UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

OR

 

 

 

(212) 953-4100

Registrant’s telephone number, including area code

 

No Change

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  ý   NO  o

 

Indicate by check mark whether the registrant  is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).              YES  ý   NO  o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

 

Common Shares outstanding as of October 26, 2004 –  39,371,393

 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS

 

		SEPTEMBER 30, 2004			DECEMBER 31, 2003
		(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents		$	418,763		$	74,003
Voyage receivables, including unbilled of $68,483 and $45,877		72,869			51,990
Other receivables		12,103			7,634
Inventories and prepaid expenses		8,596			7,796
Total Current Assets		512,331			141,423
Capital Construction Fund		260,504			247,433
Vessels, at cost, less accumulated depreciation of $472,904 and $439,495		1,485,483			1,336,824
Vessels under Capital Leases, less accumulated amortization of $53,048 and $50,372		25,273			27,949
Investments in Joint Ventures		114,620			183,831
Other Assets		65,121			63,226
Total Assets		$	2,463,332		$	2,000,686
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and sundry liabilities and accrued expenses		$	38,238		$	49,801
Federal income taxes		51,493			13,172
Short-term debt and current installments of long-term debt		29,477			31,318
Current obligations under capital leases		4,599			3,917
Total Current Liabilities		123,807			98,208
Long-term Debt		863,830			739,733
Obligations under Capital Leases		44,050			47,855
Deferred Federal Income Taxes ($175,667 and $151,304), Deferred Credits and Other Liabilities		216,892			197,815
Shareholders’ Equity		1,214,753			917,075
Total Liabilities and Shareholders’ Equity		$	2,463,332		$	2,000,686

 

See notes to condensed consolidated financial statements.

 

2

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS (UNAUDITED)

 

		THREE MONTHS ENDED						NINE MONTHS ENDED
		SEPT. 30, 2004			SEPT. 30, 2003			SEPT. 30, 2004			SEPT. 30, 2003
Shipping Revenues:
Time and bareboat charter revenues, including vessels operating in pools and $4,679, $7,013, $15,124 and $21,039 received from a 37.5% owned joint venture		$	163,072		$	75,528		$	488,572		$	294,217
Voyage charter revenues		8,881			14,551			41,733			48,996
		171,953			90,079			530,305			343,213
Voyage expenses		(4,065		)	(5,903		)	(16,374		)	(17,610		)
Time Charter Equivalent Revenues		167,888			84,176			513,931			325,603
Ship Operating Expenses:
Vessel expenses		24,697			23,345			74,264			65,668
Time and bareboat charter hire expenses, including $20 and $1,766 in 2003 paid to a 50% owned joint venture		16,818			3,481			39,507			15,968
Depreciation and amortization		25,368			23,641			75,009			67,044
General and administrative		9,294			7,697			32,494			26,230
Total Ship Operating Expenses		76,177			58,164			221,274			174,910
Income from Vessel Operations		91,711			26,012			292,657			150,693
Equity in Income of Joint Ventures		12,024			4,417			19,022			24,574
Operating Income		103,735			30,429			311,679			175,267
Other Income		16,295			3,876			28,717			7,986
		120,030			34,305			340,396			183,253
Interest Expense		18,809			16,480			55,183			45,042
Income before Federal Income Taxes		101,221			17,825			285,213			138,211
Provision for Federal Income Taxes		32,700			3,789			95,100			38,100
Net Income		$	68,521		$	14,036		$	190,113		$	100,111
Weighted Average Number of Common Shares Outstanding:
Basic		39,368,594			34,955,851			39,021,687			34,648,379
Diluted		39,424,207			35,273,133			39,083,569			34,937,901
Per Share Amounts:
Basic net income		$	1.74		$	0.40		$	4.87		$	2.89
Diluted net income		$	1.74		$	0.40		$	4.86		$	2.87
Cash dividends declared		—			$	0.175		$	0.525		$	0.65

 

See notes to condensed consolidated financial statements.

