UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
---------
(X) QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
JUNE 30, 1998
-------------
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 NO.
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 Identi-
incorporation or organization) fication No.)
1114 Avenue of the Americas, New York, New York 10036
- ----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (212) 869-1222
-----------------
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
--- ---
Common Shares outstanding as of August 10, 1998 - 36,794,121
<PAGE>
<TABLE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
-----------------------------------------
<CAPTION>
JUNE DECEMBER
30, 1998 31, 1997 (A)
------------- ------------
(UNAUDITED)
ASSETS
------
Current Assets:
- --------------
<S> <C> <C>
Cash, including interest-bearing
deposits of $97,208,000 and
$109,835,000 $ 98,458,000 $ 113,195,000
Receivables 29,948,000 30,806,000
Prepaid expenses 24,862,000 26,379,000
-------------- --------------
Total Current Assets 153,268,000 170,380,000
Investments in Marketable Securities 29,025,000 26,792,000
Capital Construction Fund 180,739,000 174,892,000
Vessels, at cost, less accumulated
depreciation of $493,849,000 and
$459,965,000 - Notes F and H7 1,081,972,000 1,106,790,000
Vessels Under Capital Leases, less
accumulated amortization of
$64,858,000 and $87,392,000 -
Note H7 57,232,000 65,475,000
Vessels included in Disposal Program,
at estimated fair value - Note H2 83,454,000 135,860,000
Investment in Cruise Business - Note B 160,269,000
Investments in Bulk Shipping Joint
Ventures - Note C 96,612,000 95,542,000
Other Assets 82,791,000 87,224,000
-------------- --------------
$1,765,093,000 $2,023,224,000
============== ==============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
<S> <C> <C>
Accounts payable $ 6,116,000 $ 6,099,000
Sundry liabilities and accrued expenses 47,857,000 36,649,000
-------------- --------------
53,973,000 42,748,000
Current installments of long-term
debt - Note F 22,881,000 22,430,000
Current obligations under capital
leases - Note H7 3,959,000 5,867,000
-------------- --------------
Total Current Liabilities 80,813,000 71,045,000
Advance Time Charter Revenues 5,703,000 7,433,000
Long-term Debt - Notes F and H7 691,441,000 966,212,000
Obligations Under Capital Leases -
Note H7 79,067,000 90,094,000
Deferred Federal Income Taxes
($110,689,000 and $102,514,000)
and Deferred Credits - Note E 116,792,000 108,643,000
Shareholders' Equity - Notes E and H3 791,277,000 779,797,000
Commitments and Other Comments -
Note H
-------------- --------------
$1,765,093,000 $2,023,224,000
============== ==============
<FN>
(A) The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date.
(See Accompanying Notes)
</TABLE>
<PAGE>
<TABLE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
- --------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
JUNE JUNE JUNE JUNE
30, 1998 30, 1997 30, 1998 30, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shipping Revenues:
Revenue from voyages $104,139,000 $121,620,000 $209,172,000 $248,401,000
Income attributable
to bulk shipping
joint ventures -
Note C
767,000 1,181,000 1,070,000 2,193,000
------------ ------------ ------------ ------------
104,906,000 122,801,000 210,242,000 250,594,000
------------ ------------ ------------ ------------
Shipping Expenses:
Vessel and voyage -
Note D 62,629,000 73,339,000 126,874,000 151,887,000
Depreciation of
vessels and
amortization
of capital leases 18,284,000 20,033,000 35,065,000 39,701,000
Agency fees - Note D 8,321,000 8,954,000 17,140,000 17,798,000
General and
administrative 2,019,000 2,156,000 4,893,000 5,285,000
------------ ------------ ------------ ------------
91,253,000 104,482,000 183,972,000 214,671,000
------------ ------------ ------------ ------------
Income from Vessel
Operations 13,653,000 18,319,000 26,270,000 35,923,000
Equity in Results of
Cruise Business -
Note B 1,293,000 ( 179,000)
Other Income (net) -
Note G 13,419,000 11,805,000 20,730,000 19,576,000
------------ ------------ ------------ ------------
27,072,000 31,417,000 47,000,000 55,320,000
Interest Expense 15,831,000 21,567,000 34,796,000 41,383,000
------------ ------------ ------------ ------------
11,241,000 9,850,000 12,204,000 13,937,000
Gain on Sale of
Investment in
Cruise Business -
Note B 42,288,000
Provision for Loss on
Vessel Disposal
Program - Note H2 (5,100,000)
------------ ------------ ------------ ------------
Income before Federal 11,241,000 9,850,000 49,392,000 13,937,000
Income Taxes
Provision for Federal
Income Taxes,
reflecting deferred
provision of
$750,000 $2,760,000,
$8,175,000 and
$4,800,000 - Note E 3,750,000 2,760,000 18,075,000 4,800,000
------------ ------------ ------------ ------------
Net Income $ 7,491,000 $ 7,090,000 $ 31,317,000 $ 9,137,000
============ ============ ============ ============
Per Share Amounts - Note H3:
Basic and diluted net
income $.20 $.19 $.85 $.25
==== ==== ==== ====
Cash dividends declared* $.30 $.30 $.45 $.45
==== ==== ==== ====
<FN>
*Includes $.15 (1998 and 1997) per share for the third quarter.
