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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 SEPTEMBER 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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 October 29, 2003 - 35,654,462
Form 10-Q
Page 2
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 88,301 $ 36,944
Investments in marketable securities - Note G -- 28,796
Voyage receivables, including unbilled of $28,619 and $35,637 33,424 38,755
Other receivables, including federal income taxes recoverable of
$5,765 and $6,098 14,423 12,777
Inventories and prepaid expenses 6,552 6,115
----------- -----------
Total Current Assets 142,700 123,387
Capital Construction Fund - Note G 239,956 231,072
Vessels, at cost, less accumulated depreciation of $446,571 and
$423,344 - Note I 1,421,548 1,383,744
Vessels under Capital Leases, less accumulated amortization of
$93,093 and $89,060 28,996 33,030
Investments in Joint Ventures - Note F 120,655 168,315
Other Assets 79,163 95,294
----------- -----------
Total Assets $ 2,033,018 $ 2,034,842
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and sundry liabilities and accrued expenses $ 47,365 $ 25,172
Federal income taxes 4,735 --
Short-term debt and current installments of long-term debt 33,285 14,284
Current obligations under capital leases 5,436 6,791
----------- -----------
Total Current Liabilities 90,821 46,247
Long-term Debt - Note I 814,027 932,933
Obligations under Capital Leases 49,022 52,102
Deferred Federal Income Taxes ($151,317 and $134,204), Deferred
Credits and Other Liabilities - Notes H and J 200,229 219,411
Shareholders' Equity - Notes H, J and K 878,919 784,149
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,033,018 $ 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 NINE MONTHS ENDED
---------------------------- ----------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Shipping Revenues - Note D:
Time and bareboat charter revenues, including vessels
operating in pools and $7,013, $7,013, $21,039 and
$21,039 received from a 37.5% owned joint venture $ 75,528 $ 50,531 $ 294,217 $ 158,952
Voyage charter revenues 14,551 18,424 48,996 54,243
------------ ------------ ------------ ------------
90,079 68,955 343,213 213,195
Voyage expenses (5,903) (6,761) (17,610) (23,801)
------------ ------------ ------------ ------------
Time Charter Equivalent Revenues 84,176 62,194 325,603 189,394
------------ ------------ ------------ ------------
Ship Operating Expenses:
Vessel expenses 23,345 20,598 65,668 63,722
Time and bareboat charter hire expenses, including $20,
$1,918, $1,766 and $6,254 paid to a 50% owned joint
venture - Notes F and L 3,481 6,130 15,968 18,474
Depreciation and amortization 23,641 20,466 67,044 59,781
General and administrative 7,697 6,912 26,230 21,660
------------ ------------ ------------ ------------
Total Ship Operating Expenses 58,164 54,106 174,910 163,637
------------ ------------ ------------ ------------
Income from Vessel Operations 26,012 8,088 150,693 25,757
Equity in Income of Joint Ventures - Note F 4,417 1,475 24,574 4,762
------------ ------------ ------------ ------------
Operating Income 30,429 9,563 175,267 30,519
Other Income/(Expense) - Note M 3,876 (32,467) 7,986 (19,685)
------------ ------------ ------------ ------------
34,305 (22,904) 183,253 10,834
Interest Expense 16,480 13,267 45,042 40,081
------------ ------------ ------------ ------------
Income/(Loss) before Federal Income Taxes 17,825 (36,171) 138,211 (29,247)
Provision/(Credit) for Federal Income Taxes -
Note J 3,789 (6,510) 38,100 (4,000)
------------ ------------ ------------ ------------
Net Income/(Loss) $ 14,036 $ (29,661) $ 100,111 $ (25,247)
============ ============ ============ ============
Weighted Average Number of Common Shares Outstanding -
Note N:
Basic net income 34,955,851 34,426,557 34,648,379 34,381,483
Diluted net income 35,273,133 34,426,557 34,937,901 34,381,483
Per Share Amounts:
Basic net income $ 0.40 $ (0.86) $ 2.89 $ (0.73)
Diluted net income $ 0.40 $ (0.86) $ 2.87 $ (0.73)
Cash dividends declared $ 0.175 $ 0.15 $ 0.65 $ 0.60
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)
NINE MONTHS ENDED
--------------------------
SEPT. 30, SEPT. 30,
2003 2002
---------- ----------
Net cash provided by operating activities $ 181,578 $ 2,686
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of marketable securities 34,674 32,164
Expenditures for vessels, including $19,178 and $101,504
related to vessels under construction (76,774) (134,733)
Proceeds from disposal of vessels 80,296 12,729
Investments in and advances to joint ventures (16,656) (17,844)
Distributions from joint ventures 6,612 5,612
Purchases of other investments (846) (703)
Proceeds from dispositions of other investments 10,541 1,885
Other - net (568) (1,263)
---------- ----------
Net cash provided by/(used in) investing activities 37,279 (102,153)
---------- ----------
Cash Flows from Financing Activities:
Issuance of long-term debt, net of issuance costs 194,849 256,000
Payments on debt and obligations under capital leases (356,337) (158,423)
Cash dividends paid (16,425) (15,470)
Issuance of common stock upon exercise of stock options 11,975 2,311
Other - net (1,562) (2,140)
---------- ----------
Net cash provided by/(used in) financing activities (167,500) 82,278
---------- ----------
Net increase/(decrease) in cash and cash equivalents 51,357 (17,189)
Cash and cash equivalents at beginning of period 36,944 30,256
---------- ----------
Cash and cash equivalents at end of period $ 88,301 $ 13,067
========== ==========
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
Other
Paid-in Treasury Stock Comprehensive
Common Additional Retained -------------------- Income/
Stock* Capital Earnings Shares Amount (Loss)** Total
------- ---------- --------- ---------- -------- ------------- --------
Balance at January 1, 2003 $39,591 $106,154 $ 731,201 5,139,684 $(70,270) $ (22,527) $784,149
--------
Net Income 100,111 100,111
Cumulative Effect of Change in Accounting Principle,
net of tax benefit of $902 - Note C (1,674) (1,674)
Net Unrealized Holding Gains on Available-For-Sale
Securities 3,053 3,053
Effect of Derivative Instruments 932 932
--------
Comprehensive Income 102,422***
--------
Cash Dividends Declared (22,608) (22,608)
Deferred Compensation Related to Options Granted 226 226
Options Exercised and Employee Stock Purchase Plan (1,332) (883,285) 13,307 11,975
Tax Benefit Related to Options Exercised 2,755 2,755
------- -------- --------- ---------- -------- --------- --------
Balance at September 30, 2003 $39,591 $107,803 $ 808,704 4,256,399 $(56,963) $ (20,216) $878,919
======= ======== ========= ========== ======== ========= ========
Balance at January 1, 2002 $39,591 $103,529 $ 769,457 5,312,867 $(72,868) $ (26,283) $813,426
--------
Net Loss (25,247) (25,247)
Net Unrealized Holding Gains on Available-For-Sale
Securities 2,404 2,404
Effect of Derivative Instruments (13,212) (13,212)
Minimum Pension Liability 279 279
--------
Comprehensive Loss (35,776)***
--------
Cash Dividends Declared (20,635) (20,635)
Deferred Compensation Related to Options Granted 1,697 1,697
Options Exercised and Employee Stock Purchase Plan 23 (152,492) 2,288 2,311
Tax Benefit Related to Options Exercised 321 321
------- -------- --------- ---------- -------- --------- --------
Balance at September 30, 2002 $39,591 $105,570 $ 723,575 5,160,375 $(70,580) $ (36,812) $761,344
======= ======== ========= ========== ======== ========= ========
* Par value $1 per share; 60,000,000 shares authorized and 39,590,759 shares
issued.
