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UNITED STATES 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 MARCH 31, 2004
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 000-49717
CROWLEY MARITIME CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3148464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
155 GRAND AVENUE, OAKLAND, CALIFORNIA 94612
(Address of principal executive offices) (Zip Code)
(510) 251-7500
(Registrant's telephone number, including area code)
NOT APPLICABLE
(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
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 14, 2004, 89,404 shares of voting common stock, par value $.01
per share, and 46,138 shares of Class N non-voting common stock, par value $.01
per share, were outstanding.
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TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 2
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2004 and 2003.......... 2
Unaudited Condensed Consolidated Balance Sheets as of March
31, 2004 and December 31, 2003.............................. 3
Unaudited Condensed Consolidated Statement of Stockholders'
Equity for the Three Months Ended March 31, 2004............ 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2004 and 2003.......... 5
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three Months Ended March 31, 2004 and
2003........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 18
Item 4. Controls and Procedures..................................... 19
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 19
Item 6. Exhibits and Reports on Form 8-K............................ 20
SIGNATURES........................................................... 21
1
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CROWLEY MARITIME CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004 2003
-------- --------
OPERATING REVENUES.......................................... $226,651 $220,010
EXPENSES:
Operating................................................. 204,072 199,176
General and administrative................................ 7,649 8,847
Depreciation and amortization............................. 15,482 14,141
Asset recoveries, net..................................... (218) (272)
-------- --------
226,985 221,892
-------- --------
OPERATING LOSS.............................................. (334) (1,882)
OTHER INCOME (EXPENSE):
Interest income........................................... 395 124
Interest expense.......................................... (5,616) (5,010)
Minority interest in consolidated subsidiaries............ (18) 539
Other income.............................................. 22 68
-------- --------
(5,217) (4,279)
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......... (5,551) (6,161)
Income tax benefit.......................................... 2,200 2,900
-------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. (3,351) (3,261)
Discontinued operations:
Loss from operations, including loss on disposal of $269
(net of $1,000 and $500 of tax benefit in 2004 and
2003, respectively).................................... (1,547) (856)
-------- --------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. (4,898) (4,117)
Cumulative effect of change in accounting principle, net of
tax benefit of $257....................................... -- (420)
-------- --------
NET LOSS.................................................... (4,898) (4,537)
Preferred stock dividends................................... (394) (394)
-------- --------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS................ $ (5,292) $ (4,931)
======== ========
Basic loss per common share:
Loss from continuing operations before discontinued
operations and cumulative effect of change in
accounting principle................................... $ (27.63) $ (26.91)
Loss from discontinued operations......................... (11.41) (6.30)
Cumulative effect of change in accounting principle....... -- (3.09)
-------- --------
Net loss.................................................. $ (39.04) $ (36.30)
======== ========
Diluted loss per common share:
Loss from continuing operations before discontinued
operations and cumulative effect of change in
accounting principle................................... $ (27.63) $ (26.91)
Loss from discontinued operations......................... (11.41) (6.30)
Cumulative effect of change in accounting principle....... -- (3.09)
-------- --------
Net loss.................................................. $ (39.04) $ (36.30)
======== ========
The accompanying notes are an integral part of the
Unaudited Condensed Consolidated Financial Statements.
2
CROWLEY MARITIME CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
ASSETS
Cash and cash equivalents................................... $156,925 $ 160,625
Receivables, net............................................ 158,526 156,877
Prepaid expenses and other assets........................... 42,487 48,744
Current assets of discontinued operations................... 986 3,488
-------- ----------
TOTAL CURRENT ASSETS........................................ 358,924 369,734
Receivable from related party............................... 10,698 10,531
Goodwill.................................................... 44,786 44,786
Intangibles, net............................................ 15,689 15,447
Other assets................................................ 47,468 47,482
Long-term assets of discontinued operations................. -- 709
Property and equipment, net................................. 512,541 521,961
-------- ----------
TOTAL ASSETS................................................ $990,106 $1,010,650
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $100,098 $ 95,695
Accrued payroll and related expenses........................ 39,226 40,303
Insurance claims payable.................................... 16,478 14,360
Unearned revenue............................................ 6,322 6,631
Current liabilities of discontinued operations.............. 2,747 3,542
Current portion of long-term debt........................... 41,539 52,847
-------- ----------
TOTAL CURRENT LIABILITIES................................... 206,410 213,378
Deferred income taxes....................................... 88,908 89,541
Other liabilities........................................... 18,599 18,754
Long-term liabilities of discontinued operations............ 4,809 5,363
Minority interests in consolidated subsidiaries............. 2,090 2,074
Long-term debt, net of current portion...................... 373,431 381,803
-------- ----------
TOTAL LIABILITIES........................................... 694,247 710,913
-------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred class A convertible stock, $100 par value, 315,000
shares issued, authorized and outstanding................. 31,500 31,500
Common voting stock, $.01 par value, 4,485,000 shares
authorized; 89,404 shares issued and outstanding.......... 1 1
Class N common non-voting stock, $.01 par value, 54,500
shares authorized; 46,138 shares issued and outstanding... -- --
Additional paid-in capital.................................. 67,334 67,334
Retained earnings........................................... 201,664 206,956
Accumulated other comprehensive loss, net of tax benefit of
$2,609 and $3,392, respectively........................... (4,640) (6,054)
-------- ----------
TOTAL STOCKHOLDERS' EQUITY.................................. 295,859 299,737
-------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $990,106 $1,010,650
======== ==========
The accompanying notes are an integral part of the
Unaudited Condensed Consolidated Financial Statements.
3
CROWLEY MARITIME CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED CLASS A CLASS N ACCUMULATED
CONVERTIBLE STOCK COMMON STOCK COMMON STOCK ADDITIONAL OTHER
------------------- ------------------ ------------------ PAID-IN RETAINED COMPREHENSIVE
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS LOSS
------- --------- ------ --------- ------ --------- ---------- -------- -------------
December 31, 2003......... 315,000 $31,500 89,404 $ 1 46,138 $ -- $67,334 $206,956 $(6,054)
Preferred stock
dividends............... -- -- -- -- -- -- -- (394) --
Comprehensive Loss:
Net loss................ -- -- -- -- -- -- -- (4,898) --
Other comprehensive
loss:
Reclassification
adjustment for
foreign currency
translation losses
included in net
loss, net of tax
expense of $729..... -- -- -- -- -- -- -- -- 1,318
Amortization of rate
lock agreement, net
of tax expense of
$54................. -- -- -- -- -- -- -- -- 96
Total comprehensive
loss.................... -- -- -- -- -- -- -- -- --
------- ------- ------ ----- ------ ----- ------- -------- -------
March 31, 2004............ 315,000 $31,500 89,404 $ 1 46,138 $ -- $67,334 $201,664 $(4,640)
======= ======= ====== ===== ====== ===== ======= ======== =======
TOTAL
--------
December 31, 2003......... $299,737
Preferred stock
dividends............... (394)
Comprehensive Loss:
Net loss................
Other comprehensive
loss:
Reclassification
adjustment for
foreign currency
translation losses
included in net
loss, net of tax
expense of $729.....
Amortization of rate
lock agreement, net
of tax expense of
$54.................
Total comprehensive
loss.................... (3,484)
--------
March 31, 2004............ $295,859
========
The accompanying notes are an integral part of the
Unaudited Condensed Consolidated Financial Statements.
