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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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. 1-7615
KIRBY CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
NEVADA 74-1884980
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1775 ST. JAMES PLACE, SUITE 200
HOUSTON, TEXAS 77056-3453
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (713) 435-1000
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
COMMON STOCK -- $.10 NEW YORK STOCK
PAR VALUE PER SHARE EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant (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 [ ]
As of March 4, 1998, 24,435,436 shares of common stock were outstanding.
The aggregate market value of common stock held by nonaffiliates of the
registrant, based on the closing sales price of such stock on the New York Stock
Exchange on March 3, 1998, was $480,889,055. For purposes of this computation,
all executive officers, directors and 10% beneficial owners of registrant are
deemed to be affiliates. Such determination should not be deemed an admission
that such executive officers, directors and 10% beneficial owners are
affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement in connection with the Annual
Meeting of the Stockholders to be held April 21, 1998, to be filed with the
Commission pursuant to Regulation 14A, is incorporated by reference into Part
III of this report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Kirby Corporation (the "Company") was incorporated in Nevada on January 31,
1969 as a subsidiary of Kirby Industries, Inc. ("Industries"). The Company
became publicly owned on September 30, 1976 when its common stock was
distributed pro rata to the stockholders of Industries in connection with the
liquidation of Industries. At that time, the Company was engaged in oil and gas
exploration and production, marine transportation and property and casualty
insurance. Since then, through a series of acquisitions and divestitures, the
Company has become primarily a marine transportation company and is no longer
engaged in the oil and gas business. In 1990, the name of the Company was
changed from "Kirby Exploration Company, Inc." to "Kirby Corporation" because of
the changing emphasis on its business.
Unless the context otherwise requires, all references herein to the Company
include the Company and its subsidiaries.
The Company's principal executive office is located at 1775 St. James
Place, Suite 200, Houston, Texas 77056, and its telephone number is (713)
435-1000. The Company's mailing address is P.O. Box 1745, Houston, Texas
77251-1745.
BUSINESS AND PROPERTY
The Company, through its subsidiaries, conducts operations in two business
segments: marine transportation and diesel repair.
The Company's marine transportation segment is engaged in the inland
transportation of industrial chemicals, petrochemical feedstocks, agricultural
chemicals and refined petroleum products by tank barges, and the offshore
transportation of refined petroleum products by tanker and tank barge, and
dry-bulk, container and palletized cargoes by barge. The Company's marine
transportation segment is strictly a provider of transportation services and
does not assume ownership of any of the products it transports. All of the
Company's vessels operate under the U.S. flag and are qualified for domestic
trade under the Jones Act.
The Company's diesel repair segment is engaged in the overhaul and repair
of diesel engines and related parts sales in three distinct markets: the marine
market, providing aftermarket service for vessels powered by large, medium-speed
diesel engines utilized in the various inland and offshore marine industries;
the locomotive market, providing aftermarket service for the shortline and the
industrial railroad markets; and the stationary market, providing aftermarket
service for small power generation applications and stand-by generation
components of the nuclear industry.
The Company has a 45% voting common stock investment in a property and
casualty insurance company operating exclusively in the Commonwealth of Puerto
Rico. Such investment is accounted for under the equity method of accounting
effective July 1, 1995.
The Company recently entered into a definitive purchase agreement to sell
its U.S. flag product tanker operation and its harbor service operation. The
tanker and harbor service operations are reflected as discontinued operations in
this report, with the closing of the sale scheduled to be completed in mid-
March 1998. See "Discontinued Operations" on page 17 of Item 1 and Note 2 to the
notes to financial statements included under Item 8 elsewhere herein for further
disclosures on the sale of the tanker and harbor service operations.
The Company and its transportation and diesel repair subsidiaries have
approximately 1,850 employees, 1,550 with continuing operations and 300 with
discontinued operations, all of which are in the United States.
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The following table sets forth by industry segment the revenues, operating
profits and identifiable assets (including goodwill) attributable to the
continuing principal activities of the Company for the periods indicated (in
thousands):
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<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
Transportation.................................. $267,687 $249,594 $256,108
Diesel repair................................... 50,538 70,422 79,136
Insurance....................................... 45,239(*) -- --
Other........................................... 8,678 3,568 1,290
-------- -------- --------
Consolidated revenues................... $372,142 $323,584 $336,534
======== ======== ========
Operating profits:
Transportation.................................. $ 35,241 $ 38,172 $ 39,542
Diesel repair................................... 3,400 5,376 6,189
Insurance....................................... 3,971(*) -- --
Impairment of long-lived assets................. (16,807) -- --
-------- -------- --------
25,805 43,548 45,731
Equity in earnings of insurance affiliate....... 1,599(*) 2,171 4,609
Equity in earnings of marine affiliates......... 2,638 3,912 3,084
Other income.................................... 1,950 3,568 1,290
General corporate expenses...................... (5,284) (5,786) (4,864)
Interest expense................................ (12,359) (13,349) (13,378)
-------- -------- --------
Earnings from continuing operations
before taxes on income................ $ 14,349 $ 34,064 $ 36,472
======== ======== ========
Identifiable assets:
Transportation.................................. $330,144 $329,014 $329,522
Diesel repair................................... 22,401 48,012 47,290
-------- -------- --------
352,545 377,026 376,812
Investment in insurance affiliate............... 44,785 44,554 45,320
Investments in marine affiliates................ 11,985 12,697 16,256
Discontinued operations......................... 54,219 51,167 40,672
General corporate assets........................ 34,550 39,086 38,899
-------- -------- --------
Consolidated assets..................... $498,084 $524,530 $517,959
======== ======== ========
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(*) The Company changed its method of reporting its investment in Universal from
a consolidated basis to the equity method of accounting effective July 1,
1995.
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MARINE TRANSPORTATION
The Company is engaged in marine transportation as a provider of services
by barge for both the inland and offshore markets. As of March 4, 1998, the
equipment owned or operated by the Company's continuing transportation segment
was comprised of 519 tank barges, 127 inland towboats, six inland bowboats, two
offshore tank barges, six offshore dry cargo barges and nine offshore tugboats
with the following specifications and capacities:
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<CAPTION>
NUMBER AVERAGE AGE BARREL
CLASS OF EQUIPMENT IN CLASS (IN YEARS) CAPACITIES
------------------ -------- ----------- ----------
<S> <C> <C> <C>
Inland tank barges:
Regular double skin:
20,000 barrels and under....................... 239 23.1 2,703,000
Over 20,000 barrels............................ 145 16.7 3,908,000
Specialty double skin............................. 39 28.2 610,000
Single skin:
20,000 barrels and under....................... 37 30.4 630,000
Over 20,000 barrels............................ 59 27.8 1,534,000
--- ---- ---------
Total inland tank barges.................. 519 22.8 9,385,000
=== ==== =========
Inland towing vessels:
Inland towboats:
2,000 horsepower and under..................... 96 23.2
Over 2,000 horsepower.......................... 31 23.9
--- ----
Total inland towboats..................... 127 23.5
=== ====
Inland bowboats................................... 6 21.9
=== ====
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<TABLE>
<CAPTION>
DEADWEIGHT
TONNAGE
----------
<S> <C> <C> <C>
Tank barges......................................... 2 23.5 38,300
=== ==== =========
Offshore dry cargo barges(*)........................ 6 21.3 106,000
=== ==== =========
Offshore tugboats(*)................................ 9 22.3
=== ====
</TABLE>
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(*) Includes four barges and five tugboats owned by Dixie Fuels Limited and one
barge and tugboat owned by Dixie Fuels II, Limited, partnerships in which a
subsidiary of the Company owns a 35% and 50% interest, respectively.
The following table sets forth the marine transportation revenues and
percentage of such revenues for the continuing marine transportation segment for
the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
REVENUES BY PRODUCT OR OPERATION AMOUNTS % AMOUNTS % AMOUNTS %
- -------------------------------- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Marine transportation -- Inland:
Liquid petroleum products.... $230,823 86% $231,747 93% $237,828 93%
-------- --- -------- --- -------- ---
Marine
transportation -- Offshore:
Liquid petroleum products.... 6,843 3 5,285 2 7,952 3
Dry-bulk..................... 3,278 1 3,059 1 2,807 1
Break-bulk................... 26,658 10 9,661 4 7,529 3
-------- --- -------- --- -------- ---
36,779 14 18,005 7 18,288 7
-------- --- -------- --- -------- ---
Intercompany transactions...... 85 -- (158) -- (8) --
-------- --- -------- --- -------- ---
$267,687 100% $249,594 100% $256,108 100%
======== === ======== === ======== ===
</TABLE>
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MARINE TRANSPORTATION INDUSTRY FUNDAMENTALS
The United States possesses a long coastline providing numerous ports and
harbors, complemented by a network of interconnected rivers and canals that
serve the nation as water highways. Recognizing the advantages to commerce, over
the past decades the United States expanded and improved on its inherent natural
waterways for commerce and growth. The waterway system extends into numerous
states, with over 90% of the United States population served by domestic
shipping.
Today, the nation's waterways serve as the backbone of the United States
distribution system with over 1.1 billion short tons of cargo moved annually by
domestic shipping. The inland waterway system extends approximately 26,000
miles, 11,000 miles of which are generally considered significant for domestic
commerce. The navigable waterways link the United States heartland to the world.
Marine transportation is an efficient means of transportation of bulk products.
An average inland tank barge carries the equivalent cargo of 15 rail cars or 60
tractor trailer trucks. A typical Mississippi River tow of 30 barges carries as
much cargo as 450 rail cars or 1,800 trucks.
Based on cost, marine transportation is the most efficient means of
transportation of bulk products compared with rail and trucks. Inland water
transportation carries approximately 15% of domestic intercity freight at less
than 2% of domestic intercity freight costs. Inland barge transportation is also
the safest mode of transportation per ton mile in the United States. The United
States inland tank barge industry is diverse and independent with a mixture of
small operators, integrated transportation companies and captive fleets owned by
United States refining and petrochemical companies.
TANK BARGE INDUSTRY
The Company operates within the United States inland tank barge industry,
which provides marine transportation of bulk liquid cargoes for customers along
the United States inland waterway system. Among the most significant segments of
this industry are the transporters of industrial chemicals, petrochemical
feedstocks, agricultural chemicals and refined petroleum products. The Company
operates in each of these segments. The use of marine transportation by the
petroleum and petrochemical industry is a major reason for the location of
domestic refineries and petrochemical facilities on navigable inland waterways
and along the Gulf Coast. Much of the United States farm belt is likewise
situated within access to the inland waterway system, relying on marine
transportation of farm products, including agricultural chemicals. The Company's
principal distribution system encompasses the Gulf Intracoastal Waterway from
Brownsville, Texas to St. Marks, Florida, the Mississippi River System and the
Houston Ship Channel. The Mississippi River System includes the Arkansas,
Illinois, Missouri, Ohio and Tennessee Rivers and the Tombigbee Waterway.
The Company believes that the total number of tank barges that operate in
the inland waters of the United States has declined from approximately 4,200 in
1981 to approximately 2,900 in 1997. The Company believes this decrease
primarily resulted from: increasing age of the domestic tank barge fleet
resulting in scrapping; rates inadequate to justify new construction; reduction
in financial and tax incentives which previously encouraged speculative
construction of new equipment; stringent operating standards to adequately cope
with safety and environmental risk; and an increase in environmental regulations
that mandate expensive equipment modification which some owners are unwilling or
unable to undertake given current rate levels and the age of their fleets.
Although well maintained tank barges can be efficiently operated for more
than 30 years, the cost of hull work for required annual Coast Guard
certifications, as well as general safety and environmental concerns, force
operators to periodically reassess their ability to recover maintenance costs.
Previously, tax and financing incentives to operators and investors to construct
tank barges, including short-life tax depreciation, investment tax credits and
government guaranteed financing, led to growth in the supply of domestic tank
barges to a peak of approximately 4,200 in 1981. These tax incentives have since
been reduced or eliminated, although the government guaranteed financing
programs, dormant since the mid-eighties, have recently been more active. The
supply of tank barges resulting from the earlier programs has slowly aligned
with demand for tank barge services, primarily through attrition, as discussed
above.
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While the United States tank barge fleet has decreased in size, domestic
production of petrochemicals, a major component of the industry's revenues, has
continued to increase annually. Growth in the economy, continued growth of the
United States population and the continued substitution of plastics and
synthetics in a wide variety of products have been major factors behind the
increase of capacity in the petrochemical industry. Texas and Louisiana, which
are within the Company's area of operations, currently account for approximately
80% of the total United States production of petrochemicals.
A well maintained tank barge will be serviceable for more than 30 years.
The average age of the nation's tank barge fleet is over 21 years old, with only
16% of the fleet built in the last 10 years. Single skin barges comprise
approximately 19% of the nation's tank barge fleet, with an average age of 28
years. These single skin barges are being driven from the nation's tank barge
fleet by market forces, environmental concerns and rising maintenance costs to
keep such fleets afloat and in service.
The Company also believes that the current consolidating industry will be
less prone to overbuilding of the nation's tank barge fleet. Of the approximate
450 tank barges built since 1989, 74 or 16% were built by the Company. The
balance was primarily special purpose barges or barges constructed for specific
contracts. Currently, the only significant building is by an oil company to
replace its aging captive fleet.
The Company is also engaged in U.S. flag offshore tank barge and dry cargo
barge operations, providing transportation of petroleum products, dry-bulk
cargoes, and containerized and palletized cargoes, including United States
Government preference agricultural commodities. Such products and cargoes are
transported primarily in the Gulf of Mexico, to Caribbean Basin ports, and to
Alaska and the Northeast Seaboard, with occasional trips to South American
ports.
COMPETITION IN THE TANK BARGE INDUSTRY
The Company operates in the highly competitive marine transportation market
for commodities transported on the Mississippi River System, the Gulf
Intracoastal Waterway and the Houston Ship Channel. The industry has become
increasingly concentrated within recent years as smaller and/or economically
weaker companies have gone out of business or have been acquired by larger or
stronger companies. The Company's competition has historically been based
primarily on price; however, shipping customers, through increased emphasis on
safety, the environment, quality and a greater reliance on a "single source"
supply of services, are more frequently requiring that their supplier of inland
tank barge services have the capability to handle a variety of tank barge
requirements, offer distribution capability throughout the inland waterway
system, and offer flexibility, safety, environmental responsibility, financial
responsibility, adequate insurance and quality of service consistent with the
customer's own operations.
The Company's direct competitors are primarily noncaptive marine
transportation companies. "Captive" companies are those companies that are owned
by major oil and/or petrochemical companies which, although competing in the
inland barge market to varying extents, primarily transport cargoes for their
own account. The Company is the number one ranked inland tank barge carrier,
based on its 519 barges and approximately 9.4 million barrels of available
capacity. It has approximately 24% of the independent tank barge capacity and
18% of the total domestic tank barge capacity.
While the Company competes primarily with other barge companies, it also
competes with companies owning refined products and chemical pipelines, and, to
a much lesser extent, rail tank cars and tank trucks in some areas and markets.
The Company believes that inland marine transportation of bulk liquid products
enjoys a substantial cost advantage over rail and truck transportation. The
Company also believes that refined products and chemical pipelines, although
often a less expensive form of transportation than tank barges, are not as
adaptable to diverse products and are generally limited to fixed point-to-point
distribution of commodities in high volumes over extended periods of time.
MARINE TRANSPORTATION OPERATIONS
The Company provides transportation services for the following markets:
industrial chemicals, agricultural chemicals, refined petroleum products and
barge fleeting services. Collectively, the Company operates a
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fleet of 519 inland tank barges, 127 inland towboats and six inland bowboats,
two offshore tank barges, one offshore dry cargo barge and three offshore
tugboats.
Inland Operations. The Company's marine transportation service is conducted
through the following operating groups: Canal, Linehaul, River, Western Towing
Company ("Western") and Offshore. Kirby Inland Marine, Inc. ("Kirby Inland
Marine"), formerly named and still doing business as Dixie Carriers, Inc.
("Dixie"), and Sabine Transportation Company ("Sabine"), subsidiaries of the
Company, comprise the Canal, Linehaul and River fleets. The offshore services
are provided through Dixie.
Kirby Inland Marine's and Sabine's Canal fleet transport petrochemical
feedstock, processed chemicals and refined petroleum products along the Gulf
Intracoastal Waterway, the Mississippi River below Baton Rouge and in the
Houston Ship Channel. Petrochemical feedstocks are transported from one refinery
to another refinery for further processing. Processed chemicals are moved to
water-front terminals and chemical plants, while refined products are
transported to water-front terminals in Florida for distribution.
The Linehaul fleet of Kirby Inland Marine transports petrochemical
feedstocks, processed chemicals, agricultural chemicals and lube oils along the
Gulf Intracoastal Waterway, Mississippi River and the Illinois and Ohio Rivers.
Loaded barges are collected at Baton Rouge from Gulf Coast refineries and
chemical plants, and are transported from Baton Rouge upriver to water-front
terminals and plants on the Mississippi, Illinois and Ohio Rivers on regularly
scheduled Linehaul tows. Barges are dropped off and picked up going up and down
river.
Kirby Inland Marine's River fleet transports petrochemical feedstocks,
processed chemicals, agricultural chemicals and refined petroleum products along
the Mississippi, Illinois, Ohio and Arkansas Rivers. Petrochemical feedstocks
and processed chemicals are transported to water-front petrochemical and
chemical plants, while agricultural chemicals and refined petroleum products are
transported to water-front terminals. The River fleet operates unit tows, where
a towboat and generally a static group of barges operate on consecutive voyages
between a loading point and a discharge point.
Marine transportation services are conducted under long-term contracts with
customers with whom the Company has long-standing relationships, as well as
under short-term and spot contracts. Currently, approximately 70% of the
revenues are derived from term contracts and 30% are derived from spot market
movements.
For increased environmental protection, all of the inland tank barges used
in the transportation of industrial chemicals are of double-skin construction
and, where applicable, are capable of controlling vapor emissions to meet
occupational health and safety regulations and air quality concerns.
The Company, over the past five years, through consolidation within the
inland tank barge market, has become one of the most capable inland tank barge
operators, and one with the ability to offer to its customers distribution
capabilities throughout the Mississippi River System and the Gulf Intracoastal
Waterway. Such consolidation offers economies of scale to better match barges,
towboats, products and destinations.
Through the Company's proprietary vessel management computer system, the
Company's fleet of 519 barges and 127 towboats are dispatched from centralized
dispatch at the Company's corporate office. Electronic orders are communicated
to the vessel personnel, with reports of towing activities communicated
electronically back to the corporate office. The electronic interface between
the corporate office and the vessel personnel enables the Company to more
effectively match customer needs to barge capabilities, thereby maximizing
utilization of the Company's barge and towboat fleets.
Western operates what the Company believes is the largest commercial barge
fleeting service (temporary barge storage facilities) in the ports of Houston,
Galveston and Freeport, Texas. Western provides service for Kirby Inland
Marine's and Sabine's barges, as well as outside customers, transferring barges
within these ports, as well as fleeting barges.
Kirby Logistics Management, a division of Kirby Inland Marine, offers barge
tankerman services and related distribution services to its customers and to
third parties.
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Offshore Operations. Dixie's offshore fleet is comprised of two offshore
tank barge and tugboat units, one offshore dry-cargo barge and tugboat unit, and
equipment owned through two limited partnerships, Dixie Fuels, Limited ("Dixie
Fuels") and Dixie Fuels II, Limited ("Dixie Fuels II") in which a subsidiary of
Dixie owns a 35% and 50% interest, respectively.
The two ocean-going tank barge and tugboat units, one of which is a 157,000
barrel single-skin barge and one a 165,000 barrel double-skin barge, provide
service in the transportation of refined petroleum products and chemicals
primarily in domestic coastwise service. The single-skin tank barge is scheduled
to be removed from service in compliance with the Oil Pollution Act of 1990
("OPA") on January 1, 2005. The double-skin tank barge meets all OPA
construction requirements. The OPA placed a number of stringent requirements on
tankers and offshore tank barge owners and operators, including the mandated
phasing out of all single hull vessels beginning in 1995, depending on vessel
size and age. See "Environmental Regulations -- Water Pollution Regulations"
below for further discussion of the OPA.
The ocean-going dry-bulk barge and tugboat unit is engaged in the
transportation of dry-bulk commodities including sugar, limestone rock, grain
and scrap steel, primarily between domestic ports along the Gulf of Mexico,
along the Atlantic Seaboard and to points in the Caribbean Basin.
Dixie Bulk Transport, Inc. ("Dixie Bulk"), a subsidiary of the Company, as
general partner, also manages the operations of Dixie Fuels, which operates a
fleet of four ocean-going, dry-bulk barges, four ocean-going tugboats and one
shifting tugboat. The remaining 65% interest in Dixie Fuels is owned by Electric
Fuels Corporation ("EFC"), an affiliate of Florida Power Corporation ("Florida
Power"). Dixie Fuels operates primarily under term contracts of affreightment,
including a contract that expires in the year 2002 with EFC to transport coal
across the Gulf of Mexico to Florida Power's facility at Crystal River, Florida.
Dixie Fuels also has a 12-year contract, which commenced in 1989, with
Holnam, Inc. ("Holnam") to transport Holnam's limestone requirements from a
facility adjacent to the Florida Power facility at Crystal River to Holnam's
plant in Theodore, Alabama. The Holnam contract provides cargo for a portion of
the return voyage for the vessels that carry coal to Florida Power's Crystal
River facility. Dixie Fuels is also engaged in the transportation of coal,
fertilizer and other bulk cargoes on a short-term basis between domestic ports
and the transportation of grain from domestic ports to points primarily in the
Caribbean Basin.
Dixie Bulk, as general partner, also manages the operations of Dixie Fuels
II, which operates an ocean-going dry-bulk and container barge and tugboat unit.
The remaining 50% interest in Dixie Fuels II is owned by EFC. Dixie Fuels II is
engaged in the transportation of dry-bulk cargo and containers between domestic
ports, ports in the Caribbean Basin and international ports as cargo offers.
The Company, through its subsidiary AFRAM Carriers, Inc. ("AFRAM"), was
engaged in the worldwide transportation by freighters of dry-bulk, container and
palletized cargoes, primarily for departments and agencies of the United States
Government. In September 1996, in July 1997 and in October 1997, the freighters
TAMPA BAY, GALVESTON BAY and CORPUS CHRISTI, respectively, were each scrapped
following food-aid voyages overseas, taking advantage of their location and
higher scrap steel prices. The October 1997 scrappage of the CORPUS CHRISTI
concluded the Company's exit from the transportation of such cargoes by
freighters; however, the Company may occasionally transport such cargoes by
ocean-going dry-bulk barges.
During 1995, 1996 and 1997, the AFRAM freighters were laid up at various
times due to excess equipment capacity in the market in which AFRAM competed.
Such excess capacity and lack of available cargo resulted in rates that were
inadequate to achieve operating profitability. With the Company's adoption in
September 1995 of Financial Accounting Standards Board ("FASB") 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" ("SFAS No.
121"), the Company reduced the carrying value of the AFRAM freighters and
related intangibles to fair market value in the 1995 third quarter. See "Note 1"
to the notes to financial statements included under Item 8 elsewhere herein for
further disclosures on the reduction of the freighters to fair market value.
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CONTRACTS AND CUSTOMERS
The majority of the marine transportation contracts are for terms of one to
ten years. Currently, the Company operates under longer term contracts with The
Dow Chemical Company ("Dow"), Chevron Chemical Company, EFC, Holnam, and Baytank
(Houston) Inc., among others. While these companies have generally been
customers of the Company's marine transportation segment for several years and
management anticipates a continuing relationship, there is no assurance that any
individual contract will be renewed. Dow, with which the Company has a contract
through 2004, accounted for 13% of the Company's revenues in 1997 and 12% in
1996. No single customer of the Company's marine transportation segment
accounted for more than 10% of the Company's revenue in 1995.