(See Accompanying Notes)
</TABLE>
<PAGE>
<TABLE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
--------------------------------------------------------
<CAPTION>
JUNE JUNE
30, 1998 30, 1997
----------- ------------
<S> <C> <C>
Net cash provided by Operating Activities $ 34,627,000 $ 41,350,000
----------- ------------
Cash Flows from Investing Activities:
Proceeds from sale of investment in
cruise business 198,474,000
Purchase of vessel under capital lease ( 7,700,000)(b)
Purchases of marketable securities ( 763,000)(c)( 69,229,000)
Proceeds from sales of marketable
securities 9,557,000 58,857,000
Purchase of minority interest ( 5,102,000)
Additions to vessels ( 859,000) ( 75,673,000)(a)
Proceeds from sale of vessels included
in disposal program 47,306,000
Proceeds from disposal of other vessels 1,409,000
Other - net ( 1,147,000) ( 125,000)
------------ ------------
Net cash provided by/(used in)
investing activities 244,868,000 ( 89,863,000)
------------ ------------
Cash Flows from Financing Activities:
Issuance of long-term debt 90,000,000(a)
Payments on long-term debt and
obligations under capital leases (284,147,000) (19,599,000)
Cash dividends paid ( 11,038,000) (10,878,000)
Other - net 953,000 2,160,000
------------ ------------
Net cash (used in)/provided by
financing activities (294,232,000) 61,683,000
------------ ------------
Net (Decrease)/increase in Cash ( 14,737,000) 13,170,000
Cash, including interest-bearing
deposits, at beginning of period 113,195,000 109,120,000
------------ ------------
Cash, including interest-bearing
deposits, at end of period $ 98,458,000 $122,290,000
============ ============
<FN>
(a) Excludes $38,000,000 in connection with the delivery of a
vessel.
(b) Excludes $7,906,000, representing the outstanding principal
balance of debt assumed in connection with the purchase of a vessel
under capital lease.
(c) Excludes $4,083,000, representing the carrying amount of
131,400 shares of Royal Caribbean Cruises Ltd. ("RCCL") retained and
reclassified upon sale of 3,650,000 shares of RCCL.
(See Accompanying Notes)
</TABLE>
<PAGE>
<TABLE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
---------------------------------------------------------------------
<CAPTION>
Paid-in Accumulated Other
Common Additional Retained Treasury Stock Comprehensive
Stock* Capital Earnings Shares Amount (Loss)/Income** Total
-------- --------- -------- ------ ------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1998 $39,591,000 $96,149,000 $685,128,000 2,798,196 ($41,719,000) $ 648,000 $779,797,000
------------
Net Income 31,317,000 31,317,000
Unrealized
(Loss) on
Available-
For-Sale
Securities (3,305,000) ( 3,305,000)
------------
Comprehensive
Income 28,012,000***
------------
Cash Dividends
Declared ( 16,557,000) ( 16,557,000)
Options
Exercised 4,000 ( 1,558) 21,000 25,000
----------- ---------- ------------ -------- ------------ ----------- ------------
Balance at
June 30, 1998 $39,591,000 $96,153,000 $699,888,000 2,796,638 ($41,698,000) ($2,657,000) $791,277,000
=========== =========== ============ ========= ============ =========== ============
Balance at
January 1,
1997 $39,591,000 $93,725,000 $687,981,000 3,355,390 ($49,210,000) ($2,649,000) $769,438,000
------------
Net Income 9,137,000 9,137,000
Unrealized Gain
on Available-
For-Sale
Securities 3,416,000 3,416,000
------------
Comprehensive
Income 12,553,000****
------------
Cash Dividends
Declared ( 16,317,000) ( 16,317,000)
Options
Exercised 322,000 ( 120,442) 1,594,000 1,916,000
----------- ----------- ------------ --------- ------------ ----------- ------------
Balance at
June 30, 1997 $39,591,000 $94,047,000 $680,801,000 3,234,948 ($47,616,000) $ 767,000 $767,590,000
=========== =========== ============ ========= ============ =========== ============
<FN>
*Par value $1 per share; 60,000,000 shares authorized and 39,590,759 shares
issued.
**Represents unrealized (losses)/gains on available-for-sale securities, net of
tax.
***Comprehensive loss for the three months ended June 30, 1998 was $1,501,000.
****Comprehensive income for the three months ended June 30, 1997 was $16,197,000.
(See Accompanying Notes)
</TABLE>
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
Notes to Unaudited Condensed Financial Statements
General - As contemplated by the Securities and Exchange Commission, the
accompanying financial statements and footnotes, which have been
rounded to the nearest thousand dollars, have been condensed and
therefore do not contain all disclosures required by generally
accepted accounting principles. Reference should be made to the
Company's Annual Report to Shareholders for the year ended December
31, 1997.