** Amounts are net of tax.
*** Comprehensive income was $16,384 for the three months ended September 30,
2003. There was a comprehensive loss of $36,726 for the three months ended
September 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 nine month periods
ended September 30, 2003 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2003.
The condensed consolidated statements of operations for the three months and
nine months ended September 30, 2002 have been reclassified to conform to the
2003 presentation of certain items.
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 September 30, 2003, the Company had one
stock-based employee compensation plan 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/(loss) and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), to stock-based
compensation.
Form 10-Q
Page 7
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note B - Significant Accounting Policy (continued):
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income/(loss), as reported $ 14,036 $ (29,661) $ 100,111 $ (25,247)
Deduct: Total stock-based
compensation expense determined
under fair value based method for
all awards, net of tax (16) (81) (141) (483)
--------- --------- --------- ---------
Pro forma net income/(loss) $ 14,020 $ (29,742) $ 99,970 $ (25,730)
========= ========= ========= =========
Per share amounts:
Basic - as reported $ 0.40 $ (0.86) $ 2.89 $ (0.73)
Basic - pro forma $ 0.40 $ (0.86) $ 2.89 $ (0.75)
Diluted - as reported $ 0.40 $ (0.86) $ 2.87 $ (0.73)
Diluted - pro forma $ 0.40 $ (0.86) $ 2.86 $ (0.75)
Note C - Change in Accounting Principle:
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation requires the consolidation of special purpose entities by
the company that is deemed to be the primary beneficiary of such entities. This
represents a significant change from the existing rules, which required
consolidation by the entity with voting control; and, according to which OSG
accounted for its 1999 sale-leaseback transaction of U.S. Flag Crude Tankers as
an off-balance sheet financing. On July 1, 2003, the Company consolidated the
special purpose entity ("Alaska Equity Trust") that now owns these vessels and
holds the associated bank debt used to purchase them. The vessels were recorded
in the condensed consolidated balance sheet based on their carryover bases, that
is, as if FIN 46 had been effective at the time of the 1999 sale-leaseback. The
special purpose entity's debt of $38,917,000 as of September 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
cumulative effect of this change in accounting principle on the Company's
consolidated balance sheet as of July 1, 2003 was to increase total assets by
$25,079,000 (principally to reflect the reconsolidation of the vessels), to
increase liabilities by $26,753,000 (principally to reflect debt of Alaska
Equity Trust of $45,034,000 partially offset by the elimination of the
unamortized balance of the deferred gain on the 1999 sale-leaseback of
$21,141,000) and to reduce shareholders' equity by $1,674,000 (to reflect the
fair value of Alaska Equity Trust's floating-to-fixed interest rate swaps
included in accumulated other comprehensive income/(loss)). The cumulative
effect of such accounting change on net income/(loss) was insignificant.
Form 10-Q
Page 8
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note D - 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 nine month periods ended September 30, 2003 and 2002
follows:
Foreign Flag
-------------------------------------- U.S. Flag
Product Crude
In thousands VLCCs Aframaxes Carriers Tankers All other Totals
- ----------------------------------------------------------------------------- ---------- ---------- ----------
Three months ended Sept. 30, 2003:
Shipping revenues * $ 31,769 $ 20,552 $ 9,546 $ 7,013 $ 21,199 $ 90,079
Time charter equivalent revenues 31,558 20,397 7,279 7,013 17,929 84,176
Income from vessel operations 11,247 9,359 2,323 4,882 5,898 33,709**
Equity in income of joint ventures 2,172 355 -- 1,890 -- 4,417
Gain on disposal of vessels -- 7 -- -- 7 14
Total assets at September 30, 2003 908,616 466,376 65,238 26,666 160,526 1,627,422
Nine months ended Sept. 30, 2003:
Shipping revenues * 146,871 80,453 36,258 21,039 58,592 343,213
Time charter equivalent revenues 144,796 80,376 27,737 21,039 51,655 325,603
Income from vessel operations 89,642 48,018 12,239 11,761 15,263 176,923**
Equity in income of joint ventures 17,641 2,209 -- 4,664 60 24,574
Loss on disposal of vessels -- 7 (858) -- 7 (844)
Three months ended Sept. 30, 2002:
Shipping revenues * 17,514 16,267 13,728 7,013 14,433 68,955
Time charter equivalent revenues 17,109 16,167 9,549 7,013 12,356 62,194
Income from vessel operations 1,989 5,040 3,257 3,431 1,283 15,000**
Equity in income of joint ventures (132) (27) -- 1,541 93 1,475
Loss on disposal of vessels -- (1,549) -- -- -- (1,549)
Total assets at September 30, 2002 872,941 492,114 93,207 7,153 168,075 1,633,490
Nine months ended Sept. 30, 2002:
Shipping revenues * 51,902 52,159 39,372 21,039 48,723 213,195
Time charter equivalent revenues 50,893 52,123 26,836 21,039 38,503 189,394
Income from vessel operations 6,262 19,022 8,351 10,314 3,468 47,417**
Equity in income of joint ventures 536 (207) -- 4,342 91 4,762
Loss on disposal of vessels -- (1,549) -- -- 688 (861)
* 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 9
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note D -Segment Reporting (continued):
Reconciliations of total assets of the segments to amounts included in the
condensed consolidated balance sheets follow:
IN THOUSANDS AS OF
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
Total assets of all segments $ 1,627,422 $ 1,633,490
Corporate cash and securities, including Capital
Construction Fund 328,257 266,144
Other unallocated amounts 77,339 75,222
------------- -------------
Consolidated total assets $ 2,033,018 $ 1,974,856
============= =============
Note E - 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
----------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
Current assets $ 118,661 $ 54,186
Vessels, net 1,355,830 1,337,260
Other assets 106,214 165,324
------------- -------------
Total Assets $ 1,580,705 $ 1,556,770
============= =============
Current installments of long-term debt $ 14,284 $ 14,284
Other current liabilities 10,294 10,461
------------- -------------
Total current liabilities 24,578 24,745
Long-term debt, deferred credits and other liabilities,
including intercompany debt of $73,000 as of
September 30, 2003 310,845 451,881
Equity 1,245,282 1,080,144
------------- -------------
Total Liabilities and Equity $ 1,580,705 $ 1,556,770
============= =============
Note F - Joint Ventures:
As of September 30, 2003, the Company is a partner in joint ventures that own
eight foreign flag vessels (seven VLCCs and one Aframax).
