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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 2003
------------------
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 1-9063
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MARITRANS INC.
--------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0343903
- -------------------------------- ----------
(State or other jurisdiction of (Identification No.
incorporation or organization) I.R.S. Employer)
TWO HARBOUR PLACE
302 KNIGHTS RUN AVENUE
SUITE 1200
TAMPA, FLORIDA 33602
--------------------
(Address of principal executive offices)
(Zip Code)
(813) 209-0600
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Registrant's telephone number, including area code
(Former name, former address and former fiscal year,
if changed since last report)
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 requirements
for the past 90 days.
Yes X No
--- ---
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Common Stock $.01 par value, 8,159,094 shares outstanding as of
November 4, 2003
MARITRANS INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Income - Three months ended September 30,
2003 and 2002 4
Condensed Consolidated Statements of Income - Nine months ended September 30,
2003 and 2002 5
Condensed Consolidated Statements of Cash Flows - Nine months ended September 30,
2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3. Qualitative and Quantitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
PART I: FINANCIAL INFORMATION
MARITRANS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($000)
September 30, December 31,
2003 2002
------------- -------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 2,387 $ 239
Trade accounts receivable 7,196 9,396
Other accounts receivable 3,128 2,696
Inventories 3,208 3,253
Deferred income tax benefit 9,074 8,097
Prepaid expenses 3,800 3,135
-------- --------
Total current assets 28,793 26,816
Vessels and equipment 353,695 339,574
Less accumulated depreciation 178,199 162,713
-------- --------
Net vessels and equipment 175,496 176,861
Note receivable 3,444 3,780
Goodwill 2,863 2,863
Other 511 1,237
-------- --------
Total assets $211,107 $211,557
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt due within one year $ 2,084 $ 5,750
Trade accounts payable 1,940 2,829
Accrued shipyard costs 4,878 5,060
Accrued wages and benefits 4,228 1,718
Accrued insurance 1,615 1,655
Other accrued liabilities 7,174 1,987
-------- --------
Total current liabilities 21,919 18,999
Long-term debt 54,706 63,000
Accrued shipyard costs 7,317 7,590
Other liabilities 3,122 3,149
Deferred income taxes 41,732 49,432
Stockholders' equity:
Common stock 136 135
Capital in excess of par value 82,109 80,980
Retained earnings 48,903 36,061
Unearned compensation (758) (759)
Less: Cost of shares held in treasury (48,079) (47,030)
-------- --------
Total stockholders' equity 82,311 69,387
-------- --------
Total liabilities and stockholders' equity $211,107 $211,557
======== ========
See notes to financial statements.
3
MARITRANS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
($000, except per share amounts)
July 1 to July 1 to
September 30, 2003 September 30, 2002
------------------ -------------------
Revenues $ 33,684 $ 30,586
Costs and expenses:
Operations expense 18,250 16,310
Maintenance expense 6,094 4,968
General and administrative 2,079 1,937
Depreciation and amortization 5,216 4,771
--------- ---------
Total operating expense 31,639 27,986
Operating income 2,045 2,600
--------- ---------
Interest expense (809) (627)
Other income, net 197 726
--------- ---------
Income before income taxes 1,433 2,699
Income tax provision (benefit) (7,170) 1,012
--------- ---------
Net income $ 8,603 $ 1,687
========= =========
Basic earnings per share $ 1.08 $ 0.21
Diluted earnings per share $ 1.02 $ 0.20
Dividends declared per share $ 0.11 $ 0.11
See notes to financial statements.
4
MARITRANS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
($000, except per share amounts)
January 1 to January 1 to
September 30, 2003 September 30, 2002
------------------ ------------------
Revenues $ 105,825 $ 94,377
Costs and expenses:
Operations expense 55,207 49,229
Maintenance expense 16,105 12,426
General and administrative 6,364 5,930
Depreciation and amortization 15,495 14,143
---------- ----------
Total operating expense 93,171 81,728
Gain on sale of assets 1,099 --
---------- ----------
Operating income 13,753 12,649
Interest expense (1,906) (1,988)
Other income, net 591 1,184
---------- ----------
Income before income taxes 12,438 11,845
Income tax provision (benefit) (3,098) 4,442
---------- ----------
Net income $ 15,536 $ 7,403
========== ==========
Basic earnings per share $ 1.95 $ 0.91
Diluted earnings per share $ 1.84 $ 0.85
Dividends declared per share $ 0.33 $ 0.31
See notes to financial statements.
