See Note K – Deferred Charges and
Acquired Contract Costs on Page F-16).
Self-Retention
Insurance
We
maintain provisions for estimated losses under our self-retention insurance
program based on estimates of the eventual claims settlement
costs. Our policy is to establish self-insurance provisions for each
policy year based on estimates from management, and to generally maintain the
provisions at those levels for the estimated run-off period, approximately two
years from the inception of that period. We believe most claims will
be reported, or estimates for existing claims will be revised, within this
two-year period. Subsequent to this two-year period, self-insurance
provisions are adjusted to reflect our current estimate of loss exposure for the
policy year. However, if during this two-year period our estimate of
loss exposure exceeds the actuarial estimate, then additional loss provisions
are recorded to increase the self-insurance provisions to our estimate of the
eventual claims’ settlement cost. The measurement of our exposure for
self-insurance liability requires management to make estimates and assumptions
that affect the amount of loss provisions recorded during the reporting
period. Actual results could differ materially from those estimates
(See Note E – Self-Retention
Insurance on Page F-11).
Asbestos
Claims
We maintain provisions for estimated
losses for asbestos claims based on estimates of eventual claims settlement
costs. Our policy is to establish provisions based on a range of
estimated exposure. We estimate this potential range of exposure
using input from legal counsel and internal estimates based on the individual
deductible levels for each policy year. We are also indemnified for
certain of these claims by the previous owner of one of our wholly-owned
subsidiaries. The measurement of our exposure for asbestos liability
requires management to make estimates and assumptions that affect the amount of
loss provisions recorded during the period. Actual results could
differ from those estimates.
Income
Taxes
Income taxes are accounted for in
accordance with SFAS No. 109, “Accounting for Income
Taxes.” Provisions for income taxes include deferred income taxes
that are provided on items of income and expense, which affect taxable income in
one period and financial statement 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 of our foreign operations are subject to U.S. income
taxes when those earnings are repatriated to the U.S.
The Jobs
Creation Act, which first applied to us on January 1, 2005, changed the United
States tax treatment of the foreign operations of our U.S. flag vessels and our
foreign flag shipping operations. We made an election under the Jobs
Creation Act to have our qualifying U.S. flag operations taxed under a new
“tonnage tax” regime rather than under the usual U.S. corporate income tax
regime (See Note G – Income
Taxes on Page F-13).
Foreign Currency
Transactions
Certain of our revenues and expenses
are converted into or denominated in foreign currencies, primarily Singapore
Dollar, Indonesian Rupiah, Euro, British Pound, Mexican Peso, Indian Rupee,
Australian Dollar, and Japanese Yen. All exchange adjustments are
charged or credited to income in the year incurred. An exchange gain of $11,000
and $162,000 were recognized for the years ended December 31, 2007 and 2006,
respectively. An exchange loss of $74,000 was recognized for the year
ended December 31, 2005.
Dividend
Policy
On January 6, 2005, we announced
the completion of our public offering of 6% convertible exchangeable preferred
stock, and we have paid quarterly cash dividends commencing in March of 2005 at
a rate of 6% per annum. The payment of preferred stock dividends is
at the discretion of our board of directors. Through our preferred
stock offering, we are restricted from paying common stock dividends and
acquiring any of our common stock prior to December 31, 2007.
Earnings Per
Share
Basic and diluted earnings per share
were computed based on the weighted average number of common shares issued and
outstanding during the relevant periods. All stock options
outstanding have been exercised by December 31, 2007. Stock options outstanding
during the year ended December 31, 2007 were included in the computation of
diluted earnings per share. Stock options covering 400,000 and
471,600 shares (See
Note F – Employee Benefit Plans on Page F-12) were included in the
computation of diluted earnings per share in the years ended December 31, 2006
and 2005, respectively. In January of 2005, we issued convertible
exchangeable preferred stock, which are convertible into our common
stock. The if-converted effect of this preferred stock is dilutive
for years 2007 and 2006.
Derivative Instruments and
Hedging Activities
Under SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended, in order to consider a derivative instrument as a hedge, (i) we must
designate the instrument as a hedge of future transactions, and (ii) the
instrument must reduce our exposure to the applicable risk. If the
above criteria are not met, we must record the fair market value of the
instrument at the end of each period and recognize the related gain or loss
through earnings. If the instrument qualifies as a hedge, net
settlements under the agreement are recognized as an adjustment to earnings,
while changes in the fair market value of the hedge are recorded through
Stockholders’ Investment in Other Comprehensive Income (Loss). We
recognize the fair market value of the hedge through earnings at the time of
maturity, sale or termination of the hedge. We currently employ, or
have employed in the past, interest rate swap agreements, foreign currency
contracts, and commodity swap contracts (See Note O – Fair Value of
Financial Instruments and Derivatives on Page F-18).
Stock-Based
Compensation
Prior to
January 1, 2006, we accounted for stock-based compensation using Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees.” Accordingly, no compensation expense is recognized for
employee stock options issued under the Stock Incentive Plan if the exercise
price of the options equals the market price of our stock on the date of grant
(See Note F – Employee Benefit
Plans on Page F-12).
In
December of 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 123 (revised 2004), “Share-Based Payment,” which is a revision of
FASB Statement No. 123, “Accounting for Stock-Based
Compensation.” Statement No. 123(R) supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95,
“Statement of Cash Flows.” Statement No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair
values. Pro forma disclosures are no longer an
alternative. Statement No. 123(R) was effective for calendar year
public companies at the beginning of 2006. Effective January 1, 2006,
we have adopted Statement No. 123(R), which had no impact on our financial
position and results of operation.
Statement
No. 123(R) permits public companies to adopt its requirements using either a
modified prospective method or a modified retrospective method. Under
the modified prospective method, companies are required to record compensation
cost for new and modified awards over the related vesting period of such awards
prospectively and record compensation cost prospectively for the unvested
portion, at the date of adoption, of previously issued and outstanding awards
over the remaining vesting period of such awards. No change to prior
periods presented is permitted under the modified prospective
method. Under the modified retrospective method, companies record
compensation costs for prior periods retroactively through restatement of such
periods using the pro forma amounts previously disclosed in the
footnotes. Also, in the period of adoption and after, companies
record compensation cost based on the modified prospective method. We
have adopted this statement using the modified prospective method.
As
permitted by Statement No. 123, we previously accounted for share-based payments
to employees using APB Opinion No. 25 and as such no compensation expense has
been recognized for employee options granted under the Stock Incentive
Plan. Accordingly, the adoption of Statement No. 123(R)’s fair value
method will have an impact on our results of operations in future periods if we
were to grant additional awards. The future impact of adoption of
Statement No. 123(R) cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However, had we
adopted Statement No. 123(R) in prior periods, there would have been no impact
as described in the disclosure of pro forma net income and earnings per
share.
Pension and Postretirement
Benefits
Our pension and postretirement benefit
costs are calculated using various actuarial assumptions and methodologies as
prescribed by SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No.
106, “Employers’ Accounting for Postretirement Benefits Other than
Pensions.” These assumptions include discount rates, health care cost
trend rates, inflation, rate of compensation increases, expected return on plan
assets, mortality rates, and other factors. We believe that the
assumptions utilized in recording the obligations under our plans are reasonable
based on input from our outside actuary and information as to historical
experience and performance. Differences in actual experience or
changes in assumptions may affect our pension and postretirement obligations and
future expense.
In
December of 2006, we adopted SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106 and 132(R).” This
statement requires balance sheet recognition of the overfunded or underfunded
status of pension and postretirement benefit plans. Under SFAS No.
158, actuarial gains and losses, prior service costs or credits, and any
remaining transition assets or obligations that have not been recognized under
previous accounting standards must be recognized in Other Comprehensive Income,
net of tax effects, until they are amortized as a component of net periodic
benefit cost. In addition, the measurement date, the date at which
plan assets and the benefit obligation are measured, is required to be the
company’s fiscal year end. SFAS No. 158 does not change the
determination of net periodic benefit cost included in net income or the
measurement issues associated with benefit plan accounting. For the
period ended December 31, 2006, the effect of applying SFAS No. 158 on our
financial position was an increase to recorded liabilities of $2,768,000, an
increase to deferred tax assets of $8,000, and a decrease in Other Accumulated
Comprehensive Income of $2,760,000.
The
adjustment to initially apply SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements
No. 87, 88, 106 and 132(R)” was incorrectly included as part of the
comprehensive income classification in the statement of changes in stockholders’
investment in our 2006 annual financial statements. This presentation
has been corrected in our 2007 annual financial statements by separating the
impact of adopting this FASB statement in the statement of changes in
stockholders’ investment.
Other New Accounting
Pronouncements
On July
13, 2006, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109, Accounting for Incomes Taxes (“FIN
48”), to create a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for incomes taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. We adopted FIN 48 on January 1, 2007 and the adoption had
no effect on our consolidated financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which is
effective for fiscal years beginning after November 15, 2007, and for interim
periods within those years. This statement defines fair value,
establishes a framework for measuring fair value and expands the related
disclosure requirements. We are currently evaluating the impact, if
any, that SFAS No. 157 will have on our financial position and results of
operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for Financial Assets and Liabilities – including an
amendment of FASB Statement No. 155 (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure many financial assets and financial
liabilities, and certain nonfinancial instruments that are similar to financial
instruments, at fair value. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. We are currently evaluating
the impact, if any, that SFAS No. 159 will have on our financial position and
results of operations.
NOTE B - PROPERTY
Rail-Ferry Service
Assets
Our Rail-Ferry Service provides
a unique combination of rail and water ferry service between the U.S. Gulf and
Mexico. The low operating profit margin generated by this service
makes higher cargo volumes necessary to achieve meaningful levels of cash flow
and profitability. The capacity of the vessels operating in this
service defines the maximum revenues and, in turn, the cash flow and gross
profits that can be generated by our service. Therefore, in 2005, we
began making capital investments to essentially double the capacity of the
service including the construction of second decks to be added to each of the
ships. Also in 2005, the State of Louisiana and City of New Orleans
provided incentives to us to move our U.S. terminal operations from Mobile,
Alabama to New Orleans. We then began making improvements to the U.S.
terminal in New Orleans necessary to utilize the second decks, which were
previously scheduled to be completed and installed by October of
2005. We also invested in a transloading and storage facility in New
Orleans near the terminal and began making improvements to the terminal in
Mexico. Operations commenced from the New Orleans terminal on the
Mississippi River Gulf Outlet (“MR-GO”) in June of 2005 with the double ramp
necessary to utilize the second decks expected to be completed in October of
that year. The effects of Hurricane Katrina in 2005 necessitated the
decision to move the operations back to Mobile, Alabama. These events
delayed the completion of the expansion project until the first half of
2007. In the third quarter of 2007, the ships started operating with
the second deck capacity.
The total
cost of the second decks was approximately $25 million, and we have incurred
those costs through December 31, 2007. The installation of the second
deck on the first vessel was completed at the end of May 2007, while
installation of the second deck on the second vessel was completed at the end of
July 2007. The utilization of the second deck capacity is directly
related to the terminal upgrades in Mobile, AL and Coatzacoalcos,
Mexico. Both terminal upgrades were substantially completed in July
2007 and became operational at that time. The estimated cost of the
Mobile terminal is approximately $27,000,000, of which $10,000,000 was funded by
a grant from the State of Alabama. The remaining $17,000,000 was financed by the
Alabama State Docks at below-market rates and will be repaid over the ten-year
terminal lease. We estimate that our share of the cost of the
improvements to the Mexican terminal will be approximately
$5,800,000. We have a 49% interest in the company that owns the
terminal in Mexico and 30% of the advances to that company for our share of the
cost of the terminal are accounted for as capital contributions with the
remaining 70% accounted for as a loan to that company. Our investment
in the trans-loading and storage facility company (RTI) was approximately
$1,900,000, and we had also loaned $2,000,000 to our 50% partner in
RTI.
During 2006, in accordance with SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
issued by the FASB, we recorded an impairment loss of $8,866,000 to write-down
our net investment in our Rail-Ferry terminal located in New Orleans, Louisiana
on the MR-GO. That waterway was effectively closed for long-term deep
draft shipping when Congress indefinitely suspended dredging. This
resulted in the need for us to relocate the U.S. operations of the Rail-Ferry Service during
2007 to Mobile, Alabama. Our terminal lease with the Port of New
Orleans was terminated during the second quarter of 2007, upon our transition to
the Mobile terminal. As of June 30, 2007, we wrote off both the cost
of the New Orleans terminal of $17,000,000, funded by the State and City, which
was recorded as a leasehold improvement and the reimbursements to us from the
State and the City of $17,000,000 that were recorded as deferred credits,
resulting in no effect on net income.