EMPLOYEES
The Company's marine transportation continuing operations have
approximately 1,225 employees, of which approximately 975 are vessel crew
members. Approximately 125 of the 975 vessel crew members are subject to various
collective bargaining agreements with various labor organizations. No one
collective bargaining agreement covers more than 7% of the 975 vessel crew
members.
An association of individuals working in the inland barge industry as
captains, relief captains and pilots has organized around the objective of
significantly increasing the wages of persons employed in those capacities, and
perhaps other vessel employees, in the industry. The inland tank barge
operations of the Company employ approximately 390 employees in the capacity of
captain, relief captain and pilot aboard inland towing vessels operated by the
Company. Additionally, the inland tank barge operations of the Company rely on
inland towing vessels operated by others for towing services. The association
seeking to significantly increase wages has openly discussed the possibility of
an industry wide work stoppage as a potential tactic in seeking to achieve its
objectives. If an industry wide work stoppage were to take place, or if a
significant change in vessel employee wages were to occur, it could have an
adverse effect on the Company.
PROPERTIES
The principal office for Kirby Inland Marine and Sabine's inland operations
is located in Houston, Texas, in facilities under a lease that expires in August
2003. Kirby Inland Marine's operating locations are on the Mississippi River at
Baton Rouge, Louisiana, in Greenville, Mississippi and in Houston, Texas near
the Houston Ship Channel. The Baton Rouge and Houston facilities are Company
owned and the Greenville facility is leased. Western's facilities are located on
a 10.24 acre tract of land owned by Kirby Inland Marine lying between the San
Jacinto River and Old River Lake near Houston, Texas. The principal office of
the Company's offshore operations is in Belle Chasse, Louisiana in Company owned
facilities.
GOVERNMENTAL REGULATIONS
General. The Company's transportation operations are subject to regulation
by the United States Coast Guard, federal laws, state laws and certain
international conventions.
The majority of the Company's inland tank barges and all offshore tank
barges are inspected by the United States Coast Guard and carry certificates of
inspection. The Company's inland and offshore towing vessels and offshore
dry-bulk barges are not subject to United States Coast Guard inspection
requirements. The Company's offshore towing vessels and offshore dry-bulk and
tank barges are built to American Bureau of Shipping ("ABS") classification
standards and are inspected periodically by ABS to maintain the vessels in
class. The crew employed by the Company aboard vessels, including captains,
pilots, engineers, able-bodied seamen and tankermen, are licensed by the United
States Coast Guard.
The Company is required by various governmental agencies to obtain
licenses, certificates and permits for its vessels depending upon such factors
as the cargo transported, the waters in which the vessels operate, the age of
the vessels and other factors. The Company is of the opinion that the Company's
vessels have obtained and can maintain all required licenses, certificates and
permits required by such governmental agencies for the foreseeable future.
8
<PAGE> 10
The Company believes that additional safety and environmental related
regulations may be imposed on the marine industry in the form of personnel
licensing, navigation equipment and contingency planning requirements.
Generally, the Company endorses the anticipated additional regulations and
believes it is currently operating to standards at least the equal of such
anticipated additional regulations.
Jones Act. The Jones Act is a federal cabotage law that restricts domestic
marine transportation in the United States to vessels built and registered in
the United States. Furthermore, the Jones Act requires that the vessels be
manned by United States citizens and owned by United States citizens. For
corporations to qualify as U.S. citizens for the purpose of domestic trade, 75%
of the corporations' beneficial stockholders must be United States citizens. The
Company presently meets all of the requirements of the Jones Act for its owned
vessels.
Compliance with United States ownership requirements of the Jones Act is
very important to the operations of the Company and the loss of Jones Act status
could have a significant negative effect for the Company. The Company monitors
the citizenship requirements under the Jones Act of its employees and beneficial
stockholders and will take action as necessary to ensure compliance with the
Jones Act requirements.
The requirements that the Company's vessels be United States built and
manned by United States citizens, the crewing requirements and material
requirements of the Coast Guard, and the application of United States labor and
tax laws, significantly increase the costs of U.S. flag vessels when compared
with foreign flag vessels. The Company's business would be adversely affected if
the Jones Act were to be modified so as to permit foreign competition that is
not subject to the same United States Government imposed burdens.
During the past several years, the Jones Act cabotage and cargo preference
laws, see "Preference Cargo" below, have come under attack by interests seeking
to facilitate foreign flag competition for trades and cargoes reserved for U.S.
flag vessels under the Jones Act and cargo preference laws. These efforts have
been consistently defeated by large margins in the United States Congress. The
Company believes that continued efforts will be made to modify or eliminate the
cabotage provisions of the Jones Act and the cargo preference laws. If such
efforts are successful, it could have an adverse effect on the Company.
Preference Cargo. Federal law requires that preference be given to U.S.
flag vessels in the transportation of certain United States Government directed
cargoes (cargoes shipped either by the United States Government or by a foreign
nation with the aid or guarantee of the United States Government). Markets
subject to cargo preference in which the Company participates include foreign
food aid and Eximbank cargoes. Currently, 75% of the Government's directed
foreign aid and agricultural assistance programs, which include grains and other
food concessions, are required to be transported in U.S. flag vessels. Such
programs benefited the Company's offshore break-bulk ships prior to their
scrappage and currently benefit dry-bulk barge and tug units, some of which
occasionally work in this trade. The transportation of such cargo accounted for
approximately 6% of the Company's transportation revenues in 1997, 6% in 1996
and 11% in 1995.
The preference cargo law is often opposed by interests which perceive they
would benefit from the ability to transport preference cargoes aboard foreign
flag vessels. Like the cabotage provision of the Jones Act, the Company is of
the opinion that continued efforts will be made to significantly reduce, or
remove completely, the requirement that 75% of such cargoes be transported in
U.S. flag vessels. Further, the agricultural aid cargoes represent a material
United States Government budget line item. The amount of United States
Government spending in this area has declined steadily since 1993 and is
expected to continue to decline, resulting in increased competition for the
reduced number of shipments at lower transportation rates. Given current
operations of the Company, subsequent to the scrapping of the three AFRAM
freighters, any reduction in this percentage would not have a significant
adverse effect on the Company's operations; however, the Company will continue
to participate in efforts to preserve the present preference cargo requirements.
User Fees. Federal legislation requires that inland marine transportation
companies pay a user fee in the form of a tax based on propulsion fuel used by
vessels engaged in trade along the inland waterways that are maintained by the
United States Army Corps of Engineers. Such user fees are designed to help
defray the
9
<PAGE> 11
costs associated with replacing major components of the inland waterway system
such as locks and dams, and to build new waterway projects. A significant
portion of the inland waterways on which the Company's vessels operate are
maintained by the Corps of Engineers.
The Company presently pays a federal fuel tax of 24.3 cents per gallon,
reflecting a 4.3 cents per gallon transportation fuel tax imposed in October
1993 and a 20 cents per gallon waterway use tax. There can be no assurance that
additional user fees, either for inland waterways infrastructure, or such things
as aids to navigation infrastructure, may not be imposed in the future.
ENVIRONMENTAL REGULATIONS
The Company's operations are affected by various regulations and
legislation enacted for protection of the environment by the United States
Government, as well as many coastal and inland waterway states.
Water Pollution Regulations. The Federal Water Pollution Control Act of
1972, as amended by the Clean Water Act of 1977, the Comprehensive Environmental
Response, Compensation and Liability Act of 1981 and the OPA impose strict
prohibitions against the discharge of oil and its derivatives or hazardous
substances into the navigable waters of the United States. These acts impose
civil and criminal penalties for any prohibited discharges and impose
substantial liability for cleanup of these discharges and any associated
damages. Certain states also have water pollution laws that prohibit discharges
into waters that traverse the state or adjoin the state and impose civil and
criminal penalties and liabilities similar in nature to those imposed under
federal laws.
The OPA and various state laws of similar intent substantially increased
over historic levels statutory liability of owners and operators of vessels for
oil spills, both in terms of limit of liability and scope of damages. The
Company considers its most significant pollution liability exposure to be the
carriage of persistent oils (crude oil, asphalt, #5 oil, #6 oil, lube oil and
other black oil). The Company restricts the carriage of persistent oils in
inland tank barges to double hull barges only. Currently, the Company does not
carry persistent oils in its offshore tank vessels.
One of the most important requirements under the OPA is that all newly
constructed tankers or tank barges engaged in the transportation of oil and
petroleum in the United States must be double hulled and all existing single
hull tankers or tank barges be retrofitted with double hulls or phased out of
domestic service between January 1, 1995 and 2015. See "Marine Transportation
Operations" and "Discontinued Operations" for further discussions of the effects
of OPA on the Company's offshore equipment.
The Company manages its exposure to losses from potential discharges of
pollutants through the use of well maintained and equipped vessels, the safety,
training and environmental programs of the Company and the Company's insurance
program. In addition, the Company uses double skin barges in the transportation
of more hazardous substances. There can be no assurance, however, that any new
regulations or requirements or any discharge of pollutants by the Company will
not have an adverse effect on the Company.
Financial Responsibility Requirement. Commencing with the Federal Water
Pollution Control Act of 1972, as amended, vessels over three hundred gross tons
operating in the Exclusive Economic Zone of the United States have been required
to maintain evidence of financial ability to satisfy statutory liabilities for
oil and hazardous substance water pollution. This evidence is in the form of a
Certificate of Financial Responsibility ("COFR") issued by the United States
Coast Guard. The majority of the Company's tank barges and all the ships are
subject to this COFR requirement and the Company has fully complied with this
requirement since its inception.
The OPA amended the COFR requirements principally by significantly
increasing the financial ability requirements. The new rules severely limited
the ability of marine transportation companies to utilize insurance as a means
of satisfying the financial ability requirement under OPA. The principal
alternative to the use of insurance under the new rule requires marine
transportation companies to demonstrate net worth and working capital equal to
the maximum statutory limit of liability under the OPA and the Comprehensive
Environmental Response, Compensation and Liability Act of 1981.
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<PAGE> 12
Each of the subsidiaries of the Company has obtained COFRs pursuant to the
OPA amendments for all vessels requiring COFRs. The Company does not foresee any
current or future difficulty in maintaining the COFR certificates under current
rules.
Clean Air Regulations. The Federal Clean Air Act of 1979 ("Clean Air Act")
requires states to draft State Implementation Plans ("SIPs") designed to reduce
atmospheric pollution to levels mandated by this act. Several SIPs provide for
the regulation of barge loading and degassing emissions. The implementation of
these regulations requires a reduction of hydrocarbon emissions released in the
atmosphere during the loading of most petroleum products and the degassing and
cleaning of barges for maintenance or change of cargo. These new regulations
will require operators who operate in these states to install vapor control
equipment on their barges. The Company expects that future toxic emission
regulations will be developed and will apply this same technology to many
chemicals that are handled by barge. Most of the Company's barges engaged in the
transportation of petrochemicals, chemicals and refined products are already
equipped with vapor control systems. Although a risk exists that new regulations
could require significant capital expenditures by the Company and otherwise
increase the Company's costs, the Company believes that, based upon the
regulations that have been proposed thus far, no material capital expenditures
beyond those currently contemplated by the Company, or no increase in costs, are
likely to be required.
Contingency Plan Requirement. The OPA and several state statutes of similar
intent require the majority of the vessels operated by the Company to maintain
approved oil spill contingency plans as a condition of operation. The Company
has approved plans that comply with these requirements. The OPA also requires
development of regulations for hazardous substance spill contingency plans. The
United States Coast Guard has not yet promulgated these regulations; however,
the Company anticipates that they will not be significantly more difficult than
the oil spill plans.
Occupational Health Regulations. The Company's vessel operations are
primarily regulated by the United States Coast Guard for occupational health
standards. The Company's shore personnel are subject to the United States
Occupational Safety and Health Administration regulations. The Coast Guard has
promulgated regulations that address the exposure to benzene vapors, which
require the Company, as well as other operators, to perform extensive
monitoring, medical testing and record keeping of seamen engaged in the handling
of benzene and benzene containing cargo transported aboard vessels. It is
expected that these regulations may serve as a prototype for similar health
regulations relating to the carriage of other hazardous liquid cargoes. The
Company believes that it is in compliance with the provisions of the regulations
that have been adopted and does not believe that the adoption of any further
regulations will impose additional material requirements on the Company. There
can be no assurance, however, that claims will not be made against the Company
for work related illness or injury, or that the further adoption of health
regulations will not adversely affect the Company.
Insurance. The Company's marine transportation operations are subject to
the hazards associated with operating vessels carrying large volumes of cargo in
a marine environment. These hazards include the risk of loss of or damage to the
Company's vessels, damage to third parties from impact, fire or explosion as a
result of collision, loss or contamination of cargo, personal injury of
employees and third parties, pollution and other environmental damages. The
Company maintains insurance coverage against these hazards. Risk of loss of, or
damage to, the Company's vessels is insured through hull insurance policies
currently insuring approximately $480 million in hull values. Vessel operating
liabilities such as collision, cargo, environmental and personal injury, are
insured primarily through the Company's participation in mutual insurance
associations and other reinsurance arrangements under which the protection
against such hazards is in excess of $2 billion for each incident except in the
case of oil pollution, which, in conjunction with the other excess liability
coverage maintained by the Company, is limited to $700 million for each incident
for inland vessels and ocean-going dry cargo vessels and $900 million for each
incident in the case of the Company's tankers and ocean-going tank barges.
However, because it is mutual insurance, the Company is exposed to funding
requirements and coverage shortfalls in the event claims by the Company or other
members exceed available funds and reinsurance.
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<PAGE> 13
Environmental Protection. The Company has a number of programs that were
implemented to further its commitment to environmental responsibility in its
operations. One such program is environmental audits of barge cleaning vendors
principally directed at management of cargo residues and barge cleaning wastes.
Another program is the participation by the Company in the American Waterways
Operators Responsible Carrier Program, the Chemical Manufacturer's Association
Responsible Care program and the American Petroleum Institute STEP program, all
of which are oriented to continuously reducing the barge industry's and chemical
and petroleum industries' impact on the environment, including the distribution
services area.
Safety. The Company manages its exposure to the hazards incident to its
business through safety, training and preventive maintenance efforts. The
Company places considerable emphasis on safety through a program oriented
towards extensive monitoring of safety performance for the purpose of
identifying trends and initiating corrective action, and for the purpose of
rewarding personnel achieving superior safety performance. The Company believes
that its safety performance consistently places it among the industry leaders as
evidenced by what it believes are lower injury frequency and pollution incident
levels than many of its competitors. The Company also participates in the
American Waterway Operators Responsible Carrier program which is oriented to
enhancing marine safety.
The Company was honored by the Department of Transportation and the U.S.
Coast Guard in September 1995 as the recipient of the William M. Benkert Award,
the premier national award which recognizes excellence in all aspects of marine
safety and environmental protection. The Company is the first recipient of this
new award for the large vessel operator category. Given the national concern
over the transportation of hazardous material and oil products, this award is
independent affirmation of the Company's policies and achievements in the area
of marine safety and environmental protection.
Training. The Company believes that among the major elements of a
successful and productive work force is effective training programs. The Company
also believes that training in the proper performance of a job enhances both the
safety and quality of the service provided. New technology, regulatory
compliance, personnel safety, quality and environmental concerns create
additional demands for training. The Company fully endorses the development and
institution of effective training programs.
Centralized training is provided through the Kirby Marine Transportation
Corporation Training Department which is charged with developing, conducting and
maintaining training programs for the benefit of all the Company's operating
entities. It is also responsible for ensuring that training programs are both
consistent and effective. The Company's training facility includes state of the
art equipment and instruction aids, including a working towboat, tank barge and
shore tank facilities. During 1997, approximately 1,050 students completed
courses at the training facility.
Quality. In 1996, the Company's commitment to quality performance was
implemented through a major business process redesign project, and the continued
maintenance and improvement of its Quality Assurance Systems.
The business process redesign project focused on three functional areas,
customer billing, purchasing and maintenance, and resulted in significant
changes in processes and structures. Projected outcomes include faster billing
preparation and collection cycles, reduced costs for purchased products and
services as a result of leveraged buying and more efficient maintenance of our
vessels and associated equipment.
Throughout 1990, the Company has made a substantial commitment to the
implementation, maintenance and improvement of Quality Assurance Systems in
compliance with the International Quality Standard, ISO 9002. Currently, all of
the Company's marine transportation units serving the liquid and dry cargo
markets have been certified, many of them earning "firsts" among their peers.
These Quality Assurance Systems have enabled both shore and vessel personnel to
effectively manage the changes which occur in the working environment. In
addition, such Quality Assurance Systems have enhanced the Company's already
excellent safety and environmental performance.
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<PAGE> 14
DIESEL REPAIR
The Company is presently engaged in the overhaul and repair of large,
medium-speed diesel engines and related parts sales through three operating
subsidiaries, Marine Systems, Inc. ("Marine Systems"), Engine Systems, Inc.
("Engine Systems") and Rail Systems, Inc. ("Rail Systems"). Through each of its
three operating subsidiaries, the Company sells genuine replacement parts,
provides service mechanics to overhaul and repair engines and maintains
facilities to rebuild component parts or entire engines. As a nonexclusive
service center, the Company serves the entire domestic power, marine and
industrial markets. As an exclusive distributor, the Company serves the marine
industry and stand-by power generation market in 17 Eastern states and the
Caribbean, and the shortline and industrial railroad markets nationally, and
components of the nuclear industry worldwide.
The following table sets forth the revenues for the diesel repair division
for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Overhaul and repairs............. $26,371 52% $41,642 59% $46,911 59%
Direct parts sales............... 24,167 48 28,780 41 32,225 41
------- --- ------- --- ------- ---
$50,538 100% $70,422 100% $79,136 100%
======= === ======= === ======= ===
</TABLE>
MARINE SYSTEMS OPERATIONS
Through Marine Systems, the Company is engaged in the overhaul and repair
of marine diesel engines, reduction gear repair, line boring, block welding
services and related parts sales for customers in the marine industry. The
marine diesel repair industry services tugboats and towboats powered by large
diesel engines utilized in the inland and offshore barge industries. It also
services marine equipment and offshore drilling equipment used in the offshore
petroleum exploration and oil service industry, marine equipment used in the
offshore commercial fishing industry and vessels owned by the United States
Government.
Marine Systems operates through three divisions providing in-house and
in-field repair capabilities. These three divisions are: Gulf Coast (based in
Houma, Louisiana); Midwest (based in Paducah, Kentucky); and West Coast (based
in Seattle, Washington). All three of Marine Systems' divisions are nonexclusive
authorized service centers for the Electro-Motive Division of General Motors
Corporation ("EMD") selling parts and providing service. Marine Systems' Gulf
Coast and Midwest divisions concentrate on larger, medium-speed diesel engines,
primarily those manufactured by EMD, that are more commonly used in the inland
and offshore barge and oil service industries. The West Coast division
concentrates on the large EMD engines used by the offshore commercial fishing
industry, the military and commercial businesses on the West Coast, and
customers in Alaska. Marine Systems' emphasis is on service to its customers and
it can send its crews from any of its locations to service customers' equipment
anywhere in the world.
MARINE SYSTEMS CUSTOMERS
Major customers of Marine Systems include inland and offshore dry-bulk and
tank barge operators, oil service companies, petrochemical companies, offshore
fishing companies, other marine transportation entities and the United States
Coast Guard, Navy and Army. Marine Systems also provides services to the
Company's fleet, which accounted for approximately 2% of Marine Systems' total
1997 and 1996 revenues and approximately 5% for 1995; however, such revenues are
eliminated in consolidation and not included in the table above. No single
customer of Marine Systems accounted for more than 10% of the Company's revenues
in 1997, 1996 or 1995.
Since Marine Systems' business can be cyclical and is linked to the
relative health of the diesel power tugboat and towboat industry, the offshore
oil service industry, the military and the offshore commercial fishing industry,
there is no assurance that its present gross revenues can be maintained in the
future. The
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<PAGE> 15
results of the diesel repair service industry are largely tied to the industries
it serves, and, therefore, have been somewhat influenced by the cycles of such
industries.
MARINE SYSTEMS COMPETITIVE CONDITIONS
Marine Systems' primary competitors are approximately 10 independent diesel
repair companies and authorized EMD distributors for each of its three
divisions. Certain operators of diesel powered marine equipment elect to
maintain in-house service capabilities. While price is a major determinant in
the competitive process, reputation, consistent quality, expeditious service,
experienced personnel, access to parts inventories and market presence are
significant factors. A substantial portion of Marine Systems' business is
obtained by competitive bids. Marine Systems has entered into preferential
service agreements with certain large operators of diesel powered marine
equipment, providing such operations with one source of support and service for
all of their requirements at pre-negotiated prices.
Many of the parts sold by Marine Systems are generally available from other
distributors; however, Marine Systems is one of a limited number of authorized
resellers of EMD parts. Although the Company believes it is unlikely,
termination of Marine Systems' relationship with suppliers could adversely
affect its business.
ENGINE SYSTEMS OPERATIONS
Through Engine Systems, the Company is engaged in the overhaul and repair
of diesel engines for power generation, marine and nuclear applications. In July
1996, the Company purchased the operating assets of MKW Power Systems, Inc., a
subsidiary of Wartsila Diesel, N.A. ("MKW"). The acquisition expanded the diesel
repair segment's relationship with EMD to an authorized distributorship for 17
Eastern states and the Caribbean, and as the exclusive world-wide distributor of
EMD products to the nuclear industry. As the exclusive East Coast distributor,
the Company gains a better pricing structure for parts purchased.
Engine Systems serves as a central distributor for Woodward Governor
Company's Turbo and Engine Divisions ("Woodward") for 14 Midwest and Southeast
states and portions of the Caribbean. In addition, it serves as a United States
marine parts distributor for Falk Corporation, a marine reduction gear
manufacturer.
Effective July 1997, Engine Systems entered into an agreement with Stewart
& Stevenson Services, Inc. ("Stewart & Stevenson"), allowing Stewart & Stevenson
to sell EMD engines within Engine Systems' distributorship territory. Engine
Systems will receive an annual fee based on sales within the distributorship
territory.
ENGINE SYSTEM CUSTOMERS
The major customers of Engine Systems are East Coast inland and offshore
dry-bulk, tank barge and harbor docking operators, U.S. Coast Guard and aircraft
carriers of the U.S. Navy. In addition, Engine Systems provides service to the
power generation industry (Disney World, Dade County, Florida and Bahamas
Electricity Corporation), and the world-wide nuclear power industry, through
parts for standby generators.
ENGINE SYSTEM COMPETITIVE CONDITIONS
Engine Systems is currently the major source of genuine EMD parts and
authorized service for customers in power generation, marine and industrial
applications in 17 Eastern states and the Caribbean, its distributorship
territory. Generic parts, remanufactured parts and non-authorized services
supporting existing applications of EMD engines are available to existing
applications in Engine Systems' distributorship territory; however, many
customers will give preference to Engine Systems due to its access to preferred
genuine EMD replacement parts. Engine Systems' sales and service of Woodward
parts is on an exclusive basis in Woodward's Southeast district and Woodward's
Midwest district.
Engine Systems is also the exclusive distributor of EMD parts for the
nuclear industry worldwide. Specific regulations relating to equipment used in
nuclear power generation require extensive testing and
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<PAGE> 16
certification of replacement parts. Non-genuine parts and parts not properly
tested and certified cannot be used in nuclear applications.