The statements as of June 30, 1998 and for the three month and six month
periods ended June 30, 1998 and June 30, 1997 are unaudited. In the
opinion of the Company, all adjustments (which were of a normal
recurring nature) have been made to present fairly the results for
such unaudited interim periods.
The results of operations for the three month and six month periods ended
June 30, 1998 are not necessarily indicative of those for a full
fiscal year.
Note A - Foreign Subsidiaries:
<TABLE>
A condensed summary of the combined assets and liabilities of the Company's
foreign (incorporated outside the U.S.) subsidiaries, whose operations
are principally conducted in U.S. Dollars, follows:
<CAPTION>
AS OF
-------------------------------
JUNE DECEMBER
30, 1998 31, 1997
-------------- ---------------
<S> <C> <C>
Current Assets $ 25,689,000 $ 27,004,000
Vessels, net and Vessels Included
in Disposal Program 974,905,000 1,048,945,000
Investment in Cruise Business 160,269,000
Other Assets 123,419,000 121,976,000
-------------- --------------
1,124,013,000 1,358,194,000
-------------- --------------
Current Installments of
Long-term Debt, including inter-
company of $66,800,000 and
$35,800,000 77,250,000 46,086,000
Other Current Liabilities 14,420,000 19,613,000
-------------- --------------
Total Current Liabilities 91,670,000 65,699,000
Long-term Debt, including
intercompany of $167,000,000
and $107,400,000, and Deferred
Credits, etc. 235,162,000 350,177,000
-------------- --------------
326,832,000 415,876,000
-------------- --------------
Net Assets $ 797,181,000 $ 942,318,000
============== ==============
<FN>
(See Notes on Following Pages)
</TABLE>
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Notes to Unaudited Condensed Financial Statements
Note B - Investment in Cruise Business:
In March 1998, the Company recognized a gain of $42,288,000 ($26,500,000
after tax) from the sale of 3,650,000 shares of Royal Caribbean
Cruises Ltd. ("RCCL") common stock that it had acquired in July 1997
in connection with the disposal of its joint venture interest in
Celebrity Cruise Lines Inc. The Company has applied the proceeds from
this sale, approximately $180,000,000 net of taxes, to reduce amounts
outstanding under its long-term credit facility.
Note C - Bulk Shipping Joint Ventures:
<TABLE>
Certain subsidiaries have investments in bulk shipping joint ventures. A
condensed summary of the combined assets and liabilities and results
of operations of the bulk shipping joint ventures follows:
<CAPTION>
AS OF
--------------------------
JUNE DECEMBER
30, 1998 31, 1997
----------- ------------
<S> <C> <C>
Cash ($47,458,000 and $38,432,000) and
other current assets (including
$1,060,000 and $2,640,000 due
from owners) $ 54,348,000 $ 47,003,000
Vessels, net 198,167,000 205,770,000
Other assets (including $874,000
and $557,000 due from owners) 2,292,000 3,486,000
----------- ------------
254,807,000 256,259,000
------------ ------------
Current installments of long-term debt 7,500,000 7,500,000
Other current liabilities 6,375,000 6,176,000
------------ ------------
13,875,000 13,676,000
Long-term debt 45,000,000 48,750,000
------------ ------------
58,875,000 62,426,000
------------ ------------
Net assets (principally undistributed
net earnings) $195,932,000 $193,833,000
============ ============
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue, primarily from
voyages (including
$7,033,000,
$10,456,000,
$13,418,000 and
$18,545,000 from
vessels chartered
to owners) $13,496,000 $13,193,000 $27,884,000 $25,050,000
Costs and expenses 11,980,000 10,816,000 25,785,000 20,665,000
----------- ----------- ----------- -----------
Net income $ 1,516,000 $ 2,377,000 $ 2,099,000 $ 4,385,000
=========== =========== =========== ===========
<FN>
(See Notes on Following Pages)
</TABLE>
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
Notes to Unaudited Condensed Financial Statements
Note D - Agency Fees and Brokerage Commissions:
All subsidiaries with vessels and certain joint ventures are parties to
agreements with Maritime Overseas Corporation ("Maritime") that
provide, among other matters, for Maritime and subsidiaries to render
services related to the chartering and operation of the vessels and
certain general and administrative services for which Maritime and
subsidiaries receive specified compensation. Vessel and voyage
expenses include $1,291,000 (three months ended June 30, 1998),
$1,566,000 (three months ended June 30, 1997), $2,595,000 (six months
ended June 30, 1998) and $3,090,000 (six months ended June 30, 1997) of
brokerage commissions to Maritime. By agreement, Maritime's
compensation for any year is limited to the extent Maritime's
consolidated net income from shipping operations would exceed a
specified amount (approximately $1,221,000 for 1998). Maritime is
owned by a director of the Company; directors or officers of the
Company constitute all four of the directors and the majority of the
principal officers of Maritime.
