_________________________________________________________________
_________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 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 Number 1-8544
APL LIMITED
(Exact name of registrant as specified in its charter)
Delaware 94-2911022
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 Broadway
Oakland, California 94607
(Address of principal executive offices)
Registrant's telephone number: (510) 272-8000
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes (X) No ( ).
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at July 25, 1997
____________________________ ____________________________
Common Stock, $.01 par value 24,866,899
_________________________________________________________________
_________________________________________________________________
<PAGE>
APL LIMITED
INDEX
PART I. FINANCIAL INFORMATION Page
_____________________
Item 1. Consolidated Financial Statements
Statement of Income 3
Balance Sheet 4
Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 12-21
Part II. OTHER INFORMATION
_________________
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
<PAGE>
APL Limited and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
___________________________________________________________________
(In thousands, except Quarter Ended 26 Weeks Ended
per share amounts) June 27 June 28 June 27 June 28
1997 1996 1997 1996
___________________________________________________________________
Revenues $626,671 $641,055 $1,305,521 $1,367,392
___________________________________________________________________
Expenses 607,959 598,498 1,295,655 1,307,268
___________________________________________________________________
Operating Income 18,712 42,557 9,866 60,124
Interest Income 5,752 6,253 12,363 12,998
Interest Expense (13,308) (14,826) (28,908) (32,560)
___________________________________________________________________
Income (Loss) Before Taxes 11,156 33,984 (6,679) 40,562
Federal, State and
Foreign Tax Expense
(Benefit) 3,770 13,122 (4,258) 15,819
___________________________________________________________________
Net Income (Loss) $ 7,386 $ 20,862 $ (2,421) $ 24,743
___________________________________________________________________
___________________________________________________________________
Earnings (Loss) Per Common Share
___________________________________________________________________
Primary $0.29 $0.78 $(0.10) $0.94
Fully Diluted $0.28 $0.78 $(0.10) $0.93
___________________________________________________________________
Dividends Per Common Share $0.10 $0.10 $ 0.20 $0.20
___________________________________________________________________
___________________________________________________________________
See notes to consolidated financial statements.
<PAGE>
APL Limited and Subsidiaries
CONSOLIDATED BALANCE SHEET (Unaudited)
_________________________________________________________________
(In thousands, except share amounts) June 27 December 27
1997 1996
_________________________________________________________________
ASSETS
Current Assets
Cash and Cash Equivalents $ 137,811 $ 102,370
Short-Term Investments 116,602 180,628
Trade and Other Receivables, Net 227,358 242,460
Fuel and Operating Supplies 28,388 29,220
Prepaid Expenses and Other Current Assets 75,195 61,804
_________________________________________________________________
Total Current Assets 585,354 616,482
_________________________________________________________________
Property and Equipment
Ships 904,455 903,227
Containers, Chassis and Rail Cars 752,831 764,294
Leasehold Improvements and Other 254,346 252,466
Construction in Progress 37,610 29,078
_________________________________________________________________
1,949,242 1,949,065
Accumulated Depreciation and Amortization (843,095) (825,846)
_________________________________________________________________
Property and Equipment, Net 1,106,147 1,123,219
_________________________________________________________________
INVESTMENTS AND OTHER ASSETS 141,373 140,477
_________________________________________________________________
Total Assets $1,832,874 $1,880,178
_________________________________________________________________
_________________________________________________________________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt
and Capital Leases $ 349 $ 9,866
Accounts Payable and Accrued Liabilities 363,631 380,690
_________________________________________________________________
Total Current Liabilities 363,980 390,556
_________________________________________________________________
Deferred Income Taxes 169,582 173,867
_________________________________________________________________
Other Liabilities 115,753 116,569
_________________________________________________________________
Long-Term Debt 684,456 695,546
Capital Lease Obligations 622 801
_________________________________________________________________
Total Long-Term Debt and Capital
Lease Obligations 685,078 696,347
_________________________________________________________________
Commitments and Contingencies
_________________________________________________________________
Stockholders' Equity
Common Stock $.01 Par Value, Stated at $1.00
Authorized-60,000,000 Shares
Shares Issued and Outstanding-
24,763,000 in 1997 and 24,564,000 in 1996 24,763 24,564
Additional Paid-In Capital 3,435 632
Retained Earnings 470,283 477,643
_________________________________________________________________
Total Stockholders' Equity 498,481 502,839
_________________________________________________________________
Total Liabilities and
Stockholders' Equity $1,832,874 $1,880,178
_________________________________________________________________
_________________________________________________________________
See notes to consolidated financial statements.
<PAGE>
APL Limited and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
_________________________________________________________________
(In thousands) 26 Weeks Ended
June 27 June 28
1997 1996
_________________________________________________________________
Cash Flows from Operating Activities
Net Income (Loss) $(2,421) $24,743
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in)Operating Activities:
Depreciation and Amortization 53,004 57,385
Deferred Income Taxes (4,285) 5,762
Change in Receivables 15,102 1,552
Change in Fuel and Operating Supplies 832 9,693
Change in Prepaid Expenses and
Other Current Assets (13,391) 2,008
Gain on Sale of Property and Equipment (5,665) (2,079)
Gain on Sale of Distribution Services (6,900)
Change in Accounts Payable and
Accrued Liabilities (17,059) (5,152)
Other (3,896)(25,038)
_________________________________________________________________
Net Cash Provided by Operating Activities 22,221 61,974
_________________________________________________________________
Cash Flows from Investing Activities
Capital Expenditures (65,869)(89,633)
Proceeds from Sales of Property and Equipment 35,684 160,513
Proceeds from Sale of Distribution Services 2,000
Purchase of Short-Term Investments (113,943)(335,662)
Proceeds from Sales of Short-Term Investments 177,969 238,528
Transfer from Capital Construction Fund 2,688
Other 3,198 1,380
_________________________________________________________________
Net Cash Provided by (Used in)
Investing Activities 39,727 (22,874)
_________________________________________________________________
Cash Flows from Financing Activities
Issuance of Debt 62,215
Repayments of Debt (20,725) (20,660)
Repayments of Capital Lease Obligations (166) (10,822)
Dividends Paid (4,923) (5,144)
Debt Issue Costs (1,617)
Other 2,986 2,114
_________________________________________________________________
Net Cash Provided by (Used in)
Financing Activities (22,828) 26,086
_________________________________________________________________
Effect of Exchange Rate Changes on Cash (3,679) (11)
_________________________________________________________________
Net Increase in Cash and Cash Equivalents 35,441 65,175
_________________________________________________________________
Cash and Cash Equivalents at
Beginning of Period 102,370 76,564
_________________________________________________________________
Cash and Cash Equivalents at End of Period $137,811 $141,739
_________________________________________________________________
_________________________________________________________________
SUPPLEMENTAL DATA:
_________________________________________________________________
Cash Paid (Received) for:
Interest, Net of Capitalized Interest $ 29,710 $31,523
Income Taxes, Net of Refunds $(4,457) $ 8,584
_________________________________________________________________
Noncash Investing Activities:
Notes Receivable from the Sale of
Distribution Services $ 6,000
_________________________________________________________________
See notes to consolidated financial statements.