Our investment in the New Orleans
terminal was funded with the proceeds from a New Market Tax Credit (NMTC)
financing agreement. Under the NMTC financing, the lender has the
ability to utilize certain tax credits associated with profitable operations at
that location. With the relocation of the rail ferry service to
Mobile, Alabama, the company was at risk to the lender for the value of the tax
credits, which was estimated to be $5,400,000. The lender has amended
the original application to the Federal agency that oversees the NMTC issuance
to include the Mobile terminal as eligible property for the usage of the tax
credits. As a result, the company is no longer at risk for the value
of the tax credits.
In addition to the incentives for
relocating our Rail Ferry
Service’s terminal, the State of Alabama and the city and County of
Mobile have provided incentives totaling $6,700,000 to the company to relocate
the corporate headquarters from New Orleans to Mobile. As of December
31, 2007, we have received $6,300,000 in incentive payments from the
Alabama agencies.
In May of 2007, we reached an agreement
to terminate the lease of our former corporate headquarters in New
Orleans. The cost of this termination was approximately $700,000,
which was reported in administrative and general expenses in the second quarter
of 2007.
LASH Liner Service
Assets
The Board of Directors made the
decision in the fourth quarter of 2006 to dispose of certain LASH Liner Service
assets. The decision was based on the belief that we could generate
substantial cash flow and profit on the disposition of the assets, while
improving our future operating results. Accordingly, we sold our LASH
Feeder vessel and 114 barges in the first quarter of 2007. In the
second quarter of 2007, the company concluded that its U.S. flag LASH service
should be discontinued. Accordingly, in the second quarter, we sold
our one remaining U.S. flag LASH vessel and 111 LASH barges. In the
third quarter of 2007, the company elected to discontinue its International LASH
service. The one remaining LASH vessel and the remaining 235 barges
were positioned for sale in the fourth quarter of 2007. During the
first two months of 2008, we sold the one remaining LASH vessel and the majority
of LASH barges, with the remaining LASH barges under contract to be sold by the
end of the first quarter of 2008.
Our U.S. flag LASH service and
International LASH service were reported in “Continuing Operations” as a part of
our Liner segment in periods prior to the second quarter 2007. All
financial information have been restated to remove the effects of both of these
operations from “Continuing Operations”.
Throughout 2006, we were evaluating
whether to continue to operate our intermodal terminal facility in Memphis,
Tennessee, because the volume of cargo from our LASH liner services moving
through that facility decreased as the cargo carried by those services
declined. In December of 2006, we terminated the lease of that
facility and made a final payment of $1,900,000 in January 2007.
Gains and Losses on Sales of
Assets
During
2007, we recognized a net gain on the sale of assets of $9,880,000 on the sale
of the LASH feeder vessel and barges, and the U.S. flag LASH vessel and
barges. During 2006, we recognized a net gain on the sale of assets
of $5,125,000 from the sale of one of our LASH vessels that had been operating
in the International service and 130 LASH barges no longer needed for
operations. During 2005, we recognized a net gain on the sale of
assets of $584,000 from the sale of 67 LASH barges no longer needed for
operations. In 2005, we also sold the assets associated with our
over-the-road car transportation truck company, resulting in a loss on the sale
of these assets of $769,000.
NOTE C - CONVERTIBLE EXCHANGEABLE
PREFERRED STOCK
In January of 2005, we issued 800,000
shares of 6% convertible exchangeable preferred stock, $1.00 par value, at a
price of $50.00 per share. The proceeds of the preferred stock
offering, after deducting all associated costs, were $37,987,000. As
of December 31, 2007, all 800,000 shares of preferred stock were
outstanding. All of these shares were either redeemed or converted
into shares of our common stock in the first quarter of 2008 (See Note T – Accumulated Other
Comprehensive Income (Loss) on Page F-21).
Each share of the preferred stock had a
liquidation preference of $50 per share and was convertible into shares of our
common stock based on the initial conversion price of $20.00 per
share.
On December 27, 2007 we announced, and
on February 1, 2008 we completed the redemption of our 800,000
outstanding shares of 6% Convertible Exchangeable Preferred Stock. In
lieu of cash redemption, holders of 462,382 shares of the Preferred Stock
elected to convert their shares into approximately 1,155,955 shares of our
common stock. The remaining 337,618 outstanding shares of Preferred Stock were
retired for cash (including accrued and unpaid dividends to, but excluding, the
redemption date), pursuant to the terms of the Preferred Stock. As a result, we
no longer have any shares of the 6% Convertible Exchangeable Preferred Stock
outstanding. The total cash payment for the redemption of the Preferred Stock
including the accrued and unpaid dividends was $17,306,299. We will
have a charge to earnings of approximately $1.4 million in the first quarter of
2008 from the redemption of the Preferred Stock.
NOTE D – LONG-TERM
DEBT
|
(All amounts in thousands)
|
Interest
Rate
|
Total
Principal Due
|
|||||||||||||||
|
December
31,
|
December
31,
|
Maturity
|
December
31,
|
December
31,
|
|||||||||||||
|
Description
|
2007
|
2006
|
Date
|
2007
|
2006
|
||||||||||||
|
Unsecured:
|
|||||||||||||||||
|
Senior
Notes – Fixed Rate
|
7.75 | % | 7.75 | % |
2007
|
$ |
-
|
$ |
39,979
|
||||||||
|
Secured:
|
|||||||||||||||||
|
Notes
Payable – Variable Rate*
|
6.3656 | % | 6.3656 | % |
2015
|
26,000
|
28,666
|
||||||||||
|
Notes
Payable – Variable Rate*
|
4.8200 | % | 4.82 | % |
2012
|
13,720
|
13,860
|
||||||||||
|
Notes
Payable – Variable Rate**
|
6.6219 | % | 6.6219 | % |
2013
|
59,261
|
66,729
|
||||||||||
|
Notes
Payable – Variable Rate*
|
1.8713 | % |
N/A
|
2010
|
44,223
|
-
|
|||||||||||
|
Line
of Credit
|
N/A
|
N/A
|
2009
|
-
|
-
|
||||||||||||
|
143,204
|
149,234
|
||||||||||||||||
|
Less
Current Maturities
|
(12,681 | ) | (50,250 | ) | |||||||||||||
| $ |
130,523
|
$ |
98,984
|
||||||||||||||
* We
have interest rate swap agreements in place to fix the interest rates on our
variable rate notes payable expiring in 2015 and 2012 at 4.41% and 5.17%,
respectively. After applicable margin adjustments, the effective
interest rates on these notes payable are fixed at 5.41% and 4.67%,
respectively. The swap agreements are for the same terms as the associated notes
payable.
In
September 2007, a subsidiary of the Company entered into a Senior Secured
Japanese Yen (JPY) Term Loan Facility for JPY 5,000,000,000 to finance the
acquisition of a 6400 PCTC vessel. All payments will be made in JPY
and will be recorded at current market value. This facility is a JPY
LIBOR based loan with an associated interest swap agreement that results in an
actual interest rate of 2%.
** We
have two interest rate swap agreements in place to fix the interest rate on
two-thirds of our variable rate notes payable expiring in 2013 at 4.68% and
3.96%. After applicable margin adjustments, the effective interest
rates on the swapped portion of these notes payable are 5.93% and 5.21%,
respectively. These swap agreements will end in September
2010.
We
have entered into an interest rate swap agreement to fix the interest rate on
the remaining one-third of our variable rate notes payable beginning in March
2008 at 3.46%. After applicable margin adjustments, the effective
interest rate on these notes payable is 4.585%. This swap agreement
will end in September 2013.
Our
variable rate notes payable and our line of credit are secured by assets with an
aggregate net book value of $161,873,000 as of December 31, 2007, and by a
security interest in certain operating contracts and receivables.
The aggregate principal payments
required as of December 31, 2007, for each of the next five years are
$12,681,000 in 2008, $12,649,000 in 2009, $48,440,000 in 2010, $10,590,000 in
2011, and $22,980,000 in 2012.
During 2006, we retired $12,525,000 of
the 7¾% Notes all of which were at a premium. In 2005, we retired
$18,500,000 of the 7¾% Senior Notes of which $17,000,000 was at a discount and
the remaining $1,500,000 was at a premium. We also retired certain
other outstanding debt prior to maturity. Upon retirement of this
indebtedness, we recorded a net Loss on Early Extinguishment of Debt for the
years ended December 31, 2006 and 2005 of approximately $248,000 and $68,000,
respectively. In October of 2007, we retired the remaining
obligations of the 7 ¾% Senior Notes.
In August
2007, we reduced our $50 million credit facility to $35 million. As
of December 31, 2007, we had $6.3 million of our $35 million revolving credit
facility, which expires in December of 2009, pledged as collateral for letters
of credit. The remaining $28.7 million of that credit facility was
available as of December 31, 2007. Associated with this credit
facility is a commitment fee of .5% per year on the undrawn portion of this
facility.
Most of
our debt agreements, among other things, impose defined minimum working capital
and net worth requirements, impose leverage requirements, impose restrictions on
the payment of dividends, and prohibit us from incurring, without prior written
consent, additional debt or lease obligations, except as defined. As
of December 31, 2007, we met all of the financial covenants under our various
debt agreements, the most restrictive of which include the working capital,
leverage ratio, minimum net worth and interest coverage ratios, and believe we
will continue to meet these requirements throughout 2008, although we can give
no assurance to that effect.
The most
restrictive of our credit agreements prohibit the declaration or payment of
dividends unless (1) the total of (a) all dividends paid, distributions on, or
other payments made with respect to our capital stock during the period
beginning January 1, 1999, and ending on the date of dividend declaration or
other payment and (b) all investments other than our Qualified Investments (as
defined) and certain designated subsidiaries do not exceed the sum of
$10,000,000 plus 50% (or, in case of a loss, minus 100%) of our consolidated net
income during the period described above plus the net cash proceeds received
from our issuance of common stock during the above period, and (2) no default or
event of default has occurred.
Certain of our loan agreements restrict
the ability of our subsidiaries to dispose of collateralized assets or any other
asset which is substantial in relation to our assets taken as a whole without
the approval from the lender. We have consistently remained in
compliance with this provision of the loan agreements.
NOTE E – SELF-RETENTION
INSURANCE
We are
self-insured for Hull and Machinery claims in excess of $150,000 for each
accident and Loss of Hire claims in excess of 14 days, up to an aggregate stop
loss amount of $2,000,000 per policy year. Once aggregate claims
exceed $2,000,000, we have third party coverage for additional claims with
deductible levels of $150,000 per incident for Hull and Machinery and 14 days
for Loss of Hire. The estimate of our self-insurance exposure for the
policy year beginning June 27, 2007 was the maximum amount of
$1,100,000.
Protection
and Indemnity claims, including cargo and personal injury claims, are not
included in our self-retention insurance program. We have third party
insurance coverage for these claims with deductible levels ranging from $100,000
to $500,000 per incident depending on vessel type. Our estimates of
exposure for claims under these deductible levels is approximately $2,250,000
for the policy year beginning February 20, 2007.
The
current and non-current liabilities for self-insurance exposure and for claims
under the deductible levels were $1,754,000 and $4,328,000, respectively, for
the year ended December 31, 2007. The current and non-current
liabilities were $2,868,000 and $3,346,000, respectively, for the year ended
December 31, 2006.
NOTE F – EMPLOYEE BENEFIT
PLANS
Pension and Postretirement
Benefits
Our defined benefit retirement plan
covers all full-time employees of domestic subsidiaries who are not otherwise
covered under union-sponsored plans. The benefits are based on years
of service and the employee’s highest sixty consecutive months of
compensation. Our funding policy is based on minimum contributions
required under ERISA as determined through an actuarial
computation. Plan assets consist primarily of investments in equity
and fixed income mutual funds and money market holdings. The target
asset allocation range is 40% in fixed income investments and 60% in equity
investments. The asset allocation on December 31, 2007 was 38.96% in
fixed income investments and 61.04% in equity investments. The asset
allocation on December 31, 2006 was 37.6% in fixed income investments and 62.4%
in equity investments. The plan’s prohibited investments include
selling short, commodities and futures, letter stock, unregistered securities,
options, margin transactions, derivatives, leveraged securities, and
International Shipholding Corporation securities, unless held in a commingled or
mutual fund. The plan’s diversification strategy includes limiting
equity securities in any single industry to 25% of the equity portfolio market
value, limiting the equity holdings in any single corporation to 10% of the
market value of the equity portfolio, and diversifying the fixed income
portfolio so that no one issuer comprises more than 10% of the aggregate fixed
income portfolio, except for issues of the U.S. Treasury or other Federal
Agencies. The plan’s assumed future returns are based primarily on
the asset allocation and on the historic returns for the plan’s asset classes
determined from both actual plan returns and, over longer time periods, market
returns for those asset classes. As of December 31, 2007, the plan
has assets of $23,299,000 and a projected pension obligation of
$23,063,000.