In June 1998, the Company announced that it plans to assume direct
management and operation of its bulk shipping fleet, terminating its
arrangements, by mutual consent, with Maritime. The Company will
employ the staff of Maritime, acquire certain employee benefit plan
assets and assume related obligations of Maritime and acquire certain
of Maritime's other assets. The transactions are expected to be
completed in the fourth quarter of 1998 and do not involve material
amounts.
Note E - Taxes:
Effective from January 1, 1987, earnings of the foreign shipping companies
are subject to U.S. income taxation currently; post-1986 taxable income
may be distributed to the U.S. parent without further tax. Prior
thereto, tax on such earnings was deferred as long as the earnings were
reinvested in foreign shipping operations. Foreign income,
substantially all of which was earned by companies which are not
subject to income taxes in their country of incorporation, aggregated
$6,058,000 (three months ended June 30, 1998), $7,318,000 (three months
ended June 30, 1997), $52,154,000, including $42,288,000 from the sale
of 3,650,000 shares of RCCL, (six months ended June 30, 1998) and
$11,065,000 (six months ended June 30, 1997), before any U.S. income
tax effect. No provision for U.S. income taxes on the undistributed
income of the foreign shipping companies accumulated through December
31, 1986 was required, since such undistributed earnings 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.
Federal income taxes paid amounted to $4,900,000 and $200,000 in the six
months ended June 30, 1998 and 1997, respectively.
(See Notes on Following Pages)
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Notes to Unaudited Condensed Financial Statements
Note F - Long-term Debt:
Agreements relating to long-term debt provide for prepayment privileges (in
certain instances with penalties), a limitation on the amount of total
borrowings, and acceleration of payment under certain circumstances,
including if any of the consolidated financial covenants contained in
certain of such agreements are not met. The amount that the Company
can use for Restricted Payments, as defined, including dividends and
purchases of its capital stock, is limited as of June 30, 1998 to
$24,700,000.
As of June 30, 1998, the Company is a party to fixed to floating interest
rate swaps with various major financial institutions covering notional
amounts aggregating $600,000,000, pursuant to which it pays LIBOR (5.8%
as of June 30, 1998) and receives fixed rates ranging from 5.8% to 8.1%
calculated on the notional amounts. The Company is also a party to floating
to fixed interest rate swaps with various major financial institutions
covering notional amounts aggregating approximately $79,000,000,
pursuant to which it pays fixed rates ranging from 6.7% to 7.1% and
receives LIBOR. These agreements contain no leverage features and have
various maturity dates from late 1998 to 2008.
Approximately 11% of the net book amount of the Company's vessels and
vessels under capital leases, representing three foreign flag and six
U.S. flag vessels, is pledged as collateral for certain long-term debt.
Interest paid approximated $35,476,000 (six months ended June 30, 1998) and
$40,203,000 (six months ended June 30, 1997), excluding capitalized
interest.
Note G - Other Income - net:
<TABLE>
Other income - net consists of the following:
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Investment income:
Interest and dividends $ 2,405,000 $ 2,142,000 $ 5,347,000 $ 4,292,000
Gain on sale of
securities 9,802,000 9,476,000 13,848,000 15,565,000
Provision for loss
on investments (714,000)
---------- ---------- ----------- -----------
12,207,000 11,618,000 19,195,000 19,143,000
Gain on disposal
of vessels 145,000 145,000
Miscellaneous - net 1,212,000 42,000 1,535,000 288,000
---------- ---------- ----------- -----------
$13,419,000 $11,805,000 $20,730,000 $19,576,000
=========== =========== ============ ===========
<FN>
(See Note on Following Pages)
</TABLE>
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Notes to Unaudited Condensed Financial Statements
Note H - Commitments and Other Comments:
1. As of August 10, 1998, the Company has commitments for the
construction of two 308,700 dwt double-hulled foreign flag VLCCs for
delivery in 2000, with an aggregate contract price based on standard
shipyard contract terms of $140,000,000, discounted to approximately
$130,000,000 to reflect the prepayment of a substantial portion of
the purchase price. The prepayment, $105,000,000, will be made in
August 1998, after receipt of refundment guaranties from a major
U.S. insurance company. The Company will draw down on its revolving
credit facility to fund the prepayment.
2. As a result of the current weakness in world dry bulk markets,
reflecting, in particular, the Asian economic downturn, the Company
decided to extend the period over which it expects to dispose of its
10 older and less competitive dry bulk vessels included in the
program for which a reserve was established in 1997; accordingly, it
recorded a charge of $5,100,000 ($3,315,000 after tax) in the first
quarter of 1998, representing an increase in the reserve, primarily
a provision for discount of the cash proceeds expected to be
realized subsequent to March 31, 1998. To date, four vessels have
been sold with aggregate proceeds for the four vessels of
approximately $53,000,000.
