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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________________ to ________________.
Commission File Number 1-6479-1
OVERSEAS SHIPHOLDING GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2637623
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
511 Fifth Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-953-4100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
----------------------- -----------------------------------------
Common Stock (par value New York Stock Exchange
$1.00 per share) Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the Common Stock held by non-affiliates of
the registrant on February 26, 2003 was $445,600,000, based on the closing price
of $15.49 per share on the New York Stock Exchange on that date. (For this
purpose, all outstanding shares of Common Stock have been considered held by
non-affiliates, other than the shares beneficially owned by directors, officers
and certain 5% shareholders of the registrant; certain of such persons disclaim
that they are affiliates of the registrant.)
As of February 26, 2003, 34,455,582 shares of Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for 2002 are
incorporated by reference in Part I and portions of the registrant's definitive
proxy statement to be filed by the registrant in connection with its 2003 Annual
Meeting of Shareholders are incorporated by reference in Part III.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business ..................................................................................... 1
Overview ..................................................................................... 1
Forward-Looking Statements ................................................................... 3
Operations ................................................................................... 4
Fleet ..................................................................................... 5
International Fleet Operations ............................................................ 6
U.S. Flag Fleet Operations ................................................................ 7
Competition .................................................................................. 8
Environmental Matters Relating to Bulk Shipping .............................................. 9
Domestic Requirements ..................................................................... 9
International Requirements ................................................................ 10
Insurance ................................................................................. 11
Global Bulk Shipping Markets ................................................................. 11
Economic Recovery and Higher Oil Production ............................................... 11
VLCC Scrapping Rises Further; Fleet Little Changed ........................................ 12
Aframax Scrapping Remains Subdued; Newbuilding Orderbook Rises
Further .................................................................................. 12
Panamax Product Carrier Fleet Stable; Newbuilding Orderbook Grows ......................... 13
Handysize Product Carrier Newbuilding Orderbook Continues to Grow ......................... 13
Glossary ..................................................................................... 14
Available Information ........................................................................ 16
Item 2. Properties ................................................................................... 16
Item 3. Legal Proceedings ............................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders .......................................... 17
Executive Officers of the Registrant ......................................................... 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................ 18
Item 6. Selected Consolidated Financial Data ......................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 20
General ................................................................................. 20
Operations .............................................................................. 20
Critical Accounting Policies ............................................................ 22
Income from Vessel Operations ........................................................... 25
Equity in Income of Joint Ventures ...................................................... 29
Interest Expense ........................................................................ 30
Provision/(Credit) for Federal Income Taxes ............................................. 31
Effects of Inflation .................................................................... 31
Newly Issued Accounting Standard ........................................................ 31
Liquidity and Sources of Capital ........................................................ 31
Risk Management ......................................................................... 32
Interest Rate Sensitivity ............................................................... 33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................................... 33
Item 8. Financial Statements and Supplementary Data .................................................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......... 63
TABLE OF CONTENTS
Page
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PART I
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................... 63
Item 11. Executive Compensation ....................................................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 63
Item 13. Certain Relationships and Related Transactions ............................................... 63
Item 14. Controls and Procedures ...................................................................... 63
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................. 64
Signatures ........................................................................................................ 68
Certification of the Chief Executive Officer ...................................................................... 70
Certification of the Chief Financial Officer ...................................................................... 72
Certification of the Chief Executive Officer and Chief Financial Officer .......................................... 74
PART I
ITEM 1. BUSINESS
Overview
Overseas Shipholding Group, Inc. (together with its subsidiaries, "OSG" or
the "Company") is one of the world's leading independent bulk shipping companies
engaged primarily in the ocean transportation of crude oil and petroleum
products. The Company owns and operates a modern fleet of 52 oceangoing vessels,
primarily tankers, that aggregate 8.5 million deadweight tons, of which 43
vessels operate in the international market and nine vessels operate in the U.S.
Flag trades. The Company believes that it is the sixth largest independent
tanker company in the world measured by deadweight tons. OSG is the only major
U.S. shipping company with significant operations in both the international and
U.S. Flag trades.
A glossary of shipping terms (the "Glossary") that should be used as a
reference when reading this Annual Report on Form 10-K begins on page 14.
Capitalized terms that are used in this Annual Report which are not defined when
they are first used are defined in the Glossary.
In recent years, over 85% of the Company's shipping revenues have been
generated by the transportation of crude oil and petroleum products. The balance
of the Company's revenues have been derived from the transportation of dry bulk
cargoes, primarily grain, coal, and iron ore. The transportation of crude oil
has accounted for all of the operating income of the Company's joint ventures in
each of 2002, 2001 and 2000. The Company's customers include many of the world's
largest oil companies.
Of the Company's 52 vessels, 47 are engaged in the oil transportation
business, of which 41 are Foreign Flag tankers that operate in the international
market and six are U.S. Flag tankers that operate in the U.S. Alaskan and
coastwise trades. The Company's five other vessels are engaged in the
transportation of dry bulk cargo: two are Foreign Flag Dry Bulk Carriers that
operate in the international market, two are U.S. Flag Dry Bulk Carriers
chartered to foreign and U.S. governmental agencies for the transportation of
U.S. foreign aid grain cargoes, and one is a U.S. Flag Pure Car Carrier that is
on a long-term charter. As of December 31, 2002, the Foreign Flag tanker fleet
included 20 VLCCs (including ten vessels owned by joint ventures in which the
Company has interests ranging from 30% to 50%), one Suezmax, 12 Aframaxes
(including one vessel owned by a joint venture in which the Company has a 50%
interest) and eight Product Carriers. The Marshall Islands is the principal flag
of registry of the Foreign Flag fleet. The U.S. Flag Jones Act tanker fleet
consists of four tankers engaged in the transportation of Alaskan crude oil for
the remainder of their economic lives ("U.S. Flag Crude Tankers") and two
Product Carriers that are operating on time charters that continue for another
two years.
Since tankers tend to specialize on specific trade routes based on their
size, design configuration and flag of registry, the Company reports its tankers
in four business segments: Foreign Flag VLCCs, Aframaxes and Product Carriers,
and U.S. Flag Crude Tankers. The Company's two U.S. Flag Dry Bulk Carriers
constitute the Company's fifth business segment.
The Company charters its vessels either for specific voyages ("voyage
charters") at spot rates or for specific periods of time ("time charters") at
fixed monthly amounts. Under the terms of voyage and time charters, the
Company's vessels are manned and operated by the Company. The Company, from time
to time, also charters out its vessels on bareboat charters. Under bareboat
charters, the ships are chartered out for specific periods of time (generally
medium or long-term) during which they are manned and operated by the customers.
Voyage charters constituted 70% of the Company's Time Charter Equivalent
revenues in 2002, 73% in 2001 and 76% in 2000. Accordingly, the Company's
shipping revenues are significantly affected by prevailing spot rates for voyage
charters in the markets in which the Company's vessels operate. Spot market
rates are highly volatile and typically reflect intense competition among vessel
owners. Rates are determined by market forces such as local and worldwide demand
for the
1
commodities carried (such as crude oil or petroleum products), volumes of trade,
distances that the commodities must be transported, and the amount of available
tonnage both at the time such tonnage is required and over the period of
projected use. Available tonnage is affected, over time, by the volume of
newbuilding deliveries, the removal (principally through scrapping) of existing
vessels from service, and by the greater efficiency of modern tonnage. Scrapping
is affected by the level of freight rates and by international and U.S.
governmental regulations that require the maintenance of vessels within certain
standards and mandate the phase-out of tankers lacking double hulls.
A major portion of the Company's U.S. Flag fleet is on long-term charter,
providing a significant and predictable level of earnings, which is not subject
to fluctuations in spot market rates. The Company's U.S. Flag Crude Tankers are
on bareboat charters extending for the remaining useful lives of such vessels
with remaining terms ranging from one to more than three years. During 2001, the
Company's two U.S. Flag Jones Act Product Carriers entered into time charters
extending through late 2004. During 2002, the time charter on the Company's U.S.
Flag Pure Car Carrier was extended through late 2007. In the Company's
international fleet, two VLCCs and the Suezmax are on long-term charters that
extend to December 2004 and June 2005, respectively, and two of the Bostonmax
Product Carriers entered into charters that extend through December 2003. In the
aggregate, time charter and bareboat charter revenues constituted 30% of the
Company's TCE revenues in 2002, 27% in 2001 and 24% in 2000.
OSG has sought to distinguish itself through its emphasis on service,
safety, and reliability. Through its customer-focused business strategy, the
Company is committed to providing comprehensive transportation solutions for its
customers' bulk shipping challenges. As a result, the Company has successfully
maintained a number of long-term, close customer relationships.
In the international market, the Company offers its customers one of the
industry's most modern and efficient fleets. The average age of the Company's 20
VLCCs is 4.7 years and the average age for its 12 Aframaxes is 6.1 years. In
contrast, the average age of the world fleet of VLCCs and Aframaxes is 9.6 years
and 11.7 years, respectively. The young age of the Company's VLCC and Aframax
fleets and the Company's Technical Management expertise has resulted in minimal
service disruptions for these vessels.
To increase vessel utilization and thereby revenues, the Company
participates in commercial pools with other owners of modern vessels. By
operating a large number of vessels as an integrated transportation system, such
pools offer customers greater flexibility and a higher level of service while,
at the same time, achieving improved scheduling efficiencies for vessel owners.
In December 1999, the Company and other leading tanker companies formed Tankers
International LLC to pool the commercial operation of their modern VLCCs. As of
December 31, 2002, Tankers managed 43 VLCCs. The Company also has an Aframax
pooling arrangement with PDV Marina, the marine transportation subsidiary of the
Venezuelan state oil company, and Reederei "Nord" Klaus E. Oldendorff, which
joined the pool in the second quarter of 2002, adding four modern Aframaxes.
This pool consists of 24 Aframaxes that generally trade in the Atlantic Basin,
including eight Aframaxes controlled by PDV Marina (see "Operations -
International Fleet Operations - Aframax Pool" on page 6). In addition, since
2000, the Company has operated its two Foreign Flag Dry Bulk Carriers in a large
pool of Capesize vessels. All of these pools negotiate charters with customers
on behalf of the pool participants, primarily in the spot market. The size and
scope of these pools enable them to enhance utilization rates for pool vessels
and generate higher effective TCE revenues than are otherwise obtainable in the
spot market.
In recent years, the Company has materially reduced vessel operating costs
and overhead. The Company has reduced organizational layers to streamline
decision making, transferred functions from high-cost areas to lower-cost areas,
outsourced functions where appropriate and renegotiated service and supply
contracts. Through fully integrated shoreside and shipboard automation, the
Company has been able to improve the speed and quality of information provided
to its customers, while reducing the number of shoreside staff by more than 50%
since January 1999. All aspects of vessel operations are continuously reviewed
to ensure that the Company's vessels conform with best industry practices. Third
parties provide Technical Management for some of the Company's vessels held in
joint ventures, providing OSG the opportunity to benchmark its operations with
those of other parties.
2
The Company has almost completed its fleet-renewal program enabling OSG to
offer one of the industry's most modern fleets at the same time that major
customers are demonstrating a clear preference for modern tonnage based on
concerns about the environmental risks associated with older vessels. Upon
completion of the program at the beginning of 2004, more than 92% (based on
deadweight tons, weighted to reflect the Company's interest in vessels owned
jointly with others) of OSG's Foreign Flag tanker fleet will be double-hulled or
double-sided. Under the program, two newbuildings were delivered in 2000, seven
in 2001 and four in 2002. In addition, five modern second-hand vessels were
acquired in the last three years. The three remaining newbuildings on order as
of December 31, 2002 consist of one double-hulled VLCC (which was delivered in
February 2003) and two wide-bodied, shallow-draft, double-hulled Aframaxes
(scheduled for delivery in October 2003 and January 2004). All of these modern
vessels are built and maintained to operate safely and reliably in accordance
with the Company's commitment to environmental protection.
For information about the world tanker fleet in 2002, see "Global Bulk
Shipping Markets" on pages 11 to 13.
The Company believes that the strength of its balance sheet, and the
financial flexibility that it affords, distinguishes it from many of its
competitors. At December 31, 2002, the Company's liquidity adjusted debt to
capital ratio stood at 49.5% compared with 48.4% at December 31, 1999. For this
purpose, the Company's liquidity adjusted debt is defined as the Company's
long-term debt reduced by the Company's cash, marketable securities and tax
adjusted balance in the Capital Construction Fund. The Company's liquidity
adjusted debt to capital ratio has increased by only 1.1% even as OSG has made
investments in joint ventures and vessels of more than $450 million in the last
three years. Completion of the Company's fleet expansion will require further
capital expenditures of approximately $30 million in 2003.
As of December 31, 2002, the Company had 1,731 employees: 1,587 seagoing
personnel and 144 shoreside staff. The Company has collective bargaining
agreements with three different maritime unions, covering 130 seagoing personnel
employed on the Company's U.S. Flag vessels. These agreements are in effect
through June 15, 2003 with one of the unions, June 15, 2005 with another union,
and June 15, 2006 with a third union. Under the collective bargaining
agreements, the Company is obligated to make contributions to pension and other
welfare programs. OSG believes that it has a satisfactory relationship with its
employees.
Forward-Looking Statements
This Form 10-K contains forward-looking statements regarding the outlook
for tanker and dry cargo markets, and the Company's prospects, including its
anticipated acquisition of newbuildings, prospects for certain strategic
alliances and the implementation of certain overhead and operating cost
reductions. There are a number of factors, risks and uncertainties that could
cause actual results to differ from the expectations reflected in these
forward-looking statements, including changes in production of or demand for oil
and petroleum products, either generally or in particular regions; greater than
anticipated levels of newbuilding orders or less than anticipated rates of
scrapping of older vessels; the availability to the Company of suitable vessels
for acquisition or chartering in on terms it deems favorable; changes in the
pooling arrangements in which the Company participates, including withdrawal of
participants or termination of such arrangements; changes affecting the vessel
owning joint ventures in which the Company is a party; changes in trading
patterns for particular commodities significantly impacting overall tonnage
requirements; changes in the rates of growth of the world and various regional
economies; risks incident to vessel operation, including pollution; increases in
costs of operation and unanticipated delays in implementing various cost
reduction measures; unanticipated changes in laws and regulations; and the
possible outbreak of hostilities which could reduce or otherwise affect the
movement of oil from the Middle East. Forward-looking statements in this Form
10-K and written and oral forward-looking statements attributable to the Company
or its representatives after the date of this Form 10-K are qualified in their
entirety by the cautionary statement contained in this paragraph and in other
reports hereafter filed by the Company with the Securities and Exchange
Commission.
3
Operations
The bulk shipping industry has many distinct market segments based, in
large part, on the size and design configuration of vessels required and, in
some cases, on the flag of registry. Freight rates in each market segment are
determined by a variety of factors affecting the supply and demand for suitable
vessels. Tankers and Dry Bulk Carriers, unlike container and liner vessels,
which the Company does not own, are not bound to specific ports or schedules and
therefore can respond to market opportunities by moving between trades and
geographical areas.
The following chart reflects the percentage of TCE revenues generated by
the Company's five reportable segments for each year in the three-year period
ended December 31, 2002 and excludes the Company's proportionate share of TCE
revenues of joint ventures:
Percentage of TCE Revenues
-------------------------------
2002 2001 2000
-------------------------------
Foreign Flag
VLCCs 29.9% 29.6% 31.9%
Aframaxes 26.7% 29.2% 23.3%
Product Carriers 13.1% 15.2% 14.7%
-------------------------------
Total Foreign Flag Segments 69.7% 74.0% 69.9%
-------------------------------
U.S. Flag
Crude Tankers 10.5% 7.4% 10.0%
Dry Bulk Carriers 4.6% 3.9% 6.7%
-------------------------------
Total U.S. Flag Segments 15.1% 11.3% 16.7%
Other 15.2% 14.7% 13.4%
-------------------------------
Total 100.0% 100.0% 100.0%
===============================
The following chart reflects the percentage of income from vessel
operations accounted for by each reportable segment for each year in the
three-year period ended December 31, 2002. Income from vessel operations is
before general and administrative expenses, the 2001 restructuring charge, and
the Company's share of income from joint ventures:
Percentage of Income/(Loss) from
Vessel Operations
--------------------------------
2002 2001 2000
--------------------------------
Foreign Flag
VLCCs 24.0% 35.1% 42.0%
Aframaxes 35.3% 36.4% 27.9%
Product Carriers 13.6% 16.5% 14.1%
--------------------------------
Total Foreign Flag Segments 72.9% 88.0% 84.0%
--------------------------------
U.S. Flag
Crude Tankers 17.6% 7.8% 7.3%
Dry Bulk Carriers (4.4)% (2.9)% 1.7%
--------------------------------
Total U.S. Flag Segments 13.2% 4.9% 9.0%
Other 13.9% 7.1% 7.0%
--------------------------------
Total 100.0% 100.0% 100.0%
===============================
4
Despite the increase in the number of wholly-owned Foreign Flag vessels
from 2000 to 2002, the percentage of income from vessel operations derived from
the Foreign Flag segments decreased in 2002 compared with 2001 and 2000.
Revenues from Foreign Flag vessels are derived principally from voyage charters
and are, therefore, significantly affected by prevailing spot rates. During the
first three quarters of 2002, spot rates, particularly for VLCCs, were
significantly lower than their levels for corresponding periods of 2001 and
2000. In contrast to the Foreign Flag fleet, revenues from U.S. Flag Crude
Tankers are derived from long-term fixed rate charters and therefore generate a
fixed level of earnings. Accordingly, the relative contribution of the U.S. Flag
Crude Tankers to consolidated TCE revenues and to consolidated income from
vessel operations is dependent on the level of freight rates then existing in
the international market, increasing when rates in the international market
decrease and decreasing when such rates increase.
For additional information regarding the Company's five reportable
segments for the three years ended December 31, 2002, see Management's
Discussion and Analysis of Financial Condition and Results of Operations set
forth in Item 7, and Note C to the Company's consolidated financial statements
for 2002 set forth in Item 8.
Fleet
As of December 31, 2002, OSG's Foreign Flag and U.S. Flag fleets consisted
of 52 vessels, including 11 vessels owned by joint ventures (ten VLCCs and one
Aframax) in which the Company has an average interest of 41%. In addition, at
December 31, 2002, the Company had three newbuildings on order, of which one was
a VLCC and two were Aframaxes.
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
Vessel Type Vessels Dwt Vessels Dwt Vessels Dwt
--------- --------- --------- --------- --------- ---------
Foreign Flag
VLCC 20 5,916,050 17 4,999,950 10 2,933,300
Suezmax 1 145,150 1 145,150 1 145,150
Afr 12 1,208,500 12 1,181,400 9 850,450
Panamax Product Carrier 4 256,650 4 256,650 4 256,650
Bostonmax Product Carrier 4 157,050 4 157,050 4 157,050
Capesize Bulk Carrier 2 314,800 2 314,800 2 314,800
-----------------------------------------------------------------------
Foreign Flag Vessels 43 7,998,200 40 7,055,000 30 4,657,400
U.S. Flag
Crude Tanker 4 392,350 4 392,350 4 392,350
Handysize Product Carrier 2 85,650 2 85,650 2 85,650
Bulk Carrier 2 51,100 3 171,550 4 209,350
Pure Car Carrier 1 15,900 1 15,900 1 15,900
-----------------------------------------------------------------------
U.S. Flag Vessels 9 545,000 10 665,450 11 703,250
-----------------------------------------------------------------------
Foreign and U.S. Flag Vessels 52 8,543,200 50 7,720,450 41 5,360,650
Foreign Flag Newbuildings on Order
VLCC 1 313,500 4 1,213,100 4 1,235,550
Aframax 2 221,850 3 332,200 6 554,600
-----------------------------------------------------------------------
Total Vessels, including Newbuildings 55 9,078,550 57 9,265,750 51 7,150,800
=======================================================================
The following chart summarizes the fleet and its tonnage, weighted to
reflect the Company's interest in vessels owned jointly with others.
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
Vessel Type Vessels Dwt Vessels Dwt Vessels Dwt
--------- --------- --------- --------- --------- ---------
Foreign and U.S. Flag Vessels 45.5 6,742,850 44.8 6,311,850 38.8 4,835,200
Total Vessels, including Newbuildings 48.5 7,278,150 50.5 7,467,050 46.8 6,625,350
5
Of three newbuildings as of December 31, 2002, which were to be delivered
in the next 12 months, one VLCC was delivered in February 2003. The fleet
renewal program has enabled the Company to have one of the most modern VLCC and
Aframax fleets in the world.
For additional information regarding the Company's fleet, see the fleet
list tables in the Company's Annual Report to Shareholders for 2002, which
tables are incorporated herein by reference.
International Fleet Operations
During the past several years, the Company has increased its focus on
VLCCs and Aframaxes through expansion of its fleet of such vessels. The
Company's VLCC and Aframax fleets constitute two of its reportable business
segments. The Company participates in pools for the Commercial Management of its
VLCCs and Aframaxes in order to enhance vessel utilization and TCE revenues.
Tankers International LLC ("Tankers")
In December 1999, the Company and five other leading tanker companies
formed Tankers to pool the commercial operation of their modern VLCC fleets. In
June 2002, one of the members of the pool announced its intention to withdraw
its 20 vessels from the pool, which withdrawal was completed in January 2003. As
of December 31, 2002, Tankers managed a fleet of 43 modern VLCCs (of which the
Company has contributed 18 vessels, including eight ships owned by joint
ventures in which the Company has ownership interests ranging from 30% to
49.9%). The Company's one VLCC newbuilding entered the Tankers pool upon its
delivery in February 2003.
Tankers commercially manages its participants' vessels. It collects
revenues from customers, pays voyage-related expenses and distributes TCE
revenues to the participants, after deducting administrative fees, according to
a formula based upon the relative carrying capacity, speed, and fuel consumption
of each vessel.
The large number of vessels managed by Tankers and the COAs into which it
has entered give it the ability to enhance vessel utilization. With higher
requirements for imported crude oil by China, India and other Asian countries,
crude oil shipments from West Africa to Asia have expanded, increasing
opportunities for vessels returning in ballast (i.e., without cargo) from Europe
and North America to load cargoes in West Africa for delivery in Asia. This
commercial-management strategy is referred to as triangulation and is one that
is used to maximize vessel utilization by minimizing the distance vessels travel
in ballast.
By consolidating the Commercial Management of this substantial VLCC fleet,
Tankers is able to offer its customers "one-stop shopping" for high quality
modern VLCC tonnage. The size of the fleet enables Tankers to become the
logistics partner of major customers, providing new and improved tools to help
them better manage their shipping programs, inventories and risk.
Aframax Pool ("Aframax International")
Since 1996, the Company and PDV Marina, the marine transportation
subsidiary of the Venezuelan state oil company, have pooled the Commercial
Management of their Aframax fleets. In 2002, Reederei "Nord" Klaus E. Oldendorff
("Oldendorff") joined the pool. With 24 vessels that generally trade in the
Atlantic Basin, the Aframax International pool has been able to supplement
baseload cargoes with backhauls and COAs. As a result, the pool has enhanced
vessel utilization, thereby generating higher TCE revenues than would otherwise
be attainable in the spot market. The Company's two Aframax newbuildings are
scheduled to enter the pool upon delivery, further increasing the pool's size
and presence in the Atlantic Basin.
In December 2002, major unions and businesses, including unions
representing employees and managers of Petroleos de Venezuela S.A., began a
general strike in Venezuela. The strike has substantially reduced oil exports
from Venezuela. As a result of the strike, the 16 vessels owned by OSG and
Oldendorff have been repositioned, principally to the North Sea and
Mediterranean. Earnings on the Company's Aframaxes were not significantly
affected as the relatively longer routes in
6
the trans-Atlantic trades delivering crude oil to the U.S. East Coast sharply
increased ton-mile demand and TCE rates in these trades. Pending the resumption
of normal Venezuelan exports, the PDV Marina Aframaxes have been carrying
Venezuelan proprietary cargoes outside the pool.
Commercially Flexible Fleet of Product Carriers
OSG's fleet of eight Foreign Flag Product Carriers constitutes one of the
Company's reportable business segments. The Company believes that the diversity
in the size of its Foreign Flag Product Carriers enables it to respond to the
frequently changing patterns of the petroleum products trade. OSG's four
Bostonmax Product Carriers operate in the Atlantic Basin and provide the
Company's customers full access to all Boston-area terminals, allowing maximum
discharge flexibility. The Company's four Panamax Product Carriers, which for
many years traded from the Arabian Gulf to the Far East, have adapted to
changing trade patterns and are now also carrying products from Korea to the
U.S. West Coast as well as in the intra-Asian trades.
U.S. Flag Fleet Operations
The Company's four U.S. Flag Crude Tankers and two U.S. Flag Dry Bulk
Carriers constitute two of the Company's reportable business segments.
Under the Jones Act, shipping between United States ports, including the
movement of Alaskan crude oil, is reserved for U.S. Flag vessels that are built
in the U.S. and owned by U.S. companies, more than 75% owned and controlled by
U.S. citizens. In addition, the Merchant Marine Act of 1936, as amended,
requires that preference be given to U.S. Flag vessels, if available at
reasonable rates, in the shipment of at least half of all U.S.
government-generated cargoes and 75% all of food-aid cargoes.
Vessels in the Company's U.S. Flag fleet have been chartered from time to
time to the Military Sealift Command of the United States Navy ("MSC"). Charters
to MSC reflect the requirements of the United States military for transportation
of cargoes and, accordingly, depend, in part, on United States foreign policy.
Revenues from charters to MSC were not significant during the three years ended
December 31, 2002.
Since late 1996, the Company's U.S. Flag Pure Car Carrier, which is under
a long-term charter that was extended through late 2007, has participated in the
U.S. Maritime Security Program, which ensures that militarily-useful U.S. Flag
vessels are available to the Department of Defense in the event of war or
national emergency. Under the program, the Company receives approximately $2.1
million per year through 2005, subject to annual Congressional appropriations.