 

3

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

IN THOUSANDS

(UNAUDITED)

 

		NINE MONTHS ENDED
		SEPT. 30, 2004			SEPT. 30, 2003
Net cash provided by operating activities		$	256,534		$	181,578
Cash Flows from Investing Activities:
Proceeds from sales of marketable securities		—			34,674
Expenditures for vessels, including $9,332 and $19,178 related to vessels under construction		(51,130		)	(76,774		)
Proceeds from disposal of vessels		44,104			80,296
Acquisition of interests in joint ventures that own three VLCCs		(2,292		)	—
Investments in and advances to joint ventures		(123,213		)	(16,656		)
Distributions from joint ventures		—			6,612
Purchases of other investments		(256		)	(846		)
Proceeds from dispositions of other investments		8,535			10,541
Other – net		(584		)	(568		)
Net cash provided by/(used in) investing activities		(124,836		)	37,279
Cash Flows from Financing Activities:
Issuance of common stock, net of issuance costs		115,513			—
Issuance of long-term debt, net of issuance costs		158,784			194,849
Payments on debt and obligations under capital leases		(43,002		)	(356,337		)
Cash dividends paid		(20,642		)	(16,425		)
Issuance of common stock upon exercise of stock options		3,277			11,975
Other – net		(868		)	(1,562		)
Net cash provided by/(used in) financing activities		213,062			(167,500		)
Net increase in cash and cash equivalents		344,760			51,357
Cash and cash equivalents at beginning of period		74,003			36,944
Cash and cash equivalents at end of period		$	418,763		$	88,301

 

Supplemental schedule of noncash investing activities:

 

In 2004, the Company exchanged its interest in three joint ventures for its partner’s interest in three other joint ventures.  In conjunction with the exchange, the Company paid cash of $2,292 to its partner, as follows:

 

Fair value of assets received		$	199,906
Cost of investments in joint ventures		(197,614		)
Cash paid		$	2,292

 

In 2003, the Company acquired its partner’s interest in one joint venture through the joint venture’s redemption of our partner’s shares in exchange for one of the venture’s two vessel owning subsidiaries, as follows:

 

Fair value of assets received		$	66,321
Cost of investments in joint ventures		(66,321		)

 

See notes to condensed consolidated financial statements.

 

4

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

DOLLARS IN THOUSANDS

(UNAUDITED)

 

		Common			Paid-in Additional			Retained			Unearned Compensation Restricted			Treasury Stock					Accumulated Other Comprehensive
		Stock*			Capital			Earnings			Stock			Shares		Amount			Income/(Loss)**			Total
Balance at January 1, 2004		$	39,591		$	108,549		$	829,824		$	—		3,685,326		$	(48,454	)	$	(12,435	)	$	917,075
Net Income								190,113														190,113
Net Unrealized Holding Gains on Available-For-Sale Securities																			2,972			2,972
Effect of Derivative Instruments																			4,996			4,996
Comprehensive Income																						198,081		***
Cash Dividends Declared								(20,642		)												(20,642		)
Issuance of Common Stock		1,200			87,299									(2,000,000	)	27,014						115,513
Issuance of Restricted Stock Award					1,148						(1,785		)	(50,000	)	637						—
Amortization of Restricted Stock Award											312											312
Options Exercised and Employee Stock Purchase Plan					416									(215,610	)	2,861						3,277
Tax Benefit Related to Options Exercised					1,137																	1,137
Balance at September 30, 2004		$	40,791		$	198,549		$	999,295		$	(1,473	)	1,419,716		$	(17,942	)	$	(4,467	)	$	1,214,753
Balance at January 1, 2003		$	39,591		$	106,154		$	731,201		$	—		5,139,684		$	(70,270	)	$	(22,527	)	$	784,149
Net Income								100,111														100,111
Cumulative Effect of Change in Accounting Principle, net of tax benefit of $902																			(1,674		)	(1,674		)
Net Unrealized Holding Gains on Available-For-Sale Securities																			3,053			3,053
Effect of Derivative Instruments																			932			932
Comprehensive Income																						102,422		***
Cash Dividends Declared								(22,608		)												(22,608		)
Deferred Compensation Related to Options Granted					226																	226
Options Exercised and Employee Stock Purchase Plan					(1,332		)							(883,285	)	13,307						11,975
Tax Benefit Related to Options Exercised					2,755																	2,755
Balance at September 30, 2003		$	39,591		$	107,803		$	808,704		$	—		4,256,399		$	(56,963	)	$	(20,216	)	$	878,919

 

*                      Par value $1 per share; 60,000,000 shares authorized; 40,790,759 and 39,590,759 shares issued at September 30, 2004 and December 31, 2003, respectively.