3. Basic net income per share is based on the following weighted
average number of common shares outstanding during each period:
36,794,000 shares (three months ended June 30, 1998), 36,280,000
shares (three months ended June 30, 1997), 36,793,000 shares (six
months ended June 30, 1998) and 36,265,000 shares (six months ended
June 30, 1997). Diluted net income per share, which gives effect to
stock options, is based on the following weighted average number of
shares during each period: 36,867,000 shares (three months ended
June 30, 1998), 36,380,000 shares (three months ended June 30,
1997), 36,867,000 shares (six months ended June 30, 1998) and
36,359,000 shares (six months ended June 30, 1997).
4. The Company has hedged its exchange rate risk with respect to
contracted future charter revenues receivable in Japanese yen by
entering into currency swaps with a major financial institution that
will result in the Company receiving approximately $96,000,000 for
such foreign currency from July 1, 1998 through 2004.
5. In April 1998, the Company's Board of Directors adopted a stock
option plan covering up to 1,300,000 shares of the Company's common
stock, for which options may be granted at exercise prices of at
least fair market value of the common stock at the time of grant.
The plan received shareholder approval.
(See Note on Following Page)
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Notes to Unaudited Condensed Financial Statements
Note H - Commitments and Other Comments: (Continued)
6. The Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"),
effective with the first quarter of 1998. FAS 130 requires the
presentation of comprehensive income, which (in the Company's case)
presently comprises net income plus or minus the change in
unrealized gains or losses on the available-for-sale securities
portfolio. Comprehensive income for the three months and six months
ended June 30, 1998 and 1997 has been shown in the Statement of
Changes in Shareholders' Equity.
7. In March 1998, a subsidiary of the Company purchased a vessel
under capital lease. This vessel had a net carrying amount of
$5,241,000. The purchase price was $16,242,000, including the
assumption of $7,906,000 of debt to which the vessel was subject.
The excess, $5,044,000, of the purchase price over the carrying
amount, $11,198,000, of the lease obligation (which was removed from
the balance sheet) was recorded as an adjustment to the carrying
amount of the vessel.
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
-----------------------------------
Operations
- ----------
Income From Vessel Operations
- -----------------------------
Revenues and results of vessel operations of the Company are highly
sensitive to patterns of supply and demand for vessels of the types and
sizes owned and operated by the Company and the markets in which those
vessels operate. Freight rates for major bulk commodities are
determined by market forces including local and worldwide demand for
such commodities, volumes of trade, distances between sources and
destinations of cargoes and amount of available tonnage both at the
time such tonnage is required and over periods of projected
requirements. Available tonnage is affected, over time, by the amount
of newbuilding deliveries and removal of existing tonnage from service.
Results in particular periods are also affected by such factors as the
mix between voyage and time charters, the timing of the completion of
voyage charters, the time and prevailing rates when charters that are
currently being performed were negotiated, the levels of applicable
rates and the business available as particular vessels come off
existing charters, and the timing of drydocking of vessels.
Rates in the first half of 1998 in the international tanker markets averaged
above those of the same period of 1997 for VLCCs (over 200,000 dwt) but
were disappointing for most of the other sectors. Rates for modern
VLCCs peaked in November 1997 at above $50,000 per day, plunged to
around $20,000 per day in early 1998 and, thereafter, supported by
increased crude export movements from the Middle East and increased
deployment of VLCCs for floating storage, rose throughout the first
quarter reaching above $40,000 per day in the second quarter,
comfortably above the comparable 1997 period. VLCC rates were in the
$36,000 to $44,000 per day range early in the third quarter.
Rates for Aframax tankers (80,000 to 120,000 dwt) in the Caribbean market
(the Company's primary Aframax trading area) began 1998 at above
$25,000 per day, fell to below $10,000 per day, then rose briefly
before declining to average approximately $14,000 per day in the second
quarter. Average Aframax rates are presently approximately $14,000 per
day, somewhat below the level of the comparable 1997 period. This
follows a modest rally that was short lived, as oil inventories were
being replenished in anticipation of price increases later this summer.
The Company's Aframax tanker pool with PDV Marina continues to augment
its base of Petrleos de Venezuela cargoes with backhauls and contracts
of affreightment, resulting in increased operating efficiencies and
reduced idle time for OSG's 10 pool vessels. Suezmax (120,000 to
200,000 dwt) rates in the first half of 1998, on average, were a bit
higher than levels prevailing in the first half of 1997. Early in the
third quarter, these vessels were earning rates between $15,000 and
$20,000 per day, approximately the same as levels in the comparable
1997 period. Product tanker rates have generally been at
unsatisfactory levels throughout the first half of 1998.
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Income From Vessel Operations (continued)
- -----------------------------
Dry bulk rates for both Capesize (over 100,000 dwt) and Panamax (50,000 to
80,000 dwt) vessels moved lower in the first half of 1998 compared to
both the fourth quarter and first half of 1997 and continued at these low
levels early in the third quarter of 1998. The current weakness in world
dry bulk markets reflects, in particular, the Asian economic downturn. As
a result, the Company decided to extend the period over which it expects to
dispose of its 10 older and less competitive dry bulk vessels included
in the program for which a reserve was established in 1997;
accordingly, it recorded a charge of $5.1 million ($3.3 million after
tax) in the first quarter of 1998, representing an increase in the
reserve, primarily a provision for discount of the cash proceeds
expected to be realized subsequent to March 31, 1998. To date, four
vessels have been sold, with aggregate proceeds for the four vessels of
approximately $53 million.