To encourage private investment in U.S. Flag vessels, the Merchant Marine
Act of 1970 permits deferral of taxes on earnings from U.S. Flag vessels
deposited into a Capital Construction Fund and amounts earned thereon, which can
be used for the construction or acquisition of, or retirement of debt on,
qualified U.S. Flag vessels (primarily those limited to United States foreign,
Great Lakes and noncontiguous domestic trades). The Company is a party to an
agreement under the act. Under the agreement, the general objective is (by use
of assets accumulated in the fund) for three U.S. Flag vessels to be constructed
or acquired by the end of 2004. If the agreement is terminated or amounts are
withdrawn from the Capital Construction Fund for non-qualified purposes, such
amounts will then be subject to federal income taxes. Monies can remain
tax-deferred in the fund for a maximum period of 25 years (commencing January 1,
1987 for deposits prior thereto). The Company had approximately $231 million in
its Capital Construction Fund as of December 31, 2002. The Company's balance
sheet at December 31, 2002 includes a liability of approximately $71 million for
deferred taxes on the fund deposits and earnings thereon.
7
Alaska Tanker Company, LLC ("ATC")
Building on a 30-year relationship between the Company and BP p.l.c.
("BP"), ATC was formed in early 1999 by the Company, BP, and Keystone Shipping
Company ("Keystone"), to create the leading provider of marine transportation
services in the environmentally sensitive Alaskan crude oil trade. ATC, which is
owned 37.5% by the Company, 37.5% by Keystone and 25% by BP, manages the vessels
carrying BP's Alaskan crude oil, including four of the Company's vessels. At the
time ATC was established, charters for five of the Company's U.S. Flag Crude
Tankers that had been on long-term time charter to BP were converted into
bareboat charters of such vessels to ATC, with BP guaranties. Each bareboat
charter expires shortly before the date that OPA 90 precludes such single-hulled
tanker from calling on U.S. ports; the last charter expires in 2006. The four
bareboat charters (the fifth vessel having been disposed of) will generate U.S.
Flag TCE earnings averaging approximately $21 million per year for the Company
through 2005. In addition, the Company's participation in ATC provides the
Company with the ability to earn additional incentive hire income based upon
ATC's meeting certain predetermined performance standards.
In August 1999, the Company sold the foregoing four vessels (and a fifth
that was subsequently disposed of by the owner in 2000) and leased them back as
part of an off-balance sheet financing that generated approximately $170
million, which was used to reduce long-term debt. As of December 31, 2002, the
balance of debt on the books of the entity to which such vessels were sold
aggregated $52.1 million. Such debt, which is due in monthly installments
through August 2005, is repayable in full from bareboat charter revenues from
ATC, which are guaranteed by BP. On July 1, 2003, the Company expects to
consolidate this entity in accordance with FASB Interpretation No. 46. For
additional information, see the "Newly Issued Accounting Standard" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in Item 7.
Competition
The bulk shipping industry is highly competitive and fragmented, with no
one shipping group owning or controlling more than 6.1% of the world tanker
fleet. OSG competes with other owners of U.S. and Foreign Flag tankers and dry
cargo ships operating on an unscheduled basis similar to the Company.
OSG's vessels compete with all other vessels of a size and type required
by a customer that can be available at the date specified. In the spot market,
competition is based primarily on price, although charterers have become more
selective with respect to the quality of vessels they hire, with particular
emphasis on such factors as age, double hulls, and the reliability and quality
of operations. Increasingly, major customers are demonstrating a preference for
modern vessels based on concerns about the environmental risks associated with
older vessels. Consequently, owners of large modern fleets have gained a
competitive advantage over owners of older fleets. In the time charter market,
factors such as the age and quality of a vessel and the reputation of the owner
and operator tend to be more significant in competing for business.
In both the VLCC and Aframax market segments, the Company competes against
a large number of companies that own or operate vessels in these segments.
Competitors include other independent shipowners, oil companies and state owned
entities with fleets ranging from one to more than 60 vessels in a particular
segment. While some companies operate worldwide, others focus on one or more
geographical areas such as the Pacific, the Mediterranean or the Caribbean.
As of December 31, 2002, OSG owns 20 VLCCs (5.9 million dwt) of which 18
(5.3 million dwt) are Commercially Managed through Tankers. The Company's two
remaining VLCCs are operating on long-term charters. In February 2003, the
Company took delivery of a VLCC newbuilding (0.3 million dwt) that was entered
in the Tankers pool. Eight of the foregoing VLCCs entered in Tankers are owned
jointly with others. As of December 31, 2002, Tankers had a fleet of 43 VLCCs
(12.9 million dwt) with four newbuildings (1.2 million dwt) scheduled to join
Tankers upon delivery. Tankers' fleet as of December 31, 2002, represents 10.3%,
based on deadweight tons, of the total world VLCC fleet.
8
In the VLCC market segment, Tankers competes with more than 90 owners, the
largest being Frontline Ltd. (42 vessels, 12.9 million dwt), Mitsui OSK Lines
Ltd. (28 vessels, 7.6 million dwt), World-Wide Shipping Agency (S) Pte. Ltd. (24
vessels, 6.9 million dwt), Nippon Yusen Kabushiki Kaisha (24 vessels, 6.6
million dwt) and VELA International Marine Ltd., the shipping arm of the Saudi
Arabian oil company (18 vessels, 5.4 million dwt).
As of December 31, 2002, Aframax International consisted of 24 Aframaxes
(2.4 million dwt), including one 50% owned vessel, that generally trade in the
Atlantic Basin. OSG's two Aframax newbuildings are scheduled to enter this pool
upon delivery, further increasing the pool's size and presence in the Atlantic
Basin. More than 150 owners operate in the Aframax market segment. The Company's
main competitors include Teekay Shipping Corporation (63 vessels, 6.3 million
dwt), Neptune Orient Lines and its subsidiaries (22 vessels, 2.2 million dwt),
General Maritime Corp. (14 vessels, 1.3 million dwt) and Tsakos Energy
Navigation (14 vessels, 1.3 million dwt).
In the U.S. Flag trades, the Company competes with other owners of U.S.
Flag vessels. Demand for U.S. Flag Product Carriers is closely linked to changes
in regional energy demands and in refinery activity. These vessels also compete
with pipelines and oceangoing barges, and are affected by the level of imports
on Foreign Flag Product Carriers.
Environmental Matters Relating to Bulk Shipping
Domestic Requirements. Since 1990, the tanker industry has experienced a
more rigorous regulatory environment. Safety and pollution concerns have led to
a greater emphasis on quality and to the strengthening of the inspection
programs of Classification Societies, governmental authorities and charterers.
OPA 90 affects all vessel owners shipping oil or hazardous material to,
from, or within the United States. Under OPA 90, a vessel owner or operator is
liable without fault for removal costs and damages, including economic loss
without physical damage to property, of up to $1,200 per gross ton of the
vessel. When a spill is proximately caused by gross negligence, willful
misconduct or a violation of a federal safety, construction or operating
regulation, liability is unlimited. OPA 90 did not preempt state law and,
therefore, states remain free to enact legislation imposing additional
liability. Virtually all coastal states have enacted pollution prevention,
liability and response laws, many with some form of unlimited liability.
OPA 90 phases out the use of tankers having single hulls. OPA 90 requires
that tankers over 5,000 gross tons calling at U.S. ports have double hulls if
contracted after June 30, 1990, or delivered after January 1, 1994. Furthermore,
OPA 90 calls for the elimination of all single hull vessels by the year 2010 on
a phase-out schedule that is based on size and age, unless the tankers are
retrofitted with double hulls. The law permits then existing single hull tankers
to operate until the year 2015 if they discharge at deep water ports, or lighter
(i.e., offload cargo) more than 60 miles offshore.
OSG's two single-hulled VLCCs (including one in which OSG has a 30%
interest) and its Suezmax will not be permitted to trade to U.S. ports after
2009. Two 49.9% owned double-sided VLCCs are not permitted to trade to U.S.
ports after 2014. The Company's 50% owned double-sided Aframax is required to
stop trading to U.S. ports in 2015. The two U.S. Flag Jones Act Product
Carriers, which are operated under capital leases expiring in 2011, are not
affected by the OPA 90 phase-out schedule. The OPA 90 phase-out dates for the
Company's eight Foreign Flag Product Carriers are subsequent to their respective
IMO phase-out dates (see the discussion of International Requirements below).
One of OSG's four U.S. Flag Crude Tankers is required to be phased out in 2004,
two in 2005 and one in 2006, at which time each of these tankers will be at the
end of their commercial lives.
OPA 90 also requires owners and operators of vessels calling at U.S. ports
to adopt contingency plans for reporting and responding to various oil spill
scenarios up to a worst case oil spill under adverse weather conditions. The
plans must include contractual commitments with clean-up response contractors in
order to ensure an immediate response to an oil spill. Furthermore, training
programs and
9
drills for vessel, shore and response personnel are required. The Company has
developed and filed its vessel response plans with the U.S. Coast Guard, and has
received approval of such plans.
Under U.S. Coast Guard financial responsibility regulations issued
pursuant to OPA 90, all vessels entering U.S. waters are required to obtain
Certificates of Financial Responsibility ("COFRs") from the U.S. Coast Guard
demonstrating financial capability to meet potential oil spill liabilities. All
the vessels in the Company's U.S. and Foreign Flag fleets have requisite COFRs.
International Requirements. The Company's vessels undergo regular and
rigorous in-house safety reviews. They are also routinely inspected by port
authorities, Classification Societies and major oil companies. All of the
Company's vessels are certified under the standards reflected in International
Standards Organization's 9002 quality assurance program, and IMO's International
Safety Management's safety and pollution prevention protocols.
MARPOL 73/78 regulations of the IMO, as amended in 2001, require double
hulls or equivalent tanker designs for newbuildings ordered after 1993 and limit
the maximum age for continued trading by tankers to 30 years in 2003 (vessels
delivered in 1973 and earlier) decreasing to 26 years by the end of 2007
(vessels delivered in 1981 and later). For owners of older, single hull tankers,
scrapping decisions are increasingly influenced by the need to comply with these
regulations. In view of the age profile of the world VLCC fleet and the IMO
timetable, the regulations are likely to concentrate scrapping of older VLCCs in
2004 and 2005; however, commercial considerations may cause the scrapping
schedule to advance. Since the percentage of the world Aframax fleet that was
built in the 1970s is smaller than for the world VLCC fleet, scrapping of older,
single hull Aframaxes will be less pronounced in the short term.
The MARPOL regulations have been adopted by over 100 nations covering more
than 90% of the world's tanker fleet. The U.S. has not adopted the 2001
amendments; therefore, U.S. Flag Vessels operating exclusively in Jones Act
shipping are only subject to OPA 90 regulations.
Since OSG's Foreign Flag tanker fleet is mostly modern and double hulled,
the impact of the IMO phase-out schedule will be limited. None of the vessels in
OSG's international fleet are affected by the IMO timetable prior to reaching 25
years of age. Out of the 20 VLCCs in the Company's operating fleet, one of the
two single-hulled VLCCs is required to be phased out in 2015 and, and under
certain circumstances, the phase-out date of the other single-hulled VLCC (in
which OSG has a 30% interest) may be extended to 2017. The two 49.9% owned
double-sided VLCCs are required to be phased out in 2018. The Company's Suezmax
is required to be phased out in 2015. Of the Company's 12 existing Foreign Flag
Aframaxes, a 50% owned double-sided vessel is required to be phased out in 2017.
Of the Company's eight Foreign Flag Product Carriers, three are to be phased out
in 2012, one in 2013, one in 2014 and three in 2015. Further, the Company's U.S.
Flag Crude Tankers and Product Carriers participate in the U.S. Jones Act trades
and are therefore not affected by the IMO phase-out schedule.
The sinking of the Prestige, a 1976-built, 81,300 dwt, single hull oil
tanker off the coast of Spain in mid-November 2002 and the resulting pollution
to the Atlantic coasts of Spain and France has prompted the European Union
("EU") to propose an immediate ban on the transport of heavy crude oil and fuel
oil in single hull oil tankers loading or discharging at EU ports. The EU
Transport Council has also proposed that Category I single hull tankers over the
age of 23 years be phased out immediately with all Category I single hull
tankers being phased out by 2005. For Category II tankers, the comparable
restrictions would be a maximum age of 28 years and a phase-out date of 2010 and
for Category III, a maximum age of 28 years and a phase-out date of 2015,
respectively. Category I encompasses larger (over 20-30,000 dwt) pre-1982
tankers, Category II are larger (over 20-30,000 dwt) post-1982 tankers and
Category III are smaller tankers. The European Commission has called for
adoption of this proposal by the European Council and Parliament by March 2003.
The EU is also urging that neighboring countries outside the EU adopt the same
principles for the heavy crude and fuel oil trade as have been proposed to apply
in EU waters.
10
Without awaiting action by the European Council and Parliament, certain EU
nations have implemented a total ban on single hull vessels carrying fuel oil
and heavy crude oils. Spain has banned single hull tankers over 5,000 dwt from
entering her ports carrying such cargoes from January 1, 2003. Italy has
announced that analogous measures will be implemented during the first half of
2003. Since December 2002, Spain, France and Portugal have prohibited single
hull tankers carrying such cargoes from passing through their 200-mile economic
exclusion zones.
Many charterers operating around Europe are showing a distinct preference
for double hull tankers and are willing to pay a higher Worldscale rate for such
tonnage than for single hull tankers. It is becoming increasingly more difficult
to obtain clearance for single hull tankers from many countries and oil
terminals.
Insurance. Consistent with the currently prevailing practice in the
industry, the Company presently carries protection and indemnity ("P&I")
insurance coverage for pollution of $1.0 billion per occurrence on every vessel
in its fleet. P&I insurance is provided by mutual protection and indemnity
associations ("P&I Associations"). The 13 P&I Associations that comprise the
International Group insure approximately 90% of the world's commercial tonnage
and have entered into a pooling agreement to reinsure each association's
liabilities. Each P&I Association has capped its exposure to each of its members
at approximately $4.25 billion. As a member of a P&I Association, which is a
member of the International Group, the Company is subject to calls payable to
the associations based on its claim record as well as the claim records of all
other members of the individual associations, and members of the pool of P&I
Associations comprising the International Group. While the Company has
historically been able to obtain pollution coverage at commercially reasonable
rates, no assurances can be given that such insurance will continue to be
available in the future.
Global Bulk Shipping Markets
Economic Recovery and Higher Oil Production
World economic growth as measured by real Gross Domestic Product increased
modestly during 2002, averaging 1.6% compared with 1.1% in 2001. Meanwhile,
world oil demand, as estimated by the International Energy Agency ("IEA"), rose
slightly from 76.5 million barrels per day ("b/d") to 76.9 million b/d. During
2002, oil production from countries outside the Organization of Petroleum
Exporting Countries ("OPEC") increased by 1.4 million b/d, of which
approximately 60% came from the Former Soviet Union ("FSU"). Offsetting this
increase, OPEC's own production fell by a similar volume as a result of
successive production quota cuts, the latest of which was implemented on January
1, 2002. Overall tanker employment was adversely affected by increasing short
haul production displacing long haul movements of crude oil from the Middle
East. Total OPEC crude oil supply fell by 7.2% and production from OPEC Middle
East, a market upon which VLCC owners are heavily reliant, fell by 7.0%. Global
economic activity generally increased as the year progressed, and in the third
quarter, quarterly oil demand achieved the first year on year growth in five
quarters.
In the final half of 2002 the likelihood of armed conflict with Iraq
increased. Despite OPEC holding firm on production quotas, unofficial over
production increased to 2.4 million b/d. This over production provided a
significant boost to tanker demand, especially for VLCCs, during the fourth
quarter and into the first quarter of 2003. The over production was a factor in
OPEC's decision to increase its production quota twice during a relatively short
period, to make up for the loss of Venezuelan output and to keep prices within
its target price range. Increases of 1.3 million b/d as of January 2003 and 1.5
million b/d as of February 2003 raised the quota to 24.5 million b/d. The lack
of Venezuelan exports resulting from the general strike in that country, had a
negative impact on Aframax rates in the Caribbean market. The increase in
shipments from other regions to the United States to make up for the absence of
short-haul imports from Venezuela, however, was a contributing factor in the
significant gains in rates for all tanker sectors that began during the fourth
quarter.
As a result of increases in tanker rates during the fourth quarter, tanker
earnings during the quarter rose dramatically compared with the previous
quarters of 2002. For example, for fixtures for voyages from the Middle East to
Asian destinations average VLCC rates in the fourth quarter increased to
11
$46,200 per day from $9,600 per day in the third quarter, while for fixtures for
voyages from the Middle East to Western destinations rates increased to $37,100
per day from $9,400 per day. Although VLCCs were the major beneficiaries of
OPEC's increases in oil production in the last half of the year, Aframax rates
in the final quarter also rose significantly. While average rates for shipments
from the North Sea to the U.S. rose to $23,900 per day from $14,200 per day in
the year's third quarter, average rates on voyages from the Caribbean to the
U.S. increased more modestly to $19,700 per day from $14,000 per day in the
third quarter, with December rates falling to close to the third quarter
average.
The sinking of the 1976-built single hull Prestige in mid-November 2002
and the resulting pollution to the Atlantic coasts of Spain and France has
prompted the EU to propose banning all single hull tankers from loading and
discharging heavy crude oil and fuel oil at EU ports and advancing the existing
phase out date for single hull vessels in all European trades. The co-operation
of "neighboring ports" is also requested, which is understood to include ports
in the Baltic and the Black Seas, which are particularly active in fuel oil
trades.
Without awaiting action on this proposal by the European Council and
Parliament, the three coastal states most affected by the sinking of the
Prestige - Spain, France and Portugal - have prohibited single hull tankers
carrying fuel oil or heavy crude oils from calling at their ports and have
excluded such vessels from passing through their 200-mile economic exclusion
zones. At least six single hull tankers have been expelled from Spanish waters.
Italy has announced that similar measures will be implemented there shortly.
VLCC Scrapping Rises Further; Fleet Little Changed
The world VLCC fleet fell from 125.5 million dwt at the start of 2002 to
124.8 million dwt at December 31, 2002, as VLCC deletions exceeded deliveries
from shipyards for the second successive year. VLCC newbuilding deliveries
amounted to 38 vessels (12.0 million dwt) in 2002. Newbuilding orders in 2002,
which totaled 15 vessels, were spread throughout the year. At December 31, 2002,
the VLCC orderbook had fallen to 64 vessels (19.6 million dwt), equivalent to
15.7% of the existing VLCC fleet and compared with 87 vessels (26.9 million dwt)
at the start of 2002. As of December 31, 2002, 14.6% of the VLCC fleet was over
20 years old and 10.2% was 25 years or older. In comparison, the current
orderbook represents 107.3%, based on deadweight tons, of those VLCCs over 20
years of age.
The weaker demand for VLCC tonnage during the first nine months of 2002
generally meant that there was adequate modern tonnage available, and sales for
scrap of older vessels accelerated from the levels achieved in 2001. In the
final quarter of the year, however, OPEC over production increased, freight
rates rose significantly compared with the third quarter average and sales for
scrap dwindled. Nevertheless, scrap sales for 2002 exceeded the levels achieved
in 2001, with a total of 41 VLCCs (13.4 million dwt) being removed from service
during 2002, of which 33 were sold for scrap and eight were sold for conversion
to floating production, storage and off-loading vessels.
Aframax Scrapping Remains Subdued; Newbuilding Orderbook Rises Further
The sharp growth in the Aframax fleet countered the positive effects of
increased short haul production during the first nine months of 2002. As of
December 31, 2002, the world Aframax fleet amounted to 565 vessels (54.6 million
dwt), an increase of 4.7% (in terms of deadweight tons) from January 1, 2002. As
a result of average freight rates for Aframaxes in 2002 falling to three-year
lows, removals from the fleet during 2002 increased to 20 vessels (1.8 million
dwt) compared with 17 vessels (1.5 million dwt) in 2001.
The weak freight market that prevailed for most of 2002 resulted in a
sharp fall in the number of newbuilding orders being placed from 70 in 2001 to
47 in 2002. As a result of the heavy ordering activity in 2000 and 2001,
however, Aframax newbuilding deliveries during 2002 rose to 36 vessels (3.8
million dwt) from 15 vessels (1.5 million dwt) for the previous year. Despite
the reduction in new orders and the increase in deliveries, the orderbook at
December 31, 2002 increased to 132 vessels (14.2 million dwt), equivalent to 26%
of the existing Aframax fleet and from 120 vessels (12.8 million dwt) at the
start of 2002. At December 31, 2002, 21.1% of the Aframax fleet was over 20
years old. In comparison, the current orderbook represents 123.2%, based on
deadweight tons, of such fleet sector
12
that was over 20 years old, which suggests growth in the overall size of the
Aframax fleet over the next couple of years.
Aframax tankers have benefited from the 1.4 million b/d increase in
non-OPEC production during 2002, approximately 60%, or 820,000 b/d, of which
came from the FSU. Seaborne crude oil exports from the FSU in 2002 rose to 2.9
million b/d, a 24% increase compared with 2001. Because one-half of these
exports were carried in Aframax tankers, Aframaxes employed in the Mediterranean
trades have particularly benefited.
The general strike in Venezuela that started in December 2002 has reduced
Venezuelan oil production considerably. Venezuelan oil exports, a substantial
portion of which are destined for the U.S., have been severely curtailed. This
shortfall has been offset by increased shipments from other areas, such as the
North Sea, West Africa and the Middle East. Rates in each of those trades
accordingly rose sharply. As a result of the removal of a substantial portion of
Venezuelan oil movements, however, rates in the Caribbean trades fell markedly,
and many vessels ballasted across the Atlantic to take advantage of the higher
rates that prevailed in the North Sea and Mediterranean trades.
Panamax Product Carrier Fleet Stable; Newbuilding Orderbook Grows
The world Panamax Product Carrier fleet at December 31, 2002 amounted to
283 vessels (18.1 million dwt), a small reduction from the 293 vessels (18.7
million dwt) at the beginning of 2002. During 2002, 18 Panamax Product Carriers
(1.1 million dwt) were removed from the fleet compared with eight vessels (0.6
million dwt) in 2001. Although deliveries failed to keep pace with scrappings,
totaling nine vessels (0.6 million dwt) in 2002, such deliveries represented a
125% increase, based on deadweight tons, from the four vessels (0.3 million dwt)
delivered in 2001. At December 31, 2002, the orderbook was 75 vessels (5.3
million dwt), equivalent to 29.3% of the existing Panamax fleet and compared
with 39 vessels (2.8 million dwt) one year earlier. At December 31, 2002, 43.2%
of the existing world Panamax fleet was 20 or more years old and 9.2% was over
25 years old. With an average age of 16.7 years as of December 31, 2002, the
Panamax Product Carrier fleet remains the oldest overall tanker sector. In
comparison, the current newbuilding orderbook represented 67.8%, based on
deadweight tons, of this fleet sector that was over 20 years old.
The reduction in OPEC oil production in 2002, particularly in the Middle
East, led to a decrease in long haul refined products exports from that region,
negatively impacting rates for Panamax Product Carriers. Overall, U.S. imports
of refined products over the first ten months of 2002 fell by 12.5% compared
with the corresponding period in 2001, and long haul refined products movements
into the U.S. from the Middle East fell by 50%. Additionally, U.S. inventory
levels of refined products fell by 27.7 million barrels, or 7.2%, over the
course of the first eleven months of 2002. Much of this decline in product
inventories was attributable to a surge in demand for heating oil during the
fourth quarter because of very cold weather across much of North America.
Partially offsetting the impact of the decline in refined product imports
into the U.S. during 2002, Japanese fuel oil imports rose during the final
quarter of the year. One third of Japan's nuclear power stations were closed for
safety reasons, which led to an increase in fuel oil imports as oil-fired power
stations were utilized to mitigate the shortfall in power generation. Despite
lower U.S. imports for the year as a whole, the surge in product imports into
the U.S. and Japan during the fourth quarter helped underpin the near doubling
in rates for Panamax Product Carriers between September and December.
Handysize Product Carrier Newbuilding Orderbook Continues to Grow
The world Handysize Product Carrier fleet (which includes Bostonmax
Product Carriers) fell from 20.2 million dwt at the start of 2002 to 19.9
million dwt at January 1, 2003, as removals of 32 vessels (1.1 million dwt)
during 2002 exceeded deliveries of 17 vessels (0.8 million dwt). At December 31,
2002, the newbuilding orderbook for Handysize Product Carriers reached 131
vessels (6.0 million dwt), equivalent to 30.3% of the existing Handysize fleet
and compared with 87 vessels (3.9 million dwt) one year earlier. At December 31,
2002, 37.1% of the Handysize Product Carrier fleet was over
13
20 years old. In comparison, the current orderbook represents 81.8%, based on
deadweight tons, of this fleet sector that was 20 years old or older.
Glossary
Vessel Types Owned by OSG
VLCC VLCC is the abbreviation for Very Large Crude
Carrier, a large crude oil tanker of more than
200,000 deadweight tons. Modern VLCCs can
generally transport two million barrels or more
of crude oil. These vessels are mainly used on
the longest (long haul) routes from the Arabian
Gulf to North America, Europe, and Asia, and
from West VLCC Africa to the U.S. and Far
Eastern destinations.
Suezmax A large crude oil tanker of approximately
120,000 to 200,000 deadweight tons. Modern
Suezmaxes can generally transport about one
million barrels of crude oil.
Aframax A medium size crude oil tanker of approximately
80,000 to 120,000 deadweight tons. Because of
their size, Aframaxes are able to operate on
many different routes, including from Latin
America and the North Sea to the U.S. They are
also used in lightering (transferring cargo from
larger tankers, typically VLCCs, to smaller
tankers for discharge in ports from which the
larger tankers are restricted). Modern Aframaxes
can generally transport from 500,000 to 800,000
barrels of crude oil.