**               Amounts are net of tax.

***        Comprehensive income for the three month periods ended September 30, 2004 and 2003 was $67,741 and  $16,384, respectively.

 

See notes to condensed consolidated financial statements.

 

5

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

 

Notes to Unaudited Condensed Financial Statements

 

Note A – Basis of Presentation:

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.

 

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

Note B – Significant Accounting Policies:

 

Stock-based compensation - As of September 30, 2004, the Company had one stock-based employee compensation plan and one non-employee director plan under which options have been granted.  The Company accounts for those plans in accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).  Compensation cost for stock options is recognized as an expense based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date, over the amount an employee or non-employee director must pay to acquire the stock.  The following table presents the effects on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), to stock-based compensation.

 

		IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
		THREE MONTHS ENDED SEPTEMBER 30,							NINE MONTHS ENDED SEPTEMBER 30,
		2004			2003				2004				2003
Net income, as reported		$	68,521		$	14,036			$	190,113			$		100,111
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax		(102		)	(16			)	(252			)	(141			)
Pro forma net income		$	68,419		$	14,020			$	189,861			$	99,970
Per share amounts:
Basic – as reported		$	1.74		$		0.40		$		4.87		$	2.89
Basic – pro forma		$	1.74		$		0.40		$		4.87		$	2.89
Diluted – as reported		$	1.74		$		0.40		$		4.86		$	2.87
Diluted – pro forma		$	1.74		$		0.40		$		4.86		$	2.86

 

6

 

Newly issued accounting standards - On December 8, 2003, the President of the U.S. signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”).  The Act introduces a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.  In accordance with Financial Accounting Standards Board Staff Position 106-2, which is effective for the first interim or annual period beginning after June 15, 2004, the accrued benefit obligation at September 30, 2004 and December 31, 2003 and the net periodic postretirement benefit cost for the three month and nine month periods ended September 30, 2004 and 2003 that are included in the condensed consolidated financial statements do not reflect the effects of the Act on the Company’s postretirement health care plan.  The Company has not completed its evaluation of the impact of the Act on such plan.

 

Note C – Change in Accounting Principle:

 

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”).  This interpretation requires the consolidation of special purpose entities by the company that is deemed to be the primary beneficiary of such entities.  This represents a significant change from the prior rules, which required consolidation by the entity with voting control; and, according to which OSG accounted for its 1999 sale-leaseback transaction of U.S. Flag Crude Tankers as an off-balance sheet financing.  On July 1, 2003, the Company consolidated the special purpose entity (“Alaskan Equity Trust”) that now owns these vessels and holds the associated bank debt used to purchase them. The vessels were recorded in the condensed consolidated balance sheet based on their carryover bases, that is, as if FIN 46 had been effective at the time of the 1999 sale-leaseback.  The special purpose entity’s debt of $19,916,000 as of September 30, 2004 is secured by the vessels but is otherwise nonrecourse to OSG.  In addition, OSG did not issue any repayment or residual-value guaranties.  Therefore, OSG is not exposed to any loss as a result of its involvement with Alaskan Equity Trust.  The cumulative effect of this change in accounting principle on the Company’s consolidated balance sheet as of July 1, 2003 was to increase total assets by $25,079,000 (principally to reflect the reconsolidation of the vessels), to increase liabilities by $26,753,000 (principally to reflect debt of Alaskan Equity Trust of $45,034,000 partially offset by the elimination of the unamortized balance of the deferred gain on the 1999 sale-leaseback of $21,141,000) and to reduce shareholders’ equity by $1,674,000 (to reflect the fair value of Alaskan Equity Trust’s floating-to-fixed interest rate swaps included in accumulated other comprehensive income/(loss)). The cumulative effect of such accounting change on net income was insignificant.

 

Note D – Segment Reporting:

 

The Company has four reportable segments:  Foreign Flag VLCCs, Aframaxes, and Product Carriers, which participate in the international market, and U.S. Flag vessels. Following the acquisition of two U.S. Flag Product Carriers in the second quarter of 2004, the Company revised its reportable segments

 

7

 

in the third quarter of 2004.  Segment information as of September 30, 2003 and for the three and nine month periods then ended have been reclassified to conform to the 2004 presentation. Information about the Company’s reportable segments as of and for the three month and nine month periods ended September 30, 2004 and 2003 follows:

 