4
CROWLEY MARITIME CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS)
MARCH 31, MARCH 31,
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net loss.................................................. $ (4,898) $ (4,537)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting principle,
net..................................................... -- 420
Depreciation and amortization............................. 15,482 14,141
Amortization of deferred gain on the sale and leaseback of
vessels................................................. (144) (669)
Asset recoveries, net..................................... (218) (272)
Change in cash surrender value of life insurance.......... (147) 1,108
Deferred income tax (benefit) provision................... (1,415) 14
Changes in current assets and liabilities:
Receivables, net........................................ (1,649) (16,666)
Prepaid expenses and other.............................. 6,257 200
Accounts payable and accrued liabilities................ 5,706 12,308
Accrued payroll and related expenses.................... (1,077) (1,792)
Other..................................................... (23) (1,290)
-------- --------
Net cash provided by continuing operations.............. 17,874 2,965
Net cash provided by discontinued operations............ 2,149 213
-------- --------
Net cash provided by operating activities............... 20,023 3,178
-------- --------
INVESTING ACTIVITIES:
Property and equipment additions.......................... (3,905) (4,539)
Dry-docking costs......................................... (3,057) (3,141)
Proceeds from asset dispositions.......................... 394 1,834
(Deposits) withdrawals of restricted funds, net........... 1,601 (1,544)
Acquisitions, net of cash acquired........................ 100 --
Cash assumed from consolidation of Variable Interest
Entity.................................................. -- 1,915
Receipts on notes receivable, net......................... -- 40
-------- --------
Net cash used in continuing operations.................. (4,867) (5,435)
Net cash provided by discontinued operations............ 1,556 --
-------- --------
Net cash used in investing activities................... (3,311) (5,435)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of debt............................ -- 60,909
Repayments on Revolving Credit Agreement.................. -- (5,000)
Payments on long-term debt................................ (19,680) (57,737)
Payment of debt issuance costs............................ (732) (263)
Payment of rate lock agreement............................ -- (7,967)
-------- --------
Net cash used in financing activities................... (20,412) (10,058)
-------- --------
Net decrease in cash and cash equivalents............... (3,700) (12,315)
Cash and cash equivalents at beginning of period........ 160,625 43,355
-------- --------
Cash and cash equivalents at end of period.............. $156,925 $ 31,040
======== ========
The accompanying notes are an integral part of the
Unaudited Condensed Consolidated Financial Statements.
5
CROWLEY MARITIME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America and the rules and regulations of the Securities and
Exchange Commission which apply to interim financial statements. These unaudited
condensed consolidated financial statements do not include all disclosures
provided in the annual financial statements and should be read in conjunction
with the financial statements and notes thereto contained in the Annual Report
on Form 10-K for Crowley Maritime Corporation (the "Company") for the year ended
December 31, 2003 as filed with the Securities and Exchange Commission on March
19, 2004.
All adjustments of a normal recurring nature which, in the opinion of
management, are necessary to present a fair statement of the results of
operations, financial condition and cash flows for the interim periods have been
made. Results of operations for the three month period ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the full
year.
NOTE 2 -- DISCONTINUED OPERATIONS
In December 2003, the Company approved a plan to sell the Logistics
operations of its Liner Services segment in Venezuela. In February 2004, the
Company sold its Venezuelan Logistics operations for $1,506.
The Venezuelan operations have been reflected as discontinued operations in
the accompanying Unaudited Condensed Consolidated Statements of Operations.
Discontinued operations for the three months ended March 31 are summarized as
follows:
MARCH 31, MARCH 31,
2004 2003
--------- ---------
Operating revenues.......................................... $ 620 $ 888
======= =======
Loss from operations before taxes........................... $(2,278) $(1,356)
Loss on disposal before taxes............................... (269) --
Income tax benefit.......................................... 1,000 500
------- -------
Net loss from discontinued operations....................... $(1,547) $ (856)
======= =======
On April 1, 1999, the Company adopted a plan to sell its South America
trade lanes, river barging operations, related subsidiaries, vessels and certain
other assets. Related to the sale, the Company adopted a strategy to exit
operations of several other South America operations.
The combined assets and liabilities of these discontinued operations
included in the Company's Unaudited Condensed Consolidated Balance Sheets at
March 31, 2004 and December 31, 2003 are as follows:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Cash and cash equivalents................................... $ 18 $ 138
Receivables, net............................................ 968 2,943
Prepaid expenses and other assets........................... -- 407
------ ------
Current assets of discontinued operations................... $ 986 $3,488
====== ======
Property and equipment, net................................. $ -- $ 709
------ ------
Long-term assets of discontinued operations................. $ -- $ 709
====== ======
Accounts payable and accrued liabilities.................... $2,747 $3,183
Accrued payroll and related expenses........................ -- 359
------ ------
Current liabilities of discontinued operations.............. $2,747 $3,542
====== ======
Other long-term liabilities................................. $4,809 $5,363
------ ------
Long-term liabilities of discontinued operations............ $4,809 $5,363
====== ======
6
CROWLEY MARITIME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 3 -- EARNINGS PER COMMON SHARE
The computations for basic and diluted loss per common share for the three
months ended March 31, 2004 and 2003 are as follows:
2004 2003
-------- --------
Numerator:
Loss from continuing operations before discontinued
operations and cumulative effect of change in accounting
principle................................................. $ (3,351) $ (3,261)
Less preferred stock dividends............................ (394) (394)
-------- --------
Loss for basic loss per common share from continuing
operations before discontinued operations and
cumulative effect of change in accounting principle.... (3,745) (3,655)
Loss from discontinued operations........................... (1,547) (856)
Cumulative effect of change in accounting principle......... -- (420)
-------- --------
Net loss per common share................................. $ (5,292) $ (4,931)
======== ========
Denominator:
Basic weighted average shares............................. 135,542 135,848
======== ========
Diluted weighted average shares........................... 135,542 135,848
======== ========
The preferred class A convertible stock is anti-dilutive for the three
months ended March 31, 2004 and 2003.
NOTE 4 -- FINANCIAL INFORMATION BY SEGMENT AND GEOGRAPHIC AREA
The table below summarizes certain financial information for each of the
Company's segments and reconciles such information to the unaudited condensed
consolidated financial statements for the three months ended March 31, 2004 and
2003.
OIL AND
SHIP CHEMICAL
ASSIST DISTRIBUTION ENERGY
AND AND AND
LINER ESCORT TRANSPORTATION MARINE SEGMENT CONSOLIDATED
SERVICES(2) SERVICES SERVICES(1) SERVICES TOTAL OTHER(1) ELIMINATION TOTAL
----------- -------- -------------- -------- -------- -------- ----------- ------------
THREE MONTHS ENDED
MARCH 31, 2004
Operating revenues........ $145,829 $17,903 $43,604 $19,315 $226,651 -- -- $226,651
Intersegment revenues..... -- 149 -- 8,784 8,933 $25,998 $(34,931) --
Depreciation and
amortization............ 2,759 12 4,147 2,823 9,741 5,741 -- 15,482
Operating income (loss)... 85 1,651 1,696 (3,766) (334) -- -- (334)
THREE MONTHS ENDED
MARCH 31, 2003
Operating revenues........ $133,975 $18,281 $50,648 $17,106 $220,010 -- -- $220,010
Intersegment revenues..... -- 225 -- 7,727 7,952 $25,393 $(33,345) --
Depreciation and
amortization............ 2,146 9 3,183 3,202 8,540 5,601 -- 14,141
Operating income (loss)... 2,002 2,509 506 (6,899) (1,882) -- -- (1,882)
- ---------------
(1) During the second quarter of 2003, the Company contributed a subsidiary from
its Oil and Chemical Distribution and Transportation Services segment to the
Other segment. Intersegment revenues and depreciation and amortization
expenses have been restated for the quarter ended March 31, 2003 to reflect
this transaction. There was no effect on the operating income of either of
these segments.
