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
SEPTEMBER 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 November 9, 1998 - 36,795,397
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
---------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 1998 31, 1997 (A)
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Current Assets:
- --------------
Cash, including interest-bearing deposits
of $61,030,000 and $109,835,000 $ 65,482,000 $ 113,195,000
Receivables 37,733,000 30,806,000
Prepaid expenses 21,558,000 26,379,000
-------------- --------------
Total Current Assets 124,773,000 170,380,000
Investments in Marketable Securities 10,193,000 26,792,000
Capital Construction Fund 167,589,000 174,892,000
Vessels, at cost, less accumulated
depreciation of $509,984,000 and
$459,965,000 - Notes F and H7 1,180,196,000 1,106,790,000
Vessels Under Capital Leases, less
accumulated amortization of
$66,202,000 and $87,392,000 - Note H7 55,888,000 65,475,000
Vessels included in Disposal Program,
at estimated fair value - Note H2 79,428,000 135,860,000
Investment in Cruise Business - Note B 160,269,000
Investments in Bulk Shipping Joint
Ventures - Note C 97,216,000 95,542,000
Other Assets 79,943,000 87,224,000
-------------- --------------
$1,795,226,000 $2,023,224,000
============== ==============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
- -------------------
<S> <C> <C>
Accounts payable $ 3,153,000 $ 6,099,000
Sundry liabilities and accrued expenses 46,801,000 36,649,000
-------------- --------------
49,954,000 42,748,000
Current installments of long-term
debt - Note F 19,968,000 22,430,000
Current obligations under capital
leases - Note H7 4,004,000 5,867,000
-------------- --------------
Total Current Liabilities 73,926,000 71,045,000
Advance Time Charter Revenues 6,110,000 7,433,000
Long-term Debt - Notes F and H7 749,589,000 966,212,000
Obligations Under Capital
Leases - Note H7 78,552,000 90,094,000
Deferred Federal Income Taxes
($98,384,000 and
$102,514,000) and Deferred
Credits - Note E 103,912,000 108,643,000
Shareholders' Equity - Notes E
and H3 783,137,000 779,797,000
Commitments and Other Comments -
Note H
-------------- --------------
$1,795,226,000 $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 NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
----------------------------------------------------
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- -----------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1998 30, 1997 30, 1998 30, 1997
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Shipping Revenues:
Revenue from
voyages $104,885,000 $120,933,000 $314,057,000 $369,334,000
Income attributable
to bulk shipping
joint ventures -
Note C
604,000 719,000 1,674,000 2,912,000
------------ ------------ ------------ ------------
105,489,000 121,652,000 315,731,000 372,246,000
------------ ------------ ------------ ------------
Shipping Expenses:
Vessel and voyage -
Note D 64,315,000 76,922,000 191,189,000 228,809,000
Depreciation of
vessels and
amortization
of capital
leases 18,347,000 20,771,000 53,412,000 60,472,000
Agency fees -
Note D 8,593,000 8,793,000 25,733,000 26,591,000
General and
administrative 1,975,000 2,926,000 6,868,000 8,211,000
------------ ------------ ------------ ------------
93,230,000 109,412,000 277,202,000 324,083,000
------------ ------------ ------------ ------------
Income from Vessel
Operations 12,259,000 12,240,000 38,529,000 48,163,000
Equity in Results of
Cruise Business -
Note B 3,463,000 3,284,000
Other Income (net) -
Note G 10,551,000 12,023,000 31,281,000 31,599,000
------------ ------------ ------------ ------------
22,810,000 27,726,000 69,810,000 83,046,000
Interest Expense 14,991,000 21,475,000 49,787,000 62,858,000
------------ ------------ ------------ ------------
7,819,000 6,251,000 20,023,000 20,188,000
Gain on Sale of
Investment in
Cruise Business -
Note B
Gain Resulting from
Public Offering 21,576,000 42,288,000 21,576,000
of Shares by Royal
Caribbean Cruises
Ltd. - Note B 7,842,000 7,842,000
Provision for Loss
on Vessel disposal
program - Note H2 (26,536,000) ( 5,100,000) ( 26,536,000)
------------ ------------ ------------ ------------
Income before Federal
income taxes 7,819,000 9,133,000 57,211,000 23,070,000