		Foreign Flag
In thousands		VLCCs			Aframaxes			Product Carriers			Other			U.S. Flag			Totals
Three months ended Sept. 30, 2004:
Shipping revenues *		$	96,675		$	38,502		$	10,583		$	6,665		$	19,528		$	171,953
Time charter equivalent revenues		96,112			38,468			9,020			6,408			17,880			167,888
Depreciation and amortization		11,230			6,363			1,947			841			4,987			25,368
Income from vessel operations		65,379			23,398			3,747			2,153			6,328			101,005		**
Equity in income of joint ventures		9,592			868			—			—			1,564			12,024
Gain on disposal of vessels		12,584			—			—			—			—			12,584
Total assets at September 30, 2004		1,055,561			483,094			63,865			18,027			106,204			1,726,751
Nine months ended Sept. 30, 2004:
Shipping revenues *		295,784			115,160			31,949			24,503			62,909			530,305
Time charter equivalent revenues		294,009			115,106			27,115			22,514			55,187			513,931
Depreciation and amortization		34,402			18,886			5,833			2,525			13,363			75,009
Income from vessel operations		208,582			73,191			11,905			9,527			21,946			325,151		**
Equity in income of joint ventures		12,302			2,670			—			—			4,050			19,022
Gain on disposal of vessels		12,584			—			27			(36		)	2,901			15,476
Three months ended Sept. 30, 2003:
Shipping revenues *		31,769			20,552			9,546			5,967			22,245			90,079
Time charter equivalent revenues		31,558			20,397			7,279			5,936			19,006			84,176
Depreciation and amortization		9,476			5,501			1,794			1,768			5,102			23,641
Income from vessel operations		11,247			9,359			2,323			2,673			8,107			33,709		**
Equity in income of joint ventures		2,172			355			—			—			1,890			4,417
Gain on disposal of vessels		—			7			—			—			7			14
Total assets at September 30, 2003		908,616			466,376			65,238			98,300			88,892			1,627,422
Nine months ended Sept. 30, 2003:
Shipping revenues *		146,871			80,453			36,258			16,214			63,417			343,213
Time charter equivalent revenues		144,796			80,376			27,737			16,125			56,569			325,603
Depreciation and amortization		27,121			16,506			5,973			5,299			12,145			67,044
Income from vessel operations		89,642			48,018			12,239			7,093			19,931			176,923		**
Equity in income of joint ventures		17,641			2,209			—			60			4,664			24,574
Loss on disposal of vessels		—			7			(858		)	—			7			(844		)

 

*                      For vessels operating in pools or on time or bareboat charters, shipping revenues are substantially the same as time charter equivalent revenues.

 

**               Segment totals for income from vessel operations are before general and administrative expenses.

 

The joint venture that is operating four V Pluses (large crude oil tankers of more than 350,000 deadweight tons - “dwt”) is included in the VLCC segment because of the similarity in their trade.

 

8

 

Reconciliations of total assets of the segments to amounts included in the condensed consolidated balance sheets follow:

 

		IN THOUSANDS AS OF
		SEPT. 30, 2004				SEPT. 30, 2003
Total assets of all segments		$	1,726,751			$	1,627,422
Corporate cash and securities, including Capital Construction Fund		679,267				328,257
Other unallocated amounts		57,314				77,339
Consolidated total assets		$		2,463,332		$	2,033,018

 

Note E – Joint Ventures and Certain Pooling Arrangements:

 

As of September 30, 2004, the Company is a partner in joint ventures that own and operate six Foreign Flag vessels (four V Pluses, one VLCC, and one Aframax).

 

A condensed summary of the results of operations of joint ventures follows:

 

		IN THOUSANDS
		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2004				2003				2004				2003
Time charter equivalent revenues		$	74,825			$	63,902			$	174,969			$	241,011
Ship operating expenses		(46,462			)	(51,744			)	(126,904			)	(161,175		)
Loss on vessel disposal		—				—				—				(5,132		)
Income from vessel operations		28,363				12,158				48,065				74,704
Other income		157				47				173				217
Interest expense *		(3,213			)	(2,530			)	(3,940			)	(16,735		)
Net income		$		25,307		$		9,675		$		44,298		$	58,186

 

*                      Includes interest on subordinated loans payable to the joint venture partners of $1,436 (three months ended September 30, 2004), $1,023 (three months ended September 30, 2003), $1,491 (nine months ended September 30, 2004) and $10,470 (nine months ended September 30, 2003).  The Company’s share of such interest is eliminated in recording the results of the joint ventures by the equity method.