As one indication of recent trends in various charter markets, set forth
below are selected average daily spot market rates for various types
and sizes of vessels in the first and second quarters of both 1998 and
1997 based on the published reports of one well-known industry research
organization. It is important to note that rates tend to fluctuate
significantly over the course of time, and can vary widely based on
factors such as the age, condition and position of a particular vessel.
Accordingly, the rates shown are not necessarily indicative of rates
achieved by the Company's vessels during any of the periods.
<TABLE>
<CAPTION>
1998* 1997*
----------------- ------------------
Second First Second First
Tankers Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Modern VLCCs $38,700 $34,200 $31,500 $29,800
Suezmaxes (W. Africa - U.S.) 20,800 24,700 21,100 21,500
Aframaxes (Caribbean market) 13,700 19,600 27,700 24,700
Products carriers 9,600 10,700 14,000 17,800
Dry Bulk Carriers
Capesize 9,400 12,900 14,300 15,000
Panamaxes 5,700 6,400 8,100 9,700
<FN>
*Average market rates as reported by industry sources.
</TABLE>
Income from vessel operations for the second quarter and first half of 1998
decreased by approximately $4,700,000 and $9,700,000, respectively,
from the results for the corresponding periods of 1997. Income from
foreign flag vessel operations accounted for about $2,700,000 and
$5,300,000, respectively, of the decreases; this resulted from reduced
rates obtained for the Company's Aframaxes, particularly in the second
quarter of 1998, certain of the Company's Suexmax tonnage, most of its
products carriers and its two modern Capesize bulk carriers. These
declines were partially offset by the inclusion in the 1998 operating
results of one double-hulled VLCC
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Income From Vessel Operations (continued)
- -----------------------------
which began operations early in the second quarter of 1997 and improved
rates earned by the Company's double-hulled VLCC tonnage trading in
the spot market. Overall, the total number of operating days for the
foreign flag fleet (other than vessels included in the aforementioned
disposal program) was not significantly different in the 1998 periods
compared to 1997. Income from operations of the Company's U.S. flag
fleet in the second quarter and first half of 1998 declined by
$2,000,000 and $4,400,000, respectively, from comparable 1997 periods,
reflecting the lay-up of one small crude tanker for all of the first
half of 1998 and of an additional small crude tanker and two small U.S.
flag dry cargo ships for substantial portions of the 1998 periods,
whereas the U.S. flag fleet experienced no lay-up days in the
comparable periods of 1997. Overall, the U.S. flag crude tanker fleet
had 150 and 250 fewer operating days in the 1998 second quarter and
first half, respectively, than in the 1997 second quarter and first
half. Since October 1, 1997, depreciation of the dry cargo vessels
included in the aforementioned disposal program ceased. Income from
vessel operations for the second quarter and first half of 1997
includes the results of these 10 ships, as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, 1997 June 30, 1997
------------- ----------------
<S> <C> <C>
Revenue from voyages $10,469,000 $22,791,000
Costs and expenses, including
agency fees ( 10,014,000) ( 21,195,000)
Depreciation ( 2,928,000) ( 6,312,000)
------------ ------------
(Loss) from vessel operations ($ 2,473,000) ($ 4,716,000)
============ ============
</TABLE>
Equity in Results of Cruise Business
- ------------------------------------
In March 1998, the Company recognized a gain of $42,288,000 ($26,500,000
after tax) from the sale of 3,650,000 shares of Royal Caribbean Cruises
Ltd. ("RCCL") common stock, that it had acquired in July 1997 in
connection with the disposal of its joint venture interest in Celebrity
Cruise Lines Inc. ("CCLI"). The Company has applied the proceeds from
this sale of approximately $180,000,000, net of taxes, to reduce
amounts outstanding under its long-term credit facility (see Interest
Expense and Liquidity and Sources of Capital below). Accordingly, in
the first half of 1998 the
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Equity in Results of Cruise Business (continued)
- ------------------------------------
Company did not record any equity in the earnings of RCCL, whereas the
Company recorded a loss of $179,000 in the first half of 1997 and
income of $1,293,000 in the second quarter of 1997 from its then
investment in CCLI.
Other Income - Net
- ------------------
The details of other income are shown in Note G. Aggregate interest and
dividends increased in the 1998 second quarter and first half as
compared to the corresponding periods of 1997 because of increased
amounts utilized for interest-bearing deposits and investments. Gains
on sale of securities were $9,802,000 (second quarter of 1998),
$13,848,000 (first half of 1998), $9,476,000 (second quarter of 1997)
and $15,565,000 (first half of 1997).