5
MARITRANS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($000)
January 1 to January 1 to
September 30, 2003 September 30, 2002
------------------ ------------------
Cash flows from operating activities:
Net income $ 15,536 $ 7,403
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,495 14,143
Deferred tax provision (benefit) (8,677) --
Changes in receivables, inventories and prepaid expenses 1,147 316
Changes in current liabilities, other than debt 6,587 4,658
Other 500 (3,570)
Gain on sale of assets (1,099) --
--------- --------
13,953 15,547
--------- --------
Net cash provided by operating activities 29,489 22,950
Cash flows from investing activities:
Collections on notes receivable 336 636
Proceeds from sale of assets 1,849 --
Purchase of vessels and equipment (14,880) (23,431)
--------- --------
Net cash used in investing activities (12,695) (22,795)
--------- --------
Cash flows from financing activities:
Borrowings under long-term debt 36,790 9,000
Payment of long-term debt (41,250) (9,488)
Net (repayments) borrowings under revolving credit facilities (7,500) 26,000
Purchase of treasury stock (150) (25,571)
Proceeds from exercise of stock options 158 878
Dividends declared and paid (2,694) (2,541)
--------- --------
Net cash used in financing activities (14,646) (1,722)
--------- --------
Net increase (decrease) in cash and cash equivalents 2,148 (1,567)
Cash and cash equivalents at beginning of period 239 3,558
--------- --------
Cash and cash equivalents at end of period $ 2,387 $ 1,991
========= ========
See notes to financial statements
6
MARITRANS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
1. Basis of Presentation/Organization
Maritrans Inc. owns Maritrans Operating Company L.P. (the "Operating
Company"), Maritrans General Partner Inc., Maritrans Tankers Inc.,
Maritrans Barge Co., Maritrans Holdings Inc. and other Maritrans
entities (collectively, the "Company"). These subsidiaries, directly and
indirectly, own and operate oil tankers, tugboats, and oceangoing
petroleum tank barges principally used in the transportation of oil and
related products along the Gulf and Atlantic Coasts.
In the opinion of management, the accompanying condensed consolidated
financial statements of Maritrans Inc., which are unaudited (except for
the Condensed Consolidated Balance Sheet as of December 31, 2002, which
is derived from audited financial statements), include all adjustments
(consisting of normal recurring accruals) necessary to present fairly
the financial statements of the consolidated entities.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could
differ from those estimates.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the unaudited condensed consolidated financial statements do
not include all of the information and notes normally included with
annual financial statements prepared in accordance with generally
accepted accounting principles. These financial statements should be
read in conjunction with the consolidated historical financial
statements and notes thereto included in the Company's Form 10-K for the
period ended December 31, 2002.
Certain amounts in the prior year financial statements have been
reclassified to conform to their current year presentation.
Impact of Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections" ("SFAS 145"). SFAS 145 requires, among other
things, gains or losses of extinguishment of debt to be classified as
income (loss) from continuing operations rather than as an extraordinary
item, unless such extinguishment is determined to be extraordinary
pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of a Disposal of a Segment
of a Business and Extraordinary, Unusual, and Infrequently Occurring
Transactions" ("Opinion 30"). The provisions of SFAS 145 related to the
rescission of SFAS 4 are effective for fiscal years beginning after May
15, 2002. Any gain or loss on extinguishment of debt that was classified
as an extraordinary item in prior periods presented that does not meet
the criteria in Opinion 30 for classification as an extraordinary item
must be reclassified.
7
The Company adopted the provisions of SFAS 145 beginning January 1, 2003
and, accordingly, will reclassify the loss of $2.5 million on the
retirement of debt which occurred in the fourth quarter of 2001 from an
extraordinary item to a separate component of income before taxes in the
Consolidated Statements of Income in the Company's Form 10-K for the
period ended December 31, 2003.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148").
SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), to provide three alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148
also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28,
"Interim Financial Reporting". SFAS 148 is effective for fiscal years
ending after December 15, 2002, with certain disclosure requirements
effective for interim periods beginning after December 15, 2002. The
Company adopted the transition provisions of SFAS 148 using the
prospective method beginning January 1, 2003. The prospective method
requires the Company to apply the fair value based method to all employee
stock awards granted, modified and settled in its consolidated statements
of income beginning on the date of adoption.
Pro forma information regarding net income and earnings per share is
required by Statement 123 and was determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options vesting
period. The Company's pro forma information for the quarter and nine
months ended September 30, is as follows:
8
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
($000, except per share data)
Net income as reported........................................... $8,603 $1,687 $15,536 $7,403
Add: Stock based compensation included in net income, net of
tax............................................................ 11 -- 32 --
Deduct: Total stock based compensation determined under the
fair value based method, net of tax............................ 35 30 100 91
------ ------ ------- ------
Pro forma net income............................................. $8,579 $1,657 $15,468 $7,312
====== ====== ======= ======
Basic earnings per share as reported............................. $ 1.08 $ 0.21 $ 1.95 $ 0.91
Pro forma basic earnings per share............................... $ 1.07 $ 0.21 $ 1.95 $ 0.90
Diluted earnings per share as reported........................... $ 1.02 $ 0.20 $ 1.84 $ 0.85
Pro forma diluted earnings per share ............................ $ 1.02 $ 0.19 $ 1.84 $ 0.83
2. Earnings per Common Share
The following data show the amounts used in computing basic and diluted
earnings per share ("EPS"):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(000's) (000's)
Income available to common stockholders used in basic EPS $8,603 $1,687 $15,536 $7,403
Weighted average number of common shares used in basic EPS 7,999 7,931 7,951 8,113
Effect of dilutive stock options and restricted shares 409 582 476 646
------ ------ ------- ------
Weighted number of common shares and dilutive potential common stock
used in diluted EPS 8,408 8,513 8,427 8,759
====== ====== ======= ======
3. Income Taxes
The Company's effective tax rate differs from the federal statutory rate
due primarily to state income taxes and certain nondeductible items.
The Company records reserves for income taxes based on the estimated
amounts that it would likely have to pay based on its taxable net income.