 

As of September 30, 2004, the joint ventures in which the Company participates had total bank debt of $308,888,000 and subordinated loans payable to all joint venture partners of $174,000,000.  The Company’s percentage interests in these joint ventures ranged from 30% to 50%.  The Company’s guaranties in connection with the joint ventures’ bank financings, which are otherwise nonrecourse to the joint venture partners, aggregated $96,556,000 at September 30, 2004.  These guaranties remain outstanding until the related debt matures at dates ranging between March 2005 and September 2016.

 

9

 

Through April 2003, the Company had a 50% interest in a joint venture with a major oil company that owned two VLCCs that were operating on long-term charters, one to OSG (which vessel has been time chartered to the major oil company) and one to such major oil company.  In April 2003, OSG effectively acquired its partner’s 50% interest in the joint venture, resulting in such vessels becoming 100% owned.  Accordingly, the results of these two vessels are included in the condensed consolidated statements of operations from the effective date of the transaction.  The acquisition was accomplished through the joint venture’s redemption of our partner’s shares in exchange for one of the venture’s two vessel owning subsidiaries, followed by our purchase from the partner of such vessel for $56,500,000.  In accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the joint venture recognized a loss on disposal of $5,132,000 based on the excess of the carrying amount of the vessel transferred to our former partner over its fair value.  The Company’s share of such charge of $2,566,000 is reflected in equity in income of joint ventures in the condensed consolidated statement of operations for the nine months ended September 30, 2003.

 

The Company completed transactions effective July 1, 2003 with its partners to restructure the relative ownership interests in five joint-venture companies, each of which owned a VLCC.  These transactions increased OSG’s overall joint-venture interest by the equivalent of one third of a vessel.  In one transaction, the Company, jointly with one partner, acquired the remaining partner’s 33.33% interest in the joint venture companies owning the Ariake and Sakura I for cash of approximately $20,000,000, thereby increasing the Company’s share in such joint ventures to 49.889%.  In a second transaction, the Company exchanged its 33.33% interest in the Ichiban with one partner for a portion of that partner’s interest in the Tanabe and Hakata, thereby increasing the Company’s interest in these joint ventures to 49.889%.

 

In late-February 2004, the Company completed a transaction with its partner covering six joint-venture companies (including the vessel companies in the above paragraph), each of which owned a VLCC.  This transaction provided for an exchange of joint-venture interests and cash of approximately $2,300,000 paid by the Company and resulted in the Company owning 100% of the Dundee, Sakura I and Tanabe, and the joint venture partner owning 100% of the Edinburgh, Ariake and Hakata.  The results of the Dundee, Sakura I and Tanabe are included in the VLCC segment from the effective date of transaction.  In connection with the above transaction, the Company advanced $34,447,000, representing its share of the amounts required to repay the combined bank debt of such joint ventures.

 

In April 2004, the Company formed a joint venture with a Tankers pool partner to acquire four 442,000 dwt V Pluses, three built in 2002 and one built in 2003.  OSG has a 49.9% interest in this joint venture.  The joint venture took delivery of the four V Pluses in July 2004. The total purchase price for these vessels of $448,000,000 was financed by the joint venture through a long-term bank loan of $290,000,000 and subordinated partner loans and capital contributions. Amounts advanced by the Company as of September 30, 2004 aggregated $89,321,000.  In connection with the bank financing, the partners severally issued guaranties on a pro rata basis aggregating $190,000,000.  The amount of such guaranties will decrease as the outstanding balance of the bank loan is reduced below $190,000,000.  As of September 30, 2004, the carrying value of the Company’s pro rata share of such guaranties, which is included in other liabilities in the accompanying condensed consolidated balance sheet, was $325,000.

 

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The Company’s two Foreign Flag Dry Bulk Carriers were withdrawn from a pool of Capesize Dry Bulk Carriers in February 2004, upon commencement of three-year time charters.

 

Note F – Capital Construction Fund:

 

Based on a number of factors, including the magnitude of the drop in market values below the Company’s cost bases and the length of time that the declines had been sustained, management concluded that declines in fair value of certain securities with aggregate cost bases of $16,187,000 as of March 31, 2003 were other than temporary.  Accordingly, during the nine months ended September 30, 2003 the Company recorded impairment losses aggregating $4,756,000 in the accompanying condensed consolidated statement of operations.

