Form 10-Q
Page 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 1-6479-1
OVERSEAS SHIPHOLDING GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2637623
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
511 Fifth Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
(212) 953-4100
Registrant's telephone number, including area code
No Change
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Shares outstanding as of August 6, 2003 - 34,744,324
Form 10-Q
Page 2
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
JUNE 30, DECEMBER 31,
2003 2002
---------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 79,457 $ 36,944
Investments in marketable securities - Note F 3,938 28,796
Voyage receivables, including unbilled of $36,733 and $35,637 41,498 38,755
Other receivables, including federal income taxes
recoverable of $5,888 and $6,098 11,854 12,777
Inventories and prepaid expenses 8,221 6,115
---------- ----------
Total Current Assets 144,968 123,387
Capital Construction Fund - Note F 239,235 231,072
Vessels, at cost, less accumulated depreciation of $427,315
and $423,344 - Note H 1,413,931 1,383,744
Vessels under Capital Leases, less accumulated
amortization of $91,749 and $89,060 30,341 33,030
Investments in Joint Ventures - Note E 111,944 168,315
Other Assets 94,616 95,294
---------- ----------
Total Assets $2,035,035 $2,034,842
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and sundry liabilities and accrued
expenses $ 49,904 $ 25,172
Federal income taxes 5,235 --
Short-term debt and current installments of long-term debt 14,284 14,284
Current obligations under capital leases 5,344 6,791
---------- ----------
Total Current Liabilities 74,767 46,247
Long-term Debt - Note H 826,434 932,933
Obligations under Capital Leases 50,074 52,102
Deferred Federal Income Taxes ($150,730 and $134,204),
Deferred Credits and Other Liabilities - Notes G and I 226,456 219,411
Shareholders' Equity - Notes I and J 857,304 784,149
---------- ----------
Total Liabilities and Shareholders' Equity $2,035,035 $2,034,842
========== ==========
See notes to condensed consolidated financial statements.
Form 10-Q
Page 3
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Shipping Revenues - Note C:
Time and bareboat charter revenues, including
vessels operating in pools and $7,013,
$14,026, $7,013 and $14,026 received from
a 37.5% owned joint venture $ 107,834 $ 56,225 $ 218,689 $ 108,421
Voyage charter revenues 18,415 14,520 34,445 35,819
------------ ------------ ------------ ------------
126,249 70,745 253,134 144,240
Voyage expenses (5,952) (7,424) (11,707) (17,040)
------------ ------------ ------------ ------------
Time Charter Equivalent Revenues 120,297 63,321 241,427 127,200
------------ ------------ ------------ ------------
Ship Operating Expenses:
Vessel expenses 21,565 21,833 42,323 43,124
Time and bareboat charter hire expenses,
including $344, $1,970, $1,746 and $4,336
paid to a 50% owned joint venture - Notes E
and K 5,675 5,997 12,487 12,344
Depreciation and amortization 22,208 19,758 42,656 38,618
General and administrative 8,235 7,599 19,280 15,445
------------ ------------ ------------ ------------
Total Ship Operating Expenses 57,683 55,187 116,746 109,531
------------ ------------ ------------ ------------
Income from Vessel Operations 62,614 8,134 124,681 17,669
Equity in Income of Joint Ventures - Note E 8,142 1,342 20,157 3,287
------------ ------------ ------------ ------------
Operating Income 70,756 9,476 144,838 20,956
Other Income - Note L 4,796 10,247 4,110 12,782
------------ ------------ ------------ ------------
75,552 19,723 148,948 33,738
Interest Expense 15,412 13,868 28,562 26,814
------------ ------------ ------------ ------------
Income before Federal Income Taxes 60,140 5,855 120,386 6,924
Provision for Federal Income Taxes - Note I 18,300 2,185 34,311 2,510
------------ ------------ ------------ ------------
Net Income $ 41,840 $ 3,670 $ 86,075 $ 4,414
============ ============ ============ ============
Weighted Average Number of Common Shares
Outstanding - Note M:
Basic net income 34,532,597 34,405,179 34,494,643 34,358,946
Diluted net income 34,863,665 34,751,056 34,770,285 34,677,446
Per Share Amounts:
Basic net income $ 1.21 $ 0.11 $ 2.50 $ 0.13
Diluted net income $ 1.20 $ 0.11 $ 2.48 $ 0.13
Cash dividends declared $ 0.325 $ 0.30 $ 0.475 $ 0.45
See notes to condensed consolidated financial statements.
Form 10-Q
Page 4
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
SIX MONTHS ENDED
-----------------------------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Net cash provided by/(used in) operating activities $ 136,031 $ (8,774)
------------ -----------
Cash Flows from Investing Activities:
Proceeds from sales of marketable securities 30,463 32,164
Expenditures for vessels, including $17,213 and $38,649
related to vessels under construction (74,019) (39,781)
Proceeds from disposal of vessels 80,282 2,949
Investments in and advances to joint ventures (6,300) (16,247)
Distributions from joint ventures 6,612 5,087
Other - net (534) 845
------------ -----------
Net cash provided by/(used in) investing activities 36,504 (14,983)
------------ -----------
Cash Flows from Financing Activities:
Issuance of long-term debt, net of issuance costs 194,834 26,000
Payments on debt and obligations under capital leases (317,116) (9,453)
Cash dividends paid (10,344) (10,306)
Issuance of common stock upon exercise of stock options 2,833 2,213
Other - net (229) (982)
------------ -----------
Net cash provided by/(used in) financing activities (130,022) 7,472
------------ -----------
Net increase/(decrease) in cash and cash equivalents 42,513 (16,285)
Cash and cash equivalents at beginning of period 36,944 30,256
------------ -----------
Cash and cash equivalents at end of period $ 79,457 $ 13,971
============ ===========
See notes to condensed consolidated financial statements.
Form 10-Q
Page 5
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
DOLLARS IN THOUSANDS
(UNAUDITED)
Accumulated
Paid-in Treasury Stock Other
Common Additional Retained ---------------------- Comprehensive
Stock* Capital Earnings Shares Amount Income/(Loss)** Total
-------- ---------- -------- --------- -------- --------------- ---------
Balance at January 1, 2003 $ 39,591 $ 106,154 $ 731,201 5,139,684 $ (70,270) $ (22,527) $ 784,149
---------
Net Income 86,075 86,075
Net Unrealized Holding Gains on
Available-For-Sale Securities 4,384 4,384
Effect of Derivative Instruments (4,401) (4,401)
---------
Comprehensive Income 86,058***
---------
Cash Dividends Declared (16,408) (16,408)
Deferred Compensation Related
to Options Granted 226 226
Options Exercised and Employee
Stock Purchase Plan (171) (200,282) 3,004 2,833
Tax Benefit Related to Options
Exercised 446 446
-------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2003 $ 39,591 $ 106,655 $ 800,868 4,939,402 $ (67,266) $ (22,544) $ 857,304
======== ========= ========= ========= ========= ========= =========
Balance at January 1, 2002 $ 39,591 $ 103,529 $ 769,457 5,312,867 $ (72,868) $ (26,283) $ 813,426
---------
Net Income 4,414 4,414
Net Unrealized Holding Losses on
Available-For-Sale Securities (334) (334)
Effect of Derivative Instruments (3,409) (3,409)
Minimum Pension Liability 279 279
---------
Comprehensive Income 950***
---------
Cash Dividends Declared (15,470) (15,470)
Deferred Compensation Related to
Options Granted 1,131 1,131
Options Exercised and Employee
Stock Purchase Plan 25 (145,855) 2,188 2,213
Tax Benefit Related to Options
Exercised 312 312
-------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 2002 $ 39,591 $ 104,997 $ 758,401 5,167,012 $ (70,680) $ (29,747) $ 802,562
======== ========= ========= ========= ========= ========= =========
* Par value $1 per share; 60,000,000 shares authorized and 39,590,759 shares
issued.
** Amounts are net of tax.
*** Comprehensive income was $40,201 for the three months ended June 30, 2003.
There was a comprehensive loss of $11,245 for the three months ended June
30, 2002.
See notes to condensed consolidated financial statements.
Form 10-Q
Page 6
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note A - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month periods ended
June 30, 2003 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2003.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
Note B - Significant Accounting Policy:
Stock-based compensation - As of June 30, 2003, the Company had three
stock-based employee compensation plans and one non-employee director plan. The
Company accounts for those plans in accordance with the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Compensation cost for
stock options is recognized as an expense based on the excess, if any, of the
quoted market price of the stock at the grant date of the award or other
measurement date, over the amount an employee or non-employee director must pay
to acquire the stock. The following table presents the effects on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"), to stock-based compensation.