The Company periodically reviews its position based on the best available
information and adjusts its income tax reserve accordingly. In the
quarter ended September 30, 2003, the Company reduced its income tax
reserve by $7.7 million. Most of the decrease resulted from the income
tax effects of the restructuring of Maritrans Partners L.P. to Maritrans
Inc. in 1993. Due to the non-cash nature of the reduction, there was no
corresponding effect on cash flow or income from operations.
9
4. Share Buyback Program
On February 9, 1999, the Board of Directors authorized a share buyback
program (the "Program") for the acquisition of up to one million shares
of the Company's common stock. In February 2000 and again in February
2001, the Board of Directors authorized the acquisition of an additional
one million shares in the Program. The total authorized shares under the
Program is three million. As of September 30, 2003, 2,485,442 shares have
been repurchased under the Program and were financed from internally
generated funds, leaving 514,558 shares authorized for repurchase.
5. Debt
In September 2003, the Company entered into new financing agreements. The
new agreements consist of a $7.3 million loan with a 5-year amortization
and a $29.5 million loan with a 9.5-year amortization and a 50 percent
balloon payment at the end of the term. The new debt accrues interest at
an average fixed rate of 5.53 percent. The proceeds of the new debt were
used to pay off the balance of the term loan under the Company's existing
credit facility. Principal payments on the $7.3 million loan are required
on a quarterly basis beginning in January 2004. Principal payments on the
$29.5 million loan are required on a monthly basis beginning in November
2003. The Company has granted first preferred ship mortgages and a first
security interest in the some of its vessels and other collateral to the
lenders to secure the debt.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Information
Some of the statements in this Form 10-Q (this "10-Q") constitute
forward-looking statements under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including statements made with respect to present or anticipated utilization,
future revenues and customer relationships, capital expenditures, future
financings, and other statements regarding matters that are not historical
facts, and involve predictions. These statements involve known and unknown
risks, uncertainties and other factors that may cause actual results, levels of
activity, growth, performance, earnings per share or achievements to be
materially different from any future results, levels of activity, growth,
performance, earnings per share or achievements expressed in or implied by such
forward-looking statements.
The forward-looking statements included in this 10-Q relate to future events or
the Company's future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "seem," "should,"
"believe," "future," "potential," "estimate," "offer," "opportunity," "quality,"
"growth," "expect," "intend," "plan," "focus," "through," "strategy," "provide,"
"meet," "allow," "represent," "commitment," "create," "implement," "result,"
"seek," "increase," "establish," "work," "perform," "make," "continue," "can,"
"will," "include," or the negative of such terms or comparable terminology.
These forward-looking statements inherently involve certain risks and
uncertainties, although they are based on the Company's current plans or
assessments that are believed to be reasonable as of the date of this 10-Q.
Factors that may cause actual results, goals, targets or objectives to differ
materially from those contemplated, projected, forecast, estimated, anticipated,
planned or budgeted in such forward-looking statements include, among others,
the factors outlined in this 10-Q, changes in oil companies' decisions as to the
type and origination point of the crude that it produces, changes in the amount
of imported petroleum products, competition for marine transportation, domestic
and international oil consumption, the continuation of federal law restricting
United States point-to-point maritime shipping to U.S. vessels (the Jones Act),
demand for petroleum products, future spot market rates, changes in interest
rates, the effect of war or terrorists activities and the general financial,
economic, environmental and regulatory conditions affecting the oil and marine
transportation industry in general. Given such uncertainties, current or
prospective investors are cautioned not to place undue reliance on any such
forward-looking statements. These factors may cause the Company's actual results
to differ materially from any forward-looking statement.
Although the Company believes that the expectations in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance, growth, earnings per share or achievements. However,
neither the Company nor any other person assumes responsibility for the accuracy
and completeness of such statements. The Company is under no duty to update any
of the forward-looking statements after the date of this 10-Q to conform such
statements to actual results.
11
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I Item 1 of this Form
10-Q and the audited financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 2002 contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
Results of Operations
Time Charter Equivalent ("TCE") is a commonly used industry measure where direct
voyage costs are deducted from revenue. Maritrans enters into various types of
charters, some of which involve the customer paying substantially all voyage
costs, while other types of charters involve Maritrans paying some or
substantially all of the voyage costs. The Company's management believes that
the presentation of TCE revenue provides useful information regarding the
Company's financial condition and results of operation because TCE revenue
essentially nets the voyage costs and voyage revenue to yield a measure that is
comparable between periods regardless of the types of charters utilized. These
voyage costs are included in the "Operations expense" line item in the Condensed
Consolidated Statements of Income. TCE revenue is a non-GAAP financial measure
and a reconciliation of TCE revenue to revenue, the most directly comparable
GAAP measure, is set forth below.