 

During the first nine months of 2003, the Company sold certain of the securities for which write-downs aggregating $26,140,000 had previously been recorded.  These sales resulted in the recognition of gains of $1,947,000 in the three months ended September 30, 2003 and $11,872,000 in the nine months ended September 30, 2003 (see Note N).

 

Note G – Derivatives:

 

During the third quarter of 2004, the Company transferred a loss of $339,000 from accumulated other comprehensive income/(loss) to other income in the accompanying condensed statements of operations for an interest rate swap maturing in July 2005 with a notional amount of $8,750,000 that no longer qualified as an effective cash flow hedge because the underlying debt was repaid.  As of September 30, 2004, the Company is a party to other floating-to-fixed interest rate swaps, which are being accounted for as cash flow hedges, with various major financial institutions covering notional amounts aggregating approximately $396,047,000 pursuant to which it pays fixed rates ranging from 4.6% to 8.3% and receives floating rates based on LIBOR (approximately 2.0% as of September 30, 2004).  These agreements contain no leverage features and have various maturity dates ranging from August 2005 to August 2014.  As of September 30, 2004, the Company has recorded a liability of $16,643,000 related to the fair values of all of these swaps in other liabilities.

 

Shipping revenues for the three month and nine month periods ended September 30, 2004 have been reduced by $648,000 because of forward freight agreements with a remaining notional value of $600,000 that extend to December 2004. Other forward freight agreements, which were entered into in the first quarter of 2004, with a remaining notional value of $2,026,000 that also extend to December 2004 met the 80% effectiveness threshold required by FAS 133 and, therefore, are being accounted for as cash flow hedges. The fair value of all of these agreements, a liability of $1,644,000, was reflected in other liabilities as of September 30, 2004.

 

Note H – Debt:

 

In February 2004, the Company issued $150,000,000 principal amount of senior unsecured notes pursuant to a Form S-3 shelf registration filed on January 13, 2004.  The notes, which are due in February 2024 and may not be redeemed prior to maturity, have a coupon of 7.5%.  The Company received proceeds of approximately $146,659,000, after deducting expenses.

 

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In July 2004, the Company concluded a new $100,000,000 seven-year unsecured revolving credit facility.  The terms, conditions and financial covenants contained in this agreement are more favorable than those contained in the long-term revolving credit facility that matures in December 2006.  Borrowings under the new facility bear interest at a rate based on LIBOR plus a margin.

 

In August 2004, the Company extended the maturity of a $150,000,000 five-year unsecured revolving credit facility by one year to August 2009 and amended one of its floating rate secured term loans.  The amendment to the secured loan extended its maturity date by two years to 2016, reduced required principal payments by approximately $390,000 per annum and added a $20,000,000 short-term credit facility.

 

As of September 30, 2004, the Company had unsecured long-term credit facilities aggregating $780,000,000, of which $581,000,000 was unused.  In addition, the Company had two short-term credit facilities expiring in August 2005 aggregating $65,000,000.  As of September 30, 2004, letters of credit aggregating $26,700,000 had been issued under one of such facilities, reducing aggregate short-term credit availability to $38,300,000.

 

Agreements relating to long-term debt provide for prepayment privileges (in certain instances with penalties), limitations on the amount of total borrowings and secured debt (as defined), and acceleration of payment under certain circumstances, including failure to satisfy the financial covenants contained in certain of such agreements.

 

As of September 30, 2004, approximately 22.6% of the net book amount of the Company’s vessels, representing seven Foreign Flag tankers and three U.S. Flag Crude Tankers, is pledged as collateral under certain debt agreements.

 

Interest paid, excluding capitalized interest, approximated $58,705,000 and $43,909,000 for the nine months ended September 30, 2004 and 2003, respectively.