RAIL SYSTEMS OPERATIONS
Through Rail Systems, the Company is engaged in the overhaul and repair of
locomotive diesel engines and sale of replacement parts for locomotives serving
the shortline and the industrial railroads within the continental United States.
In October 1993, EMD awarded an exclusive United States distributorship to Rail
Systems to provide replacement parts, service and support to these important and
expanding markets. EMD is the world's largest manufacturer of diesel-electric
locomotives, a position it has held for over 70 years. The operation of Rail
Systems commenced in January 1994.
Rail Systems has an office and service facility in Nashville, Tennessee.
The service facility is primarily a parts warehouse. Service to the actual
locomotives is completed at sites convenient for the customer by Rail Systems'
service crews.
RAIL SYSTEMS CUSTOMERS
Shortline railroads have been a growing component of the United States
railroad industry since deregulation of the railroads in 1970. Generally,
shortline railroads have been created through the divestiture of branch routes
from the major railroad systems. These short routes provide switching and short
haul of freight, with an emphasis on responsive and reliable service. Currently,
about 500 shortline railroads in the United States operate approximately 2,400
EMD engines. Approximately 280 United States industrial users operate
approximately 1,300 EMD engines. Generally, the EMD engines operated by the
shortline and industrial users are older and, therefore, may require more
maintenance.
RAIL SYSTEMS COMPETITIVE CONDITIONS
As an exclusive United States distributor for EMD parts, Rail Systems
provides all EMD parts sales to these markets, as well as providing rebuild and
service work. Currently, other than Rail Systems, there are several primary
companies providing service for the shortline and industrial locomotives. In
addition, the industrial companies in some cases provide their own service.
EMPLOYEES
Marine Systems, Engine Systems and Rail Systems together have approximately
250 employees.
PROPERTIES
The principal office of Marine Systems is located in Houma, Louisiana.
Parts and service facilities are located in Houma, Louisiana, in Morgan City,
Louisiana, in Paducah, Kentucky and in Seattle, Washington. The Paducah,
Kentucky and Seattle, Washington locations are on leased property and the Houma
location is situated on approximately seven acres of Company owned land. The
principal office of Engine Systems is located in Rocky Mount, North Carolina
with service facilities in Chesapeake, Virginia, Medley, Florida and in South
Bend, Indiana. Each of Engine Systems' locations is on leased property. The
principal office of Rail Systems is located in Nashville, Tennessee on leased
property.
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<PAGE> 17
INSURANCE
The Company is engaged in the writing of property and casualty insurance
primarily through a 45% voting common stock ownership of Universal Insurance
Company ("Universal"), a corporation located in the Commonwealth of Puerto Rico.
Since its formation in 1972, Universal has evolved primarily from an automobile
physical damage insurer to a full service property and casualty insurer, with
emphasis on the property insurance lines. Universal is ranked second among
Puerto Rican insurance companies in terms of policyholders' surplus and admitted
assets, and was assigned an A (Excellent) rating by A. M. Best Company, a
leading insurance rating agency, effective April 21, 1997.
On September 25, 1992, Universal merged with Eastern America Insurance
Company ("Eastern America"), a property and casualty insurance company in Puerto
Rico, with Universal being the surviving entity. The Company owns 45% of the
voting common stock of Universal (consisting of Class B voting common stock and
Class C non-voting common stock) and 100% of the non-voting preferred stock of
Universal. Eastern America Financial Group, Inc. ("Eastern America Group"), the
former parent of Eastern America, owns 55% of the voting common stock of
Universal.
In accordance with a shareholder agreement among Universal, the Company and
Eastern America Group, through options and redemption rights, Universal has the
right to purchase the Company's interest in Universal over a period of up to 12
years from September 1992. The result of such redemptions would be Eastern
America Group becoming the owner of 100% of Universal's stock.
Pursuant to the Agreement, shares of Class B and Class C common stock have
been redeemed as follows (dollars in thousands):
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
CLASS B CLASS C
YEARS SHARES SHARES AMOUNT
----- --------- --------- -------
<S> <C> <C> <C>
1992............................................ 5,805 -- $ 1,000
1993............................................ 39,128 -- 7,000
1994............................................ 20,424 24,360 7,000
1995............................................ 14,215 16,240 5,016
1996............................................ -- -- --
1997............................................ 8,769 -- 2,000
------ ------ -------
88,341 40,600 $22,016
------ ------ -------
</TABLE>
In August 1994 and July 1995, Eastern America Group purchased from
Universal 40,572 shares and 28,139 shares of Class A voting common stock for
$7,000,000 and $5,000,000, respectively.
The Company's investment in Universal is accounted for under the equity in
earnings method of accounting for the 1997 and 1996 years and the second half of
1995. Effective July 1, 1995, the Company's investment in Universal's voting
common stock was reduced to 47%. Prior period financial statements were not
restated.
INSURANCE OPERATION
Universal writes a broad range of property and casualty insurance.
Universal, however, is primarily a property insurer. Universal's principal
property insurance line is automobile physical damage, specifically the vehicle
single-interest and double-interest risks. Vehicle single-interest insures
lending institutions against the risk of loss of the unpaid balance of their
automobile loans with respect to financed vehicles and vehicle double-interest
also insures the policyholders against risk of loss of their automobiles.
Universal's insurance business is generated primarily through Eastern
America Insurance Agency, an affiliate of Eastern America Group, and through
independent agents and brokers in Puerto Rico. Eastern America Insurance Agency
and three independent agents each accounted for more than 5% of premiums written
in 1997. Universal could be adversely affected if it were to lose several of its
higher producing agents.
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<PAGE> 18
Universal maintains an extensive program of reinsurance of the risks that
it insures, primarily under arrangements with reinsurers in London and the
United States. Because Universal's business is written in Puerto Rico,
Universal's insurance risk is not as diversified as the risk of a carrier that
covers a broader geographical area. A natural catastrophe could cause property
damage to a large number of Universal's policyholders, which would result in
significantly increased losses to Universal. However, the Company believes that
Universal's reinsurance program will limit its net exposure in any such
catastrophe. Property damage from Hurricane Hugo in September 1989 attributable
to Universal was approximately $34,000,000; however, the net impact was
$1,450,000 after deducting the reinsurance recoverables.
Universal's insurance business is governed by the Insurance Code of the
Commonwealth of Puerto Rico and in accordance with the regulations issued by the
Commissioner of Insurance of the Commonwealth of Puerto Rico.
REINSURANCE OPERATION
Prior to 1991, the Company participated in the international reinsurance
market through Mariner Reinsurance Company Limited ("Mariner"), a wholly owned
subsidiary of the Company domiciled in Bermuda. From 1991 to present, Mariner
has been in run-off, paying claims on business written prior to 1991 and not
underwriting any new business.
Effective May 31, 1995, Mariner entered into Commutation Agreements with
parties representing the majority of its outstanding underwriting liabilities
("Commuting Parties") and simultaneously executed documents granting the
Commuting Parties absolute interest in any assets of Mariner which remain upon
liquidation of Mariner. Since May 31, 1995, Mariner has continued in run-off, as
a solvent insurance company under Bermuda law and regulations, paying claims of
parties other than the Commuting Parties, while seeking to consummate further
commutations as well. The effect of the May 31, 1995 transaction between Mariner
and the Commuting Parties was to transfer to the Commuting Parties all of
Mariner's interest in the equity and surplus assets of Mariner, if any,
remaining at the time of the ultimate liquidation of Mariner. Loss of the
Company's equity in Mariner was fully reserved in 1994 and the transaction was
charged against that reserve in 1995.
CAPTIVE INSURANCE OPERATION
The Company utilizes a Bermuda domiciled wholly owned insurance subsidiary,
Oceanic Insurance Limited ("Oceanic"), to insure risks of the Company and its
transportation and diesel repair subsidiaries and affiliated entities. Oceanic
procures reinsurance in international markets to limit its exposure to losses.
DISCONTINUED OPERATIONS
During the 1997 fourth quarter, the Company announced its intention to
review alternative strategies concerning certain offshore assets. In this
regard, the Company entered into a definitive purchase agreement, dated January
28, 1998, to sell its U.S. flag offshore product tanker operation and its harbor
service operation. In accordance with the purchase agreement, Hvide Marine
Incorporated will acquire the Company's harbor service operation, consisting of
seven harbor tugboats, and two tankers, and August Trading Company, Inc. will
acquire five tankers, for a combined purchase price of $38,600,000 in cash,
subject to certain adjustments. The Company has recorded an estimated net loss
on the sale of the tanker and harbor service operations of $3,966,000. The
closing of the transaction is expected in mid-March 1998, subject to the
satisfaction of certain conditions of the purchase agreement.
The tanker and harbor service operations are conducted through Sabine and
Kirby Tankships, Inc. ("Kirby Tankships"), subsidiaries of the Company. Sabine
and Kirby Tankships operate a fleet of seven owned U.S. flag single skin tankers
that transport clean petroleum products, gasoline, heating oil and gasoline
additives for reformulated gasoline, primarily from Gulf Coast refineries to
Florida and the Northeast United States. Certain additional trades exist
carrying gasoline additives from Gulf Coast refineries to the West Coast and
refined products to the Caribbean. As of March 1998, two of the Company's
tankers were chartered to an
17
<PAGE> 19
oil company for the transportation of their products and five operate in the
spot market, transporting petroleum products as cargo offers. Classified as
"handi size," the tankers have deadweight capacities ranging between 28,000 and
49,000 tons, with a total capacity of 1,725,000 barrels.
In compliance with the OPA, the seven single skin tankers are scheduled to
be retired from service as follows: one -- January 1, 1999, two -- January 1,
2000; one -- October 30, 2000; one -- November 4, 2004; one -- January 1, 2005;
and one -- August 23, 2008. In order to stay in service beyond the retirement
date, these tankers would have to be either retrofitted with a double hull cargo
section or used exclusively in foreign trade, although the one tanker scheduled
to be retired from service October 30, 2000 may be extended an additional three
years.
Sabine's harbor service operation consists of seven harbor tugboats which
provide towing, docking and shifting services for vessels calling at the ports
of Beaumont, Port Arthur and Orange, Texas and the port of Lake Charles,
Louisiana. In addition, the harbor service operation provides offshore ship
assistance and drill-rig movements off the Texas and Louisiana coasts.
The tanker and harbor service operations are reflected as discontinued
operations in this report. See "Note 2" to the financial statements included
under Item 8 elsewhere herein for further disclosures on the sale of the tanker
and harbor service operations.
ITEM 2. PROPERTIES
The information appearing in Item 1 is incorporated herein by reference.
The Company and Kirby Inland Marine currently occupy leased office space at 1775
St. James Place, Suite 200, Houston, Texas under a lease that expires in August
2003. The Company believes that its facilities are adequate for its needs and
additional facilities would be readily available.
ITEM 3. LEGAL PROCEEDINGS
See "Note 13" to the financial statements included under Item 8 elsewhere
herein for a discussion of legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1997, no
matter was submitted to a vote of security holders through solicitation of
proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES
---- --- ---------------------
<S> <C> <C>
George A. Peterkin, Jr............. 70 Chairman of the Board of Directors
J. H. Pyne......................... 50 President, Director and Chief Executive Officer
Brian K. Harrington................ 51 Senior Vice President, Treasurer and Assistant
Secretary and Chief Financial Officer
G. Stephen Holcomb................. 52 Vice President, Controller, Assistant Treasurer
and Assistant Secretary
Ronald C. Dansby................... 58 President -- Inland Division
Dorman L. Strahan.................. 41 President -- Diesel Repair Division
</TABLE>
No family relationship exists between the executive officers or between the
executive officers and the directors. Officers are elected to hold office until
the annual meeting of directors, which immediately follows the annual meeting of
stockholders, or until their respective successors are elected and have
qualified.
18
<PAGE> 20
George A. Peterkin, Jr. holds a degree in business administration from the
University of Texas and has served the Company as Chairman of the Board since
April 1995. He has served as a Director of the Company since 1973 and served as
President of the Company from 1976 to April 1995. He had served as a Director of
Industries from 1969 to 1976 and as President of Industries from 1973 to 1976.
Prior to that, he was President of Kirby Inland Marine from 1953 through 1972.
J. H. Pyne holds a degree in liberal arts from the University of North
Carolina and has served as President of the Company since April 1995. He has
served as a Director of the Company since 1988 and President of Kirby Inland
Marine since 1984. He had served as Executive Vice President of the Company from
1992 to April 1995. He also served in various operating and administrative
capacities with Kirby Inland Marine from 1978 to 1984, including Executive Vice
President from January to June 1984. Prior to joining Kirby Inland Marine, he
was employed by Northrop Services, Inc. and served as an officer in the United
States Navy.
Brian K. Harrington is a Certified Public Accountant and holds an M.B.A.
degree from the University of Oregon. He has served as Treasurer and Chief
Financial Officer of the Company since May 1989, Vice President since September
1989 and Senior Vice President since 1993. Prior to joining the Company, he was
engaged as a financial consultant with emphasis in the petrochemical
distributing industry, providing services to Kirby Inland Maine and other
companies. Prior to 1979, he was Vice President of Planning, Marketing and
Development for Paktank Corporation.
G. Stephen Holcomb holds a degree in business administration from Stephen
F. Austin State University and has served the Company as Vice President,
Controller, Assistant Treasurer and Assistant Secretary since January 1989. He
also served as Controller from 1987 through 1988 and as Assistant Controller and
Assistant Secretary from 1976 through 1986. Prior to that, he was Assistant
Controller of Industries from 1973 to 1976. Prior to joining the Company, he was
employed by Cooper Industries, Inc.
Ronald C. Dansby holds a degree in business administration from the
University of Houston and has served the Company as President -- Inland Division
since 1994. He also serves as President of Kirby Inland Marine -- Texas, having
joined the Company in connection with the acquisition of Alamo Inland Marine Co.
("Alamo") in 1989. He had served as President of Alamo since 1974. Prior to
that, he was employed by Alamo Barge Lines and Monsanto Chemical from 1962 to
1973.
Dorman L. Strahan attended Nicholls State University and has served the
Company as President -- Diesel Repair Division since 1994. He has also served as
President of Marine Systems since 1986, President of Rail Systems since 1993 and
President of Engine Systems since July 1996. After joining the Company in 1982
in connection with the acquisition of Marine Systems, he served as Vice
President of Marine Systems until 1985.
19
<PAGE> 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NYSE under the symbol KEX. The
following table sets forth the high and low sales prices per share for the
common stock for the periods indicated as reported by The Wall Street Journal.
<TABLE>
<CAPTION>
SALES PRICES
------------------------
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter............................................. $18 7/8 $16
Second Quarter............................................ 18 3/4 16 3/4
Third Quarter............................................. 18 15 3/8
Fourth Quarter............................................ 20 1/2 17 3/8
1997
First Quarter............................................. 19 3/4 17
Second Quarter............................................ 19 7/8 16 3/8
Third Quarter............................................. 20 5/8 18 1/4
Fourth Quarter............................................ 21 1/8 17 7/8
1998
First Quarter (through March 3, 1998)..................... 24 1/16 19 1/16
</TABLE>
As of March 4, 1998, the Company had 24,435,436 outstanding shares held by
approximately 1,600 stockholders of record. On February 17, 1998, the Company
commenced a tender offer for up to 3,000,000 shares of its common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition, Capital Resources and Liquidity -- Treasury
Stock Purchases" for further discussion.
The Company does not have an established dividend policy. Decisions
regarding the payment of future dividends will be made by the Board of Directors
based on the facts and circumstances that exist at that time. Since 1989, the
Company has not paid any cash dividends on its common stock.
ITEM 6. SELECTED FINANCIAL DATA
The comparative selected financial data of the Company and consolidated
subsidiaries is presented for the five years ended December 31, 1997. The tanker
and harbor service operations financial results for 1997 have been accounted for
as discontinued operations and previously issued financial statements have been
restated. The information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company and the Financial Statements and Schedules included under Item 8
elsewhere herein (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1993(1) 1994(1) 1995(1) 1996(1) 1997(1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Transportation.................... $232,901 $255,462 $267,687 $249,594 $256,108
Diesel repair..................... 31,952 45,269 50,538 70,422 79,136
Insurance(2)...................... 52,875 65,812 45,239 -- --
Investment income and other....... 8,137 9,554 7,800 817 883
Gain on disposition of assets..... 367 415 10 2,751 407
Realized gain on investments...... 1,164 1,222 868 -- --
-------- -------- -------- -------- --------
$327,396 $377,734 $372,142 $323,584 $336,534
======== ======== ======== ======== ========
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1993(1) 1994(1) 1995(1) 1996(1) 1997(1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net earnings from continuing
operations........................ $ 18,176 $ 16,969 $ 6,958 $ 21,208 $ 22,705
-------- -------- -------- -------- --------
Discontinued operations:
Earnings (loss) from discontinued
operations, net of income
taxes.......................... 4,653 (316) 2,425 6,021 2,943
Estimated loss on sale of
discontinued operations, net of
income taxes................... -- -- -- -- (3,966)
-------- -------- -------- -------- --------
4,653 (316) 2,425 6,021 (1,023)
-------- -------- -------- -------- --------
Net earnings.............. $ 22,829 $ 16,653 $ 9,383 $ 27,229 $ 21,682
======== ======== ======== ======== ========
Earnings (loss) per share of common
stock:
Basic:
Continuing operations.......... $ .69 $ .60 $ .25 $ .83 $ .93
Discontinued operations........ .18 (.01) .09 .24 (.04)
-------- -------- -------- -------- --------
$ .87 .59 .34 1.07 .89
======== ======== ======== ======== ========
Diluted:
Continuing operations.......... $ .69 $ .59 $ .25 $ .82 $ .92
Discontinued operations........ .17 (.01) .09 .24 (.04)
-------- -------- -------- -------- --------
$ .86 $ .58 $ .34 $ 1.06 $ .88
======== ======== ======== ======== ========
Weighted average shares
outstanding:
Basic.......................... 26,095 28,290 27,561 25,555 24,381
Diluted........................ 26,527 28,790 27,772 25,781 24,594
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1993(1) 1994(1) 1995(1) 1996(1) 1997(1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Property and equipment, net......... $262,698 $284,444 $275,184 $277,622 $272,384
Total assets........................ $563,253 $667,472 $498,084 $524,530 $517,959
Long-term debt...................... $120,559 $159,497 $179,226 $181,950 $154,818
Stockholders' equity................ $211,749 $222,976 $205,333 $205,754 $218,269
</TABLE>
- ---------------
(1) Comparability with prior periods is affected by the following: The
acquisition of TPT, a marine transportation division of Ashland Oil, Inc.,
in the first quarter of 1993; the merger with AFRAM Lines (USA), Co., Ltd.
in the second quarter of 1993 and the acquisition of Chotin Transportation,
Inc. in the fourth quarter of 1993; the acquisition of offshore tankers from
Tosco Refining Company and OMI Corp. in the third quarter of 1994; the
acquisition of the marine assets of Dow in the fourth quarter of 1994; the
Company's ownership of the voting stock of Universal declining to 47% on
July 18, 1995, and the recording of the Company's investment in Universal on
the equity method of accounting effective July 1, 1995; and the purchase of
the assets of MKW in July 1996.
(2) The Company changed its method of reporting its investment in Universal from
a consolidated basis to the equity method of accounting effective July 1,
1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY
Statements contained in this Form 10-K that are not historical facts,
including, but not limited to, any projections contained herein, are
forward-looking statements and involve a number of risks and uncertainties. Such
statements can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate" or "continue" or the negative
thereof or other variations thereon or comparable terminology. The actual
results of the future events described in such forward-looking statements in
this
21
<PAGE> 23
Form 10-K could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, adverse weather conditions such as high water, low water,
fog and ice, marine accidents, construction of new equipment by competitors,
including construction with government assisted financing, government and
environmental laws and regulations, and the timing, magnitude and number of
acquisitions made by the Company.
During the 1997 fourth quarter, the Company announced its intention to
review alternative strategies concerning certain offshore assets. In this
regard, the Company entered into a definitive purchase agreement, dated January
28, 1998, to sell its U.S. flag tanker and harbor service operations. In
accordance with the purchase agreement, Hvide Marine Incorporated will acquire
the Company's harbor service operation and two tankers, and August Trading
Company, Inc. will purchase five tankers, for a combined purchase price of
$38,600,000, subject to certain adjustments. The closing of the transactions is
expected to take place in mid-March 1998, subject to the satisfaction of certain
conditions of the purchase agreement. The Company's offshore tanker and harbor
service operations have been accounted for as discontinued operations as of
December 31, 1997, and previously reported financial statements have been
restated to reflect the discontinuation of the operations.
Results of Continuing Operations
The Company reported net earnings from continuing operations of
$22,705,000, or $.92 per share, on revenues of $336,534,000 for the 1997 year,
compared with $21,208,000, or $.82 per share, on revenues of $323,584,000 for
the 1996 year, and $6,958,000, or $.25 per share, on revenues of $372,142,000
for the 1995 year.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS No. 128"),
which establishes standards for computing and presenting earnings per share. All
previously reported earnings per share amounts have been restated to conform
with SFAS No. 128. For purposes of this Management Discussion, all earnings per
share amounts presented are "Diluted Earnings Per Share."
The continuing operations transportation revenues totaled $256,108,000, or
76% of total revenues for 1997, compared with $249,594,000, or 77% of total
revenues for 1996, and $267,687,000, or 72% of total revenues for 1995. Diesel
repair revenues for 1997 totaled $79,136,000, or 24% of total revenues for 1997,
compared with $70,422,000, or 22% of total revenues for 1996, and $50,538,000,
or 14% of total revenues for 1995. Insurance revenues totaled $45,239,000, or
12% of total 1995 revenues. Investment income, earned primarily from investments
by the insurance segment for the 1995 year, totaled $883,000 for 1997, compared
with $817,000 for 1996 and $7,800,000 for 1995.
The Company reported net gains from the disposition of assets of $407,000
for 1997, $2,751,000 for 1996 and $10,000 for 1995. The amounts reported for
each year were predominately from the sale of marine equipment. For the 1997
year, the gain was primarily from the sale of two offshore freighters, and for
the 1996 year, from the sale of two inland towboats and six inland asphalt
barges.
Effective July 1, 1995, the Company began accounting for its investment in
Universal, its property and casualty insurance subsidiary, under the equity
method of accounting as a result of a July 1995 redemption of Universal's common
stock, reducing the Company's ownership to 47%. Prior period financial
statements have not been restated. For the 1995 first six months and prior
years, results for Universal were consolidated, with a minority interest expense
recorded for Universal's minority shareholder.
The 1995 results included a $17,500,000 pre-tax charge in the 1995 third
quarter, $13,000,000 after taxes, or $.47 per share. Of the $17,500,000 pre-tax
charge, $16,807,000 was from continuing operations and $693,000 was from
discontinued operations. Such charge was the result of adoption of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The charge is more fully described below.
22
<PAGE> 24
In October 1995, the Financial Accounting Standards Board approved the
issuance of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"), which establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 allows a company to adopt
a fair value based method of accounting for an employee stock-based compensation
plan or to continue to use the intrinsic value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," the Company's current accounting method. The
Company has elected to continue to follow APB Opinion No. 25; however, if the
Company had adopted SFAS No. 123, the Company's net earnings from continuing
operations and earnings per share for the 1997, 1996 and 1995 years would have
been reduced by $2,178,000, or $.09 per share, $957,000, or $.04 per share, and
$387,000, or $.02 per share, respectively.