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
-------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income, as reported $ 41,840 $ 3,670 $ 86,075 $ 4,414
Deduct: Total stock-based
compensation expense
determined under fair value
based method for all awards,
net of tax (56) (183) (125) (402)
---------- ---------- ---------- ----------
Pro forma net income $ 41,784 $ 3,487 $ 85,950 $ 4,012
========== ========== ========== ==========
Per share amounts:
Basic - as reported $ 1.21 $ 0.11 $ 2.50 $ 0.13
Basic - pro forma $ 1.21 $ 0.10 $ 2.49 $ 0.12
Diluted - as reported $ 1.20 $ 0.11 $ 2.48 $ 0.13
Diluted - pro forma $ 1.20 $ 0.10 $ 2.47 $ 0.12
Form 10-Q
Page 7
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note C -Segment Reporting:
The Company has four reportable segments: Foreign Flag VLCCs, Aframaxes, and
Product Carriers, which participate in the international markets, and U.S. Flag
Crude Tankers, which participate in the U.S. Flag trades. U.S. Flag Dry Bulk
Carriers no longer meet the materiality thresholds for disclosure as a
reportable segment as established by Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." Information about the Company's reportable segments as of and for
the three month and six month periods ended June 30, 2003 and 2002 follows:
Foreign Flag
-------------------------------------- U.S. Flag
Product Crude
In thousands VLCCs Aframaxes Carriers Tankers All other Totals
--------------------------------------------------------------------------------- --------- --------- -----------
Three months ended June 30, 2003:
Shipping revenues * $ 59,237 $ 28,100 $ 12,078 $ 7,013 $ 19,821 $ 126,249
Time charter equivalent revenues 57,602 28,231 9,642 7,013 17,809 120,297
Income from vessel operations 39,350 17,461 4,943 3,452 5,643 70,849**
Equity in income of joint ventures 5,734 813 -- 1,595 -- 8,142
Gain on disposal of vessels -- -- 44 -- -- 44
Total assets at June 30, 2003 922,519 472,121 65,493 5,504 164,087 1,629,724
Six months ended June 30, 2003:
Shipping revenues * 115,102 59,901 26,712 14,026 37,393 253,134
Time charter equivalent revenues 113,238 59,979 20,458 14,026 33,726 241,427
Income from vessel operations 78,395 38,659 9,916 6,879 10,112 143,961**
Equity in income of joint ventures 15,469 1,854 -- 2,774 60 20,157
Loss on disposal of vessels -- -- (858) -- -- (858)
Three months ended June 30, 2002:
Shipping revenues * 16,666 19,413 12,485 7,013 15,168 70,745
Time charter equivalent revenues 16,522 19,491 8,416 7,013 11,879 63,321
Income from vessel operations 1,421 8,050 2,272 3,458 532 15,733**
Equity in income of joint ventures (450) 146 -- 1,648 (2) 1,342
Gain on disposal of vessels -- -- -- -- 688 688
Total assets at June 30, 2002 863,941 429,410 96,244 5,521 166,142 1,561,258
Six months ended June 30, 2002:
Shipping revenues * 34,388 35,892 25,644 14,026 34,290 144,240
Time charter equivalent revenues 33,784 35,956 17,287 14,026 26,147 127,200
Income from vessel operations 4,273 13,982 5,093 6,883 2,883 33,114**
Equity in income of joint ventures 668 (180) -- 2,801 (2) 3,287
Gain on disposal of vessels -- -- -- -- 688 688
* For vessels operating in pools or on time or bareboat charters, shipping
revenues are substantially the same as time charter equivalent revenues.
** Segment totals for income from vessel operations are before general and
administrative expenses.
Form 10-Q
Page 8
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note C -Segment Reporting (continued):
Reconciliations of total assets of the segments to amounts included in the
condensed consolidated balance sheets follow:
IN THOUSANDS AS OF
----------------------------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Total assets of all segments $ 1,629,724 $ 1,561,258
Corporate cash and securities, including Capital
Construction Fund 322,630 291,445
Other unallocated amounts 82,681 76,290
------------ ------------
Consolidated total assets $ 2,035,035 $ 1,928,993
============ ============
Note D - Assets and Liabilities of Foreign Subsidiaries:
Condensed summaries of the combined assets and liabilities of the Company's
foreign subsidiaries, whose operations are principally conducted in U.S.
dollars, follow:
IN THOUSANDS AS OF
---------------------------------
JUNE 30, DECEMBER 31,
2003 2002
------------- ------------
Current assets $ 125,624 $ 54,186
Vessels, net 1,369,594 1,337,260
Other assets 117,477 165,324
------------- ------------
Total Assets $ 1,612,695 $ 1,556,770
============= ============
Current installments of long-term debt $ 14,284 $ 14,284
Other current liabilities 12,112 10,461
------------- ------------
Total current liabilities 26,396 24,745
Long-term debt, deferred credits and other liabilities,
including intercompany debt of $98,000 as of
June 30, 2003 364,867 451,881
Equity 1,221,432 1,080,144
------------- ------------
Total Liabilities and Equity $ 1,612,695 $ 1,556,770
============= ============
Note E - Joint Ventures:
As of June 30, 2003, the Company is a partner in joint ventures that own nine
foreign flag vessels (eight VLCCs and one Aframax).
Form 10-Q
Page 9
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note E - Joint Ventures (continued):
A condensed summary of the results of operations of the joint ventures follows:
IN THOUSANDS
------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Time charter equivalent revenues $ 87,164 $ 57,797 $ 177,109 $ 117,470
Ship operating expenses (53,487) (52,137) (109,431) (102,100)
Loss on vessel disposal (5,132) -- (5,132) --
--------- --------- --------- ---------
Income from vessel operations 28,545 5,660 62,546 15,370
Other income 66 163 170 354
Interest expense * (6,813) (6,397) (14,205) (12,084)
--------- --------- --------- ---------
Net income/(loss) $ 21,798 $ (574) $ 48,511 $ 3,640
========= ========= ========= =========
* Includes interest on subordinated loans payable to the joint venture
partners of $4,743 (three months ended June 30, 2003), $3,360 (three
months ended June 30, 2002), $9,447 (six months ended June 30, 2003) and
$6,199 (six months ended June 30, 2002). The Company's share of such
interest is eliminated in recording the results of the joint ventures by
the equity method.
In January 2003, a joint venture in which the Company has a 50% interest
borrowed $15,375,000. The proceeds from such borrowing were used to repay the
capital contributions received from the shareholders in 2002 to purchase an
Aframax tanker that had previously been chartered in by such joint venture.
As of June 30, 2003, the joint ventures in which the Company had interests
ranging from 30% to 49.9% had bank debt of $272,219,000 and subordinated loans
payable to all joint venture partners of $226,485,000. The Company's guaranties
in connection with the joint ventures' bank financings, which are otherwise
nonrecourse to the joint venture partners, aggregated $28,148,000 at June 30,
2003. The amounts of these guaranties are reduced as the bank loans are paid
down. These guaranties remain outstanding until the related debt matures at
dates ranging between March 2005 and June 2009.
On April 14, 2003, OSG effectively acquired its partner's 50% interest in a
joint venture that owned two VLCCs, resulting in such vessels becoming 100%
owned. Accordingly, the results of these two vessels are included in the
condensed consolidated statements of operations from the effective date of the
transaction. The acquisition was accomplished through the joint venture's
redemption of our partner's shares in exchange for one of the venture's two
vessel owning subsidiaries, followed by our purchase from the partner of such
vessel for $56,500,000. In accordance with provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the joint venture recognized a loss on disposal of
$5,132,000 based on the excess of the carrying amount of the vessel transferred
to our former partner over its fair value. The Company's share of such charge of
$2,566,000 is reflected in equity in income of joint ventures in the condensed
consolidated statements of operations.
Form 10-Q
Page 10
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note E - Joint Ventures (continued):
The Company has entered into agreements with partners Euronav Luxembourg SA
("Euronav") and Frontline Ltd. ("Frontline") to restructure the relative
ownership interests in five joint venture companies, each of which owns a VLCC.
In one transaction the Company, jointly with Frontline, will acquire Euronav's
33.33% interest in the joint venture companies owning the Ariake and Sakura I,
thereby increasing the Company's share in such joint ventures to 49.889%. In a
second transaction the Company will exchange its 33.33% interest in the Ichiban
with Euronav for a portion of Euronav's interest in the Tanabe and Hakata,
thereby increasing the Company's interest in these joint ventures to 49.889%.