Provision for Federal
income taxes,
reflecting deferred
provision/(credit)
of ($325,000),
$1,510,000, $7,850,000
and $6,310,000 -
Note E 2,625,000 3,950,000 20,700,000 8,750,000
------------ ------------ ------------ ------------
Net Income $ 5,194,000 $ 5,183,000 $ 36,511,000 $ 14,320,000
============ ============ ============ ============
Per Share Amounts - Note H3:
Basic and diluted net
income $.14 $.14 $.99 $.39
==== ==== ==== ====
Cash dividends declared $.45 $.45
==== ====
<FN>
(See Accompanying Notes)
</TABLE>
<PAGE>
<TABLE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
-----------------------------------------------------------------
<CAPTION>
SEPTEMBER SEPTEMBER
30, 1998 30, 1997
----------- ------------
<S> <C> <C>
Net cash provided by Operating Activities $ 43,471,000 $ 60,361,000
------------ ------------
Cash Flows from Investing Activities:
Proceeds from sale of investment in
cruise business 198,474,000 120,050,000
Purchase of vessel under capital lease ( 7,700,000)(b)
Purchases of marketable securities ( 753,000)(c) (100,959,000)
Proceeds from sales of marketable
securities 29,490,000 93,959,000
Purchase of minority interest ( 5,102,000)
Additions to vessels (112,619,000) ( 80,348,000)(a)
Proceeds from sale of vessels included
in disposal program 47,306,000
Proceeds from disposal of other vessels 4,612,000
Other - net ( 398,000) ( 5,653,000)
------------ ------------
Net cash provided by
investing activities 153,800,000 26,559,000
------------ ------------
Cash Flows from Financing Activities:
Issuance of long-term debt (a)
Payments on long-term debt and
obligations under capital leases (229,382,000) (77,916,000)
Cash dividends paid ( 16,557,000) (16,352,000)
Issuance of common stock upon exercise
Of stock options 8,291,000
Other - net 955,000 274,000
------------ ------------
Net cash (used in)
financing activities (244,984,000) ( 85,703,000)
------------ ------------
Net (Decrease)/increase in Cash ( 47,713,000) 1,217,000
Cash, including interest-bearing
deposits, at beginning of period 113,195,000 109,120,000
------------ ------------
Cash, including interest-bearing
deposits, at end of period $ 65,482,000 $110,337,000
============ ============
<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 of131,400
shares of Royal Caribbean Cruises Ltd. ("RCCL") retained and
reclassified upon sale of 3,650,000 shares of RCCL.
(See Accompanying Notes)
</TABLE>
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
-------------------------------------------------------------------
<TABLE>
<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 36,511,000 36,511,000
Unrealized
(Loss) on
Available-
For-Sale
Securities ( 16,641,000) ( 16,641,000)
------------
Comprehensive
Income 19,870,000***
------------
Cash Dividends ( 16,557,000) ( 16,557,000)
Options
Exercised 4,000 ( 1,714) 23,000 27,000
----------- ----------- ------------ --------- ----------- ----------- -------------
Balance at
September 30,
1998 $39,591,000 $96,153,000 $705,082,000 2,796,482 ($41,696,000) ($15,993,000) $783,137,000
=========== =========== ============ ========= =========== =========== ============
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 14,320,000 14,320,000
Unrealized Gain
on Available-
For-Sale
Securities 7,920,000 7,920,000
------------
Comprehensive
Income 22,240,000****
------------
Cash Dividends ( 16,352,000) ( 16,352,000)
Options
Exercised 934,000 ( 547,316) 7,357,000 8,291,000
Tax Benefit Re-
lated to
Options
Exercised 1,440,000 1,440,000
----------- ----------- ------------ ---------- ------------ ---------- -----------
Balance at
September 30,
1997 $39,591,000 $96,099,000 $685,949,000 2,808,074 ($41,853,000) $5,271,000 $785,057,000
=========== =========== ============ ========== =========== ========== ============
<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 September 30, 1998 was
$8,142,000.
****Comprehensive income for the three months ended September 30, 1997 was
$9,687,000.
(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 September 30, 1998 and for the three month and nine
month periods ended September 30, 1998 and September 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 nine month periods ended
September 30, 1998 are not necessarily indicative of those for a full
fiscal year.