Three Month Comparison
TCE revenue for the quarter ended September 30, 2003 compared to the quarter
ended September 30, 2002 is as follows:
9/30/03 9/30/02
------- -------
Voyage revenue $33,684 $30,586
Voyage costs 5,658 4,906
------- -------
Time Charter Equivalent $28,026 $25,680
======= =======
TCE revenue increased from $25.7 million to $28.0 million, an increase of $2.3
million or 9 percent, over the comparable quarter in 2002. Vessel utilization,
as measured by revenue days divided by calendar days available, increased from
77.5 percent in the third quarter of 2002 to 82.2 percent in the third quarter
of 2003. The increase in utilization had a positive impact on voyage revenue and
resulted from fewer vessels out of service for maintenance and weather in the
third quarter of 2003 compared to the third quarter of 2002. In the second
quarter of 2002, the MARITRANS 254 was taken out of service for her double hull
rebuild and returned in November 2002. The OCEAN STATES was taken out of service
early in September 2003 for her double-hull rebuild and is expected to return to
service in the second quarter of 2004. The Company will experience decreased
utilization in the remainder of 2003 as the OCEAN STATES remains in the
shipyard. Barrels of cargo transported increased from 41.7 million in the third
quarter of 2002 to 44.4 million in the third quarter of 2003.
12
The majority of the Company's fleet was deployed in contract business in the
third quarter of 2003 with limited exposure to the Jones Act spot market.
Furthermore, the Company utilized its own vessels, which would otherwise have
been utilized in the spot market, to cover the maintenance periods of vessels
deployed in its contract business.
While most of the vessel utilization resulted from contract business in the
third quarter of 2003, spot market rates attained on vessels working in that
market were higher than in the same period in 2002. Efforts to re-supply
depleted refined product inventories, caused by several factors discussed below,
in addition to the added demand for gasoline additives in the West Coast caused
by the ban of MTBE in gasoline, increased demand for Jones Act transportation
and increased spot market rates in the third quarter of 2003. Refined product
imports, particularly from Europe, continue to have a dampening effect on demand
for Jones Act transportation of refined products into the eastern U.S. in 2003.
Voyage costs increased from $4.9 million in the third quarter of 2002 to $5.7
million in the third quarter of 2003, an increase of $0.8 million or 16 percent.
Port charges increased $0.7 million as a result of increased utilization and
additional trips through the Panama Canal compared to the same quarter in 2002.
Operations expense, excluding voyage costs discussed above, increased from $11.4
million in the third quarter of 2002 to $12.6 million in the third quarter of
2003, an increase of $1.2 million or 11 percent. The primary increases were in
crew, insurance and charter hire expenses. Crew expenses increased $0.7 million
for seagoing salary increases in 2003 as well as additional seagoing employees
in 2003. Charter hire expense increased $0.2 million for an outside tugboat
chartered in to cover one of the Company's tugboats while it was in the
shipyard. Insurance expense increased $0.1 million as a result of additional
deductible amounts paid in the quarter and increased premiums charged by
insurance companies on renewed policies.
Maintenance expenses increased $1.1 million or 22 percent from $5.0 million in
the third quarter of 2002 to $6.1 million in the third quarter of 2003. Routine
maintenance incurred during voyages and in port increased $0.4 million from the
third quarter of 2002 to the third quarter of 2003. Expenses accrued for
maintenance in shipyards increased $0.7 million from the third quarter of 2002
to the third quarter of 2003. The Company continually reviews upcoming shipyard
costs to determine the appropriate level of accrual. As a result, in the second
half of 2002 the Company increased its shipyard accrual rate to reflect the
expected rise in costs resulting from an increase in regulatory and customer
vetting requirements, which increases the scope and frequency of maintenance
performed in the shipyard and results in increased costs. This higher accrual
rate has continued throughout 2003.
13
As a result of the aforementioned changes in revenue and expenses, operating
income decreased from $2.6 million in the third quarter of 2002 to $2.1 million
in the third quarter of 2003, a decrease of $0.5 million or 19 percent.
Other income in the third quarter of 2002 included a $0.5 million litigation
settlement.
Income tax expense decreased from $1.0 million in the third quarter of 2002 to
an income tax benefit of $7.2 million in the third quarter of 2003, a decrease
of $8.2 million. The Company records reserves for income taxes based on the
estimated amounts that it would likely have to pay based on its taxable net
income. The Company periodically reviews its position based on the best
available information and adjusts its income tax reserve accordingly. In the
quarter ended September 30, 2003, the Company reduced its income tax reserve by
$7.7 million. Most of the decrease resulted from the restructuring of Maritrans
Partners L.P. to Maritrans Inc. in 1993. Due to the non-cash nature of the
reduction, there was no corresponding effect on cash flow or income from
operations.
Net income increased from $1.7 million in the third quarter of 2002 to $8.6
million in the third quarter of 2003, an increase of $6.9 million and resulted
from the aforementioned changes in revenue and expenses. Net income for the
third quarter of 2003 included the effect of the decrease in the Company's tax
reserve discussed above.
Nine Month Comparison
TCE revenue for the nine months ended September 30, 2003 compared to the nine
months ended September 30, 2002 is as follows:
9/30/03 9/30/02
-------- -------
Voyage revenue $105,825 $94,377
Voyage costs 18,519 14,257
-------- -------
Time Charter Equivalent $ 87,306 $80,120
======== =======
TCE revenue increased from $80.1 million in the nine months ended September 30,
2002 to $87.3 million in the nine months ended September 30, 2003, an increase
of $7.2 million or 9 percent. Vessel utilization, as measured by revenue days
divided by calendar days available, increased from 80.9 percent in the nine
months ended September 30, 2002 to 86.2 percent in the nine months ended
September 30, 2003. The increase in utilization had a positive impact on voyage
revenue and resulted from fewer vessels out of service for maintenance in the
nine months ended September 30, 2003 compared to the nine months ended September
30, 2002. In the second quarter of 2002, the MARITRANS 254 was taken out of
service for her double hull rebuild and returned in November 2002. The OCEAN
STATES was taken out of service early in September 2003 for her double-hull
rebuild and is expected to return to service in the second quarter of 2004. The
Company will experience decreased utilization in the remainder of 2003 as the
OCEAN STATES remains in the shipyard. Barrels of cargo transported increased
from 127.9 million in the nine months ended September 30, 2002 to 136.7 million
in the nine months ended September 30, 2003.