Our
postretirement benefit plans currently provide medical, dental, and life
insurance benefits to eligible retired employees and their eligible
dependents. The measurement date for both plans is December
31. The following table sets forth the plans’ changes in the benefit
obligations and fair value of assets and a statement of the funded
status:
|
(All amounts in
thousands)
|
Pension
Plan
|
Postretirement
Benefits
|
||||||||||||||
|
Year
Ended December 31,
|
Year
Ended December 31,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Change in Benefit
Obligation
|
||||||||||||||||
|
Benefit
Obligation at Beginning of Year
|
$ |
23,684
|
$ |
23,323
|
$ |
8,048
|
$ |
9,164
|
||||||||
|
Service
Cost
|
616
|
676
|
25
|
63
|
||||||||||||
|
Interest
Cost
|
1,347
|
1,312
|
439
|
453
|
||||||||||||
|
Actuarial
(Gain) Loss
|
(1,057 | ) |
12
|
(38 | ) | (919 | ) | |||||||||
|
Benefits
Paid and Expected Expenses
|
(1,138 | ) | (1,045 | ) | (620 | ) | (586 | ) | ||||||||
|
Curtailments
|
(409 | ) | (604 | ) | (587 | ) | (127 | ) | ||||||||
|
Special
Termination Benefits
|
20
|
10
|
-
|
-
|
||||||||||||
|
Benefit
Obligation at End of Year
|
$ |
23,063
|
$ |
23,684
|
$ |
7,267
|
$ |
8,048
|
||||||||
|
Change in Plan
Assets
|
||||||||||||||||
|
Fair
Value of Plan Assets at Beginning of Year
|
$ |
22,432
|
$ |
20,330
|
$ |
-
|
$ |
-
|
||||||||
|
Actual
Return on Plan Assets
|
1,399
|
2,393
|
-
|
-
|
||||||||||||
|
Employer
Contribution
|
600
|
750
|
620
|
586
|
||||||||||||
|
Benefits
Paid and Actual Expenses
|
(1,132 | ) | (1,041 | ) | (620 | ) | (586 | ) | ||||||||
|
Fair
Value of Plan Assets at End of Year
|
$ |
23,299
|
$ |
22,432
|
$ |
-
|
$ |
-
|
||||||||
|
Funded
Status
|
$ |
236
|
$ | (1,252 | ) | $ | (7,267 | ) | $ | (8,048 | ) | |||||
|
Key
Assumptions
|
||||||||||||||||
|
Discount
Rate
|
6.25 | % | 5.75 | % | 6.25 | % | 5.75 | % | ||||||||
|
Rate
of Compensation Increase
|
5.00 | % | 5.00 | % |
N/A
|
N/A
|
||||||||||
The accumulated benefit obligation for
the pension plan was $20,314,000 and $20,548,000 at December 31, 2007 and 2006,
respectively.
The following
table shows amounts recognized in accumulated other comprehensive
income:
|
(All amounts in
thousands)
|
Pension
Plan
|
Postretirement
Benefits
|
||||||||||||||
|
Year
Ended December 31,
|
Year
Ended December 31,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Prior
Service Cost
|
$ |
-
|
$ |
-
|
$ |
91
|
$ |
143
|
||||||||
|
Net
Loss
|
(1,217 | ) | (2,381 | ) |
96
|
(530 | ) | |||||||||
| $ | (1,217 | ) | $ | (2,381 | ) | $ |
187
|
$ | (387 | ) | ||||||
The following table provides the
components of net periodic benefit cost for the plans:
|
(All amounts in
thousands)
|
Pension
Plan
|
Postretirement
Benefits
|
||||||||||||||||||||||
|
Year
Ended December 31,
|
Year Ended December
31,
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Components of Net Periodic
Benefit Cost
|
||||||||||||||||||||||||
|
Service
Cost
|
$ |
616
|
$ |
676
|
$ |
668
|
$ |
25
|
$ |
63
|
$ |
90
|
||||||||||||
|
Interest
Cost
|
1,347
|
1,311
|
1,248
|
439
|
453
|
536
|
||||||||||||||||||
|
Expected
Return on Plan Assets
|
(1,719 | ) | (1,534 | ) | (1,440 | ) |
-
|
-
|
-
|
|||||||||||||||
|
Amortization
of Prior Service Cost
|
-
|
-
|
-
|
(14 | ) | (22 | ) | (22 | ) | |||||||||||||||
|
Amortization
of Net Actuarial Loss
|
12
|
162
|
212
|
-
|
-
|
131
|
||||||||||||||||||
|
Net
Periodic Benefit Cost
|
256
|
615
|
688
|
450
|
494
|
735
|
||||||||||||||||||
|
Special
Termination Benefits
|
20
|
10
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Curtailment
Gain
|
-
|
-
|
-
|
(38 | ) | (45 | ) |
-
|
||||||||||||||||
|
Net
Periodic Benefit Cost After Special
Termination
Benefits and Curtailment Gain
|
$ |
276
|
$ |
625
|
$ |
688
|
$ |
412
|
$ |
449
|
$ |
735
|
||||||||||||
|
Key
Assumptions
|
||||||||||||||||||||||||
|
Discount
Rate
|
5.75 | % | 5.75 | % | 5.50 | % | 6.25 | % | 5.75 | % | 5.50 | % | ||||||||||||
|
Expected
Return on Plan Assets
|
7.75 | % | 7.75 | % | 7.75 | % |
N/A
|
N/A
|
N/A
|
|||||||||||||||
|
Rate
of Compensation Increase
|
5.00 | % | 5.00 | % | 5.00 | % |
N/A
|
N/A
|
N/A
|
|||||||||||||||
For measurement purposes, the health
cost trend was assumed to be 8.5% and the dental care cost trend rate was
assumed to be 5% for all years. The health cost trend is decreasing steadily by
..50 per year over the next seven years to a long-term rate of 5%. For employees
over 65, the health cost trend was assumed to be 10.5% and the dental care cost
trend was assumed to be 5% for all years. The health cost trend is
decreasing steadily by .50% per year over the next eleven years to a long-term
rate of 5%. A one percent change in the assumed health care cost
trend rates would have the following effects:
|
(All
amounts in thousands)
|
1%
Increase
|
1%
Decrease
|
||||||
|
Change
in total service and interest cost components
|
||||||||
|
for
the year ended December 31, 2007
|
$ |
43
|
$ | (36 | ) | |||
|
Change
in postretirement benefit obligation as of December 31,
2007
|
675
|
(581 | ) | |||||
The
following table provides the expected future benefit payments as of December 31,
2007:
|
(All amounts in
thousands)
|
||||||||||
|
Fiscal
Year Beginning
|
Pension
Plan
|
Postretirement
Benefits
|
||||||||
|
2008
|
$ |
1,197
|
$ |
540
|
||||||
|
2009
|
1,233
|
552
|
||||||||
|
2010
|
1,294
|
577
|
||||||||
|
2011
|
1,378
|
593
|
||||||||
|
2012
|
1,412
|
593
|
||||||||
|
2013-2017
|
7,938
|
2,848
|
||||||||
We continue to evaluate ways in which
we can better manage these benefits and control the costs. Any
changes in the plan or revisions to assumptions that affect the amount of
expected future benefits may have a significant effect on the amount of reported
obligation and annual expense.
Crew members on our U.S. flag vessels
belong to union-sponsored pension plans. We contributed approximately
$2,499,000, $2,353,000, and $1,988,000 to these plans for the years ended
December 31, 2007, 2006, and 2005, respectively. These contributions
are in accordance with provisions of negotiated labor contracts and generally
are based on the amount of straight pay received by the union
members. Information from the plans’ administrators is not available
to permit us to determine whether there may be unfunded vested
benefits.
In December of 2003, the Medicare
Prescription Drug, Improvements, and Modernization Act of 2003 (“Act”) was
signed into law. In addition to including numerous other provisions
that have potential effects on an employer’s retiree health plan, the Act
includes a special subsidy beginning in 2006 for employers that sponsor retiree
health plans with prescription drug benefits that are at least as favorable as
the new Medicare Part D benefit. In May of 2004, the FASB Drug,
Improvements, and Modernization Act of 2003,” that provides guidance on the
accounting for the effects of the Act for employers that sponsor postretirement
health care plans that provide drug benefits. We have determined that
our plan is actuarially equivalent and as such we qualify for this special
subsidy. The effect of our future savings from this law reduced the
December 31, 2005 estimate of our accumulated postretirement benefit obligation
by approximately $2.3 million, which was recorded in the net actuarial gain for
2005. The new law also resulted in a decrease in our annual net
periodic benefit cost for periods beginning January 1, 2005.
401(k) Savings
Plan
We provide a 401(k) tax-deferred
savings plan to all full-time employees. We match 50% of the employee’s first
$2,000 contributed to the plan annually. We contributed $110,000,
$108,000 and $107,000 to the plan for the years ended December 31, 2007, 2006
and 2005, respectively.
Stock Incentive
Plan
In April of 1998, we established a
stock-based compensation plan, the Stock Incentive Plan (the “Plan”). The
purpose of the Plan is to increase shareholder value and to advance the interest
of the Company by furnishing a variety of economic incentives designed to
attract, retain, and motivate key employees and officers and to strengthen the
mutuality of interests between such employees, officers, and our
shareholders. Incentives consist of opportunities to purchase or
receive shares of common stock in the form of incentive stock options,
non-qualified stock options, restricted stock, or other stock-based
awards. Under the Plan, we may grant incentives to our eligible Plan
participants for up to 650,000 shares of common stock. The exercise
price of each option equals the market price of our stock on the date of
grant. In July of 1999, options to purchase 475,000 shares of common
stock were granted to certain qualified participants at an exercise price of
$14.125 per share. The stock options were due to expire on April 14,
2008. All options vested immediately upon the grant date and were
immediately exercisable. No options were granted during 2007, 2006,
or 2005. A total of 400,000, 32,900 and 3,400 options were exercised
in 2007, 2006, and 2005 respectively, and 38,700 options were forfeited during
2006.
Life
Insurance
We have agreements with two former
Chairmen of the Company whereby their estates will be paid approximately
$822,000 and $626,000, respectively, upon death. We reserved amounts
to fund a portion of these death benefits, which amount to $822,000, and hold an
insurance policy to cover the remaining liability. The cash surrender
value of the insurance policy was approximately $74,000 and $93,000 as of
December 31, 2007 and 2006, respectively.
NOTE G - INCOME
TAXES
Under
previous United States tax law, U.S. companies and their domestic subsidiaries
generally have been taxed on all income, including in our case, income from
shipping operations, whether derived in the United States or
abroad. With respect to any foreign subsidiary in which we hold more
than a 50 percent interest (referred to in the tax laws as a controlled foreign
corporation, or “CFC”), we were treated as having received a current taxable
distribution of our pro rata share of income derived from foreign shipping
operations.
The
American Jobs Creation Act, which became effective for us on January 1, 2005,
changed the United States tax treatment of our U.S. flag vessels and our foreign
flag shipping operations operating in CFCs. In December of 2004, we
made an election under the Jobs Creation Act to have our U.S. flag operations
(other than those of two ineligible vessels used exclusively in United States
coastwise commerce) taxed under a new “tonnage tax” regime rather than under the
usual U.S. corporate income tax regime. As a result of that election,
our gross income and taxable income for United States income tax purposes with
respect to our eligible U.S. flag vessels will not include (1) income from
qualifying shipping activities in U.S. foreign trade (i.e., transportation
between the U.S. and foreign ports or between foreign ports), (2) income from
cash, bank deposits and other temporary investments that are reasonably
necessary to meet the working capital requirements of our qualifying shipping
activities, and (3) income from cash or other intangible assets accumulated
pursuant to a plan to purchase qualifying shipping assets.
Under the
tonnage tax regime, our taxable income with respect to the operations of our
eligible U.S. flag vessels will instead be based on a “daily notional taxable
income,” which are taxed at the highest corporate income tax
rate. In 2007, we had taxable
income of $324,000 on vessels qualifying under the tonnage tax regime as
compared to taxable income of $11,099,000 that would have been subject to the
U.S. corporate income tax regime prior to the election.