The Company conducts its continuing operations in marine transportation and
diesel repair business segments. In addition, the Company owns a 45% voting
interest in a property and casualty insurance company.
MARINE TRANSPORTATION
The marine transportation segment is the nation's largest operator of
inland tank barges transporting industrial chemicals, refined petroleum products
and agricultural chemicals along the United States inland waterways. The segment
also provides coastwise movements by barges of petroleum products and dry-bulk
commodities.
The Company's marine transportation segment reported 1997 transportation
revenues of $256,108,000, an increase of 3% compared with $249,594,000 reported
for the 1996 year, and a decrease of 4% compared with $267,687,000 reported for
the 1995 year.
1997 Marine Transportation Revenues
The 3% increase in marine transportation revenues for 1997 over 1996
reflected a modest hike in utilization and spot market rates, and the renewal of
contracts generally at higher rates. Over the past eighteen months, the Company
decreased its active inland barge fleet capacity by a net 3%, removing from
service older single-skin barges when it was not prudent to continue to maintain
or overhaul the barges. The marine transportation segment operates under
long-term contracts, short-term contracts and spot movements of products. For
1997, approximately 70% of movements were under term contracts and 30% were spot
market movements compared with 80% of movements under term contracts and 20%
were spot market movements for 1996. Chemical and petrochemical volumes held at
1996 levels, while refined product volumes improved during 1997 over 1996. The
1997 year was negatively impacted by the flooding on the Mississippi River
System during the months of February through April. During the majority of the
1997 first quarter, the upper Mississippi River and Ohio River experienced high
water and flooding conditions, with river closures in selected areas and
mandated regulatory operating restrictions. During the month of March and
extending into April, the lower Mississippi River, the Company's principal area
of operations, experienced high water not seen in such severity since 1983. The
loss of revenue, estimated at approximately $3,450,000 for the months of
February through April, was the result of delays, diversions and limitations on
night passages, horsepower requirements and size of tows. The effects of the
flooding throughout the Mississippi River System reduced the Company's revenues
and increased its expenses, resulting in a reduction in net earnings by an
estimated $.11 per share for the 1997 year.
During 1997, the Company scrapped its last two of three U.S. flag offshore
break-bulk freighters which were engaged in the transportation of food-aid
commodities and related products under the U.S. Government's preference food-aid
programs. Excess equipment capacity and lack of available cargo, which resulted
in low rates, led to the decision to scrap the Company's remaining two
freighters. One freighter was scrapped in September 1997, after a food-aid
voyage to North Korea. The last freighter was scrapped in October 1997 following
a food-aid trip to East Africa. In September 1996, after a food-aid trip to
North Korea, the Company scrapped its first freighter. The freighters were
scrapped overseas, taking advantage of higher foreign scrap metal prices.
23
<PAGE> 25
1996 Marine Transportation Revenues
Transportation revenues for the 1996 year totaled $249,594,000, a decrease
of 7% compared with $267,687,000 for the 1995 year. Contract volumes for the
movement of chemicals were stable and rates flat during 1996; however, spot
market volumes remained soft, with week to week variations in demand, and with
certain spot market pricing pressure. The contract and spot market movements of
refined products in the Mississippi River declined to some degree. Such
reduction in volumes resulted in lower rates for spot market river movements.
The Gulf Intracoastal Waterway movements of refined products remained weak for
the entire 1996 year, resulting in lower rates for such movements. Additional
Midwest refinery capacity and some improved pipeline efficiencies through
debottle-necking were the primary reasons for the decline in refined products
volumes and rates.
The major reason for the 7% decline in transportation revenues for 1996
compared with 1995 was the significant weakness in the movement of U.S.
Government preference food-aid cargo and military household goods. Revenues
derived from that market for 1996 fell 64% to $9,661,000 compared with
$26,658,000 in 1995. Excess equipment capacity and a reduction in available
movements resulted in inadequate rates. During 1996, the Company averaged only
one of its freighters being employed. As noted above, the Company scrapped one
freighter in September 1996 after a food-aid trip to North Korea.
1995 Marine Transportation Revenues
Transportation revenues for the 1995 year totaled $267,687,000, an increase
of 5% compared with $255,462,000 for the 1994 year. The acquisition in November
1994 from Dow of 65 inland tank barges, and the assumption of the lease of 31
inland tank barges along with a ten year contract with Dow to provide inland
bulk liquid marine transportation services, contributed to the increase in 1995
over 1994.
The demand for movements of industrial chemicals remained strong during
1995. The movements of agricultural chemicals were extended due to flooding in
the upper Mississippi River, more fully described below, as demand was enhanced
from the flooding of the Midwest farmlands. Refined product movements were
strong during 1995; however, when compared with 1994 movements were down
slightly due to additional refinery capacity in the Midwest and improved
pipeline efficiencies to the Midwest.
Movements under the U.S. Government's preference food-aid cargo programs
and military household goods were sporadic during the 1995 year. Revenues from
this business declined to $26,658,000 in 1995, a decrease of 34% compared with
$40,474,000 reported for 1994. Excess equipment capacity and lack of available
cargoes resulted in rates inadequate to achieve profitability. All three
freighters operating in that market were laid up at various times during 1995.
Marine Transportation Costs and Expenses
Costs and expenses, excluding interest expense, for the marine
transportation segment for the 1997 year totaled $216,566,000, up 2% compared
with 1996 costs and expenses of $211,422,000, and 7% lower than the 1995 costs
and expenses of $232,446,000, which excludes the $16,807,000 write-down
discussed below. Each of the comparable years was impacted by the costs and
expenses of the 1994 Dow equipment acquisition, the 26 inland tank barges placed
in service since 1995, and various existing equipment placed in service since
1995, all of which is more fully described in Business Acquisitions and
Development below. In addition, each year reflected higher equipment costs,
health and welfare costs, and inflationary increases in costs and expenses.
Specific events which affected the costs and expenses for each of the last three
years are more fully described below.
1997 Marine Transportation Costs and Expenses
As discussed under 1997 Marine Transportation Revenues, the segment
incurred additional expenses associated with the 1997 February through April
flooding in the Mississippi River, reflecting the higher costs and equipment
utilization associated with the flooding. During 1997, the marine transportation
segment achieved a reduction in costs and expenses of approximately $3,400,000
($2,200,000 after taxes, or $.09 per
24
<PAGE> 26
share) from its cost reduction efforts implemented in 1996, as more fully
discussed under the 1996 Marine Transportation Costs and Expenses. Savings
obtained from cost reductions during 1997 were partially offset by continued
higher vessel labor and vessel maintenance costs. The Company competes with the
same labor pool and for the same shipyard space as companies participating in
the lucrative oil and gas drilling activities in the Gulf of Mexico.
1996 Marine Transportation Costs and Expenses
Effective January 1, 1996, the transportation segment changed the estimated
depreciable lives of its inland tank barges and towboats. Vessel upgrades and
enhanced maintenance standards have resulted in useful lives beyond the original
estimated lives. The change in the estimated lives provided a more consistent
matching of revenues and depreciation expense over the economic useful lives of
the inland barges and towboats. The depreciable lives of inland double skin
barges were changed from an average of 22 years to 30 years and inland towboats
were changed from an average of 22 years to 35 years. Changes were made on
single skin barges on a barge by barge basis, with shorter lives recorded in
anticipation of early retirements when appropriate. Salvage values were also
assigned to certain inland vessels where it was reasonable to expect that the
vessel would have a residual value at the end of its depreciable life. The
result of the change in depreciable lives was to reduce 1996 depreciation
expense by approximately $2,500,000 ($1,625,000 after taxes, or $.06 per share).
During 1996, the Company focused its efforts on decreasing costs and
expenses and improving operating efficiencies. Reorganizational changes were
made during 1996, resulting in office closures and the consolidation of the
majority of sales, traffic, maintenance and accounting functions to Houston,
Texas. The Company incurred reorganization expense in 1996 of approximately
$2,700,000 ($1,755,000 after taxes, or $.07 per share).
The Company's freighters, reduced from three to two in 1996, experienced
significant idle time as demand was very sporadic. In addition, the write-down
of the freighters in 1995, in accordance with SFAS No. 121, substantially
reduced depreciation and amortization expenses applicable to the freighters.
1995 Marine Transportation Costs and Expenses
As stated above, in September 1995, the Company adopted SFAS No. 121, which
establishes standards for the impairment of long-lived assets, certain
identifiable intangibles related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of. The
Company reduced the carrying value of three freighters and related intangibles
by taking a $16,807,000 pre-tax charge in the 1995 third quarter. The Company
reviewed long-term assets and certain identifiable intangibles for impairment by
vessel class. For purposes of determining fair value, the Company estimated
future net cash expected to be generated, assuming the above asset groups.
Freight rates for its freighters, which have been depressed since 1994, were not
expected to recover to levels which would allow the freighters to make
consistent contributions to earnings. The freighters were reduced to a fair
market value of $3,698,000, which was based upon estimated scrap steel prices if
the freighters were scrapped. In addition to the charge, the Company also
reduced administrative overhead associated with the freighters through employee
reductions and office closure.
The transportation segment was negatively affected by the upper Mississippi
River System closure for all marine transportation movements from mid-May
through mid-June 1995 and, to a lesser extent, flooding in the Arkansas River.
The closure of the upper River, the result of severe flooding, resulted in idle,
delayed or diverted equipment equal to approximately 10% of the inland tank
barge fleet. When the upper River opened, operations were impeded by channel
silting which restricted drafts, and in some cases, briefly closed the upper
River in certain areas. The closure marked the second time in three years the
upper River had to close due to flooding. The Company estimated that operating
income was reduced by approximately $1,250,000 ($800,000 after taxes, or $.03
per share) from the effects of the upper River and Arkansas River flooding.
Additionally, in the third quarter, the Illinois River was closed for lock
repairs for almost the entire quarter and numerous hurricanes during 1995
affected the operating results of the segment.
25
<PAGE> 27
In 1994, the Company formed a captive insurance operation, Oceanic, to
insure the majority of risks previously self-insured by the Company and to
access the reinsurance market directly. During 1995, the effect of insurance
casualty losses, previously expensed on an incurred basis, was to increase
insurance expense charged to the Company's subsidiaries by approximately
$2,000,000 ($1,300,000 after taxes, or $.05 per share).
Marine Transportation Operating Income
Operating income for the marine transportation segment for the 1997 year
totaled $39,542,000, an increase of 4% compared with $38,172,000 of operating
income for 1996, and 12% over 1995 operating income of $35,241,000. Operating
margins for 1997 were 15.4% compared with 15.3% for 1996 and 13.2% for 1995.
The Company's investment in two offshore marine partnerships, accounted for
under the equity method of accounting, reported earnings for the 1997 year of
$3,084,000, down 21% from earnings of $3,912,000 for 1996 and up 17% compared
with earnings from the partnerships of $2,638,000 for 1995. The decrease in
earnings in 1997 compared with 1996 reflects additional scheduled maintenance on
the partnerships' vessels and lower coal volume requirements. The 1996 year
reflected enhanced coal and limestone rock contract volume movements, while the
1995 year was negatively impacted by scheduled maintenance of vessels and lower
coal volume requirements.
DIESEL REPAIR
The diesel repair segment is divided into three divisions organized around
the markets they serve. The Marine Systems Division operates on the Gulf Coast
and West Coast and in the Midwest through three facilities that repair and
overhaul marine diesel engines and reduction gears, and sells parts and
accessories. The Rail Systems Division is the exclusive distributor of
aftermarket parts to shortline and industrial railroads for EMD. The Division
provides replacement parts, service and support nationwide to shortline
railroads and industrial companies that operate locomotives. The Engine Systems
Division, organized in July 1996 with the purchase of the assets of MKW,
expanded the Company's relationship with EMD to an authorized distributorship
for 17 Eastern states and the Caribbean. In addition, the Engine Systems
Division serves as a central distributor for Woodward in Southeast and Midwest
states, and as the exclusive worldwide distributor of EMD products to the
nuclear industry.
The Company's diesel repair segment reported 1997 diesel repair revenues of
$79,136,000, an increase of 12% compared with $70,422,000 reported for the 1996
year, and an increase of 57% compared with $50,538,000 reported for the 1995
year.
1997 Diesel Repair Revenue
The 12% increase in diesel repair revenues for 1997 over 1996 was primarily
due to the inclusion of MKW for the entire 1997 year, as the assets were
acquired in July 1996. During 1997, the segment eliminated certain MKW
unprofitable business lines. Diesel repair revenues for the 1997 year were
negatively impacted by deferred overhauls from Midwest inland towing customers
due to spring flooding and by Midwest dry cargo customers due to slow grain
exports. The Gulf Coast market remained strong due to the continued enhanced
drilling activities and related oil services activities in the Gulf of Mexico.
The East Coast market was supported by a strong overall economy, while the West
Coast market remained depressed due to a continued weak North Pacific fishing
market.
1996 Diesel Repair Revenues
Diesel repair revenues for the 1996 year totaled $70,422,000, an increase
of 39% compared with $50,538,000 for the 1995 year. The 1996 year included
approximately $12,600,000 of revenues generated from the acquisition of MKW in
July 1996. In addition, the 1996 year benefited from enhanced drilling
activities and related oil service activities in the Gulf of Mexico, and
continued health of the inland tank barge and dry cargo industry in its Gulf
Coast and Midwest markets. The West Coast market was hampered by a depressed
26
<PAGE> 28
offshore fishing market and during 1996, the diesel repair segment shifted its
forces from the South Pacific fishing fleet to the North Pacific fishing fleet.
1995 Diesel Repair Revenues
Diesel repair revenues for the 1995 year totaled $50,538,000, an increase
of 12% compared with $45,269,000 for the 1994 year. Operating in a very
competitive market, the segment benefited from increased drilling and well
service activities in the Gulf of Mexico and the continued health of inland tank
barge and dry cargo customers.
Diesel Repair Costs and Expenses
Costs and expenses, excluding interest expense, for the diesel repair
segment for 1997 totaled $72,947,000 compared with $65,046,000 for 1996 and
$47,138,000 for 1995. The increase of 12% for 1997 over 1996 and 55% for 1997
over 1995 reflected the costs and expenses associated with the acquisition of
the assets of MKW in July 1996 and also reflected the overall continued growth
in revenue in the Marine Systems and Rail Systems Divisions.
Diesel Repair Operating Income
The Diesel Repair segment's operating income for 1997 was $6,189,000, an
increase of 15% compared with 1996 operating income of $5,376,000, and 82% over
1995 operating income of $3,400,000. Operating margins for 1997 were 7.8%
compared with 7.6% for 1996 and 6.7% for 1995.
PROPERTY AND CASUALTY INSURANCE
1997, 1996 and 1995 Equity in Earnings of Unconsolidated Insurance Affiliate
The Company currently has a 45% voting common stock ownership of Universal,
a full service property and casualty insurance company which operates
exclusively in the Commonwealth of Puerto Rico. In March 1997, Universal
redeemed $2,000,000 of its common stock, thereby reducing the Company's voting
common stock ownership from 47% prior to the redemption to the current 45%.
Eastern America Group currently owns 55% of Universal. In July 1995, Universal
redeemed $5,000,000 of its common stock from the Company and sold $5,000,000 of
its common stock to Eastern America Group, thereby reducing the Company's voting
ownership from 58% prior to such redemption and sale, to 47%. No redemptions
were made in 1996.
Effective July 1, 1995, the Company began accounting for its investment in
Universal under the equity in earnings method of accounting. Prior period
financial statements were not restated. For the 1995 first six months, results
for Universal were consolidated with a minority interest expense recorded for
Eastern America Group's interest. For the last six months of 1995 and for 1996
and 1997, the Company's investment in Universal was recorded on the equity in
earnings method of accounting.
The amount recorded by the Company as equity in earnings for the Company's
investment in Universal is influenced to the extent that anticipated future
redemptions by Universal of its common stock exceed the Company's investment in
Universal's stock. The Company also has an investment in Universal's nonvoting
preferred stock (100%). Because the preferred stock is collateralized by a
separate portfolio of U.S. Treasury Securities, the Company accounts for this
preferred stock under SFAS 115. Therefore, the interest earned, as well as the
realized gains from the sale of U.S. Treasury Securities collateralizing the
preferred stock, are included as part of equity in earnings of the insurance
affiliate. During 1997, 1996 and 1995, the Company recorded $1,044,000, $980,000
and $649,000, respectively, of interest earned from its investment in U.S.
Treasury Securities and recognized $465,000, $592,000 and $650,000,
respectively, of realized gains from the sale of such U.S. Treasury Securities.
In addition, during the 1997 year, the Company recognized as equity in earnings
of insurance affiliate, $2,500,000 of cash received from Universal as the result
of a resolution of a previously reserved Universal contingency for outstanding
litigation. The litigation was fully reserved on Universal's records and was set
aside as part of the merger in 1992 of Universal with Eastern America Group.
27
<PAGE> 29
For the 1997 year, the company recorded equity in earnings from Universal
of $4,609,000 compared with $2,171,000 for the 1996 year and $1,599,000 for the
second half of 1995.
1995 Property and Casualty Insurance Revenues, Expenses and Pretax Earnings
For the first six months of 1995, the Company reported the results of
Universal on a consolidated basis, with a minority interest expense reported for
Eastern America Group's 42% voting ownership.
The Company's property and casualty insurance subsidiary reported premiums
written of $78,979,000 for the 1995 first six months compared with premiums
written of $111,415,000 for 1994. Net premiums earned for the 1995 first six
months totaled $43,191,000 compared with $61,477,000 for 1994.
Since 1992, Universal has expanded its property and casualty insurance
portfolio with particular emphasis in the vehicle single-interest and
double-interest lines of business. Such expansion resulted from new financial
institution customers, portfolio transfers and a significant improvement in
automobile sales in Puerto Rico. The improvement in net premiums earned reflects
the amortization of net premiums written over the life of a policy. The
significant increase in premiums earned was the result of the increase in the
vehicle line of business and resulting increase in net premiums written.
Property and casualty insurance costs and expenses for the 1995 first six
months totaled $47,995,000 compared with $70,705,000 for 1994. The annualized
increase resulted from the significant increase in vehicle lines of business and
a favorable year for actual losses.
The Company's portion of the property and insurance segment's pretax
earnings totaled $3,971,000 for the 1995 first six months compared with pretax
earnings of $5,119,000 for 1994.
DISCONTINUED OPERATIONS
The Company's offshore tanker and harbor service operations have been
accounted for as discontinued operations as of December 31, 1997, and previously
reported financial statements have been restated. In accordance with the
purchase agreement noted above, the Company's offshore tanker and harbor service
operations are expected to be sold in mid-March 1998, subject to certain
conditions of the purchase agreement.
The Company reported a 1997 net loss from discontinued operations of
$1,023,000, or $.04 per share, compared with net earnings from discontinued
operations of $6,021,000, or $.24 per share, for the 1996 year and $2,425,000,
or $.09 per share, for the 1995 year. The 1997 year included an estimated
$3,966,000 net loss, or $.16 per share, from the sale of the operations. The
estimated net loss included a provision for an operating loss of $700,000 during
the phase-out period, January 1, 1998 through the date of sale.
The Company's discontinued marine transportation operations reported 1997
transportation revenues of $66,434,000, relatively flat compared with revenues
of $66,773,000 reported for 1996, and 3% lower than 1995 revenues of
$68,226,000.
Costs and expenses for the discontinued operations totaled $62,002,000 for
1997, reflecting a 7% increase over $57,700,00 for 1996, and 3% lower than 1995
costs and expenses of $64,012,000.
Operating income for the discontinued operations totaled $4,598,000, 51%
lower than operating income of $9,354,000 reported for 1996, and 15% higher than
1995 operating income of $3,996,000.
The offshore discontinued tanker market has been very volatile over the
past three years. Reduced demand for movements of products during certain
seasons, as well as unanticipated and unneeded increases in capacity, have lead
to a very volatile offshore tanker market, and a market where periodic lay-ups
of tankers have occurred with increased regularity. Such volatility contributed
to the Company's decision to exit the tanker, as well as the harbor service
operations, and concentrate on the core inland tank barge business.
28
<PAGE> 30
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Balance Sheet
Total assets as of December 31, 1997 were $517,959,000, a decrease of 1%
compared with $524,530,000 as of December 31, 1996 and 4% higher than the
December 31, 1995 total assets of $498,084,000. The carrying value of the
discontinued tanker and harbor service property and equipment has been
reclassified as long-term assets of discontinued operations. Certain prepaid
maintenance costs, previously classified in prepaid expenses and other assets,
have been reclassified as current assets of discontinued operations.
The available-for-sale securities of $21,773,000 as of December 31, 1997
and $18,199,000 as of December 31, 1996 were investments of Oceanic, the
Company's wholly owned captive insurance subsidiary.
Total liabilities as of December 31, 1997 equaled $299,690,000, a decrease
of 6% compared with $318,776,000 as of December 31, 1996, and 2% higher than the
December 31, 1995 total liabilities of $292,751,000. The 6% decrease for 1997
compared with 1996 primarily reflected the 18% decrease in long-term debt from
$176,617,000 in 1996 to $149,485,000 in 1997. The reduction in long-term debt
reflected significant pay-downs on debt from the operating cash flow generated
during 1997, partially offset by additional debt incurred with the repurchase of
the Company's common stock and the recently completed barge construction
project, both of which are more fully described below.
Stockholders' equity as of December 31, 1997 totaled $218,269,000, compared
with $205,754,000 as of December 31, 1996 and $205,333,000 as of December 31,
1995. All three years reflect the Company's repurchase of 626,000 shares of its
common stock at a total price of $11,699,000 during 1997, 1,587,000 shares at a
total price of $26,331,000 during 1996 and 2,224,000 shares at a total price of
$33,386,000 during 1995, as more fully described in Treasury Stock Purchases
below. Unrealized net gains (losses) in value of available-for-sale securities,
net of taxes, was reflected as a gain in the Company's stockholders' equity of
$604,000 in 1997, a loss of $2,010,000 in 1996 and a gain of $4,664,000 in 1995.
Securities representing such unrealized gain (losses) are from the Company's
preferred stock investment in Universal, which controls a separate portfolio of
U.S. Treasury Securities, and from securities invested by Oceanic.
Long-Term Financing
The Company has a $100,000,000 revolving credit agreement (the "Credit
Agreement") with Chase Bank of Texas, N.A., as agent bank. On September 19,
1997, the Company agreed to new terms with Chase regarding the Credit Agreement,
superseding the previous Credit Agreement dated March 18, 1996. Under the new
terms, the maturity date was extended to September 19, 2002 from December 31,
1998. The new Credit Agreement reduced the margin of interest paid on its
borrowings, provided adjusted interest rates based on the Company's senior
credit rating and eliminated certain financial covenants. The new Credit
Agreement also contains usual and customary events of default. The Credit
Agreement was amended effective January 30, 1998 to provide a one-time allowance
for the disposition of assets at the subsidiary level. The amendment also
modified the minimum net worth covenant and fixed charge calculation. The
Company was in compliance with all covenants as of December 31, 1997. Proceeds
under the Credit Agreement may be used for general corporate purposes, the
purchase of existing or new equipment, the purchase of the Company's common
stock, or for possible business acquisitions.