7
CROWLEY MARITIME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) During the fourth quarter of 2003, the Company approved a plan to sell the
Logistics operations of its Liner Services segment in Venezuela. The Liner
Services segment has been restated for the quarter ended March 31, 2003 as
discontinued operations. See Note 2.
GEOGRAPHIC AREA INFORMATION
Revenues are attributed to the United States and to all foreign countries
based on the port of origin for the carriage of ocean cargo and the location of
service provided for all other operations. Revenues from external customers
attributable to an individual country, other than the United States, were not
material.
The Company has restated its foreign revenues for the three months ended
March 31, 2003 to include certain foreign revenues previously classified as
United States revenue. Operating revenues from external customers and property
and equipment, net information by geographic area are summarized as follows:
UNITED ALL FOREIGN CONSOLIDATED
STATES COUNTRIES TOTAL
-------- ----------- ------------
THREE MONTHS ENDED MARCH 31, 2004
Operating revenues......................................... $192,051 $34,600 $226,651
Property and equipment, net................................ $508,530 $ 4,011 $512,541
THREE MONTHS ENDED MARCH 31, 2003
Operating revenues......................................... $185,587 $34,423 $220,010
Property and equipment, net................................ $551,607 $ 3,785 $555,392
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
GENERAL LITIGATION
The Company is subject to various foreign and domestic legal and regulatory
rules and certain proceedings arising therefrom in the conduct of normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse or beneficial effect on the Company's
consolidated financial condition, results of operations, or cash flows.
ASBESTOS LITIGATION
The Company is currently named as a defendant with other companies with
respect to approximately sixteen thousand maritime asbestos cases and other
toxic tort cases, most of which were filed in the Federal Courts in Ohio,
Michigan, California and New Jersey. Additional cases were filed in the
Territorial Court of the Virgin Islands, and in state courts in Utah,
Pennsylvania, Texas, and Louisiana. Each of the cases, filed on behalf of a
seaman or his personal representative, alleges injury or illness based upon
exposure to asbestos or other toxic substances and sets forth a claim based upon
the theory of negligence under the Jones Act and on the theory of
unseaworthiness under the General Maritime Law. Pursuant to an order issued by
the Judicial Panel on Multidistrict Litigation dated July 29, 1991, all Federal
cases were transferred to the United States District Court for the Eastern
Division of Pennsylvania for pretrial processing. On May 1, 1996, the cases were
administratively dismissed by Judge Charles R. Weiner, subject to reinstatement
in the future. At present it is not known how long the process will require. It
is also not known whether Judge Weiner will be able to develop a plan which will
result in settlement of the cases. If he is unsuccessful, it is expected that
the cases will be remanded to the Ohio and Michigan courts in the event that
they are reinstated.
The Company has insurance coverage that reimburses it for a substantial
portion of the: (a) costs incurred defending against asbestos claims; and (b)
amounts the Company pays to settle claims or honor judgments by courts. The
coverage is provided by a large number of insurance policies written by dozens
of insurance companies over a period of many years. The amount of insurance
coverage depends on the nature of the alleged exposure to asbestos, the specific
subsidiary against which an asbestos claim is asserted and the terms and
conditions of the specific policy.
8
CROWLEY MARITIME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The uncertainties of asbestos claim litigation make it difficult to
accurately predict the results of the ultimate resolution of these claims. By
their very nature, civil actions relating to toxic substances vary according to
the fact pattern of each case, the number of defendants and their relative
shares of liability in each case, the applicable jurisdiction and numerous other
factors. This uncertainty is increased by the possibility of adverse court
rulings or new legislation affecting the asbestos claim litigation or the
settlement process. Accordingly, we cannot predict the eventual number of such
cases or their final resolution. The full impact of these claims and proceedings
in the aggregate continues to be unknown. At March 31, 2004, 36 claims have been
reinstated by the Judicial Panel on Multidistrict Litigation and remanded to the
U.S. District Court for the Northern District of Ohio for trial. The Company has
accrued $808 as an estimate of the ultimate outcome of this litigation. The
Company has also recorded a receivable from its insurance companies of $479
related to these claims.
In addition to the asbestos litigation discussed above, the Company is
party to certain other proceedings in which other claimants allege injury or
illness based upon exposure to asbestos or other toxic substances. The Company
has accrued an estimated litigation reserve of $3,057 with a corresponding
re-insurance receivable of $490.
While it is not feasible to accurately predict or determine the ultimate
outcome of all pending investigations and legal proceedings or provide
reasonable ranges of potential losses, given the large and/or indeterminate
amounts sought in certain of these matters and the inherent unpredictability of
litigation, it is possible that an adverse outcome in some of these cases could
have a material adverse affect on our financial condition, operating results or
cash flows.
OTHER COMMITMENTS
The Company has executed agreements for the construction of operating
equipment of approximately $16,737. Lease financing of the equipment is being
negotiated. The Company is also in the process of negotiating with shipyards to
construct two additional articulated tug/barge units.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following presentation of Management's Discussion and Analysis ("MD&A")
of Crowley Maritime Corporation's (the "Company's") financial condition, results
of operations and cash flows should be read in conjunction with the unaudited
condensed consolidated financial statements, accompanying notes thereto and
other financial information appearing elsewhere in this Form 10-Q and with the
December 31, 2003 consolidated financial statements and notes thereto, along
with the MD&A, included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003 as filed with the Securities and Exchange Commission on
March 19, 2004.
This discussion contains forward-looking statements that involve risks and
uncertainties. These statements are based on current expectations and
assumptions which management believes are reasonable and on information
currently available to management. These forward-looking statements are
identified by words such as "estimates," "expects," "anticipates," "plans,"
"believes," and other similar expressions. The Company's actual results may
differ materially from those anticipated in these forward-looking statements as
a result of changes in global, political, economic, business, competitive,
market and regulatory factors.
In February 2004, the Company sold its Logistics operations based in
Venezuela for $1.5 million. Accordingly, all financial information in "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" has been restated to present the discontinued Venezuela operations
separately from the Company's continuing operations.
EXECUTIVE SUMMARY
Crowley Maritime Corporation is a diverse transportation company with
global operations. We have four business segments: Liner Services; Ship Assist
and Escort Services; Oil and Chemical Distribution and Transportation Services;
and Energy and Marine Services. Each segment is capital intensive and requires
the periodic renewal or replacement of the assets used by it. While all of our
segments are primarily engaged in maritime transportation and services related
to maritime transportation, each segment serves a different market with separate
and distinct customers. Certain markets are primarily based in the United States
and certain markets are based overseas. In most cases, each segment uses
equipment that has been specially designed and constructed to meet the needs of
that particular segment. By operating in four distinct markets, we diversify the
nature of our capital investments and hope to minimize the impact that any
economic downturn or other unforeseen adverse event may have upon one or more of
our segments at any particular time.
During the first quarter of 2004:
(a) Our consolidated operating revenues increased to $226.7 million
from $220.0 million during the first quarter of 2003;
(b) Our consolidated operating loss decreased to $.3 million from a
consolidated operating loss of $1.9 million during the first quarter of
2003; and
(c) Our net loss attributable to common shareholders increased to $5.3
million ($39.04 basic and diluted loss per common share) from $4.9 million
($36.30 basic and diluted loss per common share) during the first quarter
of 2003.