Under the Jobs Creation Act, the
taxable income from shipping operations of the Company’s CFCs will generally no
longer be subject to current United States income tax but will be
deferred. In December of 2004, we established a valuation allowance
of $4,330,000 on the net deferred tax asset associated with the foreign deficit
carry-forwards that were no longer supportable as a result of the Jobs Creation
Act, the impact of which is included in our deferred tax
provision. We were able to release $417,000, $3,177,000, and $736,000
of the valuation allowance during 2007, 2006, and 2005,
respectively. This reduction of the valuation allowance is attributed
to our CFCs generation of earnings not subject to U.S. taxation during
2007. Since those earnings are not subject to U.S. taxation, the
earnings can be used to offset foreign deficits. None of the
valuation allowance remains at December 31, 2007.
Our
Federal income tax returns are filed on a consolidated basis and include the
results of operations of our wholly-owned U.S. subsidiaries. Pursuant
to the Tax Reform Act of 1986, the recognition of earnings of foreign
subsidiaries, which were $1,817,000 in 2007, $13,933,000 in 2006, and $159,000
in 2005, has been included in our federal tax provision
calculations. No foreign tax credits are expected to be utilized on
the federal return as of December 31, 2007.
Components of the net deferred tax
liability/(asset) are as follows:
|
December
31,
|
|
|||||||||||
|
(All amounts in
thousands)
|
2007
2006
|
|
||||||||||
|
Deferred
Liabilities:
|
||||||||||||
|
Fixed Assets
|
$ |
23,628
|
$ |
24,044
|
||||||||
|
Deferred
Charges
|
2,338
|
2,338
|
||||||||||
| Unterminated Voyage Revenue/Expense |
|
72
|
72
|
|
||||||||
|
Other Liabilities
|
6,570
|
5,926
|
||||||||||
|
Total
Liabilities
|
32,608
|
32,380
|
||||||||||
|
Deferred
Assets:
|
||||||||||||
|
Insurance
and Claims Reserve
|
471
|
471
|
||||||||||
|
Post-Retirement
Benefits
|
(401 | ) | (395 | ) | ||||||||
|
Alternative
Minimum Tax Credit
|
(4,577 | ) | (4,577 | ) | ||||||||
|
Net
Operating Loss/Carryforward/Unutilized Deficit
|
(15,602 | ) | (12,242 | )) | ||||||||
|
Valuation
Allowance
|
-
|
417
|
||||||||||
|
Worker
Retention Credit
|
(293 | ) | (293 | ) | ||||||||
|
Other
Assets
|
(3,142 | ) | (3,991 | ) | ||||||||
|
Total
Assets
|
(23,544 | (20,610 | ) | |||||||||
|
Total
Deferred Tax Liability, Net
|
$ |
9,064
|
$ |
11,770
|
||||||||
The
following is a reconciliation of the U.S. statutory tax rate to our effective
tax rate –expense (benefit):
Year Ended December
31,
|
2007
|
2006
|
2005
|
||||||||||
|
Statutory
Rate
|
35.00 | % | 35.00 | % | 35.00 | % | ||||||
|
State
Income Tax
|
2.26 | % | 0.03 | % | 1.27 | % | ||||||
|
Effect
of Tonnage Tax Rate
|
(50.00 | %) | (20.99 | %) | (169.93 | %) | ||||||
|
Foreign
Earnings-Indefinitely Reinvested
|
(26.39 | %) |
-
|
-
|
||||||||
|
Foreign
Income Taxes
|
12.90 | % |
-
|
81.04 | % | |||||||
|
Jobs
Creation Act
|
-
|
-
|
(19.37 | %) | ||||||||
|
Employee
Retention Credit
|
-
|
-
|
(16.21 | %) | ||||||||
|
Change
in Valuation Allowance
|
(10.92 | %) | (11.92 | %) | 28.19 | % | ||||||
|
Permanent
Differences and Other, Primarily Non-Deductible
Expenditures
|
1.36 | % | 5.02 | % | (16.20 | %) | ||||||
| (35.79 | %) | 7.14 | % | (43.81 | %) | |||||||
Foreign
income taxes of $492,000, $544,000 and $461,000 are included in our consolidated
statements of income in the Provision for Income Taxes for the years ended
December 31, 2007, 2006, and 2005, respectively. We pay foreign
income taxes in Indonesia.
For U.S.
federal income tax purposes, in 2007, we generated $9,598,000 in net operating
loss carryforwards (“NOLs”), which will be added to the previous carryforward of
$2,845,000. The balance at December 31, 2007 of approximately
$12,443,000, if not used, will expire in 2022 through 2026. We also have
approximately $6,823,000 of alternative minimum tax credit carryforwards, which
are not subject to expiration and are available to offset future regular income
taxes subject to certain limitations. Additionally, for state income tax
purposes, we have NOLs of approximately $15,754,000 available to reduce future
state taxable income. These NOLs expire in varying amounts beginning in
year 2010 through 2021.
Total
income from continuing operations before (benefit) provision for income taxes
and equity in net income of unconsolidated entities is reported at $3,827,000,
$11,190,000 and $2,016,000 for 2007, 2006 and 2005, respectively. Income
(loss) from continuing U.S. operations was $5,900,000, ($6,291,000) and
$3,778,000 and income (loss) from continuing foreign operations was $8,947,000,
$17,481,000 and ($1,762,000) for 2007, 2006 and 2005, respectively.
In July 2006, the Financial Accounting
Standards Board issued FASB Interpretation No. 48 (FIN 48), “Accounting for
Uncertainity in Income Taxes- an interpretation of FASB Statement No.
109.” FIN 48 provides guidance on the measurement and recognition in
accounting for income tax uncertainties. We adopted the provisions of
FIN 48 on January 1, 2007. As a result of the adoption, we recognized
no adjustment to the liability for income tax benefits that existed as of
December 31, 2006.
It is our
policy to recognize interest and penalties associated with underpayment of
income taxes as interest expense and general and administrative expenses,
respectively.
We file
income tax returns in the U.S. federal and various state and foreign
jurisdictions. The number of years that are open under the statute of
limitations and subject to audit varies depending on the tax
jurisdiction. Our U.S. income tax returns for 2004 and subsequent
years remain open to examination.
We had
approximately $1.1 million of unrecorded tax benefits at January 1,
2007. Approximately $0.3 million of additional unrecorded tax
benefits resulted from tax positions taken during the current year,
totaling approximately $1.4 million of unrecorded tax benefits at
December 31, 2007. All of this amount would impact our effective tax
rate if recognized.
A
reconciliation of the total amounts of unrecognized tax benefits
follows:
|
Total
unrecognized tax benefits as of January 1, 2007
|
$ |
1,051
|
||
|
Increases
(decreases) in unrecognized tax benefits as a result of:
|
||||
|
Tax
positions taken during a prior year
|
-
|
|||
|
Tax
positions taken during the current year
|
349
|
|||
|
Settlements
with taxing authorities
|
-
|
|||
|
Lapse
of applicable statute of limitations
|
-
|
|||
|
Total
unrecognized tax benefits as of December 31, 2007
|
$ |
1,400
|
NOTE H – TRANSACTIONS WITH RELATED
PARTIES
We own a
50% interest in RTI Logistics L.L.C. (“RTI”) (See Note M – Unconsolidated
Entities on Page F-17). At December 31, 2007, we had two
long-term receivables of $2,000,000 and $310,000, respectively, due from
RTI. The long-term portion of both of these receivables is included
in Due from Related Parties. Interest income on the $2,000,000
receivable is earned at the rate of 5% per year for seven years. A
total of $20,000 was repaid in 2007 on this receivable. Interest
income on the $310,000 receivable is earned at the rate of 6% per year, and the
receivable along with interest income is payable on demand.
We own a
49% interest in Terminales Transgolfo (“TTG”) (See Note M – Unconsolidated
Entities on Page F-17). At December 31, 2007, we
had a long-term receivable of $2,355,000 due from TTG. The long-term
portion of this receivable is included in Due from Related
Parties. Interest income on this receivable is earned at the rate of
7.5% per year for seven years.
A
son of one of our Directors serves as our Secretary and is a partner in the law
firm of Jones, Walker, Waechter, Poitevent, Carrere and Denegre, which has
represented us since our inception. Another son of one of our
Directors serves as our Assistant Secretary and is a partner in the same law
firm and serves on their Board of Directors. Fees paid to the firm
for legal services rendered to us were approximately $735,000, $886,000, and
$1,633,000 for the years ended December 31, 2007, 2006 and 2005,
respectively. Amounts of $20,000 and $3,000 were due to the legal
firm at December 31, 2007 and 2006, respectively, which were included in
Accounts Payable and Accrued Liabilities.
NOTE I - COMMITMENTS AND
CONTINGENCIES
Commitments
As of December 31, 2007, 21 vessels
that we own or operate were under various contracts extending beyond 2007 and
expiring at various dates through 2019. Certain of these agreements
also contain options to extend the contracts beyond their minimum
terms.
Approximately
$6,341,000 of our $35,000,000 line of credit is maintained to cover standby
letters of credit required on certain of our contracts.
In 2007,
we entered into a memorandum of agreement to sell our last remaining LASH vessel
along with 83 LASH barges in the first quarter of 2008 and as of December 31,
2007, the book value of those assets is included in assets held for
disposal.
We have
made certain commitments in connection with the expansion of the Rail-Ferry Service discussed
in Note B, including the construction of a terminal in Mobile, and improvements
to a terminal in Mexico. The estimated total cost of the Mobile
terminal is approximately $27 million, of which $10 million was funded by the
State of Alabama. The remaining $17 million will be financed by the
Alabama State Docks at below-market rates and repaid by us over the ten-year
terminal lease.
On
September 21, 2007, our wholly-owned subsidiary, East Gulf Shipholding, Inc.
(“EGS”), entered into a SHIPSALES contract to purchase one 6400 CEU Newbuilding
PCTC. Upon signing of the agreement, East Gulf Shipholding paid an
initial 20% installment of approximately $13.7 million. The next two
installments of 10% each are due upon keel-laying of the Vessel and launching of
the Vessel, both of which are projected due in 2009. The final
payment of 60% is due upon delivery of the vessel, scheduled for
2010. The initial installment amount was recorded as Vessel, Property
& Other Equipment on the balance sheet and will not begin depreciating until
the vessel is placed in service.
Contingencies
In the normal course of our
operations, we become involved in various litigation matters including, among
other things, claims by third parties for alleged property damages, personal
injuries, and other matters. While we believe that we have
meritorious defenses against these claims, our management has used significant
estimates in determining our potential exposure. Our estimates are
determined based on various factors, such as (1) severity of the injury (for
personal injuries) and estimated potential liability based on past judgments and
settlements, (2) advice from legal counsel based on its assessment of the facts
of the case and its experience in other cases, (3) probability of pre-trial
settlement which would mitigate legal costs, (4) historical experience on claims
for each specific type of cargo (for cargo damage claims), and (5) whether our
seamen are employed in permanent positions or temporary revolving
positions. It is reasonably possible that changes in our estimated
exposure may occur from time to time. As is true of all estimates
based on historical experience, these estimates are subject to some
volatility. However, because our total exposure is limited by our
aggregate stop loss levels (see Note E on Page F-11 for further
discussion of our self-retention insurance program), we believe that our
exposure is within our estimated levels. Where appropriate, we have
recorded provisions, included in Other Long-Term Liabilities: Other, to cover
our potential exposure and anticipated recoveries from insurance companies,
included in Other Assets. Although it is difficult to predict the
costs of ultimately resolving such issues, we have determined that our current
insurance coverage is sufficient to limit any additional exposure to an amount
that would not be material to our financial position. Therefore, we
do not expect such changes in these estimates to have a material effect on our
financial position or results of operations.
We have
been named as a defendant in numerous lawsuits claiming damages related to
occupational diseases, primarily related to asbestos and hearing
loss. We believe that most of these claims are without merit, and
that insurance and the indemnification of a previous owner of one of our
subsidiaries mitigate our exposure. Our current overall exposure to
the numerous lawsuits in question, after considering insurance coverage for
these claims, has been estimated by our lawyers and internal staff to be
approximately $280,000. We believe those estimates are reasonable and
have established reserves accordingly. Our reserves for these
lawsuits as of December 31, 2007 and 2006 were approximately
$350,000. There is a reasonable possibility that there will be
additional claims associated with occupational diseases asserted against us.