Form 10-Q
Page 10
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note F - Joint Ventures (continued):
A condensed summary of the results of operations of the joint ventures follows:
IN THOUSANDS
------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Time charter equivalent revenues $ 63,902 $ 59,729 $ 241,011 $ 177,199
Ship operating expenses (51,744) (52,988) (161,175) (155,088)
Loss on vessel disposal -- -- (5,132) --
--------- --------- --------- ---------
Income from vessel operations 12,158 6,741 74,704 22,111
Other income 47 125 217 479
Interest expense * (2,530) (7,257) (16,735) (19,341)
--------- --------- --------- ---------
Net income/(loss) $ 9,675 $ (391) $ 58,186 $ 3,249
========= ========= ========= =========
* Interest expense includes interest on subordinated loans payable to the
joint venture partners of $1,023 (three months ended September 30, 2003),
$4,097 (three months ended September 30, 2002), $10,470 (nine months ended
September 30, 2003) and $10,296 (nine months ended September 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 September 30, 2003, the joint ventures in which the Company had interests
ranging from 30% to 49.9% had bank debt of $225,342,000 and subordinated loans
payable to all joint venture partners of $112,191,000. The Company's guaranties
in connection with the joint ventures' bank financings, which are otherwise
nonrecourse to the joint venture partners, aggregated $30,783,000 at September
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.
In April 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 11
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note F - Joint Ventures (continued):
The Company completed transactions with partners Euronav Luxembourg SA
("Euronav") and Frontline Ltd. ("Frontline") to restructure the relative
ownership interests in five joint venture companies, each of which owned a VLCC.
These transactions, which increased OSG's overall joint venture interest by the
equivalent of one third of a vessel, were effective as of July 1, 2003. In one
transaction, the Company, jointly with Frontline, acquired Euronav's 33.33%
interest in the joint venture companies owning the Ariake and Sakura I for cash
of approximately $20,000,000, thereby increasing the Company's share in such
joint ventures to 49.889%. In a second transaction, the Company exchanged its
33.33% interest in the Ichiban with 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 continues as our partner with the remaining
interest in these four vessels. The Ichiban became wholly owned by Euronav as of
July 1, 2003.
Note G - 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 as of March 31, 2003 were other than temporary. Accordingly, during
the first quarter of 2003, the Company recorded impairment losses aggregating
$4,756,000 related to such securities in the accompanying condensed consolidated
statement of operations.
During the first nine months of 2003, the Company sold certain securities for
which impairment losses aggregating $26,140,000 had previously been recorded in
2002, resulting in the recognition of gains of $1,947,000 in the three months
ended September 30, 2003 and $11,872,000 in the nine months ended September 30,
2003 (see Note M).
Note H - Derivatives:
As of September 30, 2003, the Company is a party to floating-to-fixed interest
rate swaps with various major financial institutions covering notional amounts
aggregating approximately $442,000,000 pursuant to which it pays fixed rates
ranging from 4.6% to 8.3% and receives floating rates based on LIBOR
(approximately 1.2% as of September 30, 2003). These agreements contain no
leverage features and have various maturity dates from July 2005 to August 2014.
As of September 30, 2003, the Company has recorded a liability of $31,747,000
related to the fair values of these swaps in other liabilities.
As of September 30, 2003, the Company is a party to forward freight agreements
maturing in December 2003 with a remaining notional value of $2,092,000. As of
September 30, 2003, the Company has recorded a liability of $312,000 related to
the fair value of these agreements, which do not qualify as effective hedges, in
other liabilities.
Form 10-Q
Page 12
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note I - 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. In August 2003, the Company exchanged all of
the notes issued in the private offering for an equal amount of notes registered
under the Securities Act of 1933. The terms of the registered notes are
identical in all material respects to the notes issued in the private offering.
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 $194,849,000 were used to repay a portion of the
balances then outstanding under long-term revolving credit facilities.
As of September 30, 2003, the Company had unsecured long-term credit facilities
aggregating $650,000,000, of which $438,000,000 was unused. In addition, the
Company has an unsecured short-term credit facility of $45,000,000, of which
$34,900,000 was unused at September 30, 2003.
In August and October 2003, the Company concluded two new five-year unsecured
revolving credit facilities aggregating $330,000,000, which together with its
existing $350,000,000 long-term credit facility that matures in December 2006,
results in aggregate long-term revolving credit availability of $680,000,000.
The maturities of the two newly executed facilities may, subject to lender
approval, be extended for two, one-year periods on the first and second
anniversary dates of each of the two facilities. The terms, conditions and
financial covenants contained in both agreements are more favorable than those
contained in the existing long-term revolving credit facility that matures in
December 2006. Borrowings under both of the new facilities bear interest at a
rate based on LIBOR plus a margin. In consideration of entering into these two
new revolving credit facilities, the Company reduced the maximum availability
under its revolving credit facility that matures in April 2005 to $150,000,000
from $350,000,000 by September 30, 2003 and terminated the facility in October
2003.
The Company intends to refinance the $69,844,000 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 September 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 September 30, 2003, approximately 26.3% of the net book amount of the
Company's vessels, representing seven foreign flag tankers and the four U.S.
Flag Crude Tankers, is pledged as collateral under certain debt agreements.
Interest paid, excluding capitalized interest, approximated $43,909,000 and
$38,199,000 for the nine months ended September 30, 2003 and 2002, respectively.
Form 10-Q
Page 13
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note J - Taxes:
Since January 1, 1987, earnings of the foreign shipping companies (exclusive of
foreign joint ventures in which the Company has a less than 50% interest) are
subject to U.S. income taxation in the year earned and may be distributed to the
U.S. parent without further tax. 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 $24,775,000 (three months ended
September 30, 2003), $161,157,000 (nine months ended September 30, 2003) and
$1,144,000 (nine months ended September 30, 2002), before any U.S. income tax
effect. There was a loss from foreign shipping operations of $2,953,000 for the
three months ended September 30, 2002. 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
September 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 September
30, 2003, since it is intended that such undistributed earnings ($19,400,000 at
September 30, 2003) will be indefinitely reinvested; the unrecognized deferred
U.S. income taxes attributable thereto approximated $6,800,000.
The components of the provisions for federal income taxes follow:
IN THOUSANDS
-----------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Current $ 2,149 $ (258) $ 19,480 $ (482)
Deferred 1,640 (6,252) 18,620 (3,518)
-------- -------- -------- --------
$ 3,789 $ (6,510) $ 38,100 $ (4,000)
======== ======== ======== ========
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
nine months ended September 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 $2,324,000 for
the nine months ended September 30, 2003.
Actual income taxes paid during the nine months ended September 30, 2003
amounted to $14,524,000. Actual income taxes paid during the nine months ended
September 30, 2002 amounted to $24,500,000, all of which related to 2001.