Frontline will continue as our partner with the remaining interest in these four
vessels. The Ichiban will become wholly owned by Euronav. The effect of these
transactions will be to increase OSG's overall joint venture interest by the
equivalent of one third of a vessel. These transactions, which will be effective
as of July 1, 2003, will close during the third quarter of 2003. Had these
transactions closed June 30, 2003, the Company's guaranties in connection with
the joint ventures' bank financings would have increased by $3,621,000 to
$31,769,000.
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 the length of time that the declines
had been sustained, management concluded that declines in fair value of certain
securities in the Capital Construction Fund with an aggregate cost basis of
$16,187,000 were other-than-temporary. Accordingly, during the six months ended
June 30, 2003 (all in the first quarter), the Company recorded impairment losses
aggregating $4,756,000 related to such securities in the accompanying condensed
consolidated statement of operations.
During the first six months of 2003, the Company sold certain of the securities
for which write-downs aggregating $21,380,000 had previously been recorded in
2002, resulting in the recognition of gains of $5,855,000 in the three months
ended June 30, 2003 and $9,926,000 in the six months ended June 30, 2003 (see
Note L).
Note G - Derivatives:
As of June 30, 2003, the Company is a party to floating-to-fixed interest rate
swaps with various major financial institutions covering notional amounts
aggregating approximately $405,000,000 pursuant to which it pays, or will pay,
fixed rates ranging from 4.6% to 6.7% and receives floating rates based on LIBOR
(approximately 1.1% as of June 30, 2003). These agreements contain no leverage
features and have various maturity dates from July 2005 to August 2014. As of
June 30, 2003, the Company has recorded a liability of $37,377,000 related to
the fair values of these swaps in other liabilities.
As of June 30, 2003, the Company is a party to forward freight agreements
maturing in December 2003 with a remaining notional value of $4,185,000. As of
June 30, 2003, the Company has recorded a liability of $267,000 related to the
fair value of these agreements, which do not qualify as effective hedges, in
other liabilities.
Form 10-Q
Page 11
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note H - Debt:
In March 2003, the Company issued $200,000,000 principal amount of senior
unsecured notes in an unregistered offering pursuant to Rule 144A and Regulation
S under the Securities Act of 1933. The notes, which are due in March 2013, have
a coupon of 8.25% and are non-callable for a period of five years from the date
of issuance. Proceeds from the offering of approximately $194,834,000 were used
to repay a portion of the balances then outstanding under long-term revolving
credit facilities.
The Company has unsecured long-term credit facilities aggregating $700,000,000,
of which $237,000,000 was used at June 30, 2003. In addition, the Company has an
unsecured short-term credit facility of $45,000,000, all of which was unused at
June 30, 2003.
The Company intends to refinance the $70,028,000 balance of its 8% Notes, which
mature in December 2003, using amounts available under the long-term revolving
credit facilities. Accordingly, such amount has been classified as long-term as
of June 30, 2003.
Agreements relating to long-term debt provide for prepayment privileges (in
certain instances with penalties), limitations on the amount of total borrowings
and secured debt (as defined), and acceleration of payment under certain
circumstances, including failure to satisfy the financial covenants contained in
certain of such agreements.
As of June 30, 2003, approximately 24.0% of the net book amount of the Company's
vessels, representing seven foreign flag vessels, is pledged as collateral under
certain debt agreements.
Interest paid, excluding capitalized interest, approximated $24,513,000 and
$26,738,000 for the six months ended June 30, 2003 and 2002, respectively.
Note I - Taxes:
Since January 1, 1987, earnings of the foreign shipping companies (exclusive of
foreign joint ventures in which the Company has a less than 50% interest) are
subject to U.S. income taxation in the year earned and may be distributed to the
U.S. parent without further tax. Foreign income, substantially all of which
resulted from the operations of companies that are not subject to income taxes
in their country of incorporation, aggregated $65,340,000 (three months ended
June 30, 2003), $926,000 (three months ended June 30, 2002), $136,382,000 (six
months ended June 30, 2003) and $4,097,000 (six months ended June 30, 2002),
before any U.S. income tax effect. Prior to 1987, tax on such earnings was
deferred as long as the earnings were reinvested in foreign shipping operations.
No provision for U.S. income taxes on the undistributed income of the foreign
shipping companies accumulated through December 31, 1986 was required at June
30, 2003 since undistributed earnings of foreign shipping companies have been
reinvested or are intended to be reinvested in foreign shipping operations so
that the qualified investment therein is not expected to be reduced below the
corresponding amount at December 31, 1986. No provision for U.S. income taxes on
the Company's share of the undistributed earnings of the less than 50%-owned
foreign shipping joint ventures was required as of June 30, 2003, since it is
intended that such undistributed earnings ($19,400,000 at June 30, 2003) will be
indefinitely reinvested; the unrecognized deferred U.S. income taxes
attributable thereto approximated $6,800,000.
Form 10-Q
Page 12
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note I - Taxes (continued):
The components of the provisions for federal income taxes follow:
IN THOUSANDS
--------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Current $ 8,412 $ 107 $ 17,331 $ (224)
Deferred 9,888 2,078 16,980 2,734
-------- -------- -------- --------
$ 18,300 $ 2,185 $ 34,311 $ 2,510
======== ======== ======== ========
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. The valuation allowance was established because the Company could
not be certain that the full amount of the deferred tax asset would be realized
through the generation of capital gains in the future. The valuation allowance
was recorded as a reduction in the federal income tax credit in 2002. During the
six months ended June 30, 2003, the Company reduced the valuation allowance by
$2,324,000 based on subsequent increases in the fair value of securities
previously written down. The reduction in the valuation allowance has been
recorded as a reduction in the provision for federal income taxes in the
accompanying condensed consolidated statements of operations of $63,000 and
$2,324,000 for the three months and six months ended June 30, 2003,
respectively.
Actual Federal income taxes paid during the six months ended June 30, 2003
amounted to $12,000,000. Actual Federal income taxes paid during the six months
ended June 30, 2002 amounted to $24,500,000, all of which related to 2001.
Note J - Accumulated Other Comprehensive Income/(Loss):
The components of accumulated other comprehensive income/(loss), net of related
taxes, in the accompanying condensed balance sheets follow:
IN THOUSANDS AS OF
---------------------------
JUNE 30, DECEMBER 31,
2003 2002
---------- ------------
Unrealized gains on available-for-sale securities $ 4,716 $ 332
Unrealized losses on derivative instruments (24,295) (19,894)
Minimum pension liability (2,965) (2,965)
---------- ----------
$ (22,544) $ (22,527)
========== ==========
Form 10-Q
Page 13
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note K - Leases:
In June 2003, the Company entered into a sale-leaseback agreement for the
Meridian Lion, which lease is classified as an operating lease. The gain on the
sale-leaseback was deferred and is being amortized over the eight year term of
the lease. The lease agreement contains no renewal or purchase options.
Note L - Other Income:
Other income consists of:
IN THOUSANDS
-------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Investment income:
Interest and dividends $ 1,504 $ 2,975 $ 2,977 $ 5,512
Gain on sale of securities, net of unrealized
loss on other investments 3,255 3,328 6,679 2,683
Write-down of marketable securities - Note F -- -- (4,756) --
Foreign currency exchange gain -- 3,240 -- 3,483
-------- -------- -------- --------
4,759 9,543 4,900 11,678
Gain/(loss) on sale of vessels 44 688 (858) 688
Gain on derivative transactions -- -- -- 325
Miscellaneous - net (7) 16 68 91
-------- -------- -------- --------
$ 4,796 $ 10,247 $ 4,110 $ 12,782
======== ======== ======== ========
Loss on sale of vessels for the six months ended June 30, 2003 includes $416,000
for the loss on disposal of a vessel that was recorded as held for sale at March
31, 2003. Such vessel was delivered to the buyer in early April 2003.
Form 10-Q
Page 14
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note M - Capital Stock and Per Share Amounts:
In April 2003, options covering 4,669 shares were granted at $18.16 (the market
price at the date of the grant) under the Company's 1998 stock option plan. In
February 2003, options covering 7,500 shares were granted at $16.35 (the market
price at the date of grant) under the 1999 non-employee director (as defined)
stock option plan. The Company follows APB 25 and related interpretations in
accounting for its stock options. For purposes of determining compensation cost
for the Company's stock option plans using the fair value method of FAS 123, the
fair values of the options granted were estimated on the dates of grant using
the Black-Scholes option pricing model. The weighted average grant-date fair
value of options granted in 2003 was $4.85 per share.
Diluted net income per share gives effect to stock options.