The increase in consolidated operating revenues and the decrease in
consolidated operating losses were due to: (a) logistics revenues generated by a
transportation management company that we acquired in the third quarter of 2003;
(b) revenues from the resale of fuel from a tank farm in Alaska which commenced
operations in the fourth quarter of 2003; (c) revenues from a new liner service
that commenced operations in 2004 between the United States and Haiti; (d) an
increase in contract activity in the Gulf of Mexico, United States west coast,
and central and western Pacific Ocean; and (e) an increase in the number of
containers carried by us between the United States and Puerto Rico and between
the United States and Latin America. Consolidated operating losses were
increased by additional asbestos litigation reserves in the first quarter of
2004. The net loss attributable to common shareholders was further affected by:
(a) a decrease in minority interest in consolidated subsidiaries and income tax
benefit; and (b) an increase in interest expense and the loss generated by the
discontinued operations in Venezuela.
We are continually looking for opportunities that will complement or
strengthen our existing businesses. As part of these efforts, we: (1) purchased
one transportation management company in 2003; and (2) have
10
been in negotiations since the middle of 2003 to purchase a fuel distribution
company located in Alaska. In February 2004, we sold our Logistics business
based in Venezuela. To be certain that we have the financial resources required
for any project that meets our criteria, we maintain a revolving line of credit
that may provide up to $95 million and, in December 2003, we received proceeds
of $115 million from a term loan which can be used for general corporate
purposes, acquisitions and/or other corporate projects. At March 31, 2004, the
Company had cash and cash equivalents of $156.9 million and long-term debt in
the amount of $415 million.
CRITICAL ACCOUNTING POLICIES
The preparation of the unaudited condensed consolidated financial
statements, upon which this MD&A is based, requires management to make estimates
which impact these unaudited condensed consolidated financial statements. The
most critical of these estimates and accounting policies relate to long-lived
asset depreciation, amortization and impairment, to goodwill, to revenue
recognition, to litigation and to environmental reserves. In particular, the
accounting for these areas requires significant judgments by management.
Different assumptions in the application of these policies could result in
material changes in the Company's consolidated financial position, results of
operations, or cash flows. For details regarding all of the Company's critical
and significant accounting policies, see "Note 1 -- Summary of Significant
Accounting Policies" in the "Notes to Consolidated Financial Statements" and
"Critical Accounting Policies" in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in the Form 10-K filed
on March 19, 2004.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Consolidated operating revenues for the three months ended March 31, 2004
increased $6.7 million or 3.0%, to $226.7 million compared with $220.0 million
for the first quarter in 2003. This increase is primarily the result of: (a) an
increase in resale fuel revenues from a tank farm in Alaska which commenced
operations during the fourth quarter of 2003; (b) increased contract activity in
the Gulf of Mexico, United States west coast, and central and western Pacific
Ocean; (c) revenues generated by a transportation management company
specializing in the apparel industry that we acquired in 2003; (d) an increase
in the rates in our Puerto Rico Service; (e) the commencement of a new liner
service between the United States and Haiti; and (f) an increase in the number
of automobiles shipped to Puerto Rico. This increase was partially offset by:
(a) fewer vessels operating as a result of vessel disposals and vessel repairs;
and (b) a decrease in activity in our northern Alaskan land operations.
Consolidated operating expenses for the three months ended March 31, 2004
increased $4.9 million or 2.5%, to $204.1 million compared with $199.2 million
for the first quarter in 2003. The increase is primarily the result of an
increase in: (a) asbestos litigation reserves; (b) labor, fuel, transportation,
and repair and maintenance costs for the Company's equipment and vessels; (c)
expenses attributable to the operation of a tank farm in Alaska which commenced
operations during the fourth quarter of 2003; and (d) expenses attributable to
the operations of a transportation management company specializing in the
apparel industry that we acquired in 2003. This increase was partially offset
by: (a) fewer vessels operating as a result of vessel disposals and vessel
repairs; and (b) a decrease in activity in our northern Alaskan land operations.
Consolidated general and administrative expenses for the three months ended
March 31, 2004 decreased $1.2 million or 13.6%, to $7.6 million compared with
$8.8 million for the first quarter in 2003. This decrease is primarily
attributable to a change in cash surrender value of split-dollar life insurance.
Consolidated depreciation and amortization expense for the three months
ended March 31, 2004 increased $1.4 million or 9.9%, to $15.5 million compared
with $14.1 million for the first quarter in 2003. This increase is attributed to
an increase in dry-dock amortization of $2.0 million as a result of amortized
dry-dock costs for nine vessels in 2004 compared with seven vessels in 2003.
This increase was partially offset by lower depreciation expense for vessels
sold in 2003.
Consolidated asset recoveries, net for the three months ended March 31,
2004 decreased $.1 million to a recovery of $.2 million compared with a recovery
of $.3 million for the first quarter of 2003. The gains from the first quarter
of 2004 resulted from the sale of equipment while the gains from the first
quarter of 2003 resulted from the sale of land and equipment.
11
As a result, the consolidated operating loss for the three months ended
March 31, 2004 decreased $1.6 million to $.3 million compared with $1.9 million
for the three months ended March 31, 2003.
Due to an increase in the Company's average cash and cash equivalent
amounts on hand, interest income for the three months ended March 31, 2004
increased $.3 million to $.4 million compared with $.1 million for the three
months ended March 31, 2003.
Due to increased interest expense incurred for vessel financings, interest
expense for the three months ended March 31, 2004 increased $.6 million or
12.0%, to $5.6 million compared with $5.0 million for the first quarter in 2003.
Minority interest in consolidated subsidiaries for the three months ended
March 31, 2004 decreased $.5 million compared with the three months ended March
31, 2003. This decrease is due to the Company's acquisition in December 2003 of
a joint venture in which it previously owned a 75% interest.
Income tax benefit for the three months ended March 31, 2004 decreased $.7
million or 24.1% to $2.2 million compared with $2.9 million for the first
quarter in 2003. The effective tax rate was 39.6% and 47.1% for the first
quarters of 2004 and 2003, respectively. The decrease in the effective tax rate
results from changes in the Company's projections of pre-tax income and the
inability to utilize foreign tax credits in the first quarter of 2003.
As a result, net loss attributable to common shareholders for the first
quarter of 2004 increased $.4 million to $5.3 million ($39.04 basic and diluted
loss per common share) compared with $4.9 million ($36.30 basic and diluted loss
per common share) for the first quarter of 2003.
The Company provides diversified transportation services in the United
States domestic and international markets. The Company is organized to provide
services in four lines of business: Liner Services; Ship Assist and Escort
Services; Oil and Chemical Distribution and Transportation Services; and Energy
and Marine Services. During the second quarter of 2003, the Company contributed
a subsidiary from the Oil and Chemical Distribution and Transportation Services
segment to the Other segment. Although intersegment revenues and depreciation
and amortization expenses have been restated for the quarter ended March 31,
2003 to reflect this transaction, there was no effect on the operating income of
either of these segments. As discussed in Note 2 to the Company's Unaudited
Condensed Consolidated Financial Statements in "Part 1 -- Financial
Information -- Item 1. Financial Statements", the Liner Services segment was
restated in 2003 for discontinued operations. The following is a discussion of
the results of operations of the Company's segments.