<PAGE>
APL Limited and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Significant Accounting Policies
The consolidated financial statements presented herein
include the accounts of APL Limited and its wholly-owned
subsidiaries (the "company") and have been prepared by the
company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. The company
believes that the disclosures are adequate to make the
information presented not misleading, although certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, the consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the company's results of
operations, financial position and cash flows. The
consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes
thereto included in the company's Annual Report on Form 10-K
for the year ended December 27, 1996 (Commission File No. 1-
8544).
Foreign Currency Instruments
The company periodically enters into contracts to buy
foreign currencies in the future to hedge the impact of foreign
currency fluctuations on certain operating commitments. The
gains or losses on contracts related to firm commitments are
deferred and recognized when the related operating expenses are
incurred, and are recorded as a decrease or increase in
Expenses on the accompanying Consolidated Statement of Income.
Gains or losses on foreign currency contracts related to
anticipated transactions are reflected in Expenses on the
accompanying Consolidated Statement of Income in the period in
which the currency fluctuation occurs.
Income Taxes
The provision for income taxes has been calculated using
the effective tax rate estimated for the respective years. The
company's estimated income tax rate for the first half of 1997
was 34%. During the first quarter, the company also recorded a
tax benefit of $2.0 million relating to a prior year state
income tax settlement. The effective income tax rate for the
first half of 1996 was 39%. The full year effective tax rate
for 1996 was 33%, which was reduced during 1996 to reflect the
availability of additional tax credits and deductions.
Note 2. Operating-Differential Subsidy Agreement
The company and the United States Maritime Administration
("MarAd") are parties to an Operating-Differential Subsidy
("ODS") agreement expiring December 31, 1997, which provides
for payment by the U.S. government to partially compensate the
company for the relatively greater labor expense of vessel
operation under United States registry. The ODS amounts were
$6.9 million and $11.8 million for the quarters ended June 27,
1997 and June 28, 1996, respectively, and $14.7 million and
$25.4 million for the 26-week periods ended June 27, 1997 and
June 28, 1996, respectively, and have been included as a
reduction of Expenses on the accompanying Consolidated
Statement of Income.
<PAGE>
APL Limited and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 3.Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at June 27, 1997
and December 27, 1996, were as follows:
_________________________________________________________________
(In thousands) June 27 December 27
1997 1996
_________________________________________________________________
Accounts Payable $ 46,967 $52,316
Accrued Liabilities 245,932 250,523
Current Portion of Insurance Claims 12,812 15,326
Unearned Revenue 55,027 50,566
Restructuring Charge 2,893 11,959
_________________________________________________________________
Total Accounts Payable and
Accrued Liabilities $363,631 $380,690
_________________________________________________________________
_________________________________________________________________
Note 4. Long-Term Debt
Long-Term Debt at June 27, 1997 and December 27, 1996
consisted of the following:
_________________________________________________________________
(In thousands) June 27 December 27
1997 1996
_________________________________________________________________
Vessel Mortgage Note Due Through 2008 (1) $369,773 $380,880
8% Senior Debentures $150 million Face Amount
Due on January 15, 2024 (2) 147,212 147,198
7 1/8% Senior Notes $150 million Face Amount
Due on November 15, 2003 (2) 148,491 148,399
Series I 8% Vessel Mortgage Bonds
Due Through 1997(3) 9,530
8% Refunding Revenue Bonds Due on
November 1, 2009 12,000 12,000
Other 6,980 7,069
_________________________________________________________________
Total Debt 684,456 705,076
Current Portion (9,530)
_________________________________________________________________
Total Long-Term Debt $684,456 $695,546
_________________________________________________________________
_________________________________________________________________
(1)To finance a portion of the purchase price of its six C11-
class vessels, the company borrowed $402.1 million in 1995
and 1996 under a loan agreement with European banks pursuant
to vessel mortgage notes due through 2008. Principal
payments are due in semiannual installments over a 12-year
period commencing six months after the delivery of the
respective vessels. The interest rates on the notes are
based upon various margins over LIBOR or the banks' cost of
funds, as elected by the company. Until the sixth
anniversary of the delivery date, the company may defer up
to four principal payments. Aggregate deferred payments are
due at the end of the term of the notes. Principal payments
on this debt are classified as long-term on the basis that
the company has the ability to defer at least two payments.
The notes issued under this loan agreement are
collateralized by the C11-class vessels.
<PAGE>
APL Limited and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Long-Term Debt (continued)
The company entered into interest rate swap agreements on
four of the vessel mortgage notes, with a notional amount of
$253.6 million at June 27, 1997, to exchange the variable
interest rate obligations on such notes for fixed rate
obligations for periods ranging between 7 and 12 years. The
current variable interest rates for all of the vessel
mortgage notes range between 6.555% and 7.02%. As a result
of the swaps, the effective interest rates range between
6.625% and 7.531% for the first five years after inception,
and 6.625% and 7.656% for the remaining terms of the swaps.
Net payments or receipts under the agreements are included
in interest expense.
(2)The company issued 7 1/8% Senior Notes and 8% Senior
Debentures in November 1993 and January 1994, respectively.
Interest payments are due semiannually. The Senior Notes
had an effective interest rate of 7.325%, and an unamortized
discount of $1.5 million at June 27, 1997. The Senior
Debentures had an effective interest rate of 8.172%, and an
unamortized discount of $2.8 million at June 27, 1997.
(3)The Series I Vessel Mortgage Bonds were fully repaid during
the first quarter of 1997.
The company has a credit agreement with a group of banks
which provides for an aggregate commitment of $200 million
through March 1999. The credit agreement contains, among other
things, various financial covenants that require the company to
meet certain levels of interest and fixed charge coverage,
leverage and net worth. The borrowings bear interest at rates
based upon various indices as elected by the company. There
have been no borrowings under this agreement.
As an alternative to borrowing under its credit agreement,
the company has an option under that agreement to sell up to
$150 million of certain of its accounts receivable to the
banks. This alternative is subject to less restrictive
financial covenants than the borrowing option.
Note 5. Leases
In connection with the new terminal in Los Angeles and
terminal improvements in Kaohsiung, Taiwan, the company entered
into agreements to purchase new cranes and, in April 1997,
reached an agreement with a group of banks pursuant to which
the company assigned its rights to the cranes to the banks, and
the banks leased the cranes to the company, subject to certain
terms and conditions on a year-to-year basis. Under the
agreement, the company makes all payments to the crane
manufacturer and is subsequently reimbursed by the banks. The
payments and receipts have been included in the Consolidated
Statement of Cash Flows as Capital Expenditures and Proceeds
from the Sales of Property and Equipment, respectively. In
addition, the banks intend to acquire ownership of certain
cranes at the company's Oakland terminal and will lease the
cranes to the company. The aggregate cost of all cranes
involved in the transaction is approximately $102.9 million.
Under the terms of its agreement, the company has annual
options to either renew the lease, purchase the cranes or
arrange for the sale of the cranes to a third party. As part
of the sale option, the company has guaranteed the lessors a
minimum estimated value of $74.3 million which will decline
over time.