Note N - Commitments:
As of June 30, 2003, the Company had remaining commitments of $16,700,000 on
non-cancelable contracts for the construction of two double hulled foreign flag
Aframax tankers scheduled for delivery in October 2003 and January 2004. Unpaid
costs, which are net of $64,300,000 of progress payments and prepayments, will
be funded in 2003. The progress payments are covered by refundment guaranties.
Note O - Agreement with an Executive Officer:
The Company entered into an agreement dated June 23, 2003 in connection with the
retirement, effective December 31, 2003, of the Company's chief executive
officer ("CEO"). The agreement provides, among other matters, for a payment of
$1,200,000 to be made to the CEO in January 2004. Accordingly, the Company will
recognize $1,200,000 ratably over the period from June 23, 2003 through December
31, 2003. The agreement also provides for the payment of the CEO's unfunded,
nonqualified pension plan obligation in January 2004, at which time the Company
will recognize, as a charge to earnings, a settlement loss of approximately
$3,500,000 in accordance with the provisions of Statement of Financial
Accounting Standards No. 88, "Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
Form 10-Q
Page 15
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
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 9.2
million deadweight tons ("dwt"), including nine vessels that are owned by joint
ventures in which the Company has an average interest of 38%, and two vessels
that have been chartered in (the Company has a 40% interest in one of the
chartered-in vessels). An additional two newbuildings aggregating 0.2 million
dwt are scheduled for delivery in the next six 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 the 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 time charter equivalent ("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 requires 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
---------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Average $ 39,800 $ 10,800 $ 53,900 $ 12,200
High $ 78,300 $ 26,800 $ 96,100 $ 26,800
Low $ 14,900 $ 4,700 $ 14,900 $ 4,700
- --------------------------------------------------------------------------------
Form 10-Q
Page 16
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations (continued):
During the second quarter of 2003, rates for modern VLCCs trading East and West
out of the Arabian Gulf averaged $39,800 per day, 41% lower than the previous
quarter but 268% higher than the average rate for the corresponding quarter in
2002. It is estimated that global oil demand during the second quarter of 2003
was 76.2 million barrels per day ("b/d"), representing a decrease of 3.2% from
the previous quarter but 0.8% higher than the comparable quarter in 2002. The
decline in VLCC spot freight rates that began in April 2003 was attributable to
the rapid conclusion of the war in Iraq, which eased concerns over the security
of oil supplies in the Middle East, and the restoration of both Venezuelan and
Nigerian crude oil production, which reduced demand for longer haul Middle
Eastern OPEC oil supplies.
Effective June 1, 2003, OPEC members agreed to reduce production by 2 million
b/d and a new quota was set at 25.4 million b/d. Nigerian oil production
temporarily fell by 6.4% in April 2003 to 1.9 million b/d, but recovered to 2.1
million b/d by June 2003. Venezuelan oil production collapsed to 0.6 million b/d
in January 2003, but recovered to 2.4 million b/d by June 2003. In contrast,
Middle Eastern OPEC production has fallen steadily from a peak of 20.1 million
b/d in February 2003, before the war in Iraq, to 17.7 million b/d by June 2003.
The world VLCC fleet grew marginally from 427 vessels (124.8 million dwt) at the
start of 2003 to 428 vessels (125.0 million dwt) at June 30, 2003. Newbuilding
orders totaled 14 vessels (4.3 million dwt) in the second quarter of 2003 and 33
vessels (10.1 million dwt) in the first six months of the year compared with 16
vessels (4.9 million dwt) for the full year 2002. At June 30, 2003, the VLCC
orderbook had risen to 76 vessels (23.2 million dwt), equivalent to 18.5% of the
existing VLCC fleet compared with 64 vessels (19.6 million dwt), equivalent to
15.7% of the VLCC fleet, at the start of 2003.
Foreign Flag Aframax Segment
- --------------------------------------------------------------------------------
Spot Market TCE Rates
Aframaxes in the Caribbean
------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Average $ 30,600 $ 17,800 $ 35,900 $ 15,300
High $ 44,000 $ 24,000 $ 67,000 $ 24,000
Low $ 11,500 $ 13,500 $ 11,000 $ 10,500
- --------------------------------------------------------------------------------
During the second quarter of 2003, rates for Aframaxes operating in the
Caribbean trades averaged $30,600 per day, 26% lower than the previous quarter,
but 71% higher than the average rate for the corresponding quarter in 2002.
Non-OPEC production in the second quarter of 2003 fell 0.8% from the first
quarter but was 0.6% higher than the second quarter of 2002. The gradual return
of Venezuelan exports towards the end of the first quarter of 2003 initially
boosted freight rates, but rates subsided during the second quarter of 2003 as
additional tonnage became available in the region. Although Venezuelan crude oil
production has been restored, average production in the second quarter of 2003
remained below last year's second quarter levels.
Form 10-Q
Page 17
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations (continued):
Spring maintenance in the North Sea and lower production in Indonesia also
reduced demand for Aframax vessels during the second quarter of 2003. Former
Soviet Union ("FSU") production, however, grew by 2.0% to 10.1 million b/d in
the second quarter of 2003 and seaborne exports from the FSU grew by 17.4% to
5.6 million b/d compared with the first quarter when severe weather restricted
seaborne exports from the Baltic Sea and Black Sea. The Aframax fleet carries a
significant share of FSU exports from the Baltic Sea and Black Sea. The share of
reported dirty fixtures carried on Aframaxes from the Baltic Sea rose to 58% in
the second quarter from 51% in the first quarter while the Aframax share of
Black Sea exports increased to 52% from 46%.
The world Aframax fleet rose from 565 vessels (54.6 million dwt) at the start of
2003 to 587 vessels (57.3 million dwt) at June 30, 2003, as Aframax deliveries
exceeded deletions. Newbuilding orders reached 20 vessels (2.1 million dwt) in
the second quarter of 2003 and 41 vessels (4.4 million dwt) in the first six
months of the year compared with 43 vessels (4.7 million dwt) for the full year
2002. As of June 30, 2003, the Aframax orderbook had risen by one vessel to 133
vessels (14.4 million dwt), equivalent to 25.1 % of the existing Aframax fleet
compared with 132 vessels (14.2 million dwt), equivalent to 26% of the Aframax
fleet, at December 31, 2002.
Foreign Flag Product Carrier Segment
- --------------------------------------------------------------------------------
Spot Market TCE Rates
Panamaxes in the Pacific and Bostonmaxes in the Caribbean
----------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- --------- ----------
Panamax Average $ 21,400 $ 10,700 $ 22,100 $ 11,300
Panamax High $ 27,000 $ 13,300 $ 27,000 $ 13,300
Panamax Low $ 15,500 $ 9,000 $ 15,500 $ 9,000
Bostonmax Average $ 14,800 $ 11,300 $ 16,100 $ 10,300
Bostonmax High $ 24,900 $ 12,400 $ 24,900 $ 12,400
Bostonmax Low $ 10,000 $ 9,000 $ 10,000 $ 8,300
- --------------------------------------------------------------------------------
Panamax Product Carriers operating in the Pacific region averaged $21,400 per
day during the second quarter of 2003, 6% lower than the previous quarter, but
101% higher than the average rate for the corresponding quarter in 2002. Rates
for Bostonmax Product Carriers operating in the Caribbean trades averaged
$14,800 per day during the second quarter of 2003, 15% lower than the previous
quarter, but 31% higher than the average rate for the corresponding quarter in
2002.
U.S. refineries operated at nearly full capacity during the second quarter of
2003, as concerns mounted over low product inventory levels ahead of the summer
driving season. Total gasoline imports also increased during the second quarter,
with transAtlantic trade from Europe particularly strong in April. However, the
gradual resumption of Venezuelan gasoline exports to the U.S. as well as weaker
than expected U.S. gasoline demand dampened transAtlantic trade during May and
June. In Asia, an early start of summer weather led to increased levels of
Chinese fuel oil imports during May and June. Additionally, the continued outage
of Japanese nuclear power stations boosted demand for residual fuel oil.
Otherwise, sluggish Asian product demand and rising stocks resulted in lower
import demand.
Form 10-Q
Page 18
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations (continued):
The world Panamax tanker fleet at June 30, 2003 amounted to 284 vessels (18.3
million dwt), virtually unchanged from the 283 vessels (18.1 million dwt) at the
beginning of 2003. As of June 30, 2003, the Panamax orderbook had risen sharply
to 106 vessels (7.4 million dwt), equivalent to 40.4% of the existing Panamax
fleet compared with 75 vessels (5.3 million dwt), equivalent to 29.3% of the
Panamax fleet, at the beginning of 2003.