14
The majority of the Company's fleet was deployed in contract business in 2003
with limited exposure to the Jones Act spot market. Demand for the Company's
services in its contract business during the current year increased compared to
2002 due to high refinery margins experienced by the Philadelphia area
refineries in the first quarter of 2003, the need to supply inventories to the
Northeastern U.S. and added demand for gasoline additives on the West Coast in
the second and third quarters of 2003.
Spot market rates were higher than the same nine month period in 2002. The spot
market rate increase in the first quarter of 2003 was driven primarily by
increased fuel prices. These increased fuel prices were caused by tightened fuel
availability due to supply disturbances resulting from the war with Iraq, the
oil industry strike in Venezuela and seasonal U.S. Gulf refinery maintenance in
addition to increased distillate demand caused by the cold winter in the
Northeastern U.S. As a result of these supply and demand factors, refined
product inventories throughout the US reached extremely low levels by the
beginning of the second quarter of 2003. Efforts to re-supply these depleted
inventories, in addition to the added demand for gasoline additives in the West
Coast caused by the ban of MTBE in gasoline, increased demand for Jones Act
transportation which had a significant impact on the spot market rates in the
second and third quarters of 2003. Refined product imports, particularly from
Europe, continue to have a dampening effect on demand for Jones Act
transportation of refined products into the eastern U.S. in 2003.
The Company expects spot market rates in the fourth quarter of 2003 to be higher
than in the same period in 2002 as the U.S. economy improves, although rates
will continue to be negatively affected by the volume of European imports. The
Company will continue to have limited exposure to the Jones Act spot market
during the remainder of 2003 due to the majority of the Company's vessels being
under contract, as well as the utilization of the Company's own vessels, which
would otherwise been utilized in the spot market, to cover some maintenance
periods of vessels deployed in its contract business.
In 2004, other than the scheduled double-hull rebuilding, the Company expects to
experience less out of service time for scheduled maintenance and may have more
exposure to spot market. Utilization is expected to be at 2003 levels due to the
out of service time of the double-hull rebuilds. Lightering volumes are expected
to decrease in 2004 as a result of customer modifications to their refining
facilities early in 2004.
15
Voyage costs increased from $14.3 million in the nine months ended September 30,
2002 to $18.5 million in the nine months ended September 30, 2003, an increase
of $4.2 million or 29 percent. Fuel costs increased $2.9 million or 32 percent
compared to the same nine month period in 2002. The average price per gallon of
fuel increased approximately 40 percent compared to the same nine month period
in 2002. Port charges increased $1.3 million as a result of increased
utilization and increases in the costs of the services provided.
Operations expense, excluding voyage costs discussed above, increased from $34.9
million in the nine months ended September 30, 2002 to $36.7 million in the nine
month ended September 30, 2003, an increase of $1.8 million or 5 percent. Crew
expenses increased $1.1 million for seagoing salary increases in 2003 and for
additional seagoing employees in 2003. Shoreside support expenses increased $0.8
million as a result of pension costs and additional personnel compared to 2002.
Insurance expense increased $0.3 million as a result of increased premiums
charged by insurance companies on policies renewed in the 2003. Charter hire
expense decreased $0.2 million as a result of less charter-in time than in 2002
to cover one of the Company's tugboats while it was in the shipyard.
Maintenance expenses increased $3.7 million or 30 percent from $12.4 million in
the nine months ended September 30, 2002 to $16.1 million in the nine months
ended September 30, 2003. Routine maintenance incurred during voyages and in
port increased $0.5 million from the nine months ended September 30, 2002 to the
nine months ended September 30, 2003. Expenses accrued for maintenance in
shipyards increased $3.2 million from the nine months ended September 30, 2002
to the nine months ended September 30, 2003. As discussed above, the Company
continually reviews upcoming shipyard costs. As a result, in the second half of
2002 the Company increased its shipyard accrual rate to reflect the expected
rise in costs resulting from an increase in regulatory and customer vetting
requirements, which increases the scope and frequency of maintenance performed
in the shipyard and results in increased costs. This higher accrual rate has
continued throughout 2003.
Gain on sale of assets in the nine months ended September 30, 2003 of $1.1
million consists of a pre-tax gain on the sale of property not used in
operations.
As a result of the aforementioned changes in revenue and expenses, operating
income increased from $12.6 million in the nine months ended September 30, 2002
to $13.8 million in the nine months ended September 30, 2003, an increase of
$1.2 million or 10 percent.
Other income in the nine months ended September 30, 2002 included a $0.5 million
litigation settlement.