Product Carrier General term that applies to any tanker that is
used to transport refined oil products, such as
gasoline, jet fuel or heating oil.
Panamax Product Carrier A large size Product Carrier of approximately
50,000 to 80,000 deadweight tons that generally
operates on longer routes.
Handysize Product Carrier A small size Product Carrier of approximately
30,000 to 50,000 deadweight tons. This type of
vessel generally operates on shorter routes
(short haul).
Bostonmax Product Carrier A small size Product Carrier of approximately
39,000 deadweight tons Product Carrier and the
largest size capable of accessing all
Boston-area Bostonmax terminals.
Capesize Bulk Carrier A large Dry Bulk Carrier (any vessel used to
carry non-liquid bulk commodities) with a
carrying capacity of more than 80,000 deadweight
tons that mainly transports iron ore and coal.
Pure Car Carrier A single-purpose vessel, with many decks,
designed to carry automobiles, which are driven
on and off using ramps.
Operations
Worldscale Industry name for the Worldwide Tanker Nominal
Freight Scale published annually by the
Worldscale Association as a rate reference for
shipping companies, brokers, and their customers
engaged in the bulk shipping of oil in the
international markets. Worldscale is a list of
calculated rates for specific voyage itineraries
for a standard vessel, as defined, using defined
voyage cost assumptions such as vessel speed,
fuel consumption, and port costs. Actual market
rates for voyage charters are usually quoted in
terms of a percentage of Worldscale.
14
Charter Contract entered into with a customer for the
use of the vessel for a specific voyage at a
specific rate per unit of cargo, or for a
specific period of time at a specific rate per
unit (day or month) of time.
Voyage Charter A Charter under which a customer pays a
transportation charge for the movement of a
specific cargo between two or more specified
ports. The shipowner pays all vessel and voyage
expenses. The customer is liable for Demurrage,
if incurred.
Demurrage Additional revenue paid to the shipowner on its
voyage charters for delays experienced in
loading and/or unloading cargo, which are not
deemed to be the responsibility of the
shipowner, calculated in accordance with
specific Charter terms.
Time Charter A Charter under which a customer pays a fixed
daily or monthly rate for a fixed period of time
for use of the vessel. Subject to any
restrictions in the Charter, the customer
decides the type and quantity of cargo to be
carried and the ports of loading and unloading.
The customer pays all voyage expenses such as
fuel, canal tolls, and port charges. The
shipowner pays all vessel expenses such as the
Technical Management expenses.
Bareboat Charter A Charter under which a customer pays a fixed
daily or monthly rate for a fixed period of time
for use of the vessel plus all voyage and vessel
expenses. Bareboat charters are usually long
term.
Contract of Affreightment or COA is the abbreviation for Contract of
COA Affreightment, which is an agreement providing
for the transportation of a specific quantity of
cargo over a specific time period but without
designating specific vessels or voyage
schedules, thereby allowing flexibility in
scheduling. COAs can either have a fixed rate or
a market-related rate. An example would be two
shipments of 70,000 tons per month for the next
two years at the prevailing spot rate at the
time of each loading.
Time Charter Equivalent or TCE is the abbreviation for Time Charter
TCE Equivalent. TCE revenues, which is voyage
revenues less voyage expenses, serves as an
industry standard for measuring and managing
fleet revenue and comparing Charter Equivalent
or TCE results between geographical regions and
among competitors.
Commercial Management The management of the employment, or chartering,
of a vessel and associated functions, including
seeking and negotiating employment for vessels,
billing and collecting revenues, issuing voyage
instructions, purchasing fuel, and appointing
port agents.
Technical Management The management of the operation of a
vessel, including physically maintaining the
vessels, maintaining necessary certifications,
and supplying necessary stores, spares, and
lubricating oils. Responsibilities also
generally include selecting, engaging and
training crew, and arranging necessary insurance
coverage.
Regulations
Jones Act U.S. law that applies to port-to-port shipments
within the continental U.S. and between the
continental U.S. and Hawaii, Alaska, Puerto
Rico, and Guam, and restricts such shipments to
U.S. Flag Vessels that are built in the U.S. and
that are owned by a U.S. company that is more
than 75% owned and controlled by U.S. citizens.
15
U.S. Flag vessel A U.S. Flag vessel must be crewed by U.S.
sailors, and owned and operated by a U.S.
company.
Foreign Flag vessel A vessel that is registered under a flag other
than that of the U.S.
OPA 90 OPA 90 is the abbreviation for the U.S. Oil
Pollution Act of 1990.
IMO IMO is the abbreviation for International
Maritime Organization, an agency of the United
Nations, which is the body that is responsible
for the administration of internationally
developed maritime safety IMO and pollution
treaties, including MARPOL 73/78.
MARPOL 73/78 International Convention for the
Prevention of Pollution from Ships, 1973, as
modified by the Protocol of 1978 relating
thereto, includes regulations aimed at
preventing and minimizing pollution from ships
by accident and by routine operations.
Miscellaneous
Deadweight tons or Dwt Dwt is the abbreviation for deadweight tons,
representing principally the cargo carrying
capacity of a vessel, but including the weight
of consumables such as fuel, lube oil, drinking
water and stores.
Classification Societies Organizations that establish and administer
standards for the design, construction and
operational maintenance of vessels. As a
practical matter, vessels cannot trade unless
they meet these standards.
Drydocking An out-of-service period during which planned
repairs and maintenance are carried out,
including all underwater maintenance such as
external hull painting. During the drydocking,
certain mandatory Classification Society
inspections are carried out and relevant
certifications issued. Normally, as the age of a
vessel increases, the cost of drydocking
increases.
Available Information
The Company makes available free of charge through its internet website,
www.osg.com, its Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after the Company electronically
files such material with, or furnishes it to, the Securities and Exchange
Commission.
ITEM 2. PROPERTIES
See Item 1.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party, as plaintiff or defendant, to various suits in the
ordinary course of business for monetary relief arising principally from
personal injuries, collision or other casualty and to claims arising under
charter parties. All such personal injury, collision and casualty claims against
the Company are fully covered by insurance (subject to deductibles not material
in amount). Each of the other claims involves an amount which, in the opinion of
management, is not material in relation to the consolidated current assets of
the Company as shown in the Company's Consolidated Balance Sheet as at December
31, 2002, set forth in Item 8.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
Name Age Position Held Has Served as Such Since
- ------------------ --- ----------------------- ------------------------
Morton P. Hyman 67 Chairman of the Board, September 2000
President and October 1971
Chief Executive Officer
Robert N. Cowen 54 Senior Vice President, February 1993
Chief Operating Officer June 1999
and Secretary June 1982
Myles R. Itkin 55 Senior Vice President, June 1995
Chief Financial Officer
and Treasurer
Robert E. Johnston 55 Senior Vice President October 1998
and Chief Commercial June 1999
Officer
Peter J. Swift 59 Senior Vice President June 1999
and Head of Shipping
Operations
The term of office of each executive officer continues until the first
meeting of the Board of Directors of the Company immediately following the next
annual meeting of its shareholders, to be held on June 3, 2003, and until the
election and qualification of his successor. There is no family relationship
between the executive officers.
Messrs. Morton P. Hyman and Robert N. Cowen have served as directors of
the Company since 1969 and 1993, respectively. Mr. Robert E. Johnston has served
as an officer and director of certain of the Company's subsidiaries during the
past five years; he also served for more than the five years ended in 1998 as a
senior officer of Maritime Overseas Corporation ("MOC"), the corporation that
managed the fleet from the Company's inception in 1969 to 1998. Mr. Peter J.
Swift was Vice President of the Company from October 1998 until June 1999. He
has served as an officer and director of certain of the Company's subsidiaries
since October 1998; he also served as an officer of MOC and one of its
subsidiaries for more than the five years ended in 1998.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's common stock is listed for trading on the New York Stock
Exchange and the Pacific Exchange, Inc. under the trading symbol OSG. The
range of high and low sales prices of the Company's common stock as
reported on the New York Stock Exchange for each of the quarters during
the last two years are set forth below.
2002 High Low
--------------- ----- -----
First Quarter 24.30 18.55
Second Quarter 24.75 19.60
Third Quarter 20.59 15.28
Fourth Quarter 18.65 15.15
2001 High Low
--------------- ----- -----
First Quarter 28.00 21.38
Second Quarter 37.09 27.28
Third Quarter 30.62 19.90
Fourth Quarter 24.93 21.51
(b) On February 26, 2003, there were 495 shareholders of record of the
Company's common stock.
(c) The Company has paid a dividend of 15(cent) per share of common stock for
each of the quarters during the last two years. The payment of cash
dividends in the future will depend upon the Company's operating results,
cash flow, working capital requirements and other factors deemed pertinent
by the Company's Board of Directors.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following unaudited selected consolidated financial data for the years
ended December 31, 2002, 2001 and 2000, and at December 31, 2002 and 2001, are
derived from the audited consolidated financial statements of the Company set
forth in Item 8, which have been audited by Ernst & Young LLP, independent
auditors. The unaudited selected consolidated financial data for the years ended
December 31, 1999 and 1998, and at December 31, 2000, 1999 and 1998, are derived
from audited consolidated financial statements of the Company not appearing in
this Annual Report, which have also been audited by Ernst & Young LLP.
18
In thousands, except per share amounts 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Shipping revenues $ 297,283 $ 469,333 $ 467,618 $ 350,545 $ 412,384
Time charter equivalent revenues(a) 266,725 381,018 370,081 253,217 326,519
Income from vessel operations 44,888 130,686(b) 134,066 23,366 41,050
Income/(loss) before federal income taxes and
cumulative effect of change in accounting principle(c) (20,864) 154,445 132,989 21,764 (56,220)
Net income/(loss)(d) (17,620) 101,441 90,391 14,764 (37,920)
Depreciation and amortization 78,940 69,912 70,138 75,860 90,331
EBITDA(g) 110,769 269,392 249,794 128,228 160,093
Net cash provided by operating activities(e) 13,173 193,025 102,042 37,033 56,296
Vessels and capital leases, at net book amount 1,416,774 1,345,719 1,293,958 1,237,513 1,229,110(f)
Total assets 2,034,842 1,964,275 1,823,913 1,720,945 1,695,515
Debt - long-term debt and capital lease obligations
(exclusive of short-term debt and current portions)(h) 985,035 854,929 836,497 827,372 833,893
Reserve for deferred federal income taxes -
noncurrent 134,204 132,170 117,749 77,877 69,384
Shareholders' equity $ 784,149 $ 813,426 $ 750,167 $ 661,058 $ 707,622
Debt/total capitalization 55.7% 51.2% 52.7% 55.6% 54.1%
Per share amounts:
Basic net income/(loss) $ (0.51) $ 2.97 $ 2.67 $ 0.41 $ (1.03)
Diluted net income/(loss) $ (0.51) $ 2.92 $ 2.63 $ 0.41 $ (1.03)
Shareholders' equity $ 22.76 $ 23.73 $ 22.07 $ 19.63 $ 19.24
Cash dividends paid $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.60
Average shares outstanding for basic earnings per share 34,395 34,169 33,870 35,712 36,794
Average shares outstanding for diluted earnings per share 34,395 34,697 34,315 35,725 36,794
(a) Represents shipping revenues less voyage expenses.
(b) Reflects restructuring charge of $10,439 to cover costs associated with
the reduction of staff at the New York headquarters and the transfer of
ship management and administrative functions to the Company's subsidiary
in Newcastle, U.K.
(c) Results for 2000, 1999 and 1998 have been reclassified to reflect gains on
early extinguishment of debt of $803 in 2000 and $2,249 in 1999 and a loss
of ($20,998) in 1998 in accordance with the provisions of Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Such amounts had previously been presented as extraordinary
items, net of related taxes.
(d) Results for 2000 include income of $4,152 ($.12 per share) from the
cumulative effect of a change in accounting principle from the completed
voyage method to the percentage of completion method of recognizing net
voyage revenues of vessels operating on voyage charters. Income before
cumulative effect of change in accounting principle in 2000 was $86,239,
or $2.55 per basic share ($2.51 per diluted share). Assuming the
percentage of completion method had been applied retroactively, the pro
forma income/(loss) before cumulative effect of change in accounting
principle would have been income of $13,450, or $0.37 per share in 1999;
and a loss of $40,780, or $1.11 per share in 1998.
(e) Amounts for years prior to 2002 have been restated to conform with the
2002 presentation.
(f) Includes vessels held for disposal, at estimated fair value.
(g) EBITDA represents operating earnings, which is before net interest
expense, income taxes and cumulative effect of change in accounting
principle, plus other income and depreciation and amortization expense.
EBITDA should not be considered a substitute for net income, cash flows
from operating activities and other operations or cash flow statement data
prepared in accordance with accounting principles generally accepted in
the United States or as a measure of profitability or liquidity. EBITDA is
presented to provide additional information with respect to the Company's
ability to satisfy debt service, capital expenditure and working capital
requirements. While EBITDA is frequently used as a measure of operating
results and the ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other
companies due to differences in methods of calculations. The following
table is a reconciliation of operating income, as reflected in the
consolidated statements of operations, to EBITDA:
2002 2001 2000 1999 1998
----------------------------------------------------------
Operating income $ 56,295 $ 151,160 $ 145,515 $ 30,498 $ 37,450
Other income/(expense) (24,466) 48,320 34,141 21,870 32,312
Depreciation and amortization 78,940 69,912 70,138 75,860 90,331
----------------------------------------------------------
EBITDA $ 110,769 $ 269,392 $ 249,794 $ 128,228 $ 160,093
==========================================================
(h) Amounts do not include debt of joint ventures in which the Company
participates.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is one of the largest independent bulk shipping companies in
the world. The Company's operating fleet consists of 52 vessels aggregating 8.5
million deadweight tons, including 11 vessels that are owned by joint ventures
in which the Company has an average interest of 41%. An additional VLCC and two
additional Aframaxes are scheduled to be delivered in the next 12 months.
Operations
The Company's revenues are highly sensitive to patterns of supply and
demand for vessels of the size and design configurations owned and operated by
the Company and the trades in which those vessels operate. Rates for the
transportation of crude oil and refined petroleum products from which the
Company earns a substantial majority of its revenue are determined by market
forces such as the supply and demand for oil, the distance that cargoes must be
transported, and the number of vessels expected to be available at the time such
cargoes need to be transported. The demand for oil shipments is significantly
affected by the state of the global economy and level of OPEC's exports. The
number of vessels is affected by newbuilding deliveries and by the removal of
existing vessels from service, principally because of scrapping. The Company's
revenues are also affected by the mix of charters between spot (voyage charter)
and long-term (time charter). Because shipping revenues and voyage expenses are
significantly affected by the mix between voyage charters and time charters, the
Company manages its vessels based on TCE revenues. Management makes economic
decisions based on anticipated TCE rates and evaluates financial performance
based on TCE rates achieved.
Set forth in the tables below are daily TCE rates that prevailed in
various markets in which the Company's vessels operated for the periods
indicated. In each case, the rates may differ from the actual TCE rates achieved
by the Company in the period indicated because of the timing and length of
voyages and the portion of revenue generated from long-term charters. It is
important to note that the spot market is quoted in Worldscale rates. The
conversion of Worldscale rates to the following TCE rates necessarily required
the Company to make certain assumptions as to brokerage commissions, port time,
port costs, speed and fuel consumption, all of which will vary in actual usage.
Foreign Flag VLCC Segment
Spot Market TCE Rates
VLCCs in the Arabian Gulf
Q1-2002 Q2-2002 Q3-2002 Q4-2002 2002 2001 2000
-------------------------------------------------------------------
Average $13,600 $10,800 $ 9,500 $42,500 $19,000 $32,700 $46,100
High $20,600 $26,800 $18,800 $81,500 $81,500 $69,800 $79,700
Low $ 7,500 $ 4,700 $ 3,500 $13,400 $ 3,500 $11,700 $11,000
For 2002, spot freight rates for modern VLCCs trading East and West out of
the Arabian Gulf averaged $19,000 per day, which is 42% lower than the average
for 2001 and 59% lower than the average for 2000.
Freight rates, which had declined steadily on a quarter-to-quarter basis
during 2001, continued this downward trend for the first three quarters of 2002
as OPEC implemented a fourth reduction in production quotas effective from
January 1, 2002. While reductions in Iraqi production during the
20
second quarter led to lower exports from its Mediterranean terminal at Ceyhan,
other OPEC producers, particularly in the Arabian Gulf, increased exports with
an accompanying temporary beneficial effect on VLCC freight rates. As a result,
rates spiked to $26,800 per day during the second quarter but thereafter plunged
to a low of just $3,500 per day during the third quarter. Concerns about armed
conflict with Iraq were exacerbated in the second half of 2002 by the terrorist
attack on a VLCC off Yemen in October and the terrorist bombing in Bali. As a
result, demand for crude oil increased in anticipation of an imminent supply
disruption during the year's final quarter. Global economic activity also
increased as the year progressed, reversing the year-on-year decline in oil
demand and increasing demand for tankers. Despite OPEC maintaining its
production quota throughout 2002, over production increased as the year
progressed and in the fourth quarter OPEC production was 11% above established
quotas. In December, OPEC increased its production by 1.3 million b/d effective
from January 2003, in an effort to legitimize and limit this over production.
These factors combined with reduced availability of tonnage in the Arabian Gulf
resulted in a surge in freight rates during the fourth quarter to a 2002 high of
$81,500 per day reached in mid December and an average rate of $42,500 per day.
Since the VLCC market predominantly entails longer-haul voyages, in a rising
rate environment, such as that which prevailed in the fourth quarter, there is
typically a lag before an increase in rates is fully reflected in actual
operating results.
A general strike in Venezuela that started in early December, has
significantly reduced oil production and exports from Venezuela. Accordingly,
exports of oil to the U.S., its major market, have been sharply curtailed. The
North Sea, West Africa and the Middle East have increased shipments to the U.S.
to offset this shortfall with a resulting rise in rates in each of these trades.
Rates in the Caribbean trades fell markedly in December, and many vessels
ballasted across the Atlantic to take advantage of the higher rates that
prevailed in the North Sea and Mediterranean trades. OPEC agreed to raise
production quotas by 1.5 million b/d effective from February 2003 to offset this
shortfall in Venezuelan exports. The resulting increase in long-haul imports
into the U.S. has raised demand for VLCC tonnage, in particular.
Foreign Flag Aframax Segment
Spot Market TCE Rates
Aframaxes in the Caribbean
Q1-2002 Q2-2002 Q3-2002 Q4-2002 2002 2001 2000
- --------------------------------------------------------------------------------
Average $12,700 $17,800 $14,000 $19,700 $16,100 $24,800 $30,600
High $24,000 $24,000 $22,000 $34,000 $34,000 $51,000 $56,000
Low $10,500 $13,500 $ 8,500 $ 9,000 $ 8,500 $12,000 $11,200
Aframax freight rates have derived support from increasing crude oil
exports from the Former Soviet Union ("FSU"), which have increased by 17% over
2001 and largely utilize Aframax and Suezmax tonnage. In December, the
Venezuelan strike effectively closed all ports in that country and rates in the
Caribbean market fell significantly to a low of $9,000 per day in conjunction
with the reduction in available cargoes. For the first ten months of the year,
average crude oil imports into the U.S. from the Caribbean region (Colombia,
Venezuela, Trinidad and Mexico) rose by just 0.5% over the average for 2001.
This modest increase was more than offset by a reduction of 18% in long haul
crude oil imports from the Middle East, which although principally impacting the
VLCC market, reduced the demand for Aframaxes in lightering operations in the
U.S. Gulf. U.S. imports of North Sea oil rose by 37%, most of which is carried
in Aframax tankers.
As a result, rates for Aframaxes operating in the Caribbean trades in 2002
averaged $16,100 per day, a decline of 35% from the 2001 level and 47% from the
2000 average. Caribbean freight rates reached a 2002 low of just $8,500 per day
during the third quarter, but rose rapidly to reach $34,000 per day in early
November, due largely to a limited availability of tonnage. A number of vessels
normally available for trading had been chartered for use in lightering
operations in the U.S. Gulf as long-haul imports into the U.S. increased. At the
start of the fourth quarter, the Turkish authorities
21
imposed stricter regulations on vessels transiting the Bosphorus Strait and
rates in this region rose to compensate for the resulting delays. The sinking of
the single hull, 1976-built Prestige in mid November has led to an increased
preference on the part of many charterers for modern double hull vessels,
especially for trades involving the European region. These factors reduced
availability of suitable vessels, contributing to the rise in rates in the North
Sea and Mediterranean trades in the fourth quarter.
Foreign Flag Product Carriers Segment
Spot Market TCE Rates
Panamaxes in the Pacific and Bostonmaxes in the Caribbean
Q1-2002 Q2-2002 Q3-2002 Q4-2002 2002 2001 2000
- -------------------------------------------------------------------------------------------
Panamax Average $12,000 $10,700 $13,600 $16,000 $13,100 $27,100 $22,100
Panamax High $13,300 $13,300 $14,800 $23,500 $23,500 $58,000 $50,000
Panamax Low $ 9,500 $ 9,000 $12,000 $13,000 $ 9,000 $10,500 $11,500
Bostonmax Average $ 9,400 $11,300 $ 8,900 $10,700 $10,100 $18,200 $15,900
Bostonmax High $12,000 $12,400 $11,500 $15,000 $15,000 $32,000 $28,700
Bostonmax Low $ 8,300 $ 9,000 $ 8,000 $ 7,200 $ 7,200 $ 7,300 $ 7,000
Rates for Panamax Product Carriers in 2002 were weak in comparison to the
two previous years, with rates in the Pacific averaging only $13,100 per day in
2002, a decline of 52% from the 2001 average and 41% from the 2000 average.
Rates in the first half of the year were particularly weak, reflecting a 6%
year-over-year reduction in deliveries of refined products to Japan. Longer haul
imports from the Middle East were replaced by shorter haul supplies from
non-OECD countries in Asia (primarily China, India and Singapore) reducing
ton-mile demand and placing additional pressure on rates. In the second half of
the year, however, rates staged a modest recovery as Japanese fuel oil imports
for oil-fired power generation compensated for shortfalls in nuclear power
generation attributable to technical difficulties at a number of nuclear power
stations. Additionally, petrochemical producers in the Asian region stepped up
imports to build up inventory levels in anticipation of potential supply
disruptions from the Middle East.
Bostonmax Product Carrier rates similarly failed to match their 2001
levels, with rates averaging just $10,100 per day, 45% below the 2001 average
and 37% below the 2000 average. Over the first ten months of the year, total
U.S. refined product imports fell by 12% from the comparable period in 2001.
Almost 54% of this decrease occurred in imports from the Caribbean region,
primarily Venezuela. Rates reached $12,400 per day during the second quarter as
U.S. imports of gasoline peaked in anticipation of the start of the summer
driving season. Overall refined product inventory levels in the U.S. declined
during the third quarter and heating oil inventories entered the winter
approximately 18 million barrels, or 13%, lower than one year earlier.
Consequently, U.S. imports of heating oil surged during the fourth quarter as
colder than normal weather blanketed the Northeast. The general strike in
Venezuela that started in December hobbled the Venezuelan oil industry and
initially caused Caribbean rates to weaken. Caribbean Product Carrier rates,
however, have subsequently improved as significant amounts of tonnage were
repositioned to take advantage of higher rates available elsewhere. Towards the
end of the fourth quarter, Caribbean Product Carrier rates reached a high for
the year of $15,000 per day.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States, which
require the Company to make estimates in the application of its accounting
policies based on the best assumptions, judgments, and opinions of management.
Following is a discussion of the accounting policies that involve a higher
degree of
22
judgment and the methods of their application. For a description of all of the
Company's material accounting policies, see Note A to the Company's consolidated
financial statements set forth in Item 8.
Revenue Recognition
The Company generates a majority of its revenue from voyage charters.
Within the shipping industry, there are two methods used to account for voyage
revenue and expenses: percentage of completion and completed voyage. The
percentage of completion method is the most prevalent method of accounting for
voyage revenues and expenses, and the method currently being used by OSG. Under
each method, voyages may be calculated on either a load-to-load or
discharge-to-discharge basis.
Prior to 2000, OSG accounted for voyage revenues and expenses using the
completed voyage method, with voyages calculated on a load-to-load basis.
Accordingly, OSG did not recognize the revenues and expenses of voyages until
vessels had completed their trips to the next load ports, and the Company's
revenues fluctuated from period to period because of the timing of voyage
completions. The change to the percentage of completion method, with voyages
calculated on a discharge-to-discharge basis, eliminates these fluctuations
since specific voyage results are allocated on a pro rata basis to the periods
over which they are performed.
In applying the percentage of completion method, management believes that
the discharge-to-discharge basis of calculating voyages more accurately
estimates voyage results than the load-to-load basis. Since, at the time of
discharge, management generally knows the next load port and expected discharge
port, the discharge-to-discharge calculation of voyage revenues and expenses can
be estimated with a greater degree of accuracy.
In accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements," OSG does not begin recognizing voyage revenue until a
Charter has been agreed to by both the Company and the customer, even if the
vessel has discharged its cargo and is sailing to the anticipated load port on
its next voyage.
Vessel Lives and Impairment
The carrying value of each of the Company's vessels represents its
original cost at the time it was delivered or purchased less depreciation
calculated using an estimated useful life of 25 years from the date such vessel
was originally delivered from the shipyard. In the shipping industry, use of a
25-year life has become the standard. The actual life of a vessel may be
different. The Company has evaluated the impact of the revisions to MARPOL
Regulation 13G on the economic lives assigned to the tankers in the Company's
Foreign Flag fleet. Current regulations will not require that any of the
single-hulled or double-sided Foreign Flag tankers be removed from service prior
to attaining 25 years of age.