The world Handysize Product Carrier fleet (which includes Bostonmaxes) grew to
511 vessels (20.5 million dwt) at June 30, 2003 from 501 vessels (19.9 million
dwt) at the start of 2003. As of June 30, 2003, the Handysize orderbook has
risen to 147 vessels (6.8 million dwt), equivalent to 33.0% of the existing
Handysize fleet compared with 131 vessels (6.0 million dwt), equivalent to 20.3%
of the Handysize fleet, at the beginning of 2003.
Impact of revised European Union ("EU") legislation on the OSG fleet
In June 2003, the European Parliament gave final approval to regulations further
accelerating the phase out of single hull tankers. These new regulations will
come into force by September 1, 2003, and apply to EU-flagged tankers and all
tankers loading or discharging at EU ports. In addition, all single hull tankers
over 5,000 dwt carrying fuel oil or heavy crude will be banned from EU ports or
terminals regardless of age or flag.
Category 1 single hull pre-MARPOL (vessels generally built before 1982) crude
tankers (over 20,000 dwt) and product carriers (over 30,000 dwt) over 23 years
old will be phased out immediately from September 1, 2003. All other Category 1
single hull pre-MARPOL tankers will be phased out by 2005. The maximum permitted
age for Category 2 single hull MARPOL (vessels generally built after 1982) crude
tankers (over 20,000 dwt) and product carriers (over 30,000 dwt) will be 28
years and all Category 2 tankers will be banned from EU ports by 2010. Category
2 tankers fitted with double sides or double bottoms will be banned from EU
ports commencing in 2015, or upon reaching the age of 25 years. The rules also
impose a Condition Assessment Scheme for all single hull tankers older than 15
years.
In July 2003, the International Maritime Organization reached a consensus to
adopt the 2005 accelerated phase out schedule for the oldest single hull tankers
(Category 1) and will consider application of the other EU restrictions on
single hull tankers later this year.
Because the OSG Foreign Flag tanker fleet comprises mainly modern, double hull
vessels, the revised EU regulations would only affect two wholly-owned vessels
and four vessels held in joint ventures. Two single hull VLCCs will be banned
from EU ports beginning in 2010 at the ages of 17 (for one VLCC which is 30%
owned by OSG) and 20 years (for one VLCC which is wholly owned by OSG),
respectively. Two double sided VLCCs (both 49.9% owned by OSG) will be banned
from EU ports in 2015 at the age of 22 years. The Company's single hull Suezmax
tanker will be banned from EU ports in 2010 at the age of 21 years. A 50% owned
double sided Aframax tanker will be banned from EU ports in 2015 at the age of
23 years.
Form 10-Q
Page 19
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Update on 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. For a description
of all of the Company's material accounting policies, see Note A to the
Company's consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
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 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. As of June 30, 2003, the
Capital Construction Fund holds a diversified portfolio of marketable equity
securities, with an aggregate cost basis of $37,328,000 (after consideration of
the write-down discussed below) and an aggregate fair value of $40,533,000.
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 the declines in fair value of
securities in the Capital Construction Fund with an aggregate cost basis of
$16,187,000 were other-than-temporary at the end of the first quarter of 2003.
For the six months ended June 30, 2003, the Company recorded pre-tax impairment
losses of $4,756,000 related to such securities in the Capital Construction
Fund, all in the first quarter. These impairment losses are reflected in the
accompanying condensed consolidated statement of operations for the six months
ended June 30, 2003.
The fair value of certain marketable securities in the Capital Construction Fund
has declined below the Company's cost bases in those securities. The gross
unrealized losses on equity securities held in the Capital Construction Fund as
of June 30, 2003 were $1,468,000. None of these securities had a fair value that
had been materially below its carrying value for more than six months.
Form 10-Q
Page 20
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations:
During the second quarter of 2003, TCE revenues increased by $56,976,000, or
90%, to $120,297,000 from $63,321,000 in the second quarter of 2002, resulting
from an increase in average daily TCE rates for vessels operating in the spot
market. During the second quarter of 2003, approximately 82% of the Company's
TCE revenues were derived in the spot market, including vessels in pools that
predominantly perform voyage charters, compared with 66% in the second quarter
of 2002. In the second quarter of 2003, approximately 18% of TCE revenues were
generated from long-term charters compared with 34% in the second quarter of
2002.
During the first six months of 2003, TCE revenues increased by $114,227,000, or
90%, to $241,427,000 from $127,200,000 in the first six months of 2002 because
of an increase in spot market rates. In the first six months of 2003,
approximately 82% of the Company's TCE revenues were derived in the spot market
compared with 67% in the first six months of 2002. In the first six months of
2003, approximately 18% of the Company's TCE revenues were generated from
long-term charters compared with 33% in the first six months of 2002.
This reduction in percentage contribution from long-term charters was
principally attributable to significant increases in average TCE rates in 2003
for vessels operating in the spot market and the expiry, in the second quarter
of 2002, of a long-term charter on a VLCC.
The reliance on the spot market contributes to fluctuations in the Company's
revenue, cash flow, and net income, 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 more predictable level of
revenues.
During the second quarter of 2003, income from vessel operations increased by
$54,480,000, or 670%, to $62,614,000 from $8,134,000 in the second quarter of
2002. During the first six months of 2003, income from vessel operations
increased by $107,012,000, or 606%, to $124,681,000 from $17,669,000 in the
first six months of 2002. The improvement resulted from an increase in average
daily TCE rates and revenues for all of the Company's Foreign Flag segments (see
Note C to the condensed financial statements for additional information on the
Company's segments).
Form 10-Q
Page 21
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations (continued):
VLCC Segment
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
TCE revenues (in thousands) $ 57,602 $ 16,522 $ 113,238 $ 33,784
Vessel expenses (in thousands) (6,912) (5,535) (12,498) (10,612)
Time and bareboat charter hire expenses
(in thousands) (1,770) (1,971) (4,700) (4,337)
Depreciation and amortization (in thousands) (9,570) (7,595) (17,645) (14,562)
--------- --------- --------- ---------
Income from vessel operations (in thousands)(a) $ 39,350 $ 1,421 $ 78,395 $ 4,273
========= ========= ========= =========
Average daily TCE rate $ 48,001 $ 16,689 $ 50,328 $ 18,252
Average number of vessels(b) 12.6 10.0 11.5 9.5
Average number of vessels chartered in under
operating leases 0.6 1.0 1.0 1.0
Number of revenue days(c) 1,200 990 2,250 1,851
Number of ship-operating days(d) 1,205 998 2,270 1,898
(a) Income from vessel operations by segment is before general and
administrative expenses.
(b) The average is calculated to reflect the addition and disposal of vessels
during the period.
(c) Revenue days represent ship-operating days less days that vessels were not
available for employment due to repairs, drydock or lay-up.
(d) Ship-operating days represent calendar days.
During the second quarter of 2003, TCE revenues for the VLCC segment increased
by $41,080,000, or 249%, to $57,602,000 from $16,522,000 in the second quarter
of 2002. This improvement in TCE revenues resulted from an increase of $31,312
per day in the average daily TCE rate earned and an increase in the number of
revenue days. All but one of the vessels in the VLCC segment participate in the
Tankers pool. The increase in revenue days resulted principally from the
delivery of one newbuilding VLCC in mid-February 2003 and the April 2003
purchase of a 1997-built double hulled VLCC previously held by a 50% owned joint
venture (see Note E to the condensed financial statements). The redemption of
the other partner's joint venture interest in the Equatorial Lion and Meridian
Lion (as described in Note E) and the simultaneous acquisition of the Meridian
Lion from the other partner resulted in the inclusion of both vessels in the
VLCC segment from the mid-April effective date of the transaction. The
Equatorial Lion, which had, prior to the completion of this transaction, been
time chartered-in from the joint venture is now owned by a subsidiary of the
Company. Vessel expenses increased by $1,377,000 to $6,912,000 in the second
quarter of 2003 from $5,535,000 in the prior year's second quarter principally
as a result of an increase in ship-operating days. Average daily vessel expenses
increased by $189 per day in the second quarter of 2003 compared with the second
quarter of 2002 principally attributable to increases in crew costs and
insurance premiums. Time and bareboat charter hire expenses decreased by
$201,000 to $1,770,000 in the second quarter of 2003 from $1,971,000 in the
second quarter of 2002 as a result of the termination of the charter-in of the
Equatorial Lion from a joint venture partially offset by the inclusion of a
chartered-in VLCC in which the Company has an interest along with certain other
members of the Tankers pool. Such charter-in, which commenced in the third
quarter of 2002, provides for profit sharing with the vessel's owner when TCE
rates exceed $23,000 per day, as they did in the second quarter of 2003.