16
Income tax expense decreased from $4.4 million in the nine months ended
September 30, 2002 to an income tax benefit of $3.1 million in the nine months
ended September 30, 2003, a decrease of $7.5 million. The Company records
reserves for income taxes based on the estimated amounts that it would likely
have to pay based on its taxable net income. The Company periodically reviews
its position based on the best available information and adjusts its income tax
reserve accordingly. In the quarter ended September 30, 2003, the Company
reduced its income tax reserve by $7.7 million. Most of the decrease resulted
from the restructuring of Maritrans Partners L.P. to Maritrans Inc. in 1993. Due
to the non-cash nature of the reduction, there was no corresponding effect on
cash flow or income from operations.
Net income increased from $7.4 million in the nine months ended September 30,
2002 to $15.5 million in the nine months ended September 30, 2003, an increase
of $8.1 million and resulted from the aforementioned changes in revenue and
expenses. Net income for the third quarter of 2003 included the effect of the
decrease in the Company's tax reserve discussed above.
Liquidity and Capital Resources
For the nine months ended September 30, 2003, funds provided by operating
activities were $29.5 million. These funds, augmented by the Company's Credit
Facility, were sufficient to meet debt service obligations and loan agreement
restrictions, to make capital acquisitions and improvements and to allow the
Company to pay a dividend in the current quarter. Management believes funds
provided by operating activities, augmented by the Company's Credit Facility,
described below, and investing activities, will be sufficient to finance
operations, anticipated capital expenditures, lease payments and required debt
repayments for the foreseeable future. While dividends have been made quarterly
in each of the last two years, there can be no assurance that the dividend will
continue. The ratio of total debt to capitalization is .41:1 at September 30,
2003 compared to .50:1 at December 31, 2002.
On February 9, 1999, the Board of Directors authorized a share buyback program
for the acquisition of up to one million shares of the Company's common stock,
which represented approximately 8 percent of the 12.1 million shares outstanding
at that time. In February 2000 and again in February 2001, the Board of
Directors authorized the acquisition of an additional one million shares in the
program. The total authorized shares under the buyback program are three
million. As of September 30, 2003, 2,485,442 shares have been purchased under
the plan and financed by internally generated funds. The Company intends to hold
the majority of the shares as treasury stock, although some shares will be used
for employee compensation plans and others may be used for acquisitions and/or
other corporate purposes.
17
In November 2001, the Company entered into a credit facility, discussed in "Debt
Obligations and Borrowing Facility" below. The Credit Facility (as defined
below) requires the Company to maintain its properties in a specific manner,
maintain specified insurance on its properties and business, and abide by other
covenants, which are customary with respect to such borrowings. The Credit
Facility also requires the Company to meet certain financial covenants. If the
Company fails to comply with any of the covenants contained in the Credit
Facility, the Lenders may foreclose on the collateral or call the entire balance
outstanding on the Credit Facility immediately due and payable. The Company was
in compliance with all applicable covenants at September 30, 2003.
In September 2003, the Company entered into loan agreements, discussed in "Debt
Obligations and Borrowing Facility" below. The loan agreements require the
Company to maintain its properties in a specific manner, maintain specified
insurance on its properties and business, and abide by other covenants, which
are customary with respect to such borrowings. The loan agreements also require
the Company to meet certain financial covenants beginning in the quarter ended
December 31, 2003. If the Company fails to comply with any of the covenants
contained in the Credit Facility, the Lenders may foreclose on the collateral or
call the entire balance outstanding on the Credit Facility immediately due and
payable. The Company currently expects to be in compliance with all such
covenants at December 31, 2003.
Total future commitments and contingencies related to the Company's outstanding
Credit Facility, loan agreements and non-cancelable operating leases, as of
September 30, 2003, are as follows:
($000's)
2003* 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Debt Obligations $ 197 $ 2,533 $2,672 $2,819 $22,974 $25,595 $56,790
Contractual
Obligations** 7,047 21,717 1,578 -- -- -- 30,342
Operating Leases 113 507 457 407 421 1,001 2,906
------ ------- ------ ------ ------- ------- -------
Total $7,357 $24,757 $4,707 $3,226 $23,395 $26,596 $90,038
====== ======= ====== ====== ======= ======= =======
* For the period October 1, 2003 through December 31, 2003.
** These contractual obligations represent amounts due under existing contracts
for vessel rebuilds.
In November 2002, the Company awarded a contract to rebuild the fifth large
single hull barge, the OCEAN STATES, to a double hull configuration, which is
expected to have a total cost of approximately $21 million, of which $18 million
is a fixed contract with the shipyard. In addition to the double hull, the OCEAN
STATES will have a 30,000 barrel mid-body insertion. As of September 30, 2003,
$12.0 million has been paid to the shipyard contractor for the project. The
Company has financed, and expects to continue the financing of, this project
from a combination of internally generated funds and borrowings under the
Company's Credit Facility.
In August 2003, the Company awarded a contract to rebuild its sixth large single
hull barge, the OCEAN 193, to a double hull configuration, which is expected to
have a total cost of approximately $21.8 million, of which $21.8 million is a
fixed contract with the shipyard. As of September 30, 2003, $2.2 million has
been paid to the shipyard contractor for the project. The Company has financed,
and expects to continue the financing of, this project from a combination of
internally generated funds and borrowings under the Company's Credit Facility.