The carrying values of the Company's vessels may not represent their fair
market value at any point in time since the market prices of second-hand vessels
tend to fluctuate with changes in charter rates and the cost of newbuildings.
Both charter rates and newbuilding costs tend to be cyclical. The Company
records impairment losses only when events occur that cause the Company to
believe that future cash flows for any individual vessel will be less than its
carrying value.
Market Value of Marketable Securities
In accordance with Statement of Financial Accounting Standards No. 115
("FAS 115"), the Company's holdings in marketable securities are classified as
available-for-sale and, therefore, are carried on the balance sheet at fair
value (determined by using period-end sales prices on U.S. or foreign stock
exchanges) with changes in carrying value being recorded in accumulated other
comprehensive income/(loss) until the investments are sold. Accordingly, these
changes in value are not reflected in the Company's statements of operations.
If, however, pursuant to the provisions of FAS 115 and Staff Accounting Bulletin
No. 59, the Company determines that a material decline in the fair value below
the Company's cost basis is other-than-temporary, the Company records a noncash
impairment loss as a charge in the statement of operations in the period in
which that determination is
23
made. As a matter of policy, the Company evaluates all material declines in fair
value for impairment whenever the fair value of a stock has been below its cost
basis for six consecutive months. In the period in which a decline in fair value
is determined to be other-than-temporary, the carrying value of that security is
written down to its fair value at the end of such period, thereby establishing a
new cost basis. 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 have been sustained, management concluded that declines in fair
value of securities with an aggregate cost basis of $72,521,000, including
$9,898,000 attributable to securities in the Capital Construction Fund, were
other-than-temporary. During the third and fourth quarters of 2002, the Company
recorded pre-tax noncash impairment losses aggregating $42,055,000 related to
such marketable securities, including $6,413,000 related to securities held in
the Capital Construction Fund. These impairment losses are reflected in the
accompanying consolidated statement of operations for 2002.
The fair value of certain other marketable securities have declined below
the Company's cost bases in those securities. See Note F to the consolidated
financial statements set forth in Item 8 for additional information on pre tax
unrealized losses as of December 31, 2002. Certain of these securities have had
fair values below their carrying values for more than six months. The Company
has evaluated the circumstances surrounding the declines in market values as of
December 31, 2002 and believes that these declines are temporary and,
accordingly, continues to record the net after tax unrealized losses in
accumulated other comprehensive income/(loss). If, however, the market values of
these securities do not recover in the near term, the declines may then be
considered other-than-temporary, which would result in impairment charges to
earnings in future periods, which charges previously have been included in
accumulated other comprehensive income/(loss).
Drydocking
Within the shipping industry, there are three methods that are used to
account for drydockings: (1) capitalize drydocking costs as incurred (deferral
method) and amortize such costs over the period to the next scheduled
drydocking, (2) accrue the estimated cost of the next scheduled drydocking over
the period preceding such drydocking, and (3) expense drydocking costs as
incurred. Since drydocking cycles typically extend over two and a half years or
longer, management believes that the deferral method provides a better matching
of revenues and expenses than the expense-as-incurred method. The Company
further believes that the deferral method is preferable to the accrual method
because estimates of drydocking costs can differ greatly from actual costs and,
in fact, anticipated drydockings may not be performed if management decides to
dispose of the vessels before their scheduled drydock dates.
Deferred Tax Assets and Valuation Allowance
The carrying value of the Company's deferred tax assets is based on the
assumption that the Company will generate sufficient taxable income in the
future in order to permit the Company to take deductions and use tax-credit
carryforwards. The deferred tax assets are net of a valuation allowance. As of
December 31, 2002, the Company recorded a valuation allowance of $3,640,000
related to capital losses arising from the write-down of certain marketable
securities. Management believes that it is more likely than not that a portion
of the capital losses may expire unused because the generation of future taxable
capital gains cannot be assured. If these assumptions and estimates change in
the future, the Company could be required to increase the valuation allowance
against its deferred tax assets, which will result in additional income tax
expense in the Company's statement of operations. Each quarter, management
evaluates the realizability of the deferred tax assets and assesses the need for
changes to the valuation allowance.
Pension and Other Postretirement Benefits
The Company has recorded pension and other postretirement benefit costs
based on complex valuations developed by its actuarial consultant. These
valuations are based on key estimates and assumptions related to the discount
rates used and the rates expected to be earned on investments of plan assets.
OSG is required to consider market conditions in selecting a discount rate that
is
24
representative of the rates of return currently available on high-quality fixed
income investments. A higher discount rate would result in a lower benefit
obligation and a lower rate would result in higher benefit obligation. The
expected rate of return on plan assets is management's best estimate of expected
returns. A decrease in the expected rate of return will increase future net
periodic benefit costs and an increase in the expected rate of return will
decrease future benefit costs. As of December 31, 2002, management reduced the
discount rate and the rate of return on plan assets by 0.4% and 0.25%,
respectively. Changes in pension and other postretirement benefit costs may
occur in the future as a result of changes in these rates.
Special Purpose Entity ("SPE")
In 1999, the Company facilitated the creation of an SPE that purchased
from and bareboat chartered back to the Company five U.S. Flag Crude Tankers
that were being time chartered to BP for the transportation of Alaskan crude
oil. The purchase price of $170 million was financed by a term loan from a
commercial lender and a substantive equity capital investment by the owner of
the SPE. The Company did not guarantee the vessels' residual values or guarantee
the SPE's debt. The Company immediately thereafter bareboat chartered the
vessels to a joint venture in which it has a 37.5% interest. The joint venture,
in turn, has time chartered the vessels to BP under a "hell or highwater" lease
through the date on which they must be removed from service in accordance with
OPA 90. The portion of the charter hire payments from BP to the joint venture
representing bareboat charter hire to the Company is sufficient to fully
amortize the debt of the SPE. Such payments have been assigned to the SPE. The
Company has not consolidated the SPE. As of December 31, 2002, total assets and
total liabilities on the books of the SPE were $58.6 million and $52.5 million,
respectively. On July 1, 2003, the Company expects to consolidate this SPE in
accordance with FASB Interpretation No. 46. For additional information, see
"Newly Issued Accounting Standard" on Page 31.
Income from Vessel Operations
During 2002, TCE revenues decreased by $114,293,000 to $266,725,000 from
$381,018,000 in 2001, as a result of a sharp decline in average daily TCE rates
for vessels operating in the spot market partially offset by an increase in
revenue days. During 2001, TCE revenues increased by $10,937,000 to $381,018,000
from $370,081,000 in 2000 because of an increase in average daily TCE rates and
revenue days. During 2002, approximately 70% of the Company's TCE revenues were
derived in the spot market, including vessels in pools that predominantly
perform voyage charters compared with 73% in 2001 and 76% in 2000. In 2002,
approximately 30% of TCE revenues were generated from long-term charters
compared with 27% in 2001 and 24% in 2000. The increased percentage contribution
from long-term charters during 2002 compared with 2001 and 2000 reflects the
sharp decline in average daily TCE rates for the vessels operating in the spot
market.
The reliance on the spot market contributes to fluctuations in the
Company's revenue, cash flow, and net income/(loss), but affords the Company
greater opportunity to increase income from vessel operations when rates rise.
On the other hand, time and bareboat charters provide the Company with a
predictable level of revenues.
During 2002, income from vessel operations decreased by $85,798,000 to
$44,888,000 from $130,686,000 in 2001. Excluding the impact of the restructuring
charge of $10,439,000 recorded in 2001, income from vessel operations decreased
by $96,237,000. This reduction resulted from a decrease in average daily TCE
rates and revenues for all of the Company's Foreign Flag segments (see Note C to
the consolidated financial statements set forth in Item 8 for additional
information on the Company's segments). Average daily vessel expenses decreased
by more than $370 per day on a consolidated basis for 2002 compared with 2001.
During 2001, income from vessel operations increased by approximately
$7,059,000 from $134,066,000 in 2000, before taking into account a $10,439,000
restructuring charge in 2001. The improvement resulted from an increase in
average daily TCE rates and revenues for the Aframax and Product Carriers
segments, partially offset by a decrease in TCE rates and revenues for the VLCC
segment.
25
VLCC Segment: 2002 2001 2000
-------- -------- --------
TCE revenues (in thousands) $ 79,714 $112,820 $118,156
Running expenses (in thousands)(a) 61,026 48,467 43,927
-------- -------- --------
Income from vessel operations (in thousands)(b) $ 18,688 $ 64,353 $ 74,229
======== ======== ========
Average daily TCE rate $ 20,545 $ 37,432 $ 44,137
Average number of vessels(c) 9.8 7.4 6.4
Average number of vessels chartered in under
operating leases 1.1 1.0 1.0
Number of revenue days(d) 3,880 3,014 2,677
Number of ship-operating days(e) 3,972 3,077 2,701
(a) Running expenses represent vessel expenses, time and bareboat charter hire
expenses, and depreciation and amortization.
(b) Income from vessel operations by segment is before general and
administrative expenses and the restructuring charge.
(c) The average is calculated to reflect the addition and disposal of vessels
during the year.
(d) Revenue days represent ship-operating days less days that vessels were not
available for employment due to repairs, drydock or lay-up.
(e) Ship-operating days represent calendar days.
The VLCC segment includes two vessels that were time chartered out during
the three years ended December 31, 2002. The charter on one of these vessels
expired at the end of February 2002, at which time the vessel commenced
participation in the Tankers pool. The following table presents information for
the VLCCs generating revenue in the spot market.
2002 2001 2000
------- ------- -------
Spot Market:
TCE revenues (in thousands) $65,536 $89,631 $91,419
Running expenses (in thousands) 51,923 35,990 31,729
------- ------- -------
Income from vessel operations (in thousands) $13,613 $53,641 $59,690
======= ======= =======
Average daily TCE rate $18,827 $38,987 $47,002
Number of revenue days 3,481 2,299 1,945
During 2002, TCE revenues for the VLCC segment decreased by $33,106,000,
or 29%, to $79,714,000 from $112,820,000 in 2001. This reduction in TCE revenues
resulted from a decrease of $16,887 per day in the average daily TCE rate earned
partially offset by an increase in the number of revenue days. The increase in
revenue days resulted from the delivery of three newbuilding VLCCs (two in the
second half of 2001 and one in early-April 2002). Running expenses increased by
$12,559,000 to $61,026,000 in 2002 from $48,467,000 in the prior year as a
result of an increase in ship-operating days. Average daily running expenses,
however, were relatively unchanged.
During 2001, TCE revenues for the VLCC segment decreased by $5,336,000, or
5%, to $112,820,000 from $118,156,000 in 2000 because of a decrease of $6,705
per day in the average daily TCE rate earned partially offset by an increase in
the number of revenue days. The increase in revenue days resulted from the
delivery of two VLCC newbuildings in the second half of 2001 and the operation
for all of 2001 of two VLCC newbuildings delivered in the first half of 2000,
partially offset by an increase in days spent repairing and drydocking the
segment's vessels. Running expenses increased by $4,540,000 to $48,467,000 in
2001 from $43,927,000 in 2000 as a result of an increase in ship-operating days,
but average daily running expenses were relatively unchanged.
26
Aframax Segment: 2002 2001 2000
-------- -------- --------
TCE revenues (in thousands) $ 71,121 $111,293 $ 86,101
Running expenses (in thousands) 43,685 44,575 36,868
-------- -------- --------
Income from vessel operations (in thousands) $ 27,436 $ 66,718 $ 49,233
======== ======== ========
Average daily TCE rate $ 17,389 $ 29,505 $ 26,957
Average number of vessels 11.5 9.9 9.0
Average number of vessels chartered in under
operating leases -- 0.5 0.1
Number of revenue days 4,090 3,772 3,194
Number of ship-operating days 4,187 3,810 3,295
During 2002, TCE revenues for the Aframax segment decreased by
$40,172,000, or 36%, to $71,121,000 from $111,293,000 in 2001. This reduction in
TCE revenues resulted from a decrease of $12,116 per day in the average daily
TCE rate earned partially offset by an increase in revenue days. The increase in
revenue days primarily resulted from the delivery of four new vessels since
January 1, 2001. TCE revenues for 2002 reflect a loss of $697,000 generated by
forward freight agreements compared with income of $3,197,000 in 2001. Running
expenses decreased by $890,000 to $43,685,000 from $44,575,000 in 2001 as a
result of a reduction in charter-in expense partially offset by an increase in
ship-operating days. Average daily running expenses, excluding the impact of
charter-in expense, were relatively unchanged.
During 2001, TCE revenues for the Aframax segment increased by
$25,192,000, or 29%, to $111,293,000 from $86,101,000 in 2000 because of an
increase of $2,548 per day in the average daily TCE rate earned and an increase
in revenue days resulting from the delivery of three Aframaxes in 2001 and a
decrease in days spent repairing and drydocking the segment's vessels. TCE
revenues for 2001 include $3,197,000 resulting from forward freight agreements.
Running expenses increased in 2001 as a result of an increase in ship-operating
days, but average daily running expenses were relatively unchanged.
Product Carrier Segment: 2002 2001 2000
------- ------- -------
TCE revenues (in thousands) $35,053 $58,078 $54,354
Running expenses (in thousands) 24,493 27,818 29,416
------- ------- -------
Income from vessel operations (in thousands) $10,560 $30,260 $24,938
======= ======= =======
Average daily TCE rate $12,226 $21,212 $16,541
Average number of vessels 8.0 8.0 8.0
Average number of vessels chartered in under
operating leases -- 0.2 1.0
Number of revenue days 2,867 2,738 3,286
Number of ship-operating days 2,920 3,007 3,293
During 2002, TCE revenues for the Product Carrier segment decreased by
$23,025,000, or 40%, to $35,053,000 from $58,078,000 in 2001. This reduction in
TCE revenues resulted from a decrease of $8,986 per day in the average daily TCE
rate earned and the redelivery of a chartered-in vessel to its owner in
late-March 2001 partially offset by an increase in revenue days caused by a
216-day reduction in repair and drydocking days. Running expenses decreased by
$3,325,000 to $24,493,000 from $27,818,000 in 2001 as a result of decreases in
charter-in expense and insurance costs related to hull and machinery claims.
Average daily running expenses, excluding the impact of charter-in expense and
insurance costs related to hull and machinery claims, were relatively unchanged.
27
During 2001, TCE revenues for the Product Carrier segment increased by
$3,724,000, or 7%, to $58,078,000 from $54,354,000 in 2000 because of an
increase of $4,671 per day in the average daily TCE rate earned partially offset
by a decrease in revenue days resulting from the expiration in early 2001 of an
operating lease on a chartered-in vessel and an increase in days spent repairing
and drydocking the segment's vessels. Running expenses decreased by $1,598,000
to $27,818,000 in 2001 from $29,416,000 in 2000 because of a decrease in
ship-operating days, partially offset by an increase of $2,000,000 in damage
repair expenses involving two vessels.
U.S. Flag Crude Tanker Segment
TCE revenues in 2002 for the U.S. Flag Crude Tanker segment were unchanged
from 2001 because the segment's vessels are bareboat chartered at fixed rates to
Alaska Tanker Company ("ATC").
During 2001, TCE revenues for the U.S. Flag Crude Tanker segment decreased
by $9,247,000 to $28,052,000 from $37,299,000 in 2000 principally because of a
reduction of the number of segment vessels from five to four. This reduction
resulted from the cancellation of both the bareboat charter-in and bareboat
charter-out for one vessel that was sold by the owner of the SPE in October 2000
in connection with BP's merger with ARCO.
U.S. Flag Dry Bulk Carrier Segment
During 2002, TCE revenues for the U.S. Flag Dry Bulk Carrier segment
decreased by $2,541,000, or 17%, to $12,331,000 from $14,872,000 in 2001. This
reduction in TCE revenues resulted from a 216-day reduction in revenue days
because of the sale of two vessels (one in June 2002 and one in June 2001)
offset by a decrease of 178 days to 47 days in 2002 from 225 days in 2001, in
time waiting for cargoes. This reduction in revenue days was partially offset by
an increase of $840 per day in the charter rates earned. Running expenses
decreased by $4,490,000 to $15,757,000 from $20,247,000 in 2001 due to the sale
of segment vessels discussed above. Average daily running expenses, however,
were relatively unchanged.
During 2001, TCE revenues for the U.S. Flag Dry Bulk Carriers segment
decreased by $9,862,000, or 40%, to $14,872,000 from $24,734,000 in 2000 because
of lower charter rates, an increase of 100 days to 225 days in 2001 from 125 in
2000 in time waiting for cargoes, and a 202-day reduction in revenue days caused
by the sale in 2001 of an older U.S. Flag Product Carrier that had participated
in the U.S. grain trade program since the beginning of 2000. Running expenses
decreased by $1,472,000 because of the vessel sale discussed above.
All Other
The Company also owns and operates a U.S. Flag Pure Car Carrier, two U.S.
Flag Handysize Product Carriers operating in the Jones Act trade, and a Foreign
Flag Suezmax, all on long-term charter, as well as two Foreign Flag Dry Bulk
Carriers that operate in a pool of Capesize Dry Bulk Carriers. During 2002, TCE
revenues decreased by $15,449,000, or 28%, to $40,454,000 from $55,903,000 in
2001. The reduction in TCE revenues resulted from the Company's reduced
participation in the charter-in of vessels that were commercially managed by the
pool of Capesize Dry Bulk Carriers and a 56-day decrease in revenue days for
drydockings in 2002 and a $3,414 per day decrease in TCE rates earned by the two
Foreign Flag Dry Bulk Carriers.
During 2001, TCE revenues increased by $6,466,000, or 13%, to $55,903,000
from $49,437,000 in 2000 principally because of the Company's participation in
the charter-in of vessels that were commercially managed by the pool of Capesize
Dry Bulk Carriers. Running expenses similarly increased because of the
charter-in expense attributable to such vessel interests. The increase in TCE
revenues earned in 2001 by the two U.S. Flag Product Carriers, which commenced
long-term charters in that year, was offset by significantly weaker results from
the two Foreign Flag Dry Bulk Carriers.
28
The average daily rates paid with respect to the chartered-in vessels
discussed in the two preceding paragraphs were higher than the TCE rates earned
by such vessels during 2002 and 2001. Accordingly, the reduced participation in
the charter-in of vessels positively affected consolidated income from vessel
operations by $1,254,000 in 2002 compared with 2001.
Since December 1996, the Pure Car Carrier has received payments of
$2,100,000 per year under the U.S. Maritime Security Program, which continues
through late 2005, subject to annual congressional appropriations.
General and Administrative Expenses
During 2002, general and administrative expenses decreased by $9,046,000
to $32,921,000 from $41,967,000 in 2001 principally due to a decrease in cash
compensation and related benefits. Such reductions were principally attributable
to the New York headquarters staff reductions discussed in Note O to the
consolidated financial statements set forth in Item 8.
During 2001, general and administrative expenses decreased by $655,000 to
$41,967,000 from $42,622,000 in 2000 because of a decrease of $3,364,000 in cash
compensation and related benefits, partially offset by increases of $1,377,000
in non-cash stock compensation and $962,000 in net periodic pension and other
postretirement plan costs.
Equity in Income of Joint Ventures
As of December 31, 2002, the Company is a partner in joint ventures that
own 11 foreign flag vessels (ten VLCCs and one Aframax). As of December 31,
2002, eight of these VLCCs participate in the Tankers pool and two operate on
long-term charters, one to OSG and one to the other joint venture partner, a
major oil company, and do not participate in the Tankers pool. The Aframax
participates in Aframax International.
During the three years ended December 31, 2002, the Company's various
joint ventures made the following acquisitions:
o In March 2000, one VLCC in which the Company has a 30% interest.
o In June 2000, one Aframax in which the Company has a 50% interest.
o In March 2001, two VLCCs in which the Company has a 49.9% interest.
o In the third quarter of 2001, three VLCCs in which the Company has a
33.3% interest.
o In February and July 2002, two VLCC newbuildings in which the
Company has a 33.3% interest.
The following is a summary of the Company's interest in all of its joint
ventures, excluding ATC (see discussion below), and the revenue days for the
respective vessels since their acquisition date. Revenue days are adjusted for
OSG's percentage ownership in order to state the revenue days on a basis
comparable to that of a wholly-owned vessel. For the joint venture VLCCs
operating in the Tankers pool, the ownership percentage reflected below is an
average as of December 31, 2002. The Company's actual ownership percentages for
these joint ventures ranged from 30% to 49.9%:
29
Number of Revenue Days
Average % ----------------------
Ownership 2002 2001 2000
--------- --------------------
VLCCs participating in Tankers pool 37.1% 997 555 89
VLCCs owned jointly with a major oil
company 50.0% 365 365 366
Aframax in Aframax International pool 50.0% 165 183 91
---------------------
Total 1,527 1,103 546
=====================
Additionally, the Company is a partner in ATC, a joint venture that
operates ten U.S. Flag tankers transporting Alaskan crude oil for BP. The
participation in ATC provides the Company with the opportunity to earn
additional income (in the form of its share of incentive hire paid by BP to ATC)
based on ATC's meeting certain predetermined performance standards.
During 2002, equity in income of joint ventures decreased by $9,067,000 to
$11,407,000 from $20,474,000 in 2001, principally due to a decrease in average
daily rates earned by the joint venture vessels. The impact of this decrease in
rates was partially offset by an increase in revenue days of joint venture VLCCs
participating in the Tankers pool to 997 in 2002 from 555 in 2001, resulting
from the delivery since January 1, 2001 of seven vessels. In addition, the
Company's share of incentive hire earned by ATC in 2002 decreased by $580,000
from 2001.
During 2001, equity in income of joint ventures increased by $9,025,000 to
$20,474,000 from $11,449,000 in 2000, principally because of the inclusion of
the earnings of vessels acquired by joint ventures (as discussed above) and an
increase in incentive hire earned by ATC. Of the total increase, $3,193,000
resulted from the acquisition of six VLCCs from March 2000 to August 2001, all
of which have joined the Tankers pool, as reflected by the increase in revenue
days to 555 days in 2001 from 89 days in 2000. The increase in the Company's
share of incentive hire earned by ATC amounted to $3,108,000. An increase of
$908,000 resulted from the operation of the Aframax for the full year in 2001,
as reflected by the increase in revenue days to 183 days from 91 days in 2000.
Interest Expense
The components of interest expense are as follows (in thousands):
In thousands for the year ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------
Interest before impact of swaps and capitalized interest $ 43,798 $ 53,386 $ 63,364
Impact of swaps 13,844 4,800 (1,286)
Capitalized interest (4,949) (13,151) (15,411)
--------------------------------
Interest expense $ 52,693 $ 45,035 $ 46,667
================================
During 2002, interest expense increased by $7,658,000 to $52,693,000 from
$45,035,000 in 2001 as a result of an increase in the average amount of debt
outstanding of $89,930,000 and a reduction of $8,202,000 ($4,949,000 in 2002
compared with $13,151,000 in 2001) in interest capitalized in connection with
vessel construction. Such increases were offset by a decrease of 210 basis
points in the average rate paid on floating rate debt to 3.0% in 2002 from 5.1%
in 2001. The impact of this decline in rates was substantially offset by the
impact of floating-to-fixed interest rate swaps that increased interest expense
by $13,844,000 in 2002 compared with an increase of $4,800,000 in 2001.
During 2001, interest expense decreased by $1,632,000 to $45,035,000 from
$46,667,000 in 2000 because of a decrease of 210 basis points in the average
rate paid on floating rate debt to 5.1% in 2001 from 7.2% in 2000. The impact of
this decline in rates was partially offset by an increase in the average amount
of debt outstanding of $26,500,000. Interest expense reflects the impact of
interest rate swaps
30
that increased interest expense by $4,800,000 in 2001 and reduced interest
expense by $1,286,000 in 2000. Interest expense is net of amounts capitalized in
connection with vessel construction of $13,151,000 in 2001 compared with
$15,411,000 in 2000.
Provision/(Credit) for Federal Income Taxes
The credit for income taxes in 2002 and the income tax provisions in 2001
and 2000 are based on pre-tax income/(loss), adjusted to reflect items that are
not subject to tax and the dividends received deduction. The credit for income
taxes for 2002 also reflects the recording of a valuation allowance offset of
$3,640,000 against the deferred tax asset resulting from the write-down of
certain marketable securities. The valuation allowance was established because
the Company believes, based on currently available evidence, that it is more
likely than not that the full amount of the deferred tax asset will not be
realized through the generation of capital gains in the future.
Effects of Inflation
The Company does not believe that inflation has had or is likely, in the
foreseeable future, to have a significant impact on vessel operating expenses,
drydocking expenses and general and administrative expenses.
Newly Issued Accounting Standard
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." 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 current rules, which require 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 expects to consolidate the SPE
("Alaska Equity Trust") that now owns these vessels and holds the associated
bank debt used to purchase them. The SPE's bank debt of approximately
$52,100,000 as of December 31, 2002 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 Alaska Equity Trust. The Company is currently analyzing
the effect that the adoption of FASB Interpretation No. 46 and the consolidation
of Alaska Equity Trust will have on its consolidated results of operations and
financial position, but does not expect such effect to be material to net
income.
Liquidity and Sources of Capital
Working capital at December 31, 2002 was approximately $77,000,000
compared with $61,000,000 at December 31, 2001 and $88,000,000 at December 31,
2000. Current assets are highly liquid, consisting principally of cash,
interest-bearing deposits, investments in marketable securities and receivables.
In addition, the Company maintains a Capital Construction Fund with a market
value of approximately $231,000,000 at December 31, 2002. Net cash provided by
operating activities approximated $13,000,000 in 2002 compared with $193,000,000
in 2001 and $102,000,000 in 2000. Net cash provided by operating activities in
2002 reflects $24,500,000 of payments with respect to estimated 2001 federal
income taxes. Current financial resources, together with cash anticipated to be
generated from operations, are expected to be adequate to meet financial
requirements in the next year.