<PAGE>
APL Limited and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 6. Stockholders' Equity
Earnings Per Common Share
For the first half of 1997, primary and fully diluted loss
per common share were computed by dividing the net loss by the
weighted average number of common shares outstanding. For the
second quarter of 1997, and the second quarter and first half
of 1996, earnings per common share on a primary and fully
diluted basis were computed by dividing net income by the
weighted average number of common shares and common equivalent
shares outstanding. The number of shares used in these
computations was as follows:
_________________________________________________________________
Weighted Average Number of Common and Common Equivalent Shares
_________________________________________________________________
(In millions) Quarter Ended 26 Weeks Ended
June 27 June 28 June 27 June 28
1997 1996 1997 1996
_________________________________________________________________
Primary 25.8 26.6 24.6 26.3
Fully Diluted 26.0 26.7 24.6 26.6
_________________________________________________________________
_________________________________________________________________
Weighted average shares for the second quarter and first
half of 1997 reflect the repurchase of 1.3 million shares of
the company's common stock in the third and fourth quarters of
1996.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share", which is effective for interim and annual
periods ending after December 15, 1997 (early application is
not permitted). Under this new standard, primary earnings per
share and fully diluted earnings per share have been replaced
by basic earnings per share and diluted earnings per share.
Basic earnings per share is calculated by dividing net income
by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated by
dividing net income by the weighted average number of common
shares outstanding during the period plus the dilutive effect
of stock options outstanding. For the second quarter and first
half of 1997 and 1996, basic and diluted earnings (loss) per
share would have been as follows:
_________________________________________________________________
Quarter Ended 26 Weeks Ended
June 27 June 28 June 27 June 28
1997 1996 1997 1996
_________________________________________________________________
Basic $0.30 $0.81 $(0.10) $0.96
Diluted $0.29 $0.78 $(0.10) $0.94
_________________________________________________________________
_________________________________________________________________
Note 7. Commitments and Contingencies
Commitments
Alliances
The alliance agreements between the company, Orient
Overseas Container Line ("OOCL"), Mitsui OSK Lines, Ltd.
("MOL"), Nedlloyd Lines B.V. ("NLL") and Malaysian
International Shipping Corporation BHD ("MISC"), collectively
referred to as the Global Alliance, were fully implemented in
the first quarter of 1996.
<PAGE>
APL Limited and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Commitments and Contingencies (continued)
Commitments (continued)
Alliances (continued)
NLL merged with the container line operations of The
Peninsular and Oriental Steam Navigation Company ("P&O") on
December 31, 1996 to form P&O Nedlloyd Container Line Limited
("P&O-NL"). P&O-NL has advised the Global Alliance that NLL
will be withdrawing from the Global Alliance. The future
alliance participation of the company and Neptune Orient Lines
Ltd ("NOL") following consummation of the proposed merger of
the company and NOL discussed in Note 8, has not yet been
determined. The company cannot predict, if the proposed merger
is consummated, when the alliance participation of the company
and NOL will be determined or the resulting impact on the
operations of the company. However, while no assurances can be
given, the company believes that it will be able to reach
acceptable agreements for future alliance participation.
On July 16, 1997, the company and the remaining members of
the Global Alliance entered into a letter of intent with
Hyundai Merchant Marine Co. Ltd. ("Hyundai") to enter into a
multi-year agreement to share vessel space and coordinate
vessel sailings in the trans-Pacific and Asia-Europe trades.
The parties expect to complete detailed agreements and vessel
deployments and obtain necessary government approvals by the
end of 1997, and to initiate new services during the first
quarter of 1998. The five carriers expect to begin exchanging
vessel space in the trans-Pacific and Asia-Europe trades on a
limited basis during the third quarter of 1997. There can be
no assurances whether or when the detailed agreements will be
completed or government approvals will be obtained.
On June 5, 1997, the company and Transportacion Maritima
Mexicana ("TMM") entered into a joint operating company
agreement pursuant to which the companies will offer trans-
Pacific services in the Asia-Mexico trade. As part of the
agreements, the company is managing the operations of six time
chartered vessels and will guarantee the charter hire of five
vessels, two of which it currently guarantees. The amount of
the additional three vessel charter hire payments which are
guaranteed through the expiration of the charters in 1999 are
estimated to be $48.6 million. Initial operations under the
agreement began in July 1997. Agreements necessary to
implement the transaction are being finalized.
Facilities, Equipment and Services
The company had outstanding purchase commitments to
acquire facilities, equipment and services totaling $15.1
million at June 27, 1997. In addition, the company has
commitments to purchase terminal services for its major Asian
operations. These commitments range from one to ten years, and
the amounts of the commitments under these contracts are based
upon the actual services performed. At June 27, 1997, the
company had outstanding letters of credit and other agreements
totaling $77.6 million, which guarantee the company's
performance under certain of its commitments.
Employment Agreements
The company has entered into employment agreements with
certain of its officers. The agreements provide for certain
payments to each officer upon termination of employment, other
than as a result of death, disability in most cases, or
justified cause, as defined. The aggregate estimated
commitment under these agreements was $16.6 million at June 27,
1997. Certain employment agreements contain provisions
requiring additional payments, including excise taxes and
supplemental pension benefits, if applicable.
<PAGE>
APL Limited and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Commitments and Contingencies (continued)
Contingencies
In October 1995, Lykes Bros. Steamship Co., Inc. ("Lykes")
filed a petition seeking protection from its creditors under
Chapter 11 of the U.S. Bankruptcy laws. The company chartered
four L9-class vessels from Lykes, and Lykes chartered three
Pacesetter vessels from the company. In July 1996, the
Bankruptcy Court gave its final approval to a settlement
agreement between the company and Lykes, establishing terms for
the payment of the company's claims against Lykes for unpaid
charter hire. The settlement allowed Lykes the use of the
three Pacesetters until December 31, 1997 and required Lykes to
obtain the release of liens it permitted to be established
against those vessels. On July 29, 1997, the Pacesetters were
returned to the company.
In April 1997, Lykes' Plan of Reorganization was
confirmed, and on July 29, 1997, Lykes and Canadian Pacific,
Ltd. ("CP") finalized its agreement for CP's acquisition of
Lykes' U.S. container shipping services. In addition, the
company and CP reached an agreement which allows the company to
realize most of the remaining benefits due under its settlement
with Lykes. Appeals of certain Bankruptcy Court orders
underlying the company's agreement with Lykes have been
dismissed. As a result of the settlement and CP acquisition,
Lykes' bankruptcy is not expected to have a material adverse
impact on the company's consolidated financial position or
results of operations.
The company is a party to various legal proceedings,
claims and assessments arising in the course of its business
activities. Based upon information presently available, and in
light of legal and other defenses and insurance coverage and
other potential sources of payment available to the company,
management does not expect these legal proceedings, claims and
assessments, individually or in the aggregate, to have a
material adverse impact on the company's consolidated financial
position or operations.