In December 1994, the Company established a $250,000,000 medium term note
program providing for the issuance of fixed rate or floating rate notes with the
maturities of nine months or longer. The shelf registration program, registered
with the Securities and Exchange Commission, was activated in March 1995 with
the issuance of $34,000,000 of the authorized notes. The issued medium term
notes bore interest at an average fixed rate of 7.77% and matured on March 10,
1997. Proceeds from sale of the notes were used to retire the Company's
outstanding bank term loan in the amount of $10,286,000, due June 1, 1997, and
to reduce the Company's outstanding revolving credit loans by $23,714,000. The
Company's outstanding bank term loan in the amount of $10,666,000, due March 6,
1997, was retired on March 20, 1995 with proceeds borrowed under the Company's
revolving credit agreements. In June 1995, the Company issued $45,000,000 of
authorized notes, bearing a fixed interest rate of 7.25%, with a maturity of
June 1, 2000. Proceeds from the
29
<PAGE> 31
sale of the notes were used to reduce the Company's outstanding revolving credit
loans. In January 1997, the Company issued $50,000,000 of the authorized medium
term notes at a fixed interest rate of 7.05%, due January 29, 2002. Proceeds
from the sale of notes were used to retire the $34,000,000 of medium term notes
due March 10, 1997, with the balance used to reduce the Company's revolving
Credit Agreement noted above. The $34,000,000 notes were classified as long-term
at December 31, 1996, as the Company had the ability and intent to refinance the
notes either by selling new medium term notes, or through the Company's
revolving Credit Agreement. As of December 31, 1997, $121,000,000 was available
under the medium term note program to provide financing for future business and
equipment acquisitions and working capital requirements.
Business Acquisitions and Developments
On July 31, 1996, a subsidiary of the Company purchased the operating
assets of MKW for approximately $5,700,000 in cash plus approximately $8,500,000
for MKW's working capital. The acquisition expanded the diesel repair segment's
relationship with EMD to an authorized distributorship for 17 Eastern states and
the Caribbean. In addition, the subsidiary serves as a central distributor for
Woodward, a leader in the production of power control components.
Capital Expenditures
The Company continued to enhance its existing operations through the
acquisitions of existing equipment and the construction of new equipment from
1994 through the present.
In May 1994, the Company entered into a contract for the construction of 12
double skin 29,000 barrel capacity inland tank barges for use in the movement of
industrial chemicals and refined products. In February 1995, the Company
exercised the option under the contract to construct 12 additional barges.
During 1995, nine of the tank barges were placed in service, 13 were placed in
service during 1996, one was placed in service in January 1997 and the last
barge was placed in service in February 1997. A third option for the
construction of 12 additional barges was not exercised. In addition, in April
1995, the Company entered into a contract for the construction of two double
skin 17,000 barrel capacity inland tank barges for use in the industrial
chemical market. One barge was placed in service in October 1995 and the second
barge in January 1996. The construction project cost approximately $1,500,000
per barge. Funds for the construction project were available through the
Company's credit agreement and cash provided by operating activities.
In February 1998, the Company purchased five existing inland tank barges
for use in the linehaul fleet. During 1996, one existing inland towboat was
purchased for use in the fleeting and shifting operation. In 1995, one existing
double skin inland tank barge and four existing inland towboats were purchased
for use in the industrial chemical market, and four existing double skin inland
tank barges and three existing inland towboats were purchased for use in the
refined products market. In addition, during 1995 two existing inland towboats
were purchased for use in the fleeting and shifting operation and two existing
double skin inland tank barges were purchased for use in the agricultural
chemical market.
Treasury Stock Purchases
During 1997, the Company purchased 626,000 shares of its common stock at a
total price of $11,699,000, for an average price of $18.70 per share. During
1996, the Company purchased 1,587,000 shares of its own common stock at a total
price of $26,331,000, for an average price of $16.60 per share. During 1995, the
Company purchased 2,224,000 shares of its common stock at a total price of
$33,386,000, for an average price of $15.01. In August 1994, the Board of
Directors authorized the repurchase of 2,000,000 shares, increased the
authorization by 2,250,000 shares in October 1995, and in July 1996, increased
the authorization by an additional 2,000,000 shares. As of March 4, 1998, the
Company had 1,814,000 shares available under the 6,250,000 total repurchase
authorization. The treasury stock purchases were financed by borrowing under the
Company's Credit Agreement. The Company is authorized to purchase its common
stock on the New York Stock Exchange and in privately negotiated transactions.
When purchasing its common stock, the Company is subject to price, trading
volume and other market considerations. Shares purchased may be used for
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<PAGE> 32
reissuance upon the exercise of stock options, in future acquisitions for stock
or for other appropriate corporate purposes.
The Company announced on February 17, 1998 a "Dutch Auction" tender offer
to repurchase up to 3,000,000 shares of its common stock, representing
approximately 12% of the Company's outstanding common stock. The tender offer
price range will be from $21.00 to $24.50 per share in cash, as described below.
The offer is subject to market and other terms and conditions described in the
offering materials distributed to stockholders. The tender offer commenced on
Tuesday, February 17, 1998 and will expire at 12:00 midnight, New York City
time, on March 16, 1998, unless extended.
Under the terms of the self-tender offer, all the Company's stockholders
will be invited to tender shares within the stated price range of $21.00 to
$24.50 per share. Tendering stockholders will be required to specify the price
within that range they would be willing to accept. Upon receipt of the tenders,
the Company will determine a final price that enables it to purchase up to
3,000,000 shares pursuant to the offer. All shares will be purchased at the
determined price. If more than 3,000,000 shares are tendered at or below the
price determined, there will be a proration. Pursuant to the rules of the
Securities and Exchange Commission and subject to the number of shares tendered
within the price range stated, the Company may elect to increase the number of
shares purchased. The offer will not be contingent upon any minimum number of
shares being tendered.
Financing of the self-tender offer will be through available cash on hand
and borrowings under the Company's revolving Credit Agreement. Although the
tender offer is not contingent on the closing of the previously announced sale
of the Company's U.S. flag tanker and harbor service operations, which is
expected to be completed in mid-March 1998, proceeds of that sale are expected
to partially fund the common stock repurchase.
Liquidity
The Company generated net cash provided by operating activities of
continuing operations of $48,024,000, $44,778,000 and $65,287,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Universal, accounted for
under the equity method of accounting for the 1997 and 1996 years and the second
half of 1995, did not contribute cash flow from earnings for such periods. Under
the equity method of accounting, the Company recognizes cash flow from Universal
only upon receipt of actual distributions or redemptions, $2,000,000 of which
were received in 1997, none in 1996, and $5,016,000 during the second half of
1995. For the 1995 first half, the results of Universal were consolidated and
included in operating income, resulting in $5,901,000 of net cash provided by
operating activities.
The Company also accounts for its ownership in 35% and 50% owned marine
partnerships under the equity method of accounting, recognizing cash flow only
upon the receipt or disbursements of cash from the partnerships. For the 1997
year, the Company disbursed cash to the marine partnerships of $475,000,
compared with the receipt of cash of $3,200,000 for 1996 and $1,830,000 for
1995.
Funds generated are available for capital construction projects, treasury
stock repurchases, asset acquisitions, repayment of borrowings associated with
treasury stock acquisitions or asset acquisitions and for other operating
requirements. In addition to its net cash flow provided by operating activities,
the Company also has available as of March 4, 1998, $83,000,000 under its
revolving credit agreement and $121,000,000 available under its medium term note
program. The Company's fixed principal payments during the next 12 months are
$5,333,000.
During the last three years, inflation has had a relatively minor effect on
the financial results of the Company. The marine transportation segment has
long-term contracts which generally contain cost escalation clauses whereby
certain costs, including fuel, can be passed through to its customers, while the
transportation assets acquired and accounted for using the purchase method of
accounting were adjusted to a fair market value and, therefore, the cumulative
long-term effect of inflation was reduced. The repair portion of the diesel
repair segment is based on prevailing current market rates. The Company does not
presently use financial derivatives, but uses a mix of floating and fixed rate
debt. The Company has no foreign exchange risks.
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<PAGE> 33
The Company has no present plan to pay dividends on its common stock.
Year 2000
Historically, most computer systems utilized software that processed
transactions using two digits to represent the year of the transaction (i.e. 97
represents the year 1997). This software needs to be modified to properly
process dates beyond December 31, 1999 (the "Year 2000 Issue"). In the first
quarter of 1998, the Company completed its assessment of the Year 2000 Issue and
determined that no additional significant modifications or replacements of its
software were required. The Company utilizes both internally and externally
supported software and relies upon certain vendor enhancements yet to be
implemented to effect the Year 2000 Issue compliance. The Company presently
believes that these modifications to existing software and conversions to new
software will mitigate the Year 2000 Issue for its software.
There can be no guarantee that the systems of other companies, on which the
Company's systems rely, will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report
(see Item 14, page 64).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no disagreements with its independent accountants as
contemplated in Item 304 of Regulation S-K.
PART III
ITEMS 10 THROUGH 13.
The information for these items has been omitted inasmuch as the registrant
will file a definitive proxy statement with the Commission pursuant to the
Regulation 14A within 120 days of the close of the fiscal year ended December
31, 1997, except for the information regarding executive officers which is
provided in a separate item captioned, "Executive Officers of the Registrant,"
and is included as an unnumbered item following Item 4 in Part I of this Form
10-K.
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<PAGE> 34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Kirby Corporation:
We have audited the accompanying consolidated balance sheets of Kirby
Corporation and consolidated subsidiaries as of December 31, 1997 and 1996 and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of these consolidated
financial statements based on our audits. We did not audit the consolidated
financial statements of Universal Insurance Company and its subsidiaries, a 45
percent owned unconsolidated subsidiary. The Company's investment in this
company at December 31, 1997 and 1996 was $45,320,000 and $44,554,000,
respectively, and its equity in earnings for the years ended December 31, 1997,
1996 and 1995 was $4,609,000, $2,171,000 and $1,599,000, respectively. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Universal
Insurance Company and its subsidiaries is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly in all
material respects, the financial position of Kirby Corporation and consolidated
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
February 17, 1998
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<PAGE> 35
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and invested cash.................................... $ 1,544 $ 2,043
Available-for-sale securities -- short-term investments... 18,199 21,773
Accounts and notes receivable, net of allowance for
doubtful accounts....................................... 79,866 84,595
Inventory -- finished goods, at lower of average cost or
market.................................................. 16,361 14,875
Prepaid expenses and other................................ 7,763 7,359
Deferred income taxes..................................... 600 1,468
Current assets of discontinued operations................. 5,552 3,684
-------- --------
Total current assets................................ 129,885 135,797
-------- --------
Property and equipment, at cost:
Marine transportation equipment........................... 430,949 433,383
Land, buildings and equipment............................. 28,870 37,636
-------- --------
459,819 471,019
Less allowance for depreciation........................... 182,197 198,635
-------- --------
277,622 272,384
-------- --------
Investments in affiliates:
Insurance affiliate....................................... 44,554 45,320
Marine affiliates......................................... 12,697 16,256
-------- --------
57,251 61,576
-------- --------
Excess cost of consolidated subsidiaries, net of accumulated
amortization of $2,164,000 ($1,500,000 in 1996)........... 8,316 6,652
Sundry...................................................... 5,841 4,562
Long-term assets of discontinued operations................. 45,615 36,988
-------- --------
$524,530 $517,959
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 5,333 $ 5,333
Income taxes payable...................................... 4,027 4,319
Accounts payable.......................................... 30,518 26,712
Accrued liabilities:
Interest................................................ 1,230 1,515
Insurance premiums and claims........................... 23,998 27,287
Bonus, pension and profit-sharing plans................. 9,466 9,979
Taxes, other than on income............................. 2,840 2,797
Other................................................... 6,977 12,615
Deferred revenues......................................... 5,302 5,046
-------- --------
Total current liabilities........................... 89,691 95,603
-------- --------
Long-term debt, less current portion........................ 176,617 149,485
Deferred income taxes....................................... 45,901 48,409
Other long-term liabilities................................. 6,567 6,193
-------- --------
229,085 204,087
-------- --------
Contingencies and commitments............................... -- --
Stockholders' equity:
Preferred stock, $1.00 par value per share. Authorized
20,000,000 shares....................................... -- --
Common stock, $.10 par value per share. Authorized
60,000,000 shares, issued 30,907,000 shares............. 3,091 3,091
Additional paid-in capital................................ 158,712 159,016
Unrealized net gains (losses) in value of
available-for-sale securities........................... (32) 572
Retained earnings......................................... 115,263 136,945
-------- --------
277,034 299,624
Less cost of 6,619,000 shares in treasury (6,129,000 in
1996)................................................... 71,280 81,355
-------- --------
205,754 218,269
-------- --------
$524,530 $517,959
======== ========
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 36
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
($ IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Transportation........................................... $267,687 $249,594 $256,108
Diesel repair............................................ 50,538 70,422 79,136
Net premiums earned...................................... 43,191 -- --
Commissions earned on reinsurance........................ 2,048 -- --
Investment income and other.............................. 7,800 817 883
Gain on disposition of assets............................ 10 2,751 407
Realized gain on investments............................. 868 -- --
-------- -------- --------
372,142 323,584 336,534
-------- -------- --------
Costs and expenses:
Costs of sales and operating expenses.................... 208,456 206,465 218,123
Losses, claims and settlement expenses................... 30,189 -- --
Policy acquisition costs................................. 9,365 -- --
Selling, general and administrative...................... 41,437 40,411 40,345
Taxes, other than on income.............................. 9,227 6,992 7,796
Depreciation and amortization............................ 31,727 28,386 28,113
Minority interest........................................ 2,463 -- --
Impairment of long-lived assets.......................... 16,807 -- --
-------- -------- --------
349,671 282,254 294,377
-------- -------- --------
Operating income...................................... 22,471 41,330 42,157
Equity in earnings of insurance affiliate.................. 1,599 2,171 4,609
Equity in earnings of marine affiliates.................... 2,638 3,912 3,084
Interest expense........................................... (12,359) (13,349) (13,378)
-------- -------- --------
Earnings from continuing operations before taxes on
income.............................................. 14,349 34,064 36,472
-------- -------- --------
Provision for taxes on income:
United States............................................ 6,889 12,856 12,842
Puerto Rico.............................................. 502 -- 925
-------- -------- --------
7,391 12,856 13,767
-------- -------- --------
Net earnings from continuing operations.......... 6,958 21,208 22,705
Discontinued operations:
Earnings from discontinued operations, net of taxes on
income................................................ 2,425 6,021 2,943
Estimated loss on sale of discontinued operations,
including provision of $700,000 for net operating
losses during the phase-out period, net of taxes on
income................................................ -- -- (3,966)
-------- -------- --------
Net earnings (loss) from discontinued
operations..................................... 2,425 6,021 (1,023)
-------- -------- --------
Net earnings..................................... $ 9,383 $ 27,229 $ 21,682
======== ======== ========
Net earnings (loss) per share of common stock:
Basic:
Continuing operations................................. $ .25 $ .83 $ .93
Discontinued operations............................... .09 .24 (.04)
-------- -------- --------
Net earnings..................................... $ .34 $ 1.07 $ .89
======== ======== ========
Diluted:
Continuing operations................................. $ .25 $ .82 $ .92
Discontinued operations............................... .09 .24 (.04)
-------- -------- --------
Net earnings..................................... $ .34 $ 1.06 $ .88
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
35
<PAGE> 37
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Common stock:
Balance at beginning of year..................... $ 3,078 $ 3,091 $ 3,091
Par value of common stock issued in acquisition
of marine transportation companies............ 13 -- --
-------- -------- --------
Balance at end of year........................... $ 3,091 $ 3,091 $ 3,091
======== ======== ========
Additional paid-in capital:
Balance at beginning of year..................... $157,021 $158,383 $158,712
Excess of par value of cost of common stock
issued in acquisition of marine transportation
companies..................................... 1,300 -- --
Excess (deficit) of cost of treasury stock sold
over proceeds received upon exercise of
employees' stock options...................... (89) 148 (135)
Tax benefit of exercise of employee stock
options....................................... 151 181 439
-------- -------- --------
Balance at end of year........................... $158,383 $158,712 $159,016
======== ======== ========
Unrealized net gains (losses) in value of
available-for-sale securities, net of tax:
Balance at beginning of year..................... $ (2,686) $ 1,978 $ (32)
Net increase (decrease) in valuation of
securities during the year.................... 4,664 (2,010) 604
-------- -------- --------
Balance at end of year........................... $ 1,978 $ (32) $ 572
======== ======== ========
Retained earnings:
Balance at beginning of year..................... $ 78,651 $ 88,034 $115,263
Net earnings for the year........................ 9,383 27,229 21,682
-------- -------- --------
Balance at end of year........................... $ 88,034 $115,263 $136,945
======== ======== ========
Treasury stock:
Balance at beginning of year..................... $(13,088) $(46,153) $(71,280)
Purchase of treasury stock....................... (33,386) (26,331) (11,699)
Cost of treasury stock sold upon exercise of
employees' stock options...................... 321 1,204 1,624
-------- -------- --------
Balance at end of year........................... $(46,153) $(71,280) $(81,355)
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
36
<PAGE> 38
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 9,383 $ 27,229 $ 21,682
Adjustments to reconcile net earnings to net cash provided
by continuing operations:
Income from discontinued operations..................... (2,425) (6,021) (2,943)
Estimated loss on sale of discontinued operations....... -- -- 3,966
Depreciation and amortization........................... 31,727 28,386 28,113
Provision for doubtful accounts......................... 286 282 394
Realized gain on investments............................ (868) -- --
Provision for deferred income taxes..................... 363 795 2,790
Gain on disposition of assets........................... (10) (2,751) (407)
Deferred scheduled maintenance costs.................... 1,169 (446) 328
Equity in earnings of insurance affiliate, net of
redemptions and minority interest..................... 5,880 (2,171) (109)
Equity in earnings of marine affiliates, net of
distributions and contributions....................... (808) (712) (3,559)
Impairment of long-lived assets......................... 16,807 -- --
Other................................................... 335 4 --
Increase (decrease) in cash flows resulting from changes
in:
Accounts and notes receivable........................... (3,128) (8,079) (5,171)
Inventory............................................... (1,286) (2,176) 1,486
Other assets............................................ (9,475) (7,101) (2,534)
Income taxes payable.................................... 4,360 3,264 731
Accounts payable........................................ 5,445 6,472 (3,806)
Accrued and other liabilities........................... (6,569) 7,803 7,063
Insurance assets and liabilities........................ 14,101 -- --
-------- -------- --------
Net cash provided by operating activities of
continuing operations............................. 65,287 44,778 48,024
Net cash provided by operating activities of
discontinued operations............................... 16,392 19,290 15,476
-------- -------- --------
Net cash provided by operating activities........... 81,679 64,068 63,500
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale and maturities of investments.......... 50,178 6,861 1,935
Purchase of investments................................... (69,650) (9,583) (5,237)
Net decrease in short-term investments.................... (11,410) -- --
Capital expenditures...................................... (44,729) (36,413) (24,506)
Purchase of assets of marine and diesel repair companies,
net of assumed liabilities.............................. (693) (14,211) --
Proceeds from disposition of assets....................... 513 11,975 4,044
Other..................................................... (3,452) -- --
Investing activities of discontinued operations........... (3,939) (355) (1,893)
-------- -------- --------
Net cash used in investing activities............... (83,182) (41,726) (25,657)
-------- -------- --------
Cash flows from financing activities:
Borrowings (payments) on bank revolving credit agreements,
net..................................................... (32,000) 8,400 (37,800)
Increase in long-term debt................................ 82,891 -- 50,000
Payments on long-term debt................................ (19,727) (5,676) (39,333)
Purchase of treasury stock................................ (33,386) (26,331) (11,700)
Proceeds from exercise of stock options................... 233 1,352 1,489
Financing activities of discontinued operations........... (6,891) -- --
-------- -------- --------
Net cash used in financing activities............... (8,880) (22,255) (37,344)
-------- -------- --------
Increase (decrease) in cash and invested cash....... (10,383) 87 499
Cash and invested cash, beginning of year................... 11,840 1,457 1,544
-------- -------- --------
Cash and invested cash, end of year......................... $ 1,457 $ 1,544 $ 2,043
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest................................................ $ 11,383 $ 12,915 $ 12,640
Income taxes............................................ $ 6,704 $ 9,569 $ 9,762
Noncash investing and financing activity:
Assumption of liabilities in connection with purchase of
assets of diesel repair company......................... $ -- $ 2,623 $ --
</TABLE>
See accompanying notes to financial statements.
37
<PAGE> 39
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS
Principles of Consolidation. The consolidated financial statements include
the accounts of Kirby Corporation and its subsidiaries ("the Company"). All
material intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to reflect current
presentation of financial information.
Operations. The Company is currently engaged in two industry segments as
follows:
Marine Transportation -- Marine transportation by U.S. flag vessels on
the United States inland waterway system and in United States coastwise
trade. The principal products transported include petrochemical feedstocks,
processed chemicals, agricultural chemicals, refined petroleum products,
coal, limestone, grain and sugar.
Diesel Repair -- Overhaul and repair of large, medium-speed diesel
engines, reduction gear repair and sale of related parts and accessories
for customers in the marine industry, power generation industry, and the
shortline and industrial railroad industry.
Accounting Policies:
Cash Equivalents. Cash equivalents consist of short-term, highly liquid
investments with maturities of three months or less at date of purchase.
Available-for-Sale Securities. The Company's wholly owned captive insurance
subsidiary has available-for-sale investments reported at fair value with the
net unrealized gain or loss on such investments recorded as a separate component
of stockholders' equity, net of deferred tax. Investments are recorded on a
trade date basis with balances pending settlement accrued in the balance sheet.
Realized gains and losses on sales of investments are determined on the basis of
average cost. Investment income is recognized when earned and includes the
amortization of premiums or discount on investments.
Accounts and Notes Receivable. In the normal course of business, the
Company extends credit to its customers. The Company regularly reviews the
accounts and makes adequate provisions for potentially uncollectible balances.
It is the Company's opinion that the accounts have no impairment, other than
that for which provisions have been made. Included in accounts receivable as of
December 31, 1996 and 1997 are $4,384,000 and $11,440,000, respectively, of
accruals for diesel repair work in process which have not been invoiced as of
the end of each year.
The Company's marine transportation operations and diesel repair operations
are subject to hazards associated with such businesses. The Company maintains
insurance coverage against these hazards with mutual insurance and reinsurance
companies. As of December 31, 1996 and 1997, the Company had receivables of
$10,901,000, and $13,040,000, respectively, from the mutual insurance and
reinsurance companies to cover anticipated claims over the Company's deductible.
Depreciation. Property and equipment is depreciated on the straight-line
method over the estimated useful lives of the assets as follows: marine
transportation equipment, 6-35 years; buildings, 10-25 years; other equipment,
2-10 years; leasehold improvements, term of lease. During 1996, the Company
changed its estimated depreciable lives of its double skin inland tank barges
and inland towboats. The change in the estimated lives provided a better
matching of revenues and depreciation expense over the inland barges' and
towboats' economic useful lives. The depreciable lives of inland barges were
changed from an average of 22 years to 30 years and the depreciable lives of
inland towboats were changed from an average of 22 years to 35 years. Inland
single skin barges were evaluated on a barge by barge basis, with shorter
depreciable lives recorded in anticipation of early retirements. Salvage values
were also assigned to certain inland vessels where it was reasonable to expect
that the vessel would have a residual value at the end of its depreciable life.
The
38
<PAGE> 40
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS -- (CONTINUED)
change in estimate, effective January 1, 1996, decreased depreciation expense
for the 1996 year by approximately $2,500,000 ($1,625,000 after taxes, or $.06
per share).
Concentrations of Credit Risk. Financial instruments which potentially
subject the Company to concentrations of credit risk are primarily trade
accounts receivables. The Company's marine transportation customers include the
major oil refiners and petrochemical companies. The diesel repair customers are
offshore well service companies, inland and offshore marine transportation
companies, commercial fishing companies, electric utilities and the United
States Government. Credit risk with respect to these trade receivables is
generally considered minimal because of the credit history of such companies as
well as the Company having procedures in effect to monitor the credit worthiness
of customers.