Interest Expense
- ----------------
Interest expense decreased in the second quarter and first half of 1998 as a
result of a substantial decrease in the average amount of debt
outstanding in the 1998 periods compared with 1997, reflecting the
reduction of debt with the cash proceeds of $120,000,000 from the sale
of the Company's investment in CCLI in July 1997, the proceeds of
approximately $180,000,000, net of taxes, from the sale of RCCL common
stock referred to above and proceeds of $53,000,000 from the
aforementioned sale of four dry cargo vessels. Interest expense in the
1997 second quarter and first half were reduced by $300,000 and
$1,300,000, respectively, of interest capitalized in connection with
vessel construction. Interest expense reflects $1,100,000 (second
quarter of 1998), $2,100,000 (first half of 1998), $1,200,000 (second
quarter of 1997) and $2,600,000 (first half of 1997) of net benefits
from the interest rate swaps referred to below in Liquidity and Sources
of Capital.
Provision for Federal Income Taxes
- ----------------------------------
The provisions for federal income taxes in the second quarter and first half
of 1998 increased from the comparable periods of 1997 because of the
increase in pretax income (reflecting in the first half of 1998 a
pretax gain of $42,288,000 on the sale of shares of RCCL). The
provision in the first half of 1998 includes approximately $1,000,000 of
tax on previously untaxed RCCL earnings and the provisions in all periods
reflect items that are not subject to tax and the dividends received deduction.
New Accounting Standard
- -----------------------
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133"), which is required to be adopted in years beginning after
June 15, 1999. The Company expects to adopt the new statement
effective January 1, 2000. FAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through
income. For derivatives that are hedges, depending on the nature of
the hedges, changes in the fair value of derivatives will either be
offset against changes in fair value of the hedged liabilities or firm
commitments through earnings or recognized in
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
New Accounting Standard (continued)
- -----------------------
other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
The Company has not yet determined what the effect of FAS 133 will be on its
earnings and financial position.
Liquidity and Sources of Capital
- --------------------------------
Working capital at June 30, 1998 was approximately $72,500,000. Current
assets are highly liquid, consisting principally of cash, interest-
bearing deposits and receivables. The Company also has investments in
marketable securities carried as noncurrent assets, other than
securities included in the Capital Construction Fund, with a market
value of approximately $29,000,000 at June 30, 1998.
Net cash provided by operating activities in the first half of 1998
approximated $35,000,000 (which is not necessarily indicative of the
cash to be provided by operating activities for a full fiscal year).
Current financial resources, together with cash anticipated to be
generated from operations, are expected to be adequate to meet
requirements for short-term funds in the next year. The Company has an
unsecured long-term credit facility of $600,000,000, of which
$102,000,000 was used at June 30, 1998, and an unsecured short-term
credit facility of $30,000,000, of which $8,000,000 was used at that
date. The latter amount has been classified as long-term since it is
expected to be refinanced under the long-term credit
facility. The cash received from the sale of RCCL common stock referred to
under Equity in Results of Cruise Business was used to reduce amounts
outstanding under the long-term credit facility.
The Company has used interest rate swaps to effectively convert a portion of
its debt either from a fixed to floating rate basis or from floating to
fixed rate, reflecting management's interest rate outlook at various
times. As of June 30, 1998, the Company is a party to fixed to
floating interest rate swaps (designated as hedges against certain
debt) with various major financial institutions covering notional
amounts aggregating $600,000,000, pursuant to which it pays LIBOR (5.8%
as of June 30, 1998) and receives fixed rates ranging from 5.8% to 8.1%
calculated on the notional amounts. The Company is also a party to
floating to fixed interest rate swaps (designated as hedges against
certain debt) with various major financial institutions covering
notional amounts aggregating approximately $79,000,000, pursuant to
which it pays fixed rates ranging from 6.7% to 7.1% and receives LIBOR.
These agreements contain no leverage features and have various maturity
dates from late 1998 to 2008. The Company uses derivative financial
instruments for trading purposes from time to time. The Company has
hedged its exchange rate risk with respect to contracted future charter
revenues receivable in Japanese yen to minimize the effect of foreign
exchange rate fluctuations on reported income by entering into currency
swaps with a major financial institution to deliver such foreign
currency at fixed rates that will result in the Company receiving
approximately $96,000,000 for such foreign currency from July 1, 1998
through 2004.
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
---------------------------------------------------
Liquidity and Sources of Capital (continued)
- --------------------------------
As of August 10, 1998, the Company has commitments for the construction of
two 308,700 dwt double-hulled foreign flag VLCCs for delivery in 2000,
with an aggregate contract price based on standard shipyard contract
terms of $140,000,000, discounted to approximately $130,000,000 to
reflect the prepayment of a substantial portion of the purchase price.
The prepayment, $105,000,000, will be made in August 1998, after
receipt of refundment guaranties from a major U.S. insurance company.
The Company will draw down on its revolving credit facility to fund the
prepayment.
August 10, 1998
-----------------------------------------------------------------
Independent Accountant's Report on Review of Interim Financial Information
- --------------------------------------------------------------------------
The accompanying financial statements as of June 30, 1998 and for the three
and six months ended June 30, 1998 and 1997 are unaudited; however,
such financial statements have been reviewed by the Company's
independent accountants.