Note 8. Proposed Merger with Neptune Orient Lines Ltd
On April 13, 1997, the company entered into a merger
agreement with NOL, a Singapore corporation, and Neptune
U.S.A., Inc., a Delaware corporation and an indirect, wholly-
owned subsidiary of NOL ("Sub"), pursuant to which Sub will
merge with and into the company (the "Proposed Merger"). As a
result of the Proposed Merger, the outstanding shares of the
company's stock will be converted into the right to receive
$33.50 per share in cash and the company will become a wholly-
owned subsidiary of NOL. The Proposed Merger, which has been
approved by each company's Board of Directors, is conditioned
upon approval by holders of a majority of the outstanding
shares of the company's Common Stock and is subject to certain
other conditions, including review under the Exon-Florio
Amendment and the approval of MarAd. The parties expect to
consummate the transaction in the fall of 1997, following the
receipt of regulatory approvals.
<PAGE>
APL Limited and Subsidiaries
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial
Condition and Results of Operations for the quarter and 26
weeks ended June 27, 1997 should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the companyOs Annual Report
on Form 10-K for the year ended December 27, 1996.
RESULTS OF OPERATIONS
Summary Results Second Quarter Year to Date
(In millions) 1997 1996 Change 1997 1996 Change
______________________________________________________________________
Revenues
Container
Transportation $542.4 $560.5 (3%) $1,129.2 $1,193.9 (5%)
Logistics Services
and Other 84.2 80.6 5% 176.3 173.5 2%
_____________________________________________________________________
Operating Income $ 18.6 $ 42.5 (56%) $ 9.8 $ 60.1 (84%)
_____________________________________________________________________
Pretax Income (Loss) $ 11.1 $ 33.9 (67%) $ (6.7)$ 40.5 (116%)
_____________________________________________________________________
_____________________________________________________________________
Overview
Operating income for the second quarter and first half of
1997 was $18.6 million and $9.8 million, respectively, compared
with operating income for the second quarter and first half of
1996 of $42.5 million and $60.1 million, respectively.
Included in operating income for the second quarter of 1997 was
a gain of $5.3 million from the sale of chassis, a gain of $1.5
million from the favorable settlement of claims related to the
1995 Kobe earthquake and costs of $2.7 million related to the
proposed merger with NOL. In addition, operating income for
the first half of 1997 included a gain of $3.0 million from the
favorable settlement of claims related to the 1994 collision of
a vessel. Included in operating income for the second quarter
and first half of 1996 was a $6.9 million gain from the sale of
the company's rights to service certain domestic intermodal
customers. Also included in operating income for the first
half of 1996 was a $1.6 million gain from the sale of a vessel
which occurred in the first quarter.
In the second quarter and first half of 1997, the
company's earnings decreased as a result of reduced container
transportation revenues due to decreased average revenue per
forty-foot equivalent unit ("FEU") in most of the company's
markets, as compared with the second quarter and first half of
1996. The decrease in revenues in the second quarter of 1997
was compounded by increased expenses as compared with the
second quarter of 1996. In addition, the decrease in revenues
in the first half of 1997 was offset in part by decreased
expenses as compared with the first half of 1996.
CONTAINER VOLUMES Second Quarter Year to Date
BY MAJOR MARKET (1) 1997 1996 Change 1997 1996 Change
_________________________________________________________________
Asia to North America 42.4 40.9 3% 86.9 80.7 8%
North America to Asia 28.8 29.9 (4%) 61.5 66.0 (7%)
Intra-Asia 47.5 36.7 30% 95.9 75.7 27%
Asia-Europe 10.6 10.0 6% 21.0 18.7 12%
Latin America 6.8 3.4 101% 12.9 6.6 96%
Refrigerated 11.1 11.3 (2%) 25.4 25.3 0%
Stacktrain 110.9 92.3 20% 230.1 193.5 19%
Automotive 15.2 22.0 (31%) 34.3 49.2 (30%)
_________________________________________________________________
_________________________________________________________________
(1)Volumes are stated in thousands of FEUs, except Stacktrain
and Automotive, which are stated in thousands of shipments.
Volumes data are based upon shipments originating during the
period, which differs from the percentage-of-completion
method used for financial reporting purposes.
<PAGE>
Asia to North America
Volumes increased in the second quarter and first half of
1997, compared with the comparable 1996 periods, due primarily
to strong export activities in North and South China and India.
Lower manufacturing costs in China have shifted customer
production facilities to that region, thereby increasing
volumes from that area.
North America to Asia
Volumes declined in this market in the second quarter of
1997 compared with the second quarter of 1996 due primarily to
decreased shipments to Korea, Hong Kong and Indonesia. Volumes
also declined in this market in the first half of 1997 compared
with the first half of 1996 due primarily to decreased
shipments to North China, Hong Kong and Indonesia. The
decreased volumes are the result of reduced demand in this
market. In addition, the company sold five vessels and its
Guam business to Matson Navigation Company, Inc. ("Matson") in
the first quarter of 1996, which also contributed to the
decline in volumes in the first half of 1997. The decrease in
volumes, in the second quarter and first half of 1997 compared
with last year's second quarter and first half, was partially
offset by increased military cargoes to Japan and Korea as a
result of the company's increased share of military business
due to success with and changes to the U.S. government's
contract award program.
Intra-Asia
The company's intra-Asia volumes increased in the second
quarter of 1997 compared with last year's second quarter
primarily as a result of increased shipments to and from
Taiwan, Japan and India. In addition, intra-Asia volumes
increased in the first half of 1997 compared with the first
half of 1996 primarily as a result of increased shipments to
and from Japan, Taiwan, South China and India. The increased
volumes were the result of focused marketing efforts in this
market.
Asia-Europe
Volumes increased eastbound and decreased westbound in the
second quarter of 1997 as compared with the second quarter of
1996. Eastbound volumes increased due to shipments from the
Netherlands and the United Kingdom as the company pursued
additional cargo in order to gain market share. Westbound
volumes decreased due to reduced shipments from Hong Kong
reflecting competitive market conditions. Volumes increased in
both directions in the first half of 1997 over the first half
of 1996 as a result of the company's pursuit of additional
cargo in order to gain market share. Eastbound volumes
increased due to shipments from the Netherlands, Germany,
Belgium and the United Kingdom, and westbound volumes increased
due to shipments from North and South China.
Latin America
Volumes in this market increased in the second quarter of
1997 compared with the second quarter of 1996 due primarily to
increased eastbound shipments from Indonesia, Hong Kong and
South China to Mexico and Panama. Volumes also increased in
the first half of 1997 compared with the first half of 1996 due
primarily to increased eastbound shipments from Hong Kong,
Indonesia and Taiwan. The increase in volumes resulted from
more focused marketing efforts. In addition, westbound and
intra-Caribbean volumes also increased during the periods due
to the introduction of intra-Caribbean services in mid-1996 and
increased marketing efforts.
Refrigerated
Refrigerated volumes decreased in the second quarter of
1997 compared with the second quarter of 1996, as decreased
volumes in the intra-Asia market were only partially offset by
increased westbound commercial shipments. Compared with the
first half of 1996, volumes of refrigerated
<PAGE>
cargo increased slightly in 1997 due primarily to
increased exports to Japan, Taiwan and the United Arab
Emirates, which were partially offset by decreased volumes
primarily in the intra-Asia market. The changes in volumes
resulted from changes in demand in the related markets.
Stacktrain
North America stacktrain volumes increased significantly
in the second quarter and first half of 1997 compared with last
year's second quarter and first half due to growth in demand
and the company's pricing strategies to remain competitive.