As of December 31, 2002, the Company's total debt, including capital lease
obligations, was $1,006,110,000 compared with $878,693,000 at December 31, 2001.
The aggregate principal payments required to be made during the five years
subsequent to December 31, 2002 are $21,075,000 (2003), $18,532,000 (2004),
$369,422,000 (2005), $276,351,000 (2006) and $20,554,000 (2007). In December
2001, OSG concluded a new five-year unsecured revolving credit agreement that
provides for borrowings of up to $300,000,000, which was increased to
$350,000,000 in January 2002 during syndication. OSG has $700,000,000 of
long-term unsecured credit availability, of which $192,000,000 was unused at
December 31, 2002. The Company's two $350,000,000 long-term revolving credit
31
facilities mature in 2005 and 2006. In February 2002, the Company increased its
unsecured short-term credit facility from $15,000,000 to $45,000,000, of which
$17,000,000 was unused at December 31, 2002. The Company intends to refinance
both the outstanding balance of the 8% Notes, which mature in December 2003, and
the $28,000,000 balance outstanding under the short-term credit facility as of
December 31, 2002, using amounts available under the long-term credit
facilities. Accordingly, the aggregate amount outstanding of $98,391,000 has
been classified as long-term. The Company was in compliance with all of the
financial covenants contained in the Company's debt agreements as of December
31, 2002.
As of December 31, 2002, the joint ventures in which OSG participates had
total debt of $333,132,000. The Company's percentage interests in these joint
ventures range from 30% to 50%. OSG has guaranteed a total of $35,249,000 of the
joint venture debt at December 31, 2002. The balance of the joint venture debt
is nonrecourse to the Company. The amount of the Company's guaranties reduces
proportionately as the principal amounts of the joint venture debt are paid
down. See Note E to the consolidated financial statements set forth in Item 8
for disclosures concerning long-term debt of the joint ventures.
OSG finances vessel additions primarily with cash provided by operating
activities and long-term borrowings. In 2002, 2001 and 2000, cash used for
vessel additions approximated $153,000,000, $112,000,000 and $107,000,000,
respectively, excluding additions financed directly by secured debt. In July
2002, the Company prepaid approximately $47,600,000 of progress payments for two
newbuildings realizing the benefit of a contractually-provided discount. As of
December 31, 2002, OSG had non-cancelable commitments for the construction of
three double-hulled Foreign Flag tankers for delivery between February 2003 and
January 2004, with an aggregate unpaid cost of approximately $30,100,000. Unpaid
costs are net of progress payments and prepayments, which are covered by
refundment guaranties. Scheduled payments will be funded in 2003. OSG expects to
finance such vessel commitments from working capital, cash anticipated to be
generated from operations, existing long-term credit facilities and additional
long-term debt, as required. The amounts of working capital and cash generated
from operations that may, in the future, be utilized to finance vessel
commitments are dependent on the rates at which the Company can charter its
vessels. Such rates are volatile. Cancellation of these contracts by OSG, except
as provided in the contracts, could require the Company to reimburse the
shipyard for any losses that the shipyard may incur as a result of such
cancellation.
OSG has used interest rate swaps to effectively convert a portion of its
debt either from a fixed to floating rate basis or from a floating to fixed rate
basis, reflecting management's interest rate outlook at various times. These
agreements contain no leverage features and have various maturity dates from
February 2003 to August 2014. As of December 31, 2002, the interest rate swaps
effectively convert the Company's interest rate exposure on $309,000,000 from a
floating rate based on LIBOR to an average fixed rate of 6.74%.
Risk Management
The Company is exposed to market risk from changes in interest rates,
which could impact its results of operations and financial condition. The
Company manages this exposure to market risk through its regular operating and
financing activities and, when deemed appropriate, through the use of derivative
financial instruments. The Company manages its ratio of fixed to floating rate
debt with the objective of achieving a mix that reflects management's interest
rate outlook at various times. To manage this mix in a cost-effective manner,
the Company, from time-to-time, enters into interest rate swap agreements, in
which it agrees to exchange various combinations of fixed and variable interest
rates based on agreed upon notional amounts. The Company uses such derivative
financial instruments as risk management tools and not for speculative or
trading purposes. In addition, derivative financial instruments are entered into
with a diversified group of major financial institutions in order to manage
exposure to nonperformance on such instruments by the counterparties.
The following tables provide information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. For investment securities and debt obligations, the
tables present principal cash flows and related weighted average interest rates
32
by expected maturity dates. Additionally, the Company has assumed that its fixed
income securities are similar enough to aggregate those securities for
presentation purposes. For interest rate swaps, the tables present notional
amounts and weighted average interest rates by contractual maturity dates.
Notional amounts are used to calculate the contractual cash flows to be
exchanged under the contracts.
Interest Rate Sensitivity
Principal (Notional) Amount (dollars in millions) by Expected Maturity and
Average Interest (Swap) Rate
========================================================================================================================
Beyond Fair Value at
At December 31, 2002 2003 2004 2005 2006 2007 2007 Total Dec. 31, 2002
- ------------------------------------------------------------------------------------------------------------------------
Assets
Fixed income securities $ 0.8 $ 0.2 $ 1.0 $ 1.3 $ 1.6 $ 64.4 $ 69.3 $ 69.3
Average interest rate 6.3% 8.0% 2.6% 5.9% 4.6% 7.3%
Liabilities
Long-term debt and capital lease
obligations, including current
portion:
Fixed rate $ 77.2 $ 7.3 $ 8.2 $ 8.7 $ 9.3 $ 150.4 $261.1 $249.6
Average interest rate 8.2% 7.7% 8.0% 8.1% 8.2% 8.0%
Variable rate $ 14.3 $ 11.3 $ 361.3 $ 197.2 $ 11.2 $ 149.7 $745.0 $745.0
Average spread over LIBOR 1.01% 1.07% 1.12% 1.66% 1.07% 1.06%
Interest Rate Swaps Related to
Debt
Pay fixed/receive variable* $ 19.5 $ 17.9 $ 22.8 $ 213.0 $ 14.0 $ 131.2 $418.4 $(33.9)
Average pay rate 6.3% 5.4% 5.7% 5.4% 5.1% 4.9%
========================================================================================================================
Beyond Fair Value at
At December 31, 2001 2002 2003 2004 2005 2006 2006 Total Dec. 31, 2001
- ------------------------------------------------------------------------------------------------------------------------
Assets
Fixed income securities $ 1.9 $ 0.8 $ 1.5 $ 8.8 $ 1.0 $ 50.5 $ 64.5 $ 64.5
Average interest rate 7.0% 6.3% 6.8% 6.8% 6.1% 6.8%
Liabilities
Long-term debt and capital lease
obligations, including current
portion:
Fixed rate $ 6.2 $ 78.2 $ 4.3 $ 5.1 $ 5.7 $ 121.8 $221.3 $215.7
Average interest rate 9.8% 8.2% 10.0% 10.0% 10.0% 9.1%
Variable rate $ 17.6 $ 12.6 $ 12.6 $ 367.5 $ 187.7 $ 59.4 $657.4 $657.4
Average spread over LIBOR 1.15% 0.90% 0.90% 1.11% 1.29% 1.00%
Interest Rate Swaps Related to
Debt
Pay fixed/receive variable* $ 150.8 $ 19.5 $ 11.8 $ 16.6 $ 206.9 $ 53.8 $459.4 $(13.7)
Average pay rate 5.2% 6.3% 5.9% 6.1% 5.4% 5.4%
* LIBOR
In August 2002, floating-to-fixed interest rate swaps, with notional
amounts aggregating $133 million matured. Pursuant to these agreements, the
Company paid fixed rates of 5.1% and received floating rates based on LIBOR. In
late-September 2002, the Company entered into 11-year floating-to-fixed
amortizing interest rate swaps with major financial institutions that commence
in the third quarter of 2003. These swaps are designated and qualify as cash
flow hedges. As of December 31, 2002, the Company has effectively converted the
full $256 million of floating rate, secured loans, borrowed in the third
quarter, into fixed rate debt for periods up to 12 years, at a weighted average
effective rate of 5.74%.
As of December 31, 2002, debt in the amount of $158,000,000 bears interest
at LIBOR plus a margin, where the margin is dependent upon the Company's
leverage.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Years ended December 31, 2002, 2001 and 2000 Page
Consolidated Balance Sheets at December 31, 2002 and 2001................. 35
Consolidated Statements of Operations for the Years Ended December 31,
2002, 2001 and 2000.................................................... 36
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000.................................................... 37
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000................................. 38
Notes to Consolidated Financial Statements................................ 39
Report of Independent Auditors............................................ 62
34
Consolidated Balance Sheets
Overseas Shipholding Group, Inc. and Subsidiaries
Dollars in thousands at December 31, 2002 2001
- -------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 36,944 $ 30,256
Investments in marketable securities -- Note F 28,796 69,958
Voyage receivables, including unbilled
of $35,637 and $18,221 38,755 29,593
Other receivables, including federal income taxes recoverable of
$6,098 in 2002 12,777 8,461
Inventories 1,155 3,046
Prepaid expenses 4,960 5,308
- -------------------------------------------------------------------------------------------------------
Total Current Assets 123,387 146,622
Capital Construction Fund -- Notes F and J 231,072 232,971
Vessels, at cost, less accumulated depreciation --
Notes A5 and I 1,383,744 1,307,311
Vessels under Capital Leases, less accumulated
amortization -- Note A6 33,030 38,408
Investments in Joint Ventures -- Note E 168,315 149,775
Other Assets -- Note A5 95,294 89,188
- -------------------------------------------------------------------------------------------------------
Total Assets $ 2,034,842 $ 1,964,275
=======================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 2,201 $ 3,132
Sundry liabilities and accrued expenses -- Notes H and O 22,971 34,880
Federal income taxes -- 23,756
Short-term debt and current installments of long-term debt -- Note I 14,284 17,600
Current obligations under capital leases -- Note M1 6,791 6,164
- -------------------------------------------------------------------------------------------------------
Total Current Liabilities 46,247 85,532
Long-term Debt -- Note I 932,933 795,736
Obligations under Capital Leases -- Note M1 52,102 59,193
Deferred Federal Income Taxes ($134,204 and $132,170),
Deferred Credits and Other Liabilities -- Notes E and J 219,411 210,388
Commitments -- Note Q
Shareholders' Equity -- Notes G, I, J, K and L:
Common stock ($1 par value; 60,000,000 shares authorized;
39,590,759 shares issued) 39,591 39,591
Paid-in additional capital 106,154 103,529
Retained earnings 731,201 769,457
- -------------------------------------------------------------------------------------------------------
876,946 912,577
Cost of treasury stock (5,139,684 and 5,312,867 shares) 70,270 72,868
- -------------------------------------------------------------------------------------------------------
806,676 839,709
Accumulated other comprehensive income/(loss) (22,527) (26,283)
- -------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 784,149 813,426
- -------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 2,034,842 $ 1,964,275
=======================================================================================================
See notes to consolidated financial statements.
35
Consolidated Statements of Operations
Overseas Shipholding Group, Inc. and Subsidiaries
Dollars in thousands, except per share amounts,
for the year ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Shipping Revenues -- Note C:
Voyage charter revenues $ 69,881 $ 285,706 $ 268,010
Time and bareboat charter revenues, including vessels operating
in certain pools 227,402 183,627 199,608
- ------------------------------------------------------------------------------------------------------------------------
297,283 469,333 467,618
Voyage Expenses (30,558) (88,315) (97,537)
- ------------------------------------------------------------------------------------------------------------------------
Time Charter Equivalent Revenues 266,725 381,018 370,081
- ------------------------------------------------------------------------------------------------------------------------
Ship Operating Expenses:
Vessel expenses 84,617 84,058 81,929
Time and bareboat charter hire expenses -- Notes E and M1 25,359 43,956 41,326
Depreciation and amortization 78,940 69,912 70,138
General and administrative 32,921 41,967 42,622
Restructuring charge -- Note O -- 10,439 --
- ------------------------------------------------------------------------------------------------------------------------
Total Ship Operating Expenses 221,837 250,332 236,015
- ------------------------------------------------------------------------------------------------------------------------
Income from Vessel Operations 44,888 130,686 134,066
Equity in Income of Joint Ventures -- Note E 11,407 20,474 11,449
- ------------------------------------------------------------------------------------------------------------------------
Operating Income 56,295 151,160 145,515
Other Income/(Expense) -- Note P (24,466) 48,320 34,141
- ------------------------------------------------------------------------------------------------------------------------
31,829 199,480 179,656
Interest Expense, net of gain on early extinguishment of debt in
2000 -- Note I 52,693 45,035 46,667
- ------------------------------------------------------------------------------------------------------------------------
Income/(Loss) before Federal Income Taxes and Cumulative
Effect of Change in Accounting Principle (20,864) 154,445 132,989
Provision/(Credit) for Federal Income Taxes -- Note J (3,244) 53,004 46,750
- ------------------------------------------------------------------------------------------------------------------------
Income/(Loss) before Cumulative Effect of Change
in Accounting Principle (17,620) 101,441 86,239
Cumulative Effect of Change in Accounting Principle,
net of income taxes of $1,800 -- Note B -- -- 4,152
- ------------------------------------------------------------------------------------------------------------------------
Net Income/(Loss) $ (17,620) $ 101,441 $ 90,391
========================================================================================================================
Weighted Average Number of Common Shares
Outstanding -- Note K:
Basic 34,394,977 34,168,944 33,870,154
Diluted 34,394,977 34,696,823 34,315,257
Per Share Amounts:
Basic net income/(loss) before cumulative effect of change
in accounting principle $ (0.51) $ 2.97 $ 2.55
Diluted net income/(loss) before cumulative effect of change
in accounting principle $ (0.51) $ 2.92 $ 2.51
Cumulative effect of change in accounting principle -- -- $ 0.12
Basic net income/(loss) $ (0.51) $ 2.97 $ 2.67
Diluted net income/(loss) $ (0.51) $ 2.92 $ 2.63
Cash dividends declared and paid $ 0.60 $ 0.60 $ 0.60
See notes to consolidated financial statements.
36
Consolidated Statements of Cash Flows
Overseas Shipholding Group, Inc. and Subsidiaries
In thousands for the year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income/(loss) $ (17,620) $ 101,441 $ 90,391
Items included in net income/(loss) not affecting cash flows:
Cumulative effect of change in accounting principle -- -- (5,952)
Depreciation and amortization 78,940 69,912 70,138
Amortization of deferred gain on sale and leaseback (13,774) (13,775) (17,353)
Restructuring charge -- 10,439 --
Deferred compensation relating to stock option grants 2,262 2,659 1,282
Unrealized loss on write-down of marketable securities 42,055 -- --
Provision for deferred federal income taxes 2,759 25,862 35,040
Equity in results of joint ventures (4,026) (7,937) (9,057)
Other -- net (13,515) (6,482) (10,851)
Items included in net income/(loss) related to investing and financing
activities:
Gain on sale of securities -- net (3,643) (27,227) (3,513)
(Gain)/loss on disposal of other vessels 861 (436) (21,064)
Gain on early extinguishment of debt -- -- (803)
Changes in operating assets and liabilities:
Decrease/(increase) in receivables (12,611) 22,281 (23,695)
Increase/(decrease) in Federal income taxes payable (24,500) 18,851 4,105
Net change in prepaid items, accounts payable and sundry liabilities
and accrued expenses (24,015) (2,563) (6,626)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,173 193,025 102,042
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of marketable securities -- (116,969) (38,968)
Proceeds from sales of marketable securities 40,326 96,402 15,148
Expenditures for vessels, including $116,830, $109,960 and $105,037
related to vessels under construction* (152,640) (112,012) (106,858)
Proceeds from disposal of vessels 12,729 1,142 8,148
Investments in and advances to joint ventures (19,756) (59,845) (6,845)
Distributions from joint ventures 5,661 2,749 7,074
Purchases of other investments (1,339) (890) (3,912)
Proceeds from dispositions of other investments 2,150 1,147 6,475
Other -- net (1,442) 1,241 (3,096)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (114,311) (187,035) (122,834)
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Issuance of debt* 256,000 41,000 74,000
Payments on debt and obligations under capital leases (127,864) (14,565) (75,885)
Cash dividends paid (20,636) (20,512) (20,316)
Issuance of common stock upon exercise of stock options 2,627 4,547 4,795
Other -- net (2,301) (1,985) (2,748)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) financing activities 107,826 8,485 (20,154)
- ---------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 6,688 14,475 (40,946)
Cash and cash equivalents at beginning of year 30,256 15,781 56,727
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 36,944 $ 30,256 $ 15,781
=====================================================================================================================
* Net of $11,116 (2000) of secured debt in connection with the construction
of vessels.
See notes to consolidated financial statements.
37
Consolidated Statements of Changes in Shareholders' Equity
Overseas Shipholding Group, Inc. and Subsidiaries
Accumulated
Paid-in Treasury Stock Other
Common Additional Retained --------------------- Comprehensive
Dollars in thousands Stock Capital Earnings Shares Amount Income/(Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 39,591 $ 96,156 $ 618,453 5,918,462 $ (81,098) $ (12,044) $ 661,058
Net Income 90,391 90,391
Other Comprehensive Income,
net of tax:
Net unrealized holding gains on
available-for-sale securities* 11,940 11,940
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income 102,331
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared and Paid (20,316) (20,316)
Deferred Compensation Related to
Options Granted 1,282 1,282
Options Exercised and Employee
Stock Purchase Plan 554 (314,187) 4,241 4,795
Tax Benefit Related to Options
Exercised 1,017 1,017
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 39,591 99,009 688,528 5,604,275 (76,857) (104) 750,167
Net Income 101,441 101,441
Cumulative Effect of Change in
Accounting Principle, net of taxes
of $1,861 -- Note A10 3,455 3,455
Other Comprehensive (Loss),
net of tax:
Net unrealized holding losses on
available-for-sale securities* (16,341) (16,341)
Effect of derivative instruments --
Note L (9,469) (9,469)
Minimum pension liability (3,824) (3,824)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income 75,262
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared and Paid (20,512) (20,512)
Deferred Compensation Related to
Options Granted 2,659 2,659
Options Exercised and Employee
Stock Purchase Plan 558 (291,408) 3,989 4,547
Tax Benefit Related to Options
Exercised 1,303 1,303
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 39,591 103,529 769,457 5,312,867 (72,868) (26,283) 813,426
Net Loss (17,620) (17,620)
Other Comprehensive (Loss),
net of tax:
Net unrealized holding gains on
available-for-sale securities** 16,777 16,777
Effect of derivative instruments --
Note L (13,880) (13,880)
Minimum pension liability 859 859
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Loss (13,864)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared and Paid (20,636) (20,636)
Deferred Compensation Related to
Options Granted 2,262 2,262
Options Exercised and Employee
Stock Purchase Plan 29 (173,183) 2,598 2,627
Tax Benefit Related to Options
Exercised 334 334
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 39,591 $ 106,154 $ 731,201 5,139,684 $ (70,270) $ (22,527) $ 784,149
====================================================================================================================================
* Net of realized gains included in net income of $18,230 (2001) and $3,056
(2000).
** Net of write-down of marketable securities of $30,976 and realized gains
of $2,173 that were included in net loss.
See notes to consolidated financial statements.
38
Notes to Consolidated Financial Statements
Overseas Shipholding Group, Inc. and Subsidiaries
Note A -- Summary of Significant Accounting Policies:
1. Basis of presentation and description of business - The consolidated
financial statements include the accounts of Overseas Shipholding Group,
Inc., a U.S. corporation, and its majority-owned subsidiaries (the
"Company" or "OSG"). For the three years ended December 31, 2002, all
subsidiaries were wholly owned. All significant intercompany balances and
transactions have been eliminated in consolidation. Investments in 50% or
less owned joint ventures, in which the Company exercises significant
influence, are accounted for by the equity method.
The Company owns and operates a fleet of oceangoing vessels engaged in the
transportation of liquid and dry bulk cargoes in the international market
and the U.S. Flag trades.
The consolidated statements of cash flows for 2001 and 2000 have been
reclassified to conform with the 2002 presentation of certain items. The
consolidated statement of operations for 2000 has been reclassified to not
reflect the gain on early extinguishment of debt as an extraordinary item
in accordance with the provisions of Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" (see Note
I).
2. Cash and cash equivalents - Interest-bearing deposits that are highly
liquid investments and have a maturity of three months or less when
purchased are included in cash and cash equivalents.
3. Marketable securities - The Company's investments in marketable securities
are classified as available-for-sale and are carried at fair value. Net
unrealized gains or losses are reported as a component of accumulated
other comprehensive income/(loss) within shareholders' equity.
The Company accounts for investments in marketable securities in
accordance with the provisions of Statement of Financial Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
and Staff Accounting Bulletin No. 59, "Noncurrent Marketable Equity
Securities." Accordingly, if a material decline in the fair value below
the Company's cost basis is determined to be other-than-temporary, a
noncash impairment loss is recorded as a charge in the statement of
operations in the period in which that determination is made. As a matter
of policy, the Company evaluates all material declines in fair value for
impairment whenever the fair value of a stock has been below its cost
basis for more than six consecutive months. In the period in which a
decline in fair value is determined to be other-than-temporary, the
carrying value of that security is written down to its fair value at the
end of such period, thereby establishing a new cost basis.
The classification of investments in marketable securities in the
consolidated balance sheets as a current asset reflects management's view
with respect to the portfolio's availability for use in current
operations.
4. Inventories - Inventories, which consist of fuel, are stated at cost
determined on a first-in, first-out basis.
5. Vessels and deferred drydocking expenditures - Vessels include vessels
under construction aggregating $126,093,000 and $120,521,000 at December
31, 2002 and 2001, respectively (see Note Q).
39
Vessels are recorded at cost and are depreciated to their estimated
salvage value on the straight-line basis, using a vessel life of 25 years.
Each vessel's salvage value is equal to the product of its lightweight
tonnage and an estimated scrap rate. Accumulated depreciation was
$423,344,000 and $434,442,000 at December 31, 2002 and 2001, respectively.
Interest costs are capitalized to vessels during the period that vessels
are under construction. Interest capitalized aggregated $4,949,000 in
2002, $13,151,000 in 2001 and $15,411,000 in 2000.
Expenditures incurred during a drydocking are deferred and amortized on
the straight-line basis over the period until the next scheduled
drydocking, generally two and a half to five years. Expenditures for
maintenance and repairs are expensed when incurred. Amortization of
capitalized drydock expenditures, which is included in depreciation and
amortization in the consolidated statements of operations, amounted to
$10,369,000 in 2002, $10,268,000 in 2001 and $14,912,000 in 2000. The
unamortized portion of deferred drydocking expenditures, which is included
in other assets in the consolidated balance sheets, was $18,647,000 and
$12,202,000 at December 31, 2002 and 2001, respectively.
6. Vessels under capital leases - The Company charters in four U.S. Flag
Vessels that it accounts for as capital leases. Amortization of capital
leases is computed by the straight-line method over 22 or 25 years,
representing the terms of the leases (see Note M1). Accumulated
amortization was $89,060,000 and $83,681,000 at December 31, 2002 and
2001, respectively.
7. Impairment of long-lived assets - The carrying amounts of long-lived
assets held and used by the Company are reviewed for potential impairment
whenever events or changes in circumstances indicate that the carrying
amount of a particular asset may not be fully recoverable. In such
instances, an impairment charge would be recognized if the estimate of the
undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition is less than the asset's carrying
amount. This assessment is made at the individual vessel level since
separately identifiable cash flow information for each vessel is
available. The amount of an impairment charge, if any, would be determined
using discounted cash flows.
8. Deferred finance charges - Finance charges incurred in the arrangement of
debt are deferred and amortized to interest expense on the straight-line
basis over the life of the related debt. Deferred finance charges of
$6,826,000 and $7,116,000 are included in other assets at December 31,
2002 and 2001, respectively. Amortization amounted to $1,711,000 in 2002,
$1,282,000 in 2001 and $1,149,000 in 2000.
9. Revenue and expense recognition - Time charters and bareboat charters that
are operating leases are reported on the accrual basis. Effective January
1, 2000, voyage revenues and expenses are reported using the percentage of
completion method (see Note B). For 1999 and earlier periods, voyage
revenues and expenses were reported on the completed voyage basis. Under
voyage charters, expenses such as fuel, port charges, canal tolls, cargo
handling operations and brokerage commissions are paid by the Company
whereas, under time and bareboat charters, such voyage costs are paid by
the Company's customers. For voyage charters, time charter equivalent
revenues represent shipping revenues less voyage expenses. For time and
bareboat charters, time charter equivalent revenues represent shipping
revenues less brokerage commissions, if applicable, which are included in
voyage expenses.
For the Company's vessels operating in the Tankers International LLC
("Tankers") pool and the Dry Bulk Carrier pool, revenues and voyage
expenses are pooled and allocated to each pool's participants on a time
charter equivalent basis in accordance with an agreed-upon formula.
40
Beginning in 2002, operation of the PDVM/OSG pool, now named Aframax
International, changed to be substantially similar to the operations of
the Tankers and Dry Bulk Carrier pools. Accordingly, in the first quarter
of 2002, Aframax International began reporting results on a time charter
equivalent basis in accordance with an agreed-upon formula. For the
Company's vessels operating in Aframax International prior to 2002, the
Company billed and collected its own revenues and paid its own voyage
expenses. Accordingly, prior to 2002, revenues and voyage expenses were
reported on a gross basis in the consolidated statements of operations.
Settlements between the pool participants were recorded as adjustments of
shipping revenues on a one-quarter lag, in accordance with an agreed-upon
formula.
Ship operating expenses exclude voyage expenses. Vessel expenses include
crew costs, vessel stores and supplies, lubricating oils, maintenance and
repairs, insurance and communication costs.