Depreciation and amortization increased by $1,975,000 to $9,570,000 from
$7,595,000 in the second quarter of 2002 as a result of the
Form 10-Q
Page 22
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations (continued):
three vessel additions discussed above. In late-June 2003, the Company entered
into a sale-leaseback agreement for its VLCC, the Meridian Lion, which lease is
classified as an operating lease. The gain on the sale-leaseback was deferred
and is being amortized over the eight year term of the lease as a reduction of
time and bareboat charter hire expenses. The sale-leaseback transaction will
reduce depreciation by approximately $662,000 per quarter and increase time
charter hire expenses by approximately $2,250,000 per quarter in future periods.
The proceeds received from the sale-leaseback transaction were used to reduce
amounts then outstanding under long-term credit facilities. Accordingly,
interest expense in future periods will be reduced by approximately $370,000 per
quarter calculated based on rates in effect during the second quarter of 2003.
During the first six months of 2003, TCE revenues for the VLCC segment increased
by $79,454,000, or 235%, to $113,238,000 from $33,784,000 in the first six
months of 2002. This improvement in TCE revenues resulted from an increase of
$32,076 per day in the average daily TCE rate earned and an increase in the
number of revenue days. The increase in revenue days resulted principally from
the purchase of the 1997-built VLCC referred to in the preceding paragraph and
the delivery of two newbuilding VLCCs (one in April 2002 and another in
mid-February 2003). Vessel expenses increased by $1,886,000 to $12,498,000 in
the first six months of 2003 from $10,612,000 in the prior year's first six
months as a result of an increase in ship-operating days. Average daily vessel
expenses in the first six months of 2003 compared with the first six months of
2002 were relatively unchanged. Time and bareboat charter hire expenses
increased by $363,000 to $4,700,000 in the first six months of 2003 from
$4,337,000 in the first six months of 2002 as a result of the inclusion of a
chartered-in VLCC in which the Company has an interest along with certain other
members of the Tankers pool partially offset by the termination of the
charter-in on the Equatorial Lion. Depreciation and amortization increased by
$3,083,000 to $17,645,000 from $14,562,000 in the first six months of 2002 as a
result of the four vessel additions discussed above.
Aframax Segment
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
TCE revenues (in thousands) $ 28,231 $ 19,491 $ 59,979 $ 35,956
Vessel expenses (in thousands) (5,266) (5,583) (10,315) (10,635)
Time and bareboat charter hire expenses
(in thousands) -- -- -- --
Depreciation and amortization (in thousands) (5,504) (5,858) (11,005) (11,339)
-------- -------- -------- --------
Income from vessel operations (in thousands) $ 17,461 $ 8,050 $ 38,659 $ 13,982
======== ======== ======== ========
Average daily TCE rate $ 28,203 $ 18,371 $ 30,617 $ 17,270
Average number of vessels 11.0 12.0 11.0 11.7
Average number of vessels chartered in under
operating leases -- -- -- --
Number of revenue days 1,001 1,061 1,959 2,082
Number of ship-operating days 1,001 1,092 1,991 2,115
During the second quarter of 2003, TCE revenues for the Aframax segment
increased by $8,740,000, or 45%, to $28,231,000 from $19,491,000 in the second
quarter of 2002. This improvement in TCE revenues resulted from an increase of
$9,832 per day in the average daily TCE rate earned partially offset
Form 10-Q
Page 23
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations (continued):
by a small decrease in revenue days. All of the vessels in the Aframax segment
participate in the Aframax International pool. The decrease in revenue days
resulted from the purchase, in the third quarter of 2002, of a 1994-built double
hulled Aframax, offset by the sale, also in the third quarter of 2002, of two
single-hulled Aframaxes. TCE revenues for the second quarter of 2003 reflect a
loss of $877,000 generated by forward freight agreements. Although the Company
entered into these forward freight agreements to convert a portion of its
variable revenue stream from Aframax International to a fixed rate, such forward
freight agreements do not qualify as effective cash flow hedges under FAS 133.
Vessel expenses decreased by $317,000 to $5,266,000 in the second quarter of
2003 from $5,583,000 in the prior year's second quarter. Average daily vessel
expenses increased by $163 per day principally due to increases in repair costs
and insurance premiums.
During the first six months of 2003, TCE revenues for the Aframax segment
increased by $24,023,000, or 67%, to $59,979,000 from $35,956,000 in the first
six months of 2002. This improvement in TCE revenues resulted from an increase
of $13,347 per day in the average daily TCE rate earned partially offset by a
decrease in revenue days. The decrease in revenue days resulted from the
delivery of one newbuilding Aframax in the first six months of 2002, the
purchase, in the third quarter of 2002, of a 1994-built double hulled Aframax,
offset by the sale of two single hulled Aframaxes. TCE revenues for the first
six months of 2003 reflect a loss of $1,830,000 generated by forward freight
agreements. Vessel expenses decreased marginally by $320,000 to $10,315,000 in
the first six months of 2003 from $10,635,000 in the prior year's first six
months. Average daily vessel expenses increased by $183 per day principally due
to increases in repair costs and insurance premiums.
Product Carrier Segment
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
-------- -------- -------- --------
TCE revenues (in thousands) $ 9,642 $ 8,416 $ 20,458 $ 17,287
Vessel expenses (in thousands) (2,918) (3,675) (6,363) (7,358)
Time and bareboat charter hire expenses
(in thousands) -- -- -- --
Depreciation and amortization (in thousands) (1,781) (2,469) (4,179) (4,836)
-------- -------- -------- --------
Income from vessel operations (in thousands) $ 4,943 $ 2,272 $ 9,916 $ 5,093
======== ======== ======== ========
Average daily TCE rate $ 17,660 $ 11,560 $ 16,701 $ 12,243
Average number of vessels 6.0 8.0 7.0 8.0
Average number of vessels chartered in under
operating leases -- -- -- --
Number of revenue days 546 728 1,225 1,412
Number of ship-operating days 546 728 1,246 1,448
During the second quarter of 2003, TCE revenues for the Product Carrier segment
increased by $1,226,000, or 15%, to $9,642,000 from $8,416,000 in the second
quarter of 2002. As of June 30, 2003, two of the four Bostonmaxes were operating
on time charters extending through December 2003. This increase in TCE revenues
resulted from an increase of $6,100 per day in the average daily TCE rate earned
partially offset by a decrease in revenue days attributable to the sale of two
of the four Panamaxes in the first quarter of 2003. Vessel expenses decreased by
$757,000 to $2,918,000 in the second quarter of 2003 from $3,675,000 in the
second quarter of 2002 as a result of the vessel sales. Average daily
Form 10-Q
Page 24
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations (continued):
vessel expenses increased by $296 per day in the second quarter of 2003 compared
with the second quarter of 2002. This increase was principally attributable to
an increase in repair costs. Depreciation and amortization decreased by $688,000
to $1,781,000 from $2,469,000 in the second quarter of 2002 as a result of the
vessel sales.
During the first six months of 2003, TCE revenues for the Product Carrier
segment increased by $3,171,000, or 18%, to $20,458,000 from $17,287,000 in the
first six months of 2002. This increase in TCE revenues resulted from an
increase of $4,458 per day in the average daily TCE rate earned partially offset
by a decrease in revenue days attributable to the sale of two of the segment's
vessels late in the first quarter of 2003. Vessel expenses decreased by $995,000
to $6,363,000 in the first six months of 2003 from $7,358,000 in the first six
months of 2002 as a result of the vessel sales. Average daily vessel expenses in
the first six months of 2003 compared with the first six months of 2002 were
relatively unchanged. Depreciation and amortization decreased by $657,000 to
$4,179,000 from $4,836,000 in the first six months of 2002 as a result of the
vessel sales.
U.S. Flag Crude Tanker Segment
TCE revenues in the second quarter and the first six months of 2003 for the U.S.
Flag Crude Tanker segment were unchanged from the comparable 2002 periods
because the segment's vessels are bareboat chartered at fixed rates to Alaska
Tanker Company ("ATC").
All Other
As of June 30, 2003, 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 U.S.
Flag Dry Bulk Carriers that carry U.S. foreign aid grain cargoes and two Foreign
Flag Dry Bulk Carriers that operate in a pool of Capesize Dry Bulk Carriers. The
U.S. Flag Dry Bulk Carriers no longer meet the materiality threshold established
by FAS 131 for disclosure as a reportable segment. This was due to the reduction
in shipping revenues attributable to the sale of two of that segment's vessels
during 2001 and 2002. TCE revenues increased by $5,930,000, or 50%, to
$17,809,000 in the second quarter of 2003 from $11,879,000 in the second quarter
of 2002 principally because of an increase of $8,755 per day in the average
daily TCE rate earned, partially offset by a decrease in revenue days resulting
from the sale in June 2002 of one U.S. Flag Dry Bulk Carrier. Vessel expenses
decreased by $587,000 to $6,479,000 in the second quarter of 2003 from
$7,066,000 in the second quarter of 2002 because of the vessel sale in June
2002. Depreciation and amortization expense increased by $1,516,000 to
$5,352,000 in the second quarter of 2003 from $3,836,000 in the second quarter
of 2002 because of the amortization of drydock costs that were incurred in the
latter half of 2002.