However, we do not believe that it is reasonably possible that our exposure from
those claims will be material because (1) the lawsuits filed since 1989 claiming
damages related to occupational diseases in which we have been named as a
defendant have primarily involved seamen that served on-board our vessels and
the number of such persons still eligible to file a lawsuit against us is
diminishing and (2) such potential additional claims, if pursued, would be
covered under an indemnification agreement with a previous owner of one of our
subsidiaries and/or under one or more of our existing insurance policies with
deductibles ranging from $2,500 to $25,000 per claim. (See Note T – Accumulated Other
Comprehensive Income (Loss) on Page F-21).
NOTE J - LEASES
Direct Financing
Leases
In 2007, we entered into a direct
financing lease of a U.S. flag PCTC expiring in 2010; in 2005, we entered into a
direct financing lease of a U.S. flag PCTC expiring in 2015; and, in 1999, we
entered into a direct financing lease of a foreign flag PCTC expiring in
2019. The schedule of future minimum rentals to be received under
these direct financing leases in effect at December 31, 2007, is as
follows:
|
(All amounts in
thousands)
|
Receivables Under Financing
Leases
|
|||
|
Year Ended December
31,
|
||||
|
2008
|
$ |
17,422
|
||
|
2009
|
16,766
|
|||
|
2010
|
52,878
|
|||
|
2011
|
13,097
|
|||
|
2012
|
13,117
|
|||
|
Thereafter
|
60,055
|
|||
|
Total
Minimum Lease Payments Receivable
|
173,335
|
|||
|
Estimated
Residual Values of Leased Property
|
8,051
|
|||
|
Less
Unearned Income
|
(66,787 | ) | ||
|
Total
Net Invetment in Direct Financing Leases
|
114,599
|
|||
|
Current
Portion
|
(7,391 | ) | ||
|
Long-Term
Net Investment in Direct Financing Leases
|
$ |
107,208
|
||
The
schedule of future minimum rentals to be received under the direct financing
leases in effect at December 31, 2006, was as follows:
|
Receivables
Under
|
||||
|
(All amounts in
thousands)
|
Financing
Leases
|
|||
|
Year
Ended December 31,
|
||||
|
2007
|
$ |
14,077
|
||
|
2008
|
14,099
|
|||
|
2009
|
13,498
|
|||
|
2010
|
13,112
|
|||
|
2011
|
13,097
|
|||
|
Thereafter
|
73,171
|
|||
|
Total
Minimum Lease Payments Receivable
|
141,054
|
|||
|
Estimated
Residual Value of Leased Property
|
8,052
|
|||
|
Less
Unearned Income
|
(74,209 | ) | ||
|
Total
Net Investment in Direct Financing Leases
|
74,897
|
|||
|
Current
Portion
|
(4,400 | ) | ||
|
Long-Term
Net Investment in Direct Financing Leases
|
$ |
70,497
|
||
Operating
Leases
During
2001, we entered into two sale-leasebacks, covering one of our U.S. flag PCTCs
and one of our foreign flag PCTCs for terms of 12 years and 15 years,
respectively. During 2007, we entered into a sale-leaseback covering
our U.S. flag molten sulphur carrier for a term of 10 years. These leases are
classified as operating leases, and the gains on these sale-leasebacks were
deferred and are being recognized over the term lives of the
leases. We renegotiated a capital lease agreement for one of our U.S.
flag PCTCs in December of 2001 and subsequently reclassified the lease as an
operating lease with a term of 10 years. This reclassification also
resulted in a gain that was deferred and is being recognized over the remaining
term life of the lease. The vessels under these leases are operated
under fixed charter agreements covering the terms of the respective
leases.
During
2002, we entered into a sale-leaseback of a LASH vessel resulting in an
operating lease with a term of 5 years. During 2006, we purchased
this LASH vessel thereby terminating the lease agreement. We have subsequently
sold this vessel (See Note B –
Property on Page F-10).
Our
operating lease agreements have fair value renewal options and fair value
purchase options. Most of these agreements impose defined minimum
working capital and net worth requirements, impose restrictions on the payment
of dividends, and prohibit us from incurring, without prior written consent,
additional debt or lease obligations, except as defined.
We also
conduct certain of our operations from leased office facilities under operating
leases expiring at various dates through 2026. In April of 2007, we
moved our corporate headquarters to the new RSA Battlehouse Tower in Mobile, AL.
The lease for this building is twenty years. In May of 2007, we
reached an agreement to terminate the lease of our former corporate headquarters
in New Orleans, LA. The cost of termination was approximately $700,000, which
was reported in administrative and general expenses in the second quarter of
2007.
In
addition to those operating leases with terms expiring after December 31, 2007,
we also operated certain vessels under short-term operating leases during
2007.
Rent
expense related to all of our operating leases totaled approximately
$31,886,000, $30,704,000 and $27,063,000 for the years ended December 31, 2007,
2006 and 2005, 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, 2007:
|
Payments
Under Operating Leases
|
||||||||||||||||
|
(All amounts in
thousands)
|
U.S.
Flag Vessels
|
Foreign
Flag Vessels
|
Other
Leases
|
Total
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||
|
2008
|
$ |
9,094
|
$ |
6,340
|
$ |
732
|
$ |
16,166
|
||||||||
|
2009
|
8,797
|
6,340
|
474
|
15,611
|
||||||||||||
|
2010
|
8,203
|
6,340
|
490
|
15,033
|
||||||||||||
|
2011
|
8,203
|
6,340
|
499
|
15,042
|
||||||||||||
|
2012
|
8,203
|
6,340
|
499
|
15,042
|
||||||||||||
|
Thereafter
|
19,257
|
22,719
|
9,614
|
51,590
|
||||||||||||
|
Total
Future Minimum Payments
|
$ |
61,757
|
$ |
54,419
|
$ |
12,308
|
$ |
128,484
|
||||||||
NOTE K - 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)
|
2007
|
2006
|
||||||
|
Drydocking
Costs
|
$ |
13,062
|
$ |
12,915
|
||||
|
Financing
Charges and Other
|
2,275
|
1,662
|
||||||
|
Acquired
Contract Costs
|
3,274
|
4,729
|
||||||
| $ |
18,611
|
$ |
19,306
|
|||||
The Acquired Contract Costs represent
the portion of the purchase price paid for Waterman Steamship Corporation
applicable to that company’s three U.S. flag RO/RO vessels under maritime
prepositioning ship contract agreements, which expire in 2009 and
2010. The amortization expense for each of the years ended December
31, 2007 and 2006 was $1,455,000. The estimated annual amortization
expense is $1,455,000 for 2008 and 2009, and $364,000 for 2010.
Only those costs, that are incurred to
meet regulatory requirements or upgrades, that add economic life to the vessel,
are capitalized. Normal repairs, whether incurred as part of the
drydocking or not, are expensed as incurred.
NOTE L - SIGNIFICANT
OPERATIONS
Major
Customers
We have several medium to long-term
contracts related to the operations of various vessels (See Note I – Commitments and
Contingencies on Page F-15), from which revenues represent a significant
amount of our total revenue. Revenues from the contracts with the MSC
were $32,387,000, $31,796,000 and $29,157,000 for the years ended December 31,
2007, 2006 and 2005, respectively.
We
have six U.S. flag PCTCs, also under the MSP, which carry automobiles from Japan
to the United States for a Japanese charterer. Revenues, including
MSP revenue, were $43,945,000, $44,908,000 and $39,756,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
We
have four foreign flag PCTCs under various contracts that transport automobiles
from South Korea to the United States and Europe. Revenues under
these contracts were $23,645,000, $19,108,000 and $15,287,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.
All
of the aforementioned revenues are included in our Time Charter
segment.
We have
two Special Purpose vessels, which carry loaded rail cars between the U.S. Gulf
and Mexico. Revenues from this service were $21,235,000, $18,427,000
and $11,051,000 for the years ended December 31, 2007, 2006 and 2005,
respectively. Revenues from these two Special Purpose vessels are
included in our Rail-Ferry segment.
Concentrations
A significant portion of our traffic
receivables is due from contracts with the MSC and transportation of government
sponsored cargo. There are no concentrations of receivables from
customers or geographic regions that exceed 10% of stockholders’ investment at
December 31, 2007 or 2006.
With only minor exceptions related to
personnel aboard certain foreign flag vessels, all of our shipboard personnel
are covered by collective bargaining agreements under multiple
unions. The percentage of the Company’s total work force that is
covered by these agreements is approximately 73.1%. One of these
contracts representing 8% of our workforce expires on December 31,
2008.
Geographic
Information
We have
operations in several principal markets, including international service between
the U.S. Gulf and East Coast ports and ports in Mexico and Far East, 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, Contract of
Affreightment, Rail-Ferry Service, and Other are assigned to regions
based on the location of the customer. Because we operate
internationally, most of our assets are not restricted to specific
locations. Accordingly, an allocation of identifiable assets to
specific geographic areas is not applicable.
|
Year
Ended December 31,
|
||||||||||||
|
(All Amounts in
Thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
United
States
|
$ |
101,638
|
$ |
96,786
|
$ |
94,300
|
||||||
|
Asian
Countries
|
74,091
|
69,197
|
62,191
|
|||||||||
|
Rail-Ferry
Service Operating Between U.S. Gulf and Mexico
|
21,235
|
18,428
|
11,051
|
|||||||||
|
Other
Countries
|
146
|
1,053
|
1,249
|
|||||||||
|
Total
Revenues
|
$ |
197,110
|
$ |
185,464
|
$ |
168,791
|
||||||
Operating
Segments
Our operating segments are identified
primarily based on the characteristics of the contracts or terms under which the
fleet of vessels and barges are operated. Each of the reportable
segments is managed separately as each requires different resources depending on
the nature of the contract or terms under which each vessel within the segment
operates. Our operating segments are identified and described
below.
Time Charter Contracts: Time
charters are contracts by which our charterer obtains the right for a specified
period to direct the movements and utilization of the vessel in exchange for
payment of a specified daily rate, but we retain operating control over the
vessel. Typically, we fully equip the vessel and are responsible for
normal operating expenses, repairs, crew wages, and insurance, while the
charterer is responsible for voyage expenses, such as fuel, port and stevedoring
expenses. Our Time Charter
Contracts include contracts with Far Eastern shipping companies for ten
PCTCs, with an electric utility for a conveyor-equipped, self-unloading Coal
Carrier, and with a mining company providing ocean transportation services at
its mine in Papua, Indonesia. Also included in this segment are
contracts under which the MSC charters three RO/ROs that are under an operating
contract, and contracts with another shipping company for two container
vessels.
Contract of Affreightment
(“COA”): For
this type of contract, we undertake to provide space on our vessel for the
carriage of specified goods or a specified quantity of goods on a single voyage
or series of voyages over a given period of time between named ports or within
certain geographical areas in return for the payment of an agreed amount per
unit of cargo carried. Generally, we are responsible for all
operating and voyage expenses. Our COA segment includes one
contract, which is for the transportation of molten sulphur.
Rail-Ferry Service: This
service uses our two Special Purpose vessels, which carry loaded rail cars
between the U.S. Gulf and Mexico. Each vessel currently has a
capacity for 113 standard size rail cars. With departures every four
days from Coatzacoalcos, Mexico and the U.S. Gulf, it offers with each vessel a
three-day transit between these ports and provides a total of 90 trips per year
in each direction when both ships are operating.
Other: This segment consists of operations
that include more specialized services than the above-mentioned three segments
and ship charter brokerage and agency services. Also included in the
Other category are
corporate related items, results of insignificant operations, and income and
expense items not allocated to reportable segments.