Fair Value of Financial Instruments. Cash, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to the short-term
maturity of these financial instruments. The fair value of the Company's
investments are more fully described in Note 5, Investments, and the fair value
of the Company's debt instruments are more fully described in Note 6, Long-Term
Debt. The Company does not hold or issue derivative financial instruments.
Property, Maintenance and Repairs. Property is recorded at cost.
Improvements and betterments are capitalized as incurred. When property items
are retired, sold, or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts with any gain or loss on the
disposition included in income. Routine maintenance and repairs are charged to
operating expense as incurred on an annual basis. Scheduled major maintenance on
ocean-going vessels is recognized as prepaid maintenance cost when incurred and
charged to operating expense over the period between such scheduled maintenance,
generally ranging from 23 to 34 months.
Environmental Liabilities. The Company expenses costs related to
environmental events as they incur or when a loss is considered probable.
Excess Cost of Consolidated Subsidiaries. The excess of purchase price over
the fair value of identifiable net assets acquired in transactions accounted for
as a purchase are included in excess cost of consolidated subsidiaries. The
excess cost is amortized over the period of the lives of the underlying assets
acquired in the transaction, which generally approximates 15 years. Management
monitors the recoverability of the excess cost on an ongoing basis based on
projections of future cash flows, excluding interest expense, of acquired
assets.
Taxes on Income. The Company follows the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Company files a consolidated federal income tax return with its
domestic subsidiaries and its Bermudian subsidiary, Oceanic Insurance Limited
("Oceanic").
39
<PAGE> 41
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS -- (CONTINUED)
Treasury Stock. The Company follows the average cost method of accounting
for treasury stock transactions.
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. 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" ("SFAS No. 121"), establishes standards for the impairment of long-lived
assets, certain identifiable intangibles related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company reviews long-lived assets and certain identifiable
intangibles for impairment by vessel class. For purposes of determining fair
value, the Company estimates future cash flows expected to be generated,
assuming the above asset groups, less the future cash outflows expected to be
necessary to obtain the inflows. Effective September 30, 1995, the Company
adopted SFAS No. 121. As a result of the adoption of SFAS No. 121, the Company
reduced the carrying value of certain marine transportation equipment and
related intangibles by taking a $17,500,000 pre-tax charge in the 1995 third
quarter. The after-tax effect of the charge was $13,000,000, or $.47 per share.
Adoption of Accounting Standards. As more fully described in Note 9, Stock
Option Plans, the Company has five employee stock option plans for selected
officers and other key employees, two Director stock option plans for
nonemployee Directors of the Company, and a 25,000 share nonqualified stock
option granted to Robert G. Stone, Jr., former Chairman of the Board and current
Director of the Company. SFAS "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), issued in October 1995, allows a company to adopt a fair value based
method of accounting for its stock-based compensation plans, or to continue to
follow the intrinsic value method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees," in accounting for its stock option plans.
The Company has elected to continue to follow APB Opinion No. 25; however,
if the Company had adopted SFAS No. 123, the Company's net earnings and earnings
per share for the years ended December 31, 1995, 1996 and 1997 would have been
reduced as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- -------------------
AS AS AS
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net earnings for continuing
operations..................... $6,958 $6,571 $21,208 $20,251 $22,705 $20,527
Net earnings per share from
continuing operations:
Basic.......................... $ .25 $ .24 $ .83 $ .79 $ .93 $ .84
Diluted........................ $ .25 $ .23 $ .82 $ .79 $ .92 $ .83
Net earnings (loss) from
discontinued operations........ $2,425 $2,425 $ 6,021 $ 6,021 $(1,023) $(1,023)
Net earnings (loss) per share
from discontinued operations:
Basic.......................... $ .09 $ .09 $ .24 $ .24 $ (.04) $ (.04)
Diluted........................ $ .09 $ .09 $ .24 $ .23 $ (.04) $ (.04)
Net earnings..................... $9,383 $8,996 $27,229 $26,272 $21,682 $19,504
Net earnings per share:
Basic.......................... $ .34 $ .33 $ 1.07 $ 1.03 $ .89 $ .80
Diluted........................ $ .34 $ .32 $ 1.06 $ 1.02 $ .88 $ .79
</TABLE>
40
<PAGE> 42
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS -- (CONTINUED)
The weighted average fair value of options granted during 1995, 1996 and
1997 was $11.73, $12.12 and $11.44 respectively. The fair value of each option
was determined using the Black-Scholes option valuation model. The key input
variables used in valuing the options were as follows: average risk-free
interest rate based on 10-year Treasury bonds -- 6.5%; stock price
volatility -- 48% for 1995 and 1996, and 51% for 1997; and estimated option
term -- 9 years. Under the provisions of No. 123, the pro forma disclosures
above include only the effects of stock options granted by the Company
subsequent to December 31, 1994. During this initial phase-in period, the pro
forma disclosures as required by SFAS No. 123 are not representative of the
effects on reported net income for future years as options vest over several
years and additional awards are generally made each year.
The FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"), in
February 1997, which establishes standards for computing and presenting earnings
per share and requires, among other things, dual presentation of basic and
diluted earnings per share on the face of the statements of earnings. Effective
December 31, 1997, the Company adopted SFAS No. 128, restating all previously
reported per share amounts to conform with the new presentations, the effects of
which are more fully described in Note 11, Earnings Per Share of Common Stock.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"), in June 1997 which establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in a company's equity, including,
among other things, foreign currency transaction adjustments, notes receivable
from employee stock ownership plans and deferred gains (losses) on hedging
activities. SFAS No. 130 is effective for financial statements for periods
beginning after December 15, 1997. The adoption of SFAS No. 130 is not expected
to have a material impact on the Company's financial condition or results of
operations.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS No. 131"), in June 1997 which establishes
standards for reporting information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim reports issued to shareholders. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The adoption of SFAS No. 131 is not expected to have a material impact on
the Company's financial condition or results of operations.
(2) DISCONTINUED OPERATIONS
During the 1997 fourth quarter, the Company announced its intention to
review alternative strategies concerning certain offshore assets. In this
regard, the Company entered into a definitive purchase agreement, dated January
28, 1998, to sell its U.S. flag offshore product tanker operation and its harbor
service operation. In accordance with the purchase agreement, Hvide Marine
Incorporated will acquire the Company's harbor service operations and two
tankers, and August Trading Company, Inc. will acquire five tankers, for a
combined purchase price of $38,600,000 in cash, subject to certain adjustments.
The Company's U.S. flag offshore product tankers transport refined products from
the U.S. Gulf Coast to Florida and the East Coast, with occasional voyages to
the U.S. West Coast. The Company's harbor service operation primarily provides
towing, docking and shifting services for vessels calling at the ports of
Beaumont, Port Arthur and Orange, Texas and the port of Lake Charles, Louisiana.
The closing of the transaction is expected in mid-March 1998, subject to certain
conditions of the purchase agreement.
The offshore tanker and harbor service operations' financial results have
been accounted for as discontinued operations as of December 31, 1997, and
previously reported financial statements have been restated to reflect the
discontinuation of the operations. The Company recorded an estimated net loss of
$3,966,000 as of December 31, 1997 for the sale of the tanker and harbor service
operations.
41
<PAGE> 43
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) DISCONTINUED OPERATIONS (CONTINUED)
A summary of the financial position of the discontinued operations as of
December 31, 1996 and 1997 included in the accompanying balance sheets follows
(in thousands):
<TABLE>
<CAPTION>
ASSETS 1996 1997
------ ------- -------
<S> <C> <C>
Current assets.............................................. $13,812 $13,514
Property and equipment, net................................. 41,102 36,481
Sundry...................................................... 4,820 813
------- -------
$59,734 $50,808
======= =======
LIABILITIES
-----------
Current liabilities......................................... $ 8,268 $10,219
Deferred taxes.............................................. 2,773 1,299
Other long-term liabilities................................. 2,428 1,379
------- -------
$13,469 $12,897
======= =======
</TABLE>
A summary of the results of the discontinued operations included in the
accompanying statements of earnings for the years ended December 31, 1995, 1996
and 1997 follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Transportation...................................... $68,226 $66,773 $66,434
Loss on disposition of assets....................... (259) (81) --
Other............................................... 41 362 166
------- ------- -------
68,008 67,054 66,600
------- ------- -------
Costs and expenses:
Costs of sales and operating expenses............... 50,686 46,023 49,819
Selling, general and administrative................. 5,179 5,008 5,236
Taxes, other than income............................ 195 250 322
Depreciation and amortization....................... 7,259 6,419 6,625
Impairment of long-lived assets..................... 693 -- --
------- ------- -------
64,012 57,700 62,002
------- ------- -------
Operating income................................. 3,996 9,354 4,598
Interest expense...................................... (152) -- --
------- ------- -------
Earnings before taxes on income.................. 3,844 9,354 4,598
Provision for taxes on income......................... (1,419) (3,333) (1,655)
------- ------- -------
Net earnings................................ $ 2,425 $ 6,021 $ 2,943
======= ======= =======
Estimated loss on sale of discontinued operations,
including provision for net operating losses of
$700,000 during the phase-out period (less
applicable income tax benefit of $2,135,000)........ $ -- $ -- $(3,966)
======= ======= =======
</TABLE>
(3) COMPARABILITY OF FINANCIAL STATEMENTS
Effective July 1, 1995, the Company began accounting for its investment in
Universal Insurance Company ("Universal"), a property and casualty insurance
company in Puerto Rico, under the equity method
42
<PAGE> 44
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) COMPARABILITY OF FINANCIAL STATEMENTS -- (CONTINUED)
of accounting as a result of a redemption of Universal's common stock, reducing
the Company's ownership to 47%. Prior period financial statements have not been
restated. For the 1995 first six months, results for Universal were
consolidated, with a minority interest expense recorded for Universal's minority
shareholder. The significant accounting policies and applicable insurance
disclosures for Universal are more fully described in Note 14, Insurance
Disclosure.
The following unaudited proforma condensed financial statement is based on
historical financial statements of the Company. The proforma condensed statement
of earnings for the year ended December 31, 1995 assumes the Company was
accounting for its investment in Universal on an equity basis as of the
beginning of 1995 (in thousands):
PROFORMA CONDENSED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Revenues.................................................... $320,175
Costs and expenses.......................................... 301,675
--------
Operating income.......................................... 18,500
Equity in earnings of insurance affiliate................... 5,570
Equity in earnings of marine affiliates..................... 2,638
Interest expense............................................ (12,359)
--------
Earnings from continuing operations before taxes on
income................................................. 14,349
Provision for taxes on income............................... (7,391)
--------
Net earnings from continuing operations........... $ 6,958
========
</TABLE>
(4) ACQUISITION
On July 31, 1996, a subsidiary of the Company purchased the operating
assets of MKW Power Systems, Inc., a subsidiary of Wartsila Diesel, N.A.
("MKW"), for approximately $5,700,000 in cash plus approximately $8,500,000 for
MKW's working capital. The acquisition expanded the diesel repair segment's
relationship with the Electro-Motive Division of General Motors to an authorized
distributorship for 17 Eastern states and the Caribbean. In addition, the
subsidiary serves as a central distributor for Woodward Governor Company's Turbo
and Engine Divisions ("Woodward") in 14 Midwest and Southeast states and the
Caribbean. Woodward is a leader in the production of power control components.
Funding for the transaction was provided through the Company's bank revolving
credit agreement. Operations of the assets acquired from MKW were included as
part of the Company's operations effective July 31, 1996, in accordance with the
purchase method of accounting.
(5) INVESTMENTS
The Company's wholly owned captive insurance subsidiary accounts for
investments in debt and equity securities in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), which establishes certain criteria for the accounting and reporting of
investments in debt and equity securities that have readily determinable fair
values. Investments in debt and equity securities as of December 31, 1996 and
1997 qualify as available-for-sale securities in accordance with SFAS No. 115.
Realized gains and losses on the sale of the securities in the statements of
earnings are computed by using the specific cost of the security when originally
purchased and include net unrealized holding gains and losses as a separate
component of stockholders' equity, net of taxes.
43
<PAGE> 45
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) INVESTMENTS -- (CONTINUED)
A summary of the investments as of December 31, 1996 and 1997 is as follows
(in thousands):
<TABLE>
<CAPTION>
GROSS GROSS FAIR VALUE AS
AMORTIZED UNREALIZED UNREALIZED SHOWN IN THE
TYPE OF INVESTMENT COST LOSSES GAINS BALANCE SHEET
------------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
December 31, 1996:
Short-term investments..................... $ 1,578 $ -- $ -- $ 1,578
Bonds and notes:
United States corporate bonds........... 5,988 (24) 61 6,025
United States Government Bonds and
Issues................................ 995 4 999
Multi-National Agencies.................... 2,003 (16) 8 1,995
Foreign corporate securities............... 7,481 (32) 153 7,602
------- ---- ---- -------
$18,045 $(72) $226 $18,199
======= ==== ==== =======
December 31, 1997:
Short-term investments..................... $ 367 $ -- $ -- $ 367
Bonds and notes:
United States corporate bonds........... 5,439 (40) 60 5,459
United States Government Bonds and
Issues................................ 6,078 173 6,251
Mortgage backed securities................. 5,978 59 6,037
Foreign corporate securities............... 3,489 170 3,659
------- ---- ---- -------
$21,351 $(40) $462 $21,773
======= ==== ==== =======
</TABLE>
A summary of the available-for-sale securities by maturities as of December
31, 1996 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
INVESTMENTS MATURING WITHIN
One to five years.......................... $ 8,572 $ 8,603 $ 5,464 $ 5,485
Five to ten years.......................... 9,473 9,596 5,079 5,292
Greater than ten years..................... -- -- 10,808 10,996
------- ------- ------- -------
$18,045 $18,199 $21,351 $21,773
======= ======= ======= =======
</TABLE>
(6) LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Long-term debt, including current portion:
Revolving credit loan due September 19, 2002.............. $ 70,400 $ 32,600
Medium term notes due March 10, 1997...................... 34,000 --
Medium term notes due June 1, 2000........................ 45,000 45,000
Medium term notes due January 29, 2002.................... -- 50,000
8.22% senior notes, $5,000,000 due annually through June
30, 2002............................................... 30,000 25,000
Other long-term debt...................................... 2,550 2,218
-------- --------
$181,950 $154,818
======== ========
</TABLE>
44
<PAGE> 46
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) LONG-TERM DEBT -- (CONTINUED)
The aggregate payments due on the long-term debt in each of the next five
years are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 5,333
1999........................................................ 5,333
2000........................................................ 50,333
2001........................................................ 5,333
2002........................................................ 87,933
Thereafter.................................................. 553
--------
$154,818
========
</TABLE>
The Company has a $100,000,000 revolving credit agreement (the "Credit
Agreement") with Chase Bank of Texas, N.A. ("Chase") as agent bank. On September
19, 1997 the Company agreed to new terms with Chase regarding the Credit
Agreement, superseding the previous Credit Agreement dated March 18, 1996. Under
the new term, the maturity date was extended to September 19, 2002 from December
31, 1998. The new Credit Agreement reduced the margin of interest paid on its
borrowings, provided adjusted interest rates based on the Company's senior
credit rating and eliminated certain financial covenants. The new Credit
Agreement also contains usual and customary events of default. The Credit
Agreement was amended effective January 30, 1998, to provide a one-time
allowance for the disposition of assets at the subsidiary level. The amendment
also modified the minimum net worth covenant and fixed charge calculation. The
Company was in compliance with all covenants as of December 31, 1997. Proceeds
under the Credit Agreement may be used for general corporate purposes, the
purchase of existing or new equipment, the purchase of the Company's common
stock, or for possible business acquisitions. At December 31, 1997, the amount
outstanding under the Credit Agreement totaled $32,600,000 and the average
interest rate was 6.58%. The average borrowing under the Credit Agreement during
1997 was $48,120,000, computed by using the daily balance, and the weighted
average interest rate was 6.44% computed by dividing the interest expense under
the Credit Agreement by the average Credit Agreement borrowings. The maximum
Credit Agreement borrowings outstanding at any month end during 1997 totaled
$60,200,000. At December 31, 1997, the Company had $67,400,000 available for
takedown under the Credit Agreement.
The Company has on file a shelf registration on Form S-3 with the
Securities and Exchange Commission providing for the issue of up to $250,000,000
of medium term notes ("Medium Term Notes") at fixed or floating interest rates
with maturities of nine months or longer. Activities under the Medium Term Notes
program have been as follows (in thousands):
<TABLE>
<CAPTION>
OUTSTANDING INTEREST AVAILABLE
BALANCE RATE BALANCE
----------- -------- ---------
<S> <C> <C> <C>
Medium Term Notes program............................ $ -- $250,000
Issuance March 1995 (Maturity March 10, 1997)........ 34,000 7.77% 216,000
Issuance June 1995 (Maturity June 1, 2000)........... 45,000 7.25 171,000
--------
Outstanding December 31, 1995 and 1996............... 79,000 171,000
Issuance January 1997 (Maturity January 29, 2002).... 50,000 7.05 121,000
Payment March, 1997.................................. (34,000) 121,000
--------
Outstanding December 31, 1997........................ $ 95,000 $121,000
========
</TABLE>
Proceeds from the issuance of Medium Term Notes have been used to retire
certain bank credit agreements, reduce the Company's Credit Agreement and retire
the $34,000,000 of Medium Term Notes due March 10, 1997. The $121,000,000
available balance as of December 31, 1997 may be used for future business
45
<PAGE> 47
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) LONG-TERM DEBT -- (CONTINUED)
and equipment acquisitions, working capital requirements and reductions of the
Company's Credit Agreement.
In August 1992, the Company's principal marine transportation subsidiary
entered into a $50,000,000 private placement of 8.22% senior notes due June 30,
2002. Principal payments of $5,000,000, plus interest, are due annually through
June 30, 2002. At December 31, 1997, $25,000,000 was outstanding under the
senior notes.
The Company is of the opinion that the amounts included in the consolidated
financial statements for outstanding debt materially represent the fair value of
such debt at December 31, 1996 and 1997.
(7) TAXES ON INCOME
Earnings from continuing operations before taxes on income and details of
the provision for taxes on income from continuing operations for United States
and Puerto Rico operations for the years ended December 31, 1995, 1996 and 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Earnings from continuing operations before taxes on
income:
United States....................................... $ 8,779 $31,893 $31,863
Foreign -- Puerto Rico.............................. 5,570 2,171 4,609
------- ------- -------
$14,349 $34,064 $36,472
======= ======= =======
Provision for taxes on income:
United States:
Current.......................................... $ 5,875 $11,586 $ 9,265
Deferred......................................... 504 385 2,741
State and local.................................. 510 885 836
------- ------- -------
6,889 12,856 12,842
Puerto Rico......................................... 502 -- 925
------- ------- -------
$ 7,391 $12,856 $13,767
======= ======= =======
</TABLE>
Earnings from discontinued operations before taxes on income and details of
the provision for taxes on income from United States discontinued operations for
the years ended December 31, 1995, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Earnings before taxes on income.......................... $3,844 $9,354 $4,598
====== ====== ======
Provision for taxes on income :
Current................................................ $1,040 $ 710 $ 977
Deferred............................................... 313 2,586 661
State and local........................................ 66 37 17
------ ------ ------
$1,419 $3,333 $1,655
====== ====== ======
</TABLE>
During the three years ended December 31, 1995, 1996 and 1997, tax benefits
related to the exercise of stock options that were allocated directly to
additional paid-in capital totaled $151,000, $181,000 and $439,000,
respectively.
46
<PAGE> 48
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) TAXES ON INCOME (CONTINUED)
The Company's provision for taxes on income varied from the statutory
federal income tax rate for the years ended December 31, 1995, 1996 and 1997 due
to the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
United States income tax statutory rate.................... 35.0% 35.0% 35.0%
Puerto Rico taxes.......................................... 2.8 -- 2.3
State and local taxes, net of federal benefit.............. 3.2 2.1 2.1
Foreign tax credits........................................ (4.1) -- (2.5)
Impairment of intangible assets............................ 8.9 -- --
Other...................................................... 2.6 .2 .7
---- ---- ----
48.4% 37.3% 37.6%
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the current deferred tax assets and non-current deferred tax
liabilities at December 31, 1995, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current deferred tax assets:
Compensated absences, principally due to accrual
for financial reporting purposes.............. $ 523 $ 772 $ 814
Allowance for doubtful account reserves.......... 209 258 290
Other............................................ (55) (430) 364
-------- -------- --------
$ 677 $ 600 $ 1,468
======== ======== ========
Non-current deferred tax assets and liabilities:
Deferred tax assets:
Tax credit carryforwards...................... $ 216 $ -- $ --
Alternative minimum tax credit
carryforwards............................... 12,122 11,383 12,561
Postretirement health care benefits........... 1,811 2,054 2,252
Marine insurance claims reserves.............. 945 628 839
Other......................................... 186 965 2,816
-------- -------- --------
15,280 15,030 18,468
-------- -------- --------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation and bases....... (40,354) (40,632) (46,643)
Undistributed earnings from foreign
subsidiaries................................ (15,556) (15,896) (16,145)
Deferred state taxes.......................... (482) (657) (707)
Scheduled vessel maintenance costs............ (2,503) (3,746) (3,382)
-------- -------- --------
(58,895) (60,931) (66,877)
-------- -------- --------
$(43,615) $(45,901) $(48,409)
======== ======== ========
</TABLE>
The Company has determined that it is more likely than not that the
deferred tax assets will be realized and a valuation allowance for such assets
is not required.
47
<PAGE> 49
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) LEASES
The Company and its subsidiaries currently lease various facilities and
equipment under a number of cancelable and noncancelable operating leases. Total
rental expense for the years ended December 31, 1995, 1996 and 1997 follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Rental expense:
Marine equipment....................................... $2,263 $1,803 $1,803
Other buildings and equipment.......................... 1,503 1,050 1,398
Sublease rental.......................................... (10) (10) (10)
------ ------ ------
Net rental expense............................. $3,756 $2,843 $3,191
====== ====== ======
</TABLE>
Rental commitments under noncancelable leases are as follows (in
thousands):
<TABLE>
<CAPTION>
LAND, BUILDINGS AND EQUIPMENT
-----------------------------
<S> <C>
1998........................................................ $2,899
1999........................................................ 1,623
2000........................................................ 754
2001........................................................ 463
2002........................................................ 473
Thereafter.................................................. 319
------
$6,531
======
</TABLE>
(9) STOCK OPTION PLANS
The Company has five employee stock option plans which were adopted in
1976, 1982, 1989, 1994 and 1996 for selected officers and other key employees.
The 1976 Employee Plan, as amended, provided for the issuance until 1986 of
incentive and non-qualified stock options to purchase up to 1,000,000 shares of
common stock. The 1982 Employee Plan provided for the issuance until 1992 of
incentive and non-qualified stock options to purchase up to 600,000 shares of
common stock. The 1989 Employee Plan provides for the issuance of incentive and
nonincentive stock options to purchase up to 600,000 shares of common stock. The
1994 Employee Plan provides for the issuance of incentive and non-qualified
stock options to purchase up to 1,000,000 shares of common stock. The 1996
Employee Plan provides for the issuance of incentive and non-qualified stock
options to purchase up to 900,000 shares of common stock. The 1976, 1982 and
1989 stock option plans authorize the granting of limited stock appreciation
rights.