Partially offsetting these increases was the loss of volumes
related to the sale of the company's rights to service certain
domestic intermodal customers in the second quarter of 1996.
Automotive
Automotive volumes declined in the second quarter and
first half of 1997 compared with the same periods in 1996, due
to reduced stacktrain and non-stacktrain shipments by U.S.
automobile manufacturers between the U.S. and Mexico and within
the U.S.
AVERAGE REVENUE PER UNIT (1)Second Quarter Year to Date
1997 1996 Change 1997 1996 Change
__________________________________________________________________
Trans-Pacific $3,170 $3,456 (8%) $3,185 $3,517 (9%)
Other Ocean
Transportation $1,779 $2,173 (18%) $1,834 $2,183 (16%)
Stacktrain Average $1,181 $1,290 (8%) $1,177 $1,297 (9%)
__________________________________________________________________
__________________________________________________________________
(1)Average revenue per unit is stated in FEUs, except for
Stacktrain, which is in shipments. Average revenue per unit
data are based upon shipments originating during the period,
which differs from the percentage-of-completion method used
for financial reporting purposes. Stacktrain revenue per
unit includes Automotive.
Trans-Pacific
In the second quarter and first half of 1997, the
company's trans-Pacific average revenue per FEU declined from
the same periods in 1996 due primarily to significant rate
pressures in the Asia to North America market resulting from
capacity outpacing growth in trade, and continued rate
reductions by the company and its competitors. Considerable
rate instability persists in this market, and the company
cannot predict whether rate reductions will continue to be
taken by the company or its competitors in 1997, or the extent
of such reductions, if any. Continued destabilization of
rates, if extensive, could have a material adverse impact on
the results of operations of carriers, including the company.
Also contributing to lower trans-Pacific average revenue per
FEU are lower rates and a lower percentage of high value cargo
in the North America to Asia market.
Other Ocean Transportation
Average revenue per FEU in the company's other ocean
transportation markets decreased in the second quarter and
first half of 1997 compared with the second quarter and first
half of 1996, due primarily to an increase in lower-rated,
short-leg cargo in the intra-Asia market. The decrease in
average revenue per FEU was compounded by continued rate
deterioration in the Asia-Europe market throughout 1996 and the
first half of 1997 due to excess vessel capacity and
significant rate pressure as carriers compete for market share.
Stacktrain
Stacktrain average revenue per shipment declined in the
second quarter and first half of 1997 compared with the same
periods in 1996 primarily due to lower rates resulting from
increased competition and excess equipment capacity in this
market.
<PAGE>
Proposed Merger with Neptune Orient Lines Ltd
On April 13, 1997, the company entered into a merger
agreement with NOL, and Neptune U.S.A., Inc. ("Sub"), pursuant
to which Sub will merge with and into the company (the
"Proposed Merger"). As a result of the Proposed Merger, the
outstanding shares of the company's stock will be converted
into the right to receive $33.50 per share in cash and the
company will become a wholly-owned subsidiary of NOL. The
Proposed Merger, which has been approved by each company's
Board of Directors, is conditioned upon approval by holders of
a majority of the outstanding shares of the company's Common
Stock and is subject to certain other conditions, including
review under the Exon-Florio Amendment and the approval of
MarAd. The parties expect to consummate the transaction in the
fall of 1997, following the receipt of regulatory approvals.
Outlook
The company currently expects to operate profitably in the
second half of the year due to volume increases from seasonal
and other factors and continued focus on cost reduction,
partially offset by continued rate pressures in most of its
major markets as increased capacity continues to exceed market
growth.
Logistics Services and Other Revenues
Logistics Services and Other Revenues, which include cargo
handling, freight consolidation, logistics services and charter
hire revenues, totaled $84.2 million and $176.3 million in the
second quarter and first half of 1997, respectively, and $80.6
million and $173.5 during comparable periods of 1996. The
increase reflects increased cargo handling revenues in Asia and
North America associated with greater use of the company's
terminals by third parties.
Alliances
The alliance agreements between the company, OOCL, MOL,
NLL and MISC, collectively referred to as the Global Alliance,
were fully implemented in the first quarter of 1996.
NLL merged with the container line operations of P&O on
December 31, 1996 to form P&O-NL. P&O-NL has advised the
Global Alliance that NLL will be withdrawing from the Global
Alliance. The future alliance participation of the company and
NOL following consummation of the proposed merger of the
company and NOL discussed in Note 8, has not yet been
determined. The company cannot predict, if the proposed merger
is consummated, when the alliance participation of the company
and NOL will be determined or the resulting impact on the
operations of the company. However, while no assurances can be
given, the company believes that it will be able to reach
acceptable agreements for future alliance participation.
On July 16, 1997, the company and the remaining members of
the Global Alliance entered into a letter of intent with
Hyundai to enter into a multi-year agreement to share vessel
space and coordinate vessel sailings in the trans-Pacific and
Asia-Europe trades. The parties expect to complete detailed
agreements and vessel deployments and obtain necessary
government approvals by the end of 1997, and to initiate new
services during the first quarter of 1998. The five carriers
expect to begin exchanging vessel space in the trans-Pacific
and Asia-Europe trades on a limited basis during the third
quarter of 1997. There can be no assurances whether or when
the detailed agreements will be completed or government
approvals will be obtained.
<PAGE>
On June 5, 1997, the company and TMM entered into a joint
operating company agreement pursuant to which the companies
will offer trans-Pacific services in the Asia-Mexico trade. As
part of the agreements, the company is managing the operations
of six time chartered vessels and will guarantee the charter
hire of five vessels, two of which it currently guarantees.
The amount of the additional three vessel charter hire payments
which are guaranteed through the expiration of the charters in
1999 are estimated to be $48.6 million. Initial operations
under the agreement began in July 1997. Agreements necessary
to implement the transaction are being finalized.
Maritime Regulation and Subsidy
Under the company's ODS agreement with MarAd, which
expires December 31, 1997, payments to the company were
approximately $6.9 million and $14.7 million in the second
quarter and first half of 1997, respectively, and $11.8 million
and $25.4 million during comparable periods of 1996. The
company expects ODS payments in 1997 to be substantially lower
than in 1996 as a result of a reduction in the number of U.S.
flag vessels operated by the company. During 1996, the company
sold five U.S. flag vessels to Matson and returned five
chartered U.S. flag vessels, four of which had been chartered
from Lykes.
In October 1996, the Maritime Security Act of 1996 was
signed into law. This legislation provides for a Maritime
Security Program ("MSP") administered by MarAd with up to $100
million in payments per annum to be appropriated by Congress on
an annual basis. MSP provides $2.1 million per vessel per
year, compared with up to $3.6 million per vessel per year
under ODS, and will expire on October 1, 2005.