Form 10-Q
Page 14
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note K - Accumulated Other Comprehensive Income/(Loss):
The components of accumulated other comprehensive income/(loss), net of related
taxes, in the accompanying condensed balance sheets follow:
IN THOUSANDS AS OF
---------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Unrealized gains on available-for-sale securities $ 3,385 $ 332
Unrealized losses on derivative instruments (20,636) (19,894)
Minimum pension liability (2,965) (2,965)
------------ ------------
$ (20,216) $ (22,527)
============ ============
Note L - 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 was deferred and is being amortized over the eight year term of the lease.
The lease agreement contains no renewal or purchase options.
Note M - Other Income/(Expense):
Other income/(expense) consists of:
IN THOUSANDS
--------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Investment income:
Interest and dividends $ 1,486 $ 1,735 $ 4,463 $ 7,247
Gain/(loss) on sale of securities, net of
unrealized loss on other investments 1,573 (1,027) 8,252 1,656
Write-down of marketable securities -
Note G -- (31,976) (4,756) (31,976)
Foreign currency exchange gain -- 272 -- 3,755
-------- -------- -------- --------
3,059 (30,996) 7,959 (19,318)
Gain/(loss) on sale of vessels 14 (1,549) (844) (861)
Gain on derivative transactions -- -- -- 325
Miscellaneous - net 803 78 871 169
-------- -------- -------- --------
$ 3,876 $(32,467) $ 7,986 $(19,685)
======== ======== ======== ========
Form 10-Q
Page 15
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note N - Capital Stock and Per Share Amounts:
In July 2003, options covering 9,000 shares were granted at $22.07 (the market
price at the date of grant) under the 1999 non-employee director (as defined)
stock option plan. 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 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 $5.59 per share.
Diluted net income per share gives effect to stock options for 2003. Such
options have not been included in the computation of diluted net (loss) per
share for the three and nine months ended September 30, 2002 since their effect
thereon would be antidilutive.
Note O - Commitments:
As of September 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 the fourth quarter of 2003. The progress payments are covered
by refundment guaranties.
Note P - 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 is
recognizing this $1,200,000 expense 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 16
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note Q - Legal Matters:
On September 11, 2003, the Department of Transport of the Government of Canada
commenced an action in the Provincial Court of New Brunswick against the
Company's international flag Product Carrier, the Uranus, charging the vessel
with violation of the Canadian Oil Pollution Prevention Regulations promulgated
under the Canada Shipping Act with respect to discrepancies in the vessel's oil
record book during the period between December 2002 and March 2003. The
regulations provide for a maximum fine for each of the six alleged violations
not to exceed Cdn.$200,000 (approximately $152,000). The Company has not been
charged with making any improper discharge into the environment.
Subsequently, on October 1, 2003, the U.S. Department of Justice served a grand
jury subpoena directed at the Uranus and the Company's handling of waste oils.
The Company is cooperating with the U.S. investigation.
In accordance with Financial Accounting Standards No. 5, "Contingent
Liabilities" ("FAS 5") the Company assessed the likelihood of incurring any
liability as a result of the Canadian action or the U.S. investigation. The
maximum fine for the six alleged violations in the Canadian action is
Cdn.$1,200,000 (approximately $912,000). Management is currently investigating
the facts relating to these charges but believes that if any record keeping
violations occurred, there are mitigating factors that are likely to reduce any
fines that could be assessed. Accordingly, management is unable to estimate the
amount of any fines. The U.S. investigation is preliminary and no charges
against the Company have been filed. Accordingly, no loss accrual has been
recorded.
Form 10-Q
Page 17
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 51 vessels aggregating 8.9
million deadweight tons ("dwt"), including eight vessels that are owned by joint
ventures in which the Company has an average interest of 47%, 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 three 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------------- --------------- ------------- --------------
Average $ 28,600 $ 9,500 $ 45,400 $ 11,300
High $ 72,800 $ 18,800 $ 96,100 $ 26,800
Low $ 9,200 $ 3,500 $ 9,200 $ 3,500
- --------------------------------------------------------------------------------
Form 10-Q
Page 18
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations (continued):
During the third quarter of 2003, rates for modern VLCCs trading out of the
Arabian Gulf averaged $28,600 per day, 28% lower than the previous quarter but
201% higher than the average rate for the corresponding quarter in 2002. It is
estimated that global oil demand during the third quarter of 2003 was 77.6
million barrels per day ("b/d"), an increase of 1.6% relative to the previous
quarter and 0.9% higher than the comparable quarter in 2002.
Effective June 1, 2003, OPEC members agreed to reduce production by 2 million
b/d to achieve a new quota of 25.4 million b/d. Higher crude oil production in
Iraq during the third quarter was partially offset by reduced output from Saudi
Arabia and Kuwait. Japanese oil usage in the third quarter also declined
slightly relative to the third quarter of 2002 reflecting the gradual return to
operation of some nuclear power plants, which had previously been idled for
safety inspections, as well as relatively cool summer temperatures that
moderated air-conditioning use. As a result, key loading areas experienced a
build up of available VLCC tonnage.
In the final week of August, the VLCC market began a recovery from its
abbreviated summer slowdown, significantly earlier than the seasonal recovery in
2002. Rates rose sharply reaching over $70,000 per day by the third week in
September. Then, an unexpected decision by OPEC on September 24 to reduce their
production ceiling by 900,000 b/d caused markets to reverse dramatically, even
though this reduction in quota is not scheduled to be implemented until November
1.
The world VLCC fleet decreased marginally from 427 vessels (124.8 million dwt)
at the start of 2003 to 426 vessels (123.9 million dwt) at September 30, 2003.
Newbuilding orders slowed to 3 vessels (0.9 million dwt) in the third quarter of
2003 but totaled 38 vessels (11.6 million dwt) in the first nine months of the
year compared with 16 vessels (4.9 million dwt) for the full year 2002. As of
September 30, 2003, the VLCC orderbook had risen to 70 vessels (21.3 million
dwt), equivalent to 17.2% 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- -------------- --------------
Average $ 18,800 $ 14,000 $ 30,200 $ 14,800
High $ 31,000 $ 22,000 $ 67,000 $ 24,000
Low $ 13,500 $ 8,500 $ 11,000 $ 8,500
- --------------------------------------------------------------------------------
During the third quarter of 2003, rates for Aframaxes operating in the Caribbean
trades averaged $18,800 per day, 39% lower than the previous quarter, but 34%
higher than the average rate for the corresponding quarter in 2002. The
continuing sizable number of Aframax newbuilding deliveries during the quarter
contributed to the decline in rates, as did lower output levels from Venezuela
compared with the corresponding quarter in 2002 and the steady decline in
Indonesian production
Form 10-Q
Page 19
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations (continued):
attributable to that country's aging oilfields. The increase in non-OPEC
production during the quarter to 49.3 million b/d, 2.5% higher than the previous
quarter, tempered the decline in rates. In the latter part of the third quarter,
increased activity in the North Sea and the Mediterranean, rising production
from the Former Soviet Union ("FSU") and transit delays in the Bosporus
tightened availability of Aframaxes with a positive effect on rates. The Aframax
fleet carries a significant share of FSU exports from the Baltic Sea and the
Black Sea. The share of reported spot crude oil liftings carried on Aframaxes
from the Baltic Sea rose to 61% in the third quarter from 58% in the second
quarter while the Aframax share of Black Sea exports declined to 45% from 52%.