48
<PAGE> 50
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) STOCK OPTION PLANS -- (CONTINUED)
Changes in options outstanding under the employee plans described above for
the years ended December 31, 1995, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
NON-QUALIFIED OR
NONINCENTIVE
STOCK OPTIONS
------------------------- OPTION PRICE
OUTSTANDING EXERCISABLE RANGE PER SHARE
----------- ----------- ---------------
<S> <C> <C> <C>
Outstanding December 31, 1994................ 948,800 549,550 $ 2.88 -- $21.38
Granted.................................... 320,150 -- $16.31 -- $18.31
Became exercisable......................... -- 138,750 $12.94 -- $20.19
Exercised.................................. (39,300) (39,300) $ 2.88 -- $13.88
Canceled or expired........................ (18,250) (5,500) $12.94 -- $18.31
--------- --------
Outstanding December 31, 1995................ 1,211,400 643,500 $ 3.69 -- $21.38
Granted.................................... 961,000 -- $16.44 -- $19.50
Became exercisable......................... -- 247,162 $12.94 -- $21.38
Exercised.................................. (90,500) (90,500) $ 6.56 -- $18.31
Canceled or expired........................ (58,500) (30,000) $12.94 -- $18.31
--------- --------
Outstanding December 31, 1996................ 2,023,400 770,162 $ 3.69 -- $21.38
Granted.................................... 42,500 -- $18.56
Became exercisable......................... -- 161,163 $12.94 -- $21.38
Exercised.................................. (133,550) (133,550) $ 3.69 -- $18.31
Canceled or expired........................ (15,000) (3,000) $16.31 -- $18.56
--------- --------
Outstanding December 31, 1997................ 1,917,350 794,775
========= ========
</TABLE>
At December 31, 1997, 700,814 shares were available for future grants under
the employee plans and 268,500 shares of the outstanding stock options under the
employee plans were issued with limited stock appreciation rights.
The Company has two Director stock option plans, which were adopted in 1989
and 1994 for nonemployee Directors of the Company. The 1989 Director Plan
provides for the issuance of nonincentive options to Directors of the Company to
purchase up to 150,000 shares of common stock. The 1994 Director Plan provides
for the issuance of non-qualified options to Directors of the Company, including
Advisory Directors, to purchase up to 100,000 shares of common stock. The
Director plans are intended as an incentive to attract and retain qualified,
independent directors.
49
<PAGE> 51
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) STOCK OPTION PLANS -- (CONTINUED)
Changes in options outstanding under the director plans described above for
the years ended December 31, 1995, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
NON-QUALIFIED OR
NONINCENTIVE
STOCK OPTIONS
------------------------- OPTION PRICE
OUTSTANDING EXERCISABLE RANGE PER SHARE
----------- ----------- ---------------
<S> <C> <C> <C>
Outstanding December 31, 1994................ 82,500 82,500 $ 7.56 -- $21.38
Granted.................................... 10,500 -- $16.69
Became exercisable......................... -- 10,500 $16.69
Canceled or expired........................ (1,500) (1,500) $21.38
------- -------
Outstanding December 31, 1995................ 91,500 91,500 $ 7.56 -- $21.38
Granted.................................... 20,500 -- $16.63 -- $17.94
Became exercisable......................... -- 20,500 $16.63 -- $17.94
Exercised.................................. (20,000) (20,000) $ 7.56
------- -------
Outstanding December 31, 1996................ 92,000 92,000 $ 7.56 -- $21.38
Granted.................................... 10,500 $17.06
Became exercisable......................... -- 10,500 $17.06
Exercised.................................. (1,500) (1,500) $16.69
Canceled or expired........................ (7,500) (7,500) $16.69 -- $21.38
------- -------
Outstanding December 31, 1997................ 93,500 93,500 $ 7.56 -- $21.38
======= =======
</TABLE>
The Company has a 1993 nonqualified stock option for 25,000 shares granted
to Robert G. Stone, Jr. at an exercise price of $18.625, all of which are
currently exercisable. The grant serves as an incentive to retain the optionee
as a member of the Board of Directors of the Company.
(10) RETIREMENT PLANS
The transportation subsidiaries sponsor defined benefit plans for certain
ocean-going personnel. The plan benefits are based on an employee's years of
service. The plans' assets primarily consist of fixed income securities and
corporate stocks. Funding of the plans is based on actuarial computations that
are designed to satisfy minimum funding requirements of applicable regulations
and to achieve adequate funding of projected benefit obligations.
The components of net periodic pension cost determined by using the
projected unit credit actuarial method for the years ended December 31, 1995,
1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- ------
<S> <C> <C> <C>
Service cost -- benefits earned during the year........ $ 1,271 $ 1,357 $1,257
Interest cost.......................................... 959 1,090 $1,205
Actual return on plan assets........................... (2,699) (2,218) (3,240)
Net amortization and deferrals......................... 2,065 1,277 2,031
Less partnerships' allocation.......................... (76) (32) (22)
------- ------- ------
Net periodic pension cost.............................. $ 1,520 $ 1,474 $1,231
======= ======= ======
</TABLE>
50
<PAGE> 52
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) RETIREMENT PLANS -- (CONTINUED)
The funding status of the plans as of December 31, 1996 and 1997 is as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested.................................................... $12,944 $14,457
Non-vested................................................ 1,211 1,275
------- -------
Accumulated benefit obligation.............................. 14,155 15,732
Impact of future salary increases........................... 1,786 1,877
------- -------
Projected benefit obligation................................ 15,941 17,609
Plan assets at fair value................................... 15,243 18,551
Plan assets greater (less) than projected benefit
obligation................................................ (698) 942
Unrecognized transition obligation.......................... 91 74
Unrecognized prior service cost............................. 1,185 992
Unrecognized net gain....................................... (416) (2,526)
------- -------
Prepaid (accrued) pension cost.............................. $ 162 $ (518)
======= =======
Actuarial assumptions:
Discount rate............................................. 7.25% 7.25%
Return on assets.......................................... 9.25% 9.25%
Salary increase rate...................................... 4.00% 4.00%
</TABLE>
The Company sponsors defined contribution plans for all shore-based
employees and certain ocean-going personnel. Maximum contributions to these
plans equal the lesser of 15% of the aggregate compensation paid to all
participating employees, or up to 20% of each subsidiary's earnings before
federal income tax after certain adjustments for each fiscal year. The aggregate
contributions to the plans were approximately $3,507,000, $3,871,000 and
$4,075,000 in 1995, 1996 and 1997, respectively.
In addition to the Company's defined benefit pension plans, the Company
sponsors an unfunded defined benefit health care plan that provides limited
postretirement medical benefits to employees who meet minimum age and service
requirements and eligible dependents. The plan is contributory, with retiree
contributions adjusted annually.
In connection with the Company's sale of its discontinued operations, the
Company recognized the reversal of previously accrued health care plan benefits
for non-vested active employees. The effect of the reversal was used to reduce
an insignificant unrecognized prior service cost obligation, with the remaining
amount of approximately $1,100,000 included as a reduction of the estimated loss
from the sale of the discontinued operations.
51
<PAGE> 53
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) RETIREMENT PLANS -- (CONTINUED)
The following table presents the unfunded defined benefit health care
plan's funded status reconciled with amounts recognized in the Company's
consolidated balance sheet at December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $1,593 $2,021
Fully eligible active plan participants................... 741 769
Other active plan participants............................ 4,014 3,011
Partnership's allocation.................................. (168) (192)
Unrecognized loss......................................... (320) (362)
------ ------
Accrued postretirement benefit cost included in other
long-term liabilities.................................. $5,860 $5,247
====== ======
Net periodic postretirement benefit cost for 1996 and 1997
includes the following components:
Service cost.............................................. $ 389 $ 372
Interest cost............................................. 434 478
Less partnership's allocation............................. (21) (22)
------ ------
Net periodic postretirement benefit cost.................. $ 802 $ 828
====== ======
</TABLE>
The Company's unfunded defined benefit health care plan, which provides
limited postretirement medical benefits, limits cost increases in the Company's
contribution to 4% per year. For measurement purposes, a 4% annual rate of
increase in the per capita cost of covered benefits (i.e., health care cost
trend rate) was assumed for future periods. Accordingly, a 1% increase in the
health care cost trend rate assumption would have no effect on the amounts
reported.
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25% at December 31, 1996 and 1997.
52
<PAGE> 54
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) EARNINGS PER SHARE OF COMMON STOCK
The following table presents basic and diluted earnings (loss) per share
calculations for the years ended December 31, 1995, 1996, and 1997 (in
thousands, except earnings (loss) per share):
<TABLE>
<CAPTION>
INCOME
(LOSS) SHARES EARNINGS (LOSS)
(NUMERATOR) (DENOMINATOR) PER SHARE
----------- ------------- ---------------
<S> <C> <C> <C>
For the year ended December 31, 1995:
Basic earnings per share:
Continuing operations.................... $ 6,958 27,561 $ .25
Discontinued operations.................. 2,425 27,561 .09
------- ------ -----
$ 9,383 27,561 $ .34
======= ====== =====
Effect of dilutive securities:
Employee and director common stock
options................................ 211
Diluted earnings per share:
Continuing operations.................... $ 6,958 27,772 $ .25
Discontinued operations.................. 2,425 27,772 .09
------- ------ -----
$ 9,383 27,772 $ .34
======= ====== =====
For the year ended December 31, 1996:
Basic earnings per share:
Continuing operations.................... $21,208 25,555 $ .83
Discontinued operations.................. 6,021 25,555 .24
------- ------ -----
$27,229 25,555 $1.07
======= ====== =====
Effect of dilutive securities:
Employee and director common stock
options................................ 226
Diluted earnings per share:
Continuing operations.................... $21,208 25,781 $ .82
Discontinued operations.................. 6,021 25,781 .24
------- ------ -----
$27,229 25,781 $1.06
======= ====== =====
For the year ended December 31, 1997:
Basic earnings (loss) per share:
Continuing operations.................... $22,705 24,381 $ .93
Discontinued operations.................. (1,023) 24,381 (.04)
------- ------ -----
$21,682 24,381 $ .89
======= ====== =====
Effect of dilutive securities:
Employees and director common stock
options................................ 213
Diluted earnings (loss) per share:
Continuing operations.................... $22,705 24,594 $ .92
Discontinued operations.................. (1,023) 24,594 (.04)
------- ------ -----
$21,682 24,594 $ .88
======= ====== =====
</TABLE>
53
<PAGE> 55
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(12) QUARTERLY RESULTS (UNAUDITED)
The unaudited quarterly results for the year ended December 31, 1996 are as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.................................... $75,515 $80,887 $83,808 $83,374
Costs and expenses.......................... 68,122 68,343 72,709 73,080
------- ------- ------- -------
Operating income.......................... 7,393 12,544 11,099 10,294
Equity in earnings of insurance affiliate... 969 382 404 416
Equity in earnings of marine affiliates..... 748 1,165 1,141 858
Interest expense............................ (3,315) (3,161) (3,437) (3,436)
------- ------- ------- -------
Earnings from continuing operations before
taxes on income........................ 5,795 10,930 9,207 8,132
Provision for taxes on income............... (2,180) (3,954) (3,422) (3,300)
------- ------- ------- -------
Earnings from continuing operations....... 3,615 6,976 5,785 4,832
Earnings from discontinued operations, net
of taxes on income........................ 1,625 1,250 1,321 1,825
------- ------- ------- -------
Net earnings.............................. $ 5,240 $ 8,226 $ 7,106 $ 6,657
======= ======= ======= =======
Net earnings per share of common stock:
Basic earnings per share:
Continuing operations.................. $ .14 $ .26 $ .23 $ .20
Discontinued operations................ .06 .05 .05 .07
------- ------- ------- -------
Net earnings...................... $ .20 $ .31 $ .28 $ .27
======= ======= ======= =======
Diluted earnings per share:
Continuing operations.................. $ .14 $ .26 $ .23 $ .20
Discontinued operations................ .06 .05 .05 .07
------- ------- ------- -------
Net earnings...................... $ .20 $ .31 $ .28 $ .27
======= ======= ======= =======
</TABLE>
54
<PAGE> 56
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(12) QUARTERLY RESULTS (UNAUDITED) -- (CONTINUED)
The unaudited quarterly results for the year ended December 31, 1997 are as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $80,264 $88,968 $84,219 $83,083
Costs and expenses......................... 73,752 76,743 72,783 71,099
------- ------- ------- -------
Operating income......................... 6,512 12,225 11,436 11,984
Equity in earnings of insurance
affiliate................................ 401 2,911 422 875
Equity in earnings of marine affiliates.... 863 531 778 912
Interest expense........................... (3,374) (3,450) (3,293) (3,261)
------- ------- ------- -------
Earnings from continuing operations
before taxes on income................ 4,402 12,217 9,343 10,510
Provision for taxes on income.............. (1,780) (4,526) (3,470) (3,991)
------- ------- ------- -------
Earnings from continuing operations...... 2,622 7,691 5,873 6,519
Earnings (loss) from discontinued
operations, net of taxes on income....... 2,117 414 76 (3,630)
------- ------- ------- -------
Net earnings............................. $ 4,739 $ 8,105 $ 5,949 $ 2,889
======= ======= ======= =======
Net earnings (loss) per share of common
stock:
Basic earnings (loss) per share:
Continuing operations................. $ .11 $ .31 $ .24 $ .27
Discontinued operations............... .08 .02 -- (.15)
------- ------- ------- -------
Net earnings..................... $ .19 $ .33 $ .24 $ .12
======= ======= ======= =======
Diluted earnings (loss) per share:
Continuing operations................. $ .11 $ .31 $ .24 $ .27
Discontinued operations............... .08 .02 -- (.15)
------- ------- ------- -------
Net earnings..................... $ .19 $ .33 $ .24 $ .12
======= ======= ======= =======
</TABLE>
Quarterly basic and diluted earnings (loss) per share of common stock may
not total to the full year per share amounts, as the weighted average number of
shares outstanding for each quarter fluctuates as a result of the assumed
exercise of stock options.
(13) CONTINGENCIES AND COMMITMENTS
There are various suits and claims against the Company, none of which in
the opinion of management will have a material effect on the Company's financial
condition, results of operations or cash flows.
Management has recorded necessary reserves and believes that it has
adequate insurance coverage or has meritorious defenses for the foregoing claims
and contingencies.
Certain Significant Risks and Uncertainties
The Company's marine transportation segment is engaged in the inland marine
transportation of industrial chemicals, petrochemical feedstocks, agricultural
chemicals and refined petroleum products by tank barge along the Mississippi
River System, Gulf Intracoastal Waterway and Houston Ship Channel. In addition,
the segment is engaged in the offshore marine transportation of refined
petroleum products by tank
55
<PAGE> 57
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(13) CONTINGENCIES AND COMMITMENTS -- (CONTINUED)
barge, and dry-bulk cargo, containers and palletized cargo by barge. Such
products are transported between United States ports, with emphasis on the Gulf
of Mexico and along the Northeast Seaboard and Caribbean Basin ports, with
occasional voyages to South American, West African and European ports.
The Company's diesel repair segment is engaged in the overhaul and repair
of large diesel engines and related parts sales in the marine, locomotive and
power generator markets. The marine market serves vessels powered by large
diesel engines utilized in the various inland and offshore marine industries.
The locomotive market serves the shortline and industrial railroad markets, and
the power generator market serves the stationary industries.
During 1997, the Company's continuing marine transportation industry
segment accounted for 64% of the Company's assets and the diesel repair segment
accounted for 9%. Of total consolidated revenues, the marine transportation
segment generated 76% during 1997, and the diesel repair segment generated 24%.
Operating profits, including equity in earnings of affiliates and before general
corporate expenses, included a 86% contribution from the marine transportation
segment and 14% contribution from the diesel repair segment.
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. However, in
the opinion of management, the amounts would be immaterial.
The customer base includes the major industrial chemical and petrochemical
manufacturers, agricultural chemical manufacturers and refining companies in the
United States. Approximately 70% of the movements of such products are under
long-term contracts, ranging from one year to 10 years. While the manufacturing
and refining companies have generally been customers of the Company for numerous
years (some as long as 30 years) and management anticipates a continuing
relationship, there is no assurance that any individual contract will be
renewed. The Dow Chemical Company accounted for 12% of the Company's revenues in
1996 and 13% in 1997. No single customer of the marine transportation segment
accounted for more than 10% of the Company's revenue in 1995.
Major customers of the diesel repair segment include the inland and
offshore dry-bulk and tank barge operators, oil service companies, petrochemical
companies, offshore fishing companies, other marine transportation entities, the
United States Coast Guard, Navy and Army, shortline railroads, industrial owners
of locomotives, and stationary applications. The marine segment serves as
non-exclusive authorized service centers for the EMD and the locomotive segment
serves as the excessive distributorship of EMD aftermarket parts sales and
services to the shortline and industrial railroad market. The acquisition of MKW
in July 1996, more fully described in Note 4, Acquisition, expanded the diesel
repair segment's relationship with EMD to an authorized distributorship for 17
Eastern states and the Caribbean. The results of the diesel repair service
segment are largely tied to the industries it serves and, therefore, can be
influenced by the cycles of such industries. The diesel repair segment's
relationship with EMD has been maintained for 30 years. No single customer of
the diesel repair segment accounted for more than 10% of the Company's revenues
in 1995, 1996 and 1997.
An association of individuals working in the inland barge industry as
captains, relief captains and pilots has organized around the objective of
significantly increasing the wages of persons employed in those capacities, and
perhaps other vessel employees, in the industry. The inland tank barge
operations of the Company employ approximately 390 employees in the capacity of
captain, relief captain and pilot aboard inland towing vessels operated by the
Company. Additionally, the inland tank barge operations of the Company rely on
inland towing vessels operated by others for towing services. The association
seeking to significantly increase wages has openly discussed the possibility of
an industry wide work stoppage as a
56
<PAGE> 58
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(13) CONTINGENCIES AND COMMITMENTS -- (CONTINUED)
potential tactic in seeking to achieve its objectives. If an industry wide work
stoppage were to take place, or if a significant change in vessel employee wages
were to occur, it could have an adverse effect on the Company.
Weather can be a major factor in the day to day operations of the marine
transportation segment. Adverse weather conditions, such as fog in the winter
and spring months, can impair the operating efficiencies of the fleet. Shipments
of products can be significantly delayed or postponed by weather conditions,
which are totally beyond the control of management. River conditions are also a
factor which impairs the efficiency of the fleet. During 1995, the upper
Mississippi River was closed to marine transportation movements for extended
periods due to severe flooding, and the flooding continued to disrupt deliveries
even after the upper Mississippi River was opened. During the first quarter of
1997, the upper Mississippi River and the Ohio River experienced high water and
flooding conditions, resulting in river closures in selected areas for numerous
days and mandated regulatory restrictions which slowed operations. During the
month of March 1997, the lower Mississippi River, the Company's principal area
of operations, experienced high water not seen in such severity since 1983. The
flooding resulted in delays, diversions and limitations on night passages,
horsepower requirements and size of tows. Additionally, much of the inland
waterway system is controlled by a series of locks and dams designed to provide
flood control, maintain pool levels of water in certain areas of the country and
facilitate navigation on the inland river system. During 1995, certain locks
were closed for repairs for extended periods of time. Maintenance and operations
of the navigable inland waterway infrastructure is a government function handled
by the U.S. Army Corps of Engineers with cost sharing by industry. Significant
changes in governmental policies or appropriations with respect to maintenance
and operations of the infrastructure could adversely affect the Company.
The Company's transportation segment is subject to regulations by the
United States Coast Guard, federal laws, state laws and certain international
conventions. The Company believes that additional safety, environmental and
occupational health regulations may be imposed on the marine industry. The
Company believes that it is currently operating to standards at least the equal
of such anticipated additional regulations. However, there can be no assurance
that any such new regulations or requirements, or any discharge of pollutants by
the Company, will not have an adverse effect on the Company.
The Company's captive insurance subsidiary insures the hull and machinery,
shoreside property, general liability, and protection and indemnity risks of the
Company. The Company has reinsurance protection which limits losses to
$1,000,000 per occurrence on the hull and machinery risks, $1,000,000 per
occurrence on the general liability and $250,000 on the protection and indemnity
risks.
The Company's marine transportation segment competes principally in markets
subject to the Jones Act, a federal cabotage law that restricts domestic marine
transportation in the United States to vessels built and registered in the
United States, and manned and owned by United States citizens. During the past
several years, the Jones Act cabotage provisions have come under attack by
interests seeking to facilitate foreign flag competition in trades reserved for
domestic companies and vessels under the Jones Act. The efforts have been
consistently defeated by large margins in the United States Congress. The
Company believes that continued efforts will be made to modify or eliminate the
cabotage provisions of the Jones Act. If such efforts are successful, certain
elements could have an adverse effect on the Company.
Historically, most computer systems utilized software that processed
transactions using two digits to represent the year of the transaction (i.e. 97
represents the year 1997). This software needs to be modified to properly
process dates beyond December 31, 1999 (the "Year 2000 Issue"). In the first
quarter of 1998, the Company completed its assessment of the Year 2000 Issue and
determined that no additional significant modifications or replacements of its
software were required. The Company utilizes both internally and externally
supported software and relies upon certain vendor enhancements yet to be
implemented to effect
57
<PAGE> 59
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(13) CONTINGENCIES AND COMMITMENTS -- (CONTINUED)
the Year 2000 Issue compliance. The Company presently believes that these
modifications to existing software and conversions to new software will mitigate
the Year 2000 Issue for its software.
There can be no guarantee that the systems of other companies, on which the
Company's systems rely, will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
The Company's discontinued tanker operations compete in a market where
excess capacity can materially affect rates and tanker utilization. During 1997,
the tanker market was very volatile, primarily the result of expanded Jones Act
tonnage, as four tankers, destined to be removed from the market under the Oil
Pollution Act of 1990, were retrofitted with double hull forebodies. Financing
of the retrofits was guaranteed under the United States Government Title XI
program. Such construction was premature of market demands, and resulted in the
lay-up of the Company's spot market tankers for periods of time and a
significant decline in spot market rates.
(14) INSURANCE DISCLOSURE
The Company's investment in Universal, a property and casualty insurance
company located in Puerto Rico, is accounted for under the equity method of
accounting effective July 1, 1995. For the 1995 first six months and prior
years, results for Universal were consolidated with a minority interest recorded
for Universal's minority shareholder. Currently, the Company owns 45% of
Universal's voting common stock and 55% is owned by Eastern America Financial
Group, Inc. ("Eastern America Group").
On September 25, 1992, the Company completed the acquisition of Eastern
America Insurance Company ("Eastern America") by means of a merger of Eastern
America with and into Universal, with Universal being the surviving entity.
Eastern America was engaged in the writing of property and casualty insurance in
Puerto Rico. At the date of the merger, the Company owned 75% of the voting
common stock and the remaining 25% was owned by Eastern America Group, the
former parent of Eastern America. Through options and redemption rights included
in the merger transaction, Eastern America Group could become the owner of up to
100% of Universal's stock over a period of up to 12 years from September 1992.
To date, Universal has redeemed a total of 88,341 shares of voting Class B
common stock and all of non-voting Class C common stock for a total redemption
of $22,016,000 as follows (in thousands, except share amounts):
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR SHARES SHARES AMOUNT
---- ------- ------- -------
<S> <C> <C> <C>
1992.................................................... 5,805 -- $ 1,000
1993.................................................... 39,128 -- 7,000
1994.................................................... 20,424 24,360 7,000
1995.................................................... 14,215 16,240 5,016
1996.................................................... -- -- --
1997.................................................... 8,769 -- 2,000
------ ------ -------
88,341 40,600 $22,016
====== ====== =======
</TABLE>
No redemptions were made during the 1996 year.