The
following table presents information about segment profit and loss and segment
assets. We do not allocate administrative and general expenses, gains
or losses on sales of investments, investment income, gains or losses on early
extinguishment of debt, equity in net income of unconsolidated entities, income
taxes, or losses from discontinued operations to our
segments. Intersegment revenues are based on market prices and
include revenues earned by our subsidiaries that provide specialized services to
the operating segments. Expenditures for segment assets represent
cash outlays during the periods presented, including purchases of assets,
improvements to assets, and drydock payments.
|
Time
Charter
|
Rail-Ferry
|
|||||||||||||||||||
|
(All amounts in
thousands)
|
Contracts
|
COA
|
Service
|
Other
|
Total
|
|||||||||||||||
|
2007
|
||||||||||||||||||||
|
Revenues from External
Customers
|
$ |
157,333
|
$ |
16,652
|
$ |
21,235
|
$ |
1,890
|
$ |
197,110
|
||||||||||
|
Intersegment Revenues
(Eliminated)
|
-
|
-
|
-
|
14,245
|
14,245
|
|||||||||||||||
|
Intersegment Expenses
(Eliminated)
|
-
|
-
|
-
|
(14,245 | ) | (14,245 | ) | |||||||||||||
|
Voyage
Expenses
|
116,825
|
10,940
|
18,406
|
841
|
147,012
|
|||||||||||||||
|
Depreciation and
Amortization
|
23,231
|
2,046
|
5,223
|
601
|
31,101
|
|||||||||||||||
|
Gross Voyage Profit
(Loss)
|
25,198
|
4,100
|
(1,566 | ) |
1,044
|
28,776
|
||||||||||||||
|
Interest
Expense
|
7,122
|
625
|
2,172
|
(157 | ) |
9,762
|
||||||||||||||
|
Gain on Sale of Other
Assets
|
-
|
-
|
-
|
12
|
12
|
|||||||||||||||
|
Segment Profit
(Loss)
|
18,076
|
3,475
|
(3,738 | ) |
1,213
|
19,026
|
||||||||||||||
|
Segment
Assets
|
242,202
|
4,946
|
102,988
|
1,326
|
351,462
|
|||||||||||||||
|
Expenditures for Segment
Assets
|
32,620
|
3,932
|
12,630
|
16,700
|
65,882
|
|||||||||||||||
|
2006
|
||||||||||||||||||||
|
Revenues
from External Customers
|
$ |
148,581
|
$ |
16,081
|
$ |
18,427
|
$ |
2,375
|
$ |
185,464
|
||||||||||
|
Intersegment
Revenues (Eliminated)
|
-
|
-
|
-
|
13,582
|
13,582
|
|||||||||||||||
|
Intersegment
Expenses (Eliminated)
|
-
|
-
|
-
|
(13,582 | ) | (13,582 | ) | |||||||||||||
|
Voyage
Expenses
|
106,255
|
9,522
|
19,734
|
1,967
|
137,478
|
|||||||||||||||
|
Depreciation
and Amortization
|
18,267
|
2,744
|
4,598
|
86
|
25,695
|
|||||||||||||||
|
Impairment
Loss
|
-
|
-
|
(8,866 | ) |
-
|
(8,866 | ) | |||||||||||||
|
Gross
Voyage Profit (Loss)
|
28,517
|
4,142
|
(14,002 | ) |
397
|
19,054
|
||||||||||||||
|
Interest
Expense
|
7,562
|
1,399
|
2,154
|
32
|
11,147
|
|||||||||||||||
|
Segment
Profit (Loss)
|
20,955
|
2,743
|
(16,156 | ) |
365
|
7,907
|
||||||||||||||
|
Segment
Assets
|
184,659
|
32,468
|
83,082
|
14,312
|
314,521
|
|||||||||||||||
|
Expenditures
for Segment Assets
|
6,990
|
-
|
16,429
|
6,812
|
30,231
|
|||||||||||||||
|
2005
|
||||||||||||||||||||
|
Revenues
from External Customers
|
$ |
138,177
|
$ |
16,693
|
$ |
11,051
|
$ |
2,870
|
$ |
168,791
|
||||||||||
|
Intersegment
Revenues (Eliminated)
|
-
|
-
|
-
|
12,614
|
12,614
|
|||||||||||||||
|
Intersegment
Expenses (Eliminated)
|
-
|
-
|
-
|
(12,614 | ) | (12,614 | ) | |||||||||||||
|
Voyage
Expenses
|
99,394
|
9,584
|
14,205
|
1,924
|
125,107
|
|||||||||||||||
|
Depreciation
and Amortization
|
17,822
|
2,747
|
5,008
|
39
|
25,616
|
|||||||||||||||
|
Gross
Voyage Profit (Loss)
|
25,853
|
4,692
|
(6,684 | ) |
928
|
24,789
|
||||||||||||||
|
Interest
Expense
|
6,760
|
1,260
|
1,812
|
(206 | ) |
9,626
|
||||||||||||||
|
Segment
Profit (Loss)
|
19,093
|
3,432
|
(8,496 | ) |
1,134
|
15,163
|
||||||||||||||
|
Segment
Assets
|
194,575
|
35,202
|
90,578
|
23,855
|
344,210
|
|||||||||||||||
|
Expenditures
for Segment Assets
|
1,038
|
-
|
35,036
|
3,969
|
40,043
|
|||||||||||||||
In 2007,
we elected to discontinue our U.S. flag LASH service and our International LASH
service. Those services were reported in the Liner Services segment
in previous periods. Financial information for all periods presented
have been restated to remove the effects of those operations from the Liner
Services segment to reflect the reclassification from continuing to discontinued
operations.
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)
|
Year
Ended December 31,
|
|||||||||||
|
Profit or
Loss:
|
2007
|
2006
|
2005
|
|||||||||
|
Total
Profit for Reportable Segments
|
$ |
19,026
|
$ |
7,907
|
$ |
15,163
|
||||||
|
Unallocated
Amounts:
|
||||||||||||
|
Administrative
and General Expenses
|
(18,158 | ) | (17,609 | ) | (14,685 | ) | ||||||
|
Gain
on Sale of Investment
|
352
|
23,058
|
287
|
|||||||||
|
Investment
Income
|
2,592
|
1,397
|
1,111
|
|||||||||
|
Loss
on Early Extinguishment of Debt
|
-
|
(248 | ) | (68 | ) | |||||||
|
Income
from Continuing Operations Before (Benefit)
|
||||||||||||
|
Provision
for Income Taxes and Equity in Net
|
||||||||||||
|
Income
of Unconsolidated Entities
|
$ |
3,812
|
$ |
14,505
|
$ |
1,808
|
||||||
|
December
31,
|
December
31,
|
|||||||
|
Assets:
|
2007
|
2006
|
||||||
|
Total
Assets for Reportable Segments
|
$ |
351,462
|
$ |
314,521
|
||||
|
Unallocated
Amounts:
|
||||||||
|
Current
Assets
|
61,843
|
90,998
|
||||||
|
Investment
in Unconsolidated Entities
|
16,326
|
12,409
|
||||||
|
Due
from Related Parties
|
5,897
|
4,015
|
||||||
|
Other
Assets
|
5,127
|
6,099
|
||||||
|
Total
Assets
|
$ |
440,655
|
$ |
428,042
|
||||
NOTE M - UNCONSOLIDATED
ENTITIES
The Company’s policy is to use the
equity method of accounting for investments in entities in which it holds a 20%
to 50% voting interest and in which it cannot exercise significant influence
over operating and financial activities. Under the equity method, the
initial investment is recorded at cost, increased or decreased periodically by
the Company’s portion of earnings or losses of the entity, and decreased by any
dividends declared by the entity. The Company’s portion of earnings
is recognized, net of taxes, through earnings.
Bulk
Carriers
In 2003,
we acquired a 50% investment in Dry Bulk Cape Holding Inc. (“Dry Bulk”) for
$3,479,000, which currently owns two Capesize Bulk Carriers and two Panamax Bulk
Carriers. The two Panamax-Size Bulk Carriers were acquired by Dry
Bulk during 2005. This investment is accounted for under the equity
method and our share of earnings or losses is reported in our consolidated
statements of income net of taxes. For the years ended December 31,
2007, 2006 and 2005, our portions of earnings net of taxes were $6,659,000,
$4,131,000 and $1,953,000, respectively. We received dividends of
$4,400,000, $800,000 and $2,500,000 in 2007, 2006 and 2005,
respectively.
In
January of 2005, we were granted an option to purchase an additional 1% of Dry
Bulk. The other unaffiliated 50% owner of Dry Bulk was granted a
similar option.
|
The
unaudited condensed financial position and results of operations of Dry
Bulk are summarized below:
|
|
December
31,
|
December
31,
|
|||||||
|
(All amounts in
thousands)
|
2007
|
2006
|
||||||
|
Current
Assets
|
$ |
6,783
|
$ |
5,351
|
||||
|
Noncurrent
Assets
|
$ |
119,129
|
$ |
111,300
|
||||
|
Current
Liabilities
|
$ |
525
|
$ |
8,143
|
||||
|
Noncurrent
Liabilities
|
$ |
102,146
|
$ |
90,047
|
||||
|
Year
Ended December 31,
|
||||||||||||
|
(All amounts in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Operating
Revenues
|
$ |
30,778
|
$ |
25,174
|
$ |
15,277
|
||||||
|
Operating
Income
|
$ |
18,959
|
$ |
13,846
|
$ |
9,118
|
||||||
|
Net
Income
|
$ |
12,699
|
$ |
7,089
|
$ |
6,448
|
||||||
Terminal Management
Company
In 2000,
we acquired a 50% interest in Terminales Transgolfo (“TTG”) for $228,000, which
operates a terminal in Coatzacoalcos, Mexico, utilized by our Rail-Ferry
Service. During 2005, the other unaffiliated 50% owner of TTG
acquired 1% of our 50% interest in TTG. As of December 31,
2007, we have a 49% interest in TTG. In 2006, TTG began making
improvements to the terminal in Mexico to accommodate the second decks that were
added to the two vessels operating in our Rail-Ferry Service during the
first half of 2007. We are funding 49% of the cost of the terminal
improvements, of which 30% is a capital contribution and is reported as an
investment in unconsolidated entities. The remaining 70% is a loan to
TTG (see Note H – Transactions
with Related Parties on Page F-15). As of December
31, 2007, we had made capital contributions of $1,004,000 associated with
funding improvements to the terminal. The investment is accounted for
under the equity method, and our share of earnings or losses is reported in our
consolidated statements of income net of taxes. No distributions were
made during 2007, 2006 and 2005. As of December 31, 2007 and 2006,
TTG owed us $2,355,000 and $2,217,000, respectively. (see Note H – Transactions with
Related Parties on Page F-15).
Transloading and Storage
Facility Company
In 2005,
we acquired a 50% interest in RTI Logistics L.L.C. (“RTI”), which owns a
transloading and storage facility that is used in our Rail-Ferry Service for
$1,587,000. We purchased our shares from a former owner at a premium,
which resulted in a difference of approximately $973,000 between our investment
in RTI and the underlying equity in net assets of the
subsidiary. Additional investments of approximately $386,000 were
made in 2006. The investment is accounted for under the equity method, and our
share of earnings or losses is reported in our consolidated statements of income
net of taxes. The Company’s interest in the earnings from the date of
this investment through December 31, 2007, was immaterial. No
distributions were made during 2007, 2006 and 2005. We have also
loaned funds to RTI, and as of December 31, 2007, 2006 and 2005, RTI owed the
company $4,101,000, $2,135,000 and $2,000,000, respectively (see Note H – Transactions with
Related Parties on Page F-15).
Cement Carrier
Company
Prior to December of 2004, we had a 30%
interest in Belden Cement Holding, Inc. (“BCH”), a Cement Carrier company which
owns and operates Cement Carriers. During December of 2004, one of
the shareholders of BCH exercised its option to purchase additional shares of
common stock, which upon exercise brought our ownership down to
26.1%. In 2005, we acquired a 26.1% interest in Belden Shipholding
Pte Ltd. (“BSH”), another Cement Carrier Company, for $78,000. In
January of 2006, BSH acquired BCH, which resulted in a cash distribution to us
of $3,130,000. In November of 2006, we sold our entire 26.1% interest
in BSH for $27,490,000, which was received in cash. This sale
resulted in a gain of approximately $22,598,000. We received the aforementioned
cash distribution of $3,130,000 in 2006 and $783,000 in 2005.
This investment was accounted for under
the equity method, and our share of earnings or losses was reported in our
consolidated statements of income net of taxes. Our portion of the
combined earnings of this investment, net of taxes, was $631,000 and $1,850,000
for the years ended December 31, 2006 and 2005 respectively. The
aggregate amount of consolidated retained earnings that represented
undistributed earnings of this investment was approximately $3,000,000 at
December 31, 2005.
NOTE N - SUPPLEMENTAL CASH FLOW
INFORMATION
|
Year
Ended December 31,
|
||||||||||||
|
(All amounts in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
Payments:
|
||||||||||||
|
Interest
Paid
|
9,874
|
$ |
10,949
|
$ |
9603
|
|||||||
|
Taxes
Paid
|
$ |
528
|
$ |
557
|
$ |
470
|
||||||
NOTE O - FAIR VALUE OF FINANCIAL
INSTRUMENTS AND DERIVATIVES
The
estimated fair values of our financial instruments and derivatives are as
follows (asset/ (liability)):
December
31, December
31,
2007
2006
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
(All amounts in
thousands)
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
|
Interest
Rate Swap Agreements
|
$ | (1,428 | ) | $ | (1,428 | ) | $ |
959
|
$ |
959
|
||||||
|
Foreign
Currency Contracts
|
$ |
79
|
$ |
79
|
$ |
194
|
$ |
194
|
||||||||
|
Long-Term
Debt
|
$ | (141,893 | ) | $ | (141,893 | ) | $ | (149,234 | ) | $ | (149,508 | ) | ||||
Disclosure of the fair value of all
balance sheet classifications, including but not limited to certain vessels,
property, equipment, direct financing leases, or intangible assets, which may
have a fair value in excess of historical cost, is not
required. Therefore, this disclosure does not purport to represent
our fair value.