18
In October 2003 the Company awarded a contract to rebuild the tugboat Honour
which currently works with the barge OCEAN STATES. The rebuild is expected to
have a total cost of approximately $6.3 million, of which $3.7 million is a
fixed contract with the shipyard. As of September 30, 2003, no payments have
been made to the shipyard contractor for the project. The Company will finance
this project from a combination of internally generated funds and borrowings
under the Company's Credit Facility.
In December 1999, the Company sold vessels to K-Sea Transportation LLC for a
total of $34 million, $29 million in cash and $4.5 million in the form of a
subordinated note receivable maturing in December 2007. In a filing with the
Securities and Exchange Commission, K-Sea Transportation Partner LP has
disclosed that one of the intended uses of proceeds from their proposed initial
public offering is to repay $4.5 million in subordinated debt, which the Company
believes is the subordinated debt payable to the Company. However, the Company
cannot be certain that the debt referenced in the K-Sea Transportation Partner
LP filing is in fact its indebtedness to the Company. Furthermore, there is no
guarantee that K-Sea Transportation Partner LP will consummate their initial
public offering, and if they do, that they will use the proceeds as contemplated
in their latest filing.
Debt Obligations and Borrowing Facility
In November 2001, the Company entered into an $85 million credit and security
agreement (the "Credit Facility"). Pursuant to the terms of the Credit Facility,
the Company could borrow up to $45 million of term loans and up to $40 million
under a revolving credit facility. Interest is variable based on either the
LIBOR rate plus an applicable margin (as defined in the Credit Facility) or the
prime rate. Principal payments on the term loans are required on a quarterly
basis and began in April 2002. The Credit Facility expires in January 2007. The
Company has granted first preferred ship mortgages and a first security interest
in some of the vessels and other collateral to the lenders to secure the debt.
In September 2003, the Company paid the remaining term loan balance of $37
million. At September 30, 2003, there was $20 million outstanding under the
revolving line of credit.
In September 2003, the Company entered into new financing agreements. The new
agreements consist of a $7.3 million loan with a 5-year amortization and a $29.5
million loan with a 9.5-year amortization and a 50 percent balloon payment at
the end of the term. The new debt accrues interest at an average fixed rate of
5.53 percent. The proceeds of the new debt were used to pay off the balance of
the term loan under the Company's existing credit facility. Principal payments
on the $7.3 million loan are required on a quarterly basis beginning in January
2004. Principal payments on the $29.5 million loan are required on a monthly
basis beginning in November 2003. The Company has granted first preferred ship
mortgages and a first security interest in the some of the vessels and other
collateral to the Lenders as a guarantee of the debt.
19
As of September 30, 2003, the Company has the following amounts outstanding
under the debt agreements:
$20 million under the revolving credit facility
$7.3 million under the 5-year term loan
$29.5 million under the 9.5-year term loan with the 50 percent balloon payment
at the end of the term.
Impact of Recent Accounting Pronouncements
In September 2001, the rulemaking body of the AICPA issued an Exposure Draft on
a Statement of Position, "Accounting for Certain Costs and Activities Related to
Property, Plant, and Equipment" (the "Proposed Statement"). This group, referred
to as AcSEC, recently decided that it will no longer issue accounting guidance
and planned to transition the majority of its projects to the FASB. However, the
FASB subsequently requested that AcSEC address certain portions of the Proposed
Statement in smaller scope projects. The FASB expressed their concern that the
project would not be completed timely, by AcSEC or the FASB, if the scope of the
project was not reduced. AcSEC had voted to approved the proposed statement and
is expected to present it to the FASB for clearance. At this time, it is unclear
whether the Proposed Statement will be issued or in what form.
If the existing Proposed Statement is issued, it would require the Company to
modify its accounting policy for maintenance and repairs. Such costs would no
longer be accrued in advance of performing the related maintenance and repairs;
rather, the Proposed Statement requires these costs to be capitalized and
amortized over their estimated useful life. The Company has not yet quantified
the impact of adopting the Proposed Statement on its financial statements;
however, the Company's preliminary assessment is that the adoption of this
pronouncement would increase the value of vessels and equipment, decrease the
shipyard accrual and increase stockholders' equity of the Company.
In April 2002, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections" ("SFAS
145"). SFAS 145 requires, among other things, gains or losses of extinguishment
of debt to be classified as income (loss) from continuing operations rather than
as an extraordinary item, unless such extinguishment is determined to be
extraordinary pursuant to Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of a Disposal of a Segment of
a Business and Extraordinary, Unusual, and Infrequently Occurring Transactions"
("Opinion 30"). The provisions of SFAS 145 related to the rescission of SFAS 4
are effective for fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item must be reclassified.
20
The Company adopted the provisions of SFAS 145 beginning January 1, 2003 and
accordingly, will reclassify the loss of $2.5 million on the retirement of debt
which occurred in the fourth quarter of 2001 from an extraordinary item to a
separate component of income before taxes in the Consolidated Statement of
Income in the Company's Form 10-K for the period ended December 31, 2003.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to
provide three alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 also amends the disclosure provisions of SFAS 123 and APB
Opinion No. 28, "Interim Financial Reporting". SFAS 148 is effective for fiscal
years ending after December 15, 2002, with certain disclosure requirements
effective for interim periods beginning after December 15, 2002. The Company
adopted the transition provisions of SFAS 148 using the prospective method
beginning January 1, 2003. The prospective method requires the Company to apply
the fair value based method to all employee stock awards granted, modified and
settled in its consolidated statements of income beginning on the date of
adoption.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk to which the Company is exposed is a change in
interest rates on debt instruments. The Company manages its exposure to changes
in interest rate fluctuations by optimizing the use of fixed and variable rate
debt. The table below presents principal cash flows by year of maturity.