In January 1997, the company signed operating agreements
under MSP for nine ships, including five C10-class vessels and
four C11-class vessels. The company has a one-year period in
which to begin the participation of those vessels in the
program. Vessels participating in MSP must be registered under
U.S. flag and manned by U.S. crews and must participate in the
Emergency Preparedness Program established by the Maritime
Security Act. Certain U.S. citizenship requirements are
applicable to the participating carrier. Transfers of
operating agreements and substitution of vessels are permitted
under specified circumstances, subject to the prior approval of
MarAd. The operating agreements are one-year contracts, which
will be automatically renewed each year through September 30,
2005 subject to available funding. No assurances can be given
that the funds will continue to be appropriated. If annual
funding is not appropriated by the U.S. Congress, the operating
agreements may be terminated on 60 days' notice by MarAd. The
agreements may also be terminated by the participating carrier
on 60 days' notice at any time, provided that the carrier
continues to participate in the Emergency Preparedness Program
and the vessels continue under U.S. flag registry through the
end of the then-current fiscal year.
On June 25, 1997, the company submitted a notice to MarAd
detailing plans to transfer its ODS agreement and its nine MSP
Operating Agreements to American Ship Management, LLC, a newly
formed, U.S.-owned and operated company that will be
independent of the company and NOL. The filing requests that
MarAd allow the transfer to become effective immediately prior
to consummation of the planned merger between the company and
NOL. MarAd has advised the company that it considers that the
90-day period for its review of the transfer of the MSP
agreements will expire October 16, 1997. No equivalent
statutory time period for approval of a request to transfer an
ODS agreement is specified, but such MarAd action is subject to
review by the U.S. Secretary of Transportation and does not
become final until the expiration of 20 days (25 days if an
appeal is filed), and the U.S. Secretary of Transportation can
further postpone the effective date of the action. There is no
defined statutory period within which MarAd is required to act
with respect to the other maritime approvals which are to be
sought in connection with the Proposed Merger. The company is
unable to predict when or whether MarAd will grant its
approval. The company and NOL intend to resubmit a voluntary
notice to the Staff Chairman of the Committee on
<PAGE>
Foreign Investment in the United States ("CFIUS") pursuant
to the Exon-Florio laws. There is a 30-day period for such
review, which can be extended by CFIUS. The company is also
unable to give any assurances as to whether clearance will be
granted by CFIUS.
Due to the enactment of MSP, the company's collective
bargaining agreement covering its unlicensed personnel expired
and was renegotiated, and a new agreement was reached in
December 1996. The new contract expires in June 1999. The
company has also been engaged in negotiations with the three
unions representing its licensed personnel regarding
continuation of their agreements and, during July 1997, the
company reached agreements with these unions, extending their
contracts to June 2005. The contracts are subject to
ratification by votes of the unions' members. The company is
unable to give assurances as to whether such contracts will be
ratified, and if they are not ratified, labor disturbances
could result which could have a material adverse impact on the
company.
In 1997, legislation was introduced in the U.S Senate that
would substantially modify the Shipping Act of 1984 (the
"Shipping Act"). The Shipping Act, among other things,
provides the company with certain immunity from antitrust laws
and requires the company and other carriers in U.S. foreign
commerce to file tariffs publicly. The legislation would amend
the Shipping Act to mandate the right of independent contracts
between shippers and ocean carriers, allow contract terms to be
treated confidentially except for specific terms, and
strengthen remedies to combat predatory activities by foreign
carriers. Limited continuing oversight by a successor agency
to the Federal Maritime Commission would continue under this
legislation, with no change to the companyOs existing antitrust
immunity. The company is unable to predict whether this or
other proposed legislation will be introduced or enacted.
Enactment of legislation modifying the Shipping Act, depending
upon its terms, could have a material impact on the competitive
environment in which the company operates and on the company's
results of operations. The company is unable to predict the
nature or extent of the impact of this legislation, if enacted.
EXPENSES Second Quarter Year to Date
(In millions) 1997 1996 Change 1997 1996 Change
_____________________________________________________________________
Transportation
Land $204.6 $211.2 (3%) $ 428.5 $ 463.3 (8%)
Ocean 96.9 91.5 6% 216.2 212.9 2%
Equipment 60.7 57.5 6% 130.7 125.8 4%
Cargo Handling 159.9 151.9 5% 339.6 313.9 8%
Sales, General &
Administrative 90.0 93.4 (4%) 187.8 199.9 (6%)
Other (Income) Expense (4.1) (6.9) (41%) (7.1) (8.5) (17%)
_____________________________________________________________________
Total $608.0 $598.6 2% $1,295.7 $1,307.3 (1%)
_____________________________________________________________________
Operating Ratio (1) 98% 94% 100% 96%
_____________________________________________________________________
_____________________________________________________________________
(1)Other (Income)/Expense is excluded from this calculation.
Land Transportation
Land transportation expenses decreased in the second
quarter and first half of 1997 from the second quarter and
first half of 1996, primarily due to decreases in domestic
automotive and freight brokerage volumes as a result of the
sale of the company's rights to service certain domestic
intermodal customers in the second quarter of 1996.
<PAGE>
Ocean Transportation
Ocean transportation expenses increased in the second
quarter and first half of 1997 compared with the second quarter
and first half of 1996 as a result of increased purchases of
vessel space from alliance partners in the Asia-Latin America
service, additional feeder costs in Asia due to slot purchase
arrangements and additional vessel charters, and lower subsidy
payments resulting from operating fewer vessels in 1997.
Partially offsetting these increases were reductions in costs
resulting from fewer vessels operating in the 1997 periods due
to the sale of five U.S. flag vessels to Matson in 1996 and the
return of five chartered U.S. flag vessels, four of which had
been chartered from and returned to Lykes, during 1996.
Transportation Equipment
Transportation equipment costs increased in the second
quarter and first half of 1997 compared with the second quarter
and first half of 1996 due to increased container lease and
maintenance costs.
Cargo Handling
Cargo handling expenses increased in the second quarter
and first half of 1997 compared with the same periods in 1996,
as result of higher cargo volumes from both the company and its
alliances, primarily in intra-Asia and Latin America markets,
and from higher labor rates. These increases were partially
offset by the strengthening value of the U.S. dollar against
the Japanese yen in the second quarter and first half of 1997
compared with the same periods in 1996.
Sales, General and Administrative
Sales, general and administrative expenses decreased in
the second quarter and first half of 1997 compared with the
second quarter and first half of 1996, as the company realized
salary and benefit savings from its 1995 restructuring which
resulted in the elimination of certain positions in the U.S.
and Asia during 1996. Other factors were lower accruals for
certain employee benefit costs due to workforce reductions, and
favorable insurance claims experience.
Other Income and Expense
In the second quarter of 1997, the company recognized a
gain of $5.3 million from the sale of chassis, recorded a gain
of $1.5 million from the favorable settlement of claims related
to the 1995 Kobe earthquake and incurred $2.7 million in costs
related to the proposed merger with NOL. In addition, in the
first quarter of 1997, the company recorded $3.0 million from
the favorable settlement of claims related to the 1994
collision of a vessel. In the second quarter and first quarter
of 1996, the company recognized gains of $6.9 million from the
sale of the companyOs rights to service certain domestic
intermodal customers and $1.6 million from the sale of a vessel
to Matson, respectively.