Liner Services
Operating revenues from our Liner Services segment for the three months
ended March 31, 2004 increased $11.9 million or 8.9%, to $145.9 million compared
with $134.0 million for the first quarter of 2003. The increase in revenues is
primarily attributable to a 3.7% increase in container and noncontainer volume,
a 2.7% increase in average revenue per twenty-foot equivalent unit, or TEU
("average revenue"), and an increase of 105.6% in other logistical service
revenues. The Company's container and noncontainer volume increased to 144,279
TEUs in the first quarter of 2004 from 139,117 TEUs during the first quarter of
2003 due to a new service from the United States to Haiti and an increase in the
number of automobiles shipped to Puerto Rico. The average revenue increase was a
result of rate increases for our services between the United States and Puerto
Rico and between the United States and certain Caribbean Islands and was offset
by decreases in rates for our service between the United States and Latin
America due to competitive pressures. The increase in other logistical service
revenues was primarily due to revenues generated by a transportation service
provider that we purchased in July 2003.
Operating expenses for the three months ended March 31, 2004 increased
$14.0 million or 11.3%, to $138.1 million compared with $124.1 million for the
first quarter in 2003. These expenses consist primarily of fuel costs, purchased
transportation costs, equipment costs, maintenance and repair costs, and labor
costs. An increase in other logistical service expenses was primarily due to
expenses incurred by a transportation service provider purchased in July 2003.
Depreciation and amortization for the three months ended March 31, 2004
increased $.8 million or 38.1%, to $2.9 million compared with $2.1 million for
the first quarter in 2003. The increase was directly attributable to an increase
in dry-dock amortization of $.6 million. Liner Services amortized dry-dock costs
for six vessels during the first quarter in 2004 compared with four vessels
during the first quarter of 2003.
12
Asset recoveries, net for the three months ended March 31, 2004, increased
$.2 million to a recovery of $.2 million for the first quarter in 2003. These
gains resulted from disposals of equipment during the first quarter of 2004.
As a result, the operating income from Liner Services for the first quarter
in 2004 decreased $1.9 million to $.1 million compared with $2.0 million for the
first quarter in 2003.
Ship Assist and Escort Services
Operating revenues from our Ship Assist and Escort Services segment for the
three months ended March 31, 2004 decreased $.4 million or 2.2%, to $17.9
million compared with $18.3 million for the first quarter of 2003. The decrease
was directly attributable to a decrease in the vessel utilization rate to 72%
during the first quarter of 2004 from a 75% vessel utilization rate during the
first quarter of 2003.
Operating expenses for the three months ended March 31, 2004 increased $.5
million or 3.3%, to $15.7 million compared with $15.2 million for the first
quarter in 2003. The increase was directly attributable to an increase in
repairs and maintenance costs for these vessels. This increase was partially
offset by a decrease in property taxes.
As a result, operating income from Ship Assist and Escort Services for the
three months ended March 31, 2004 decreased $.8 million to $1.7 million compared
with $2.5 million for the first quarter in 2003.
Oil and Chemical Distribution and Transportation Services
Operating revenues from our Oil and Chemical Distribution and
Transportation Services segment for the three months ended March 31, 2004
decreased $7.0 million or 13.8%, to $43.6 million compared with $50.6 million
for the first quarter in 2003. The decrease is directly attributable to thirteen
vessels that were in this service during the first quarter of 2003 that are no
longer in service as the vessels were either sold or no longer managed by the
service in 2004. This decrease was partially offset by: (a) an increase in
revenue generated during the first quarter of 2004 by the resale of fuel from a
tank farm in Alaska that commenced operations during the fourth quarter of 2003;
and (b) the operation of one articulated tug/barge unit ("ATB") placed in
service during the second quarter of 2003. An overall decrease in vessel
utilization (45% in 2004 compared with 46% in 2003) also contributed to the
decrease in operating revenues.
Operating expenses for the three months ended March 31, 2004 decreased $9.1
million or 20.0%, to $36.3 million compared with $45.4 million for the first
quarter in 2003. This decrease is primarily attributable to: (a) thirteen
vessels that were in this service during the first quarter of 2003 that are no
longer in service as the vessels were either sold or no longer managed by the
service in 2004; and (b) an overall decrease in vessel utilization. This
decrease was partially offset by increased expenses in 2004 associated with the
operation of: (a) a new tank farm in Alaska which commenced operations during
the fourth quarter of 2003; and (b) an ATB placed in service during the second
quarter of 2003.
Depreciation and amortization for the three months ended March 31, 2004
increased $.9 million or 28.1%, to $4.1 million compared with $3.2 million for
the first quarter of 2003. The increase was directly attributable to a $1.8
million increase in dry-dock amortization for vessels which was partially offset
by a decrease in depreciation of $.9 million. The decrease in depreciation was
caused by the sale of vessels. Dry-dock costs for three vessels were amortized
during the first quarter in 2004 compared with one vessel during the first
quarter in 2003.
Asset recoveries (charges), net for the three months ended March 31, 2004
decreased $.2 million as compared with the first quarter in 2003. The gains from
the first quarter of 2003 resulted from the sale of land.
As a result, the operating income from Oil and Chemical Distribution and
Transportation Services for the three months ended March 31, 2004 increased $1.2
million to $1.7 million compared with $.5 million for the first quarter in 2003.
Energy and Marine Services
Operating revenues from our Energy and Marine Services segment for the
three months ended March 31, 2004 increased $2.2 million or 12.9%, to $19.3
million compared with $17.1 million for the first quarter of 2003. The increase
was directly attributable to a vessel utilization rate of 47% during the first
quarter of 2004 as compared with a 26% utilization rate during the first quarter
of 2003. The increase in vessel utilization was principally driven by increased
contract activity in the Gulf of Mexico, United States west coast, and central
13
and western Pacific Ocean. Vessel utilization in this segment is impacted by oil
exploration activity and general economic conditions and tends to be very
volatile. This increase was partially offset by a decrease in revenues from our
northern Alaskan land operations.
Operating expenses for the three months ended March 31, 2004 increased $.8
million or 2.9%, to $28.3 million compared with $27.5 million for the first
quarter in 2003. The increase is directly attributable to increases in vessel
related costs due to the increase in vessel utilization. This increase was
partially offset by a decrease in operating costs from our northern Alaskan land
operations.
Depreciation and amortization for the three months ended March 31, 2004
decreased $.4 million or 12.5%, to $2.8 million compared with $3.2 million for
the first quarter in 2003. The decrease was the result of an adjustment made for
a vessel placed in service during the first quarter of 2003 that was previously
classified as held for sale.
As a result, the operating loss from Energy and Marine Services for the
first quarter in 2004 decreased $3.1 million to $3.8 million compared with $6.9
million for the first quarter in 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing liquidity requirements arise primarily from its need
to fund working capital, to acquire, construct, or improve equipment, to make
investments and to service debt. Management believes that cash flows from
operations and borrowings will provide sufficient working capital to fund the
Company's operating needs and to finance capital expenditures.
The Company has been engaged in discussions with Northland Holdings, Inc.
concerning a possible purchase by the Company of all the stock or assets of
Yukon Fuel Company ("Yukon") and/or Service Oil & Gas, Inc. as well as certain
vessels and other assets used in Yukon's fuel distribution business in Alaska.
The Company anticipates a cash purchase price of approximately $72 million
(depending on the level of working capital and other adjustments at closing.)