 

Note I – Taxes:

 

Since January 1, 1987, earnings of the foreign shipping companies (exclusive of foreign joint ventures in which the Company has a less than 50% interest) are subject to U.S. income taxation in the year earned and may be distributed to the U.S. parent without further tax.  Prior to 1987, tax on such earnings was deferred as long as the earnings were reinvested in foreign shipping operations.  Foreign income, substantially all of which resulted from the operations of companies that are not subject to income taxes in their country of incorporation, aggregated $104,887,000 (three months ended September 30, 2004), $24,775,000 (three months ended September 30, 2003), $304,439,000 (nine months ended September 30, 2004) and $161,157,000 (nine months ended September 30, 2003), before any U.S. income tax effect.  No provision for U.S. income taxes on the undistributed income of the foreign shipping companies accumulated through December 31, 1986 was required at September 30, 2004 since undistributed earnings of foreign shipping companies have been reinvested or are intended to be reinvested in foreign shipping operations so that the qualified investment therein is not expected to be reduced below the corresponding amount at December 31, 1986. No provision for U.S. income taxes on the Company’s share of the undistributed earnings of the less than 50%-owned foreign shipping joint ventures was required as of September 30, 2004, because it is intended that such undistributed earnings

 

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($36,100,000 at September 30, 2004) will be indefinitely reinvested; the unrecognized deferred U.S. income taxes attributable thereto approximated $12,600,000.

 

The components of the provision for federal income taxes follow:

 

		IN THOUSANDS
		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2004				2003				2004			2003
Current		$	26,828			$	2,149			$	75,028		$	19,480
Deferred		5,872				1,640				20,072			18,620
		$		32,700		$		3,789		$	95,100		$	38,100

 

During 2002, the Company established a valuation allowance against the deferred tax asset resulting from the write-down of certain marketable securities.  The valuation allowance was established because the Company could not be certain that the full amount of the deferred tax asset would be realized through the generation of capital gains in the future.

 

The Company reduced the valuation allowance as follows, reflecting capital gains recognized or anticipated in 2004 and increases in fair values of securities previously written down and the effect of securities sold in 2003:

 

IN THOUSANDS
THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
2004			2003			2004			2003
$	—		$	—		$	934		$	2,324

 

The reductions in the valuation allowance have been recorded as reductions in the provisions for federal income taxes in the accompanying condensed consolidated statements of operations.  The valuation allowance has been reduced to zero as of September 30, 2004.

 

Actual federal income taxes paid during the nine months ended September 30, 2004 amounted to $36,000,000, of which $11,040,000 related to 2003. Actual federal income taxes paid during the nine months ended September 30, 2003 amounted to $14,524,000, all of which related to 2003.

 

Note J – Capital Stock and Stock Compensation:

 

In January 2004, the Company awarded 50,000 shares of common stock at no cost to its new chief executive officer.  Restrictions limit the sale or transfer of these shares until they vest, which occurs ratably over a four-year period.  During the restriction period, the shares will have voting rights and cash dividends will be paid if declared.  At the date of the award, the fair market value of the Company’s common stock was $35.70 per share.  Accordingly, $1,785,000 was recorded as unearned compensation in shareholders’ equity as of the award date.  Such amount is being amortized to compensation expense over four years using the straight-line method. Compensation expense related thereto for the three months and nine months ended September 30, 2004 was $112,000 and $312,000, respectively.

 

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In January 2004, options covering 100,000 shares were granted to the new chief executive officer at $35.70 per share (the market price at the date of grant) under the Company’s 1998 stock option plan. In June 2004, options covering 7,500 shares were granted at $41.37 per share (the market price at the date of grant) under the 1999 non-employee director (as defined) stock option plan.  The options granted vest and become exercisable over a three-year period and expire ten years from the date of grant.  On July 1, 2004, options covering 9,000 shares were granted at $44.47 per share (the market price at the date of grant) under the 1999 non-employee director stock option plan.  These options vest and become exercisable one year from the date of grant and expire ten years from the date of grant.  The Company follows APB 25 and related interpretations in accounting for its stock options.  For purposes of determining compensation cost for the Company’s stock option plans using the fair value method of FAS 123, the fair value of the options granted was estimated on the date of grant using the Black-Scholes option pricing model.  The weighted average grant-date fair value of options granted in 2004 was $13.25 per share.

 

In April 2004, the Board of Directors approved the 2004 Stock Incentive Plan (the “2004 Plan”) subject to approval by the shareholders, which approval was received in June.  The 2004 Plan enables the Company to grant stock-based awards, including stock options, stock appreciation rights, restricted stock and performance awards to employees, consultants and non-employee directors.  Approximately 2,740,000 shares of the Company’s stock may be issued or used as the basis for awards under the 2004 Plan.  No further stock options will be granted under the 1998 stock option plan and the 1999 non-employee director stock option plan after July 1, 2004.