TCE revenues increased by $7,579,000, or 29%, to $33,726,000 in the first six
months of 2003 from $26,147,000 in the first six months of 2002 principally
because of an increase of $6,486 per day in the average daily TCE rate earned,
partially offset by a decrease in revenue days resulting from the sale in June
2002 of one U.S. Flag Dry Bulk Carrier. Vessel expenses decreased by $1,438,000
to $13,140,000 in the first six months of 2003 from $14,578,000 in the first six
months of 2002 because of the vessel sale in June 2002. Depreciation and
amortization expense increased by $1,945,000 to $9,826,000 in the first six
months of 2003 from $7,881,000 in the first six months of 2002 because of the
amortization of drydock costs that were incurred in the latter half of 2002.
Form 10-Q
Page 25
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations (continued):
General and Administrative Expenses
During the second quarter of 2003, general and administrative expenses increased
by $636,000 to $8,235,000 from $7,599,000 in the second quarter of 2002
principally due to the recording of a reserve for an expected loss of $544,000
in connection with the sublease of overseas office space.
During the first six months of 2003, general and administrative expenses
increased by $3,835,000 to $19,280,000 from $15,445,000 in the first six months
of 2002 principally due to severance payments of approximately $500,000 made in
connection with the 2003 resignation of a senior officer, 2003 bonus payments
aggregating $1,940,000 in recognition of the substantial completion of the
Company's five year cost reduction program, increases in the cost of certain
benefits and the reserve discussed in the preceding paragraph. General and
administrative expenses for the third and fourth quarters of 2003 will include
$600,000 per quarter of additional compensation to be recognized in connection
with the retirement, effective December 31, 2003, of the Company's CEO (see Note
O to the condensed financial statements).
Equity in Income of Joint Ventures:
During the second quarter of 2003, equity in income of joint ventures increased
by $6,800,000 to $8,142,000 from $1,342,000 in the second quarter of 2002,
principally due to a significant increase in average daily TCE rates earned by
the joint venture vessels operating in pools, which more than offset the impact
of a reduction in revenue days. The reduction in revenue days was attributable
to the termination in April 2003 of the joint venture agreement with a major oil
company for two VLCCs (see Note E to the condensed financial statements). These
two vessels have been included in the VLCC segment from April 2003.
During the first six months of 2003, equity in income of joint ventures
increased by $16,870,000 to $20,157,000 from $3,287,000 in the first six months
of 2002, principally due to a significant increase in average daily TCE rates
earned by the joint venture vessels operating in pools.
Equity in income of joint ventures for the three months and six months ended
June 30, 2003 reflects the Company's share ($2,566,000) of a loss on disposal
recognized in connection with the redemption of the other partner's interest in
a joint venture in exchange for 100% of the stock of one of two vessel owning
joint venture companies.
The following is a summary of the Company's interest in 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 the
Company'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 June 30, 2003. The Company's actual ownership percentages for
these joint ventures range from 30% to 49.9%.
Form 10-Q
Page 26
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Equity in Income of Joint Ventures (continued):
NUMBER OF REVENUE DAYS
----------------------------------------------
Average % THREE MONTHS SIX MONTHS
Ownership ENDED JUNE 30, ENDED JUNE 30,
--------- ------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
VLCCs operating in the spot market* 37.1% 268 238 535 455
Two VLCCs owned jointly with a major oil
company operating on long-term charters 50.0% 14 91 104 181
One Aframax participating in Aframax
International pool 50.0% 45 46 90 91
---- ---- ---- ----
Total 327 375 729 727
---- ---- ---- ----
* The increase in revenue days reflects the delivery of two VLCC
newbuildings in February and July 2002 to joint ventures in which the
Company has a 33.3% interest.
Additionally, the Company has a membership interest in ATC, a limited liability
company that operates nine (10 during 2002) 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.
Interest Expense:
The components of interest expense are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Interest before impact of swaps
and capitalized interest $ 13,440 $ 10,662 $ 24,797 $ 21,424
Impact of swaps 3,019 3,878 5,945 7,657
Capitalized interest (1,047) (672) (2,180) (2,267)
-------- -------- -------- --------
Interest expense $ 15,412 $ 13,868 $ 28,562 $ 26,814
======== ======== ======== ========
Interest expense increased by $1,544,000 to $15,412,000 in the second quarter of
2003 from $13,868,000 in the second quarter of 2002 as a result of an increase
in the average amount of debt outstanding of $24,000,000 and the impact of the
issuance in March 2003 of 10-year senior unsecured notes with a coupon of 8.25%
and the application of the resulting proceeds to repay amounts outstanding under
long-term credit facilities (which bear interest at a margin above LIBOR), which
increased the weighted average effective interest rates for debt (excluding
capital lease obligations) outstanding at June 30, 2003 by 137 basis points to
6.37%. Such effects were partially offset by an increase of $375,000 ($1,047,000
in the second quarter of 2003 compared with $672,000 in the second quarter of
2002) in interest capitalized in connection with vessel construction and a
decrease of 70 basis points in the average rate paid on floating rate debt to
2.4% in the second quarter of 2003 from 3.1% in the comparable quarter of 2002.
The impact of this decline in rates was substantially offset by the impact of
Form 10-Q
Page 27
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Interest Expense (continued):
floating-to-fixed interest rate swaps that increased interest expense by
$3,019,000 in the second quarter of 2003 compared with an increase of $3,878,000
in the second quarter of 2002.
Interest expense increased by $1,748,000 to $28,562,000 in the first six months
of 2003 from $26,814,000 in the first six months of 2002 as a result of an
increase in the average amount of debt outstanding of $52,000,000, the impact of
the issuance of the 10-year senior unsecured notes discussed in the preceding
paragraph, and a decrease of $87,000 ($2,180,000 in the first six months of 2003
compared with $2,267,000 in the first six months of 2002) in interest
capitalized in connection with vessel construction. Such increases were offset
by a decrease of 60 basis points in the average rate paid on floating rate debt
to 2.5% in the first six months of 2003 from 3.1% in the comparable period of
2002. 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
$5,945,000 in the first six months of 2003 compared with an increase of
$7,657,000 in the first six months of 2002.
Provision for Federal Income Taxes:
The provision for income taxes for the second quarter of 2003 reflects a $63,000
reduction in the valuation allowance offset recorded in 2002 against the
deferred tax asset resulting from the write-down of certain marketable
securities.
The provision for income taxes for the first six months of 2003 reflects a
$2,324,000 reduction in the valuation allowance offset against the deferred tax
asset resulting from the write-down of certain marketable securities.
The above reductions in the valuation allowance reflects increases subsequent to
December 31, 2002 in fair values of securities previously written down and the
effect of securities sold in 2003. The valuation allowance was established in
2002 because the Company could not be certain that the full amount of the
deferred tax asset would be realized through the generation of capital gains in
the future.
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 special
purpose entity ("Alaska Equity Trust") that now owns these vessels and holds the
associated bank debt used to purchase them. The special purpose entity's bank
debt of approximately $39,900,000 as of June 30, 2003 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 does
not believe that the effect of adoption of FASB Interpretation No. 46 and
consolidation of Alaska Equity Trust will be material to either consolidated net
income or consolidated financial position.
Form 10-Q
Page 28
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of Capital:
Working capital at June 30, 2003 was approximately $70,000,000 compared with
$77,000,000 at December 31, 2002. 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 $239,000,000 at June 30,
2003. Net cash provided by operating activities in the first six months of 2003
was more than $136,000,000 (which is not necessarily indicative of the cash to
be provided by operating activities for the year ending December 31, 2003)
compared with net cash used in operating activities of $9,000,000 in the first
six months of 2002. Net cash used in operating activities in the first six
months of 2002 reflected $24,500,000 of payments with respect to estimated 2001
federal income taxes. The Company's reliance on the spot market contributes to
fluctuations in cash flows from operating activities. Any decrease in the
average TCE rates earned by the Company's vessels in quarters subsequent to June
30, 2003, compared with the actual TCE rates achieved during the first six
months of 2003, will have a negative comparative impact on the amount of cash
provided by operating activities. Current financial resources, together with
cash anticipated to be generated from operations, are expected to be adequate to
meet requirements in the next year.
