-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FeD13HRoQPmK1DqcjNpzqxO3GAXTgK3gIbrk1G2/iYLlSVwWDppjbNVCBU/t0mSY 0ndM3wPWCrW6EWIgKPAiug== 0000890566-99-000415.txt : 19990402 0000890566-99-000415.hdr.sgml : 19990402 ACCESSION NUMBER: 0000890566-99-000415 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL SHIPHOLDING CORP CENTRAL INDEX KEY: 0000278041 STANDARD INDUSTRIAL CLASSIFICATION: DEEP SEA FOREIGN TRANSPORTATION OF FREIGHT [4412] IRS NUMBER: 362989662 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10852 FILM NUMBER: 99582611 BUSINESS ADDRESS: STREET 1: 650 POYDRAS ST STE 1700 CITY: NEW ORLEANS STATE: LA ZIP: 70130 BUSINESS PHONE: 5045295461 10-K405 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO ________________ COMMISSION FILE NO. 2-63322 INTERNATIONAL SHIPHOLDING CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-2989662 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 650 POYDRAS STREET, NEW ORLEANS, LOUISIANA 70130 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (504) 529-5461 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, $1 Par Value New York Stock Exchange 9% Senior Notes Due 2003 New York Stock Exchange 7 3/4% Senior Notes Due 2007 New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non- affiliates of the registrant. DATE AMOUNT ---- ------ March 5, 1999 $67,606,093 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common stock, $1 par value. . . 6,498,637 shares outstanding as of March 5, 1999 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1998, have been incorporated by reference into Parts I and II of this Form 10-K. Portions of the registrant's definitive proxy statement dated March 16, 1999, have been incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS GENERAL The Company, through its subsidiaries, operates a diversified fleet of U.S. and foreign flag vessels that provide international and domestic maritime transportation services to commercial and governmental customers primarily under medium- to long-term charters or contracts. Substantially all of these charters or contracts are either renewals or extensions of previous agreements. At December 31, 1998, the Company's fleet consisted of 33 ocean-going vessels, 19 towboats, 127 river barges, 28 special purpose barges, 1,864 LASH (Lighter Aboard SHip) barges, and related shoreside handling facilities. The Company is the only significant operator of the LASH transportation system, which it pioneered in 1969. The Company's fleet includes 13 large LASH vessels, four LASH feeder vessels and 1,864 LASH barges. The LASH transportation system uses specially designed barges of uniform size which are loaded with cargo at various locations, towed to a centralized fleeting area, loaded aboard a large ocean-going LASH vessel by a 500-ton capacity shipboard crane, and transported overseas, where another set of previously loaded LASH barges awaits pick-up. In its transoceanic liner services, the Company uses the LASH system primarily to gather cargo on rivers, in island chains, and in harbors that are too shallow for traditional vessels. The 400-ton capacity LASH barges are ideally suited to transport large unit size items such as forest products, natural rubber, and steel that cannot be transported efficiently to and from such areas in container ships. The LASH vessel's shipboard crane permits rapid loading and unloading of LASH barges either dockside or at anchor. This rapid loading and unloading capability provides quick vessel turnaround and minimizes port time, cargo handling and reliance upon shoreside support facilities. In addition to LASH vessels, the Company's fleet consists of (i) one foreign flag and two U.S. flag pure car carriers specially designed to transport fully assembled automobiles and one U.S. flag and one foreign flag car/truck carrier with the capability of transporting heavy weight and large dimension trucks and buses, as well as automobiles; (ii) two U.S. flag ice-strengthened multi-purpose vessels, one of which supports scientific and defense operations in the polar regions and the other of which is used by the Military Sealift Command ("MSC") to carry the components of a 500-bed U.S. Navy field hospital in the Indian Ocean; (iii) one foreign flag cape-size bulk carrier; (iv) one U.S. flag molten sulphur carrier, which is used to carry molten sulphur from Louisiana and Texas to a processing plant on the Florida Gulf Coast; (v) two float-on/float-off special purpose vessels ("SPV") and one 5,000-ton container vessel, which, together with ancillary vessels, are used to transport supplies for the Indonesian operations of a major mining company; (vi) one U.S. flag conveyer-equipped self-unloading coal carrier which carries coal in the coastwise and near-sea trade; (vii) three roll-on/roll-off ("RO/RO") vessels that permit rapid deployment of rolling stock, munitions, and other military cargoes requiring special handling; and (viii) 14 inland waterway towboats and 111 super-jumbo river barges that transport coal from Indiana to Florida for an electric utility and unload via shoreside facilities owned and operated by the utility. The Company's fleet is deployed by its principal operating subsidiaries, Central Gulf Lines, Inc. ("Central Gulf"), LCI Shipholdings, Inc. ("LCI"), Forest Lines Inc. ("Forest Lines"), and Waterman Steamship Corporation ("Waterman"). The Company also operates several other subsidiaries that provide ship charter brokerage, agency, barge fleeting, and other specialized services primarily to the Company's operating segments. The Company has three operating segments, LINER SERVICES, TIME CHARTER CONTRACTS, AND CONTRACTS OF AFFREIGHTMENT ("COA"), as described below. For additional information about the company's operating segments see Note I-Significant Operations of the Notes to the Consolidated Financial Statements incorporated by reference to the Company's 1998 Annual Report to Shareholders. LINER SERVICES. A liner service operates a vessel or vessels on an established trade route with regularly scheduled sailing dates. The Company receives revenues for the carriage of cargo within the established trading area and pays the operating and voyage expenses incurred. The Company's liner services include a U.S. flag liner service between U.S. Gulf and East Coast ports and ports in South Asia and a foreign flag transatlantic liner service operating between U.S. Gulf and East Coast ports and ports in northern Europe. TIME CHARTER CONTRACTS. Time Charters are contracts by which the charterer obtains the right for a specified period to direct the movements and utilization of the vessel in exchange for payment of a specified daily rate, but the Company retains operating control over the vessel. Typically, the Company fully equips the vessel and is responsible for normal operating expenses, repairs, wages, and insurance, while the charterer is responsible for voyage expenses, such as fuel, port, and stevedoring expenses. The Company's time charter contracts include those by which the MSC charters LASH, Roll-On/Roll-Off, and Ice-Strengthened Multi-Purpose Vessels for contracts of varying terms. Also included in this segment are contracts with car manufacturers for three Pure Car Carriers and two Pure Car/Truck Carriers and with an electric utility for a conveyor-equipped, self-unloading coal carrier. Additionally, the Company's Cape-Size Bulk Carrier currently operating in the spot market is included in this segment. CONTRACTS OF AFFREIGHTMENT. COA'S are contracts by which the Company undertakes to provide space on its vessel(s) for the carriage of specified goods or a specified quantity of goods on a single voyage or series of voyages over a given period of time between named ports or within certain geographical areas in return for the payment of an agreed amount per unit of cargo carried. Generally, the Company is responsible for all operating and voyage expenses. The Company's COA segment includes a coal transportation contract with a Florida-based electric utility, a sulphur transportation contract with a major sulphur producer, and a contract to provide transportation services to a major mining company at its mine in West Irian Jaya, Indonesia. For information about the recent termination of performance by the utility and related litigation, see Item 3, Legal Proceedings, elsewhere in this Form 10-K and Note F-Commitments and Contingencies of the Notes to the Consolidated Financial Statements incorporated by reference to the Company's 1998 Annual Report to Shareholders. BUSINESS STRATEGY The Company's strategy is to (i) identify customers with high credit quality and marine transportation needs requiring specialized vessels or operating techniques, (ii) seek medium- to long-term charters or contracts with those customers and, if necessary, modify, acquire or construct vessels to meet the requirements of those charters or contracts and (iii) provide its customers with reliable, high quality service at a reasonable cost. The Company believes that its strategy has produced stable operating cash flows and valuable long-term relationships with its customers. The Company plans to continue this strategy by expanding its relationships with existing customers, seeking new customers, and selectively pursuing acquisitions. HISTORY The Company was originally founded as Central Gulf Steamship Corporation in 1947 by the late Niels F. Johnsen and his sons, Niels W. Johnsen, the Company's current Chairman, and Erik F. Johnsen, its current President. Central Gulf was privately held until 1971 when it merged with Trans Union Corporation ("Trans Union"). In 1978, ISC was formed to act as a holding company for Central Gulf, LCI, and certain other affiliated companies in connection with the 1979 spin-off by Trans Union of the Company's common stock to Trans Union's stockholders. In 1986, the Company acquired the assets of Forest Lines, and in 1989, the Company acquired the ownership of Waterman. Since its spin-off from Trans Union, the Company has continued to act solely as a holding company, and its only significant assets consist of the capital stock of its subsidiaries. COMPETITIVE STRENGTHS LARGEST LASH TRANSPORTATION SYSTEM PROVIDER. The Company is the only significant commercial operator of the LASH transportation system, which it pioneered in 1969. The Company owns all of the LASH vessels that are currently used worldwide for commercial services. A key advantage of the LASH transportation system is that it minimizes port and cargo handling time. While a LASH vessel is transporting one set of LASH barges overseas, another set of LASH barges is being loaded with cargo and gathered at the destination staging area. Other advantages of the Company's LASH transportation system include the ability to access areas that lack traditional port facilities and to carry larger than container sized cargo. The Company believes that the cost of replicating its LASH transportation system is a significant barrier to entry for a potential competitor. Management believes that a new competitor would have to acquire not only a LASH vessel (estimated to cost $80 million to build), but also three sets of approximately 90 barges each (estimated to cost $100,000 per barge to build) to achieve similar operating efficiencies. STABLE CASH FLOW. The Company's historical cash flows have been relatively stable because of the length and structure of the Company's contracts with creditworthy customers, as well as the Company's diversified customer and cargo bases. The Company's medium- to long-term charters provide for a daily charter rate that is payable whether or not the charterer utilizes the vessel. These charters generally require the charterer to pay certain voyage operating costs, including fuel, port, and stevedoring expenses, and often include cost escalation features covering certain of the Company's expenses. In addition, the Company's medium- to long-term contracts of affreightment guarantee a minimum amount of cargo for transportation. Furthermore, the Company's diversified cargo and customer bases have contributed to the stability of the Company's operating cash flow. The Company also believes that the high credit quality of its customers and the length of its contracts help reduce the effects of cyclical market conditions. LONG-STANDING CUSTOMER RELATIONSHIPS. The Company currently has medium- to long-term time charters with, or contracts to carry cargo for, high credit quality commercial customers that include International Paper Company, Freeport-McMoRan Sulphur LLC, P.T. Freeport Indonesia Company, The Goodyear Tire and Rubber Company, Toyota Motor Corporation, Honda Motor Co. Ltd., Hyundai Motor Company, Seminole Electric Cooperative utility, and USGen New England, Inc. Most of these companies have been customers of the Company for over ten years. Substantially all of the Company's current cargo contracts and charter agreements are renewals or extensions of previous agreements. In recent years the Company has been successful in winning extensions or renewals of substantially all of the contracts rebid by its commercial customers. Additionally, for over 30 years the Company has been operating vessels for the MSC under charters or contracts that typically contain extension options for one or more periods. Historically, the MSC has exercised substantially all of its renewal options. The Company believes that its long-standing customer relationships are in part due to the Company's excellent reputation for providing quality specialized maritime service in terms of on-time performance, low cargo loss, minimal damage claims, and reasonable rates. EXPERIENCED MANAGEMENT TEAM. The Company's management team has substantial experience in the shipping industry. The Company's Chairman and President have each served the Company in various management capacities since its founding in 1947. In addition, the Company's two Executive Vice Presidents and the Chief Financial Officer have over 75 years of collective experience with the Company. The Company believes that the experience of its management team is important to maintaining long-term relationships with its customers. TYPES OF SERVICE The Company, through its principal operating subsidiaries, provides specialized maritime transportation services to its customers primarily under medium- to long-term contracts. The Company's three operating segments, LINER SERVICES, TIME CHARTER CONTRACTS, and CONTRACTS OF AFFREIGHTMENT, are described below: LINER SERVICES FOREIGN FLAG. The Company operates two foreign flag LASH vessels and a self-propelled, semi-submersible feeder vessel on a scheduled transatlantic liner service under the name "Forest Lines." This service has historically operated as a two LASH vessel service. After purchasing and refurbishing a newer LASH vessel in 1996 and adding it to this service in early 1997, the Company operated three LASH vessels in this service until the older of the two original vessels was retired from the service in May of 1998. Each Forest Lines LASH vessel normally makes 10 round trip sailings per year between U.S. Gulf and East Coast ports and ports in northern Europe. Approximately one-half of the aggregate eastbound cargo space has historically been reserved for International Paper Company ("International Paper") under a long-term contract. During the period that a third LASH vessel was operated in this service, the total eastbound cargo space reserved for International Paper was approximately 33%. With the return to a two LASH vessel service, the space occupied by International Paper returned to the historical average of 50%. The remaining space was provided on a voyage affreightment basis to commercial shippers. In recent years, other forest products exporters used approximately 10%, and the remaining 40% was used by various commercial shippers to carry a variety of general cargo. The Company has had ocean transportation contracts with International Paper since 1969 when the Company had two LASH ships built to accommodate International Paper's trade. The Company's contract with International Paper is for the carriage of wood pulp, liner board, and other forest products, the characteristics of which are well suited for transportation by LASH vessels. The LASH system minimizes damage to such cargo by reducing the number of times that the cargo is handled and permits the Company to load and unload these products at the shipper's and the receiver's facilities, which are generally located on river systems that container ships and break bulk vessels do not serve. The Company's current contract with International Paper is for a ten-year term ending in 2002. Over the years, the Company has established a base of commercial shippers to which it provides space on the westbound Forest Lines service. The principal westbound cargoes are steel and other metal products, high-grade paper and wood products, and other general cargo. Over the last five years, the westbound utilization rate for these vessels averaged approximately 85% per year. U.S. FLAG. Waterman operates a U.S. flag liner service between U.S. Gulf and East Coast ports and ports in South Asia. In connection with this service, Waterman operates four U.S. flag LASH vessels, as well as three FLASH vessels that are used as feeder vessels in Southeast Asia. Until early 1997, Waterman received operating differential subsidy ("ODS") payments from the U.S. government with respect to each of the four LASH vessels used in this service. The subsidy payments were in amounts approximating the excess of certain vessel expenses, primarily wages, over comparable costs of the Company's principal foreign flag competitors on the same trade routes. The Maritime Security Act of 1996 established a new subsidy program for certain U.S. flag vessels. This program eliminated the trade route restrictions imposed by the ODS program and provides flexibility to operate freely in the competitive market. Under this new program, each participating vessel is eligible to receive an annual subsidy payment of $2.1 million, subject to annual appropriations. Seven of the Company's vessels have qualified for participation, including the four LASH vessels deployed in Waterman's U.S. flag liner service. On the eastbound portion of Waterman's U.S. flag liner service, a significant part of each vessel's cargo traditionally has been shipped to lesser developed countries under the Public Law-480 program, pursuant to which the United States government sells or donates surplus food products for export to developing countries. Seventy-five percent of this cargo is reserved for carriage by U.S. flag vessels, if they are available at reasonable rates. Awards under the Public Law-480 program are made on a voyage-to-voyage basis through periodic competitive bidding. The remaining eastbound cargo consists of general cargo, including some military equipment. Over the last five years, these vessels generally have been fully utilized on their eastbound voyages. On the westbound portion of this service, Waterman provides a significant portion of its cargo space to Goodyear for the transportation of natural rubber under a contract of affreightment expiring in April of 1999. The Company expects to negotiate an extension of this contract. Space is also provided on a voyage-to-voyage basis to other importers of natural rubber. The Company has had a continuing relationship with such companies since the early 1970s. The Company's LASH barges are ideally suited for large shipments of natural rubber because compression damage is minimal as compared to the damage that can occur when shipments are made in traditional break bulk vessels. Waterman is the largest U.S. flag carrier of natural rubber from Southeast Asia to the United States. The remaining westbound cargo generally consists of coffee, jute, guar, piece goods, and other general cargo. Over the last five years, these vessels generally have been fully utilized on their westbound voyages. The Company acquired a 1987-built LASH vessel in June of 1997 and a 1989-built LASH vessel in early 1998. One of these vessels is being used temporarily to perform auxiliary service for Waterman in the Indian Ocean area and is ultimately intended as a replacement for the older vessel remaining in the Company's Trans-Atlantic liner service. The other of these vessels is in reserve pending a decision on its deployment. TIME CHARTER CONTRACTS MILITARY SEALIFT COMMAND CHARTERS The Company has had contracts with the MSC (or its predecessor) almost continuously for over 30 years. Currently, the Company's subsidiaries have nine vessels under contract to the MSC. These vessels are employed in the MSC's prepositioning programs, which strategically place military equipment and supplies throughout the world, or are chartered to the MSC mainly to service military and scientific operations in the Arctic and Antarctic. The Company believes that the demand for military prepositioning vessels will continue for the near term, notwithstanding planned reductions in overall military spending, because prepositioning military cargo is a key component of the military's established plans to respond quickly to international incidents without incurring the significant costs of operating foreign bases, some of which have been closed in recent years. However, there is no assurance that this policy will continue. MSC charters and contracts are awarded through competitive bidding for fixed terms with options allowing the MSC to extend the charters or contracts for additional periods. During the initial contract period, the MSC typically pays higher charter rates to cover significant expenses incurred in preparing the vessels for deployment, and therefore generally has an economic incentive to extend or renew a charter or contract if the vessel is still needed rather than paying a new shipowner to reconfigure a different vessel. Except in two cases, the MSC has always exercised its extension options, and the Company generally has been successful in winning renewals when the charters and contracts are rebid. Again, there is no assurance that this practice will continue. All charters and contracts require the MSC to pay certain voyage operating costs such as fuel, port, and stevedoring expenses, and certain charters and contracts include cost escalation features covering certain of the expenses paid by the Company. For a discussion of the MSC's rights to cancel charters or contracts during option periods, see "Regulation." LASH VESSELS. The Company currently time charters to the MSC four U.S. flag LASH vessels which are used in the military's prepositioning force in the Indian Ocean. One of these charters expires in 1999 at which time the vessel will be sold or used elsewhere as market conditions permit. Two of these contracts expire in 2000, and the fourth LASH vessel completed its initial term and began its first option period in 1998 with the second option period extending into 2001. After these charters expire, it is anticipated that the MSC will invite rebidding for these contracts and the Company will have to meet the competition at the time to be successful in obtaining renewal charters. ICE-STRENGTHENED MULTI-PURPOSE VESSELS. The Company owns and operates the only two U.S. flag ice-strengthened multi-purpose vessels. These vessels are capable of transporting containerized and break bulk cargo. One of these vessels is used by the MSC to resupply Pacific Rim military bases and to supply scientific projects in the Arctic and Antarctic. The other of these vessels began operations under a new charter with the MSC in July of 1997 to carry the components of a 500-bed U.S. Navy field hospital in the Indian Ocean. Both of these vessels are in the initial seventeen-month term of their contracts with options extending into 2001. ROLL-ON/ROLL-OFF VESSELS. In 1983, Waterman was awarded a contract to operate three U.S. flag roll-on/roll-off vessels under time charters to the MSC for use by the United States Navy in its maritime prepositioning ship ("MPS") program. These vessels represent three of the four MPS vessels currently in the MSC's Atlantic fleet, which provides support for the U.S. Marine Corps. These ships are designed primarily to carry rolling stock and containers, and each can carry support equipment for 17,000 military personnel. Waterman sold the three vessels to unaffiliated corporations shortly