The parties have not arrived at a definitive agreement concerning the terms of
any such transaction and there can be no assurance that these discussions will
lead to such an agreement or a purchase of such stock or assets by the Company.
Any such transaction is subject to, among other things, the negotiation,
execution and delivery of a definitive acquisition agreement, completion by the
Company of its due diligence investigation, approval of such agreement by the
board of directors of the Company, receipt of necessary consents from certain
lenders to the Company, satisfactory resolution of pending litigation, and the
parties' joint determination that such a transaction could be effected in
compliance with applicable state and federal antitrust laws.
On November 20, 2003, a lawsuit was filed in the Superior Court for the
State of Alaska, Second Judicial District at Nome, against the Company, its
wholly owned subsidiary, Crowley Marine Services, Inc., Yukon and Northland
Holdings, Inc. by certain cooperatives and associations located in Western
Alaska. The complaint in this litigation alleges violations or threatened
violations by defendants of Alaska's antitrust and unfair trade practices
statutes in connection with the foregoing possible acquisition. Plaintiffs in
this litigation are seeking declaratory and injunctive relief which would
prevent completion of such transaction. The Company believes that the lawsuit is
without merit. On February 27, 2004, the court stayed the proceedings at the
defendants' request pending the outcome of an investigation by the Attorney
General of Alaska as to whether the proposed transaction violates such Alaska
statutes. Depending upon the outcome of this investigation and further
proceedings in the litigation, the Company may close the proposed acquisition
despite the pending litigation, but reserves the right not to do so.
FINANCIAL CONDITION AS OF MARCH 31, 2004
As of March 31, 2004 the Company has cash and cash equivalents of $156.9
million compared with $160.6 million at December 31, 2003. The Company generated
$20.0 million of cash from operations during the first quarter of 2004. The net
loss before depreciation and amortization expense and taxes provided $7.4
million of cash. Additional cash from operations was provided by lower levels of
funding for working capital requirements.
The Company used $3.3 million of cash in investing activities during the
first quarter of 2004. The Company has expended $3.9 million for the
construction of vessels and the purchase of equipment. Dry-docking costs of $3.1
million were incurred for four vessels during the first quarter of 2004. The
Company sold
14
its Logistics operations of its Liner Services segment in Venezuela for $1.5
million and received $1.6 million in escrowed Title XI funds for reimbursement
of construction expenditures related to the ATB's.
The Company used cash of $20.4 million in financing activities for
principal payments of the Company's debt and the payment of debt issuance costs.
All of the principal payments were scheduled except for the redemption of $10.4
million of Title XI financed bonds.
CAPITAL RESOURCES
The Company has executed agreements for the construction of operating
equipment of approximately $16.7 million. Lease financing of the equipment is
being negotiated. The Company is also in the process of negotiating with
shipyards to construct two additional articulated tug/barge units.
RISK FACTORS
If any of the following risks actually occur, our business, financial
condition, operating results or cash flows could be materially adversely
affected.
DEMAND FOR OUR SERVICES DEPENDS ON FACTORS BEYOND OUR CONTROL
Demand for our services is dependent on a number of factors beyond our
control, including:
- worldwide demand for chemicals and petroleum products and other cargo
shipped by our customers;
- local and international political and economic conditions and policies;
and
- weather conditions.
We have high fixed costs, and downtime or low productivity due to reduced
demand or other causes can have a significant negative effect on our operating
results.
LINER SERVICES IS SUBJECT TO ECONOMIC FACTORS AND
THE CYCLICAL NATURE OF ITS BUSINESS
Economic factors affecting the geographic regions in which Liner Services
are provided and cyclical business patterns experienced by this part of the
maritime shipping industry have caused the earnings of Liner Services to vary in
the past and are likely to cause similar variations in the future. There is no
assurance that Liner Services will be able to redeploy its vessels from less
profitable markets into other markets or uses.
FLUCTUATION OF FUEL PRICES
Economic and political factors can affect fuel prices. The Company's
operations may be impacted due to the timing and our ability to pass these
changes in fuel prices to our customers.
ENERGY AND MARINE SERVICES ARE FREQUENTLY PROVIDED
FOR DISCRETE PROJECTS
Energy and Marine Services frequently provides many of its services in
response to discrete customer projects or in response to emergency conditions
and its contracts are generally short-term, usually terminating within one year.
Accordingly, customers which account for a significant portion of operating
revenues and operating income in one fiscal year may represent an immaterial
portion of revenues in subsequent fiscal years.
THE COMPANY FACES INTENSE COMPETITION THAT COULD ADVERSELY AFFECT
ITS ABILITY TO INCREASE ITS MARKET SHARE AND ITS REVENUES
Our businesses operate in highly competitive industries. These intense
levels of competition could reduce our revenues, increase our expenses and
reduce our profitability.
In addition to price, service, experience and reputation, important
competitive factors include safety record, ability to meet the customer's
schedule, customers' national flag preference, operating conditions, capability
and intended use, complexity of logistical support needs and presence of
equipment in the appropriate geographical locations.
Many of our major competitors are diversified multinational companies. Some
of these companies have financial resources and operating staffs substantially
larger than ours. As a result, they may be better able to compete in making
vessels available more quickly and efficiently, meeting the customer's schedule
and withstanding the effect of declines in market prices. They may also be
better able to weather a downturn in our customers' industries. As a result, we
could lose customers and market share to these competitors.
15
THE COMPANY MAY INCUR SIGNIFICANT COSTS, LIABILITIES AND
PENALTIES IN COMPLYING WITH GOVERNMENT REGULATIONS
Government regulation, such as international conventions, federal, state
and local laws and regulations in jurisdictions where the Company's vessels
operate or are registered have a significant impact on our operations. These
regulations relate to worker health and safety, the manning, construction and
operation of vessels, homeland, port and vessel security, and oil spills and
other aspects of environmental protection.
Risks of incurring substantial compliance costs and liabilities and
penalties for non-compliance, particularly with respect to environmental laws
and regulations, are inherent in the Company's business. If this happens, it
could have a substantial negative impact on the Company's profitability and
financial position. The Company cannot predict whether it will incur such costs
or penalties in the future.
OIL AND CHEMICAL DISTRIBUTION AND TRANSPORTATION SERVICES EMPLOYS
A NUMBER OF TANKERS AND BARGES WHICH, IN THEIR PRESENT CONDITION,WILL
NOT BE PERMITTED TO CARRY PETROLEUM PRODUCTS IN UNITED STATES
WATERS AS OF CERTAIN DATES OCCURRING OVER THE NEXT THREE YEARS.
In the event that the Company is not able to replace or rebuild those
tankers and barges which it currently uses to carry crude oil or petroleum
products, it could become impossible for Oil and Chemical Distribution and
Transportation Services to continue to transport crude oil and petroleum
products at current levels for its current customers between ports in the United
States. Should this occur, it could have a substantial negative impact on the
profitability of Oil and Chemical Distribution and Transportation Services.
MARINE-RELATED RISKS COULD LEAD TO THE DISRUPTION OF
OUR SERVICES AND ADDED LIABILITIES
The operation of our vessels is subject to various risks, including
catastrophic marine disaster, adverse weather and sea conditions, capsizing,
grounding, mechanical failure, collision, oil, chemical and other hazardous
substance spills and navigation errors. These risks could endanger the safety of
our personnel, our vessels, the cargo we carry, the equipment under tow and
other property, as well as the environment. If any of these events was to occur,
the Company could be held liable for resulting damages. In addition, the
affected vessels could be removed from service and would not be available to
generate revenue.