The world Aframax fleet rose from 565 vessels (54.6 million dwt) at the start of
2003 to 597 vessels (58.5 million dwt) at September 30, 2003, as Aframax
deliveries far exceeded deletions. Newbuilding orders remained high at 26
vessels (2.8 million dwt) in the third quarter of 2003 and totaled 75 vessels
(8.1 million dwt) in the first nine months of the year compared with 43 vessels
(4.7 million dwt) for the full year 2002. As of September 30, 2003, the Aframax
orderbook had risen to 146 vessels (15.8 million dwt), equivalent to 26.9% 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------ ------------
Panamax Average $ 20,800 $ 13,600 $ 21,700 $ 12,100
Panamax High $ 25,000 $ 14,800 $ 27,000 $ 14,800
Panamax Low $ 15,000 $ 12,000 $ 15,000 $ 9,000
Bostonmax Average $ 14,000 $ 8,900 $ 15,400 $ 9,900
Bostonmax High $ 16,900 $ 11,500 $ 24,900 $ 12,400
Bostonmax Low $ 10,000 $ 8,000 $ 10,000 $ 8,000
- --------------------------------------------------------------------------------------
Panamax Product Carriers operating in the Pacific region averaged $20,800 per
day during the third quarter of 2003, 3% lower than the previous quarter, but
53% higher than the average rate for the corresponding quarter in 2002. Rates
for Bostonmax Product Carriers operating in the Caribbean trades averaged
$14,000 per day during the third quarter of 2003, 5% lower than the previous
quarter, but 57% higher than the average rate for the corresponding quarter in
2002.
A number of refineries in the U.S. and Canada were disrupted by the North
American power outage in August. This event, coupled with unrelated refinery
shutdowns on the U.S. Gulf and West Coasts, coincided with the summer driving
season and low gasoline inventories, necessitating higher gasoline imports.
Warmer weather also boosted cooling demand in North America and Europe.
Escalated product imports from the Middle East and Northwest Europe increased
ton-mile demand. In China, residual fuel oil demand was boosted by record high
electricity demand, attributable to high summer temperatures and China's ongoing
construction boom. In Japan, however, consumption fell slightly relative to the
corresponding quarter of 2002 as lower summer temperatures limited electricity
demand, and a gradual easing of Japan's nuclear crisis saw a number of nuclear
power stations return to operation.
Form 10-Q
Page 20
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations (continued):
The world Panamax tanker fleet at September 30, 2003 amounted to 278 vessels
(18.0 million dwt), down from the 283 vessels (18.1 million dwt) at the
beginning of 2003. The Panamax orderbook continued to trend sharply higher,
rising to 116 vessels (8.1 million dwt), equivalent to 44.6% of the existing
Panamax fleet, as of September 30, 2003. This compares 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) decreased
to 498 vessels (20.0 million dwt) at September 30, 2003 from 501 vessels (19.9
million dwt) at the start of 2003. As of September 30, 2003, the Handysize
orderbook had risen to 157 vessels (7.2 million dwt), equivalent to 35.8% of the
existing Handysize fleet compared with 131 vessels (6.0 million dwt), equivalent
to 30.3% 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 went
into force on October 21, 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 heavy fuel oil or heavy crude will be banned from EU ports or
terminals regardless of age or flag.
Category 1 single hull pre-MARPOL (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 October 21, 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 (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 ("IMO") 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 21
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 September 30, 2003,
the Capital Construction Fund holds a diversified portfolio of marketable equity
securities with an aggregate cost basis of $38,420,000 (after consideration of
the write-down discussed below) and an aggregate fair value of $41,678,000.
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 nine months ended September 30, 2003, the Company recorded pre-tax
impairment losses of $4,756,000 related to such securities, all in the first
quarter of 2003. These impairment losses are reflected in the accompanying
condensed consolidated statement of operations for the nine months ended
September 30, 2003.
The gross unrealized losses on equity securities held in the Capital
Construction Fund as of September 30, 2003 were $1,737,000. Only one of these
securities had a fair value that had been materially below its carrying value
for more than six months. The Company has evaluated the circumstances
surrounding the decline ($609,000) in market value of this security, which has
traded below its cost basis for less than nine months as of September 30, 2003,
and believes this decline to be temporary and, accordingly, continues to record
the net, after-tax unrealized loss in accumulated other comprehensive
income/(loss). If however, the market value of this security does not recover in
the near term, the decline may then be considered to be an other-than-temporary
impairment, which would result in an impairment charge to earnings in future
periods, which charge previously would have been included in accumulated other
comprehensive income/(loss).
Form 10-Q
Page 22
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations:
During the third quarter of 2003, TCE revenues increased by $21,982,000, or 35%,
to $84,176,000 from $62,194,000 in the third quarter of 2002, resulting from an
increase in average daily TCE rates for vessels operating in the spot market.
During the third quarter of 2003, approximately 74% of the Company's TCE
revenues were derived in the spot market, including vessels in pools that
predominantly perform voyage charters, compared with 71% in the third quarter of
2002. In the third quarter of 2003, approximately 26% of TCE revenues were
generated from long-term charters compared with 29% in the third quarter of
2002.
During the first nine months of 2003, TCE revenues increased by $136,209,000, or
72%, to $325,603,000 from $189,394,000 in the first nine months of 2002 because
of an increase in spot market rates. In the first nine months of 2003,
approximately 80% of the Company's TCE revenues were derived in the spot market
compared with 68% in the first nine months of 2002. In the first nine months of
2003, approximately 20% of the Company's TCE revenues were generated from
long-term charters compared with 32% in the first nine 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 early 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 third quarter of 2003, income from vessel operations increased by
$17,924,000, or 222%, to $26,012,000 from $8,088,000 in the third quarter of
2002. During the first nine months of 2003, income from vessel operations
increased by $124,936,000, or 485%, to $150,693,000 from $25,757,000 in the
first nine months of 2002. The improvement resulted from an increase in average
daily TCE rates for all of the Company's Foreign Flag segments (see Note D to
the condensed financial statements for additional information on the Company's
segments).