after being awarded the contract but retained the right to operate the vessels under operating agreements. The MSC time charters commenced in late 1984 and early 1985 for initial five-year periods and were renewable at the MSC's option for additional five-year periods up to a maximum of twenty-five years. In 1993, the Company reached an agreement with the MSC to make certain reductions in future charter hire payments in consideration of fixing the period of these charters for the full 25 years. The charters and related operating agreements will terminate in 2009 and 2010. CAR/TRUCK CARRIERS U.S. FLAG. In 1986, the Company entered into multi-year charters to carry Toyota and Honda automobiles from Japan to the United States. To service these charters, the Company had constructed two pure car carriers which are specially designed to carry 4,000 and 4,660 fully assembled automobiles, respectively. Both vessels were built in Japan, but are registered under the U.S. flag. To be competitive with foreign flag vessels operated by foreign crews, the Company worked in close cooperation with the unions representing the Company's U.S. citizen shipboard personnel. Service under these charters commenced in the fourth quarter of 1987 and continues under recently negotiated medium-term extensions. In 1998, the Company acquired a 1994-built U.S. flag car/truck carrier. Immediately after being delivered to the company in April of 1998, this vessel entered a long-term charter to a major Japanese shipping company. FOREIGN FLAG. Since 1988, the Company has transported Hyundai automobiles from South Korea primarily to the United States and Europe under two long-term charters that expire in 2000. To service these charters, the Company had two new pure car carriers constructed by a shipyard affiliated with Hyundai, each with a carrying capacity of 4,800 fully assembled automobiles. In 1998, the Company sold one of these car carriers. The charter for the remaining car carrier is scheduled to expire in 2000. Also in 1998, the Company purchased a newbuilding car/truck carrier with the capacity to carry heavy and large size rolling stock in addition to automobiles and trucks. This vessel immediately entered into a long-term charter to a major Far Eastern company. Under each of the Company's car carrier charters, the charterers are responsible for voyage operating costs such as fuel, port, and stevedoring expenses, while the Company is responsible for other operating expenses including crew wages, repairs, and insurance. The Hyundai charter also includes escalation features covering certain of the expenses paid by the Company. During the terms of these charters, the Company is entitled to its full fee irrespective of the number of voyages completed or the number of cars carried per voyage. COAL CARRIER In late 1995, the Company purchased an existing U.S. flag conveyor- equipped, self-unloading coal carrier that it concurrently chartered to a New England Power Company under a 15-year contract to carry coal in the coastwise and near-sea trade. The ship will also be used, from time to time during this charter period, to carry coal and other bulk commodities for the account of other major charterers. BULK CARRIER In 1990, the Company acquired a 148,000 DWT-cape-size drybulk carrier. The vessel has been fully employed in the commercial market under various time charters in specific trading areas where bulk cargoes using this size vessel move on a regular basis. CONTRACTS OF AFFREIGHTMENT COAL TRANSPORTATION CONTRACT In 1981, the Company entered into a 22-year contract expiring in 2004 with Seminole Electric Cooperative, Inc. ("Seminole"), a Florida based rural electric generation and transmission cooperative, for the transportation of coal from Mt. Vernon, Indiana, to Gulf County, Florida. This contract provides for Central Gulf to transport for Seminole a minimum of 2.7 million tons of coal annually through the fourth quarter of 2004 by barge. The agreement requires Seminole to pay for the water transportation segment of the contract on a rate or "cost-plus" basis and the transfer from barge to rail on a rate basis. On December 15, 1998, the Company was notified that Seminole had filed suit against Central Gulf, seeking a declaratory judgment that Seminole was entitled to terminate its performance under the long-term coal transportation agreement, subject to Seminole's obligation to pay "fair and lawful damages" to Central Gulf. Seminole has also asked the court to determine the amount of damages payable to Central Gulf as a result of termination of its performance. The suit was filed in the United States District Court for the Middle District of Florida (Case Number 98-2561-CIV-T-25B). Seminole alleges that the cost of the contract exceeds the total cost of currently available all-rail transportation. After failing to negotiate a buy-out of the agreement with Central Gulf, Seminole notified Central Gulf on December 15, 1998, that it was terminating performance under the agreement, commencing alternative rail transportation, and commencing litigation to confirm its ability to terminate performance and to establish the damages owed to Central Gulf as a result of such termination. Seminole's complaint states that it is "prepared to pay damages to Central Gulf properly calculated to return to Central Gulf the value of the profits that Central Gulf otherwise would earn over the remaining term" of the agreement. Central Gulf has disputed Seminole's right to terminate performance and has served a demand for arbitration pursuant to the terms of the agreement in which Central Gulf seeks specific performance of the agreement for its remaining six-year term, and in the alternative, damages. Because of Seminole's admitted obligation to reimburse Central Gulf for its lost profits, the Company does not believe that this dispute will have a material adverse effect on its financial condition or results of operations, even if Seminole is successful in terminating its performance under the agreement. MOLTEN SULPHUR In 1994, the Company entered into a 15-year transportation contract with Freeport-McMoRan Sulphur LLC, a major sulphur producer for which it had built a 24,000 DWT molten sulphur carrier that carries molten sulphur from Louisiana and Texas to a fertilizer plant on the Florida Gulf Coast. Under the terms of this contract, the Company is guaranteed the transportation of a minimum of 1.8 million tons of sulphur per year. The contract also gives the charterer three five-year renewal options. The vessel was delivered and began service during late 1994. SPECIAL PURPOSE VESSELS (SPV'S) During 1994, the Company entered into a long-term contract to provide ocean transportation services to P.T. Freeport Indonesia Company, a major mining company producing copper and gold concentrates at its mine in West Irian Jaya, Indonesia. The Company acquired two SPV's and one container/break bulk vessel and had 28 cargo barges constructed for use with those vessels. The Company's contract is through 2006 with seven three-year renewal options. This contract also contains buy-out provisions beginning in December of 2001. ANCILLARY SERVICES LITCO FACILITY. During 1991, the Company entered into an agreement with Cooper/T. Smith Stevedoring pursuant to which the Company acquired a 50% interest in a newly constructed, all weather rapid cargo transfer facility at the river port of Memphis, Tennessee, for handling LASH barges transported by subsidiaries of the Company in its LASH liner services. LITCO (LASH Intermodal Terminal Company) began operations in May of 1992 and provides 287,500 square feet of enclosed warehouse and loading/discharging stations for LASH barge, rail, truck, and heavy-lift operations. In June of 1993, the Company purchased the remaining 50% interest from Cooper/T. Smith Stevedoring, which has continued to manage the facility under a management agreement with the Company. OTHER SERVICES. The Company has several other subsidiaries providing ship charter brokerage, agency, barge fleeting, and other specialized services to the Company's subsidiaries and, in the case of ship charter brokerage and agency services, to unaffiliated companies. The income produced by these services substantially covers the related overhead expenses. These services facilitate the Company's operations by allowing it to avoid reliance on third parties to provide these essential shipping services. MARKETING The Company maintains marketing staffs in Washington, D.C., New York, New Orleans, Houston, Chicago, and Singapore and maintains a network of marketing agents in major cities around the world who market the Company's liner, charter, and contract services. The Company markets its Trans-Atlantic LASH liner service under the trade name "Forest Lines," and its LASH liner service between the U.S. Gulf and Atlantic coast ports and South Asia ports under the Waterman house flag. The Company advertises its services in trade publications in the United States and abroad. INSURANCE The Company maintains protection and indemnity ("P&I") insurance to cover liabilities arising out of the ownership or operation of vessels with Assuranceforeningen GARD and the Standard Steamship Owners' Protection & Indemnity Association (Bermuda) Ltd., which are mutual shipowners' insurance organizations commonly referred to as P&I clubs. Both clubs are participants in and subject to the rules of their respective international group of P&I associations. The premium terms and conditions of the P&I coverage provided to the Company are governed by the rules of each club. The Company maintains hull and machinery insurance policies on each of its vessels in amounts related to the value of each vessel. This insurance coverage, which includes increased value, freight, and time charter hire, is maintained with a syndicate of hull underwriters from the U. S., British, French, and Scandinavian insurance markets. The Company maintains war risk insurance on each of the Company's vessels in an amount equal to each vessel's total insured hull value. War risk insurance is placed through U.S., British, French, and Scandinavian insurance markets and covers physical damage to the vessels and P&I risks for which coverage would be excluded by reason of war exclusions under either the hull policies or the rules of the applicable P&I club. The P&I insurance also covers the Company's vessels against liabilities arising from the discharge of oil or hazardous substances in U.S., international, and foreign waters. The Company also maintains loss of hire insurance with U.S., British, French, and Scandinavian markets to cover its loss of revenue in the event that a vessel is unable to operate for a certain period of time due to loss or damage arising from the perils covered by the hull and machinery policy. Insurance coverage for shoreside property, shipboard consumables and inventory, spare parts, workers' compensation, office contents, and general liability risks is maintained with underwriters in U. S. and British markets. Insurance premiums for the coverage described above vary from year to year depending upon the Company's loss record and market conditions. In order to reduce premiums, the Company maintains certain deductible and co-insurance provisions that it believes are prudent and generally consistent with those maintained by other shipping companies and in recent years has increased the self-retention portion under its insurance program while capping its self-retention exposure under stop-loss insurance coverage. REGULATION The Company's operations between the United States and foreign countries are subject to the Shipping Act of 1984 (the "Shipping Act"), which is administered by the Federal Maritime Commission, and certain provisions of the Federal Water Pollution Control Act, the Oil Pollution Act of 1990, and the Comprehensive Environmental Response Compensation and Liability Act, all of which are administered by the U.S. Coast Guard and other federal agencies, and certain other international, federal, state, and local laws and regulations, including international conventions and laws and regulations of the flag nations of its vessels. Pursuant to the requirements of the Shipping Act, the Company has on file with the Federal Maritime Commission tariffs reflecting the outbound and inbound rates currently charged by the Company to transport cargo between the United States and foreign countries as a common carrier in connection with its liner services. These tariffs are filed by the Company either individually or in connection with its participation as a member of rate or conference agreements, which are agreements that (upon becoming effective following filing with the Federal Maritime Commission) permit the members to agree concertedly upon rates and practices relating to the carriage of goods in U.S. and foreign ocean commerce. Tariffs filed by a company unilaterally or collectively under rate or conference agreements are subject to Federal Maritime Commission approval. Once a rate or conference agreement is filed, rates may be changed in response to market conditions on 30 days' notice, with respect to a rate increase, and one day's notice, with respect to a rate decrease. On October 16, 1998, the Ocean Shipping Reform Act of 1998 (the "Act") was enacted, and it amended the Shipping Act of 1984 to promote the growth and development of United States exports through certain reforms in the regulation of ocean transportation. This legislation, in part, repeals the requirement that a common carrier or conference file tariffs with the Federal Maritime Commission, replacing it with a requirement that tariffs be open to public inspection in an electronically available, automated tariff system. Furthermore, the legislation requires that only the essential terms of service contracts be published and made available to the public. To implement the provisions of the Act, the Federal Maritime Commission is promulgating rules and regulations that will become effective in 1999. The Merchant Marine Act of 1936, as amended (the "Merchant Marine Act"), authorized the federal government to pay an operating differential subsidy to U.S. flag vessels employed in the foreign trade of the United States. The operating differential subsidy program was designed to allow U.S. ships to compete on an equal footing with their lower-cost foreign competitors. Under the program, the U.S. Maritime Administration ("MarAd") was authorized to pay qualified U.S. flag operators (i) the differential between U.S. and foreign crew wage costs and (ii) the differential between U.S. and foreign costs of protection and indemnity insurance, hull and machinery insurance, and maintenance and repairs not compensated by insurance. Waterman's operating differential subsidy payments terminated in early 1997. The federal government has entered into no new ODS contracts since 1981 and recent administrations have indicated that existing ODS agreements will be allowed to lapse. However, 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 fiscal year 2005. Congress has appropriated a total of $135.5 million to date for the MSP. This program eliminates the trade route restrictions imposed by the ODS program and provides flexibility to operate freely in the competitive market. On December 20, 1996, Waterman entered into MSP contracts with MarAd for each of its four LASH vessels that operated under ODS contracts until early 1997, and Central Gulf entered into MSP contracts with MarAd for each of its two car carriers and one of its LASH vessels currently on charter to the MSC. In 1998, Central Gulf enrolled a recently built car carrier into the MSP in substitution of its LASH vessel previously enrolled in that program. Waterman's vessels began receiving payments under the MSP in early 1997 upon the lapse of Waterman's ODS payments; two of Central Gulf's car carriers commenced immediate operation in the MSP on December 20, 1996; and Central Gulf's new car carrier began receiving MSP payments in April of 1998. By law, the MSP is subject to annual appropriations. In the event that sufficient appropriations are not made for the MSP by Congress in any fiscal year, the Maritime Security Act of 1996 permits MSP contractors, such as Waterman and Central Gulf, to re-flag their vessels under foreign registry expeditiously. Seven of the Company's U.S. flag LASH vessels were constructed with the aid of construction differential subsidies and Title XI loan guarantees administered by MarAd, the receipt of which obligates the Company to comply with various dividend and other financial restrictions. Vessels constructed with the aid of construction differential subsidies may not be operated in domestic coastwise trade or domestic trade with Hawaii, Puerto Rico, or Alaska without the permission of MarAd and without repayment of the construction differential subsidy under a formula established by law. Recipients of Title XI loan guarantees must pay an annual fee of up to 1% of the loan amount. Under the Merchant Marine Act, U.S. flag vessels are subject to requisition or charter by the United States whenever the President declares that the national security requires such action. The owners of any such vessels must receive just compensation as provided in the Merchant Marine Act, but there is no assurance that lost profits, if any, will be fully recovered. In addition, during any extension period under each MSC charter or contract, the MSC has the right to terminate the charter or contract on 30 days' notice. Certain of the Company's operations, including its carriage of U.S. foreign aid cargoes, as well as the Company's coal and molten sulphur transportation contracts and its Title XI financing arrangements, require the Company to be as much as 75% owned by U.S. citizens. The Company monitors its stock ownership to verify its continuing compliance with these requirements and has never had more than 1% of its common stock held of record by non-U.S. citizens. In April of 1996, the Company's shareholders amended the Company's charter and stock transfer procedures to limit the acquisition of its common stock by non-U.S. citizens. Under the amendment, any transfer of the Company's common stock that would result in non-U.S. citizens owning more than 23% (the "permitted amount") of the total voting power of the Company would be void and ineffective against the Company. With respect to any shares owned by non-U.S. citizens in excess of the permitted amount, the voting rights will be denied and the dividends will be withheld. Furthermore, the Company is authorized to redeem shares of common stock owned by non-U.S. citizens in excess of the permitted amount to reduce ownership by non-U.S. citizens to the permitted amount. The Company is required by various governmental and quasi-governmental agencies to obtain permits, licenses, and certificates with respect to its vessels. The kinds of permits, licenses, and certificates required depend upon such factors as the country of registry, the commodity transported, the waters in which the vessel operates, the nationality of the vessel's crew, the age of the vessel, and the status of the Company as owner or charterer. The Company believes that it has, or can readily obtain, all permits, licenses, and certificates necessary to permit its vessels to operate. The International Maritime Organization (IMO) has mandated that vessels documented under the laws of its member countries, including the United States, develop and implement quality and safety programs by July 1, 1998, or July 1, 2002, depending on the type of vessels. Vessels operating without the required compliance certificates could either be fined or denied entry into or detained in the ports of those countries that are members of the IMO. The Company's ship management subsidiary, LMS Shipmanagement, Inc., received certification in January of 1998 that its Quality Management System was approved as meeting the ISO 9002 Quality Standard. The Company has implemented a comprehensive program to obtain timely IMO certification for all of its vessels and has obtained IMO certification for three of its vessels in 1998. For those vessels for which certification is not required until July 1, 2002, the Company has received certification for five vessels and plans to obtain certification for the remainder of its fleet subject to the certification requirements by the end of 2000, although no assurances to this effect can be given. COMPETITION The shipping industry is intensely competitive and is influenced by events largely outside the control of shipping companies. Varying economic factors can cause wide swings in freight rates and sudden shifts in traffic patterns. Vessel redeployments and new vessel construction can lead to an overcapacity of vessels offering the same service or operating in the same market. Changes in the political or regulatory environment can also create competition that is not necessarily based on normal considerations of profit and loss. The Company's strategy is to reduce competitive pressures and the effects of cyclical market conditions by operating specialized vessels in niche market segments and deploying a substantial number of its vessels under medium- to long-term charters or contracts with creditworthy customers and on trade routes where it has established market shares. The Company also seeks to compete effectively in the traditional areas of price, reliability, and timeliness of service. Competition principally comes from numerous break bulk vessels and, occasionally, container ships. Much of the Company's revenue is generated by contracts with the MSC and contracts to transport Public Law-480 U.S. government-sponsored cargo, a cargo preference program requiring that 75% of all foreign aid "Food for Peace" cargo must be transported on U.S. flag vessels, if they are available at reasonable rates. The Company competes with all U.S. flag companies, including Overseas Shipholding Group, Inc., OMI Corporation, Farrell Lines, Inc., and Sea-Land Service, Inc. for the MSC work and the Public Law-480 cargo. Additionally, the Company's principal foreign competitors include Hoegh Lines, Star Shipping, Wilhelmsen Lines, and the Shipping Corporation of India. The Company's LASH liner services face competition from foreign flag liner operators and, to a lesser degree, from U.S. flag liner operators. In addition, during periods in which the Company participates in conference agreements or rate agreements, competition includes other participants with whom the Company may agree to charge the same rates and non-participants charging lower rates. Because the Company's LASH barges are used primarily to transport large unit size items, such as forest products, natural rubber, and steel, that cannot be transported as efficiently in container ships, the Company's LASH fleet often has a competitive advantage over these vessels for this type of cargo. In addition, the Company believes that the ability of its LASH system to operate in shallow harbors and river systems and its specialized knowledge of these harbors and river systems give it a competitive advantage over operators of container ships and break bulk vessels that are too large to operate in these areas. The Company's pure car carriers operate worldwide in markets where foreign flag vessels with foreign crews predominate. The Company believes that its U.S. flag pure car carriers can continue to compete effectively if it continues to receive the cooperation of its seamen's unions in controlling costs. RISK FACTORS SUBSTANTIAL LEVERAGE. The Company is highly leveraged and devotes a substantial portion of its operating income to debt service. To date, the Company has been able to generate sufficient cash from operations to meet annual interest and principal payments on its indebtedness. The Company's ability to satisfy its debt obligations will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control. If the Company's cash flow and capital resources are insufficient to fund its debt service obligations, the Company may be forced to reduce or delay capital expenditures, sell assets, obtain additional equity capital, or restructure its debt. There can be no assurance that the Company will be able to generate sufficient cash flow to cover required interest and principal payments. Subject to compliance with various financial and other covenants