10. Derivatives - In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"). FAS 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are
not effective hedges must be adjusted to fair value through income. If the
derivative is an effective hedge, depending on the nature of the hedge, a
change in the fair value of the derivative is either offset against the
change in fair value of the hedged item (fair value hedge), or recognized
in other comprehensive income/(loss) until the hedged item is reflected in
earnings (cash flow hedge). The ineffective portion (that is, the change
in fair value of the derivative that does not offset the change in fair
value of the hedged item) of an effective hedge and the full amount of an
ineffective hedge will be immediately recognized in earnings. The adoption
of FAS 133 on January 1, 2001 resulted in the cumulative effect of an
accounting change, net of taxes, of $3,455,000 being recognized as a gain
in other comprehensive income/(loss). The cumulative effect of such
accounting change on net income was insignificant.
The Company uses derivatives to reduce market risks associated with its
operations. The Company uses interest rate swaps for the management of
interest rate risk exposure. The interest rate swaps effectively convert a
portion of the Company's debt either from a fixed to a floating rate
basis, which swaps are designated and qualify as fair value hedges, or
from a floating to a fixed rate, which swaps are designated and qualify as
cash flow hedges. The Company uses foreign currency swaps from
time-to-time, which swaps are designated and qualify as cash flow hedges,
to minimize the effect of foreign exchange rate fluctuations on reported
revenues and protect against the reduction in value of forecasted foreign
currency cash flows from future charter revenues receivable in currencies
other than U.S. dollars. The Company also uses forward freight agreements
and fuel swaps from time-to-time in order to reduce its exposure to the
spot charter market for specified trade routes by creating synthetic time
charters for the terms of the agreements. The forward freight agreements
involve contracts to provide a fixed number of theoretical voyages at
fixed rates. The forward freight agreements to date have not met the 80%
effectiveness threshold required by FAS 133; therefore, they have not been
accounted for as effective cash flow hedges. For interest rate swaps, the
Company assumes no ineffectiveness since each interest rate swap either
meets the conditions required under FAS 133 to apply the short-cut method
or the critical terms method in the case of prepayable debt such as
borrowings under the Company's long-term revolving credit facilities.
Accordingly, no gains or losses have been recorded in income relative to
the Company's interest rate swaps. Any gain or loss realized upon the
early termination of an interest rate swap is recognized as an adjustment
of interest expense over the shorter of the remaining term of the swap or
the hedged debt. For foreign currency swaps, effectiveness is assessed
based on changes in forward rates and, accordingly, there is no hedge
ineffectiveness. Any gain or loss realized upon the termination of foreign
currency swaps would be recognized as an adjustment of shipping revenues
over the remaining term of the related charter.
41
For 2000 and earlier periods, amounts receivable or payable under interest
rate swaps (designated as hedges against certain existing debt) were
accrued and reflected as adjustments of interest expense. Such receivables
or payables were included in other receivables or sundry liabilities and
accrued expenses, respectively. Changes in the value of currency swaps
(designated as hedges against contracted future charter revenues
receivable in a foreign currency) were deferred and offset against
corresponding changes in the value of the charter hire, over the related
charter periods.
11. Stock-based compensation - As of December 31, 2002, the Company has four
stock-based employee compensation plans, which are more fully described in
Note K. 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/(loss) 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,
for the year ended December 31, 2002 2001 2000
---------------------------------------------------------------------------------------------------------
Net income/(loss), as reported $ (17,620) $ 101,441 $ 90,391
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (561) (1,527) (1,382)
---------------------------------------------------------------------------------------------------------
Pro forma net income/(loss) $ (18,181) $ 99,914 $ 89,009
=========================================================================================================
Per share amounts:
Basic - as reported $ (0.51) $ 2.97 $ 2.67
Basic - pro forma $ (0.53) $ 2.93 $ 2.63
Diluted - as reported $ (0.51) $ 2.92 $ 2.63
Diluted - pro forma $ (0.53) $ 2.88 $ 2.59
12. Use of estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
13. Newly issued accounting standard - In January 2003, the Financial
Accounting Standards Board issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities." 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 current rules, which require 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 expects to
consolidate the SPE ("Alaska Equity Trust") that now owns these vessels
and holds the associated bank debt used to purchase them. The SPE's bank
debt of approximately $52,100,000 as of December 31, 2002 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 Alaska Equity
Trust. The Company is currently analyzing the effect that the adoption of
FASB Interpretation No. 46 and consolidation of Alaska Equity Trust will
have on its consolidated results of operations and financial position, but
does not expect such effect to be material to net income.
42
Note B -- Change in Accounting for Voyage Revenue:
Prior to 2000, revenues and voyage expenses for vessels operating on voyage
charters were accounted for using the completed voyage method, with voyages
being calculated on a load-to-load basis. Under that method, revenue of a voyage
was included in operating results in the period in which that voyage was deemed
completed, that is, upon the vessel's arrival at the subsequent voyage's initial
load port.
Effective January 1, 2000, the Company changed its accounting policy for the
recognition of net voyage revenues of vessels operating on voyage charters to
the percentage of completion method, with voyages being calculated on a
discharge-to-discharge basis. Under this method, voyage revenues and expenses
are recognized evenly over the period from a vessel's departure from its last
discharge port to the projected departure from its next discharge port. The
change in revenue recognition policy eliminates fluctuations in income from
vessel operations attributable solely to the timing of completion of voyages.
Further, the discharge-to-discharge basis is deemed by management to be a more
reliable method of recognizing net voyage revenues under the percentage of
completion method, because it eliminates uncertainty associated with predicting
the actual location of the next load port. The cumulative effect of this change
is shown separately in the consolidated statement of operations for 2000, and
resulted in income, net of taxes, of $4,152,000 in the first quarter. The
cumulative effect of this change in accounting principle as of January 1, 2000
on the Company's consolidated balance sheet was to increase total assets by
$3,749,000, to reduce total liabilities by $403,000 and to increase
shareholders' equity by $4,152,000.
Note C -- Business and Segment Reporting:
The Company is engaged primarily in the ocean transportation of crude oil and
petroleum products in both the international market and the U.S. Flag trades
through the ownership and operation of a diversified fleet of bulk cargo
vessels. The bulk shipping industry has many distinct market segments based, in
large part, on the size and design configuration of vessels required and, in
some cases, on the flag of registry. Rates in each market segment are determined
by a variety of factors affecting the supply and demand for vessels to move
cargoes in the trades for which they are suited. Bulk vessels, unlike container
and liner vessels, which the Company does not own, are not bound to specific
ports or schedules and therefore can respond to market opportunities by moving
between trades and geographical areas. The Company charters its vessels to
commercial shippers and U.S. and foreign governments and governmental agencies
primarily on voyage charters and also on time and bareboat charters, which are
longer term (see Note M2).
The Company has five reportable segments: Foreign Flag VLCCs, Aframaxes and
Product Carriers, which participate in the international market, and U.S. Flag
Crude Tankers and Dry Bulk Carriers, which participate in the U.S. Flag trades.
Segment results are evaluated based on income from vessel operations before
general and administrative expenses. The Company uses time charter equivalent
revenues to analyze fluctuations in revenues between periods and to make
decisions regarding the deployment and use of its vessels. The accounting
policies followed by the reportable segments are the same as those followed in
the preparation of the Company's consolidated financial statements.
43
Information about the Company's reportable segments for the three years ended
December 31, 2002 follows:
In thousands Foreign Flag U.S. Flag
--------------------------------- -------------------
Product Crude Dry Bulk
2002 VLCCs Aframaxes Carriers Tankers Carriers All other Totals
- -----------------------------------------------------------------------------------------------------------------------------
Shipping revenues** $ 81,039 $ 71,162 $ 52,020 $ 28,052 $ 24,162 $ 40,848 $ 297,283
Time charter equivalent revenues 79,714 71,121 35,053 28,052 12,331 40,454 266,725
Depreciation and amortization 30,033 22,554 9,807 -- 3,607 12,939 78,940
Income/(loss) from vessel operations 18,688 27,436 10,560 13,724 (3,426) 10,827 77,809*
Equity in income of joint ventures 3,404 132 -- 7,776 -- 95 11,407
Gain/(loss) on disposal of vessels -- (1,549) -- -- 688 -- (861)
Investments in joint ventures at
December 31, 2002 149,869 10,590 -- 7,813 -- 43 168,315
Total assets at December 31, 2002 892,068 488,895 91,287 10,462 5,254 163,575 1,651,541
Expenditures for vessels 59,269 88,724 113 -- 262 4,272 152,640
2001
- -----------------------------------------------------------------------------------------------------------------------------
Shipping revenues** 113,614 160,221 73,992 28,052 37,051 56,403 469,333
Time charter equivalent revenues 112,820 111,293 58,078 28,052 14,872 55,903 381,018
Depreciation and amortization 23,815 20,096 9,486 -- 3,439 13,076 69,912
Income/(loss) from vessel operations 64,353 66,718 30,260 14,233 (5,375) 12,903 183,092*
Equity in income of joint ventures 7,161 4,924 -- 8,356 -- 33 20,474
Gain on disposal of vessels -- -- -- -- 436 -- 436
Investments in joint ventures at
December 31, 2001 138,420 4,100 -- 7,165 -- 90 149,775
Total assets at December 31, 2001 839,001 417,074 99,411 12,630 13,470 157,882 1,539,468
Expenditures for vessels 40,225 70,878 909 -- -- -- 112,012
2000
- -----------------------------------------------------------------------------------------------------------------------------
Shipping revenues** 120,549 132,006 76,655 37,486 47,490 53,432 467,618
Time charter equivalent revenues 118,156 86,101 54,354 37,299 24,734 49,437 370,081
Depreciation and amortization 20,857 18,553 9,402 4,600 3,791 12,935 70,138
Income from vessel operations 74,229 49,233 24,938 12,843 3,015 12,430 176,688*
Equity in income/(loss) of joint
ventures 2,736 4,016 -- 5,248 -- (551) 11,449
Gain on disposal of vessels -- 1,353 -- 19,711 -- -- 21,064
Investments in joint ventures at
December 31, 2000 72,703 5,879 -- 4,644 -- 1,516 84,742
Total assets at December 31, 2000 764,118 374,288 110,666 6,628 28,577 174,163 1,458,440
Expenditures for vessels 86,126 31,317 174 -- 145 212 117,974
=============================================================================================================================
* Segment totals for income/(loss) from vessel operations are before general
and administrative expenses and the restructuring charge.
** Revenues of VLCCs operating in the Tankers pool amounted to $66,757
(2002), $89,971 (2001) and $88,943 (2000). Beginning in 2002, operation of
the PDVM/OSG pool, now named Aframax International, changed to be
substantially similar to the operations of the Tankers and Dry Bulk
Carrier pools. Accordingly, in the first quarter of 2002, Aframax
International began reporting results on a time charter equivalent basis
(after reduction for voyage expenses). Prior to 2002, revenues of the
Aframaxes were reported on a voyage charter basis, that is, before
reduction for voyage expenses that aggregated $48,928 (2001) and $45,905
(2000). Revenues of $7,243 (2002), $22,436 (2001) and $19,630 (2000) from
vessels operating in the Dry Bulk Carrier pool are reported in All other.
For vessels operating in pools or on time or bareboat charters, shipping
revenues are substantially the same as time charter equivalent revenues.
44
Reconciliations of total assets of the segments to amounts included in the
consolidated balance sheets follow:
In thousands at December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Total assets of all segments $1,651,541 $1,539,468 $1,458,440
Corporate cash and securities,
including Capital Construction Fund 296,812 333,185 284,206
Other unallocated amounts 86,489 91,622 81,267
- ------------------------------------------------------------------------------------------------------------------------
Consolidated total assets $2,034,842 $1,964,275 $1,823,913
========================================================================================================================
Certain additional information about the Company's operations for the three
years ended December 31, 2002 follows:
In thousands Consolidated Foreign Flag* U.S. Flag
- ------------------------------------------------------------------------------------------------------------------------
2002
Shipping revenues $ 297,283 $ 215,626 $ 81,657
- ------------------------------------------------------------------------------------------------------------------------
Vessels and vessels under capital leases
at December 31, 2002 1,416,774 1,360,027** 56,747
- ------------------------------------------------------------------------------------------------------------------------
2001
Shipping revenues 469,333 374,414 94,919
- ------------------------------------------------------------------------------------------------------------------------
Vessels and vessels under capital leases
at December 31, 2001 1,345,719 1,283,833** 61,886
- ------------------------------------------------------------------------------------------------------------------------
2000
Shipping revenues 467,618 355,397 112,221
- ------------------------------------------------------------------------------------------------------------------------
Vessels and vessels under capital leases
at December 31, 2000 1,293,958 1,224,004** 69,954
========================================================================================================================
* Principally Marshall Islands as of December 31, 2002.
** Includes vessels under construction of $126,093 (2002), $120,521 (2001)
and $260,937 (2000).
See Note J for information relating to taxation of income and undistributed
earnings of foreign subsidiaries and unconsolidated affiliates.
Note D -- Assets and Liabilities of Foreign Subsidiaries:
A condensed summary of the combined assets and liabilities of the
Company's foreign subsidiaries, whose operations are principally conducted in
U.S. dollars, is as follows:
In thousands at December 31, 2002 2001
- ----------------------------------------------------------------------------------------------
Current assets $ 54,186 $ 35,182
Vessels, net 1,337,260 1,259,383
Other assets 165,324 166,238
- ----------------------------------------------------------------------------------------------
Total Assets $1,556,770 $1,460,803
==============================================================================================
Current installments of long-term debt, including intercompany
of $66,800 in 2001 $ 14,284 $ 79,400
Other current liabilities 10,461 16,135
- ----------------------------------------------------------------------------------------------
Total current liabilities 24,745 95,535
Long-term debt, deferred credits and other liabilities 451,881 304,861
Equity 1,080,144 1,060,407
- ----------------------------------------------------------------------------------------------
Total Liabilities and Equity $1,556,770 $1,460,803
==============================================================================================
45
Note E -- Bulk Shipping Joint Ventures and Certain Pooling Arrangements:
In the first quarter of 1999, OSG, BP, and Keystone Shipping Company formed
Alaska Tanker Company ("ATC") to manage the vessels carrying Alaskan crude oil
for BP. ATC, which is owned 37.5% by OSG, 37.5% by Keystone and 25% by BP,
provides marine transportation services in the environmentally sensitive Alaskan
crude oil trade. Each member in ATC is entitled to receive its respective share
of any incentive charter hire payable, if certain conditions are met, by BP to
ATC. In the second quarter of 1999, the charters for five of the Company's U.S.
Flag Crude Tankers, which were previously time chartered to BP, were converted
to bareboat charters to ATC, with guaranties from BP, to employ the vessels
through their OPA 90 retirement dates, ranging from December 2003 through 2006.
In August 1999, the Company sold these five vessels and leased them back as part
of an off-balance sheet financing that generated $170 million, which was used to
reduce long-term debt. The gain on the sale-leaseback transaction was deferred
and is being amortized over the leaseback period as a reduction in time and
bareboat charter hire expense in the consolidated statements of operations (see
Note A13).
In October 2000, one of the vessels referred to above was sold by the owner in
connection with BP's merger with ARCO and OSG was released from its leaseback
commitment. As a result of the sale, OSG recorded a gain of $19.7 million in
other income, equal to the unamortized balance of the deferred gain on the
sale-leaseback transaction, net of the vessel's unamortized deferred drydocking
expenditures.
As of December 31, 2002 and 2001, the unamortized balance of deferred gain on
the sale-leaseback transaction was $28,029,000 and $41,803,000, respectively,
and was included in other noncurrent liabilities.
Revenue from the bareboat charters of these vessels to ATC is included in time
and bareboat charter revenue. The cost of leasing back these vessels is included
in time and bareboat charter hire expense. The Company accounts for its 37.5%
interest in ATC according to the equity method.
In December 1999, the Company and other leading tanker companies established
Tankers to pool their VLCC fleets. Tankers, which commenced operations in
February 2000, commercially manages a fleet of more than 40 modern VLCCs.
Tankers was formed to meet the global transportation requirements of
international oil companies and other major customers. As of December 31, 2002,
ten of the Company's VLCCs participate in the Tankers pool. In addition, eight
other VLCCs that are owned by joint ventures, as discussed below, participate in
the Tankers pool. The Company's one remaining VLCC newbuilding is scheduled to
enter the pool upon its delivery. The Company and certain of the other pool
members have interests in a chartered-in VLCC, which commenced during the third
quarter of 2002, that participates in the Tankers pool. OSG's share of the cost
of such charter-in expense was $1,113,000 for 2002.
In March 2000, the Company acquired a 30% interest in a joint venture that
purchased a 1993-built VLCC for approximately $37 million, which immediately
began participating in the Tankers pool. The vessel's acquisition was financed
by the joint venture through long-term bank financing and subordinated partner
loans. As of December 31, 2002, the outstanding balance of such subordinated
partner loans advanced by the Company was $2,281,000. In connection with the
bank financing, the partners have severally issued guaranties aggregating
$6,000,000 at December 31, 2002, of which the Company's share was 30%.
In early 2001, the Company formed joint ventures that entered into an agreement
whereby companies in which OSG holds a 49.9% interest acquired two 1993-built
VLCCs for approximately $103 million. Such acquisitions were financed by the
joint ventures through long-term bank financing and subordinated partner loans.
As of December 31, 2002, the outstanding balance of such subordinated partner
loans advanced by the Company was $22,159,000. In connection with the bank
financing, the partners have severally issued guaranties aggregating $15,934,000
at December 31, 2002, of which the Company's share was 49.9%. The amount of
these guaranties reduces proportionately as the principal amount of the bank
loan is paid down.
46
In June 2001, the Company agreed to acquire a 33.3% interest in joint ventures
formed to purchase six new VLCCs. The number of vessels to be purchased was
reduced to five in August 2001. Three vessels were delivered to the joint
ventures in the third quarter of 2001. The remaining two were delivered to the
joint ventures upon completion of their construction in February and July 2002.
The total purchase price for the vessels of $399 million and the joint ventures'
then remaining commitments under the construction contracts for two of those
vessels were financed by the joint ventures through long-term bank financing and
subordinated partner loans. As of December 31, 2002, the outstanding balance of
such subordinated partner loans advanced by the Company was $57,660,000. In
connection with the bank financings for the five vessels, the partners have
severally issued guaranties aggregating approximately $76,492,000 at December
31, 2002, of which the Company's share was 33.3%. The amount of these guaranties
reduces proportionately, to a stated minimum amount, as the bank loans are paid
down.
During the first quarter of 2000, the Company and other major vessel owners
agreed to pool their Capesize Dry Bulk Carriers. The pool currently commercially
manages a fleet of more than 30 vessels, including the Company's two Foreign
Flag Dry Bulk Carriers. The Company and certain of the other pool members have
interests in a number of short-term charters-in that participate in the pool.
OSG's share of the cost of such charter-in expense for 2002, 2001 and 2000 was
$1,284,000, $14,612,000 and $8,868,000, respectively.
In May 2000, the Company invested $1,500,000 for a 50% interest in a newly
formed joint venture that bareboat chartered in a 1992-built Aframax tanker,
which was accounted for as a capital lease by the joint venture. In May 2002,
such joint venture exercised a purchase option and acquired the vessel. The
purchase price of approximately $13,000,000 was financed through capital
contributions from the partners. The Company provided certain charter guaranties
to its joint venture partner through the May 2002 exercise of the purchase
option; daily TCE revenues in excess of an agreed amount were for the Company's
benefit through the May 2002 exercise of the purchase option. This Aframax
tanker participates in the Aframax International pool.
The Company has a 50% interest in two other joint ventures with a major oil
company that own two VLCCs, which are 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, and do not participate in the Tankers pool.
A condensed summary of the combined assets and liabilities and results of
operations of the joint ventures, follows:
In thousands at December 31, 2002 2001
- ----------------------------------------------------------------------------------------------------
Current assets $102,307 $ 78,338
Vessels, net 666,214 571,159*
Other assets 11,034 4,510
- ----------------------------------------------------------------------------------------------------
Total Assets $779,555 $654,007
====================================================================================================
Current installments of long-term debt $ 42,046 $ 33,211
Other current liabilities 53,388 46,828
- ----------------------------------------------------------------------------------------------------
Total current liabilities 95,434 80,039
Long-term debt 291,086 244,349
Other liabilities, including subordinated loans of $224,652 and $166,082
due to the joint venture partners 225,177 171,422
Equity (principally undistributed net earnings) 167,858 158,197
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Equity $779,555 $654,007
====================================================================================================
* Includes vessels under construction of $38,898.
As of December 31, 2002, the joint ventures in which the Company had interests
ranging from 30% to 50% had bank debt of $333,132,000 and subordinated loans
payable to all joint venture partners of $224,652,000. The Company's guaranties
in connection with the joint ventures' bank financings,
47
which are otherwise nonrecourse to the joint venture partners, aggregated
$35,249,000 at December 31, 2002. The amount of these guaranties reduces as the
bank loans are paid down. The terms of these guaranties are equal to the terms
of the related debt that matures between March 2005 and June 2009.
In thousands for the year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Time charter equivalent revenues $ 261,217 $ 243,288 $ 240,054
Ship operating expenses 217,936 194,125 210,981
- ---------------------------------------------------------------------------------------------------
Income from vessel operations 43,281 49,163 29,073
Other income 639 1,020 1,057
Interest expense* (26,516) (17,062) (6,368)
- ---------------------------------------------------------------------------------------------------
Net income $ 17,404 $ 33,121 $ 23,762
===================================================================================================
* Includes interest on subordinated loans payable to the joint venture
partners of $14,488 (2002), $6,063 (2001) and $762 (2000). The Company's
share of such interest is eliminated in recording the results of the joint
ventures by the equity method.
Note F -- Investments in Marketable Securities and 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 length of time that the declines had
been sustained, management concluded that declines in fair value of certain
securities with an aggregate cost basis of $72,521,000, including $9,898,000
attributable to securities in the Capital Construction Fund were
other-than-temporary. Accordingly, during the third and fourth quarters of 2002,
the Company recorded impairment losses aggregating $42,055,000 related to such
marketable securities, including $6,413,000 related to securities held in the
Capital Construction Fund, in the accompanying consolidated statement of
operations. During the fourth quarter, the Company sold certain of the
securities for which a write-down aggregating $14,516,000 had previously been
recorded at September 30, 2002, resulting in the recognition of a gain of
$3,821,000 (see Note P).
Certain information, which gives effect to the above write-downs, concerning the
Company's marketable securities (including securities in the Capital
Construction Fund), all of which are accounted for as available-for-sale
securities, follows:
Approximate
Gross unrealized market value and
--------------------------- carrying
In thousands at December 31, Cost Gains Losses amount
- -----------------------------------------------------------------------------------------------------------------
2002
Capital Construction Fund:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 8,662 $ 567 $ -- $ 9,229
Mortgage-backed securities 44,373 885 4 45,254
Other debt securities 14,173 779 165 14,787
- -----------------------------------------------------------------------------------------------------------------
Total debt securities 67,208 2,231 169 69,270
Equity securities 41,359 5,869 12,974 34,254
Cash and cash equivalents 127,548 -- -- 127,548
- -----------------------------------------------------------------------------------------------------------------
Total Capital Construction Fund $ 236,115 $ 8,100 $ 13,143 $ 231,072
=================================================================================================================
Equity securities included in investments
in marketable securities $ 23,244 $ 5,884 $ 332 $ 28,796
=================================================================================================================
At February 24, 2003, the aggregate market quotation of the above marketable
securities was approximately $133,300,000 compared with a market value of
$132,320,000 as of December 31, 2002.
48
Approximate
Gross unrealized market value and
------------------------- carrying
In thousands at December 31, Cost Gains Losses amount
- ---------------------------------------------------------------------------------------------------------------
2001
Capital Construction Fund:
U.S. Treasury securities and
obligations of U.S. government
agencies $ 9,822 $ 21 $ 36 $ 9,807
Mortgage-backed securities 34,962 372 183 35,151
Other debt securities 19,667 287 397 19,557
- ---------------------------------------------------------------------------------------------------------------
Total debt securities 64,451 680 616 64,515
Equity securities 64,203 2,323 4,046 62,480
Cash and cash equivalents 105,976 -- -- 105,976
- ---------------------------------------------------------------------------------------------------------------
Total Capital Construction Fund $ 234,630 $ 3,003 $ 4,662 $ 232,971
===============================================================================================================
Equity securities included in investments
in marketable securities $ 91,764 $ -- $ 21,806 $ 69,958
===============================================================================================================
The cost and approximate market value of debt securities held by the Company as
of December 31, 2002, by contractual maturity (except for mortgage-backed
securities, which do not have a single maturity date), follow:
Approximate
In thousands Cost market value
- ---------------------------------------------------------------------------------------------------------------
Due in one year or less $ 820 $ 825
Due after one year through five years 3,147 3,247
Due after five years through ten years 7,987 8,431
Due after ten years 10,881 11,513
- ---------------------------------------------------------------------------------------------------------------
22,835 24,016
Mortgage-backed securities 44,373 45,254
- ---------------------------------------------------------------------------------------------------------------
$ 67,208 $ 69,270
===============================================================================================================
Note G -- Derivatives and Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents -- The carrying amounts reported in the consolidated
balance sheet for interest-bearing deposits approximate their fair value.
Investment securities -- The fair value for marketable securities is based on
quoted market prices or dealer quotes.
Debt, including capital lease obligations -- The carrying amounts of the
borrowings under the revolving credit agreements and the other floating rate
loans approximate their fair value. The fair values of the Company's fixed rate
debt are estimated using discounted cash flow analyses, based on the rates
currently available for debt with similar terms and remaining maturities.
Interest rate swaps -- The fair value of interest rate swaps (used for hedging
purposes) is the estimated amount that the Company would receive or pay to
terminate the swaps at the reporting date.
Foreign currency swaps -- The fair value of foreign currency swaps (used for
hedging purposes) is the estimated amount that the Company would receive or pay
to terminate the swaps at the reporting date.