Note A - Foreign Subsidiaries:
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:
<TABLE>
<CAPTION>
AS OF
------------------------------
SEPTEMBER DECEMBER
30, 1998 31, 1997
-------------- --------------
<S> <C> <C>
Current Assets $ 25,539,000 $ 27,004,000
Vessels, net and Vessels Included
in Disposal Program 1,068,986,000 1,048,945,000
Investment in Cruise Business 160,269,000
Other Assets 122,336,000 121,976,000
-------------- --------------
1,216,861,000 1,358,194,000
-------------- --------------
Current Installments of
Long-term Debt, including inter-
company of $16,700,000 and
$35,800,000 27,236,000 46,086,000
Other Current Liabilities 12,983,000 19,613,000
-------------- --------------
Total Current Liabilities 40,219,000 65,699,000
Long-term Debt, including
intercompany of $217,100,000
and $107,400,000, and Deferred
Credits, etc. 374,094,000 350,177,000
-------------- --------------
414,313,000 415,876,000
-------------- --------------
Net Assets $ 802,548,000 $ 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:
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:
<TABLE>
<CAPTION>
AS OF
--------------------------
SEPTEMBER DECEMBER
30, 1998 31, 1997
----------- ------------
<S> <C> <C>
Cash ($44,807,000 and $38,432,000) and
other current assets (including
$282,000 and $2,640,000 due
from owners) $ 51,544,000 $ 47,003,000
Vessels, net 195,376,000 205,770,000
Other assets (including $1,061,000
and $557,000 due from owners) 3,529,000 3,486,000
----------- ------------
250,449,000 256,259,000
------------ ------------
Current installments of long-term debt 7,500,000 7,500,000
Other current liabilities 4,574,000 6,176,000
------------ ------------
12,074,000 13,676,000
Long-term debt 41,250,000 48,750,000
------------ ------------
53,324,000 62,426,000
------------ ------------
Net assets (principally undistributed
net earnings) $197,125,000 $193,833,000
============ ============
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue, primarily from
voyages (including
$5,168,000,
$8,765,000,
$18,586,000 and
$27,310,000 from
vessels chartered
to owners) $13,008,000 $12,396,000 $40,892,000 $37,446,000
Costs and expenses 11,815,000 10,999,000 37,600,000 31,664,000
----------- ----------- ----------- -----------
Net income $ 1,193,000 $ 1,397,000 $ 3,292,000 $ 5,782,000
=========== =========== =========== ===========
</TABLE>
(See Notes on Following Pages)
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Notes to Unaudited Condensed Financial Statements
Note D - Agency Fees and Brokerage Commissions:
On October 30, 1998, the Company assumed direct management and operation of
its bulk shipping fleet, terminating its arrangements (see below), by
mutual consent, with Maritime Overseas Corporation ("Maritime"). The
Company has employed the staff of Maritime, acquired certain employee
benefit plan assets and assumed related obligations of Maritime and
acquired certain of Maritime's other assets. The acquisition price of
the other assets is based upon their carrying amount (which is in the
process of being determined) at October 30, 1998; such amount is not
expected to be material.
All subsidiaries with vessels and certain joint ventures were parties to
agreements with Maritime that provided, 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 received specified
compensation. Vessel and voyage expenses include $1,296,000 (three
months ended September 30, 1998), $1,468,000 (three months ended
September 30, 1997), $3,891,000 (nine months ended September 30, 1998)
and $4,558,000 (nine months ended September 30, 1997) of brokerage
commissions to Maritime. By agreement, Maritime's compensation for any
year was limited to the extent Maritime's consolidated net income from
shipping operations would exceed a specified amount (approximately
$1,014,000 for the period from January 1 to October 30, 1998).
Maritime is owned by a director of the Company; directors or officers
of the Company constituted all four of the directors and the majority
of the principal officers of Maritime until October 1998, at which time
the owner of Maritime became its sole director and officers of the
Company resigned as officers of Maritime in connection with the
transaction referred to in the preceding paragraph.
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
$5,508,000 (three months ended September 30, 1998), $30,498,000 (three
months ended September 30, 1997), $57,662,000 (nine months ended
September 30, 1998) and $41,563,000 (nine months ended September 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.