THE COMPANY IS A DEFENDANT IN NUMEROUS ASBESTOS-RELATED LAWSUITS
The Company is a defendant in numerous lawsuits filed on behalf of current,
retired or deceased seamen seeking damages for unspecified asbestos-related
injuries or diseases as a result of occupational exposure to fibers emitted from
asbestos-containing products in the course of employment aboard vessels owned or
operated by the Company. See Note 5 to our Unaudited Condensed Consolidated
Financial Statements in "Item 1. Financial Statements". Additional litigation
relating to these matters may be commenced in the future. While it is not
feasible to predict or determine the ultimate outcome of all pending
investigations and legal proceedings or provide reasonable ranges of potential
losses, given the large and/or indeterminate amounts sought in certain of these
matters and the inherent unpredictability of litigation, it is possible that an
adverse outcome in certain matters could have a material adverse effect on our
financial condition, operating results or cash flows.
INSURANCE COVERAGE MAY NOT PROTECT THE COMPANY FROM ALL OF THE
LIABILITIES THAT COULD ARISE FROM THE RISKS INHERENT IN ITS BUSINESSES
The Company maintains insurance coverage against the risks related to its
operations. There can be no assurance, however, that its existing insurance
coverage can be renewed at commercially reasonable rates or that available
coverage will be adequate to cover future claims. If a loss occurs that is
partially or completely uninsured, the Company could be exposed to substantial
liability.
While our vessels are not trading in the areas of the potential war zone, a
terrorist attack on one or more of our vessels anywhere in the world could have
a material adverse effect on our financial condition, results of operations or
cash flows. Although we currently maintain the maximum available War Risk and
Terrorism liability insurance coverage that is available through the
international Protection & Indemnity Insurers, a
16
catastrophic occurrence could result in liability in excess of available
insurance coverage, resulting in a material adverse affect on our business.
WE DEPEND ON ATTRACTING AND RETAINING QUALIFIED, SKILLED EMPLOYEES TO
OPERATE OUR BUSINESSES AND PROTECT OUR KNOW-HOW
Our results of operations depend in part upon our business know-how. We
believe that protection of our know-how depends in large part on our ability to
attract and retain highly skilled and qualified personnel. Any inability we
experience in the future to hire, train and retain a sufficient number of
qualified employees could impair our ability to manage and maintain our
businesses and to protect our know-how.
We require skilled employees who may have to perform physically demanding
work. As a result of the volatility of our customers' industries, particularly
the oil and petrochemical industries, and the demanding nature of the work,
potential employees may choose to pursue employment in fields that offer a more
desirable work environment at wage rates that are competitive with ours. With a
reduced pool of workers, it is possible that we will have to raise wage rates to
attract workers from other fields and to retain our current employees. If we are
not able to increase the rates we charge our customers to compensate for
wage-rate increases, our operating results may be adversely affected.
THE COMPANY IS HEAVILY DEPENDENT ON UNIONIZED LABOR
The Company's operations are heavily dependent on unionized labor, both in
the United States and in foreign markets. Maintenance of satisfactory labor
relations is important to our operations. At March 31, 2004, approximately 64%
of the Company's employees were members of unions. A protracted strike or
similar action by a union could have a material adverse effect on our results of
operations or financial condition.
WE MAY NOT BE ABLE TO NEGOTIATE COLLECTIVE BARGAINING AGREEMENTS ON
TERMS FAVORABLE TO THE COMPANY
The Company has collective bargaining agreements with 12 different unions.
These agreements will expire through 2008. There is no assurance that we will be
able to negotiate new collective bargaining agreements on terms favorable to the
Company upon expiration of the agreements. If the Company is not able to
negotiate favorable terms, it may be at a competitive disadvantage.
THERE ARE CERTAIN RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS
Substantial amounts of our operating revenues are derived from our foreign
operations. These operations are subject to various conditions and potential
events associated with and inherent in the conduct of business with foreign
nations. These include, without limitation, political instability, vessel
seizure, nationalization of assets, fluctuating currency values, hard currency
shortages, controls of currency exchange, the repatriation of income or capital,
import-export quotas, and other forms of public and governmental regulation, all
of which are beyond our control.
While it is not possible to predict whether any of these conditions will
develop or events will occur, the development or occurrence of any one or more
of them could have a material adverse affect on our financial condition, results
of operations or cash flows. While we do business in many countries outside of
the United States, substantially all such business is denominated in United
States dollars.
OTHER BUSINESS RISKS
Other risks which may affect our operations and revenues include our
ability to:
- manage our costs effectively;
- finance our operations and construct new vessels on acceptable terms;
- charter our vessels on acceptable terms; and
- manage these risks successfully.
17
THERE IS NO ESTABLISHED PUBLIC TRADING MARKET FOR OUR STOCK
There is no established public trading market for our capital stock and
none is expected to develop in the foreseeable future. We do not intend to apply
for listing of any shares of our capital stock on any securities exchange. We
also will not seek to have any of our shares quoted on an interdealer quotations
system. Accordingly, no assurances can be given as to the liquidity of our
shares and the ability of the holders of our shares to sell them in secondary
market transactions, or as to the prices at which such shares may be sold.
MR. CROWLEY CAN EXERCISE CONTROL OVER ALL MATTERS REQUIRING
STOCKHOLDER APPROVAL AND COULD MAKE DECISIONS ABOUT OUR
BUSINESS THAT CONFLICT WITH OTHER STOCKHOLDERS' INTERESTS
As of April 30, 2004, Thomas B. Crowley, Jr., the Chairman of the Board of
Directors, President and Chief Executive Officer of the Company, owns or is
deemed to own approximately 64.7% of our outstanding common stock, 100% of our
Class N common stock, and approximately 99.9% of our outstanding Series A
preferred stock. This ownership gives Mr. Crowley approximately 77.7% of the
total votes attributable to our outstanding voting stock as of April 30, 2004.
Because the Series A preferred stock is entitled to vote along with the shares
of common stock, Mr. Crowley's stock ownership means that he is able to exercise
control over all matters requiring stockholder approval even if other
stockholders oppose them. As a result, Mr. Crowley controls all matters
affecting the Company, including:
- the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers;
- any determinations with respect to mergers or other business
combinations;
- our acquisition or disposition of assets;
- our financing arrangements; and
- the payment of dividends on our stock.
Mr. Crowley and his family are the beneficiaries of certain split-dollar
life insurance agreements. The Board of Directors has approved these agreements
in furtherance of its belief that preserving Crowley family control and the
closely held nature of the Company is beneficial to the Company's stockholders
and will maximize stockholder value over the long-term. The Board of Directors
has long been concerned that short-term and long-term estate tax and other
obligations of certain Crowley family stockholders could lead to an unrelated
third party gaining a highly influential and potentially detrimental position
with respect to the business and management of the Company. Such circumstances
also could lead to stock falling into the hands of speculative investors who may
later attempt to disrupt Company affairs in order to encourage the Company to
take action favorable to such investors, yet not in the best interests of the
Company and remaining stockholders.
The Board of Directors also has been concerned that should the Company
receive a request to purchase shares held by such stockholders or their estates
in lieu of a possible sale to such investors, the Company would be unable to
effect such a purchase without negatively impacting its results of operations,
financial condition or cash flows. In this regard, the split-dollar life
insurance agreements enable Mr. Crowley and certain trusts for the benefit of
his descendants to purchase most, if not all, of such shares without involving
the Company.