Form 10-Q
Page 23
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations (continued):
VLCC Segment
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
TCE revenues (in thousands) $ 31,558 $ 17,109 $ 144,796 $ 50,893
Vessel expenses (in thousands) (7,628) (5,222) (20,126) (15,834)
Time and bareboat charter hire expenses (in
thousands) (3,207) (2,208) (7,907) (6,545)
Depreciation and amortization (in thousands) (9,476) (7,690) (27,121) (22,252)
--------- --------- --------- ---------
Income from vessel operations (in thousands)(a) $ 11,247 $ 1,989 $ 89,642 $ 6,262
========= ========= ========= =========
Average daily TCE rate $ 25,995 $ 16,956 $ 41,800 $ 17,795
Average number of vessels(b) 12.0 10.0 11.7 9.7
Average number of vessels chartered in under
operating leases 1.4 1.1 1.1 1.0
Number of revenue days(c) 1,214 1,009 3,464 2,860
Number of ship-operating days(d) 1,233 1,025 3,503 2,923
(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 third quarter of 2003, TCE revenues for the VLCC segment increased by
$14,449,000, or 84%, to $31,558,000 from $17,109,000 in the third quarter of
2002. This improvement in TCE revenues resulted from an increase of $9,039 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 F 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 F) 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 $2,406,000 to $7,628,000 in the third
quarter of 2003 from $5,222,000 in the prior year's third quarter principally as
a result of the Equatorial Lion becoming wholly owned in April 2003 and an
increase in ship-operating days. Average daily vessel expenses increased by
$1,093 per day in the third quarter of 2003 compared with the third quarter of
2002 principally attributable to increases in damage repair expenses and, to a
lesser degree, insurance premiums and the timing of delivery of lubricating
oils. Time and bareboat charter hire expenses increased by $999,000 to
$3,207,000 in the third quarter of 2003 from $2,208,000 in the third quarter of
2002 as a result of the sale-leaseback agreement discussed below and 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 of the Equatorial Lion from a joint venture. The charter-in of
the VLCC, 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.
Depreciation and amortization
Form 10-Q
Page 24
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations (continued):
increased by $1,786,000 to $9,476,000 from $7,690,000 in the third quarter of
2002 as a result of the vessel additions discussed above. In late-June 2003, the
Company entered into a sale-leaseback agreement for one of its VLCCs, the
Meridian Lion, which lease is classified as an operating lease. The gain on the
sale 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 increased time charter hire expenses by approximately $2,250,000 per
quarter commencing in the third quarter of 2003.
During the first nine months of 2003, TCE revenues for the VLCC segment
increased by $93,903,000, or 185%, to $144,796,000 from $50,893,000 in the first
nine months of 2002. This improvement in TCE revenues resulted from an increase
of $24,005 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 $4,292,000 to $20,126,000 in
the first nine months of 2003 from $15,834,000 in the prior year's first nine
months as a result of the Equatorial Lion becoming wholly owned in April 2003
and an increase in ship-operating days. Average daily vessel expenses increased
by $328 per day in the first nine months of 2003 compared with the first nine
months of 2002 principally attributable to increases in damage repair expenses
in the third quarter of 2003 and insurance premiums. Time and bareboat charter
hire expenses increased by $1,362,000 to $7,907,000 in the first nine months of
2003 from $6,545,000 in the first nine months of 2002 as a result of the June
2003 sale-leaseback of the Meridian Lion and 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 $4,869,000 to
$27,121,000 from $22,252,000 in the first nine months of 2002 principally as a
result of the vessel additions discussed above.
Aframax Segment
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
TCE revenues (in thousands) $ 20,397 $ 16,167 $ 80,376 $ 52,123
Vessel expenses (in thousands) (5,537) (5,412) (15,852) (16,047)
Time and bareboat charter hire expenses (in
thousands) -- -- -- --
Depreciation and amortization (in thousands) (5,501) (5,715) (16,506) (17,054)
-------- -------- -------- --------
Income from vessel operations (in thousands) $ 9,359 $ 5,040 $ 48,018 $ 19,022
======== ======== ======== ========
Average daily TCE rate $ 20,942 $ 16,007 $ 27,404 $ 16,857
Average number of vessels 11.0 11.5 11.0 11.6
Average number of vessels chartered in under
operating leases -- -- -- --
Number of revenue days 974 1,010 2,933 3,092
Number of ship-operating days 1,012 1,060 3,003 3,175
Form 10-Q
Page 25
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations (continued):
During the third quarter of 2003, TCE revenues for the Aframax segment increased
by $4,230,000, or 26%, to $20,397,000 from $16,167,000 in the third quarter of
2002. This improvement in TCE revenues resulted from an increase of $4,935 per
day in the average daily TCE rate earned partially offset 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 third quarter of 2003 include income of $124,000
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
increased marginally by $125,000 to $5,537,000 in the third quarter of 2003 from
$5,412,000 in the prior year's third quarter. Average daily vessel expenses
increased by $330 per day principally due to increases in crew costs and
insurance premiums.
During the first nine months of 2003, TCE revenues for the Aframax segment
increased by $28,253,000, or 54%, to $80,376,000 from $52,123,000 in the first
nine months of 2002. This improvement in TCE revenues resulted from an increase
of $10,547 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 nine months of 2002 and 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
nine months of 2003 reflect a loss of $1,706,000 generated by forward freight
agreements. Vessel expenses decreased marginally by $195,000 to $15,852,000 in
the first nine months of 2003 from $16,047,000 in the prior year's first nine
months. Average daily vessel expenses, however, increased by $233 per day
principally due to increases in insurance premiums.
Product Carrier Segment
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
TCE revenues (in thousands) $ 7,279 $ 9,549 $ 27,737 $ 26,836
Vessel expenses (in thousands) (3,162) (3,791) (9,525) (11,148)
Time and bareboat charter hire expenses (in
thousands) -- -- -- --
Depreciation and amortization (in thousands) (1,794) (2,501) (5,973) (7,337)
-------- -------- -------- --------
Income from vessel operations (in thousands) $ 2,323 $ 3,257 $ 12,239 $ 8,351
======== ======== ======== ========
Average daily TCE rate $ 14,356 $ 13,244 $ 16,014 $ 12,581
Average number of vessels 6.0 8.0 6.6 8.0
Average number of vessels chartered in under
operating leases -- -- -- --
Number of revenue days 507 721 1,732 2,133
Number of ship-operating days 552 736 1,798 2,184
During the third quarter of 2003, TCE revenues for the Product Carrier segment
decreased by $2,270,000, or 24%, to $7,279,000 from $9,549,000 in the third
quarter of 2002. This decrease in TCE revenues resulted from a decrease in
revenue days principally attributable to the sale of two (Lucy and
Form 10-Q
Page 26
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations (continued):
Suzanne) of the four Panamaxes in the first quarter of 2003 partially offset by
an increase of $1,112 per day in the average daily TCE rate earned. As of
September 30, 2003, two of the four Bostonmaxes were operating on time charters
extending through December 2003 and one of the two Panamaxes was operating on a
time charter extending through September 2004. Vessel expenses decreased by
$629,000 to $3,162,000 in the third quarter of 2003 from $3,791,000 in the third
quarter of 2002 as a result of the vessel sales. Average daily vessel expenses,
however, increased by $577 per day in the third quarter of 2003 compared with
the third quarter of 2002. This increase was principally attributable to an
increase in crew costs and the timing of delivery of lubricating oils and stores
and supplies. Depreciation and amortization decreased by $707,000 to $1,794,000
from $2,501,000 in the third quarter of 2002 as a result of the vessel sales.