(See Notes on Following Pages)
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Notes to Unaudited Condensed Financial Statements
Note E - Taxes: (Continued)
Federal income taxes paid (of which $7,000,000 related to a prior period)
amounted to $17,500,000 and $563,000 in the nine months ended September
30, 1998 and 1997, respectively.
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 September 30, 1998 to
$27,300,000.
As of September 30, 1998, the Company was 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 (5.2% as of September 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 $74,000,000, 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.
In November 1998, the Company reached agreement to repurchase, at a premium
of approximately $31,300,000, Unsecured Senior Notes with an aggregate
principal amount of $238 million. The Company expects to complete the
purchase on November 16, 1998. Fixed rate interest on the Unsecured
Senior Notes was converted to floating rate by certain of the interest
rates swaps referred to above. The swaps related to the debt to be
purchased were terminated in November 1998, resulting in a fourth
quarter gain of $15,700,000. The premium net of the swap gain,
$15,600,000 ($10,100,000 after tax), will be reported in the Company's
statement of operations as an extraordinary charge in the fourth
quarter of 1998, as required by Statement of Financial Accounting
Standards No. 125. The Company intends to borrow the amount needed for
the purchase initially under its Revolving Credit Agreement; it
estimates its interest cost on such borrowings to be lower than the
interest cost on the repurchased notes by $4,000,000 per year, based on
interest rates and the amount of notes outstanding at the time of the
transaction.
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 $48,169,000 (nine months ended September 30,
1998) and $58,736,000 (nine months ended September 30, 1997), excluding
capitalized interest.
(See Notes on Following Pages)
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Notes to Unaudited Condensed Financial Statements
Note G - Other Income - net:
Other income - net consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Investment income:
Interest and dividends $ 2,423,000 $ 2,326,000 $ 7,770,000 $ 6,618,000
Gain on sale of
securities 8,569,000 10,195,000 22,417,000 25,760,000
Provision for loss
on investments (714,000)
---------- ---------- ----------- -----------
10,992,000 12,521,000 30,187,000 31,664,000
(Loss) on disposal
of vessels (950,000) (733,000) (950,000) (588,000)
Miscellaneous - net 509,000 235,000 2,044,000 523,000
---------- ---------- ----------- -----------
$10,551,000 $12,023,000 $31,281,000 $31,599,000
=========== =========== =========== ===========
</TABLE>
Note H - Commitments and Other Comments:
1. As of September 30, 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, is covered by
refundment guaranties from a major U.S. insurance company.
2. As a result of 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 September 30, 1998),
36,547,000 shares (three months ended September 30, 1997),
36,794,000 shares (nine months ended September 30, 1998) and
36,360,000 shares (nine months ended September 30, 1997). Diluted
net income per share, which gives effect to stock options, is based
(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)
on the following weighted average number of shares during each period:
36,831,000 shares (three months ended September 30, 1998), 36,701,000
shares (three months ended September 30, 1997), 36,854,000 shares (nine
months ended September 30, 1998) and 36,471,000 shares (nine months
ended September 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 $92,000,000 for
such foreign currency from October 1, 1998 through 2004.
5. In addition to stock option plans existing at December 31, 1997, the
Company has a stock option plan adopted in 1998, 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.
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 nine months ended September 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.
8. In October 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan, and declared a Rights distribution under the Plan of one
Common Stock Purchase Right on each outstanding share of common stock
of the Company. The Rights Plan is designed to guard against attempts
to take over the Company for a price which does not reflect the
Company's full value, or which are conducted in a manner or on terms
not approved by the board as being in the best interests of the Company
and the stockholders. The Rights are preventative in nature and are
not being distributed in response to any known attempt to acquire
control of the Company.
<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 nine months of 1998 for VLCCs (over 200,000 dwt) in the
international tanker markets averaged above those for the same period
of 1997, although average VLCC rates were lower in the third quarter
and early fourth quarter of 1998 (because of a steep decline which
began in the middle of the third quarter) than in the comparable 1997
periods. Rates were disappointing for most of the other sectors.
