Note 10. Income Taxes
The Company and the majority of its subsidiaries are not subject to U.S. corporate income tax on income generated from the international operation of ships pursuant to Section 883 of the Internal Revenue Code, provided that they meet certain tests related to country of incorporation and composition of shareholders. The Company believes that it and a majority of its subsidiaries meet these tests. Income tax expense related to the Company's remaining subsidiaries is not significant.
Note 11. Financial Instruments
The estimated fair values of the Company's financial instruments are as follows (in thousands):
The carrying amounts shown are the amounts reported in the consolidated balance sheets. The reported fair values are based on a variety of factors and assumptions. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of December 31, 1997 or December 31, 1996 or that will be realized in the future and do not include expenses that could be incurred in an actual sale or settlement. The following methods were used to estimate the fair values of the Company's financial instruments, all of which are held for purposes other than trading:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of those instruments.
LONG-TERM DEBT
The fair values of the $1 Billion Revolving Credit Facility, the capital leases, the secured fixed and variable rate loans and the unsecured fixed rate loan were estimated based on the market rates available to the Company for similar debt with the same remaining maturities. The fair values of the Senior Notes and Senior Debentures were estimated by obtaining quoted market prices.
INTEREST RATE SWAP AGREEMENTS
The fair value of interest rate swap agreements was estimated based on quoted market prices for similar or identical financial instruments to those held by the Company. The Company enters into these agreements to manage interest costs as part of its liability risk management program. The objective of the program is to control fluctuations in interest expense which could occur as a result of movements in market interest rates. The Company continuously evaluates its debt portfolio including its interest rate swap agreements and makes periodic adjustments to the mix of fixed rate and floating rate debt based on its view of interest rate movements. As of December 31, 1997, the Company had agreements in effect which exchanged floating interest rates for fixed interest rates in a notional amount of $185.0 million maturing 1998 to 1999 and fixed interest rates for floating interest rates in a notional amount of $593.8 million maturing 1998 to 2007.
The Company has exposure under these interest rate swap agreements for the cost of replacing the contracts in the event of nonperformance by the counterparties, all of which are currently the Company's lending banks. To minimize that risk, the Company limits its exposure to any individual counterparty and selects counterparties with credit risks acceptable to the Company.