Net Interest Expense
Net interest expense decreased from $8.6 million and $19.6
million in the second quarter and first half of 1996,
respectively, to $7.6 million and $16.5 million in the second
quarter and first half of 1997, respectively. The decrease was
primarily due to the repayment of the remaining balance of the
C10-class Series I Vessel Mortgage Bonds in the first quarter
of 1997, reductions in the balance of the C11-class Vessel
Mortgage Notes and higher interest capitalized under terminal
construction contracts compared with the same periods in 1996.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Summary of Financial Resources
(In millions) June 27 December 27
As of: 1997 1996
_________________________________________________________________
Cash, Cash Equivalents and
Short-term Investments $ 254.4 $ 283.0
Working Capital 221.4 225.9
Total Assets 1,832.9 1,880.2
Long-Term Debt and Capital
Lease Obligations (1) 685.4 706.2
_________________________________________________________________
June 27 June 28
For the 26 weeks ending: 1997 1996
_________________________________________________________________
Cash Provided by Operations $ 22.2 $ 62.0
_________________________________________________________________
Investing Activities
Proceeds from Sales of
Property and Equipment $ 35.7 $ 160.5
Proceeds from Sale of
Distribution Services 2.0
Capital Expenditures
Ships $ 1.2 $ 67.6
Containers, Chassis and Rail Cars 11.1 7.3
Leasehold Improvements and Other 53.6 14.7
_________________________________________________________________
Total Net Capital Expenditures $ 65.9 $ 89.6
_________________________________________________________________
Financing Activities
Borrowings $ 62.2
Repayment of Debt and
Capital Leases $ (20.9) (31.5)
Dividend Payments (4.9) (5.1)
_________________________________________________________________
_________________________________________________________________
(1)Includes current and long-term portions.
Cash Flows
In connection with the new terminal in Los Angeles and
terminal improvements in Kaohsiung, Taiwan, the company entered
into agreements to purchase new cranes and, in April 1997,
reached an agreement with a group of banks pursuant to which
the company assigned its rights to the cranes to the banks, and
the banks leased the cranes to the company, subject to certain
terms and conditions on a year-to-year basis. Under the
agreement, the company makes all payments to the crane
manufacturer and is subsequently reimbursed by the banks. The
payments and receipts have been included in the Consolidated
Statement of Cash Flows as Capital Expenditures and Proceeds
from the Sales of Property and Equipment, respectively. In
addition, the banks intend to acquire ownership of certain
cranes at the company's Oakland terminal and will lease the
cranes to the company. The aggregate cost of all cranes
involved in the transaction is approximately $102.9 million.
Under the terms of its agreement, the company has annual
options to either renew the lease, purchase the cranes or
arrange for the sale of the cranes to a third party. As part
of the sale option, the company has guaranteed the lessors a
minimum estimated value of $74.3 million which will decline
over time.
In the first quarter of 1996, the company sold Matson five
U.S. flag ships (three C9-class vessels and two C8-class
vessels) and certain of its assets in Guam for approximately
$158 million in cash.
Capital Spending
Capital expenditures of $65.9 million in the first half of
1997 were primarily for purchases of chassis, containers, and
terminal and leasehold improvements. Capital expenditures in
1997, including expenditures for the Los Angeles and Kaohsiung
cranes, are expected to be approximately $144 million; non-
crane expenditures will be primarily for terminal and leasehold
<PAGE>
improvements, transportation equipment and systems. The
company has outstanding purchase commitments to acquire
facilities, equipment and services totaling $15.1 million. In
addition to vessel expenditures of $67.6 million, the company
made capital expenditures in the first half of 1996 of $22.0
million primarily for purchases of chassis, containers, and
terminal and leasehold improvements.
In January 1996, the company took delivery of the sixth
and final C11-class vessel, five of which were delivered during
1995. The total cost of the six C11-class vessels was $529
million, including total payments to the shipyards of $503
million, of which $62 million was paid in January 1996. To
finance a portion of these vessel purchases, the company
borrowed $402 million. Of this amount, $62.2 million was
borrowed in January 1996 and the remainder in 1995. The
company has entered into four interest rate swap agreements to
exchange the variable interest rates on certain vessel mortgage
notes for fixed rates over periods ranging between 7 and 12
years. This debt is more fully described in Note 4 of Notes to
Consolidated Financial Statements.
Share Repurchases
In April 1996, the Board of Directors approved a program
to repurchase up to an aggregate of $50 million of the
company's common stock from time to time through open-market or
privately negotiated transactions. In the third and fourth
quarters of 1996, the company paid $29 million to repurchase
approximately 1.3 million shares of its common stock under this
program. No shares were repurchased during the first half of
1997.
Capital Resources
The company has a credit agreement with a group of banks
which provides for an aggregate commitment of $200 million
through March 1999. Under that agreement, the company also has
an option to sell up to $150 million of certain of its accounts
receivable to the banks as an alternative to borrowing. There
have been no borrowings under this agreement.
The company believes its existing resources, cash flows
from operations and borrowing capacity under its existing
credit facilities will be adequate to meet its liquidity needs
for the foreseeable future.
CERTAIN FACTORS THAT MAY AFFECT OPERATING RESULTS
Statements prefaced with "expects", "anticipates",
"estimates", "believes" and similar words, including statements
concerning anticipated rate and volume trends, alliance
participation, regulatory approvals and capital spending, are
forward-looking statements based on the company's current
expectations as to prospective events, circumstances and
conditions over which it may have little or no control and as
to which it can give no assurances. All forward-looking
statements, by their nature, involve risks and uncertainties,
including those discussed above and below, that could cause
actual results to differ materially from those projected.
The company expects that it and the shipping industry
generally will face challenging conditions in coming years.
The adversity of the operating environment and its impact on
the company's operating results will depend on a variety of
factors, including: the timing and extent of an anticipated
slowing of market growth in certain markets served by the
company; the amount and timing of an anticipated significant
increase in industry capacity due to new vessel deliveries to
competing carriers; rate reductions in some market segments due
to this additional capacity and other factors; successful
implementation and continuation of the company's alliances,
which comprise a significant factor in the company's long-term
strategy to remain competitive; and the pace and degree of
industry deregulation.
As a result of capacity increases exceeding market growth
and increased competition, considerable rate instability exists
in most of the company's major markets. Destabilization of
rates has in the past had and, if extensive, could in the
future have a material adverse impact on the results of
operations of carriers in these trades, including the company.
<PAGE>
Demand in the trans-Pacific market is dependent on factors
such as the quantity of available import and export cargo and
economic conditions in the U.S. and other Pacific Basin
countries. The degree to which any growth or contraction in
the trans-Pacific market impacts the company will depend in
large part on the introduction of additional vessels into the
market by the company's competitors. Because a number of
competing ocean carriers have placed orders for the
construction of a significant number of new vessels, capacity
in the trans-Pacific market is expected to grow significantly
more than demand, which could result in further rate
reductions.
Other risks and uncertainties include: growth trends in
other markets served by the company, the company's ability to
respond to those trends, changes in the cost of fuel, the
status of labor relations, the amplitude of recurring seasonal
business fluctuations, and the continuation and effectiveness
of the Trans-Pacific Stabilization Agreement and the various
shipping conferences to which the company belongs. If the
recently reached labor agreements are not ratified, labor
difficulties which could have a material adverse affect on the
company's operating results could occur. The company has
experienced such difficulties at times in the past and can
provide no assurance that they will not occur in the future.