The following methods and assumptions
were used to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Interest Rate Swap
Agreements
We enter into interest rate swap
agreements to manage well-defined interest rate risks. During
September of 2005, we entered into two interest rate swap agreements with two
commercial banks to reduce the possible impact of higher interest rates in the
long-term market by utilizing the fixed rate available with the
swap. We are the fixed rate payor, and DnB NOR Bank is the floating
rate payor for the first contract, and we are the fixed rate payor, and Deutsche
Schiffsbank is the floating rate payor for the second contract. The
combined amount for both contracts totaled $26,000,000 and $28,666,000 at
December 31, 2007 and 2006, respectively, and will expire in September of
2015. The fixed rate was 4.41% at December 31, 2007 and 2006, and the
floating rates were 5.20000% and 5.37063% at December 31, 2007 and 2006,
respectively. We have designated these interest rate swap agreements
as effective hedges. Settlements of these agreements are made
quarterly and resulted in a decrease to interest expense of $256,000 in 2007, a
decrease to interest expense of $204,000 in 2006, and an increase to interest
expense of $37,000 in 2005.
During
November of 2005, we entered into another 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 contract amount totaled $13,720,000 and $13,860,000 at
December 31, 2007 and 2006, respectively, and will expire in November of
2012. We are the fixed rate payor, and Capital One, N.A. (formerly
Hibernia National Bank) is the floating rate payor. The fixed rate
was 5.17% for 2007 and 2006, and the floating rate was 4.82% and 5.32% at
December 31, 2007 and 2006, respectively. We have designated this
interest rate swap agreement as an effective hedge. Settlements of
this agreement are made monthly and resulted in a decrease to interest expense
of $9,000, $18,000 and $11,000 in 2007, 2006 and 2005,
respectively.
During
September of 2007, we entered into two interest rate swap agreements with a
commercial bank to reduce the possible impact of higher interest rates in the
long-term market by utilizing the fixed rates available with the
swaps. The first contract amount totaled $19,754,000 at December 31,
2007, and will expire in September of 2010. We are the fixed rate
payor, and DnB NOR Bank ASA New York is the floating rate payor. The
fixed rate was 4.68% for 2007 and the floating rate was 5.19813% at December 31,
2007. We have designated this interest rate swap agreement as an
effective hedge. Settlements of this agreement are made monthly and
resulted in a decrease to interest expense of $28,000 in 2007. The second
contract amount totaled Yen 5,000,000,000 at December 31, 2007, and will expire
in September 2010. We are the fixed rate payor, and DnB NOR Bank ASA New York is
the floating rate payor. The fixed rate was 1.15% for 2007 and the floating rate
was 1.02125% at December 31, 2007. We have designated this interest rate swap
agreement as an effective hedge. Settlements of this agreement are made
quarterly and resulted in an increase to interest expense of Yen 2,127,566
($19,045) in 2007.
During
November of 2007, we entered into another 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 contract amount totaled $19,754,000 at December 31, 2007,
and will expire in September of 2010. We are the fixed rate payor,
and DnB NOR Bank ASA New York is the floating rate payor. The fixed
rate was 3.96% for 2007 and the floating rate was 4.93000% at December 31,
2007. We have designated this interest rate swap agreement as an
effective hedge.
Foreign Currency
Contracts
We enter into forward exchange
contracts to hedge certain firm purchase and sale commitments denominated in
foreign currencies. The purpose of our foreign currency hedging
activities is to protect us from the risk that the eventual dollar cash inflows
or outflows resulting from revenue collections from foreign customers and
purchases from foreign suppliers will be adversely affected by changes in
exchange rates. The term of the currency contracts is rarely more
than one year. We account for our foreign currency contracts as a
cash flow hedge with the mark to market adjustments to the balance sheet each
quarter. We only recognize the fair market value of hedges through earnings at
maturity, sale or termination.
During
2005, we entered into a forward purchase contract for Mexican Pesos for $630,000
U.S. Dollar equivalents beginning in January of 2006 that expired in September
of 2006. During 2006, we entered into three forward purchase
contracts. One contract was for Mexican Pesos for $420,000 U.S.
Dollar equivalents beginning in January of 2007 that expired in July of
2007. The other two contracts were for Indonesian Rupiah, one for
$2,925,000 U.S. Dollar equivalents beginning in October of 2006 that expired in
December of 2007, and the second contract was for $1,800,000 U.S. Dollar
equivalents beginning in June of 2006 that expires in May of
2007. During 2007, we entered into five forward purchase contracts.
Four contracts were for Mexican Pesos, one for $600,000 U.S. Dollar equivalents
beginning in July of 2007 that expired in December of 2007, the second contract
was for $3,000,000 U.S. Dollar equivalents with a delivery basis of a monthly
window, the third contract was for $450,000 U.S. Dollar equivalents beginning in
July of 2007 that expired in December of 2007, the fourth contract was for
$1,800,000 U.S. Dollar equivalents beginning in January of 2008 that expires in
December of 2008. The other contract was for Indonesian Rupiah for $3,420,000
U.S. Dollar equivalents beginning in January of 2008 that expires in December of
2008.There were no forward sales contracts as of December 31, 2007 or
2006.
Long-Term
Debt
The fair value of our debt is estimated
based on the quoted market price for the publicly listed Senior Notes and the
current rates offered to us on other outstanding obligations.
Amounts Due from Related
Parties
The carrying amount of these notes
receivable approximated fair market value as of December 31, 2007 and
2006. 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, 2007 and 2006,
based upon current rates offered on similar instruments.
Marketable
Securities
We have categorized all marketable
securities as available-for-sale. The following table shows the
carrying amount, fair value and net gains or losses recorded to accumulated
other comprehensive income for each security type at December 31, 2007 and
2006.
|
(All amounts in
thousands)
|
December 31,
2007
|
|||||||||||
|
Security
Type
|
Carrying
Value
|
Fair
Value
|
Net Gain (Loss) Net of
Taxes
|
|||||||||
|
Equity
Securities
|
$ |
3,708
|
$ |
4,090
|
$ |
247
|
||||||
|
Corporate
Debt Securities
|
1,477
|
1,488
|
4
|
|||||||||
| $ |
5,185
|
$ |
5,578
|
$ |
251
|
|||||||
|
December
31, 2006
|
||||||||||||
|
Security
Type
|
Carrying
Value
|
Fair
Value
|
Net
Gain (Loss) Net of Taxes
|
|||||||||
|
Equity
Securities
|
$ |
3,644
|
$ |
4,446
|
$ |
521
|
||||||
|
Corporate
Debt Securities
|
2,127
|
2,099
|
(20 | ) | ||||||||
| $ |
5,771
|
$ |
6,545
|
$ |
501
|
|||||||
|
NOTE P - ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
|
||||||||
|
Following
are the components of the consolidated balance sheet classification
Accounts Payable and Accrued Liabilities:
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
(All Amounts in
Thousands)
|
2007
|
2006
|
||||||
|
Accrued
Voyage Expenses
|
$ |
15,454
|
$ |
20,664
|
||||
|
Trade
Accounts Payable
|
2,676
|
31
|
||||||
|
Lease
Incentive Obligation
|
2,876
|
1,839
|
||||||
|
Self-Insurance
Liability
|
1,880
|
2,170
|
||||||
|
Accrued
Salaries and Benefits
|
59
|
1,695
|
||||||
|
Accrued
Insurance Premiums
|
248
|
235
|
||||||
|
Accrued
Customs Liability
|
296
|
578
|
||||||
|
Accrued
Interest Expense
|
57
|
623
|
||||||
| $ |
23,546
|
$ |
27,835
|
|||||
NOTE Q – DISCONTINUED
OPERATIONS
The Board
of Directors made the decision in the fourth quarter of 2006 to dispose of
certain LASH Liner Service assets. The decision was based on the
belief that we could generate substantial cash flow and profit on the
disposition of the assets, while improving our future operating
results. Accordingly, we sold our LASH Feeder vessel and 114 barges
in the first quarter of 2007. In the second quarter of 2007, the
company sold the one remaining U.S. flag LASH vessel and 111 LASH
barges. In the third quarter of 2007, the company elected to
discontinue its International LASH service by the end of 2007. The
one remaining LASH vessel and the remaining 370 barges were positioned for sale
in the fourth quarter of 2007. During the first two months of 2008,
we sold the one remaining LASH vessel and the majority of LASH barges, with the
remaining LASH barges under contract to be sold by the end of the first quarter
of 2008.
Our U.S.
flag LASH service and International LASH service were reported in “Continuing
Operations” as a part of our Liner segment in periods prior to June 30,
2007. Both services have been restated to remove the effects of those
operations from “Continuing Operations”.
The
components of loss from discontinued International LASH and U.S. flag LASH
service operations as reported on the income statements for the periods
presented are described below:
|
(All amounts in
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
Loss
from Discontinued Liner Service
|
2007
|
2006
|
2005
|
||||||||||
|
Loss
before benefits for income taxes
|
$ | (4,238 | ) | $ | (8,440 | ) | $ | (376 | ) | ||||
|
Gain
on Sale of Liner Assets
|
9,880
|
5,125
|
584
|
||||||||||
|
Provision
for Income Taxes
|
(18 | ) |
2,169
|
1,665
|
|||||||||
|
Net
Income (Loss) from Discontinued Liner Service
|
$ |
5,624
|
$ | (1,146 | ) | $ |
1,873
|
||||||
Revenues
associated with these operations for the years ended December 31, 2007, 2006 and
2005 were $42,005,000, $89,417,000 and $91,136,000, respectively.
In 2005,
we sold the assets associated with our over-the-road car transportation truck
company. The decision to sell these assets was primarily the result
of a decrease during 2005 in the volume of business available to us due to the
loss of market share by one of our customers and an industry-wide shortage of
drivers that caused underutilization of the assets. The sale of these assets was
completed in July of 2005 and all proceeds were received and all associated
costs were incurred before the end of that year. The carrying value
of those assets before the sale was approximately $3,600,000; costs associated
with the sale were $269,000; and net proceeds were $3,100,000 resulting in a net
loss before taxes of $769,000.
The components of loss from
discontinued over-the-road transportation operations as reported on the income
statements for the year ended December 31, 2005 is described below:
|
(All amounts in
thousands)
|
||||
|
2005
|
||||
|
Discontinued
Operations:
|
||||
|
Loss
from Operations
|
$ | (1,133 | ) | |
|
Loss
on Disposal of Assets
|
(769 | ) | ||
|
Tax
Benefit
|
632
|
|||
| $ | (1,270 | ) | ||
Revenues
associated with these operations for the years ended December 31, 2005 was
$2,534,000. The over-the-road car carrying truck company was reported
in the “Other” segment in previous years.