imposed by debt instruments governing the indebtedness of the Company and its subsidiaries, the Company and its subsidiaries may incur additional indebtedness from time to time. The degree to which the Company is leveraged could have important consequences. Among other things, high leverage may: (i) impair the Company's ability to obtain additional financing for working capital, capital expenditures, vessel and other acquisitions, and general corporate purposes; (ii) require the Company to dedicate a substantial portion of its cash flow from operations to the payment of principal and interest; (iii) place the Company at a competitive disadvantage to less highly-leveraged competitors; and (iv) make the Company more vulnerable to economic downturns and limit its ability to withstand competitive pressures. REGULATION. The Company's business is materially affected by government regulation in the form of international conventions, national, state, and local laws and regulations, and laws and regulations of the flag nations of the Company's vessels, including laws relating to the discharge of materials into the environment. Because such conventions, laws, and regulations are often revised, the Company is unable to predict the ultimate costs of compliance. In addition, the Company is required by various governmental and quasi-governmental agencies to obtain and maintain certain permits, licenses, and certificates with respect to its operations. In certain instances, the failure to obtain or maintain such permits, licenses or certificates could have a material adverse effect on the Company's business. In the event of war or national emergency, the Company's U.S. flag vessels are subject to requisition by the United States without any guarantee of compensation for lost profits, although the United States government has traditionally paid fair compensation in such circumstances. REDUCTION OF SUBSIDY PAYMENTS. Until early 1997, the Company received ODS payments with respect to four of its LASH vessels under a federal program designed to allow U.S. ships to compete with lower-cost foreign competitors. For the years ended December 31, 1994, 1995, and 1996, the Company received aggregate subsidy payments under this program of $21.7 million, $22.7 million, and $25.6 million, respectively. Although the Company's ODS agreement has lapsed, all four of the Company's LASH vessels that previously received such subsidies, and three of its other vessels, have qualified to participate in a new subsidy program created under the Maritime Security Act of 1996. Under this new program, each participating vessel is eligible to receive annual subsidy payments of $2.1 million through fiscal year 2005. Also, this program eliminated the trade route restrictions imposed by the ODS program and provides flexibility to operate freely in the competitive market. Payments under this program are subject to annual appropriation by Congress and are not guaranteed. If Congress does not make sufficient appropriations in any fiscal year with respect to this program, the Company would be permitted to reflag its vessels under foreign registry. DEPENDENCE ON GOVERNMENT CHARTERS AND CONTRACTS. The Company is materially dependent on various charters or contracts with agencies of the United States government. Companies engaged in government contracting are subject to certain unique business risks. Among these risks are dependence on congressional appropriations and administrative allotment of funds, and changing policies and regulations. Because the government contracts held by the Company are usually awarded for relatively short periods of time and are subject to renewal options in favor of the government, the stability and continuity of that portion of the Company's business depends on the periodic exercise by the government of contract renewal options. Further, the government contracting laws provide that the United States government is to do business only with responsible contractors. In this regard, federal agencies have the authority under certain circumstances to suspend or debar a contractor from further government contracting for a certain period of time in order to protect the government's interest. The Company has never been suspended or debarred from government contracting, nor has it ever been the subject of any proceeding for such a purpose. The Company currently has nine vessels under time charter or contract to the MSC. During any extension period under each MSC charter or contract, the MSC has the right to terminate the charter or contract upon 30 days' notice. Historically, the MSC has exercised substantially all of its renewal options on the Company's charters or contracts, and the Company generally has been successful in winning charter or contract renewals when they are rebid. COMPETITION. The shipping industry is intensely competitive and can be influenced by economic and political events that are outside the control of shipping companies. There can be no assurance that the Company will be able to renew expiring charters on economically attractive terms, maintain attractive freight rates, or otherwise successfully compete against its competitors. CONTROL BY PRINCIPAL STOCKHOLDERS. Niels W. Johnsen, the Chairman of the Board and Chief Executive Officer of the Company, Erik F. Johnsen, the President and Chief Operating Officer of the Company (and the brother of Niels W. Johnsen) and their spouses, children and grandchildren (collectively, the "Johnsen Family"), beneficially owned an aggregate of 28.86% of the common stock of the Company as of December 31, 1998. By virtue of such ownership, the Johnsen Family may continue to have the power to determine many of the policies of the Company and its subsidiaries, the election of the Company's directors and officers, and the outcome of various corporate actions requiring shareholder approval. YEAR 2000 COMPLIANCE. The Year 2000 (Y2K) issue refers to the potential failure of information technology (IT) systems, telecommunications, and other electronic devices before, on or after January 1, 2000. This problem is primarily due to the use of a 2-digit year indicator within software code including applications, operating systems, hardware, or microchips. Non-compliant systems will likely interpret the "00" in "2000" incorrectly as "1900." STATE OF READINESS The Company has appointed a Y2K Project Manager who, along with department heads responsible for compliance in their respective areas are addressing the Y2K issue. The Company's Y2K Plan is an overall corporate plan supported by lower schedules developed by each functional area. The phases in the Y2K Plan include INVENTORY, ASSESSMENT, REMEDIATION, TESTING, and CONTINGENCY PLANNING. During the INVENTORY PHASE, all computer-based systems, components (such as systems developed in-house, purchased software, computers, and associated hardware), service providers, and hardware that contain microchips that support the functionality of the Company are being identified. Additionally, items that, in and of themselves, may not be impacted by the date change, but that interface with systems or equipment that are impacted by the date change are being identified. The ASSESSMENT PHASE involves determining which systems are date-sensitive and prioritizing how critical each of these systems is to continuation of the Company's business activities. Once the assessment phase is complete, the REMEDIATION PHASE begins. During this phase, the strategies for addressing systems that are not Y2K compliant will be developed. Possible strategies include repairing, replacing, or retiring the system. The TESTING PHASE will verify that the repaired or replaced system will operate properly when the date changes, and that existing business functions will continue to operate as expected. Testing efforts will not be confined solely to IT systems. Non-IT systems such as building infrastructure and components with embedded microchips will also be evaluated. The inventory and assessment phases are complete for IT systems, and those identified as most critical were 75% remediated and tested by December 31, 1998. The remaining IT systems will be addressed through September of 1999. Vessel systems inspection and original equipment manufacturer ("OEM") testing is ongoing through April of 1999. Contingency plans for vessels are in place. The Company has contacted its key suppliers and customers to ensure they are addressing the Y2K issue. Y2K questionnaires have been issued to these suppliers and customers and the Company is reviewing their responses to determine what action, if any, is necessary. COSTS TO ADDRESS Y2K ISSUES Expenditures related to evaluating and remediating any Y2K problems through December 31, 1998, have not had a material effect on the Company's financial position or results of operations. It is anticipated that the resources required to address Y2K issues during 1999 will be provided primarily by existing levels of personnel. While management does not expect Y2K compliance costs to have a material adverse effect on the Company, estimates of total expenditures for Y2K issues, including all phases of the Y2K Plan described above, as well as the cost of replacing or modifying any non-compliant IT systems have been submitted for review. Vessel Y2K budgets include OEM systems testing and replacement for previously identified non-compliant items. RISKS OF Y2K ISSUES A definitive assessment of the risk to the Company if systems that are not Y2K compliant were not identified, or identified but not successfully remediated, has been and continues to be undertaken. No Y2K issues have been identified that are unique to the Company or that otherwise would not be found in its industry. CONTINGENCY PLANS Once the potential problems that could result from the Y2K issue have been identified, the steps required in the event of the failure of any system will be determined. Vessel and information systems contingency plans are complete. The overall company plan is scheduled to be completed by March 31, 1999. Cost estimates to implement the contingency plans will be refined and analyzed against other options. EMPLOYEES As of December 31, 1998, the Company employed approximately 680 shipboard personnel and 325 shoreside personnel. The Company considers relations with its employees to be excellent. All of the Company's U.S. shipboard personnel and certain shoreside personnel are covered by collective bargaining agreements. Central Gulf, Waterman, and other U.S. shipping companies are subject to collective bargaining agreements for shipboard personnel in which the shipping companies servicing U.S. Gulf and East Coast ports also must make contributions to pension plans for dockside workers. Waterman's collective bargaining agreements covering its liner service originally scheduled to expire in September of 1998 and Central Gulf's collective bargaining agreements originally scheduled to expire in December of 1997 are currently under negotiation. In the interim, these agreements have been extended until negotiations are complete. However, pursuant to memoranda of understanding relating to each of Central Gulf's U.S. flag vessels and Waterman's four U.S. flag vessels time chartered to or operated for the MSC, the terms and conditions of the respective collective bargaining agreements will continue for the duration of the charters under which the vessels are being operated. The Company has experienced no strikes or other significant labor problems during the last ten years. ITEM 2. PROPERTIES VESSELS AND BARGES. Of the 33 ocean-going vessels in the Company's fleet at December 31, 1998, 30 are owned by the Company and three are operated under operating contracts. Of the 1,864 LASH barges in the Company's fleet, 1,809 are operated in conjunction with the Company's LASH and FLASH vessels. Of these, the Company owns approximately 1,490 barges and leases 319 barges under capital leases with 12-year terms expiring in late 2003 and early 2004. The remaining 55 LASH barges owned by the Company are not required for current vessel operations. All of the Company's barges are registered under the U.S. flag. The Company bareboat charters in 108 super-jumbo river barges (and owns three such barges) and 14 towboats specially built to meet the requirements of one of the Company's coal transportation contract. For information about the recent termination of performance by the utility and related litigation, see Item 3, Legal Proceedings, elsewhere in this Form 10-K and Note F-Commitments and Contingencies of the Notes to the Consolidated Financial Statements incorporated by reference to the Company's 1998 Annual Report to Shareholders. The Company also owns 16 standard river barges, which are chartered to unaffiliated companies on a short-term basis and one towboat, which is currently operated in the spot market along with three towboats that the Company charters from unaffiliated parties. All of the vessels owned, operated, or leased by the Company are in good condition except for the 55 LASH barges not required for current vessel operations. Since 1988, the Company has completed life extension work on eight LASH vessels and completed the refurbishment of the LASH barges operated with those vessels. Under governmental regulations, insurance policies, and certain of the Company's financing agreements and charters, the Company is required to maintain its vessels in accordance with standards of seaworthiness, safety, and health prescribed by governmental regulations or promulgated by certain vessel classification societies. The Company has implemented the quality and safety management program mandated by the IMO and plans to obtain timely certification of all vessels by the end of 2000. Vessels in the fleet are maintained in accordance with governmental regulations and the highest classification standards of the American Bureau of Shipping or, for certain vessels registered overseas, of Norwegian Veritas or Lloyd's Register classification societies. Certain of the vessels and barges owned by the Company's subsidiaries are mortgaged to various lenders to secure such subsidiaries' long-term debt (See Note B - Long-Term Debt of the Notes to the Consolidated Financial Statements incorporated by reference to the Company's 1998 Annual Report to Shareholders). OTHER PROPERTIES. The Company leases its corporate headquarters in New Orleans, its administrative and sales office in New York, and office space in Houston, Chicago, Washington, D.C., and Singapore. The Company also leases space in St. Charles and Orleans Parishes, Louisiana, for the fleeting of barges. Additionally, the Company leases a totally enclosed multi-modal cargo transfer terminal in Memphis, Tennessee, under a lease that expires in June of 2003, with one five-year renewal option. In 1998, the aggregate annual rental payments under these operating leases totaled approximately $2.7 million. The Company owns two separate facilities in St. Charles Parish, Louisiana, and one facility in Jefferson Parish, Louisiana, that are used primarily for the storage and fleeting of barges. The Company also owns a bulk coal transfer terminal in Gulf County, Florida, that is used in its coal transportation contract referred to above. For information about the recent termination of performance by the utility and related litigation, see Item 3, Legal Proceedings, elsewhere in this Form 10-K and Note F-Commitments and Contingencies of the Notes to the Consolidated Financial Statements incorporated by reference to the Company's 1998 Annual Report to Shareholders. ITEM 3. LEGAL PROCEEDINGS On December 15, 1998, the Company was notified that Seminole had filed suit against the Company's wholly owned subsidiary, Central Gulf, seeking a declaratory judgment that Seminole is entitled to terminate its performance under a long-term coal transportation agreement with Central Gulf, subject to Seminole's obligation to pay "fair and lawful damages" to Central Gulf. Seminole has also asked the court to determine the amount of damages payable to Central Gulf as a result of termination of its performance. The suit was filed in the United States District Court for the Middle District of Florida (Case Number 98-2561-CIV-T-25B). After failing to negotiate a buy-out of the agreement with Central Gulf, Seminole notified Central Gulf on December 15, 1998, that it was terminating performance under the agreement, commencing alternative rail transportation, and commencing litigation to confirm its ability to terminate performance and to establish the damages owed to Central Gulf as a result of such termination. Seminole's complaint states that it is "prepared to pay damages to Central Gulf properly calculated to return to Central Gulf the value of the profits that Central Gulf otherwise would earn over the remaining term" of the agreement. Central Gulf has disputed Seminole's right to terminate performance and has served a demand for arbitration pursuant to the terms of the agreement in which Central Gulf seeks specific performance of the agreement for its remaining six-year term, and in the alternative, damages. Because of Seminole's admitted obligation to reimburse Central Gulf for its lost profits, the Company does not believe that this dispute will have a material adverse effect on its financial condition or results of operations, even if Seminole is successful in terminating its performance under the agreement. In the normal course of its operations, the Company becomes involved in various litigation matters including, among other things, claims by third parties for alleged property damages, personal injuries and other matters. While the outcome of such claims cannot be predicted with certainty, the Company believes that its insurance coverage and reserves with respect to such claims are adequate and that such claims will not have a material adverse effect on the Company's business or financial condition (See Note F of the Notes to the Company's Consolidated Financial Statements incorporated by reference to the Company's 1998 Annual Report to Shareholders). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 4A. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT Set forth below is information concerning the directors and executive officers of the Company. Directors are elected by the shareholders for one-year terms. Executive officers serve at the pleasure of the Board of Directors. NAME CURRENT POSITION ---- ---------------- Niels W. Johnsen Chairman and Chief Executive Officer Erik F. Johnsen President, Chief Operating Officer and Director Niels M. Johnsen Executive Vice President and Director Erik L. Johnsen Executive Vice President and Director Gary L. Ferguson Vice President and Chief Financial Officer David B. Drake Vice President and Treasurer Manuel G. Estrada Vice President and Controller Harold S. Grehan, Jr. Director Laurance Eustis Director Raymond V. O'Brien, Jr. Director Edwin Lupberger Director Edward K. Trowbridge Director NIELS W. JOHNSEN, 76, has been the Chairman and Chief Executive Officer of the Company since its commencement of operations in 1979 and served as Chairman and Chief Executive Officer of each of the Company's principal subsidiaries until April of 1997. He previously served as Chairman of Trans Union's ocean shipping group of companies from December of 1971 through May of 1979. He was one of the founders of Central Gulf in 1947 and held various positions with Central Gulf until Trans Union acquired Central Gulf in 1971. He is also a former director of Reserve Fund, Inc., a money market fund and a former Trustee of Atlantic Mutual Companies, an insurance company. He is the brother of Erik F. Johnsen. ERIK F. JOHNSEN, 73, has been the President, Chief Operating Officer, and Director of the Company since its commencement of operations in 1979. Until April of 1997, Mr. Johnsen also served as the President and Chief Operating Officer of each of the Company's principal subsidiaries, except Waterman, for which he served as Chairman of the Executive Committee. Along with his brother, Niels W. Johnsen, he was one of the founders of Central Gulf in 1947 and served as its President from 1966 until April of 1997. Mr. Johnsen has served as the Chairman of the Board of Assuranceforeningen GARD, a P&I insurance club, since 1994 and has been a member since 1982. He is the brother of Niels W. Johnsen. NIELS M. JOHNSEN, 53, is Executive Vice President of the Company. Mr. Johnsen has served as a Director of the Company since April of 1988. He joined Central Gulf on a full time basis in 1970 and held various positions with the Company before being named Executive Vice President in April of 1997. He has also served as chairman of each of the Company's principal subsidiaries, except Waterman, since April of 1997. He is also President of Waterman and N. W. Johnsen & Co., Inc., subsidiaries of the Company engaged in LASH liner service and ship and cargo charter brokerage, respectively. He is the son of Niels W. Johnsen. ERIK L. JOHNSEN, 41, is Executive Vice President of the Company. He joined Central Gulf in 1979 and held various positions with the Company before being named Executive Vice President in April of 1997. He has served as a Director of the Company since 1994. He has also served as the President of each of the Company's principal subsidiaries, except Waterman, since April of 1997, and as Executive Vice President of Waterman since September of 1989. He is responsible for all operations of the Company's vessel fleet and leads the Company's Ship Management Group. He is the son of Erik F. Johnsen. GARY L. FERGUSON, 58, is Vice President and Chief Financial Officer of the Company. He joined Central Gulf in 1968 where he held various positions with the Company prior to being named Controller in 1977, and Vice President and Chief Financial Officer in 1989. DAVID B. DRAKE, 43, is Vice President and Treasurer of the Company. He joined Central Gulf in 1979 and held various positions prior to being named Vice President and Treasurer in 1996. MANUEL G. ESTRADA, 44, is Vice President and Controller of the Company. He joined Central Gulf in 1978 and held various positions prior to being named Vice President and Controller in 1996. HAROLD S. GREHAN, Jr., 71, is a Director of the Company. He joined Central Gulf in 1958 and became Vice President in 1959, Senior Vice President in 1973 and Executive Vice President and Director in 1979. Mr. Grehan retired from the Company at the end of 1997, and continued to serve as a Director during 1998. LAURANCE EUSTIS, 85, has served as a Director of the Company since 1979. He is the Chairman of the Board of Eustis Insurance, Inc., mortgage banking and general insurance, located in New Orleans, Louisiana. Mr. Eustis is also a director of Pan American Life Insurance Company. RAYMOND V. O'BRIEN, Jr., 71, has served as a Director of the Company since 1979. He is also a director of Emigrant Savings Bank. He served as Chairman of the Board and Chief Executive Officer of the Emigrant Savings Bank from January of 1978 through December of 1992. EDWIN LUPBERGER, 62, has served as a Director of the Company since April of 1988. 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. He also is an advisory director of Bank One, a bank holding company. EDWARD K. TROWBRIDGE, 70, has served as a Director of the Company since April of 1994. He served as Chairman of the Board and Chief Executive Officer of the Atlantic Mutual Companies from July of 1988 through November of 1993. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The information called for by Item 5 is included in the 1998 Annual Report to Shareholders in the section entitled "Common Stock Prices and Dividends for Each Quarterly Period of 1997 and 1998" and is incorporated herein by reference to page 22 of Exhibit 13 filed with this Form 10-K. ITEM 6. SELECTED FINANCIAL DATA The information called for by Item 6 is included in the 1998 Annual Report to Shareholders in the section entitled "Summary of Selected Consolidated Financial Data" and is incorporated herein by reference to page 1 of Exhibit 13 filed with this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information called for by Item 7 is included in the 1998 Annual Report to Shareholders in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference to pages 2 through 5 of Exhibit 13 filed with this Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by Item 7a is included in the 1998 Annual Report to Shareholders in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations: Market-Sensitive Instruments and Risk Management" and is incorporated herein by reference to page 5 of Exhibit 13 filed with this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated balance sheets as of December 31, 1998, and December 31, 1997, 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, 1998, and the notes thereto, are included in the 1998 Annual Report to the Shareholders and are incorporated herein by reference to pages 6 through 22 of Exhibit 13 filed with this Form 10-K. Such statements have been audited by Arthur Andersen LLP, independent public accountants, as set forth in their report included in such Annual Report and incorporated herein by reference to page 23 of Exhibit 13 filed with this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by Item 10 is incorporated herein by reference to Item 4a, Executive Officers and Directors of the Registrant. ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is included on pages 6, 7, 8, and 9 of the Company's definitive proxy statement dated March 16, 1999, filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item 12 is included on pages 2, 3, 4, and 5 of the Company's definitive proxy statement dated March 16, 1999, filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Item 13 is included on pages 2, 3, 4, 5, 10, and 11 of the Company's definitive proxy statement dated March 16, 1999, filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following financial statements, schedules and exhibits are filed as part of this report: (a) 1. FINANCIAL STATEMENTS The following financial statements and related notes are included in the Company's 1998 Annual Report to Shareholders and are incorporated herein by reference to pages 6 through 22 of Exhibit 13 filed with this Form10-K. Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996 Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Investment for the years ended December 31, 1998, 1997, and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements Report of Independent Public Accountants 2. FINANCIAL STATEMENT SCHEDULES Report of Independent Public Accountants on Supplemental Schedules Schedule I - Condensed Financial Information of the Registrant 3. EXHIBITS (3) Restated Certificate of Incorporation, as amended, and By-Laws of the Registrant (filed with the Securities and Exchange Commission as Exhibit 3 to the Registrant's Form 10-Q for the quarterly period ended June 30, 1996, and incorporated herein by reference) (4) Specimen of Common Stock Certificate (filed as an exhibit to the Company's Form 8-A filed with the Securities and Exchange Commission on April 25, 1980, and incorporated herein by reference) (4.1) Form of Indenture between the Company and the Bank of New York, as Trustee, with respect to 9% Senior Notes due July 1, 2003 (filed as Exhibit 4(c) to Amendment No. 1 to the Company's Registration Statement on Form S-2 (Registration No. 33-62168) and incorporated herein by reference). (4.2) Form of 9% Senior Note due July 1, 2003 (included in Exhibit (4.1) hereto and incorporated herein by reference). (4.3) Form of Indenture between the Company and the Bank of New York, Inc., as Trustee, with respect to 7 3/4% Senior Notes due October 15, 2007 (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated January 22, 1998, and incorporated herein by reference). (4.4) Form of 7 3/4% Senior Note due October 15, 2007 (included in Exhibit (4.3) hereto and incorporated herein by reference). (10) $25,000,000 Credit Agreement dated as of January 22, 1998, by and among the Company, as Borrower, Certain Lenders, as signatories thereto, Citicorp Securities, Inc., as Arranger, and Citibank, N.A., as Administrative Agent (filed as exhibit 10.1 to the Company's Registration Statement on Form S-4 (Registration No. 333-46317) and incorporated herein by reference.) (13) 1998 Annual Report to Shareholders (21) Subsidiaries of International Shipholding Corporation (27) Financial Data Schedule (b) A report on Form 8-K was filed December 30, 1998, to report that on December 15, 1998, the Company was notified that Seminole Electric Cooperative, Inc. ("Seminole") had filed suit against the Company's wholly owned subsidiary, Central Gulf Lines, Inc. ("Central Gulf"), seeking a declaratory judgment that Seminole was entitled to terminate its performance under a long-term coal transportation agreement with Central Gulf, subject to Seminole's obligation to pay "fair and lawful damages" to Central Gulf. Seminole has also asked the court to determine the amount of damages payable to Central Gulf as a result of termination of its performance. The suit was filed in the United States District Court for the Middle District of Florida (Case Number 98-2561-CIV-T-25B). (c) The Index of Exhibits and required Exhibits are included following the signatures beginning at page 24 of this Report. (d) The Index of Supplemental Financial Statement Schedules and the required Financial Statement Schedule are included following the Index of Exhibits beginning on page 25 of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL SHIPHOLDING CORPORATION (Registrant) March 29, 1999 By /s/ GARY L. FERGUSON Gary L. Ferguson Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. INTERNATIONAL SHIPHOLDING CORPORATION (REGISTRANT) March 29, 1999 By /s/NIELS W. JOHNSEN Niels W. Johnsen Chairman of the Board, Director and Chief Executive Officer March 29, 1999 By /s/ERIK F. JOHNSEN Erik F. Johnsen President and Director March 29, 1999 By /s/NIELS M. JOHNSEN Niels M. Johnsen Executive Vice President and Director March 29, 1999 By /s/ERIK L. JOHNSEN Erik L. Johnsen Executive Vice President and Director March 29, 1999 By /s/HAROLD S. GREHAN, JR. Harold S. Grehan, Jr. Director March 29, 1999 By /s/LAURANCE EUSTIS Laurance Eustis Director March 29, 1999 By /s/RAYMOND V. O'BRIEN, JR. Raymond V. O'Brien, Jr. Director March 29, 1999 By /s/EDWIN LUPBERGER Edwin Lupberger Director March 29, 1999 By /s/EDWARD K. TROWBRIDGE Edward K. Trowbridge Director March 29, 1999 By /s/GARY L. FERGUSON Gary L. Ferguson Vice President and Chief Financial Officer March 29, 1999 By /s/MANNY G. ESTRADA Manny G. Estrada Chief Accounting Officer EXHIBIT INDEX Exhibit Number - ---------- (3) Restated Certificate of Incorporation, as amended, and By-Laws of the Registrant (filed with the Securities and Exchange Commission as Exhibit 3 to the Registrant's Form 10-Q for the quarterly period ended June 30, 1996, and incorporated herein by reference). (4) Specimen of Common Stock Certificate (filed as an exhibit to the Company's Form 8-A filed with the Securities and Exchange Commission on April 25, 1980, and incorporated herein by reference). (4.1) Form of Indenture between the Company and the Bank of New York, as Trustee, with respect to 9% Senior Notes due July 1, 2003 (filed as Exhibit 4(c) to Amendment No. 1 to the Company's Registration Statement on Form S-2 (Registration No. 33-62168) and incorporated herein by reference). (4.2) Form of 9% Senior Note due July 1, 2003 (included in Exhibit (4.1) hereto and incorporated herein by reference). (4.3) Form of Indenture between the Company and the Bank of New York, Inc., as Trustee, with respect to 7 3/4% Senior Notes due October 15, 2007 (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated January 22, 1998, and incorporated herein by reference). (4.4) Form of 7 3/4% Senior Note due October 15, 2007 (included in Exhibit (4.3) hereto and incorporated herein by reference). (10) $25,000,000 Credit Agreement dated as of January 22, 1998, by and among the Company, as Borrower, Certain Lenders, as signatories thereto, Citicorp Securities, Inc., as Arranger, and Citibank, N.A., as Administrative Agent (filed as exhibit 10.1 to the Company's Registration Statement on Form S-4 (Registration No. 333-46317) and incorporated herein by reference.) (13) 1998 Annual Report to Shareholders (21) Subsidiaries of International Shipholding Corporation (27) Financial Data Schedule INDEX OF SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES Report of Independent Public Accountants on Supplemental Schedule 25 Schedule I - Condensed Financial Information of the Registrant 26-29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE We have audited, in accordance with generally accepted auditing standards, the financial statements as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 included in International Shipholding Corporation's annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 18, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index above is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. New Orleans, Louisiana, January 18, 1999 INTERNATIONAL SHIPHOLDING CORPORATION (PARENT COMPANY) SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME (ALL AMOUNTS IN THOUSANDS) Year Ended December 31, 1998 1997 1996 -------- -------- -------- Management Fee Revenue from Subsidiaries ... $ 11,555 $ 11,563 $ 6,135 Administrative and General Expenses ........ 11,626 10,867 5,957 -------- -------- -------- Gross Profit ................. (71) 696 178 -------- -------- -------- Interest: Interest Expense .................. 20,884 10,498 11,518 Investment Income ................. (3,919) (1,217) (2,372) -------- -------- -------- 16,965 9,281 9,146 -------- -------- -------- Equity in Net Income of Consolidated Subsidiaries (Net of Applicable Taxes) .................................... 17,814 7,717 13,951 -------- -------- -------- Income (Loss) Before Provision (Benefit) for Income Taxes and Extraordinary Item ..................................... 778 (868) 4,983 -------- -------- -------- Provision (Benefit) for Income Taxes: Current ........................... (205) 1,587 (1,505) Deferred .......................... (5,758) (4,581) (1,784) State ............................. 2 (29) 449 -------- -------- -------- (5,961) (3,023) (2,840) -------- -------- -------- Income Before Extraordinary Item ........... $ 6,739 $ 2,155 $ 7,823 -------- -------- -------- Extraordinary Loss on Early Extinguishment of Debt (Net of Income Tax Benefit of $1) ........ (2) -- -- -------- -------- -------- Net Income ................................. $ 6,737 $ 2,155 $ 7,823 ======== ======== ======== The "Notes to Consolidated Financial Statements of International Shipholding Corporation and Subsidiaries" are an integral part of these statements. See accompanying "Notes to Condensed Financial Information of Registrant." INTERNATIONAL SHIPHOLDING CORPORATION (PARENT COMPANY) SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (All Amounts in Thousands) ASSETS DECEMBER 31, December 31, 1998 1997 --------- --------- Current Assets: Cash and Cash Equivalents .............. $ 4,150 $ 404 Marketable Securities .................. -- 2,181 Accounts Receivable .................... 228 138 Federal Income Taxes Receivable ........ 1,299 43 Other Current Assets ................... 448 427 --------- --------- Total Current Assets ............................ 6,125 3,193 --------- --------- Deferred Federal Income Taxes ................... 11,800 1,113 --------- --------- Investment in Consolidated Subsidiaries ......... 342,267 272,186 --------- --------- Advances to Subsidiaries ........................ 49,974 -- --------- --------- Furniture and Equipment ......................... 4,375 3,761 Less - Accumulated Depreciation ................ (1,017) (90) --------- --------- 3,358 3,671 --------- --------- Deferred Charges, Net of Accumulated Amortization of $4,070 and $1,752 in 1998 and 1997, Respectively ................ 4,236 1,922 --------- --------- $ 417,760 $ 282,085 ========= ========= LIABILITIES AND STOCKHOLDERS' INVESTMENT DECEMBER 31, December 31, 1998 1997 --------- --------- Current Liabilities: Accrued Interest Payable ............... $ 6,046 $ 4,225 Accounts Payable and Accrued Liabilities 620 150 Current Deferred Income Tax Liability .. 27 1,986 --------- --------- Total Current Liabilities ....................... 6,693 6,361 --------- --------- Due to Subsidiaries ............................. -- 7,879 --------- --------- Long-Term Debt .................................. 231,390 93,891 --------- --------- Other Provisions ................................ 2,108 1,149 --------- --------- Commitments and Contingent Liabilities Stockholders' Investment: Common Stock ........................... 6,756 6,756 Additional Paid-In Capital ............. 54,450 54,450 Retained Earnings ...................... 117,860 112,794 Less - Treasury Stock .................. (1,422) (1,133) Accumulated Other Comprehensive Loss ... (75) (62) --------- --------- 177,569 172,805 --------- --------- $ 417,760 $ 282,085 ========= ========= The "Notes to Consolidated Financial Statements of International Shipholding Corporation and Subsidiaries" are an integral part of these statements. See Accompanying "Notes to Condensed Financial Information of Registrant." INTERNATIONAL SHIPHOLDING CORPORATION (PARENT COMPANY) SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (ALL AMOUNTS IN THOUSANDS) Year Ended December 31, 1998 1997 1996 --------- ------- -------- Cash Flows from Operating Activities: Net Income ............................. $ 6,737 $ 2,155 $ 7,823 Adjustments to Reconcile Net Income to Net Cash Used by Operating Activities: Depreciation ...................... 962 39 14 Amortization of Deferred Charges .. 689 449 596 Benefit for Deferred Income Taxes . (5,963) (4,581) (1,784) Net Income of Consolidated Subsidiaries .................... (17,814) (7,717) (13,951) Extraordinary Loss ................ 2 -- -- Changes in: Accounts Receivable ............... (90) (40) 149 Other Current Assets .............. (21) (69) 1,593 Other Assets ...................... -- 6 (13) Accounts Payable and Accrued Liabilities ..................... 2,074 38 (411) Federal Income Taxes Payable ...... (3,450) 2,523 (6,765) Other Provisions .................. 959 174 45 --------- ------- -------- Net Cash Used by Operating Activities ...... (15,915) (7,023) (12,704) --------- ------- -------- Cash Flows from Investing Activities: Purchase of Furniture and Equipment .... (409) (299) (69) Additions to Deferred Charges .......... -- (24) -- Proceeds from Short-Term Investments ... 2,088 500 1,799 Other Investing Activities ............. -- -- 3,015 --------- ------- -------- Net Cash Provided by Investing Activities .. 1,679 177 4,745 --------- ------- -------- Cash Flows from Financing Activities: Proceeds from Issuance of Debt ......... 169,435 -- -- Reduction of Debt ...................... (31,936) -- -- Change in Due to Subsidiaries .......... (114,592) 8,764 9,713 Additions to Deferred Financing Charges (2,965) (84) (7) Repurchase of Treasury Stock ........... (289) -- -- Common Stock Dividends Paid ............ (1,671) (1,671) (1,671) --------- ------- -------- Net Cash Provided by Financing Activities .. 17,982 7,009 8,035 --------- ------- -------- Net Increase in Cash and Cash Equivalents .. 3,746 163 76 Cash and Cash Equivalents at Beginning of Year ..................................... 404 241 165 --------- ------- -------- Cash and Cash Equivalents at End of Year ... $ 4,150 $ 404 $ 241 ========= ======= ======== The "Notes to Consolidated Financial Statements of International Shipholding Corporation and Subsidiaries" are an integral part of these statements. See accompanying "Notes to Condensed Financial Information of Registrant" NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT DECEMBER 31, 1998 Note 1. Basis of Preparation Pursuant to the rule and regulations of the Securities and Exchange Commission, the Condensed Financial Statements of the Registrant do not include all of the information and notes normally included with financial statements prepared in accordance with generally accepted accounting principles. It is, therefore, suggested that these Condensed Financial Statements be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Registrant's Annual Report as referenced in Form 10-K, Part II, Item 8, page XX. Note 2. Cash Dividends of Subsidiaries There were no cash dividends received from subsidiaries for the years ended December 31, 1998, 1997, and 1996. Note 3. Long-Term Debt Long-term debt consists of the following: (ALL AMOUNTS IN THOUSANDS) INTEREST DECEMBER 31, DECEMBER 31, RATE DUE 1998 1997 ---- --- ---- ---- Unsecured Senior Notes 7.75-9.00% 2003-2007 $ 202,390 $ 93,891 Lines of Credit 6.41% 2001 29,000 -- ------------- ------------- $ 231,390 $ 93,891 ============= ============= In addition to these Unsecured Senior Notes, International Shipholding Corporation (Parent Company) guarantees certain long-term debt of its subsidiaries, which amounted to $70,098,000 at December 31, 1998. EX-13 2 EXHIBIT 13 INTERNATIONAL SHIPHOLDING CORPORATION 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, 1998 1997 1996 1995 1994 ----------- ---------- ----------- ---------- ---------- INCOME STATEMENT DATA: Revenues ................................ $ 384,148 $ 391,056 $ 378,927 $ 341,789 $ 342,333 Gross Voyage Profits .................... $ 57,791 $ 55,403 $ 66,948 $ 64,536 $ 65,315 Operating Income ........................ $ 39,147 $ 29,949 $ 40,692 $ 37,921 $ 37,861 Income Before Extraordinary Item .................................... $ 7,305 $ 2,155 $ 8,636 $ 20,980 $ 13,051 Extraordinary Item ...................... $ (1,029) -- $ (813) -- -- Net Income .............................. $ 6,276 $ 2,155 $ 7,823 $ 20,980 $ 13,051 Basic and Diluted Earnings Per Common and Common Equivalent Share(1): Before Extraordinary Item ............................ $ 1.09 $ 0.32 $ 1.29 $ 3.14 $ 1.95 Extraordinary Item ................ $ (0.15) -- $ (0.12) -- -- Net Income ........................ $ 0.94 $ 0.32 $ 1.17 $ 3.14 $ 1.95 BALANCE SHEET DATA: Working Capital ......................... $ 44,914 $ 39,961 $ 26,928 $ 13,407 $ 16,819 Total Assets ............................ $ 689,804 $ 618,204 $ 661,596 $ 647,580 $ 547,091 Long -Term Debt (including Capital Lease Obligations and Current Liabilities to be Refinanced) ..................... $ 361,425 $ 309,340 $ 324,756 $ 308,525 $ 251,944 Common Stockholders' Investment ............................ $ 177,108 $ 172,805 $ 172,407 $ 166,261 $ 146,316 OTHER DATA: EBITDA (2) .............................. $ 101,284 $ 91,657 $ 94,929 $ 81,877 $ 79,482 Cash Dividends Per Common Share (1) ............................. $ 0.25 $ 0.25 $ 0.25 $ 0.1825 $ 0.16 Weighted Average of Common and Common Equivalent Shares(1) ............................. 6,682,216 6,682,887 6,682,887 6,682,887 6,682,887
(1) All share and per share data for the year ended December 31, 1994, have been restated for the November 17, 1995, twenty-five percent stock dividend. (2) EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), as presented above, represents income before interest expense and provision (benefit) for income taxes, plus depreciation, amortization of deferred charges and acquired contract costs, extraordinary items, and gains (losses) on sales of property and investments. EBITDA is not presented as an alternative to net income or cash flow as an indicator of the Company's operating performance or liquidity, but rather to provide additional information related to debt service capacity. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NOTICE REGARDING FORWARD-LOOKING STATEMENTS Certain statements made in this report or elsewhere by, or on behalf of, the Company that are not based on historical facts are intended to be forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and as such may involve known and unknown risks, uncertainties, and other factors that may cause the Company's actual results to be materially different from the anticipated future results expressed or implied by such forward-looking statements. Such forward-looking statements may include, without limitation, statements with respect to the Company's anticipated future performance, financial position and liquidity, growth opportunities, business and competitive outlook, demand for services, business strategies, and other similar statements of expectations or objectives that are highlighted by words such as "expects," "anticipates," "intends," "plans," "believes," "projects," "seeks," "should," and "may," and variations thereof and similar expressions. Important factors that could cause the actual results of the Company to differ materially from the Company's expectations may include, without limitation, the Company's ability to (i) identify customers with marine transportation needs requiring specialized vessels or operating techniques; (ii) secure financing on satisfactory terms to acquire, modify, or construct vessels if such financing is necessary to service the potential needs of current or future customers; (iii) obtain new contracts or renew existing contracts which would employ certain of its vessels or other assets upon the expiration of contracts currently in place; (iv) manage the amount and rate of growth of its general and administrative expenses and costs associated with crewing certain of its vessels; (v) and to manage its growth in terms of implementing internal controls and information systems and hiring or retaining key personnel, among other things. Other factors include (vi) changes in cargo rates and fuel prices which could increase or decrease the Company's gross voyage profit from its liner services; (vii) the rate at which competitors add or scrap vessels from the markets in which the Company operates; (viii) changes in interest rates which could increase or decrease the amount of interest the Company incurs on borrowings with variable rates of interest; (ix) the impact on the Company's financial statements of nonrecurring accounting charges that may result from the Company's ongoing evaluation of business strategies, asset valuations, and organizational structures; (x) changes in accounting policies and practices adopted voluntarily or as required by generally accepted accounting principles; (xi) changes in laws and regulations such as those related to government assistance programs and tax rates, among other things; (xii) unanticipated outcomes of current or possible future legal proceedings; (xiii) and other economic, competitive, governmental, and technological factors which may effect the Company's operations. The Company cautions readers that it assumes no obligation to update or publicly release any revisions to forward-looking statements made in this report or elsewhere by, or on behalf of, the Company. RESULTS OF OPERATIONS The Company's vessels are operated under a variety of charters and contracts. The nature of these arrangements is such that, without a material variation in gross voyage profits (total revenues less voyage expenses and vessel and barge depreciation), the revenues and expenses attributable to a vessel deployed under one type of charter or contract can differ substantially from those attributable to the same vessel if deployed under a different type of charter or contract. Accordingly, depending on the mix of charters or contracts in place during a particular accounting period, the Company's revenues and expenses can fluctuate substantially from one period to another even though the number of vessels deployed, the number of voyages completed, the amount of cargo carried and the gross voyage profit derived from the vessel remain relatively constant. As a result, fluctuations in voyage revenues and expenses are not necessarily indicative of trends in profitability, and management believes that gross voyage profit is a more appropriate measure of operating performance than revenues. Accordingly, the discussion below addresses variations in gross voyage profits rather than variations in revenues. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 GROSS VOYAGE PROFIT. Gross voyage profit increased to $57.8 Million in 1998 as compared to $55.4 Million in 1997. The increase was achieved primarily by the Company's LINER SERVICES segment which operates LASH vessels on two established routes. One of these routes is between the U.S. Gulf and Atlantic coasts and the Middle East, East Africa, the Indian Sub-Continent, and Southeast Asia, and the other is a transatlantic service. Gross voyage profit before depreciation for this segment increased 51.5% from $22.6 Million in 1997 to $34.2 Million in 1998 due to lower operating costs and increased market share. Contributing to the lower operating costs for this segment were lower fuel prices and the planned return from a three-vessel to a two-vessel transatlantic service. The Company's TIME CHARTER CONTRACTS segment includes sixteen vessels operating primarily under medium to long-term contracts, nine of which are with the MSC including contracts for the operation of four LASH, three RO/RO, and two Ice-Strengthened Multi-Purpose vessels. The four LASH vessels and two Ice-Strengthened Multi-Purpose vessels are each operated under contracts with initial terms of seventeen-months with two seventeen-month option periods. Contracts for three of the LASH vessels are currently in their second option periods with one expiring in 1999 and two in 2000. The contract for the fourth LASH vessel completed its initial term and began its first option period in 1998 with the second option period extending into 2001. The two Ice-Strengthened Multi-Purpose vessels are both in the initial seventeen-month term of their contracts with options extending into 2001 and 2002. The three RO/RO's are employed in the MSC's military prepositioning program under contracts that are fixed through 2009 and 2010. The remaining seven vessels in this segment include three Pure Car Carriers ("PCC") with contracts extending into 2003 and 2006; two Pure Car/Truck Carriers ("PCTC") with contracts extending into 2014 and 2018; the "ENERGY ENTERPRISE" with a contract extending into 2010; and the Company's Cape-Size Bulk Carrier operating in the spot market. This segment was impacted by a $7 Million impairment loss recognized late in 1998 on the Company's Cape-Size Bulk Carrier. Depressed freight rates in the market for this type of vessel, along with management's expectation that these conditions will not improve in the near-term, triggered a review of the recoverability of the carrying amount of this vessel. The impairment loss was measured as the amount by which the carrying amount of the vessel exceeded its fair value. The fair value of the vessel was estimated by determining the present value of its expected future cash flows using a discount rate commensurate with the risk involved. Before taking into account the aforementioned impairment loss, the TIME CHARTER CONTRACTS segment added to the increase in gross voyage profit for the year. This segment benefited from the commencement of operations of the Company's newly acquired PCTC, "GREEN POINT," in the second quarter of 1998. In December of 1998, the Company sold one of its PCC's as part of the Company's plan to replace this older and smaller PCC with a newer and larger PCTC, the "ASIAN KING," that delivered to the Company and commenced operations in December of 1998. The increase in gross voyage profit before the impairment loss for the TIME CHARTER CONTRACTS segment was partially offset by scheduled reductions in charterhire rates on three of the Company's LASH vessels chartered to the MSC and lower charterhire rates on the Company's Cape-Size Bulk Carrier. The improved results for the LINER SERVICES segment and for the TIME CHARTER CONTRACTS segment, before its impairment loss, were slightly offset by lower gross voyage profit from the CONTRACTS OF AFFREIGHTMENT segment. This segment includes a contract for two Float-On/Float-Off Special Purpose Vessels ("SPV's"), along with one container breakbulk vessel, "JAVA SEA," that extends through 2000 with seven three-year renewal options; a contract for a Molten Sulphur Carrier that extends through 2009 with renewal options through 2024; and a coal transporation contract with a Florida-based electric utility (See Note F). The lower gross profit for this segment resulted from reduced cargo volume from the domestic services. In addition to the aforementioned reportable segments, the Company also reports an OTHER category that includes results of several of the Company's subsidiaries that provide ship charter brokerage, agency, barge fleeting and other specialized 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 by management in its evaluation of segment profit and loss. The results reported in the OTHER category for 1998 compare favorably to 1997 because the Company decided to discontinue development of a new LASH service between the U.S. Gulf and Brazil. This decision resulted in a charge to operating expense in 1997 of approximately $1.2 Million for termination costs and the prepositioning of equipment. Vessel and barge depreciation increased 8.4% from $34.6 Million in 1997 to $37.5 Million in 1998 due to the commencement of operations of the "GREEN POINT" and the "HICKORY," a LASH vessel purchased early in 1998 now operating in the Liner Services segment as a feeder vessel. Depreciation on the Company's U.S. Flag Coal Carrier, "ENERGY ENTERPRISE," and one of the LASH vessels operating in the LINER SERVICES segment increased due to capital improvements made in 1997. OTHER INCOME AND EXPENSES. Administrative and general expenses increased slightly from $25.5 Million in 1997 to $26.4 Million in 1998. Earnings for 1998 included a gain of $7.8 Million recognized on the sale of one of the Company's PCC's in December of 1998. As discussed earlier in this report, the sale of this vessel was part of the Company's plan to replace it with a newer and larger PCTC that delivered in December of 1998. Interest expense was $28.7 Million in 1998 as compared to $27.7 Million in 1997. The increase was primarily the result of financing associated with the acquisition of the "GREEN POINT" early in the second quarter as discussed previously. On January 22, 1998, the Company issued $110 Million of 7 3/4% Senior Notes due 2007 (the "Notes"), the proceeds of which were used to repay shorter-term amortizing bank debt. The aforementioned early repayment of debt and regularly scheduled principal payments substantially offset interest expense on these Notes. INCOME TAXES. The Company provided $4.4 Million and $1.3 Million for Federal income taxes at the statutory rate of 35% for 1998 and 1997, respectively. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 GROSS VOYAGE PROFIT. Gross voyage profit decreased 17.2% to $55.4 Million in 1997 as compared to $66.9 Million in 1996 primarily due to lower profitability from the LINER SERVICES segment resulting from operating a three-vessel transatlantic liner service in lieu of a two-vessel service and the reduction of subsidy payments. In the first quarter of 1997, the LINER SERVICES segment added a newly-acquired and refurbished LASH vessel, the "ATLANTIC FOREST," to its transatlantic service with the objective of phasing out one of the older vessels in that service. To take advantage of the opportunity to acquire a LASH vessel, which might not have been available at a later date, the Company purchased the "ATLANTIC FOREST" and placed it in service earlier than the optimal time. Although there was an overlap of service with the two other vessels, putting her in service in 1997 enabled the Company to shake down the new vessel before retiring the old vessel. However, the Company was unable to economically fill the additional cargo space of the three vessels primarily due to a strengthened U.S. dollar, which contributed to a decline in U.S. exports and softened demand for shipping services. This situation contributed to a lower gross voyage profit from this segment for 1997 as compared to 1996. The Company's Operating Differential Subsidy ("ODS") agreements for its four LASH vessels employed in its LINER SERVICES segment operating between ports on the U.S. Gulf/U.S. Atlantic Coast and South Asia expired for each of the vessels during the first and second quarters of 1997. Upon the expiration of the ODS agreements, these four vessels and the Company's two U.S. Flag PCC's operating in the TIME CHARTER CONTRACTS segment began participation in the Maritime Security Program ("MSP"). The MSP provides for subsidy payments of approximately $2.1 Million per vessel per year as compared to approximately $5.8 Million per vessel per year under the ODS agreements. As a result, subsidy payments were approximately $10 Million less for 1997 as compared to 1996. This loss of revenue was substantially offset by the Company's cost reduction programs that reduced shipboard and shoreside expenses. In 1998, another PCC in the TIME CHARTER CONTRACTS segment, the "GREEN POINT," also qualified for and began receiving MSP payments. The TIME CHARTER CONTRACTS segment also contributed to the decrease in gross voyage profit during this period due to scheduled charterhire rate reductions effective January 1, 1997, for the Company's three Roll-On/Roll-Off vessels employed in MSC's military prepositioning program, and the renewal in mid-1997 of the MSC contract for the time charter of one of the Company's LASH vessels at lower charterhire rates. Increased gross voyage profit from two of the Company's LASH vessels operating under contracts with the MSC that were renewed at increased charterhire rates in mid-1996 partially offset the lower gross voyage profit for this segment. Additionally, gross voyage profit from the CONTRACTS OF AFFREIGHTMENT segment was lower in 1997 as compared to 1996 due to a decrease in the amount of tonnage carried under a long-term contract to provide transportation services to a major mining company in Indonesia. Results for the OTHER segment were lower for 1997 than 1996 due to expensing certain previously deferred costs related to the Company's decision to forego development of a new service. Vessel and barge depreciation increased 6.1% to $34.6 Million during 1997 as compared to $32.6 Million in 1996 due to the commencement of operations of the "ENERGY ENTERPRISE"; "JAVA SEA"; and "ATLANTIC FOREST" in February of 1996, September of 1996, and January of 1997, respectively. These increases were partially offset by a decrease resulting from the sale, in mid-1996, of the Company's semi-submersible barge, the "CAPS EXPRESS." OTHER INCOME AND EXPENSES. In a continuing effort to decrease overhead expenses, the Company effected a small reduction in office personnel during the first quarter of 1997. Along with the Company's ongoing cost reduction programs, the savings from the reduction in office personnel, partially offset by resulting severance payments, was the primary reason for the decrease in administrative and general expenses from $26.3 Million in 1996 to $25.5 Million in 1997. Interest expense decreased slightly from $28.5 Million in 1996 to $27.7 Million in 1997 primarily resulting from regularly scheduled payments on outstanding debt, the expiration in 1996 of an interest rate swap agreement on which the Company had incurred interest, and the early repayment of $9.5 Million of long-term debt at the end of the first quarter of 1996. These decreases were partially offset by increases resulting from interest incurred on the financing of the "ATLANTIC FOREST," higher outstanding balances drawn on lines of credit, additional draws on the long-term financing of the SPV's, and the financing of the "JAVA SEA." The average balance of invested funds was lower in 1997 as compared to 1996 resulting in a decrease in investment income from $1.9 Million in 1996 to $1.5 Million in 1997. INCOME TAXES. The Company provided $1.3 Million and $4.8 Million for Federal income taxes at the statutory rate of 35% for 1997 and 1996, respectively. LIQUIDITY AND CAPITAL RESOURCES The following discussion should be read in conjunction with the more detailed Consolidated Balance Sheets and Consolidated Statements of Cash Flows included elsewhere herein as part of the Company's Consolidated Financial Statements. The Company's working capital increased from $40 Million at December 31, 1997, to $44.9 Million at December 31, 1998, after provision for current maturities of long-term debt and capital lease obligations of $20.1 Million. Cash and cash equivalents were $32 Million at December 31, 1998 and 1997. The major source of cash flows from operating activities of $66 Million was net income adjusted for the gain on the sale of the vessel and noncash provisions such as depreciation, amortization, the impairment loss. Net cash used for investing activities of $116.9 Million included the purchase of two PCTC's, the "HICKORY," 82 LASH barges and two special purpose barges, and capital improvements on two LASH vessels operating in the LINER SERVICES segment all of which totaled approximately $114.1 Million. Other uses of cash included $14.0 Million for the cost of drydocking certain vessels, $3.4 Million used to purchase a 37.5% interest in three companies that operate cement carrying vessels under medium to long-term contracts, and $1.1 Million for the purchase of short-term investments. These uses of cash were partially offset by the proceeds of $15.5 Million received from the aforementioned sale of the PCC in late 1998. Net cash provided by financing activities of $50.9 Million included the net proceeds from the Company's sale of the Notes in January of 1998 of approximately $109.4 Million. The remaining proceeds of $108 Million were used for the purchase of the two PCTC's and general corporate purposes. The proceeds from the Notes were used primarily to repay certain indebtedness of the Company's subsidiaries and for related transaction costs. These sources of cash from financing activities were offset by reductions of debt and capital lease obligations of $161.2 Million for repayment of debt, including the Company's repurchase of $1 Million principal amount of its 9% Senior Notes and the use of the proceeds from the 7 3/4% Notes as discussed above, scheduled principal payments, and repayments of amounts drawn under the line of credit. Additionally, $3.0 Million was used for transaction costs of issuing the Notes, $1.7 Million was used to meet common stock dividend requirements, and $432,000 was used to pay a make-whole premium on one of the loans prepaid with the proceeds of the Notes, and $289,000 was used for the purchase of Treasury Stock. In the third quarter of 1988, the Board of Directors declared a quarterly dividend of $.05 per share ($.04 per share after giving effect to the November 17, 1995, twenty-five percent stock split) and continued quarterly dividends in the same amount for each quarterly period through the third quarter of 1995. The Board increased the dividend to $.0625 per share in the fourth quarter of 1995 and has continued quarterly dividends in the same amount for each quarterly period through the fourth quarter of 1998. The Board has expressed its intent to continue to declare similar quarterly dividends in the future, subject to the ability of the Company's operating subsidiaries to continue to achieve satisfactory earnings. Dividends on common stock during 1998 amounted to approximately $1.7 Million. Management believes that normal operations will provide sufficient working capital and cash flows to meet debt service and dividend requirements during the foreseeable future. To meet short-term requirements when fluctuations occur in working capital, at December 31, 1998, the Company had available a $50 Million revolving credit facility. Draws against this facility totaled $29 Million at December 31, 1998, of which $8 Million was repaid in January of 1999. The Company has not been notified that it is a potentially responsible party in connection with any environmental matters. STOCK REPURCHASE PROGRAM In October of 1998, the Company's Board of Directors approved a stock repurchase program to buy up to 500,000 shares of its common stock. The repurchases will be made in the open market or in privately negotiated transactions at the discretion of the Company's management, depending upon financial and market conditions or as otherwise provided by the Securities and Exchange Commission and New York Stock Exchange rules and regulations. As of December 31, 1998, 18,575 shares had been repurchased under this program for a total cost of $289,000. Subsequent to year-end, as of February 18, 1999, the Company repurchased an additional 80,525 shares for a total cost of approximately $1.3 Million. COAL TRANSPORTATION CONTRACT On December 15, 1998, the Company was notified that Seminole Electric Cooperative, Inc. ("Seminole") had filed suit against the Company's wholly owned subsidiary, Central Gulf Lines, Inc. ("CGL"), seeking declaratory judgment that Seminole was entitled to terminate its performance under a long-term coal transportation agreement with CGL, subject to Seminole's obligation to pay "fair and lawful damages" to CGL. Seminole's complaint states that it is "prepared to pay damages to CGL to return to CGL the value of the profits that CGL otherwise would earn over the remaining term" of the agreement and asks the court to determine the amount of damages payable to CGL as a result of termination of its performance. CGL has disputed Seminole's right to terminate performance and has served demand for arbitration pursuant to the terms of the agreement in which CGL seeks specific performance of the agreement for its remaining six-year term, and in the alternative, damages. Because of Seminole's admitted obligation to reimburse CGL for its lost profits, the Company does not believe that this dispute will have a material adverse effect on its financial condition or results of operations, even if Seminole is successful in terminating its performance under the agreement (SEE NOTE F FOR ADDITIONAL INFORMATION ON THIS CONTRACT). YEAR 2000 COMPLIANCE The Year 2000 ("Y2K") issue refers to the potential failure of information technology ("IT") systems, telecommunications, and other electronic devices before, on, or after January 1, 2000. This problem is primarily due to the use of a 2-digit year indicator within software code including applications, operating systems, hardware, or microchips. Non-compliant systems will likely interpret the "00" in "2000" incorrectly as "1900." STATE OF READINESS. The Company has appointed a Y2K Project Manager who, along with department heads responsible for compliance in their respective areas, is addressing the Y2K issue. The Company's Y2K Plan is an overall corporate plan supported by lower-tier plans and schedules developed by each functional area. The phases in the Y2K Plan include INVENTORY, ASSESSMENT, REMEDIATION, TESTING, and CONTINGENCY PLANNING. During the INVENTORY PHASE, all computer-based systems, components (such as systems developed in-house, purchased software, computers, and associated hardware), service providers, and hardware that contain microchips that support the functionality of the Company are being identified. Additionally, items that, in and of themselves, may not be impacted by the date change, but that interface with systems or equipment that are impacted by the date change are being identified. The ASSESSMENT PHASE involves determining which systems are date-sensitive and prioritizing how critical each of these systems is to continuation of the Company's business activities. Once the assessment phase is complete, the REMEDIATION PHASE begins. During this phase, the strategies for addressing systems that are not Y2K compliant will be developed. Possible strategies include repairing, replacing, or retiring the system. The TESTING PHASE will verify that the repaired or replaced system will operate properly when the date changes, and that existing business functions will continue to operate as expected. Testing efforts will not be confined solely to IT systems. Non-IT systems such as building infrastructure and components with embedded microchips will also be evaluated. The inventory and assessment phases are complete for IT systems, and those identified as most critical were 75% remediated and tested by December 31, 1998. The remaining IT systems will be addressed through September of 1999. Vessel systems inspection and original equipment manufacturer ("OEM") testing is ongoing through April of 1999. Contingency plans for vessels are in place. The Company has contacted its key suppliers and customers to ensure they are addressing the Y2K issue. Y2K questionnaires have been issued to these suppliers and customers and their responses are being reviewed to determine what action by the Company, if any, is necessary. COSTS TO ADDRESS Y2K ISSUES. Expenditures related to evaluating and remediating any Y2K problems through December 31, 1998, have not had a material effect on the Company's financial position or results of operations. It is anticipated that the resources required to address Y2K issues during 1999 will be provided primarily by existing levels of personnel. While management does not expect Y2K compliance costs to have a material adverse effect on the Company, estimates of total expenditures for Y2K issues, including all phases of the Y2K Plan described above, as well as the cost of replacing or modifying any non-compliant IT systems have been submitted to the Company's management for review. Vessel Y2K budgets include OEM systems testing and replacement for previously identified non-compliant items. RISKS OF Y2K ISSUES. A definitive assessment of the risk to the Company if systems that are not Y2K compliant were not identified, or identified but not successfully remediated, has been and continues to be undertaken. No Y2K issues have been identified that are unique to the Company or that otherwise would not be found in its industry. CONTINGENCY PLANS. Once the potential problems that could result from the Y2K issue have been identified, the steps required in the event any system fails will be determined. Vessel and Information Systems Contingency Plans are complete. An overall Company Plan, which includes these two critical plans plus an Operations plan is scheduled to be completed by March 31, 1999. Cost estimates to implement the contingency plans will be refined and analyzed against other options. MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT In the ordinary course of its business, the Company is exposed to foreign currency, interest rate, and commodity price risk. The Company utilizes derivative financial instruments including forward exchange contracts and commodity swap agreements to manage certain of these exposures. The Company hedges only firm commitments or anticipated transactions and does not use derivatives for speculation. The Company neither holds nor issues financial instruments for trading purposes. INTEREST RATE RISK. The fair value of the Company's cash and short-term investment portfolio at December 31, 1998, approximated carrying value due to its short-term duration. The potential decrease in fair value resulting from a hypothetical 10% increase in interest rates at year-end for the Company's investment portfolio was not material. The fair value of long-term debt, including current maturities, was estimated to be $380.9 Million compared to a carrying value of $366.6 Million. The potential increase in fair value resulting from a hypothetical 10% adverse change in the borrowing rates applicable to the Company's long-term debt at December 31, 1998, was approximately $10.1 Million or 3% of the carrying value. FOREIGN EXCHANGE RATE RISK. The Company has entered into foreign exchange contracts to hedge certain firm purchase and sale commitments with varying maturities throughout 1999. The exchange rates at which these contracts were entered into did not materially differ from the exchange rates in effect at December 31, 1998. The potential fair value that would have resulted from a hypothetical 10% adverse change in the exchange rates applicable to these contracts at December 31, 1998, was a liability of approximately $100,000. COMMODITY PRICE RISK. At December 31, 1998, the Company had entered into a commodity swap agreement to manage the Company's exposure to price risk related to the purchase a portion of the estimated 1999 fuel requirements for its LINER SERVICES segment. The agreement locked in the price the Company would pay per ton of fuel for 1999 at a specific price for a specified quantity. While this arrangement is structured to reduce the Company's exposure to increases in fuel prices, it also limits the benefit the Company might otherwise receive from any price decreases associated with this commodity. The fair value of this agreement at December 31, 1998, estimated based on the difference between year-end price per ton of fuel and the contract delivery price per ton of fuel times the quantity applicable to the agreement, was a liability of $593,000. A hypothetical 10% decrease in fuel prices as of December 31, 1998, would have resulted in a $390,000 increase in the fair value of the liability. NEW ACCOUNTING PRONOUNCEMENTS During 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Also in 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." During 1997, the FASB issue SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company has adopted SFAS No. 131 and SFAS No. 132 for the year ended December 31, 1998. SFAS No. 133 is effective for fiscal quarter of fiscal years beginning after June 15, 1999. The Company has not chosen early adoption and, as it is not possible to predict the Company's derivative position at the time this standard will be applied, it is unknown what effect, if any, SFAS No. 133 will have on its financial statements once adopted. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The Company has not chosen early adoption and expects no material impact on its financial statements when the SOP is adopted. (SEE NOTE A FOR FURTHER DETAILS ON NEW ACCOUNTING PRONOUNCEMENTS). INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF INCOME (All Amounts in Thousands Except Per Share Data) Year Ended December 31, 1998 1997 1996 --------- --------- --------- Revenues ................................ $ 370,056 $ 75,515 $ 53,346 Subsidy Revenue ......................... 14,092 15,541 25,581 --------- --------- --------- 384,148 391,056 378,927 --------- --------- --------- Operating Expenses: Voyage Expenses ................ 281,901 301,084 279,395 Vessel and Barge Depreciation ................... 37,456 34,569 32,584 Impairment Loss ................ 7,000 -- -- --------- --------- --------- Gross Voyage Profit ....... 57,791 55,403 66,948 --------- --------- --------- Administrative and General Expenses ..... 26,406 25,454 26,256 Gain on Sale of Vessel .................. 7,762 -- -- --------- --------- --------- Operating Income ............... 39,147 29,949 40,692 --------- --------- --------- Interest: Interest Expense ............... 28,738 27,654 28,528 Investment Income .............. (1,569) (1,458) (1,935) --------- --------- --------- 27,169 26,196 26,593 --------- --------- --------- Income Before Provision for Income Taxes And Extraordinary Item .......... 11,978 3,753 14,099 --------- --------- --------- Provision (Benefit) for Income Taxes: Current ........................ 2,987 3,119 3,246 Deferred ....................... 1,385 (1,773) 1,533 State .......................... 301 252 684 --------- --------- --------- 4,673 1,598 5,463 --------- --------- --------- Income Before Extraordinary Item ........ $ 7,305 $ 2,155 $ 8,636 --------- --------- --------- Extraordinary Loss on Early Extinguishment of Debt (Net of Income Tax Benefit of $554 and $437, Respectively) ................... (1,029) -- (813) --------- --------- --------- Net Income .............................. $ 6,276 2,155 7,823 ========= ========= ========= Basic and Diluted Earnings Per Share: Income Before Extraordinary Loss ........... $ 1.09 $ 0.32 $ 1.29 Extraordinary Loss ............. (0.15) -- (0.12) ========= ========= ========= Net Income ..................... $ 0.94 $ 0.32 $ 1.17 ========= ========= ========= The accompanying notes are an integral part of these statements. INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED BALANCE SHEETS (All Amounts in Thousands) DECEMBER 31, December 31, ASSETS 1998 1997 --------- --------- Current Assets: Cash and Cash Equivalents ............... $ 32,008 $ 32,002 Marketable Securities ................... 12,136 10,758 Accounts Receivable, Net of Allowance for Doubtful Accounts of $334 and $208 in 1998 and 1997, Respectively: Traffic .................. 40,543 35,442 Agents' .................. 8,082 7,128 Claims and Other ......... 5,243 3,031 Federal Income Taxes Receivable ......... 1,325 43 Net Investment in Direct Financing Leases ................................ 2,532 1,913 Other Current Assets .................... 4,215 4,187 Material and Supplies Inventory, at Cost .................................. 13,130 13,296 --------- --------- Total Current Assets ............................. 119,214 107,800 --------- --------- Marketable Equity Securities ..................... 205 582 --------- --------- Investment in Unconsolidated Entities ............ 3,368 -- --------- --------- Net Investment in Direct Financing Leases ........ 66,494 20,552 --------- --------- Vessels, Property, and Other Equipment, at Cost: Vessels and Barges ...................... 745,390 689,856 Other Marine Equipment .................. 7,776 7,590 Terminal Facilities ..................... 18,494 18,377 Land .................................... 2,317 2,317 Furniture and Equipment ................. 16,799 16,853 --------- --------- 790,776 734,993 Less - Accumulated Depreciation ................. (356,217) (311,557) --------- --------- 434,559 423,436 --------- --------- Other Assets: Deferred Charges, Net of Accumulated Amortization of $75,255 and $53,913 in 1998 and 1997, Respectively .......................... 38,849 38,960 Acquired Contract Costs, Net of Accumulated Amortization of $14,154 and $12,699 in 1998 and 1997, Respectively ................ 16,371 17,826 Due from Related Parties ................ 296 369 Other ................................... 10,448 8,679 --------- --------- 65,964 65,834 --------- --------- $ 689,804 $ 618,204 ========= ========= 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, 1998 1997 --------- --------- LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Current Maturities of Long-Term Debt ...... $ 17,212 $ 35,865 Current Maturities of Capital Lease Obligations ........................................ 2,915 2,579 Accounts Payable and Accrued Liabilities ............................. 54,146 51,735 Current Deferred Income Tax Liability ..... 27 171 Current Liabilities to be Refinanced ...... -- (22,511) --------- --------- Total Current Liabilities .......................... 74,300 67,839 --------- --------- Current Liabilities to be Refinanced ............... -- 22,511 --------- --------- Billings in Excess of Income Earned and Expenses Incurred ................................ 7,099 5,903 --------- --------- Long-Term Capital Lease Obligations, Less Current Maturities ............................... 12,085 14,994 --------- --------- Long-Term Debt, Less Current Maturities ............ 349,340 271,835 --------- --------- Deferred Credits: Deferred Income Taxes ..................... 40,906 39,494 Claims and Other .......................... 28,966 22,823 --------- --------- 69,872 62,317 --------- --------- Commitments and Contingent Liabilities Stockholders' Investment: Common Stock, $1.00 Par Value, 10,000,000 Shares Authorized, 6,756,330 Shares Issued at December 31, 1998 and 1997 .............. 6,756 6,756 Additional Paid-In Capital ................ 54,450 54,450 Retained Earnings ......................... 117,399 112,794 Less --- 92,018 and 73,443 Shares of Common Stock in Treasury, at Cost, at December 31, 1998 and 1997, Respectively .............................. (1,422) (1,133) Accumulated Other Comprehensive Loss ...... (75) (62) --------- --------- 177,108 172,805 --------- --------- $ 689,804 $ 618,204 ========= ========= The accompanying notes are an integral part of these statements. INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (All Amounts in Thousands)
Accumulated Additional Other Common Paid-In Retained Treasury Comprehensive Stock Capital Earnings Stock Income (Loss) Total ------- -------- --------- ------- ------------- --------- Balance at December 31, 1995 ........... $ 6,756 $ 54,450 $ 106,158 ($1,133) $ 30 $ 166,261 Comprehensive Income: Net Income for Year Ended December 31, 1996 ................ -- -- 7,823 -- -- 7,823 Other Comprehensive Income: Unrealized Holding Loss on Marketable Securities, Net of Deferred Taxes of ($3) ......................... -- -- -- -- (6) (6) --------- Total Comprehensive Income ............. 7,817 Cash Dividends ......................... -- -- (1,671) -- -- (1,671) ------- -------- --------- ------- ---- --------- Balance at December 31, 1996 ........... $ 6,756 $ 54,450 $ 112,310 ($1,133) $ 24 $ 172,407 ======= ======== ========= ======= ==== ========= Comprehensive Income: Net Income for Year Ended December 31, 1997 ........... -- -- 2,155 -- -- 2,155 Other Comprehensive Income: Unrealized Holding Loss on Marketable Securities, Net of Deferred Taxes of ($46) ................. -- -- -- -- (86) (86) --------- Total Comprehensive Income ............. 2,069 Cash Dividends ......................... -- -- (1,671) -- -- (1,671) ------- -------- --------- ------- ---- --------- Balance at December 31, 1997 ........... $ 6,756 $ 54,450 $ 112,794 ($1,133) ($62) $ 172,805 ======= ======== ========= ======= ==== ========= COMPREHENSIVE INCOME: NET INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 .......... -- -- 6,276 -- -- 6,276 OTHER COMPREHENSIVE INCOME: UNREALIZED HOLDING LOSS ON MARKETABLE SECURITIES, NET OF DEFERRED TAXES OF ($7) ................... -- -- -- -- (13) (13) --------- TOTAL COMPREHENSIVE INCOME ............. 6,263 TREASURY STOCK ......................... (289) (289) CASH DIVIDENDS ......................... -- -- (1,671) -- -- (1,671) ------- -------- --------- ------- ---- --------- BALANCE AT DECEMBER 31, 1998 ........... $ 6,756 $ 54,450 $ 117,399 ($1,422) ($75) $ 177,108 ======= ======== ========= ======= ==== =========
The accompanying notes are an integral part of these statements. INTERNATIONAL SHIPHOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (All Amounts in Thousands) Year Ended December 31, 1998 1997 1996 --------- --------- --------- Cash Flows from Operating Activities: Net Income .......................... $ 6,276 $ 2,155 $ 7,823 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation ................... 40,056 37,259 34,939 Amortization of Deferred Charges and Other Assets ..... 22,846 24,429 19,309 Provision (Benefit) for Deferred Income Taxes ........ 1,385 (1,773) 1,533 (Gain) Loss on Sale of Vessels and Other Property ... (7,765) 20 (11) Impairment Loss ................ 7,000 -- -- Extraordinary Loss ............. 1,029 -- 813 Changes in: Accounts Receivable ............ (7,789) 7,671 (8,515) Net Investment in Direct Financing Leases ............. 2,031 2,365 1,756 Inventories and Other Current Assets ............... 678 740 (3,539) Other Assets ................... 492 (1,098) (1,177) Accounts Payable and Accrued Liabilities .................. (6,300) (11,233) 910 Federal Income Taxes Payable ... (1,009) 2,523 (6,765) Unearned Income ................ 5,718 (2,732) 3,996 Deferred Credits ............... 1,367 3,839 (2,118) --------- --------- --------- Net Cash Provided by Operating Activities ............................ 66,015 64,165 48,954 --------- --------- --------- Cash Flows from Investing Activities: Investment in Direct Financing Lease ............................. (58,354) -- -- Purchase of Vessels and Other Property .......................... (55,727) (19,553) (65,104) Additions to Deferred Charges ....... (13,955) (18,302) (28,171) Proceeds from Sale of Vessels and Other Property .................... 15,484 334 2,512 Purchase of and Proceeds from Short-Term Investments ............ (1,072) (8,028) 1,799 Investment in Unconsolidated Entity ............................ (3,368) -- -- Proceeds from Note Receivable ....... -- -- 8,100 Purchase of Marketable Equity Securities ........................ -- (778) -- Other Investing Activities .......... 73 135 4,295 --------- --------- --------- Net Cash Used by Investing Activities ... (116,919) (46,192) (76,569) --------- --------- --------- Cash Flows from Financing Activities: Proceeds from Issuance of Debt ...... 217,435 90,066 147,482 Reduction of Debt and Capital Lease Obligations ................. (161,156) (117,250) (126,704) Additions to Deferred Financing Charges ........................... (2,977) (136) (2,753) Purchase of Treasury Stock .......... (289) -- -- Common Stock Dividends Paid ......... (1,671) (1,671) (1,671) Other Financing Activities .......... (432) -- -- --------- --------- --------- Net Cash Provided (Used) by Financing Activities ............................ 50,910 (28,991) 16,354 --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents ...................... 6 (11,018) (11,261) Cash and Cash Equivalents at Beginning of Year ..................... 32,002 43,020 54,281 --------- --------- --------- Cash and Cash Equivalents at End of Year .................................. $ 32,008 $ 32,002 $ 43,020 ========= ========= ========= 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 consolidated subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated. The Company uses the cost method to account for investments in entities in which it holds less than a 20% voting interest and in which the Company cannot exercise significant influence over operating and financial activities. The Company uses the equity method to account for investments in entities in which it holds a 20% to 50% voting interest. Certain reclassifications have been made to the prior period financial information in order to conform to current year presentation. NATURE OF OPERATIONS The Company, through its subsidiaries, operates a diversified fleet of U.S. and international flag vessels that provide international and domestic maritime transportation services to commercial customers and agencies of the United States government primarily under medium- to long-term charters or contracts. At December 31, 1998, the Company's fleet consisted of 33 ocean-going vessels, 19 towboats, 127 river barges, 28 special purpose barges, 1,864 LASH barges, and related shoreside handling facilities. The Company's strategy is to (i) identify customers with marine transportation needs requiring specialized vessels or operating techniques, (ii) seek medium- to long-term charters or contracts with those customers and, if necessary, modify, acquire, or construct vessels to meet the requirements of those charters or contracts, and (iii) secure financing for the vessels predicated primarily on those charter or contract arrangements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. VOYAGE ACCOUNTING Revenues and expenses relating to voyages are recorded on the percentage-of-completion method, except that provisions for loss voyages are recorded when contracts for the voyages are fixed and when losses become apparent for voyages in progress. Use of the percentage-of-completion method requires management to make estimates and assumptions that affect the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. VESSELS AND OTHER PROPERTY Costs of all major property additions and betterments are capitalized. Ordinary maintenance and repair costs are expensed as incurred. Interest and finance costs relating to vessels, barges, and other equipment under construction are capitalized to properly reflect the cost of assets acquired. No interest was capitalized in 1998. Capitalized interest totaled $40,000 and $425,000 for the years ended December 31, 1997 and 1996, respectively. Capitalized interest was calculated based on the interest rates applicable to the financing of the asset under construction. Assets under capital leases are recorded on the consolidated balance sheets under the caption Vessels, Property, and Other Equipment (SEE NOTE G). For financial reporting purposes, vessels are depreciated over their estimated useful lives using the straight-line method. As a result of major capital improvements during 1996, the lives of two of the Company's LASH vessels were extended by two additional years, from 28 to 30 years and from 30 to 32 years, respectively. The effect of this change on the Company's results of operations for the year ended December 31, 1996, was not material. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" issued by the Financial Accounting Standards Board ("FASB"), during 1998, the Company recognized an impairment loss of $7,000,000 on its Cape-Size Bulk Carrier. Depressed freight rates in the market for this type of vessel, along with management's expectation that these conditions will not improve in the near-term, triggered a review of the recoverability of the carrying amount of this vessel. The impairment loss was measured as the amount by which the carrying amount of the vessel exceeded its fair value. The fair value of the vessel was estimated by determining the present value of its expected future cash flows using a discount rate commensurate with the risk involved. The Company groups all LASH barges into pools with estimated useful lives corresponding to the remaining useful lives of the vessels with which they are utilized. Major barge refurbishments are capitalized and included in the aforementioned group of barge pools. From time to time, the Company disposes of barges in the ordinary course of business. In these cases, proceeds from the disposition are credited to the remaining net book value of the respective pool and future depreciation charges are adjusted accordingly. Estimated useful lives of Vessels, Terminal Facilities, and Other Marine Equipment are as follows: YEARS ----- 1 LASH Vessel 32 10 LASH Vessels 30 1 LASH Vessel 15 2 Pure Car Carriers 20 1 Pure Car Carrier 12 1 Pure Car/Truck Carrier 20 1 Pure Car/Truck Carrier 16 1 Coal Carrier 15 11 Other Vessels * 25 Coal Terminal 22 LITCO Terminal 11 Marine Equipment 4 * Includes three FLASH units, two ice-strengthened multi-purpose vessels, two float-on/float-off special purpose vessels, a dockship, a cape-size bulk carrier, a molten sulphur carrier, and a container vessel. At December 31, 1998, the Company's fleet of 33 vessels also included three roll-on/roll-off vessels which it operates and a LASH vessel which has not yet been placed in service. INCOME TAXES Deferred income taxes are provided on items of income and expense which affect taxable income in one period and financial income in another. Certain foreign operations are not subject to income taxation under pertinent provisions of the laws of the country of incorporation or operation. However, pursuant to existing U.S. Tax Laws, earnings from certain foreign operations are subject to U.S. income taxes (SEE NOTE D). FOREIGN CURRENCY TRANSLATION All exchange adjustments are charged or credited to income in the year incurred. Exchange gains of $347,000 and $175,000 were recognized for the years ended December 31, 1998 and 1997, respectively. An exchange loss of $17,000 was recognized for the year ended December 31, 1996. DIVIDEND POLICY The Board of Directors declared and paid dividends of 6.25 cents per share for each quarter in 1998 and 1997. Subsequent to year end, a dividend of 6.25 cents per common share was declared to be paid in the first quarter of 1999. NET INCOME PER COMMON SHARE Earnings per common share are based on the weighted average number of shares outstanding during the period. The weighted average number of common shares outstanding was 6,682,216 for the year ended December 31, 1998 and 6,682,887 for the years ended December 31, 1997 and 1996. Basic and diluted weighted average common shares outstanding were the same for each of these years. The effect of stock options granted during 1998 was anti-dilutive. SUBSIDY AGREEMENTS The Company's operating differential subsidy ("ODS") agreement with the U.S. Maritime Administration ("MarAd"), an agency of the Department of Transportation under Title VI of the Merchant Marine Act of 1936, as amended, under which the Company operated a fleet of four U.S. flag vessels in a liner service between ports on the U.S. Gulf/U.S. Atlantic Coast and South Asia (Trade Routes 18 and 17), expired upon completion, during the first quarter of 1997, of voyages in progress at December 31, 1996. Under this agreement, MarAd paid the excess of certain vessel expenses over comparable vessel expenses of principal foreign competitors in each respective trade route. The Maritime Security Act ("MSA"), which provides for a new subsidy program for certain U.S. flag vessels, was signed into law in October of 1996. Seven of the Company's vessels qualify for MSA participation including the four aforementioned LASH vessels which operated under ODS, two of the Company's Pure Car Carriers ("PCC"), and a Pure Car/Truck Carrier ("PCTC") the Company purchased and placed into service in 1998. The two PCC's began receiving MSA payments in late 1996, the four LASH vessels that were operated under ODS began receiving MSA payments upon the expiration of ODS in the first quarter of 1997, and the PCTC began receiving MSA payments immediately upon its commencement of operations in April of 1998. MSA eliminated the trade route restrictions imposed by the ODS program and allows flexibility to operate freely in the competitive market. MSA provides for annual subsidy payments of $2,100,000 per year per vessel for a total of ten years. These payments are subject to appropriation each year and are not guaranteed. Under the previous ODS agreement, subsidy payments were approximately $5,800,000 per year per vessel. In an effort to partially offset the decrease in the amount of subsidy payments to be provided under MSA, as compared to ODS, the Company has implemented initiatives to reduce shipboard costs and shoreside expenses. SELF-RETENTION INSURANCE The Company is self-insured for most Personal Injury and Cargo claims under $1,000,000, for Hull claims under $2,500,000, and for claims for Loss of Hire under 60 days. Primary deductibles are $25,000 for Hull, Personal Injury, and Cargo, $1,000 for LASH barges, and 10 days for Loss of Hire. The Company maintains insurance for individual claims over the above levels and maintains Stop Loss insurance to cover aggregate claims between those levels and the primary deductible levels. The Company is responsible for all claims under the primary deductibles. Under the Stop Loss insurance, claim costs between the primary deductible and $1,000,000 and $2,500,000, as applicable, are the responsibility of the Company until the aggregate Stop Loss is met. The aggregate annual Stop Loss, excluding primary deductibles, is $6,000,000 for each of the policy years ending June 26, 1999, 1998, and 1997. After the Company has retained the aggregate amounts, all additional claims are recoverable from underwriters. Provisions for losses are recorded based on the Company's estimate of the eventual settlement costs. The current portions of these liabilities were $6,627,000 and $6,278,000 at December 31, 1998 and 1997, respectively, and the noncurrent portions of these liabilities were $10,251,000 and $13,675,000 at December 31, 1998 and 1997, respectively. STOCK REPURCHASE PROGRAM In October of 1998, the Company's Board of Directors approved a stock repurchase program of up to 500,000 shares of its common stock. The repurchases will be made in the open market or in privately negotiated transactions at the discretion of the Company's management, depending upon financial and market conditions or as otherwise provided by the Securities and Exchange Commission and New York Stock Exchange rules and regulations. As of December 31, 1998, 18,575 shares had been repurchased under this program for a total cost of $289,000. Subsequent to year-end as of February 18, 1999, the Company repurchased an additional 80,525 shares for a total cost of $1,287,000. NEW ACCOUNTING PRONOUNCEMENTS During 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS No. 132 was effective for fiscal years beginning after December 15, 1997, and the required disclosures are included herein (SEE NOTE C). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not chosen early adoption and, as it is not possible to predict the Company's derivative position at the time this standard will be applied, it is unknown what effect, if any, SFAS No. 133 will have on its financial statements once adopted. In April of 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." This SOP provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company has not chosen early adoption and expects no material impact on its financial statements when the SOP is adopted. During 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. The Company has adopted SFAS No. 131 and the required disclosures are included herein (SEE NOTE I). NOTE B - LONG-TERM DEBT (ALL AMOUNTS IN THOUSANDS) DECEMBER December DECEMBER December 31, 31, 31, 31, DESCRIPTION 1998 1997 DUE 1998 1997 - ----------- ---- ---- --- ---- ---- Unsecured Senior Notes- Fixed Rate 7.75-9.00% 9.00% 2003-2007 202,390 93,891 Fixed Rate Notes Payable 6.70-8.50% 6.70-9.97% 2000-2008 39,438 51,926 Variable Rate Notes Payable 6.03-6.63% 6.64-7.37% 2001-2008 66,857 99,541 U.S. Government Guaranteed Ship Financing Notes and Bonds - Fixed Rate 8.30% 6.58-8.30% 2009 28,867 40,342 Lines of Credit 6.41% 6.88-7.47% 2001 29,000 22,000 --------- --------- 366,552 307,700 Less Current Maturities (Net of Amounts to be Refinanced) (17,212) (13,354) --------- --------- $ 349,340 $ 294,346 ========= ========= On January 22, 1998, the Company issued a new series of $110,000,000 aggregate principal amount 7 3/4% Senior Notes due 2007 (the "Notes"). The net proceeds from these Notes were used to repay certain indebtedness of the Company's subsidiaries during the first quarter of 1998. Upon retirement of this indebtedness, the Company incurred an Extraordinary Loss on Early Extinguishment of Debt of approximately $1,029,000, net of taxes. The aggregate principal payments required as of December 31, 1998, for each of the next five years are $17,212,000 in 1999, $45,607,000 in 2000, $19,515,000 in 2001, $11,187,000 in 2002, and $103,865,000 in 2003. In addition to regularly scheduled principal payments, the $45,607,000 required in 2000 includes repayment of the $29,000,000 drawn on the Company's line of credit as of December 31, 1998. During early 1999, $8,000,000 was repaid on those lines of credit before their scheduled maturity in 2000. Certain of the vessels and barges owned by the Company are mortgaged under certain debt agreements. The Company has six vessels and 558 LASH barges pledged with a net book value totaling $223,029,000. Additional collateral includes a security interest in certain operating contracts and receivables. The remaining indebtedness of the Company is unsecured. Most of these agreements, among other things, impose minimum working capital and net worth requirements, as defined, impose restrictions on the payment of dividends, and prohibit the Company from incurring, without prior written consent, additional debt or lease obligations, except as defined. The Company has consistently met the minimum working capital and net worth requirements during the period covered by the agreements and is in compliance with these requirements as of December 31, 1998. The most restrictive of the Company's credit agreements restrict the declaration or payment of dividends unless (1) the total of (a) all dividends paid, distributions on, or other payments made with respect to the Company's capital stock during the period beginning January 1, 1998, and ending on the date of dividend declaration or other payment and (b) all investments other than Qualified Investments (as defined) of the Company and certain designated subsidiaries will not exceed the sum of $10,000,000 plus 50% (or, in case of a loss, minus 100%) of the Company's consolidated net income during the period described above plus the net cash proceeds received from the issuance of common stock by the Company during the above period, and (2) no default or event of default has occurred. Certain of the Company's loan agreements also restrict the ability of the Company's subsidiaries to make dividend payments, loans, or advances, the most restrictive of which contain covenants that restrict payments of dividends, loans, or advances to the Company from Sulphur Carriers, Inc. unless certain financial ratios are maintained. As long maintained, there is no restriction on loans or advances to the Company from that subsidiary, but dividends are restricted to 40% of undistributed earnings. Certain other loan agreements restrict the ability of the Company's subsidiaries to dispose of assets to such a degree that the remaining assets' book values are less than the value of the collateralized assets. The amounts of potentially restricted net assets were as follows: (ALL AMOUNTS IN THOUSANDS) DECEMBER 31, December 31, 1998 1997 ---- ---- Enterprise Ship Company $ 67,072 $ 72,511 Sulphur Carriers, Inc. 27,492 23,314 ============= =========== Total Restricted Net Assets $ 94,564 $ 95,825 ============= =========== At December 31, 1998, the Company had available one line of credit totaling $50,000,000 used to meet short-term requirements when fluctuations occur in working capital. As of December 31, 1998, the Company had drawn $29,000,000 on this line of credit of which $8,000,000 was repaid in early 1999. At December 31, 1997, the Company had available three lines of credit totaling $35,000,000 of which $22,000,000 was drawn with this amount being fully repaid in early 1998. Early in the first quarter of 1998, the Company entered into the aforementioned $50,000,000 revolving credit facility that replaced the three aforementioned lines of credit. Under certain of the above described loan agreements, deposits are made into bank retention accounts to meet the requirements of the applicable agreements. These escrowed amounts totaled $681,000 and $701,000 at December 31, 1998 and 1997, respectively, and were included in Cash and Cash Equivalents. NOTE C - EMPLOYEE BENEFIT PLANS PENSION AND POSTRETIREMENT BENEFITS The Company's retirement plan covers all full-time employees of domestic subsidiaries who are not otherwise covered under union-sponsored plans. The benefits are based on years of service and the employee's highest sixty consecutive months of compensation. The Company's funding policy is based on minimum contributions required under ERISA as determined through an actuarial computation. Plan assets consist primarily of investments in certain bank common trust funds of trust quality assets and money market holdings. The Company's postretirement benefit plans currently provide medical, dental, and life insurance benefits to eligible retired employees and their eligible dependents. The following table sets forth the plans' funded status and costs recognized by the Company:
(ALL AMOUNTS IN THOUSANDS) December 31, December 31, December 31, December 31, 1998 1997 1998 1997 -------- -------- ------- ------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year ...................... $ 13,358 $ 12,060 $ 8,036 $ 8,198 Service cost ................................................. 704 750 131 116 Interest cost ................................................ 969 872 585 549 Actuarial loss (gain) ........................................ 1,414 310 906 (407) Benefits paid ................................................ (620) (552) (397) (421) Expenses paid ................................................ (108) (82) -- -- -------- -------- ------- ------- Benefit obligation at end of year ............................ 15,717 13,358 9,261 8,036 -------- -------- ------- ------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year ............... 15,042 13,397 -- -- Actual return on plan assets ................................. 1,130 1,779 -- -- Employer contribution ........................................ 584 500 397 421 Benefits paid ................................................ (620) (552) (397) (421) Expenses paid ................................................ (108) (82) -- -- -------- -------- ------- ------- Fair value of plan assets at end of year ..................... 16,028 15,042 -- -- -------- -------- ------- ------- Funded status ................................................ 311 1,684 (9,261) (8,036) Unrecognized net actuarial (gain) loss ....................... (278) (1,679) 2,307 1,457 Unrecognized prior service cost .............................. 76 103 -- -- -------- -------- ------- ------- Prepaid (accrued) benefit cost ............................... $ 109 $ 108 $(6,954) $(6,579) ======== ======== ======= ======= WEIGHTED-AVERAGE ASSUMPTIONS Discount rate ................................................ 6.75% 7.25% 6.75% 7.25% Expected return on plan assets ............................... 8.00% 8.00% N/A N/A Rate of compensation increase ................................ 5.50% 5.50% N/A N/A (ALL AMOUNTS IN THOUSANDS) Pension Plan Postretirement Benefits For the year ended December 31, For the year ended December 31, COMPONENTS OF NET PERIODIC BENEFIT COST ...................... 1998 1997 1998 1997 ------- ------- ---- ---- Service cost ................................................. $ 704 $ 750 $131 $115 Interest cost ................................................ 969 872 585 550 Actual return on plan assets ................................. (1,127) (1,779) -- -- Amortization of prior service cost ........................... 27 27 -- -- Unrecognized net actuarial loss .............................. 10 797 57 46 ------- ------- ---- ---- Net periodic benefit cost .................................... $ 583 $ 667 $773 $711 ======= ======= ==== ====
For measurement purposes, the health and dental care cost trend rate was assumed to be 8.75% for 1998, decreasing steadily by .75% per year over the next five years to a long-term rate of 5%. A one percent change in the assumed health care cost trend rates would have the following effects: 1% Increase 1% Decrease ----------- ----------- Change in total service and interest cost $ 89 $ (72) components for the year ended December 31, 1998 1,109 (915) Change in postretirement benefit obligation as of December 31, 1998 Crew members on the Company's U.S. flag vessels belong to union-sponsored pension plans. The Company contributed approximately $2,339,000, $2,496,000, and $2,685,000 to these plans for the years ended December 31, 1998, 1997, and 1996, respectively. These contributions are in accordance with provisions of negotiated labor contracts and generally are based on the amount of straight pay received by the union members. Information from the plans' administrators is not available to permit the Company to determine whether there may be unfunded vested benefits. The Company continues to evaluate ways in which it can better manage these benefits and control the costs. Any changes in the plan or revisions to assumptions that affect the amount of expected future benefits may have a significant effect on the amount of reported obligation and annual expense. STOCK INCENTIVE PLAN In April of 1998, the Company established a stock-based compensation plan, the Stock Incentive Plan (the "Plan"). The purpose of the Plan is to increase shareholder value and to advance the interest of the Company by furnishing a variety of economic incentives designed to attract, retain, and motivate key employees and officers and to strengthen the mutuality of interests between such employees, officers, and the Company's shareholders. Incentives consist of opportunities to purchase or receive shares of common stock in the form of incentive stock options, non-qualified stock option, restricted stock, or other stock-based awards. Under the Plan, the Company may grant incentives to its eligible Plan participants for up to 650,000 shares of common stock. The exercise price of each option equals the market price of the Company's stock on the date of grant. In April of 1998, options to purchase 475,000 shares of common stock were granted to certain qualified participants at an exercise price of $17.1875 per share. No options were exercised or forfeited during the year. All options vested immediately upon the grant date. Therefore, all 475,000 options were exercisable at December 31, 1998. The maximum term of the options is ten years. The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in accounting for this plan. Accordingly, no compensation cost has been recognized for options granted under this plan. If the Company had determined compensation cost for the Plan based on the fair value at the grant dates for awards under the Plan consistent with the method of SFAS No. 123 "Accounting for Stock-Based Compensation," the Company's net income and earnings per share for the year ended December 31, 1998, would have been reduced to the pro forma amounts indicated below: AS REPORTED PROFORMA ----------- -------- Net income $6,276,000 $3,896,000 Earnings per share $0.94 $0.58 The fair value of each of the 475,000 options granted during 1998 estimated on the date of grant was $7.71 using the Black-Scholes option-pricing model assuming expected volatility of 12.22% and a risk-free rate of 5.89%. The remaining contractual life of each option as of December 31, 1998, was 9.292 years. NOTE D - INCOME TAXES The Federal income tax returns of the Company are filed on a consolidated basis and include the results of operations of its wholly-owned U.S. subsidiaries. Pursuant to the Tax Reform Act of 1986, the earnings of foreign subsidiaries ($2,245,000 in 1998, $2,369,000 in 1997, and $619,000 in 1996) are also included. Prior to 1987, deferred income taxes were not provided on undistributed foreign earnings of $6,689,000, all of which are expected to remain invested indefinitely. In accordance with the Tax Reform Act of 1986, commencing in 1987 earnings generated from profitable controlled foreign subsidiaries are subject to Federal income taxes. Components of the net deferred tax liability/(asset) are as follows: DECEMBER 31, December 31, (ALL AMOUNTS IN THOUSANDS) 1998 1997 -------- -------- Gross Liabilities: Fixed Assets .............................. $ 48,074 $ 37,129 Deferred Charges .......................... 9,326 9,885 Unterminated Voyage Revenue/ Expense .............................. 2,541 1,192 Intangible Assets ......................... 5,730 7,887 Deferred Insurance Premiums ............... 1,106 1,551 Deferred Intercompany ..................... 2,530 Transactions ............................ 2,530 2,664 Insurance and Claims Reserve .............. -- 1,021 Other Liabilities ......................... 1,271 6,114 Gross Assets: Insurance and Claims Reserve .............. (4,788) -- Deferred Intercompany Transactions ............................ (2,530) (2,762) FASB SFAS No. 106-- Postretirement Benefits Other Than Pensions .................. (2,453) (2,324) Alternative Minimum Tax Credit Carryforward ............................ (9,354) (9,094) Net Operating Loss Carryforward/ Unutilized Deficit ...................... (6,247) (4,915) Valuation Allowance ....................... 879 879 Other Assets .............................. (5,152) (9,562) ======== ======== Total Deferred Tax Liability, Net .............. $ 40,933 $ 39,665 ======== ======== The following is a reconciliation of the U.S. statutory tax rate to the Company's effective tax rate: Year Ended December 31, 1998 1997 1996 ------ ------ ------ Statutory Rate ................... 35.0% 35.0% 35.0% State Income Taxes ............... 2.9% 6.7% 4.9% Other ............................ 1.7% 0.8% (1.2%) ====== ====== ====== 39.6% 42.5% 38.7% ====== ====== ====== The Company has available at December 31, 1998, unused operating loss carryforwards of $6,725,000 and unused foreign deficits of $11,123,000. The operating loss carryforwards will expire in 2002. Foreign income taxes of $546,000, $596,000, and $680,000 are included in the Company's consolidated statements of income in the Provision for Income Taxes for the years ended December 31, 1998, 1997, and 1996, respectively. NOTE E - TRANSACTIONS WITH RELATED PARTIES During 1990, the Company sold one of its subsidiaries to a former employee at a sales price of $500,000. At the end of 1993, the Company sold another subsidiary to the same party for a sales price of $692,000. The total receivable outstanding from this related party totaled $369,000 and $443,000 at December 31, 1998 and 1997, respectively, and is due over a period of ten years from the date of the 1993 sale. The long-term portion of this receivable is included in Due from Related Parties, and the current portion is included in Accounts Receivable - Claims and Other. Collections on the total receivable were $74,000 for each of the years ended December 31, 1998 and 1997. Interest income on this receivable is earned at the rate of 6% for the first five years and a variable rate of LIBOR plus 2% thereafter and amounted to $25,000, $29,000, and $34,000 for the years ended December 31, 1998, 1997, and 1996, respectively. During 1992, a son of the President of the Company became a partner of the legal firm of Jones, Walker, Waechter, Poitevent, Carrere and Denegre which has been utilized for various legal services since the Company's inception. The Company made payments to the firm totaling approximately $1,102,000, $958,000, and $1,299,000 for the years ended December 31, 1998, 1997, and 1996, respectively. No amounts were due to the legal firm at December 31, 1998, and $105,000 was due at December 31, 1997, which was included in Accounts Payable and Accrued Liabilities or Deferred Credits. During 1998, a wholly-owned subsidiary of the Company, LMS Shipmanagement, Inc. ("LMS"), entered into agreements with Belden Shipping Pte Ltd ("Belden") to provide ship management services beginning in 1999. The Company acquired a 37.5% interest in Belden during 1998 (SEE NOTE J). NOTE F - COMMITMENTS AND CONTINGENCIES COMMITMENTS As of December 31, 1998, 19 vessels that the Company owns or operates were under various contracts extending beyond 1998 and expiring at various dates through 2024. In addition, the Company also operates 111 jumbo river barges, 14 towboats, and certain terminal transfer equipment under a contract that is scheduled to expire in 2004 (See further discussion below regarding this contract). Certain of these agreements also contain options to extend the contracts beyond their minimum terms. During 1998, the Company entered into a contract to hedge a portion of its estimated 1999 fuel purchases related to its LINER SERVICES segment (SEE NOTE I). The contract is effective for one year beginning January 1, 1999, and is based on a notional amount (tons) of fuel. The contract requires that a payment be made for the difference between the contact rate, $75 per ton, and the market rate for the fuel. Settlement will be made monthly. Subsequent to year-end, the Company committed to the sale of certain real property located in the State of Louisiana for $3,500,000 in the first quarter of 1999. The Company expects to recognize a gain of approximately $2,000,000 on this sale. The Company also maintains lines of credit totaling $2,360,000 to cover standby letters of credit for membership in various shipping conferences. CONTINGENCIES On December 15, 1998, the Company was notified that Seminole Electric Cooperative, Inc. ("Seminole") had filed suit against the Company's wholly owned subsidiary, Central Gulf Lines, Inc. ("CGL"), seeking a declaratory judgment that Seminole is entitled to terminate its performance under a long-term coal transportation agreement with CGL, subject to Seminole's obligation to pay "fair and lawful damages" to CGL. Seminole has also asked the court to determine the amount of damages payable to CGL as a result of termination of its performance. The suit was filed in the United States District Court for the Middle District of Florida (Case Number 98-2561-CIV-T-25B). The suit is in connection with an agreement entered into in 1981, which provides for CGL to transport for Seminole a minimum of 2.7 million tons of coal annually through the fourth quarter of 2004 by barge from Mt. Vernon, Indiana, to Port St. Joe, Florida. The agreement requires Seminole to pay for the water transportation segment of the contract on a rate or "cost-plus" basis and the transfer from barge to rail on a rate basis, and Seminole alleges that the cost of the contract exceeds the total cost of currently available all-rail transportation. After failing to negotiate a buy-out of the agreement with CGL, Seminole notified CGL on December 15, 1998, that it was terminating performance under the agreement, commencing alternative rail transportation, and commencing litigation to confirm its ability to terminate performance and to establish the damages owed to CGL as a result of such termination. Seminole's complaint states that it is "prepared to pay damages to CGL properly calculated to return to CGL the value of the profits that CGL otherwise would earn over the remaining term" of the agreement. CGL has disputed Seminole's right to terminate performance and has served a demand for arbitration pursuant to the terms of the agreement in which CGL seeks specific performance of the agreement for its remaining six-year term, and in the alternative, damages. Because of Seminole's admitted obligation to reimburse CGL for its lost profits, the Company does not believe that this dispute will have a material adverse effect on its financial condition or results of operations, even if Seminole is successful in terminating its performance under the agreement. In the normal course of its operations, the Company becomes involved in various litigation matters including, among other things, claims by third parties for alleged property damages, personal injuries, and other matters. While the Company believes it has meritorious defenses against these claims, management has used significant estimates in determining the Company's potential exposure. Where appropriate, the Company has booked provisions, included in Deferred Credits: Claims and Other, to cover its potential exposure and anticipated recoveries from insurance companies, included in Other Assets. It is reasonably possible that a change in the Company's estimate of its exposure could occur. Although it is difficult to predict the costs of ultimately resolving such issues, the Company does not expect such costs will have a material effect on the Company's financial position or results of operations. NOTE G - LEASES In 1988, the Company entered into direct financing leases of two foreign flag pure car carriers scheduled to expire in 2000. The Company sold one of these vessels at the end of 1998. In 1998, the Company entered into a direct financing lease of a foreign flag pure car/truck carrier expiring in the year 2018. The schedule of future minimum rentals to be received under these two remaining direct financing leases in effect at December 31, 1998, is as follows: Receivables Under (ALL AMOUNTS IN THOUSANDS) Financing Leases ---------------- Year Ended December 31, 1999 ........................................... $ 10,916 2000 ........................................... 9,717 2001 ........................................... 8,760 2002 ........................................... 8,760 2003 ........................................... 8,710 Thereafter ..................................... 111,560 --------- Total Minimum Lease Payments Receivable ...................... 158,423 Estimated Residual Values of Leased Properties ............... 11,052 Less Unearned Income ......................................... (100,449) --------- Total Net Investment in Direct Financing Leases ............................................. 69,026 Current Portion .......................................... (2,532) --------- Long-Term Net Investment in Direct Financing Leases at December 31, 1998 .................... $ 66,494 ========= The Company entered into sale-leaseback agreements in 1991 and 1992 for a group of the Company's LASH barges. These leases meet the required criteria for a capital lease and are accounted for as such. The terms of the leases are 12 years. The capital leases are included in Vessels, Property, and Other Equipment as follows: DECEMBER 31, December 31, (ALL AMOUNTS IN THOUSANDS) 1998 1997 -------- -------- LASH barges ................................ $ 24,936 $ 24,936 Less Accumulated Depreciation .............. (14,493) (12,406) ======== ======== Total .......................... $ 10,443 $ 12,530 ======== ======== The following is a schedule, by year, of future minimum lease payments under capital leases, together with the present value of the minimum payments as of December 31, 1998: Payments Under (ALL AMOUNTS IN THOUSANDS) Capital Leases ------------------ Year Ended December 31, 1999 ......................................... $ 4,507 2000 ......................................... 4,514 2001 ......................................... 5,414 2002 ......................................... 3,080 2003 ......................................... 