Also, the company is subject to inherent risks of
conducting business internationally, including changes in:
legislative or regulatory requirements, the relative values of
the U.S. dollar and the various foreign currencies with which
the company is paid and funds its local operations, tariffs and
other trade barriers and restrictions affecting its customers,
payment cycles, the difficulty of collecting accounts
receivable, taxes, and the burdens of complying with a variety
of foreign laws. In connection with its international
operations, the company is also subject to general geopolitical
risks, such as political and economic instability and changes
in diplomatic and trade relationships affecting the company or
its customers.
The company's Proposed Merger with NOL may have
significant effects on the company's future operations,
although the nature and extent of such effects cannot currently
be determined. The Proposed Merger is also subject to the
approval of the stockholders of the company and to regulatory
approvals, including the approval of MarAd, and no assurances
can be given as to whether such approvals will be obtained. If
the Proposed Merger is not consummated the company would again
consider alternatives to increase shareholder value, which
alternatives may include continued operations as an independent
company with increased focus on its terminal, intermodal and
logistics operations and possible corporate restructurings to
take advantage of more competitive tax structures, the sale of
certain lines of business or assets of the company, a spin-off
of one or more of the business divisions of the company and a
leveraged recapitalization of the capital stock of the company
(or a combination of the foregoing), as well as a sale or
merger of the company.
The company expressly disclaims any obligation or
undertaking to update any forward-looking statements contained
herein in the event of any change in the company's expectations
with regard thereto or with regard to current or prospective
conditions or circumstances on which any such statement is
based.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The company is a party to various pending legal
proceedings, claims and assessments arising in the course of
its business activities, including actions relating to trade
practices, personal injury or property damage, alleged breaches
of contracts, torts, labor matters, employment practices, tax
matters and miscellaneous other matters. Some of these
proceedings involve claims for punitive damages, in addition to
other specific relief.
Among these actions are approximately 3,670 cases pending
against the company, together with numerous other ship owners
and equipment manufacturers, involving injuries or illnesses
allegedly caused by exposure to asbestos or other toxic
substances on ships. In May 1996, an order was entered in the
United States District Court for the Eastern District of
Pennsylvania, which administratively dismissed most of such
cases without prejudice and with all statutes of limitation
tolled, and with reinstatement permitted upon fulfillment by
plaintiffs of certain specified conditions. In July 1996, the
Court issued an order to reinstate 29 cases against vessel
owners and to dismiss the vessel owners' third party claims and
cross-claims against manufacturers of asbestos products. On
June 25, 1997, the Court issued a clarifying order permitting
vessel owners to add third party claims against specific
manufacturers. In discussion with shipowners' counsel, the
Court expanded its intention to allow the reinstatement of
cross-claims and third party claims already asserted. Written
confirmation is expected. The company is presently unable to
ascertain or predict the potential impact of this order on the
disposition or eventual outcome of such cases.
The company insures its potential liability for bodily
injury to seamen through mutual insurance associations.
Industry-wide resolution of asbestos-related claims and
resolutions of claims against bankrupt shipping companies at
higher than expected amounts could result in additional
contributions to those associations by the company and other
association members.
In December 1989, the government of Guam filed a complaint
with the Federal Maritime Commission ("FMC") alleging that
American President Lines, Ltd. and an unrelated company charged
excessive rates for carrying cargo between the U.S. and Guam,
in violation of the Shipping Act and the Intercoastal Shipping
Act of 1933, and seeking an undetermined amount of reparations.
Three private shippers are also complainants in this
proceeding. On June 3, 1996, the FMC administrative law judge
ordered that the complaint be dismissed on the merits. The
complainants filed its appeal with the FMC on July 25, 1996,
and American President Lines, Ltd. filed its reply on September
16, 1996. A decision by the FMC is expected in 1997.
The company and its directors have been named as
defendants in a purported class action on behalf of all public
stockholders of the company pending in the Superior Court of
the State of California for the County of Alameda, captioned
Soshtain et. al. v. Arledge et. al., Case No. 781838-3. The
complaint was filed on April 18, 1997 and alleges that the
company's directors breached their fiduciary duties in
connection with the Proposed Merger with NOL by failing to take
all necessary steps to ensure that the company's stockholders
would receive the maximum value realizable for their shares,
and seeks damages in an unspecified amount and equitable
relief, including an injunction against consummation of the
Proposed Merger. The time for the defendants to move or answer
with respect to the complaint has not yet elapsed.
Based upon information presently available, and in light
of legal and other defenses and insurance coverage and other
potential sources of payment available to the company,
management does not expect the legal proceedings described,
individually or in the aggregate, to have a material adverse
impact on the company's consolidated financial position or
operations.
<PAGE>
Item 6.EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
The following documents are exhibits to this Form 10-Q:
Exhibit
No. Description of Document
_______ _______________________
27 Financial Data Schedules filed under Article 5 of
Regulation S-X for the second quarter ended June 27, 1997.
(b) Reports on Form 8-K
On April 14, 1997, the company filed a Form 8-K dated
April 13, 1997, relating to the Agreement and Plan of
Merger with Neptune Orient Lines Ltd, a Singapore
corporation ("NOL"), and Neptune U.S.A., Inc., a Delaware
corporation and an indirect, wholly-owned subsidiary of
NOL ("Sub"), pursuant to which Sub will merge with and
into the company and the company will become a wholly-
owned subsidiary of NOL.
On June 25, 1997, The company filed a Form 8-K relating to
the company's Press Release dated June 25, 1997, which
announced that American President Lines, Ltd. ("APL"), a
wholly owned subsidiary of the company, has submitted a
notice to MarAd detailing plans to transfer its nine MSP
Operating Agreements and its ODS Agreement to American
Ship Management, LLC, a newly formed, U.S.-owned and
operated company that will be independent of APL and NOL.
The filing requests that MarAd allow the transfer to
become effective immediately prior to the consummation of
the planned merger between the company and NOL.
<PAGE>
APL Limited and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
APL LIMITED
Dated: August 1, 1997 By /s/ William J. Stuebgen
________________________ ________________________
William J. Stuebgen
Vice President,
Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Form 10-Q of APL
Limited for the quarter ended June 27, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-END> JUN-27-1997
<CASH> 137,811
<SECURITIES> 116,602
<RECEIVABLES> 227,358<F1>
<ALLOWANCES> 0
<INVENTORY> 28,388
<CURRENT-ASSETS> 585,354
<PP&E> 1,949,242
<DEPRECIATION> 843,095
<TOTAL-ASSETS> 1,832,874
<CURRENT-LIABILITIES> 363,980
<BONDS> 685,078
0
0
<COMMON> 24,763
<OTHER-SE> 473,718
<TOTAL-LIABILITY-AND-EQUITY> 1,832,874
<SALES> 0
<TOTAL-REVENUES> 1,305,521
<CGS> 0
<TOTAL-COSTS> 1,295,655<F2>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,908
<INCOME-PRETAX> (6,679)
<INCOME-TAX> (4,258)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,421)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
<FN>
<F1>The allowance for Doubtful Accounts, included in Receivables, amounted to
$17,640 at June 27, 1997.
<F2>The Provision for Doubtful Accounts, included in Total Costs, amounted to
$(452) for the 26 week period ended June 27, 1997.
</FN>
</TABLE>