49
Forward freight agreements -- The fair value of forward freight agreements is
the estimated amount that the Company would receive or pay to terminate the
agreements at the reporting date.
The estimated fair values of the Company's financial instruments, other than
derivatives, follow:
Carrying Fair Carrying Fair
amount value amount value
In thousands at December 31, 2002 2002 2001 2001
- ------------------------------------------------------------------------------------------------------------
Financial assets (liabilities)
Cash and cash equivalents $ 36,944 $ 36,944 $ 30,256 $ 30,256
Capital Construction Fund -- See Note F 231,072 231,072 232,971 232,971
Investments in marketable securities 28,796 28,796 69,958 69,958
Debt, including capital lease obligations (1,006,110) (994,645) (878,693) (873,126)
As of December 31, 2002, the Company is a party to floating-to-fixed interest
rate swaps with various major financial institutions covering notional amounts
aggregating approximately $418,000,000, including 11-year swaps that commence in
the third quarter of 2003, pursuant to which it pays, or will pay, fixed rates
ranging from 4.6% to 7.1% and receives floating rates based on the London
interbank offered rate ("LIBOR") (approximately 1.4% at December 31, 2002).
These agreements contain no leverage features and have various maturity dates
from February 2003 to August 2014. As of December 31, 2002, the Company has
recorded a liability of $30,606,000 related to the fair values of these swaps in
other liabilities.
In July 2001, the Company terminated all $60,000,000 of its fixed-to-floating
interest rate swaps that were to mature in December 2003. The gain of $1,760,000
realized on such termination is being recognized ratably over the period through
December 2003, as an adjustment of interest expense.
Shipping revenues for 2002 have been reduced by $534,000, because of forward
freight agreements with a notional value of $8,370,000 that extend to December
2003. The fair value of these agreements, which do not qualify as effective
hedges, is recorded as a liability in other liabilities.
Note H -- Sundry Liabilities and Accrued Expenses:
Sundry liabilities and accrued expenses follows:
In thousands at December 31, 2002 2001
- --------------------------------------------------------------------------------
Payroll and benefits $ 3,851 $ 8,147
Restructuring reserve 214 2,345
Interest 7,659 8,132
Insurance 1,582 2,448
Other 9,665 13,808
- --------------------------------------------------------------------------------
$ 22,971 $ 34,880
================================================================================
50
Note I -- Debt:
Debt consists of the following:
In thousands at December 31, 2002 2001
- ---------------------------------------------------------------------------------------------------------
Unsecured revolving credit facilities $536,000 $534,000
8.75% Debentures due 2013, net of unamortized discount of $149
and $163 84,826 84,812
8% Notes due 2003, net of unamortized discount of $15 and $32 70,391 71,124
Floating rate secured Term Loans, due through 2014 256,000 102,950
Floating rate unsecured Promissory Note, due through 2005 -- 20,450
- ---------------------------------------------------------------------------------------------------------
947,217 813,336
Less current portion 14,284 17,600
- ---------------------------------------------------------------------------------------------------------
Long-term portion $932,933 $795,736
=========================================================================================================
The weighted average effective interest rates for debt outstanding at December
31, 2002 and 2001 are 5.1% and 6.1%, respectively. Such rates take into
consideration related interest rate swaps.
In late July and early August 2002, the Company entered into four secured loan
agreements aggregating $256,000,000. Seven vessels (three VLCCs and four
Aframaxes) were pledged as collateral in connection with such loans. The loans
have terms ranging from 10 to 12 years (with an average life of approximately
eight years) and currently carry interest rates based on a spread above LIBOR.
The interest rate basis applicable to $50,000,000 of such loans will convert to
a fixed rate in August 2003. The Company used the proceeds received from these
borrowings to pay down existing secured Term Loans and the unsecured Promissory
Note with an aggregate outstanding balance of $117,100,000, which loans had
significantly shorter remaining terms, and to reduce amounts then outstanding
under the Company's revolving credit facilities. The full $256,000,000 had been
effectively converted into fixed rate debt for periods up to 12 years by the end
of the third quarter of 2002.
In December 2001, the Company concluded a new $300 million, five-year unsecured
revolving credit facility (the "2006 Facility"), which was increased to $350
million in January 2002 during syndication. The terms, conditions, and financial
covenants are substantially similar to those contained in the existing $350
million revolving credit facility (the "2005 Facility") that runs through April
2005. Borrowings under both the 2006 Facility and the 2005 Facility bear
interest at a rate based on LIBOR plus a margin that, with respect to the 2006
Facility, depends in part on the financial leverage of the Company. Borrowings
against the Company's $425 million revolving credit facility, which was due to
expire in August 2002, were repaid in early 2002 with borrowings from the 2006
Facility and the $425 million revolving credit facility was terminated on
February 1, 2002. Accordingly, $107 million outstanding as of December 31, 2001
under the $425 million facility was classified as long-term at such date.
In February 2002, the Company increased its unsecured committed short-term line
of credit facility with a bank from $15,000,000 to $45,000,000, of which
$17,000,000 was unused as of December 31, 2002. The $5,000,000 outstanding under
this facility at December 31, 2001 was reflected as short-term debt in the
accompanying consolidated balance sheet.
The Company intends to refinance both the $70,391,000 balance of the 8% Notes,
which mature in December 2003, and the $28,000,000 balance outstanding under the
short-term line of credit facility as of December 31, 2002, using amounts
available under the long-term revolving credit facilities. Accordingly, the
aggregate amount of $98,391,000 has been classified as long-term as of December
31, 2002.
Agreements related 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
51
acceleration of payment under certain circumstances, including failure to
satisfy the financial covenants contained in certain of such agreements. The
most restrictive of these covenants requires the Company to maintain net worth
as of December 31, 2002 of approximately $674,000,000 (increasing quarterly by
an amount related to net income).
In June 2000, the Company repurchased 8% Notes with an aggregate principal
amount of $15,180,000, at a discount of $803,000. Such discount has been
reported in the Company's consolidated statement of operations as an offset to
interest expense.
As of December 31, 2002, approximately 25.0% of the net book amount of the
Company's vessels, representing seven foreign flag vessels, is pledged as
collateral under certain debt agreements.
The aggregate annual principal payments required to be made on debt are as
follows:
In thousands at December 31, 2002
- --------------------------------------------------------------------------------
2003 $ 14,284
2004 14,284
2005 364,284
2006 270,676
2007 14,284
Thereafter 269,405
- --------------------------------------------------------------------------------
$ 947,217
================================================================================
Interest paid amounted to $52,147,000 in 2002, $41,874,000 in 2001 and
$47,387,000 in 2000, excluding capitalized interest. Capitalized interest (see
Note A5) decreased in 2002 compared with 2001 and 2000 principally due to vessel
deliveries.
Note J -- 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. Income of foreign shipping companies earned
from January 1, 1976 through December 31, 1986 ("Deferred Income") is excluded
from U.S. income taxation to the extent that such income is reinvested in
foreign shipping operations. Foreign shipping income earned before 1976 is not
subject to tax unless distributed to the U.S. parent. A determination of the
amount of qualified investments in foreign shipping operations, as defined, is
made at the end of each year and such amount is compared with the corresponding
amount at December 31, 1986. If, during any determination period, there is a
reduction of qualified investments in foreign shipping operations, Deferred
Income, limited to the amount of such reduction, would become subject to tax.
The Company believes that it will be reinvesting sufficient amounts in foreign
shipping operations so that U.S. income taxes on the undistributed income of its
foreign companies accumulated through December 31, 1986 will be postponed
indefinitely. U.S. income taxes on the income of its foreign companies
accumulated through December 31, 1986 will be provided at such time as it
becomes probable that a liability for such taxes will be incurred and the amount
thereof can reasonably be estimated. No provision for U.S. income taxes on the
income of the foreign shipping companies accumulated through December 31, 1986
was required at December 31, 2002 since undistributed earnings of foreign
shipping companies have been reinvested or are intended to be reinvested in
foreign shipping operations. As of December 31, 2002, such undistributed
earnings aggregated approximately $475,000,000, including $114,000,000 earned
prior to 1976; the unrecognized deferred U.S. income tax attributable to such
undistributed earnings approximated $165,000,000. Further, 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 December 31,
2002, since it is intended that such undistributed earnings ($3,500,000 at
December 31, 2002) will be indefinitely reinvested; the unrecognized deferred
U.S. income taxes attributable thereto approximated $1,200,000.
52
Pursuant to the Merchant Marine Act of 1936, as amended, the Company is a party
to an agreement that permits annual deposits, related to taxable income of
certain of its domestic subsidiaries, into a Capital Construction Fund. Payments
of federal income taxes on such deposits and earnings thereon are deferred
until, and if, such funds are withdrawn for nonqualified purposes or termination
of the agreement; however, if withdrawn for qualified purposes (acquisition of
U.S. Flag vessels or retirement of debt on U.S. Flag vessels), such funds remain
tax-deferred and the federal income tax basis of any such vessel is reduced by
the amount of such withdrawals. Under the agreement, the Company is expected to
use the fund to acquire or construct three U.S. Flag vessels by the end of 2004.
Monies can remain tax-deferred in the fund for a maximum of 25 years (commencing
January 1, 1987 for deposits prior thereto).
The significant components of the Company's deferred tax liabilities and assets
follow:
In thousands at December 31, 2002 2001
- -------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Excess of tax over book depreciation -- net $ 93,939 $ 83,859
Tax benefits related to the Capital Construction Fund 70,871 71,738
Costs capitalized and amortized for book, expensed for tax 8,358 7,869
Other -- net 7,518 8,070
- -------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 180,686 171,536
- -------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Capital leases 802 1,148
Write-down of marketable securities 7,975 --
Other comprehensive income -- Note L 10,680 11,737
Alternative minimum tax credit carryforwards, which can be carried forward
indefinitely 30,565 26,981
- -------------------------------------------------------------------------------------------------------------
Total deferred tax assets 50,022 39,866
Valuation allowance 3,640 --
- -------------------------------------------------------------------------------------------------------------
Net deferred tax assets 46,382 39,866
- -------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities 134,304 131,670
Current portion of net deferred tax (assets)/liabilities 100 (500)
- -------------------------------------------------------------------------------------------------------------
Long-term portion of net deferred tax liabilities $ 134,204 $ 132,170
=============================================================================================================
During 2002, the Company established a valuation allowance of $3,640,000 against
the deferred tax asset resulting from the write-down of certain marketable
securities (see Note F). The valuation allowance was established because the
Company believes, based on currently available evidence, that it is more likely
than not that the full amount of the deferred tax asset will not be realized
through the generation of capital gains in the future. The above valuation
allowance has been recorded as a reduction in the federal income tax credit in
the accompanying consolidated statement of operations for the year ended
December 31, 2002.
The components of income/(loss) before federal income taxes and cumulative
effect of change in accounting principle follow:
In thousands for the year ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Foreign $ 17,321 $ 136,395 $ 117,105
Domestic (38,185) 18,050 15,884
- -------------------------------------------------------------------------------------------------------------
$ (20,864) $ 154,445 $ 132,989
=============================================================================================================
Substantially all of the above foreign income resulted from the operations of
companies that were not subject to income taxes in their countries of
incorporation.
53
The components of the provision/(credit) for federal income taxes follow:
In thousands for the year ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Current $ (6,003) $ 27,142 $ 14,529
Deferred 2,759 25,862 32,221
- -------------------------------------------------------------------------------------------------------------
$ (3,244) $ 53,004 $ 46,750
=============================================================================================================
Actual federal income taxes paid amounted to $24,500,000 in 2002 (all of which
related to 2001), $6,100,000 in 2001 ($3,100,000 of which related to 2000) and
$9,850,000 in 2000 ($950,000 of which related to 1999).
Reconciliations of the actual federal income tax rate attributable to pretax
income/(loss) before cumulative effect of change in accounting principle and the
U.S. statutory income tax rate follow:
For the year ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Actual federal income tax provision/(credit) rate (15.6%) 34.3% 35.2%
Adjustments due to:
Dividends received deduction 1.0% 0.1% 0.1%
Income/(loss) not subject to U.S. income taxes (4.4%) 0.7% 0.7%
Other 1.4% (0.1%) (1.0%)
Valuation allowance (17.4%) -- --
- -------------------------------------------------------------------------------------------------------------
U.S. statutory income tax provision/(credit) rate (35.0%) 35.0% 35.0%
=============================================================================================================
Note K -- Capital Stock and Stock Compensation:
In September 2002, the Company's Board of Directors ("Board") authorized the
repurchase of up to 3,000,000 shares of the Company's common stock from
time-to-time in the open market. Such purchases will be made at the Company's
discretion and take into account such factors as price and prevailing market
conditions. As of December 31, 2002, there have been no purchases under this
program.
The Company has granted options under its 1989 nonqualified stock option plan,
as amended, at $14.00 per share (the market price at date of grant). Options
covering 100,000 shares are outstanding and remain exercisable until October
2003.
The Company has granted options under its 1990 nonqualified stock option plan,
as amended at exercise prices ranging from $14.00 to $19.50 per share (the
market prices at the dates of grant). Options covering 128,600 shares are
outstanding and remain exercisable over various periods that end between 2003
and 2005.
The Company's 1998 stock option plan, as amended, provides for options for up to
2,800,000 shares to be granted at exercise prices of at least market value at
the date of grant. Options granted vest and become exercisable over a three-year
period and expire ten years from the date of grant. Options covering 1,422,076
shares are outstanding with exercise prices ranging from $12.50 to $16.00 per
share (the market prices at dates of grant). Options covering 854,460 shares are
available for grant under the 1998 stock option plan as of December 31, 2002.
The 1999 non-employee director (as defined) stock option plan, makes available
up to 150,000 shares of the Company's stock. The plan provides for the grant of
an initial option for 7,500 shares and an annual option for 1,000 shares
thereafter to each non-employee director at an exercise price equal to market
value at the date of the grant. Initial options vest and become exercisable over
a three-year period; annual options vest and become exercisable one year from
the date of the grant. All options expire ten years from the date of grant.
Options covering 89,000 shares are outstanding with exercise prices ranging from
$13.31 to $29.67 per share (the market prices at dates of grant). Options
covering
54
46,000 shares are available for grant under the 1999 non-employee director stock
option plan as of December 31, 2002.
Stock option activity under all plans is summarized as follows:
Options Outstanding at December 31, 1999 1,796,086
Granted 722,000
Forfeited (25,236)
Exercised ($13.31 to $16.00 per share) (308,821)
- --------------------------------------------------------------------------------
Options Outstanding at December 31, 2000 2,184,029
Granted 9,000
Forfeited (22,814)
Exercised ($13.81 to $16.00 per share) (276,726)
- --------------------------------------------------------------------------------
Options Outstanding at December 31, 2001 1,893,489
Granted 8,000
Forfeited (2,297)
Exercised ($13.31 to $16.00 per share) (159,516)
- --------------------------------------------------------------------------------
Options Outstanding at December 31, 2002 1,739,676
================================================================================
Options Exercisable at December 31, 2002 1,482,023
================================================================================
The weighted average remaining contractual life of the outstanding stock options
at December 31, 2002 was 6.1 years. The weighted average exercise price of the
stock options outstanding at December 31, 2002 was $14.24.
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, for grants made
subsequent to 1994, the fair values of the options granted were estimated on the
dates of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for 2002, 2001 and 2000: risk free interest rates
of 5.1%, 4.2% and 5.0%, dividend yields of 2.9%, 2.0% and 4.1%, expected stock
price volatility factors of .36, .45 and .37, and expected lives of 6.0, 7.7 and
7.7 years. The weighted average grant-date fair values of options granted in
2002, 2001 and 2000 were $6.50, $12.71 and $4.41, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Since the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
Diluted net income/(loss) per share gives effect to the aforementioned stock
options. Such options have not been included in the computation of diluted net
(loss) per share for 2002 since their effect thereon would be antidilutive.
In October 1998, the Board adopted a Stockholder Rights Plan, and declared a
rights distribution under the plan of one common stock purchase right on each
outstanding share of common stock of the Company. The rights plan is designed to
guard against attempts to take over the Company for a price that does not
reflect the Company's full value, or that are conducted in a manner or on terms
not approved by the Board as being in the best interests of the Company and the
stockholders. The rights are preventative in nature and were not distributed in
response to any known attempt to acquire control of the Company.
55
Note L -- Accumulated Other Comprehensive Income/(Loss):
The components of accumulated other comprehensive income/(loss), net of related
taxes, follow:
In thousands at December 31, 2002 2001
- -------------------------------------------------------------------------------------------------------------
Unrealized gains/(losses) on available-for-sale securities $ 332 $ (16,445)
Unrealized losses on derivative instruments (19,894) (6,014)
Minimum pension liability (2,965) (3,824)
- -------------------------------------------------------------------------------------------------------------
$ (22,527) $ (26,283)
=============================================================================================================
At December 31, 2002, the Company expects to reclassify $8,192,000 of net losses
on derivative instruments from accumulated other comprehensive income/(loss) to
earnings during the next twelve months due to the payment of variable rate
interest associated with floating rate debt.
The components of the change in the accumulated unrealized loss on derivative
instruments, net of related taxes follow:
In thousands for the year ended December 31, 2002 2001
- -------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle -- Note A10 $ -- $ 3,455
Reclassification adjustments for (gains)/losses included in net income, net:
Interest expense 8,765 3,129
Shipping revenues (595) (1,670)
Other income* -- (2,902)
Change in unrealized loss on derivative instruments (22,050) (8,026)
- -------------------------------------------------------------------------------------------------------------
$ (13,880) $ (6,014)
=============================================================================================================
* This amount was included in other income in the first quarter of 2001 and
relates to a foreign currency swap reclassified upon receipt of notice
that the charter extension to which such swap applied would not be
exercised.
The income tax expense/(benefit) allocated to each component of other
comprehensive income/(loss) follows:
In thousands for the year ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Unrealized gains/(losses) on available-for-sale securities $ (2,711) $ 2,871 $ 7,945
Unrealized losses on derivative instruments (11,873) (2,461) --
Minimum pension liability 150 (2,059) --
Reclassification adjustments included in net income/(loss):
Write-down of marketable securities 11,079 -- --
Gains on sale of securities (1,170) (9,816) (1,645)
(Gains)/losses on derivative instruments 4,399 (777) --
- -------------------------------------------------------------------------------------------------------------
$ (126) $(12,242) $ 6,300
=============================================================================================================
56
Note M -- Leases:
1. Charters-in:
The future minimum commitments under charters-in are as follows:
In thousands at December 31, 2002 Capital Operating
--------------------------------------------------------------------------
2003 $ 12,751 $ 39,529
2004 9,313 29,246
2005 9,692 17,054
2006 9,692 1,064
2007 9,692 --
Thereafter 36,369 --
--------------------------------------------------------------------------
Net minimum lease payments 87,509 86,893
Less amount representing interest 28,616 --
--------------------------------------------------------------------------
Present value of net minimum lease payments $ 58,893 $ 86,893
==========================================================================
As of December 31, 2002, the Company participates in the charter-in of
three vessels (two Capesize Dry Bulk Carriers at an average rate of
$11,500 per day and one VLCC at an average rate of $23,700 per day), which
are commercially managed by pools in which the Company participates. As of
December 31, 2002, these charters-in, which principally commenced during
the third quarter of 2002, have remaining terms ranging from six months
for one of the Dry Bulk Carriers to 31 months for the VLCC. The Company's
share of such charter-in obligations as of December 31, 2002, which
amounts are included in the above table, are $4,191,000 (2003), $3,712,000
(2004) and $1,995,000 (2005).
The total rental expense for charters accounted for as operating leases
amounted to $25,391,000 in 2002 (including the $2,397,000 referred to in
Note E), $51,904,000 in 2001 (including the $14,612,000 referred to in
Note E) and $51,053,000 in 2000 (including the $8,868,000 referred to in
Note E).
Included in rental expense during 2002, 2001 and 2000 is $8,399,000,
$7,889,000 and $7,366,000, respectively, for the charter-in of a VLCC from
a 50% owned joint venture.
2. Charters-out:
The future minimum revenue expected to be received on noncancelable time
charters and bareboat charters are as follows:
In thousands at December 31, 2002
--------------------------------------------------------------------------
2003 $ 85,567
2004 63,601
2005 23,334
2006 7,775
2007 4,099
--------------------------------------------------------------------------
Net minimum lease payments $ 184,376
==========================================================================
Revenues from a time charter are not generally received when a vessel is
off-hire, including time required for normal periodic maintenance of the
vessel. In arriving at the minimum future charter revenues, an estimated
time off-hire to perform periodic maintenance on each vessel has been
deducted, although there is no assurance that such estimate will be
reflective of the actual off-hire in the future.
57
Included in shipping revenue during 2002, 2001 and 2000 is $28,052,000,
$28,052,000 and $37,486,000, respectively, received from the bareboat
charter-out of four (five prior to October 2000) U.S. Flag Crude Tankers
to ATC, a 37.5% owned joint venture.
Note N -- Pension and Other Postretirement Benefit Plans:
The Company is the sponsor of a noncontributory defined benefit pension plan
covering substantially all of its domestic shore-based employees. Retirement
benefits are based primarily on years of service and compensation earned during
the last years of employment. The Company's policy is to fund pension costs as
accrued, but not in excess of amounts allowable under income tax regulations.
The Company has an unfunded, nonqualified supplemental pension plan covering
certain employees, which provides for additional benefits, primarily those
benefits that would otherwise have been payable to such employees under the
Company's pension plan in the absence of limitations imposed by income tax
regulations. The accrued benefit liabilities for this supplemental plan were
$16,200,000 and $15,513,000 at December 31, 2002 and 2001, respectively, and
have been reflected in the accrued benefit costs shown in the table below.
Certain of the Company's foreign subsidiaries have pension plans that, in the
aggregate, are not significant to the Company's consolidated financial position.
The Company also provides certain postretirement health care and life insurance
benefits to qualifying domestic retirees and their eligible dependents. The
health care plan is contributory; the life insurance plan is noncontributory. In
general, postretirement medical coverage is provided to employees who retire and
have met minimum age and service requirements, under a formula related to total
years of service. The Company does not currently fund these benefit arrangements
and has the right to amend or terminate the health care benefits at any time.
Certain information as of December 31, 2002 and 2001 and for the three years
ended December 31, 2002 with respect to the above domestic plans follows:
Pension benefits Other benefits
------------------------- -------------------------
In thousands 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 43,152 $ 33,273 $ 3,872 $ 4,793
Cost of benefits earned (service cost) 1,803 1,053 55 69
Interest cost on benefit obligation 2,715 2,993 276 318
Plan participants' contributions -- -- 74 75
Amendments and changes in prescribed interest
rates 2,454 1,012 152 (2,920)
Actuarial (gains)/losses (1,879) 6,213 (229) 1,711
Benefits paid (8,842) (3,882) (370) (459)
Terminations, curtailments, settlements and other
similar events (1,414) 2,490 -- 285
- ---------------------------------------------------------------------------------------------------------------
Benefit obligation at December 31 37,989 43,152 3,830 3,872
- ---------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 38,777 36,976 -- --
Actual return on plan assets (4,110) 5,617 -- --
Benefits paid (8,299) (3,816) -- --
Terminations, curtailments, settlements and other
similar events (3,450) -- -- --
- ---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 22,918 38,777 -- --
- ---------------------------------------------------------------------------------------------------------------
Funded status at December 31 (unfunded) (15,071) (4,375) (3,830) (3,872)
Unrecognized prior-service costs 687 405 (1,259) (1,414)
Unrecognized net actuarial loss 11,786 3,645 320 399
Unrecognized transition obligation -- -- 208 228
Additional minimum liability (5,162) (6,352) -- --
- ---------------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31 $ (7,760) $ (6,677) $ (4,561) $ (4,659)
===============================================================================================================
58
The unfunded status of the pension benefits in the preceding table is
attributable to the nonqualified supplemental pension plan disclosed above. The
Company's defined benefit pension plan is overfunded as of December 31, 2002.
Pension benefits Other benefits
In thousands for the year ended --------------------------------- ----------------------------------
December 31, 2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Components of expense:
Cost of benefits earned $ 1,803 $ 1,053 $ 908 $ 55 $ 69 $ 135
Interest cost on benefit obligation 2,715 2,993 2,361 276 318 324
Expected return on plan assets (2,477) (3,466) (3,314) -- -- --
Amortization of prior-service costs 456 656 757 (154) (128) 7
Amortization of transition obligation -- -- (261) 20 48 176
Recognized net actuarial loss 297 447 23 2 36 (52)
- ----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 2,794 1,683 474 199 343 590
(Gain)/loss on terminations, curtailments,
settlements and other similar events (1,090) 1,815 -- -- 1,535 --
- ----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost after
terminations, curtailments, settlements
and other similar events $ 1,704 $ 3,498 $ 474 $ 199 $ 1,878 $ 590
=============================================================================================================================
The 2001 loss on terminations, curtailments and settlements and other similar
events has been included in the restructuring charge.
The weighted average discount rate and assumed rate of future compensation
increases used in determining the benefit obligation at December 31, 2002 were
7.4% and 4%, respectively. The expected long-term return on plan assets was
8.75%. The assumed health care cost trend rate for measuring the benefit
obligation included in Other Benefits above is 4%.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
In thousands 1% increase 1% decrease
- --------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components in 2002 $ 23 $ (19)
Effect on postretirement benefit obligation as of
December 31, 2002 $ 197 $ (175)
The Company also has a 401(k) employee savings plan covering all eligible
employees. Contributions are limited to amounts allowable for income tax
purposes. Employer matching contributions to the plan are at the discretion of
the Company.