During the first nine months of 2003, TCE revenues for the Product Carrier
segment increased by $901,000, or 3%, to $27,737,000 from $26,836,000 in the
first nine months of 2002. This increase in TCE revenues resulted from an
increase of $3,433 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
$1,623,000 to $9,525,000 in the first nine months of 2003 from $11,148,000 in
the first nine months of 2002 as a result of the vessel sales. Average daily
vessel expenses, however, increased by $193 per day in the first nine months of
2003 compared with the first nine months of 2002 principally attributable to
increases in crew and repair costs. Depreciation and amortization decreased by
$1,364,000 to $5,973,000 from $7,337,000 in the first nine months of 2002 as a
result of the vessel sales.
U.S. Flag Crude Tanker Segment
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
TCE revenues (in thousands) $ 7,013 $ 7,013 $ 21,039 $ 21,039
Vessel expenses (in thousands) 48 (13) 40 (17)
Time and bareboat charter hire expenses (in
thousands) -- (3,569) (7,139) (10,708)
Depreciation and amortization (in thousands) (2,179) -- (2,179) --
-------- -------- -------- --------
Income from vessel operations (in thousands) $ 4,882 $ 3,431 $ 11,761 $ 10,314
======== ======== ======== ========
Average daily TCE rate $ 19,057 $ 19,057 $ 19,267 $ 19,267
Average number of vessels 4.0 -- 1.3 --
Average number of vessels chartered in under
operating leases -- 4.0 2.7 4.0
Number of revenue days 368 368 1,092 1,092
Number of ship-operating days 368 368 1,092 1,092
TCE revenues in the third quarter and the first nine 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").
On July 1, 2003, in accordance with the provisions of FIN 46, the Company
consolidated the special purpose entity that owns the four U.S. Flag Crude
Tankers. The consolidation of the special purpose entity reduced time and
bareboat charter hire expenses, which was net of amortization of the deferred
Form 10-Q
Page 27
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel Operations (continued):
gain on the 1999 sale-leaseback transaction, by $3,569,000, and increased
depreciation and amortization, because the four vessels are now included in the
condensed consolidated balance sheet, by $2,179,000 for the three months and
nine months ended September 30, 2003. See Interest Expense below for a
discussion of the increase in interest expense attributable to the consolidation
of Alaska Equity Trust.
All Other
As of September 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 $5,573,000, or 45%, to
$17,929,000 in the third quarter of 2003 from $12,356,000 in the third quarter
of 2002 because of an increase of $5,805 per day in the average daily TCE rate
earned and an increase in revenue days resulting from a reduction in days spent
in drydocking the U.S. Flag Handysize Product Carriers. Vessel expenses
increased by $943,000 to $7,066,000 in the third quarter of 2003 from $6,123,000
in the third quarter of 2002.
TCE revenues increased by $13,152,000, or 34%, to $51,655,000 in the first nine
months of 2003 from $38,503,000 in the first nine months of 2002 principally
because of an increase of $6,301 per day in the average daily TCE rate earned.
Vessel expenses decreased by $495,000 to $20,206,000 in the first nine months of
2003 from $20,701,000 in the first nine months of 2002 because of the vessel
sale in June 2002. Depreciation and amortization expense increased by $2,127,000
to $15,264,000 in the first nine months of 2003 from $13,137,000 in the first
nine months of 2002 because of the amortization of drydock costs that were
incurred in the latter half of 2002.
General and Administrative Expenses
During the third quarter of 2003, general and administrative expenses increased
by $785,000 to $7,697,000 from $6,912,000 in the third quarter of 2002
principally due to additional compensation of $600,000 recognized in connection
with the retirement, effective December 31, 2003, of the Company's CEO (see Note
P to the condensed financial statements).
During the first nine months of 2003, general and administrative expenses
increased by $4,570,000 to $26,230,000 from $21,660,000 in the first nine months
of 2002 principally due to severance payments of approximately $500,000 made in
connection with the January 2003 resignation of a senior vice president, 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 a reserve for an expected loss of $544,000 in
connection with the sublease of overseas office space. General and
administrative expenses for the nine months ended September 30, 2003 also
include $600,000 of additional compensation recognized in connection with the
retirement of the Company's CEO.
Form 10-Q
Page 28
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Equity in Income of Joint Ventures:
During the third quarter of 2003, equity in income of joint ventures increased
by $2,942,000 to $4,417,000 from $1,475,000 in the third quarter of 2002,
principally due to a significant increase in average daily TCE rates earned by
the joint venture vessels operating in the spot market, 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 F to the condensed financial
statements). These two vessels have been included in the VLCC segment from April
2003.
During the first nine months of 2003, equity in income of joint ventures
increased by $19,812,000 to $24,574,000 from $4,762,000 in the first nine months
of 2002, principally due to a significant increase in average daily TCE rates
earned by the joint venture vessels operating in the spot market.
Equity in income of joint ventures for the nine months ended September 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. 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 spot market, the ownership
percentage reflected below is an average as of September 30, 2003. The Company's
actual ownership percentages for these joint ventures range from 30% to 49.9%.
NUMBER OF REVENUE DAYS
---------------------------------------
Average % THREE MONTHS NINE MONTHS
Ownership ENDED SEPT. 30, ENDED SEPT. 30,
----------- ----------------- -----------------
2003 2002 2003 2002
------ ------ ------ ------
VLCCs operating in the spot market* 47.1% 303 269 838 724
Two VLCCs owned jointly with a major oil company
operating on long-term charters -- 92 104 273
One Aframax participating in Aframax International
pool 50.0% 45 31 135 122
------ ------ ------ ------
Total 348 392 1,077 1,119
------ ------ ------ ------
* The increase in revenue days reflects the delivery of two VLCC
newbuildings in February and July 2002 to joint ventures in which the
Company had a 33.3% interest and the restructuring of the relative
ownership interests in five jointly owned VLCCs. The effect of such
restructuring was to increase the Company's overall joint venture interest
by the equivalent of one third of a vessel effective July 1, 2003.
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. Such income is included in the U.S. Flag Crude Tanker segment.
Form 10-Q
Page 29
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Interest Expense:
The components of interest expense are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Interest before impact of swaps and
capitalized interest $ 13,792 $ 11,140 $ 38,589 $ 32,564
Impact of swaps 3,795 3,352 9,740 11,009
Capitalized interest (1,107) (1,225) (3,287) (3,492)
-------- -------- -------- --------
Interest expense $ 16,480 $ 13,267 $ 45,042 $ 40,081
======== ======== ======== ========
Interest expense increased by $3,213,000 to $16,480,000 in the third quarter of
2003 from $13,267,000 in the third quarter of 2002 as a result of 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),
and a decrease of $118,000 ($1,107,000 in the third quarter of 2003 compared
with $1,225,000 in the third quarter of 2002) in interest capitalized in
connection with vessel construction. Such increases were partially offset by a
decrease in the average amount of debt outstanding of $62,000,000 (substantially
all of which carried interest rates based on LIBOR), and a decrease of 50 basis
points in the average rate paid on floating rate debt to 2.5% in the third
quarter of 2003 from 3.0% in the comparable quarter 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 $3,795,000 in the third
quarter of 2003 compared with an increase of $3,352,000 in the third quarter of
2002. The issuance of the 8.25% senior unsecured notes increased the weighted
average effective interest rate for debt (excluding capital lease obligations)
outstanding at September 30, 2003 by 137 basis points to 7.10%.