|
(All Amounts in Thousands
Except Share Data)
|
Quarter
Ended
|
||||||||||||||||
|
March 31
|
June 30
|
Sept. 30
|
Dec. 31
|
||||||||||||||
|
2007(1)
|
Revenues
|
$ |
37,532
|
$ |
56,352
|
$ |
51,306
|
$ |
51,920
|
||||||||
|
Expenses
|
31,418
|
48,318
|
43,884
|
44,714
|
|||||||||||||
|
Gross Voyage Profit
(Loss)
|
6,114
|
8,034
|
7,422
|
7,206
|
|||||||||||||
|
Income (Loss) from Continuing
Operations
|
1,889
|
2,983
|
3,433
|
3,487
|
|||||||||||||
|
Net Gain (Loss) from
Discontinued Liner Service
|
2,851
|
3,970
|
(1,116 | ) | (81 | ) | |||||||||||
|
Net Income (Loss) Available to
Common Stockholders
|
4,140
|
6,353
|
1,717
|
2,806
|
|||||||||||||
|
Basic and Diluted Earnings
(Loss) per Common Share:
|
|||||||||||||||||
|
Net Income (Loss)
Available to Common Stockholders-Basic
|
|||||||||||||||||
|
Continuing
Operations
|
0.21
|
0.38
|
0.43
|
0.44
|
|||||||||||||
|
Discontinued
Operations
|
0.47
|
0.63
|
(0.17 | ) | (0.01 | ) | |||||||||||
|
Net Income (Loss)
Available to Common Stockholders-Diluted
|
|||||||||||||||||
|
Continuing
Operations
|
0.23
|
0.36
|
0.40
|
0.41
|
|||||||||||||
|
Discontinued
Operations
|
0.35
|
0.48
|
(0.13 | ) | (0.01 | ) | |||||||||||
|
2006(1)
|
Revenues
|
$ |
22,394
|
$ |
64,559
|
$ |
51,220
|
$ |
47,291
|
||||||||
|
Expenses
|
15,651
|
58,764
|
42,480
|
40,649
|
|||||||||||||
|
Impairment
Loss (2)
|
-
|
8,866
|
-
|
-
|
|||||||||||||
|
Gross
Voyage Profit (Loss)
|
6,743
|
(3,071 | ) |
8,740
|
6,642
|
||||||||||||
|
Income
(Loss) from Continuing Operations
|
(480 | ) | (4,756 | ) |
3,785
|
19,645
|
|||||||||||
|
Net
(Loss) Gain from Discontinued Liner Service
|
2,566
|
(1,708 | ) | (4,721 | ) |
2,717
|
|||||||||||
|
Net
Income (Loss) Available to Common Stockholders
|
1,486
|
(7,064 | ) | (1,536 | ) |
21,762
|
|||||||||||
|
Basic
and Diluted Earnings (Loss) per Common Share:
|
|||||||||||||||||
|
Net
Income (Loss) Available to Common Stockholders
|
|||||||||||||||||
|
Continuing
Operations
|
(0.18 | ) | (0.87 | ) |
0.52
|
3.11
|
|||||||||||
|
Discontinued
Operations
|
0.42
|
(0.28 | ) | (0.77 | ) |
0.45
|
|||||||||||
|
Net
Income (Loss) Available to Common Stockholders-Diluted
|
|||||||||||||||||
|
Continuing
Operations
|
(0.18 | ) | (0.87 | ) |
0.47
|
2.42
|
|||||||||||
|
Discontinued
Operations
|
0.42
|
(0.28 | ) | (0.58 | ) |
0.33
|
|||||||||||
|
(1)
|
Adjustments
were made to all periods presented to reflect the discontinuation of
the
|
||||||||||||||||
|
LASH
liner service in 2007.
|
|||||||||||||||||
|
(2)
|
Pre-tax
impairment loss on the write-off of our former Rail-Ferry service terminal
in New Orleans.
|
||||||||||||||||
NOTE S – Earnings Per
Share
Basic earnings per share were computed
based on the weighted average number of common shares issued and outstanding
during the relevant periods. Diluted earnings per share also
considers dilutive potential common shares, including stock options using the
treasury stock method and convertible preferred stock using the if-converted
method.
The 2,000,000 shares of common stock
that were potentially issuable from conversion from our preferred stock were
antidilutive for the year ending December 30, 2005.
The
calculation of basic and diluted earnings per share is as follows (in thousands except share
amounts):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Numerator
|
||||||||||||
|
Net
Income (Loss) Available to Common Stockholders –
Basic
|
||||||||||||
|
Continuing
*
|
$ |
9,392
|
$ |
15,794
|
$ |
4,026
|
||||||
|
Discontinued
|
5,624
|
(1,146 | ) |
603
|
||||||||
| $ |
15,016
|
$ |
14,648
|
$ |
4,629
|
|||||||
|
Net
Income (Loss) - Diluted
|
||||||||||||
|
Continuing
|
$ |
11,792
|
$ |
18,194
|
$ |
4,026
|
||||||
|
Discontinued
|
5,624
|
(1,146 | ) |
603
|
||||||||
| $ |
17,416
|
$ |
17,048
|
$ |
4,629
|
|||||||
|
Denominator
|
||||||||||||
|
Weighted
Avg Share of Common
Stock Outstanding:
|
||||||||||||
|
Basic
|
6,360,208
|
6,116,036
|
6,083,005
|
|||||||||
|
Plus:
|
||||||||||||
|
Effect
of dilutive stock options
|
9,265
|
6,542
|
31,505
|
|||||||||
|
Effect
of dilutive convertible shares from preferred stock
|
2,000,000
|
2,000,000
|
** -
|
|||||||||
|
Diluted
|
8,369,473
|
8,122,578
|
6,114,510
|
|||||||||
|
Basic
and Diluted Earnings Per Common Share
|
||||||||||||
|
Net
Income (Loss) Available to Common
Stockholders
- Basic
|
||||||||||||
|
Continuing
Operations
|
$ |
1.48
|
$ |
2.58
|
$ |
0.66
|
||||||
|
Discontinued
Operations
|
0.88
|
(0.18 | ) |
0.10
|
||||||||
| $ |
2.36
|
$ |
2.40
|
$ |
0.76
|
|||||||
|
Net
Income (Loss) Available to Common
Stockholders
- Diluted
|
||||||||||||
|
Continuing
Operations
|
$ |
1.41
|
$ |
2.24
|
$ |
0.66
|
||||||
|
Discontinued
Operations
|
0.67
|
(0.14 | ) |
0.09
|
||||||||
| $ |
2.08
|
$ |
2.10
|
$ |
0.75
|
|||||||
|
*
Income (Loss) from Continuing Operations less Preferred Stock
Dividends
|
||||||||||||
**2005 dilutive convertible shares from
preferred stock not used in the calculation = 1,972,603
|
NOTE T - Accumulated Other
Comprehensive Income (Loss)
|
||||||
|
Accumulated
Other Comprehensive Income is comprised of the following, net of
tax:
|
||||||
|
December
31,
|
||||||
|
2007
|
2006
|
|||||
|
Unrealized
gains on marketable securities
|
$ |
252
|
$ 502
|
|||
|
Fair
value of derivatives
|
(1,190)
|
986
|
||||
|
Funding
status of benefit plans
|
(1,034)
|
(2,760)
|
||||
| $ |
(1,972)
|
$ (1,272)
|
||||
NOTE U – Subsequent
Events
On January 23, 2008, we entered into a
Facility Agreement by and among (1) East Gulf Shipholding, Inc. (“EGS”), a
wholly-owned subsidiary of the Company, as borrower, (2) the Company, as
guarantor, (3) the banks and financial institutions party thereto (the
“Lenders”), as lenders, (4) DnB NOR Bank ASA, as facility agent, and (5)
Deutsche Schiffsbank Aktiengesellschaft, as security trustee. Under
this Facility Agreement, the Lenders agreed to provide EGS with a term loan of
up to Six Billion Two Hundred Eighty Million Yen (¥6,280,000,000), or
approximately $59 million at current exchange rates. The loan will be
used to pay off the remaining balance on the construction of one 6400 CEU
Newbuilding Pure Car/Truck Carrier currently scheduled for delivery in early
2010. The Facility Agreement provides for two interim advances to be
made by the Lenders to EGS coinciding with certain construction milestones of
the Vessel, as well as a final advance to be made by the Lenders to EGS
coinciding with the delivery of the Vessel to EGS.
The loan is secured by the Vessel, its
earnings and insurances, and is guaranteed by the company. The loan,
originally entered into under a floating Libor to Yen interest rate, has been
swapped to a Yen fixed rate facility of 2.065% plus an applicable margin of
0.90% (which margin may be adjusted upwards or downwards as provided in the
Facility Agreement).
The
Facility Agreement contains affirmative and negative covenants that, among other
things, require we to maintain a specified tangible net worth, leverage ratio,
interest coverage ratio and working capital. The Facility
Agreement also contains customary events of default. Upon the
occurrence of an event of default that remains uncured after any applicable cure
period, EGS may be required to make immediate repayment of all indebtedness to
the Lenders and the Lenders would be entitled to pursue other remedies against
EGS, the Vessel and the Company under its guaranty.
On January 25, 2008, we announced
that our Board of Directors has authorized open market repurchases of up to
1,000,000 shares of our common stock. Any future purchases under this
program will be dependent upon many factors, including our cash requirements,
the market price of its common stock, and general economic and market
conditions. This authorization supersedes a predecessor authorization
authorized in 1999. Unless and until the Board otherwise provides,
this new authorization will remain open indefinitely.
During the first two months of 2008, we
sold the one remaining LASH vessel and the majority of LASH barges, with the
remaining LASH barges under contract to be sold by the end of the first quarter
of 2008 and will be included in the results of our Discontinued
Operations.
In February of 2008, we sold a
facility in Jefferson Parish, Louisiana, which was used primarily for the
maintenance and repair of LASH barges. The gain on this sale was
approximately $100,000, and will be included in the results of our
Discontinued Operations.
In
January 2008 we were notified that the United States Coast Guard was conducting
an investigation on one of our vessels, the SS MAJOR STEPHEN W. PLESS, of an
alleged discharge of untreated bilge water by one or more members of the crew.
The USCG has inspected the ship and interviewed various crew members. We are
cooperating with the USCG's investigation. The USCG has recently informed
counsel for us that while the investigation of a certain single individual is
continuing, at this time,we are not a target of the investigation. We may face
an administrative or civil penalty from the Coast Guard. However,
based on our assessment of circumstances currently known by us, we do not
believe that any such fine would be material.
On
February 13, 2008, we signed an agreement with Regions Bank to provide us with
an unsecured revolving line of credit for $35,000,000. This facility
will replace our current secured revolving line of credit for a like
amount.
INDEX OF SUPPLEMENTAL FINANCIAL
STATEMENT SCHEDULES
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
International
Shipholding Corporation
We have
audited the consolidated financial statements of International Shipholding
Corporation as of December 31, 2007 and 2006, and for each of the three years in
the period ended December 31, 2007, and have issued our report thereon
dated March 7, 2008 (included elsewhere in this Form 10-K). Our
audits also included the financial statement Schedule II 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
audits.
In our
opinion, the financial statement schedule 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
March 7,
2008
INTERNATIONAL
SHIPHOLDING CORPORATION
Schedule
II - Valuation and Qualifying Accounts and Reserves
(Amounts in
Thousands)
|
Deductions
|
||||||||||||||||||||
|
Balance
at
|
Additions
|
for
purpose for
|
Balance
at
|
|||||||||||||||||
|
beginning
of
|
Charged
to
|
Charged
to
|
which
accounts
|
end of
|
||||||||||||||||
|
period
|
expense
|
Other
accounts
|
were
set up
|
period
|
||||||||||||||||
|
December
31, 2005:
|
||||||||||||||||||||
|
Self-Retention
Reserves
|
$ |
2,948
|
$ |
4,710
|
$ |
-
|
$ |
3,618
|
$ |
4,040
|
||||||||||
|
Non
Self-Retention Reserves
|
678
|
156
|
-
|
332
|
502
|
|||||||||||||||
|
Custom
Reserves
|
1,738
|
929
|
-
|
2,501
|
166
|
|||||||||||||||
|
Other
Reserves
|
1,626
|
604
|
-
|
666
|
1,564
|
|||||||||||||||
|
Total
|
$ |
6,990
|
$ |
6,399
|
$ |
-
|
$ |
7,117
|
$ |
6,272
|
||||||||||
|
December
31, 2006:
|
||||||||||||||||||||
|
Self-Retention
Reserves
|
$ |
4,040
|
$ |
5,153
|
$ |
-
|
$ |
2,980
|
$ |
6,213
|
||||||||||
|
Non
Self-Retention Reserves
|
502
|
-
|
-
|
325
|
177
|
|||||||||||||||
|
Custom
Reserves
|
166
|
1,623
|
-
|
1,211
|
578
|
|||||||||||||||
|
Other
Reserves
|
1,564
|
1,710
|
-
|
2,020
|
1,254
|
|||||||||||||||
|
Total
|
$ |
6,272
|
$ |
8,486
|
$ |
-
|
$ |
6,536
|
$ |
8,222
|
||||||||||
|
December
31, 2007:
|
||||||||||||||||||||
|
Self-Retention
Reserves
|
$ |
6,213
|
$ |
4,487
|
$ |
-
|
$ |
4,618
|
$ |
6,082
|
||||||||||
|
Non
Self-Retention Reserves
|
177
|
-
|
-
|
67
|
110
|
|||||||||||||||
|
Custom
Reserves
|
578
|
1,142
|
-
|
1,424
|
296
|
|||||||||||||||
|
Other
Reserves
|
1,254
|
16
|
-
|
434
|
836
|
|||||||||||||||
|
Total
|
$ |
8,222
|
$ |
5,645
|
$ |
-
|
$ |
6,543
|
$ |
7,324
|
||||||||||