Certain subsidiaries make contributions to union-sponsored multi-employer
pension plans covering seagoing personnel. The Employee Retirement Income
Security Act of 1974 requires employers who are contributors to domestic
multi-employer plans to continue funding their allocable share of each plan's
unfunded vested benefits in the event of withdrawal from or termination of such
plans. The Company has been advised by the trustees of such plans that it has no
withdrawal liability as of December 31, 2002. Certain other seagoing personnel
of U.S. Flag vessels are covered under a defined contribution plan, the cost of
which is funded as accrued. The costs of these plans were not material during
the three years ended December 31, 2002.
59
Note O -- Restructuring Charge:
In the first quarter of 2001, the Company completed a review of its ship
management and administrative functions and adopted a plan to transfer a major
portion of such functions to its subsidiary in Newcastle, United Kingdom,
resulting in New York headquarters staff reductions numbering approximately 100
persons. In connection with such staff reductions, the Company recorded a
restructuring charge of $10,439,000. The charge includes $8,869,000 related to
employee termination and severance costs associated with the reduction in
workforce and $1,570,000 for the disposal of certain assets. The restructuring
has been completed. The liability for severance costs of $214,000 as of December
31, 2002 will be sufficient to cover the remaining severance payments.
Note P -- Other Income/(Expense):
Other income/(expense) consists of:
In thousands for the year ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------
Investment income:
Interest $ 6,613 $ 9,789 $ 9,766
Dividends 2,402 6,004 1,280
Realized gain on sale of securities -- net (based on
first-in, first-out method) 3,643 27,227 3,513
Write-down of marketable securities -- See Note F (42,055) -- --
Foreign currency exchange gain/(loss) 5,324 (49) --
- ----------------------------------------------------------------------------------------------
(24,073) 42,971 14,559
Gain/(loss) on disposal of vessels -- net (861) 436 21,064
Gain on derivative transactions 325 4,465 --
Miscellaneous -- net 143 448 (1,482)
- ----------------------------------------------------------------------------------------------
$(24,466) $ 48,320 $ 34,141
==============================================================================================
Gains on sale of securities are net of realized losses of $14,869,000 (2002),
$5,665,000 (2001) and $18,805,000 (2000). Gains on sale of securities for 2002
include $3,821,000 recognized in the fourth quarter attributable to securities
that were written down as of September 30, 2002, in accordance with the
provisions of FAS 115 (see Note F).
Note Q -- Commitments:
In July 2002, the Company prepaid approximately $47,600,000 of vessel
construction costs to realize the benefit of a contractually-provided discount
of $4,400,000 on what had been a $52,000,000 commitment. As of December 31,
2002, the Company had remaining commitments of $30,100,000 on non-cancelable
contracts for the construction of three double-hulled Foreign Flag tankers (one
VLCC and two Aframaxes), scheduled for delivery between February 2003 and
January 2004. Unpaid costs, which are net of $118,500,000 of progress payments
and prepayments, will be funded in 2003. The progress payments and prepayments
are covered by refundment guaranties.
60
Note R -- 2002 and 2001 Quarterly Results of Operations (Unaudited):
Results of Operations for Quarter Ended
(in thousands, except per share amounts) March 31, June 30, Sept. 30, Dec. 31,
- ---------------------------------------------------------------------------------------------------------
2002
Shipping revenues $ 73,495 $ 70,745 $ 68,955 $ 84,088
Income from vessel operations 9,535 8,134 8,088 19,131
Gain/(loss) on disposal of vessels -- net -- 688 (1,549) --
Net income/(loss) $ 744 $ 3,670 $(29,661) $ 7,627
- ---------------------------------------------------------------------------------------------------------
Basic and diluted net income/(loss) per share $ 0.02 $ 0.11 $ (0.86) $ 0.22
=========================================================================================================
2001
Shipping revenues $149,739 $129,127 $ 97,435 $ 93,032
Income from vessel operations 57,497 47,348 16,900 8,941
Gain on disposal of vessels -- net -- 436 -- --
Net income $ 40,363 $ 42,711 $ 11,162 $ 7,205
- ---------------------------------------------------------------------------------------------------------
Basic net income per share $ 1.19 $ 1.25 $ 0.33 $ 0.21
Diluted net income per share $ 1.17 $ 1.23 $ 0.32 $ 0.21
=========================================================================================================
61
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Overseas Shipholding Group, Inc.
We have audited the accompanying consolidated balance sheets of Overseas
Shipholding Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of operations, cash flows, and changes in
shareholders' equity for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Overseas
Shipholding Group, Inc. and subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note B to the consolidated financial statements, in 2000 the
Company changed its method of accounting for net voyage revenues for vessels
operating on voyage charters.
/s/ Ernst & Young LLP
New York, New York
February 24, 2003
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 13 below. Information with respect to executive officers of the
Company is included at the end of Part I.
ITEM 11. EXECUTIVE COMPENSATION
See Item 13 below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides information as of December 31, 2002 with
respect to the Company's equity (stock) compensation plans, all of which have
been approved by the Company's shareholders:
Number of securities
remaining available for
Number of securities to Weighted-average exercise future issuance under
be issued upon exercise price of outstanding equity compensation plans
of outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
Plan Category (a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 1,739,676 $14.24 900,460
===================================================================================================================
See also Item 13 below.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the table in Item 12 above, the information called for under
Items 10, 11, 12 and 13 is incorporated by reference from the definitive Proxy
Statement to be filed by the Company in connection with its 2003 Annual Meeting
of Shareholders.
ITEM 14. CONTROLS AND PROCEDURES
As of December 31, 2002, an evaluation was performed under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
current disclosure controls and procedures were effective as of December 31,
2002 in timely providing them with material information relating to the Company
required to be included in the reports the Company files or submits under the
Exchange Act. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to December 31, 2002.
63
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the
Company are filed in response to Item 8.
Consolidated Balance Sheets at December 31, 2002 and 2001.
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
(a)(2) Schedules of the Company have been omitted since they are
not applicable or are not required.
(a)(3) The following exhibits are included in response to Item
15(c):
3(i) Certificate of Incorporation of the registrant, as amended
to date (filed as Exhibit 3(i) to the registrant's Annual
Report on Form 10-K for 1998 and incorporated herein by
reference).
3(ii) By-Laws of the registrant, as amended to date (filed as
Exhibit 3(ii) to the registrant's Annual Report on Form 10-K
for 1993 and incorporated herein by reference).
4(a) Rights Agreement dated as of October 20, 1998 between the
registrant and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent, with the form of Right Certificate attached as
Exhibit A thereto and the Summary of Rights to Purchase
Shares attached as Exhibit B thereto (filed as Exhibit 4.1
to the registrant's Registration Statement on Form 8-A filed
November 9, 1998 and incorporated herein by reference).
4(b)(1) Form of Indenture dated as of December 1, 1993 between the
registrant and The Chase Manhattan Bank (National
Association) providing for the issuance of debt securities
by the registrant from time to time (filed as Exhibit
4(d)(1) to the registrant's Annual Report on Form 10-K for
1993 and incorporated herein by reference).
4(b)(2) Resolutions dated December 2, 1993 fixing the terms of two
series of debt securities issued by the registrant under the
Indenture (filed as Exhibit 4(d)(2) to the registrant's
Annual Report on Form 10-K for 1993 and incorporated herein
by reference).
64
4(b)(3) Form of 8% Notes due December 1, 2003 of the registrant
(filed as Exhibit 4(d)(3) to the registrant's Annual Report
on Form 10-K for 1993 and incorporated herein by reference).
4(b)(4) Form of 8-3/4% Debentures due December 1, 2013 of the
registrant (filed as Exhibit 4(d)(4) to the registrant's
Annual Report on Form 10-K for 1993 and incorporated herein
by reference).
4(c) Credit Agreement dated April 18, 2000 among the registrant,
two subsidiaries of the registrant and certain banks (filed
as Exhibit 4 to the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000 and incorporated
herein by reference).
4(d) Credit Agreement dated December 12, 2001 among the
registrant, two subsidiaries of the registrant and certain
banks (filed as Exhibit 4(d) to the registrant's Annual
Report on Form 10-K for 2001 and incorporated herein by
reference).
4(e) Amendment dated January 22, 2002 to the Credit Agreement
listed at Exhibit 4(d) (filed as Exhibit 4(e) to the
registrant's Annual Report on Form 10-K for 2001 and
incorporated herein by reference).
NOTE: The Exhibits filed herewith do not include other
instruments authorizing long-term debt of the registrant and
its subsidiaries, where the amounts authorized thereunder do
not exceed 10% of total assets of the registrant and its
subsidiaries on a consolidated basis. The registrant agrees
to furnish a copy of each such instrument to the Commission
upon request.
10(i)(a) Exchange Agreement dated December 9, 1969 (including
exhibits thereto) between the registrant and various parties
relating to the formation of the registrant (the form of
which was filed as Exhibit 2(3) to Registration Statement
No. 2-34124 and incorporated herein by reference).
10(i)(b) Form of Additional Exchange Agreement referred to in Section
2.02 of Exhibit 10(i)(a) hereto (filed as Exhibit 2(4) to
Registration Statement No. 2-34124 and incorporated herein
by reference).
10(i)(c) Limited Liability Company Agreement of Alaska Tanker
Company, LLC dated as of March 30, 1999 (filed as Exhibit 10
to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by
reference).
10(i)(d) Participation Agreement dated as of August 20, 1999 by and
among 398 Equity Corporation, 399 Equity Corporation, 400
Equity Corporation, 401 Equity Corporation, and Cambridge
Tankers, Inc., as owners; Alaska Tanker Company, LLC, as
bareboat charterer; Alaskan Equity Trust, as owner trust and
borrower; Wilmington Trust Company, as owner trustee;
National Australia Bank Limited, as arranger, lender, agent
for the Lenders, collateral trustee and swap counterparty;
Alaskan Equity Investors LLC, as investor participant;
American Marine Advisors, Inc., as arranger; and Overseas
Shipholding Group, Inc., as parent of the owners (filed as
Exhibit 10 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999 and incorporated
herein by reference).
*10(iii)(a)** Basic Supplemental Executive Retirement Plan of the
registrant, as amended and restated effective as of January
1, 2002.
*10(iii)(b)** Supplemental Executive Retirement Plan Plus of the
registrant, as amended and restated effective as of January
1, 2002.
65
*10(iii)(c) Agreement with an executive officer (filed as Exhibit
10(k)(4) to the registrant's Annual Report on Form 10-K for
1996 and incorporated herein by reference).
*10(iii)(d) Agreement with an executive officer (filed as Exhibit
10(k)(5) to the registrant's Annual Report on Form 10-K for
1996 and incorporated herein by reference).
*10(iii)(e) Agreement with an executive officer (filed as Exhibit 10 to
the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 and incorporated herein by
reference).
*10(iii)(f) Agreement with an executive officer (filed as Exhibit
10(d)(4) to the registrant's Annual Report on Form 10-K for
1998 and incorporated herein by reference).
*10(iii)(g) Form of Amendment to the agreements listed as Exhibits
10(iii)(c), 10(iii)(d), 10(iii)(e) and 10(iii)(f) hereto
(filed as Exhibit 10(d)(5) to the registrant's Annual Report
on Form 10-K for 1998 and incorporated herein by reference).
*10(iii)(h) Agreement with an executive officer (filed as Exhibit
10(d)(6) to the registrant's Annual Report on Form 10-K for
1998 and incorporated herein by reference).
*10(iii)(i)** Agreement dated January 24, 2003 with an executive officer.
*10(iii)(j) 1989 Stock Option Plan, as amended on October 9, 1990,
adopted for officers and key employees of the registrant or
its subsidiaries (filed as Exhibit 10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 2000 and incorporated herein by reference).
*10(iii)(k) 1998 Stock Option Plan adopted for employees of the
registrant and its affiliates (filed as Exhibit 10 to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 and incorporated herein by reference).
*10(iii)(l) Amendment to the 1998 Stock Option Plan adopted for
employees of the registrant and its affiliates (filed as
Exhibit 10 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 and incorporated herein
by reference).
*10(iii)(m) 1999 Non-Employee Director Stock Option Plan of the
registrant (filed as Exhibit 10(e)(4) to the registrant's
Annual Report on Form 10-K for 1998 and incorporated herein
by reference).
*10(iii)(n) Maritime Overseas Corporation 1990 Stock Option Plan, as
amended, assumed by the registrant (filed as Exhibit
10(e)(5) to the registrant's Annual Report on Form 10-K for
1998 and incorporated herein by reference).
*10(iii)(o) Form of Amendment to the agreements listed as Exhibits
10(iii)(c) and 10(iii)(d) hereto (filed as Exhibit 10.1 to
the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 and incorporated herein by
reference).
*10(iii)(p) Form of Amendment to the agreements listed as Exhibits
10(iii)(e), 10(iii)(f) and 10(iii)(h) hereto (filed as
Exhibit 10.2 to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2001 and incorporated
herein by reference).
*10(iii)(q) Form of Amendment to the agreements listed as Exhibits
10(iii)(c), 10(iii)(d), 10(iii)(e), 10(iii)(f) and
10(iii)(h) (filed as Exhibit 10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002 and incorporated herein by reference).
66
*10(iii)(r)** Amendment Number One effective as of January 1, 2003 to the
Basic Supplemental Executive Retirement Plan of the
registrant, as amended and restated effective as of January
1, 2002.
*10(iii)(s)** Amendment Number One effective as of January 1, 2003 to the
Supplemental Executive Retirement Plan Plus of the
registrant, as amended and restated effective as of January
1, 2002.
**13 Such portions of the Annual Report to shareholders for 2002
as are expressly incorporated herein by reference.
**21 List of subsidiaries of the registrant.
**23 Consent of Independent Auditors of the registrant.
- ----------
(1) The Exhibits marked with one asterisk (*) are a management contract or a
compensatory plan or arrangement required to be filed as an exhibit.
(2) The Exhibits which have not previously been filed or listed or are being
refiled are marked with two asterisks (**).
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: February 28, 2003
OVERSEAS SHIPHOLDING GROUP, INC.
By /s/ Myles R. Itkin
----------------------------------------
Myles R. Itkin
Senior Vice President,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each of such
persons appoints Morton P. Hyman and Myles R. Itkin, and each of them, as his
agents and attorneys-in-fact, in his name, place and stead in all capacities, to
sign and file with the SEC any amendments to this report and any exhibits and
other documents in connection therewith, hereby ratifying and confirming all
that such attorneys-in-fact or either of them may lawfully do or cause to be
done by virtue of this power of attorney.
Name Date
/s/ Morton P. Hyman February 28, 2003
- ----------------------------------
Morton P. Hyman, Principal
Executive Officer and Director
/s/ Myles R. Itkin February 28, 2003
- ----------------------------------
Myles R. Itkin, Principal
Financial Officer and
Principal Accounting Officer
/s/ Alan R. Batkin February 28, 2003
- ----------------------------------
Alan R. Batkin, Director
/s/ Thomas B. Coleman February 28, 2003
- ----------------------------------
Thomas B. Coleman, Director
/s/ Robert N. Cowen February 28, 2003
- ----------------------------------
Robert N. Cowen, Director
/s/ Charles Fribourg February 28, 2003
- ----------------------------------
Charles Fribourg, Director
/s/ William L. Frost February 28, 2003
- ----------------------------------
William L. Frost, Director
68
Name Date
/s/ Stanley Komaroff February 28, 2003
- ----------------------------------
Stanley Komaroff, Director
/s/ Solomon N. Merkin February 28, 2003
- ----------------------------------
Solomon N. Merkin, Director
/s/ Joel I. Picket February 28, 2003
- ----------------------------------
Joel I. Picket, Director
/s/ Ariel Recanati February 28, 2003
- ----------------------------------
Ariel Recanati, Director
/s/ Oudi Recanati February 28, 2003
- ----------------------------------
Oudi Recanati, Director
/s/ Michael J. Zimmerman February 28, 2003
- ----------------------------------
Michael J. Zimmerman, Director
69
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Morton P. Hyman, certify that:
1. I have reviewed this Annual Report on Form 10-K of Overseas
Shipholding Group, Inc.
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this Annual Report.
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented
in this Annual Report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this Annual
Report is being prepared;
b. evaluated the effectiveness of the Registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this Annual Report
(the "Evaluation Date"); and
c. presented in this Annual Report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors
and the audit committee of Registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Registrant's internal controls; and
70
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
6. The Registrant's other certifying officer and I have indicated in
this Annual Report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 28, 2003 /s/ Morton P. Hyman
-------------------------------
Morton P. Hyman
Chief Executive Officer
71
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Myles R. Itkin, certify that:
1. I have reviewed this Annual Report on Form 10-K of Overseas
Shipholding Group, Inc.
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented
in this Annual Report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this Annual
Report is being prepared;
b. evaluated the effectiveness of the Registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this Annual Report
(the "Evaluation Date"); and
c. presented in this Annual Report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors
and the audit committee of Registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Registrant's internal controls; and
72
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
6. The Registrant's other certifying officer and I have indicated in
this Annual Report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 28, 2003 /s/ Myles R. Itkin
------------------------------
Myles R. Itkin
Chief Financial Officer
73
CERTIFICATION OF THE CHIEF EXECUTIVE
OFFICER AND CHIEF FINANCIAL OFFICER
Each of the undersigned, the Chief Executive Officer and the Chief Financial
Officer of Overseas Shipholding Group, Inc. (the "Company"), hereby certifies,
to the best of his knowledge and belief, that the Form 10-K of the Company for
the annual period ended December 31, 2002 (the "Periodic Report") accompanying
this certification fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that
the information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company. This certification is provided solely for purposes of complying with
the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to
be used for any other purpose.
Date: February 28, 2003 /s/ Morton P. Hyman
------------------------------
Morton P. Hyman
Chief Executive Officer
Date: February 28, 2003 /s/ Myles R. Itkin
------------------------------
Myles R. Itkin
Chief Financial Officer
74
Exhibit Index
(a)(1) The following consolidated financial statements of the
Company are filed in response to Item 8.
Consolidated Balance Sheets at December 31, 2002 and 2001.
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
(a)(2) Schedules of the Company have been omitted since they are
not applicable or are not required.
(a)(3) The following exhibits are included in response to Item
15(c):
3(i) Certificate of Incorporation of the registrant, as amended
to date (filed as Exhibit 3(i) to the registrant's Annual
Report on Form 10-K for 1998 and incorporated herein by
reference).
3(ii) By-Laws of the registrant, as amended to date (filed as
Exhibit 3(ii) to the registrant's Annual Report on Form 10-K
for 1993 and incorporated herein by reference).
4(a) Rights Agreement dated as of October 20, 1998 between the
registrant and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent, with the form of Right Certificate attached as
Exhibit A thereto and the Summary of Rights to Purchase
Shares attached as Exhibit B thereto (filed as Exhibit 4.1
to the registrant's Registration Statement on Form 8-A filed
November 9, 1998 and incorporated herein by reference).
4(b)(1) Form of Indenture dated as of December 1, 1993 between the
registrant and The Chase Manhattan Bank (National
Association) providing for the issuance of debt securities
by the registrant from time to time (filed as Exhibit
4(d)(1) to the registrant's Annual Report on Form 10-K for
1993 and incorporated herein by reference).
4(b)(2) Resolutions dated December 2, 1993 fixing the terms of two
series of debt securities issued by the registrant under the
Indenture (filed as Exhibit 4(d)(2) to the registrant's
Annual Report on Form 10-K for 1993 and incorporated herein
by reference).
4(b)(3) Form of 8% Notes due December 1, 2003 of the registrant
(filed as Exhibit 4(d)(3) to the registrant's Annual Report
on Form 10-K for 1993 and incorporated herein by reference).
75
4(b)(4) Form of 8-3/4% Debentures due December 1, 2013 of the
registrant (filed as Exhibit 4(d)(4) to the registrant's
Annual Report on Form 10-K for 1993 and incorporated herein
by reference).
4(c) Credit Agreement dated April 18, 2000 among the registrant,
two subsidiaries of the registrant and certain banks (filed
as Exhibit 4 to the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000 and incorporated
herein by reference).
4(d) Credit Agreement dated December 12, 2001 among the
registrant, two subsidiaries of the registrant and certain
banks (filed as Exhibit 4(d) to the registrant's Annual
Report on Form 10-K for 2001 and incorporated herein by
reference).
4(e) Amendment dated January 22, 2002 to the Credit Agreement
listed at Exhibit 4(d) (filed as Exhibit 4(e) to the
registrant's Annual Report on Form 10-K for 2001 and
incorporated herein by reference).
NOTE: The Exhibits filed herewith do not include other
instruments authorizing long-term debt of the registrant and
its subsidiaries, where the amounts authorized thereunder do
not exceed 10% of total assets of the registrant and its
subsidiaries on a consolidated basis. The registrant agrees
to furnish a copy of each such instrument to the Commission
upon request.
10(i)(a) Exchange Agreement dated December 9, 1969 (including
exhibits thereto) between the registrant and various parties
relating to the formation of the registrant (the form of
which was filed as Exhibit 2(3) to Registration Statement
No. 2-34124 and incorporated herein by reference).
10(i)(b) Form of Additional Exchange Agreement referred to in Section
2.02 of Exhibit 10(i)(a) hereto (filed as Exhibit 2(4) to
Registration Statement No. 2-34124 and incorporated herein
by reference).
10(i)(c) Limited Liability Company Agreement of Alaska Tanker
Company, LLC dated as of March 30, 1999 (filed as Exhibit 10
to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by
reference).
10(i)(d) Participation Agreement dated as of August 20, 1999 by and
among 398 Equity Corporation, 399 Equity Corporation, 400
Equity Corporation, 401 Equity Corporation, and Cambridge
Tankers, Inc., as owners; Alaska Tanker Company, LLC, as
bareboat charterer; Alaskan Equity Trust, as owner trust and
borrower; Wilmington Trust Company, as owner trustee;
National Australia Bank Limited, as arranger, lender, agent
for the Lenders, collateral trustee and swap counterparty;
Alaskan Equity Investors LLC, as investor participant;
American Marine Advisors, Inc., as arranger; and Overseas
Shipholding Group, Inc., as parent of the owners (filed as
Exhibit 10 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999 and incorporated
herein by reference).
*10(iii)(a)** Basic Supplemental Executive Retirement Plan of the
registrant, as amended and restated effective as of January
1, 2002.
*10(iii)(b)** Supplemental Executive Retirement Plan Plus of the
registrant, as amended and restated effective January 1,
2002.
*10(iii)(c) Agreement with an executive officer (filed as Exhibit
10(k)(4) to the registrant's Annual Report on Form 10-K for
1996 and incorporated herein by reference).
76
*10(iii)(d) Agreement with an executive officer (filed as Exhibit
10(k)(5) to the registrant's Annual Report on Form 10-K for
1996 and incorporated herein by reference).
*10(iii)(e) Agreement with an executive officer (filed as Exhibit 10 to
the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 and incorporated herein by
reference).
*10(iii)(f) Agreement with an executive officer (filed as Exhibit
10(d)(4) to the registrant's Annual Report on Form 10-K for
1998 and incorporated herein by reference).
*10(iii)(g) Form of Amendment to the agreements listed as Exhibits
10(iii)(c), 10(iii)(d), 10(iii)(e) and 10(iii)(f) hereto
(filed as Exhibit 10(d)(5) to the registrant's Annual Report
on Form 10-K for 1998 and incorporated herein by reference).
*10(iii)(h) Agreement with an executive officer (filed as Exhibit
10(d)(6) to the registrant's Annual Report on Form 10-K for
1998 and incorporated herein by reference).
*10(iii)(i)** Agreement dated January 24, 2003 with an executive officer.
*10(iii)(j) 1989 Stock Option Plan, as amended on October 9, 1990,
adopted for officers and key employees of the registrant or
its subsidiaries (filed as Exhibit 10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 2000 and incorporated herein by reference).
*10(iii)(k) 1998 Stock Option Plan adopted for employees of the
registrant and its affiliates (filed as Exhibit 10 to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 and incorporated herein by reference).
*10(iii)(l) Amendment to the 1998 Stock Option Plan adopted for
employees of the registrant and its affiliates (filed as
Exhibit 10 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 and incorporated herein
by reference).
*10(iii)(m) 1999 Non-Employee Director Stock Option Plan of the
registrant (filed as Exhibit 10(e)(4) to the registrant's
Annual Report on Form 10-K for 1998 and incorporated herein
by reference).
*10(iii)(n) Maritime Overseas Corporation 1990 Stock Option Plan, as
amended, assumed by the registrant (filed as Exhibit
10(e)(5) to the registrant's Annual Report on Form 10-K for
1998 and incorporated herein by reference).
*10(iii)(o) Form of Amendment to the agreements listed as Exhibits
10(iii)(c) and 10(iii)(d) hereto (filed as Exhibit 10.1 to
the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 and incorporated herein by
reference).
*10(iii)(p) Form of Amendment to the agreements listed as Exhibits
10(iii)(e), 10(iii)(f) and 10(iii)(h) hereto (filed as
Exhibit 10.2 to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2001 and incorporated
herein by reference).
*10(iii)(q) Form of Amendment to the agreements listed as Exhibits
10(iii)(c), 10(iii)(d), 10(iii)(e), 10(iii)(f) and
10(iii)(h) hereto (filed as exhibit 10 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002 and incorporated herein by reference).
*10(iii)(r)** Amendment Number One effective as of January 1, 2003 to the
Basic Supplemental Executive Retirement Plan of the
registrant, as amended and restated effective as of January
1, 2002.
77
*10(iii)(s)** Amendment Number One effective as of January 1, 2003 to the
Supplemental Executive Retirement Plan Plus of the
registrant, as amended and restated effective as of January
1, 2002.
**13 Such portions of the Annual Report to shareholders for 2002
as are expressly incorporated herein by reference.
**21 List of subsidiaries of the registrant.
**23 Consent of Independent Auditors of the registrant.
- ----------
(1) The Exhibits marked with one asterisk (*) are a management contract or a
compensatory plan or arrangement required to be filed as an exhibit.
(2) The Exhibits which have not previously been filed or listed or are being
refiled are marked with two asterisks (**).
78