Interest expense increased by $4,961,000 to $45,042,000 in the first nine months
of 2003 from $40,081,000 in the first nine months of 2002 as a result of an
increase in the average amount of debt outstanding of $15,000,000, the impact of
the issuance of the 10-year senior unsecured notes, and a decrease of $205,000
($3,287,000 in the first nine months of 2003 compared with $3,492,000 in the
first nine months of 2002) in interest capitalized in connection with vessel
construction. Such increases were partially offset by a decrease of 60 basis
points in the average rate paid on floating rate debt to 2.5% in the first nine
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 $9,740,000 in the first
nine months of 2003 compared with an increase of $11,009,000 in the first nine
months of 2002.
Interest expense for the three months and nine months ended September 30, 2003
includes $722,000 attributable to the special purpose entity that owns the U.S.
Flag Crude Tankers and has been consolidated effective July 1, 2003 (see Note C
to the condensed financial statements).
Form 10-Q
Page 30
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Provision for Federal Income Taxes:
The provision for income taxes for the first nine 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
reduction 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.
Liquidity and Sources of Capital:
Working capital at September 30, 2003 was approximately $52,000,000 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 (at December 31, 2002) and receivables. In addition, the
Company maintains a Capital Construction Fund with a market value of
approximately $240,000,000 at September 30, 2003. Net cash provided by operating
activities in the first nine months of 2003 was more than $182,000,000 (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 provided by
operating activities of $3,000,000 in the first nine months of 2002. Net cash
provided by operating activities in the first nine 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 September 30, 2003, compared with
the actual TCE rates achieved during the first nine 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. The notes, which are due in March 2013, have a coupon of 8.25%.
Proceeds from the offering of approximately $194,849,000 were used to repay a
portion of the balances then outstanding under long-term revolving credit
facilities. As of September 30, 2003, the Company had unsecured long-term
revolving credit facilities aggregating $650,000,000, of which $438,000,000 was
unused, and an unsecured short-term revolving credit facility of $45,000,000, of
which $34,900,000 was unused. 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 $69,844,000 has been classified as long-term.
In August and October 2003, the Company concluded two new five-year unsecured
revolving credit facilities aggregating $330,000,000, which together with its
existing $350,000,000 long-term credit facility that matures in December 2006,
results in aggregate long-term revolving credit availability of $680,000,000.
The maturities of the two newly executed facilities may, subject to lender
approval, be extended for two, one-year periods on the first and second
anniversary dates of each of the two facilities. The terms, conditions and
financial covenants contained in both agreements are more favorable than those
contained in the existing long-term revolving credit facility that matures in
December 2006. Borrowings under both of the new facilities bear interest at a
rate based on LIBOR plus a margin. In
Form 10-Q
Page 31
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of Capital (continued):
consideration of entering into these two new revolving credit facilities, the
Company reduced the maximum availability under its revolving credit facility
that matures in April 2005 to $150,000,000 from $350,000,000 by September 30,
2003 and terminated the facility in October 2003.
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 September 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.
As of September 30, 2003, the joint ventures in which the Company participates
had total bank debt of $225,342,000. The Company's percentage interests in these
joint ventures range from 30% to 49.9%. The Company has guaranteed a total of
$30,783,000 of the joint venture debt at September 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 September 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 the fourth quarter of 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
September 30, 2003, the interest rate swaps effectively convert the Company's
interest rate exposure on $442,000,000 from a floating rate based on LIBOR to an
average fixed rate of 6.53%.
Form 10-Q
Page 32
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of Capital (continued):
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/(loss), as
reflected in the condensed consolidated statements of operations, to EBITDA:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income/(loss) $ 14,036 $(29,661) $100,111 $(25,247)
Provision/(credit) for federal
income taxes 3,789 (6,510) 38,100 (4,000)
Interest expense 16,480 13,267 45,042 40,081
Depreciation and amortization 23,641 20,466 67,044 59,781
-------- -------- -------- --------
EBITDA $ 57,946 $ (2,438) $250,297 $ 70,615
======== ======== ======== ========
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.
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 September 30, 2003, there was $175,000,000 outstanding
under such facility.
Independent Accountants' Report on Review of Interim Financial Information
The accompanying condensed consolidated financial statements as of September 30,
2003 and for the three months and nine months ended September 30, 2003 and 2002
are unaudited; however, such financial statements have been reviewed by the
Company's independent accountants.
Form 10-Q
Page 33
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 September 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 September 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 September 30, 2003.
PART II
Item 1. Legal Proceedings
On September 11, 2003, the Department of Transport of the Government of Canada
commenced an action in the Provincial Court of New Brunswick against the
Company's international flag Product Carrier, the Uranus, charging the vessel
with violation of the Canadian Oil Pollution Prevention Regulations promulgated
under the Canada Shipping Act with respect to discrepancies in the vessel's oil
record book during the period between December 2002 and March 2003. The
regulations provide for a maximum fine for each of the six alleged violations
not to exceed Cdn.$200,000 (approximately $152,000). The Company has not been
charged with making any improper discharge into the environment.
Subsequently, on October 1, 2003, the U.S. Department of Justice served a grand
jury subpoena directed at the Uranus and the Company's handling of waste oils.
The Company is cooperating with the U.S. investigation.
The Company has in place extensive systems and procedures aboard its vessels and
has provided additional training to its crews to ensure the proper handling of
waste oil aboard its vessels. The Company is committed to safeguarding the
environment in the operation of its vessels, and it is the Company's policy to
comply fully with all applicable oil pollution regulations.
Form 10-Q
Page 34
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Item 6(a). Exhibits
See Exhibit Index on page 37.
Item 6(b). Reports on Form 8-K
During the quarter ended September 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 August 7, 2003, that it had issued a press release on August 7,
2003 with respect to the Registrant's results for the quarter ended June 30,
2003.
Form 10-Q
Page 35
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 September 30, 2003 and
the related condensed consolidated statements of operations for the three and
nine month periods ended September 30, 2003 and 2002 and the condensed
consolidated statements of cash flows and changes in shareholders' equity for
the nine month periods ended September 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.
As discussed in Note C to the condensed consolidated financial statements, on
July 1, 2003 the Company adopted Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities."
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
October 29, 2003
Form 10-Q
Page 36
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: October 30, 2003 /s/ Morton P. Hyman
-----------------------------------------------
Morton P. Hyman
Chairman, President and Chief Executive Officer
Date: October 30, 2003 /s/ Myles R. Itkin
-----------------------------------------------
Myles R. Itkin
Senior Vice President, Chief Financial Officer
and Treasurer
Form 10-Q
Page 37
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
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.