The Company expects that following the death of Mrs. Molly M. Crowley, the
net proceeds of the policies of insurance on the life of Mrs. Crowley will be
used by Mr. Crowley and the trusts under his control to purchase shares of
Common Stock held by the Thomas B. Crowley Marital Trust so that this trust can
pay applicable estate taxes. Essentially, the split dollar life insurance
agreements enable Mr. Crowley and his family to retain ownership of shares and
control of the Company under circumstances when certain of such shares otherwise
might have to be sold to a third party to pay applicable estate taxes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates which may adversely affect the results of our
operations and financial condition. The Company's policy is not to use financial
instruments for trading purposes or other speculative purposes.
18
In February 2004, the Company sold its Logistics operation based in
Venezuela for $1.5 million. As part of the sales agreement, the Company retained
cash, accounts receivable and accounts payable as of the sale date. At March 31,
2004, the net assets of the discontinued operations formerly based in Venezuela
are $.7 million based upon an exchange rate of 1920 Venezuelan Bolivars (VEB's),
the official rate of exchange ("Official Rate"), per United States dollar. The
Venezuelan Government has introduced restrictions on the exchange of VEB's for
United States dollars and has suggested that certain measures are being
considered which could increase the Official Rate and thereby decrease the net
assets of this discontinued operation.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, including its principal executive officer (who is
the Chief Executive Officer) and the principal financial officer (who is the
Vice President, Tax and Audit), have conducted an evaluation of the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")). Based on that evaluation, the Company's principal executive
officer and the principal financial officer concluded that such disclosure
controls and procedures are effective, as of the end of the period covered by
this Quarterly Report on Form 10-Q, to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
No change in the Company's internal control over financial reporting
identified in connection with the evaluation required by Rule 13a-15(d) under
the Exchange Act that occurred during the Company's first fiscal quarter 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.
GENERAL LITIGATION
The Company is subject to various foreign and domestic legal and regulatory
rules and certain proceedings arising therefrom in the conduct of normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse or beneficial effect on the Company's
consolidated financial condition, results of operations, or cash flows.
ASBESTOS LITIGATION
The Company is currently named as a defendant with other companies with
respect to approximately sixteen thousand maritime asbestos cases and other
toxic tort cases, most of which were filed in the Federal Courts in Ohio,
Michigan, California and New Jersey. Additional cases were filed in the
Territorial Court of the Virgin Islands, and in state courts in Utah,
Pennsylvania, Texas, and Louisiana. Each of the cases, filed on behalf of a
seaman or his personal representative, alleges injury or illness based upon
exposure to asbestos or other toxic substances and sets forth a claim based upon
the theory of negligence under the Jones Act and on the theory of
unseaworthiness under the General Maritime Law. Pursuant to an order issued by
the Judicial Panel on Multidistrict Litigation dated July 29, 1991, all Federal
cases were transferred to the United States District Court for the Eastern
Division of Pennsylvania for pretrial processing. On May 1, 1996, the cases were
administratively dismissed by Judge Charles R. Weiner, subject to reinstatement
in the future. At present it is not known how long the process will require. It
is also not known whether Judge Weiner will be able to develop a plan which will
result in settlement of the cases. If he is unsuccessful, it is expected that
the cases will be remanded to the Ohio and Michigan courts in the event that
they are reinstated.
The Company has insurance coverage that reimburses it for a substantial
portion of the: (a) costs incurred defending against asbestos claims; and (b)
amounts the Company pays to settle claims or honor judgments by courts. The
coverage is provided by a large number of insurance policies written by dozens
of insurance companies over a period of many years. The amount of insurance
coverage depends on the nature of the alleged exposure to asbestos, the specific
subsidiary against which an asbestos claim is asserted and the terms and
conditions of the specific policy.
The uncertainties of asbestos claim litigation make it difficult to
accurately predict the results of the ultimate resolution of these claims. By
their very nature, civil actions relating to toxic substances vary
19
according to the fact pattern of each case, the number of defendants and their
relative shares of liability in each case, the applicable jurisdiction and
numerous other factors. This uncertainty is increased by the possibility of
adverse court rulings or new legislation affecting the asbestos claim litigation
or the settlement process. Accordingly, we cannot predict the eventual number of
such cases or their final resolution. The full impact of these claims and
proceedings in the aggregate continues to be unknown. At March 31, 2004, 36
claims have been reinstated by the Judicial Panel on Multidistrict Litigation
and remanded to the U.S. District Court for the Northern District of Ohio for
trial. The Company has accrued $.8 million as an estimate of the ultimate
outcome of this litigation. The Company has also recorded a receivable from its
insurance companies of $.5 million related to these claims.
In addition to the asbestos litigation discussed above, the Company is
party to certain other proceedings in which other claimants allege injury or
illness based upon exposure to asbestos or other toxic substances. The Company
has accrued an estimated litigation reserve of $3.1 million with a corresponding
re-insurance receivable of $.5 million.
While it is not feasible to accurately predict or determine the ultimate
outcome of all pending investigations and legal proceedings or provide
reasonable ranges of potential losses, given the large and/or indeterminate
amounts sought in certain of these matters and the inherent unpredictability of
litigation, it is possible that an adverse outcome in some of these cases could
have a material adverse affect on our financial condition, operating results or
cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 3.1 Certificate of Amendment of Restated Certificate of
Incorporation of Crowley Maritime Corporation(1)
Exhibit 3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Crowley Maritime Corporation(1)
Exhibit 3.3 Restated Certificate of Incorporation of Crowley Maritime
Corporation(1)
Exhibit 3.4 Restated By-Laws of Crowley Maritime Corporation(1)
Exhibit 11 Statement regarding computation of per share earnings(2)
Exhibit 31.1 Rules 13a-14(a) and 15d-14a Certification (Chief Executive
Officer)
Exhibit 31.2 Rules 13a-14(a) and 15d-14a Certification (Chief Financial
Officer)
Exhibit 32.1 Section 1350 Certifications
- ---------------
(1) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form 10 filed April 1, 2002.
(2) See Note 3 to the Crowley Maritime Corporation Unaudited Condensed
Consolidated Financial Statements in "Part 1 -- Financial
Information -- Item 1. Financial Statements" of this Form 10-Q.
(b) Reports on Form 8-K.
None
20
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.
CROWLEY MARITIME CORPORATION
(Registrant)
May 14, 2004
By: /s/ RICHARD L. SWINTON
--------------------------------------
Richard L. Swinton
Vice President, Tax & Audit
(Authorized Officer and Principal
Financial Officer)
21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
Exhibit 3.1 Certificate of Amendment of Restated Certificate of
Incorporation of Crowley Maritime Corporation(1)
Exhibit 3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Crowley Maritime Corporation(1)
Exhibit 3.3 Restated Certificate of Incorporation of Crowley Maritime
Corporation(1)
Exhibit 3.4 Restated By-Laws of Crowley Maritime Corporation(1)
Exhibit 11 Statement regarding computation of per share earnings(2)
Exhibit 31.1 Rules 13a-14(a) and 15d-14a Certification (Chief Executive
Officer)
Exhibit 31.2 Rules 13a-14(a) and 15d-14a Certification (Chief Financial
Officer)
Exhibit 32.1 Section 1350 Certifications
- ---------------
(1) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form 10 filed April 1, 2002.
(2) See Note 3 to the Crowley Maritime Corporation Unaudited Condensed
Consolidated Financial Statements in "Part 1 -- Financial
Information -- Item 1. Financial Statements" of this Form 10-Q.