In March 2003, the Company issued $200,000,000 principal amount of senior
unsecured notes ("Notes") in an unregistered offering pursuant to Rule 144A and
Regulation S of the Securities Act of 1933. The notes, which are due in March
2013, have a coupon of 8.25%. Proceeds from the offering of approximately
$194,834,000 were used to repay a portion of the balances then outstanding under
long-term revolving credit facilities. The Company has unsecured long-term
revolving credit facilities aggregating $700,000,000, of which $237,000,000 was
used at June 30, 2003, and an unsecured short-term revolving credit facility of
$45,000,000, all of which was unused at June 30, 2003. The Company intends to
refinance the outstanding balance of its 8% Notes, which mature in December
2003, using amounts available under long-term credit facilities. Accordingly,
the aggregate amount outstanding of $70,028,000 has been classified as
long-term.
The indenture pursuant to which the Notes were issued requires the Company to
secure the Notes equally and comparably with any indebtedness under existing
revolving credit facilities in the event OSG is required to secure the debt
outstanding under such credit facilities as a result of a downgrade in the
credit rating of senior unsecured debt.
The Company was in compliance with all of the financial covenants contained in
the Company's debt agreements as of June 30, 2003. Existing financing agreements
impose operating restrictions and establish minimum financial covenants. Failure
to comply with any of the covenants in existing financing agreements could
result in a default under those agreements and under other agreements containing
cross-default provisions. A default would permit lenders to accelerate the
maturity of the debt under these agreements and to foreclose upon any collateral
securing that debt. Under those circumstances, the Company might not have
sufficient funds or other resources to satisfy its obligations.
In addition, the secured nature of a portion of OSG's debt, together with the
limitations imposed by financing agreements on the ability to secure additional
debt and to take other actions, might impair the Company's ability to obtain
other financing.
Form 10-Q
Page 29
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of Capital (continued):
As of June 30, 2003, the joint ventures in which the Company participates had
total bank debt of $272,219,000. The Company's percentage interests in these
joint ventures range from 30% to 49.9%. The Company has guaranteed a total of
$28,148,000 of the joint venture debt at June 30, 2003. The balance of the joint
venture debt is nonrecourse to the Company. The amounts of the Company's
guaranties are reduced as the principal amounts of the joint venture debt are
paid down.
As of June 30, 2003, the Company had non-cancelable commitments for the
construction of two double hulled foreign flag Aframax tankers for delivery in
October 2003 and January 2004, with an aggregate unpaid cost of approximately
$16,700,000. Unpaid costs, which are net of progress payments and prepayments,
will be funded in 2003. The Company 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 the Company, 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.
The Company has used interest rate swaps to effectively convert a portion of its
debt from a floating to a fixed rate basis. These agreements contain no leverage
features and have various maturity dates from July 2005 to August 2014. As of
June 30, 2003, the interest rate swaps effectively convert the Company's
interest rate exposure on $295,000,000 from a floating rate based on LIBOR to an
average fixed rate of 6.67%.
EBITDA represents operating earnings, which is before interest expense and
income taxes, plus other income/(expense) and depreciation and amortization
expense. EBITDA should not be considered a substitute for net income, cash flow
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 calculation. The following table is a reconciliation of net income, as
reflected in the condensed consolidated statements of operations, to EBITDA:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 41,840 $ 3,670 $ 86,075 $ 4,414
Provision for federal income
taxes 18,300 2,185 34,311 2,510
Interest expense 15,412 13,868 28,562 26,814
Depreciation and amortization 22,208 19,758 42,656 38,618
-------- -------- -------- --------
EBITDA $ 97,760 $ 39,481 $191,604 $ 72,356
======== ======== ======== ========
Form 10-Q
Page 30
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of Capital (continued):
The ratios of earnings to fixed charges for the six months ended June 30, 2003
and 2002 were 4.1x and 1.1x, respectively. The ratio of earnings to fixed
charges has been computed by dividing the sum of (a) pretax income from
continuing operations, (b) fixed charges (reduced by the amount of interest
capitalized during the period) and (c) amortization expense related to
capitalized interest, by fixed charges. Fixed charges consist of all interest
(both expensed and capitalized), amortization of debt issuance costs, and the
interest portion of time and bareboat charter hire expenses.
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 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.
In September 2002, the Company entered into 11 year floating-to-fixed amortizing
interest rate swaps with major financial institutions with notional amounts
aggregating $110,000,000 that commence in the third quarter of 2003. These swaps
are designated and qualify as cash flow hedges.
The Company has one long-term revolving credit facility under which borrowings
bear interest at LIBOR plus a margin, where the margin is dependent on the
Company's leverage. As of June 30, 2003, there was no balance outstanding under
such facility.
Independent Accountants' Report on Review of Interim Financial Information
The accompanying condensed consolidated financial statements as of June 30, 2003
and for the three months and six months ended June 30, 2003 and 2002 are
unaudited; however, such financial statements have been reviewed by the
Company's independent accountants.
Form 10-Q
Page 31
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
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 (the
"Exchange Act"), 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 4. Controls and Procedures
As of June 30, 2003, 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 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
June 30, 2003 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 June 30, 2003.
Form 10-Q
Page 32
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
PART II
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on June 3, 2003, the stockholders elected
twelve directors, each for a term of one year, and approved the appointment of
Ernst & Young LLP as independent auditors for the year 2003. Proxies for the
meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act
of 1934. A total of 31,513,750 shares were voted with respect to each of the
aforementioned matters, and there were no broker non-votes.
The tabulation of the votes cast for each nominee for director was as follows:
NUMBER OF SHARES
- --------------------------------------------------------------------------------
WITHHELD
NAME OF NOMINEE FOR DIRECTOR VOTED FOR AUTHORITY TO VOTE
- ---------------------------- ---------- -----------------
Oudi Recanati 31,297,413 216,337
Morton P. Hyman 26,539,420 4,974,330
Robert N. Cowen 26,560,574 4,953,176
Alan R. Batkin 31,371,156 142,594
Thomas B. Coleman 31,372,029 141,721
Charles Fribourg 31,371,517 142,233
William L. Frost 30,713,165 800,585
Stanley Komaroff 27,152,999 4,360,751
Solomon N. Merkin 31,371,667 142,083
Joel I. Pickett 30,713,242 800,508
Ariel Recanati 30,726,787 786,963
Michael J. Zimmerman 30,713,196 800,554
The resolution to approve the appointment of Ernst & Young LLP as independent
auditors was adopted by a vote of 30,438,483 shares in favor, 1,068,690 shares
against and 6,577 shares abstained.
Item 6(a). Exhibits
See Exhibit Index on page 35.
Item 6(b). Reports on Form 8-K
During the quarter ended June 30, 2003, the Registrant filed one Current Report
on Form 8-K. The Registrant disclosed under Item 9 of the Current Report, which
was dated May 13, 2003, that it had issued a press release on May 13, 2003 with
respect to the Registrant's results for the quarter ended March 31, 2003.
Form 10-Q
Page 33
Ernst & Young LLP 5 Times Square Phone: 212 773-3000
New York, New York 10036
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Shareholders
Overseas Shipholding Group, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Overseas Shipholding Group, Inc. and subsidiaries as of June 30, 2003 and the
related condensed consolidated statements of operations for the three and six
month periods ended June 30, 2003 and 2002 and the condensed consolidated
statements of cash flows and changes in shareholders' equity for the six month
periods ended June 30, 2003 and 2002. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Overseas
Shipholding Group, Inc. and subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity for the year then ended, not presented herein, and in our
report dated February 24, 2003 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2002,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
ERNST & YOUNG LLP
New York, New York
August 6, 2003
Form 10-Q
Page 34
OVERSEAS SHIPHOLDING GROUP, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OVERSEAS SHIPHOLDING GROUP, INC.
--------------------------------
(Registrant)
Date: August 7, 2003 /s/ Morton P. Hyman
--------------------------------------------------
Morton P. Hyman
Chairman, President and Chief Executive Officer
Date: August 7, 2003 /s/ Myles R. Itkin
--------------------------------------------------
Myles R. Itkin
Senior Vice President, Chief Financial Officer and
Treasurer
Form 10-Q
Page 35
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
12 Computation of Ratio of Earnings to Fixed Charges.
15 Letter from Ernst & Young LLP.
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer.
32 Certification of the Chief Executive Officer and the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act.
NOTE: 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 on a consolidated
basis, are not being filed herewith. The Registrant agrees to
furnish a copy of each such instrument to the Commission upon
request.