In addition, in August 1994 and July 1995, Eastern America Group purchased
from Universal 40,572 shares and 28,139 shares, respectively, of Class A voting
common stock for $7,000,000 and $5,000,000, respectively. Eastern America Group
owns 100% of the Class A voting common stock. In 1995, 1996 and 1997, the
Universal Board of Directors declared, and Universal paid, a $3,000,000,
$4,526,000 and $3,300,000, respectively, dividend on the Class A common stock.
In accordance with the merger agreement, Eastern
58
<PAGE> 60
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(14) INSURANCE DISCLOSURE -- (CONTINUED)
America Group must use the dividends to repay the loans and interest on such
loans which Eastern America Group incurred in purchasing the additional Class A
common stock noted above.
In 1997, the Company recognized as equity in earnings of insurance
affiliate, $2,500,000 of cash received from Universal as the result of the
resolution of a previously reserved Universal contingency for outstanding
litigation. The litigation was fully reserved on Universal's financial records
and was set aside as part of the 1992 merger of Universal with Eastern America.
The financial results of Universal represent the Company's property and
casualty insurance segment for the first six months of 1995. Effective July 1,
1995, the Company accounts for its investment in Universal under the equity
method of accounting. The financial results of Oceanic, the Company's captive
insurance subsidiary engaged in the insuring of risks for the marine
transportation and diesel repair subsidiaries, are consolidated with the
Company's operations.
A summary of Universal's significant accounting policies and operation
follows:
Insurance Operation. Writing of property and casualty insurance in
Puerto Rico through Universal. Universal operates under the provisions of
the Insurance Code of the Commonwealth of Puerto Rico and is subject to
regulations issued by the Commissioner of Insurance of the Commonwealth of
Puerto Rico.
Concentrations of Credit Risk. Financial instruments which potentially
subject Universal to concentrations of credit risk are primarily trade
accounts receivable from agents and customers who reside in Puerto Rico. In
addition, credit risk exists through the placement of certificates of
deposits with Puerto Rico financial institutions.
Investments. Fixed maturity investments are classified as
available-for-sale securities and are reported at fair market value, with
unrealized holding gains and losses reported as a separate component of
stockholders' equity, net of tax.
Short-term investments consisting of certificates of deposit, United
States Treasury bills and United States Treasury notes maturing within one
year from acquisition date, are recorded at amortized cost, which
approximates fair value. Universal does not invest in high-yield securities
judged to be below investment grade.
Reinsurance. By reinsuring certain levels of risk in various areas
with reinsurers, the exposure of losses which may arise from catastrophes
or other events which may cause unfavorable underwriting results are
reduced. Amounts recoverable from reinsurance are estimated in a manner
consistent with the claim liability associated with the reinsured policy.
Deferred Policy Acquisition Costs. Deferred policy acquisition costs
representing commissions paid to agents are deferred and amortized
following the daily pro rata method over the terms of the policies except
for automobile physical damage single-interest policies, which are
amortized following the sum-of-the-years method. Deferred policy
acquisition costs are written off when it is determined that future policy
revenues are not adequate to cover related future losses and loss
adjustment expenses. Earnings on investments are taken into account in
determining whether this condition exists. No deficiencies have been
determined in the period presented.
Accrued Losses, Claims and Settlement Expenses. Accrued losses, claims
and settlement expenses include estimates based on individual claims
outstanding and an estimated amount for losses incurred but not reported
based on past experience.
Unearned Premiums. Unearned premiums are deferred and amortized
following the daily pro rata method over the terms of the policies except
for automobile physical damage single-interest policies,
59
<PAGE> 61
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(14) INSURANCE DISCLOSURE -- (CONTINUED)
which are amortized to income following the sum-of-the-years method.
Effective January 1, 1994, Universal changed its method of amortization of
double-interest automobile physical damage policies from the daily pro rata
method, the method the Company follows, to a declining value method, which
the Company did not adopt.
Guarantee Fund Assessments. Universal is a member of the Puerto Rico
Insurance Guaranty Association and is required to participate in losses
payable to policyholders under risks underwritten by insolvent associated
members. Universal adopted in 1997 the provisions of Statement of Position
("SOP") No. 97-3 "Accounting by Insurance and Other Enterprises for
Insurance -- Related Assessments." This SOP provides guidance for
determining when an entity should recognize a liability for guaranty-fund
and other insurance related assessments. The adoption of SOP No. 97-3 did
not have a significant effect on Universal's financial statements for the
year ended December 31, 1997.
The statement of earnings of Universal for the six months ended June 30,
1995, which is reflected in the Company's consolidated financial statements, is
as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1995
-------------
(UNAUDITED)
<S> <C>
Revenues:
Premiums written.......................................... $78,979
=======
Reinsurance assumed....................................... $ 108
=======
Net premiums earned....................................... $43,191
Investment income......................................... 5,859
Commissions earned on reinsurance......................... 2,048
Realized gain on investments.............................. 868
-------
51,966
-------
Cost and expenses:
Losses, claims and settlement expenses.................... 30,189
Policy acquisition costs.................................. 9,365
General and administrative and other expenses............. 5,978
Minority interest expense................................. 2,463
-------
47,995
-------
Net earnings........................................... $ 3,971
=======
</TABLE>
60
<PAGE> 62
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(14) INSURANCE DISCLOSURE -- (CONTINUED)
Policy acquisition costs deferred and amortized against earnings during the
six months ended June 30, 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1995
-------------
(UNAUDITED)
<S> <C>
Balance, beginning of year.................................. $11,690
Amount deferred during year................................. 14,272
Amount amortized against earnings during year............... (9,365)
-------
Balance, end of year........................................ $16,597
=======
</TABLE>
The following represents summarized financial information of Universal as
of December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Balance Sheets:
Investments............................................... $213,247 $207,439
Other assets.............................................. 141,718 179,250
Policy liabilities and accruals........................... 245,262 271,198
Other liabilities......................................... 19,695 17,914
Stockholders' equity...................................... 90,008 97,577
Statements of Earnings:
Premiums written.......................................... $172,313 $174,609
Total revenues............................................ 133,386 143,850
Losses and expenses....................................... 114,734 133,095
Earnings before taxes on income........................... 18,652 10,755
Net earnings.............................................. 15,728 12,755
</TABLE>
A reconciliation of Universal's net earnings for the years ended December
31, 1995, 1996 and 1997, as presented in their separate consolidated financial
statements, and for the 1995 proforma equity in earnings of the insurance
affiliate presented on page 43, are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Universal's net earnings............................. $ 19,192 $15,728 $12,755
Change in the method of amortization of unearned
premiums........................................... (3,151) (2,809) (2,184)
Nonapplicable Puerto Rico deferred taxes (benefit)... 6,003 2,924 (2,000)
Earnings attributable to majority stockholder........ (10,001) (8,397) (2,043)
Valuation allowance against earnings in excess of
future redemptions................................. (6,473) (5,275) (1,919)
-------- ------- -------
Equity in earnings of insurance affiliate.......... $ 5,570 $ 2,171 $ 4,609
======== ======= =======
</TABLE>
61
<PAGE> 63
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(15) INDUSTRY SEGMENT DATA
The following table sets forth by industry segment the combined revenues,
operating profits (before general corporate expenses, interest expense and
income taxes), identifiable assets (including goodwill), depreciation and
amortization and capital expenditures attributable to the continuing principal
activities of the Company for the years ended December 31, 1995, 1996, and 1997
(in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
Transportation................................... $267,687 $249,594 $256,108
Diesel repair.................................... 50,538 70,422 79,136
Insurance........................................ 45,239(*) -- --
Other............................................ 8,678 3,568 1,290
-------- -------- --------
Consolidated revenues......................... $372,142 $323,584 $336,534
======== ======== ========
Operating profits:
Transportation................................... $ 35,241 $ 38,172 $ 39,542
Diesel repair.................................... 3,400 5,376 6,189
Insurance........................................ 3,971(*) -- --
Impairment of long-lived assets.................. (16,807) -- --
-------- -------- --------
25,805 43,548 45,731
Equity in earnings of insurance affiliate........ 1,599(*) 2,171 4,609
Equity in earnings of marine affiliates.......... 2,638 3,912 3,084
Other income..................................... 1,950 3,568 1,290
General corporate expenses....................... (5,284) (5,786) (4,864)
Interest expense................................. (12,359) (13,349) (13,378)
-------- -------- --------
Earnings from continuing operations before
taxes on income............................. $ 14,349 $ 34,064 $ 36,472
======== ======== ========
Identifiable assets:
Transportation................................... $330,144 $329,014 $329,522
Diesel repair.................................... 22,401 48,012 47,290
-------- -------- --------
352,545 377,026 376,812
Investment in insurance affiliate................ 44,785 44,554 45,320
Investment in marine affiliates.................. 11,985 12,697 16,256
Assets of discontinued operations................ 54,219 51,167 40,672
General corporate assets......................... 34,550 39,086 38,899
-------- -------- --------
Consolidated assets........................... $498,084 $524,530 $517,959
======== ======== ========
Depreciation and amortization:
Transportation................................... $ 29,006 $ 25,818 $ 24,921
Diesel repair.................................... 752 883 980
Insurance........................................ 367 -- --
-------- -------- --------
$ 30,125 $ 26,701 $ 25,901
======== ======== ========
Capital expenditures and business acquisitions:
Transportation................................... $ 41,296 $ 33,123 $ 20,161
Diesel repair.................................... 630 14,785 521
Insurance........................................ 669 -- --
-------- -------- --------
$ 42,595 $ 47,908 $ 20,682
======== ======== ========
</TABLE>
- ---------------
(*) The Company changed its method of reporting its investment in Universal
from a consolidated basis to the equity method of accounting in July 1995.
62
<PAGE> 64
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(15) INDUSTRY SEGMENT DATA -- (CONTINUED)
Identifiable assets are those assets that are used in the operation of each
segment. General corporate assets are principally cash, short-term investments,
accounts receivable, furniture and equipment.
(16) SUBSEQUENT EVENT
The Company announced on February 17, 1998 a "Dutch Auction" tender offer
to repurchase up to 3,000,000 shares of its common stock, representing
approximately 12% of the Company's outstanding common stock. The tender offer
price range will be from $21.00 to $24.50 per share in cash, as described below.
The offer is subject to market and other terms and conditions described in the
offering materials being distributed to stockholders. The tender offer commenced
on Tuesday, February 17, 1998 and will expire at 12:00 midnight, New York City
time, on March 16, 1998, unless extended.
Under the terms of the self-tender offer, all the Company's stockholders
will be invited to tender shares within the stated price range of $21.00 to
$24.50 per share. Tendering stockholders will be required to specify the price
within that range they would be willing to accept. Upon receipt of the tenders,
the Company will determine a final price that enables it to purchase up to
3,000,000 shares pursuant to the offer. All shares will be purchased at the
determined price. If more than 3,000,000 shares are tendered at or below the
price determined, there will be a proration. Pursuant to the rules of the
Securities and Exchange Commission and subject to the number of shares tendered
within the price range stated, the Company may elect to increase the number of
shares purchased. The offer will not be contingent upon any minimum number of
shares being tendered.
Financing of the self-tender offer will be through available cash on hand
and borrowings under the Company's revolving Credit Agreement. Although the
tender offer is not contingent on the closing of the previously announced sale
of the Company's U.S. flag tanker and harbor service operations, which is
expected to be completed in mid-March 1998, proceeds of that sale are expected
to partially fund the common stock repurchase.
63
<PAGE> 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
Included in Part III of this report:
Report of KPMG Peat Marwick LLP, Independent Public Accountants, on the
financial statements of Kirby Corporation and Consolidated Subsidiaries
for the years ended December 31, 1995, 1996 and 1997.
Balance Sheets, December 31, 1996 and 1997.
Statements of Earnings, for the years ended December 31, 1995, 1996 and
1997.
Statements of Stockholders' Equity, for the years ended December 31,
1995, 1996 and 1997.
Statements of Cash Flows, for the years ended December 31, 1995, 1996
and 1997.
Notes to Financial Statements, for the years ended December 31, 1995,
1996 and 1997.
2. Financial Statement Schedules
All schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
3.1 -- Restated Articles of Incorporation of Kirby Exploration
Company, Inc. (the "Company"), as amended (incorporated
by reference to Exhibit 3.1 of the Registrant's 1989
Registration Statement on Form S-3 (Reg. No. 33-30832)).
3.2 -- Certificate of Amendment of Restated Articles of
Incorporation of the Company filed with the Secretary of
State of Nevada April 30, 1990 (incorporated by reference
to Exhibit 3.2 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1990).
3.3 -- Bylaws of the Company, as amended (incorporated by
reference to Exhibit 3.2 of the Registrant's 1989
Registration Statement on Form S-3 (Reg. No. 33-30832)).
3.4 -- Amendment to Bylaws of the Company effective April 24,
1990 (incorporated by reference to Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1990).
4.1 -- Indenture, dated as of December 2, 1994, between the
Company and Texas Commerce Bank National Association,
Trustee, (incorporated by reference to Exhibit 4.3 of the
Registrant's 1994 Registration Statement on Form S-3
(Reg. No. 33-56195)).
10.1+ -- 1976 Stock Option Plan of Kirby Exploration Company, as
amended, and forms of option agreements provided for
thereunder and related documents (incorporated by
reference to Exhibit 10.1 of the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1981).
10.2+ -- 1982 Stock Option Plan for Kirby Exploration Company, and
forms of option agreements provided for thereunder and
related documents (incorporated by reference to Exhibit
10.5 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1982).
10.3+ -- Amendment to 1982 Stock Option Plan for Kirby Exploration
Company (incorporated by reference to Exhibit 10.5 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1986).
</TABLE>
64
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.4 -- Indemnification Agreement, dated April 29, 1986, between
the Company and each of its Directors and certain key
employees (incorporated by reference to Exhibit 10.11 of
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1986).
10.5+ -- 1989 Employee Stock Option Plan for the Company, as
amended (incorporated by reference to Exhibit 10.11 of
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989).
10.6+ -- 1989 Director Stock Option Plan for the Company, as
amended (incorporated by reference to Exhibit 10.12 of
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989).
10.7 -- Loan Agreement between Dixie Fuels Limited and NCNB
Leasing Corporation, dated as of February 4, 1992
(incorporated by reference to Exhibit 10.10 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1991).
10.8 -- Note Purchase Agreement, dated as of August 12, 1992,
among Dixie Carriers, Inc., The Variable Annuity Life
Insurance Company, Provident Mutual Life and Annuity
Company of America, among others (incorporated by
reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1992).
10.9+ -- Deferred Compensation Agreement, dated August 12, 1985
between Dixie Carriers, Inc., and J. H. Pyne
(incorporated by reference to Exhibit 10.19 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992).
10.10 -- Agreement and Plan of Merger, dated April 1, 1993, among
Kirby Corporation, AFRAM Carriers, Inc. and AFRAM Lines
(USA) Co., Ltd. and the shareholders of AFRAM Lines (USA)
Co., Ltd. (incorporated by reference to Exhibit 2.1 of
the Registrant's Current Report on Form 8-K dated May 3,
1993).
10.11+ -- 1994 Employee Stock Option Plan for Kirby Corporation
(incorporated by reference to Exhibit 10.21 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993).
10.12+ -- 1994 Nonemployee Director Stock Option Plan for Kirby
Corporation (incorporated by reference to Exhibit 10.22
of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993).
10.13+ -- 1993 Stock Option Plan of Kirby Corporation for Robert G.
Stone, Jr. (incorporated by reference to Exhibit 10.23 of
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993).
10.14+ -- Amendment to 1989 Director Stock Option Plan for Kirby
Exploration Company, Inc. (incorporated by reference to
Exhibit 10.24 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993).
10.15 -- Purchase Agreement, dated November 16, 1994, by and
between The Dow Chemical Company and Dow Hydrocarbons and
Resources, Inc., and Dixie Marine, Inc. (incorporated by
reference to Exhibit 10.25 of the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1994).
10.16 -- Distribution Agreement, dated December 2, 1994, by and
among Kirby Corporation and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Salomon Brothers Inc., and Wertheim
Schroder & Co. Incorporated (incorporated by reference to
Exhibit 1.1 of the Registrant's Current Report on Form
8-K dated December 9, 1994).
10.17+ -- 1996 Employee Stock Option Plan for Kirby Corporation
(incorporated by reference to Exhibit 10.24 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
</TABLE>
65
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.18+ -- Amendment No. 1 to the 1994 Employee Stock Option Plan
for Kirby Corporation (incorporated by reference to
Exhibit 10.25 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
10.19 -- Credit Agreement, dated September 19, 1997, among Kirby
Corporation, the Banks named therein, and Texas Commerce
Bank National Association as Agent and Funds
Administrator (incorporated by reference to Exhibit 10.0
of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
10.20 -- First Amendment to Credit Agreement, dated January 30,
1998, among Kirby Corporation, the Banks named therein,
and Chase Bank of Texas, N.A. as Agent and Funds
Administrator (incorporated by reference to Exhibit B2 of
the Registrant's Tender Offer Statement on Schedule 13E-4
filed with the Securities and Exchange Commission on
February 17, 1998).
21.1* -- Principal Subsidiaries of the Registrant.
23.1* -- Consent of KPMG Peat Marwick LLP.
27.1* -- Financial Data Schedule.
28.1* -- Independent Auditors' Report of Deloitte & Touche LLP.
</TABLE>
- ---------------
* Filed herewith
+ Management contract, compensatory plan or arrangement.
66
<PAGE> 68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
KIRBY CORPORATION
(Registrant)
By: /s/ BRIAN K. HARRINGTON
----------------------------------
Brian K. Harrington
Senior Vice President
Dated: March 4, 1998
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ GEORGE A. PETERKIN, JR. Chairman of the Board and Director March 4, 1998
- ----------------------------------------------------- of the Company
George A. Peterkin, Jr.
/s/ J. H. PYNE President, Director of the Company March 4, 1998
- ----------------------------------------------------- and Principal Executive Officer
J. H. Pyne
/s/ BRIAN K. HARRINGTON Senior Vice President, Treasurer, March 4, 1998
- ----------------------------------------------------- Assistant Secretary of the
Brian K. Harrington Company and Principal Financial
Officer
/s/ G. STEPHEN HOLCOMB Vice President, Controller, March 4, 1998
- ----------------------------------------------------- Assistant Treasurer, Assistant
G. Stephen Holcomb Secretary of the Company and
Principal Accounting Officer
/s/ GEORGE F. CLEMENTS, JR. Director of the Company March 4, 1998
- -----------------------------------------------------
George F. Clements, Jr.
Director of the Company March , 1998
- -----------------------------------------------------
C. Sean Day
/s/ BOB G. GOWER Director of the Company March 4, 1998
- -----------------------------------------------------
Bob G. Gower
/s/ WILLIAM M. LAMONT, JR. Director of the Company March 4, 1998
- -----------------------------------------------------
William M. Lamont, Jr.
</TABLE>
67
<PAGE> 69
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ ROBERT G. STONE, JR. Director of the Company March 4, 1998
- -----------------------------------------------------
Robert G. Stone, Jr.
/s/ THOMAS M. TAYLOR Director of the Company March 4, 1998
- -----------------------------------------------------
Thomas M. Taylor
/s/ J. VIRGIL WAGGONER Director of the Company March 4, 1998
- -----------------------------------------------------
J. Virgil Waggoner
</TABLE>
68
<PAGE> 70
INDEX TO EXHIBITS
<TABLE>
<C> <S>
21.1 -- Principal Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP.
27.1 -- Financial Data Schedule.
28.1 -- Independent Auditors' Report of Deloitte & Touche LLP.
</TABLE>
69
<PAGE> 1
EXHIBIT 21.1
KIRBY CORPORATION
PRINCIPAL SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PLACE OF
INCORPORATION
-------------
<S> <C>
KIRBY CORPORATION -- PARENT AND REGISTRANT.................. Nevada
SUBSIDIARIES OF THE PARENT AND REGISTRANT
Kirby Inland Marine, Inc.(1).............................. Delaware
General Energy Corporation(1)............................. Delaware
Kirby Exploration Company of Texas(1)..................... Delaware
Kirby Terminals, Inc.(1).................................. Texas
Sabine Transportation Company(1).......................... Delaware
Kirby Pioneer, Inc.(1).................................... Delaware
AFRAM Carriers, Inc.(1)................................... Delaware
Marine Systems, Inc.(1)................................... Louisiana
Rail Systems, Inc.(1)..................................... Delaware
Engine Systems, Inc.(1)................................... Delaware
Americas Marine Express, Inc.(1).......................... Delaware
Kirby Tankships, Inc.(1).................................. Delaware
Kirby Marine Transportation Corporation(1)................ Texas
Sabine Marine Transportation Company(1)................... Delaware
Dixie Offshore Transportation Company(1).................. Delaware
Mariner Reinsurance Company Limited(1).................... Bermuda
Oceanic Insurance Limited(1).............................. Bermuda
CONTROLLED CORPORATIONS
Dixie Bulk Transport, Inc. (subsidiary of Kirby Inland
Marine, Inc.)(1)....................................... Delaware
Western Towing Company (subsidiary of Kirby Inland Marine,
Inc.)(1)............................................... Texas
Kirby Inland Marine, Inc. of Louisiana (subsidiary of
Kirby Inland Marine, Inc.)(1).......................... Delaware
Kirby Inland Marine, Inc. of Texas (subsidiary of Kirby
Inland Marine, Inc.)(1)................................ Delaware
Kirby Inland Marine, Inc. of Mississippi (subsidiary of
Kirby Inland Marine, Inc.)(1).......................... Delaware
Dixie Carriers, Inc. (subsidiary of Kirby Inland Marine,
Inc.)(1)............................................... Texas
</TABLE>
- ---------------
(1) Included in the consolidated financial statements.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(No. 33-62116), (No. 33-56195) on Form S-3 and (No. 33-681400), (No. 2-67954),
(No. 2-84789), (No. 33-57621), (No. 33-57625) on Form S-8 of Kirby Corporation
and consolidated subsidiaries of our report dated February 17, 1998, relating to
the consolidated balance sheets of Kirby Corporation and consolidated
subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997, which report appears in
the December 31, 1997 Annual Report on Form 10-K of Kirby Corporation.
KPMG Peat Marwick LLP
Houston, Texas
March 4, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND STATEMENTS OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,043
<SECURITIES> 21,773
<RECEIVABLES> 85,423
<ALLOWANCES> 828
<INVENTORY> 14,875
<CURRENT-ASSETS> 135,797
<PP&E> 471,019
<DEPRECIATION> 198,635
<TOTAL-ASSETS> 517,959
<CURRENT-LIABILITIES> 95,603
<BONDS> 149,485
0
0
<COMMON> 3,091
<OTHER-SE> 215,178
<TOTAL-LIABILITY-AND-EQUITY> 517,959
<SALES> 66,005
<TOTAL-REVENUES> 336,534
<CGS> 45,630
<TOTAL-COSTS> 218,123
<OTHER-EXPENSES> 76,254
<LOSS-PROVISION> 394
<INTEREST-EXPENSE> 13,378
<INCOME-PRETAX> 36,472
<INCOME-TAX> 13,767
<INCOME-CONTINUING> 22,705
<DISCONTINUED> (1,023)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,682
<EPS-PRIMARY> .89
<EPS-DILUTED> .88
</TABLE>
<PAGE> 1
EXHIBIT 28.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Universal Insurance Company
San Juan, Puerto Rico
We have audited the consolidated balance sheets of Universal Insurance
Company and its subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997 (not presented
separately herein). 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Universal Insurance Company and
its subsidiaries at December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Juan, Puerto Rico
February 18, 1998