Variable interest rates disclosed fluctuate with the LIBOR and federal fund
rates. The weighted average rate of all debt at September 30, 2003 was 4.72%.
Expected years of maturity
($000's) 2003* 2004 2005 2006 2007 Thereafter Total
----- ---- ---- ---- ---- ---------- -----
Long-term debt, including current portion
Fixed rate $197 $2,533 $2,672 $2,819 $ 2,974 $25,595 $36,790
Average interest rate (%) 5.53 5.53 5.53 5.53 5.53 5.63
Variable rate $ - $ - $ - $ - $20,000 $ - $20,000
Average interest rate (%) - - - - 3.22 -
* For the period October 1, 2003 through December 31, 2003
21
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures as of the end of the period covered by this report have been designed
and are functioning effectively to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company
believes that a controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting occurred
during the Company's most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II: OTHER INFORMATION
ITEM 1. Legal Proceedings
In 1996, Maritrans filed suit against the United States government
under the Fifth Amendment to the U.S. Constitution for "taking" Maritrans' tank
barges without just compensation. The Fifth Amendment specifically prohibits the
United States government from taking private property for public use without
just compensation. Maritrans asserted that its vessels were taken by Section
4115 of the Oil Pollution Act of 1990 ("OPA"), which prohibits all existing
single-hull tank vessels from operating in U.S. waters under a retirement
schedule that began January 1, 1995, and ends on January 1, 2015. This OPA
provision will force Maritrans to remove its single-hull barges from service
commencing on January 1, 2005 or rebuild them, thus depriving the Company of
their continued use for a significant portion of their remaining economic lives.
In December 2001, the United States Court of Federal Claims ruled that the OPA
double hull requirement did not constitute a taking of Maritrans' vessels. On
September 9, 2003, the Court of Appeals for the Federal Circuit affirmed the
Claims Court ruling. The Company has decided not to further appeal.
22
The Company is engaged in patent infringement litigation against a
competitor arising out of the Company's double-hull patent. In 2001, Maritrans
obtained a patent for its process and methodology of rebuilding single hull tank
vessels into double hull vessels. In September, 2001, Penn Maritime, Inc. filed
a suit against Maritrans in the U.S. District Court for the Southern District of
New York (Penn Maritime, Inc. v. Maritrans Inc.) to invalidate the patent, and,
in addition, sought damages and an injunction restraining Maritrans from
enforcing its patent. Maritrans challenged the jurisdiction of the Court in New
York, and on March 31, 2003 the Court dismissed the action. On April 3, 2003,
Maritrans sued Penn Maritime, Inc. in U.S. District Court for the Middle
District of Florida (Maritrans Inc. v. Penn Maritime, Inc.) for patent
infringement, misappropriation of Maritrans' trade secrets, and other causes of
action. Penn Maritime, Inc. has filed an answer and counterclaim which
essentially reiterates the claims made in its original suit. Since initiation of
the action, the parties have amended and defined their claims. In addition to
patent infringement, Maritrans now claims in excess of $8 million in affirmative
damages plus punitive damages under the Florida Trade Secrets Act. Penn
Maritime, Inc. claims in excess of $7 million plus punitive damages under the
Sherman, Clayton, and Lanham Acts, based upon a claim that Maritrans obtained
its patent through fraud. To obtain any affirmative recovery from Maritrans,
Penn Maritime, Inc. must establish that Maritrans committed actual fraud in its
submission to the U.S. Patent Office. The Company believes Penn Maritime, Inc.'s
claim to be wholly without merit.
23
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 - Loan Agreement dated September 30, 2003 between Maritrans Inc.,
Maritrans Freedom Co., and Maritrans 215 Co. and Lombard US Equipment
Finance Corporation.
10.2 - Loan Agreement dated September 26, 2003 between Maritrans Inc.,
Maritrans 250 Co. and Maritrans Intrepid Co. and Fifth Third Bank.
10.3 - Loan Agreement dated September 26, 2003 between Maritrans Inc.
and Maritrans Navigator Co. and PNC Leasing LLC.
31.1 - Certification of Chief Executive Officer, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
31.2 - Certification of Chief Financial Officer, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
32.1 - Certification of Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350.
32.2 - Certification of Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350.
(b) Reports on Form 8-K
On July 31, 2003, the Registrant filed a Current Report on Form 8-K for
the purpose of furnishing the press release announcing its earnings for
the second quarter of 2003.
On September 12, 2003, the Registrant filed a Current Report on Form 8-K
for the purpose of furnishing the press release announcing that the
Court of Appeals for the Federal Circuit had denied Maritrans' takings
claim.
24
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.
MARITRANS INC.
(Registrant)
By: WALTER T. BROMFIELD Dated: November 7, 2003
---------------------------------
Walter T. Bromfield
Chief Financial Officer
(Principal Financial Officer)
By: JUDITH M. CORTINA Dated: November 7, 2003
---------------------------------------
Judith M. Cortina
Controller
(Principal Accounting Officer)
25