-------------------------------------------------------------------
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
PART II
-------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Annual Meeting of Stockholders on June 2, 1998 the stockholders
elected twelve directors, each for a term of one year, approved the
appointment of Ernst & Young LLP as independent auditors for the year
1998 and approved the adoption by the Board of Directors of the
Registrant's 1998 Stock Option Plan. Proxies for the meeting were
solicited pursuant to Regulation 14A of the Securities Exchange Act of
1934. A total of 31,700,890 shares were voted with respect to each of
the aforementioned matters, and there were no broker non-votes.
<TABLE>
The tabulation of the votes cast for each nominee for director was as
follows:
<CAPTION>
NUMBER OF SHARES
- -----------------------------------------------------------------------------
NAME OF NOMINEE WITHHELD AUTHORITY
FOR DIRECTOR VOTED FOR TO VOTE
- -----------------------------------------------------------------------------
<S> <C> <C>
Raphael Recanati 31,678,706 22,184
Morton P. Hyman 31,682,305 18,585
Robert N. Cowen 31,682,184 18,706
George C. Blake 31,682,330 18,560
Oudi Recanati 31,681,663 19,227
Thomas H. Dean 31,678,983 21,907
Michel Fribourg 31,678,366 22,524
William L. Frost 31,681,910 18,980
Ran Hettena 31,678,810 22,080
Stanley Komaroff 31,680,010 20,880
Solomon N. Merkin 31,682,119 18,771
Joel I. Picket 31,680,290 20,600
</TABLE>
The resolution to approve the appointment of Ernst & Young LLP as
independent auditors was adopted by a vote of 31,688,138 shares in
favor, 3,008 shares against and 9,744 shares abstained.
The adoption by the Board of Directors of the Registrant's 1998 Stock Option
Plan was approved by a vote of 31,478,633 shares in favor, 146,140
shares against and 76,117 shares abstained.
Item 6(a). Exhibits
- -------- --------
See Exhibit Index on page 21.
Item 6(b). Reports on Form 8-K
- --------- -------------------
The Registrant was not required to file any report on Form 8-K during the
quarter ended June 30, 1998.
<PAGE>
Ernst & Young LLP 787 Seventh Avenue Phone: 212 773 3000
New York, New York 10019
INDEPENDENT ACCOUNTANTS' REPORT ON REVIEW OF INTERIM
FINANCIAL INFORMATION
To the Shareholders
Overseas Shipholding Group, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Overseas Shipholding Group, Inc. and subsidiaries as of June 30, 1998,
the related condensed consolidated statements of income for the three
month and six month periods ended June 30, 1998 and 1997 and the
related condensed consolidated statements of cash flows and changes in
shareholders' equity for the six month periods ended June 30, 1998 and
1997. 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 in accordance with generally
accepted auditing standards, 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 condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Overseas Shipholding
Group, Inc. and subsidiaries as of December 31, 1997, 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 23, 1998 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, 1997, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from
which it has been derived.
ERNST & YOUNG LLP
August 10, 1998
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC.
AND SUBSIDIARIES
--------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
OVERSEAS SHIPHOLDING GROUP, INC.
--------------------------------
(Registrant)
Date: August 13, 1998 MORTON P. HYMAN
----------------- -------------------------
Morton P. Hyman
President
Date: August 13, 1998 ALAN CARUS
----------------- ------------------------
Alan Carus
Controller
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
EXHIBIT INDEX
-------------
15. Letter from Ernst & Young LLP.
27. Financial Data Schedule.
NOTE: Instruments authorizing long-term debt of the
Registrant and subsidiaries, which do not exceed
10% of their total assets 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.
EXHIBIT 15
----------
August 10, 1998
To the Shareholders
Overseas Shipholding Group, Inc.
We are aware of the incorporation by reference in the
Registration Statement (Form S-8 No. 33-44013) of Overseas
Shipholding Group, Inc. of our report dated August 10, 1998
relating to the unaudited condensed consolidated interim
financial statements of Overseas Shipholding Group, Inc. which
are included in its Form 10-Q for the quarter ended June 30,
1998.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report
is not part of the registration statement prepared or certified
by accountants within the meaning of Section 7 or 11 of the
Securities Act of 1933.
ERNST & YOUNG LLP
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 98,458
<SECURITIES> 0
<RECEIVABLES> 29,948
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 153,268
<PP&E> 1,781,365
<DEPRECIATION> 558,707
<TOTAL-ASSETS> 1,765,093
<CURRENT-LIABILITIES> 80,813
<BONDS> 770,508
<COMMON> 39,591
0
0
<OTHER-SE> 751,686
<TOTAL-LIABILITY-AND-EQUITY> 1,765,093
<SALES> 0
<TOTAL-REVENUES> 273,260
<CGS> 0
<TOTAL-COSTS> 189,072
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,796
<INCOME-PRETAX> 49,392
<INCOME-TAX> 18,075
<INCOME-CONTINUING> 31,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,317
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