 

Diluted net income per share gives effect to stock options.

 

Note K – Accumulated Other Comprehensive Income/(Loss):

 

The components of accumulated other comprehensive income/(loss), net of related taxes, in the accompanying condensed balance sheets follow:

 

		IN THOUSANDS AS OF
		SEPTEMBER 30, 2004			DECEMBER 31, 2003
Unrealized gains on available-for-sale securities		$	9,546		$	6,574
Unrealized losses on derivative instruments		(11,238		)	(16,234		)
Minimum pension liability		(2,775		)	(2,775		)
		$	(4,467	)	$	(12,435	)

 

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Note L – Leases:

 

1.               Charters-in:

 

During the first nine months of 2004, the Company entered into the following charter-in arrangements in conjunction with other pool members covering ten vessels (seven VLCCs and three Aframaxes), which leases are, or will upon the vessels deliveries be, classified as operating leases:

 

•                  a 40% participation interest in the five-year time charters of two newbuilding VLCCs, which  commence upon their delivery from shipyards in September 2004 and mid 2005.  These charters provide for profit sharing with the owners of the vessels when TCE rates exceed the base rates in the charters;

•                  a 50% participation interest in the three-year time charters of two VLCCs (one built  in 1995 and the other in 1996), which commenced in the third quarter of 2004.  These charters provide for profit sharing with the owners of the vessels when TCE rates exceed the base rates in the charters;

•                  a 30% participation interest in the two-year time charter of a 2003-built VLCC;

•                  a 15% participation interest in the five-year time charter of a 2000-built VLCC;

•                  a 15% participation interest in the two-year time charter of a 1995-built VLCC;

•                  a 50% participation interest in the five-year time charters of two 1998-built Aframaxes; and

•                  a 75% participation interest in the one-year time charter of a 2003-built Aframax.

 

All but one of the above vessels are, or will be, commercially managed by pools in which the Company participates.

 

The Company exercised a renewal option in the third quarter of 2004 and extended the bareboat charter-in of the Overseas Marilyn for three additional years.  Such charter, which is classified as an operating lease, now expires in November 2007.

 

The Company’s share of the future minimum commitments for the above charter-in obligations as of September 30, 2004 are $9,522,000 (the balance of 2004), $37,393,000 (2005), $28,863,000 (2006), $20,295,000 (2007), $16,071,000 (2008) and $9,812,000 thereafter.

 

2.               Charters-out:

 

In April 2004, the Company acquired two U.S. Flag Product Carriers, built in 1982 and 1983, for cash of $40,500,000.  These vessels are currently operating on bareboat charters that extend to December 2009 and provide options for earlier termination and extension.

 

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Note M – Pension and Other Postretirement Benefit Plans:

 

The components of the net periodic benefit cost for the Company’s domestic plans follow:

 

		IN THOUSANDS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
		PENSION BENEFITS						OTHER BENEFITS
		2004			2003			2004			2003
Cost of benefits earned		$	383		$	334		$	24		$	12
Interest cost on benefit obligation		507			758			75			59
Expected return on plan assets		(577		)	(493		)	—			—
Amortization of prior-service costs		268			282			(39		)	(39		)
Amortization of transition obligation		—			—			5			5
Recognized net actuarial loss/(gain)		35			153			10			—
Net periodic benefit cost		$	616		$	1,034		$	75		$	37

 

		IN THOUSANDS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
		PENSION BENEFITS						OTHER BENEFITS
		2004			2003			2004			2003
Cost of benefits earned		$	1,149		$	1,004		$	72		$	36
Interest cost on benefit obligation		1,523			2,272			224			178
Expected return on plan assets		(1,733		)	(1,479		)	—			—
Amortization of prior-service costs		804			845			(116		)	(116		)
Amortization of transition obligation		—			—			15			15
Recognized net actuarial loss/(gain)		105			459			30			(1		)
Net periodic benefit cost		1,848			3,101			225			112
Loss on settlement		4,077			—			—			—
Net periodic benefit cost after settlement		$	5,925		$	3,101		$	225		$	112

 

The Company previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to contribute between $250,000 and $2,000,000 to its qualified defined benefit pension plan in 2004, or prior to the filing of the Company’s federal income tax return for 2004.  The Company has revised its estimate of such 2004 contributions and now expects them to range between zero and $1,750,000.  As of September 30, 2004, no such contributions were required or made.

 

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