2,125 -------- 19,640 Less Amount Representing Interest .......................... (4,641) -------- Present Value of Future Minimum Payments (BASED ON A WEIGHTED AVERAGE OF 10.39%) ........................................ $ 14,999 ======== The Company conducts certain of its operations from leased office facilities and uses certain data processing, transportation, and other equipment under operating leases expiring at various dates through 2008. Rent expense related to operating leases totaled approximately $5,028,000, $5,037,000, and $2,444,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The following is a schedule, by year, of future minimum payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 1998: Payments Under (ALL AMOUNTS IN THOUSANDS) Operating Leases ----------------- Year Ended December 31, 1999 .......................................... $2,887 2000 .......................................... 1,610 2001 .......................................... 1,471 2002 .......................................... 1,112 2003 .......................................... 950 ------ Total Future Minimum Payments ............................... $8,030 ====== NOTE H - DEFERRED CHARGES AND ACQUIRED CONTRACT COSTS The Company defers certain costs related to the acquisition of vessel operating contracts, the cost of placing vessels in service, the drydocking of vessels, and financing costs. The costs of vessel prepositioning are amortized over the applicable contract periods (generally 17 to 51 months). Deferred drydocking costs are amortized over the period between drydockings (generally two to five years). Financing charges are amortized over the life of the applicable debt involved. These deferred costs are all amortized based on a straight-line basis and are comprised of the following: DECEMBER 31, December 31, (ALL AMOUNTS IN THOUSANDS) 1998 1997 ------- ------- Drydocking and Prepositioning ............................... $29,897 $30,737 Financing Charges and Other .................. 8,952 8,223 ======= ======= $38,849 $38,960 ======= ======= The acquired contract cost represents the portion of the purchase price paid for Waterman Steamship Corporation applicable primarily to that company's maritime prepositioning ship contracts and operating differential subsidy agreements. The acquired contract costs relating to the operating differential subsidy agreements were fully amortized in the first quarter of 1997. The Company amortized acquired contract costs using the straight-line method over the contracts' useful lives ranging from seven to twenty-one years from the acquisition date. NOTE I - SIGNIFICANT OPERATIONS MAJOR CUSTOMERS The Company has several medium to long-term contracts related to the operations of various vessels (SEE NOTE F), from which revenues represent a significant amount of the Company's total revenue. Revenues from the contracts with the United States Military Sealift Command ("MSC") were $75,872,000, $72,444,000, and $69,605,000 for the years ended December 31, 1998, 1997, and 1996, respectively. Additionally, the Company operates four U.S. flag LASH vessels on subsidized liner service. Revenues, including subsidy revenue, from this operation were $126,524,000, $125,323,000, and $131,859,000 for the years ended December 31, 1998, 1997, and 1996, respectively. CONCENTRATIONS A significant portion of the Company's traffic receivables are due from contracts with MSC and transportation of government sponsored cargo. There are no other concentrations of receivables from customers or geographic regions that exceed 10% of stockholders' investment at December 31, 1998 or 1997. With only minor exceptions related to personnel aboard certain foreign flag vessels, most of the Company's shipboard personnel are covered by collective bargaining agreements. The Company is renegotiating certain of these agreements, covering 20% of the Company's shipboard personnel, that expired during 1998. The Company is currently operating under an extension of these agreements and while the Company expects to finalize the negotiations soon, no assurance can be given that the agreements will include terms and conditions consistent with those contained in the current agreements. GEOGRAPHIC INFORMATION The Company has operations in several principal markets, including international service between the U.S. Gulf and East Coast ports and ports in the Middle East, Far East, and northern Europe, and domestic transportation and services along the Mississippi River and U.S. Gulf Coast. Revenues attributable to the major geographic areas of the world are presented in the following table. Revenues for the TIME CHARTER CONTRACTS and CONTRACTS OF AFFREIGHTMENT are assigned to region based on the location of the customer. Revenues for the LINER SERVICES are presented based on the location of the ports serviced by this segment. Because the Company operates internationally, most of its assets are not restricted to specific locations. Accordingly, an allocation of identifiable assets to specific geographic areas is not possible. Year ended December 31, (ALL AMOUNTS IN THOUSANDS) 1998 1997 1996 -------- -------- -------- United States .............................. $140,750 $143,627 $142,198 Asian countries ............................ 45,809 43,462 38,863 Liner services operating between: U.S. Gulf / East Coast ports and ports in South Asia ............... 126,524 125,323 131,859 U.S. Gulf / East Coast ports and ports in Northern Europe .......... 68,044 74,164 61,259 Other countries ............................ 3,021 4,480 4,748 -------- -------- -------- $384,148 $391,056 $378,927 ======== ======== ======== OPERATING SEGMENTS The Company's three operating segments are identified primarily based on the characteristics of the contracts or terms under which its fleet of vessels and barges are operated. The Company also reports an OTHER category that includes results of several of the Company's subsidiaries that provide ship charter brokerage, agency, barge fleeting and other specialized services primarily to the Company's operating segments described below. Also included in the OTHER category are corporate related items, results of insignificant operations, and income and expense items not allocated to reportable segments. Each of the reportable segments is managed separately as each requires different resources depending on the nature of the contract or terms under which each vessel within the segment operates. The Company's operating segments are identified and described below. LINER SERVICES: A liner service operates a vessel or vessels on an established trade route with regularly scheduled sailing dates. The Company receives revenues for the carriage of cargo within the established trading area and pays the operating and voyage expenses incurred. The Company's LINER SERVICES include a U.S. flag liner service between U.S. Gulf and East Coast ports and ports in South Asia and a foreign flag transatlantic liner service operating between U.S. Gulf and East Coast ports and ports in northern Europe. TIME CHARTER CONTRACTS: These are contracts by which the charterer obtains the right for a specified period to direct the movements and utilization of the vessel in exchange for payment of a specified daily rate, but the Company retains operations control over the vessel. Typically, the Company fully equips the vessel and is responsible for normal operating expenses, repairs, wages and insurance, while the charterer is responsible for voyage expenses, such as fuel, port and stevedoring expenses. The Company's time charter contracts include those by which the Military Sealift Command charters LASH, Roll-On/Roll-Off, and Ice-Strengthened Multi-Purpose Vessels for contracts of varying terms. Also included in this segment are contracts with car manufacturers for three Pure Car Carriers and two Pure Car/Truck Carriers and with an electric utility for a conveyor-equipped, self-unloading coal carrier. Additionally, the Company's Cape-Size Bulk Carrier currently operating in the spot market is included in this segment. CONTRACTS OF AFFREIGHTMENT ("COA"): These are contracts by which the Company undertakes to provide space on its vessel(s) for the carriage of specified goods or a specified quantity of goods on a single voyage or series of voyages over a given period of time between named ports or within certain geographical area in return for the payment of an agreed amount per unit of cargo carried. Generally, the Company is responsible for all operating and voyage expenses. The Company's COA segment includes a coal transportation contract with a Florida-based electric utility (SEE NOTE F), a sulphur transportation contract with a major sulphur producer, and a contract to provide ocean transportation services to a major mining company at its mine in West Irian Jaya, Indonesia. The following table presents information about segment profit and segment assets. The Company does not allocate interest income, administrative and general expenses, or income taxes to its segments. Intersegment revenues are based on market prices and include revenues earned by subsidiaries of the Company that provide specialized services to the operating segments.
Time Liner Charter Contracts of (ALL AMOUNTS IN THOUSANDS) Services Contracts Affreightment Other Total - ------------------------------------------------------------------------------------------------------------------------------------ 1998 REVENUES FROM EXTERNAL CUSTOMERS .................... $194,568 $125,558 $ 56,154 $ 7,868 $384,148 INTERSEGMENT REVENUES ............................... -- -- -- 36,676 36,676 GROSS VOYAGE PROFIT BEFORE DEPRECIATION ............. 34,215 44,597 19,134 4,301 102,247 DEPRECIATION AND AMORTIZATION ....................... 18,760 32,427 7,789 1,326 60,302 INTEREST EXPENSE .................................... 6,246 12,452 8,897 1,143 28,738 IMPAIRMENT LOSS ..................................... -- 7,000 -- -- 7,000 GAIN ON SALE OF VESSEL .............................. -- 7,762 -- -- 7,762 SEGMENT PROFIT BEFORE INTEREST INCOME ADMINISTRATIVE AND GENERAL EXPENSES AND TAXES ............................. 15,037 15,695 3,648 2,435 36,815 SEGMENT ASSETS ...................................... 118,257 275,882 141,058 21,076 556,273 EXPENDITURES FOR SEGMENT ASSETS ..................... 19,410 104,183 4,415 3,005 131,013 - ------------------------------------------------------------------------------------------------------------------------------------ 1997 Revenues from external customers .................... $199,487 $121,540 $ 60,406 $ 9,623 $391,056 Intersegment revenues ............................... -- -- -- 35,565 35,565 Gross voyage profit before depreciation ............. 22,583 42,624 21,903 2,862 89,972 Depreciation and amortization ....................... 18,114 32,383 7,288 1,213 58,998 Interest expense .................................... 6,301 10,942 9,287 1,124 27,654 Segment profit before interest income administrative and general expenses and taxes ............................. 4,408 16,345 6,088 908 27,749 Segment assets ...................................... 112,519 222,462 144,390 21,403 500,774 Expenditures for segment assets ..................... 14,444 16,547 1,274 5,726 37,991 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 Revenues from external customers .................... $193,118 $117,098 $ 61,108 $ 7,603 $378,927 Intersegment revenues ............................... -- -- -- 31,585 31,585 Gross voyage profit before depreciation ............. 29,163 41,873 22,473 6,023 99,532 Depreciation and amortization ....................... 16,699 26,846 6,660 1,688 51,893 Interest expense .................................... 7,100 11,152 9,334 942 28,528 Segment profit before interest income administrative and general expenses and taxes ............................. 10,965 16,273 6,826 4,356 38,420 Segment assets ...................................... 128,163 235,354 149,038 18,881 531,436 Expenditures for segment assets ..................... 24,919 33,027 34,929 3,153 96,028 - ------------------------------------------------------------------------------------------------------------------------------------
Following is a reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements:
(ALL AMOUNTS IN THOUSANDS) For the year ended December 31, PROFIT: 1998 1997 1996 -------- -------- -------- Total profit loss for reportable segments ........................... $ 36,815 $ 27,749 $ 38,420 Unallocated amounts: Interest income .............................................. 1,569 1,458 1,935 Administrative and general expenses .......................... 26,406 25,454 26,256 -------- -------- -------- Income before income taxes and extraordinary items .................. $ 11,978 $ 3,753 $ 14,099 ======== ======== ======== December 31 , December 31, December 31, ASSETS: 1998 1997 1996 -------- -------- -------- Total assets for reportable segments ................................ $556,273 $500,774 $531,435 Unallocated amounts ................................................. 133,531 117,430 130,161 -------- -------- -------- $689,804 $618,204 $661,596 ======== ======== ========
Unallocated assets include Current Assets of $119,214,000, $107,800,000, and $123,200,000, as of December 31, 1998, 1997, and 1996, respectively. The Company manages its Current Assets on a corporate rather than segment basis. NOTE J - UNCONSOLIDATED ENTITIES During 1998, the Company acquired 37.5% interest in Belden for approximately $3.4 Million. Belden owns three companies that own and operate one cement carrying vessel each under medium to long-term contracts. The Company's portion of Belden's earnings from the date of the investment until December 31, 1998, was not material. LMS, a wholly-owned subsidiary of the Company, will be providing ship management services for Belden beginning in 1999. During 1996, the Company acquired the remaining 50% interest in Marco Shipping Company, (PTE.) Ltd. ("Marco"), a foreign entity which acts in an agent capacity on behalf of the Company. The acquisition was accounted for as a purchase, and the results of Marco, which were not material, have been included in the accompanying consolidated financial statements since the date of acquisition. The cost of the acquisition was allocated on the basis of the estimated fair market value of the assets acquired and the liabilities assumed. The allocation resulted in goodwill of approximately $25,000 which is being amortized over 10 years. NOTE K - SUPPLEMENTAL CASH FLOW INFORMATION Year Ended December 31, (ALL AMOUNTS IN THOUSANDS) 1998 1997 1996 ------- ------- ------- Non-Cash Investing and Financing Activities: Current Liabilities to be Refinanced .................. -- $22,511 $ 7,680 Cash Payments: Interest Paid ................. $27,380 $26,818 $27,853 Taxes Paid .................... 4,319 3,321 13,723 During 1998, the Company sold one of its foreign flag pure car carriers for $18,200,000 of which $15,200,000 was received in cash and $3,000,000 in the form of a four year promissory note. For purposes of the accompanying consolidated statements of cash flows, the Company considers highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES The estimated fair values of the Company's financial instruments and derivatives are as follows (asset/(liability)): DECEMBER 31, December 31, 1998 1997 CARRYING FAIR CARRYING FAIR (ALL AMOUNTS IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE --------- --------- --------- --------- Foreign Currency Contracts . -- -- -- $ (80) Commodity Swap Contract .... -- $ (593) -- -- Long-Term Debt ............. $(366,552) $(380,927) $(307,700) $(315,258) Disclosure of the fair value of all balance sheet classifications, including but not limited to certain vessels, property, equipment, direct financing leases, or intangible assets which may have a fair value in excess of historical cost, is not required. Therefore, this disclosure does not purport to represent the fair value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES The carrying amount approximates fair value for each of these instruments. The Company has categorized all marketable securities as available-for-sale. FOREIGN CURRENCY CONTRACTS The Company enters into forward exchange contracts to hedge certain firm purchase and sale commitments denominated in foreign currencies. The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk that the eventual dollar cash inflows or outflows resulting from revenue collections from foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates. The term of the currency derivatives is rarely more than one year. The Company had entered into various forward purchase contracts for Singapore Dollars totaling $1,188,022 and $859,000 U.S. Dollar equivalents to hedge against future payments due for drydocking cost as of December 31, 1998 and 1997, respectively. Gains or losses on forward exchange contracts which hedge exposures on firm foreign currency commitments are deferred and recognized as adjustments to the bases of those assets. As of December 31, 1998 and 1997, the Company was also a party to forward sales contracts in various currencies totaling $2,195,000 and $2,304,000 U.S. Dollar equivalents, respectively. Gains and losses on these contracts are recognized in net income of the period in which the exchange rate changes. COMMODITY CONTRACT During 1998, the Company entered into a commodity swap with a commercial bank for a portion of its estimated 1999 fuel purchases to manage the risk associated with changes in fuel prices. The contract is effective for one year beginning January 1, 1999, and is for 60,000 tons of fuel. The contract requires that a payment be made for the difference between the contact rate of $75 per ton and the market rate for the fuel on each settlement date. The fair value of this commodity swap is the estimated amount that the bank would have received to terminate the contract as of December 31, 1998. LONG-TERM DEBT The fair value of the Company's debt is estimated based on quoted market prices for the publicly listed Senior Notes and the current rates offered to the Company on other outstanding obligations. AMOUNTS DUE FROM RELATED PARTIES The carrying amount of these notes receivable approximated fair market value as of December 31, 1998 and 1997. Fair market value takes into consideration the current rates at which similar notes would be made. RESTRICTED INVESTMENTS The carrying amount of these investments, which were included in Cash and Cash Equivalents and Marketable Securities, approximated fair market value as of December 31, 1998 and 1997, based upon current rates offered on similar instruments. NOTE M - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Following are the components of the consolidated balance sheet classification Accounts Payable and Accrued Liabilities for the periods indicated. DECEMBER 31, December 31, (ALL AMOUNTS IN THOUSANDS) 1998 1997 ------- ------- Accrued Voyage Expenses ........................ $28,144 $27,257 Trade Accounts Payable ......................... 8,329 8,408 Accrued Interest ............................... 8,432 8,181 Self-Insurance Liability ....................... 6,627 6,278 Accrued Salaries and Benefits .................. 2,218 1,400 Accrued Vessel Costs ........................... 396 211 ------- ------- $54,146 $51,735 ======= ======= NOTE N-QUARTERLY FINANCIAL INFORMATION - (UNAUDITED)
Quarter Ended ------------------------------------------------------------------ March 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- -------- (ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------------------------------------------ 1998 REVENUE .............................. $ 93,498 $ 94,988 $ 98,605 $ 97,057 EXPENSE .............................. 79,435 78,433 81,835 86,654 GROSS VOYAGE PROFIT .................. 14,063 16,555 16,770 10,403 INCOME BEFORE EXTRAORDINARY ITEM ..... 768 1,777 1,976 2,784 EXTRAORDINARY ITEM ................... (1,029) -- -- -- NET (LOSS) INCOME .................... (261) 1,777 1,976 2,784 EARNINGS (LOSS) PER COMMON SHARE: BASIC AND DILUTED: INCOME BEFORE EXTRAORDINARY ITEM ....... 0.11 0.27 0.29 0.42 EXTRAORDINARY ITEM ......... (0.15) -- -- -- NET (LOSS) INCOME .......... (0.04) 0.27 0.29 0.42 - ------------------------------------------------------------------------------------------------------------------ 1997 Revenue .............................. $ 89,994 $102,520 $100,309 $ 98,233 Expense .............................. 75,420 88,021 87,195 85,017 Gross Voyage Profit .................. 14,574 14,499 13,114 13,216 Net Income ........................... 593 677 405 480 Earnings per Common Share: Basic and Diluted: Net Income ................. 0.09 0.10 0.06 0.07 - ------------------------------------------------------------------------------------------------------------------ 1996 Revenue .............................. $ 95,235 $ 97,775 $ 90,418 $ 95,499 Expense .............................. 78,088 80,316 73,655 79,920 Gross Voyage Profit .................. 17,147 17,459 16,763 15,579 Income Before Extraordinary Item ..... 2,248 2,685 2,053 1,650 Extraordinary Item ................... -- -- -- (813) Net Income ........................... 2,248 2,685 2,053 837 Earnings per Common Share: Basic and Diluted: Income Before Extraordinary Item ....... 0.34 0.40 0.31 0.24 Extraordinary Item ......... -- -- -- (0.12) Net Income ................. 0.34 0.40 0.31 0.12 - ------------------------------------------------------------------------------------------------------------------
COMMON STOCK PRICES AND DIVIDENDS FOR EACH QUARTERLY PERIOD OF 1997 AND 1998 (Source: New York Stock Exchange) Cash Dividends 1997 High Low Paid - -------------- ------------ --------------- ------------ 1st Quarter 19 16 7/8 .0625/Share 2nd Quarter 17 1/2 16 3/4 .0625/Share 3rd Quarter 18 1/4 16 .0625/Share 4th Quarter 18 5/16 16 5/8 .0625/Share Cash Dividends 1998 High Low Paid - -------------- ------------ --------------- ------------ 1st Quarter 17 1/4 16 1/16 .0625/Share 2nd Quarter 17 5/16 16 1/16 .0625/Share 3rd Quarter 16 1/2 14 1/2 .0625/Share 4th Quarter 16 5/8 14 11/16 .0625/Share Approximate Number of Common Stockholders of Record at February 26, 1999: 737 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Stockholders of International Shipholding Corporation: We have audited the accompanying consolidated balance sheets of International Shipholding Corporation (a Delaware corporation) and subsidiaries (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholder's investment and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of International Shipholding Corporation and subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Arthur Anderson LLP New Orleans, Louisiana January 18, 1999 EX-21 3 INTERNATIONAL SHIPHOLDING CORPORATION SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1998 Jurisdiction Under Which Organized --------------- International Shipholding Corporation (Registrant) Delaware International Shipholding Corporation (1) New York River Towing, Inc. Delaware Waterman Steamship Corporation New York Sulphur Carriers, Inc. Delaware Central Gulf Lines, Inc. Delaware Florida Barge Lines Corporation Delaware Material Transfer, Inc. Delaware Enterprise Ship Company, Inc. Delaware Bay Insurance Company Bermuda LCI Shipholdings, Inc. Liberia Gulf South Shipping Pte. Ltd. Singapore Forest Lines Inc. Liberia Marco Shipping Co. Pte. Ltd. Singapore Marcoship Agencies Malaysia Belden Shipping Pte Ltd (3) Singapore Echelon Shipping Inc. (4) Panama Carson Shipping Inc. (4) Panama Shining Star Malta Ltd (4) Malta N. W. Johnsen & Co., Inc. New York Shipvest Companhia de Gestao Maritima, Lda.(2) Madeira St. Rose Fleeting Company, Inc. Louisiana LMS Shipmanagement, Inc. Louisiana Lash Intermodal Terminal Company Delaware Resource Carriers, Inc. Delaware (1) New York name-holding corporation (2) 25% owned by LCI Shipholdings, Inc. (3) 37.5% owned by LCI Shipholdings, Inc. (4) 60% owned by N.W. Johnsen & Co., Inc. All of the subsidiaries listed above are wholly-owned subsidiaries and are included in the consolidated financial statements incorporated by reference herein unless otherwise indicated. EX-27 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 32,008 12,136 53,868 334 13,130 119,214 790,776 356,217 689,804 74,300 361,425 0 0 6,756 170,352 689,804 0 384,148 0 352,763 28,738 0 28,738 11,978 4,673 7,305 0 (1,029) 0 6,276 0.94 0.94
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