Rates for modern VLCCs have ranged from a peak of above $50,000 per day in
the late fall of 1997 to a low of about $20,000 per day in September
1998. During the first half of 1998, VLCC rates were supported by
increased crude export movements from the Middle East and increased
deployment of VLCCs for floating storage. Global demand dropped 0.3%
in the third quarter of 1998, the first year-over-year decline in five
years and VLCC rates ranged between $20,000 and $30,000 per day during
the early part of the fourth 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. Except for a few brief periods when rates spiked or
dropped dramatically, Aframax rates have been in the $14,000 per day
range throughout most of the first nine months of 1998. Average
Aframax rates are presently approximately $15,000 per day. The
Company's Aframax tanker pool with PDV Marina continues to augment its
base of Petroleos de Venezuela cargoes with backhauls and contracts of
affreightment, resulting in increased operating efficiencies and
reduced idle time for OSG's 10 pool vessels. Rates for older Suezmaxes
(120,000 to 200,000 dwt) in the first nine months of 1998 were a bit
lower, on average, than levels prevailing in the comparable 1997
period. Early in the fourth quarter, these vessels were earning rates
of about $15,000 per day, somewhat below the levels prevailing in the
comparable 1997 period. Product tanker rates have generally been at
unsatisfactory levels throughout the first nine months 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 nine months of 1998
compared to both the fourth quarter and first nine months of 1997 and
continued at low levels early in the fourth quarter of 1998,
although there was some firming of Capesize rates as the third
quarter ended. The 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 (of which
six remain) 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.
Aggregate proceeds for the four vessels which have been sold to date
are 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 half and third quarter 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*
----------------- ------------------
Third First Third First
Tankers Quarter Half Quarter Half
- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Modern VLCCs $33,400 $36,500 $37,500 $30,600
Suezmaxes (W. Africa - U.S.) 18,600 22,800 19,800 21,300
Aframaxes (Caribbean market) 14,300 16,700 16,400 26,200
Products carriers 9,800 10,200 9,500 15,900
Dry Bulk Carriers
- -----------------
Capesize 8,500 11,200 15,100 14,700
Panamaxes 5,000 6,000 7,800 8,900
</TABLE>
*Average market rates as reported by industry sources.
[FN]
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Income From Vessel Operations (continued)
- -----------------------------
Income from vessel operations for the third quarter of 1998 was
approximately the same as the results for the corresponding period of
1997. Income from foreign flag vessel operations increased by
approximately $1,500,000. This resulted from substantially increased
rates earned by the Company's double-hulled VLCC tonnage trading in the
spot market on voyages fixed late in the second quarter or early in the
third quarter of 1998. This increase was partially offset by reduced
rates on most of the Company's other tonnage, particularly its
Aframaxes. Income from operations of the Company's U.S. flag fleet in
the third quarter of 1998 declined by approximately $1,500,000 from the
comparable 1997 period, reflecting primarily the lay-up of two small
crude tankers for all of the 1998 third quarter; these vessels operated
profitably in the comparable period of 1997. One of these vessels was
sold and one was contracted for sale in the fourth quarter of 1998 and
the estimated loss ($950,000) from such sales was provided for in the
third quarter of 1998.
Income from vessel operations in the first nine months of 1998 decreased by
approximately $9,700,000 from the results for the corresponding period
of 1997. Income from operations of the Company's U.S. flag fleet in
the nine months of 1998 declined by approximately $5,800,000 from the
comparable 1997 period, reflecting the lay-up of the aforementioned two
small crude tankers and two small U.S. flag dry cargo ships for all or
substantial portions of the 1998 period, whereas the U.S. flag fleet
experienced no lay-up days in the commparable period of 1997. Income
from vessel operations of the foreign flag fleet declined $3,900,000 in
the nine months ended September 30, 1998. This resulted from reduced
rates obtained for the Company's Aframaxes (particularly in the second
and third quarters of 1998) and most of its other classes of foreign
flag tonnage. These rate declines were partially offset by the
inclusion in the nine months of 1998 of the operating results of one
double-hulled VLCC 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. The U.S. flag crude tanker fleet
had 150 and 400 fewer operating days (including the effect of vessels
undergoing drydockings) in the 1998 third quarter and first nine
months, respectively, than in the 1997 third quarter and first nine
months.
Since October 1, 1997, depreciation of the dry cargo vessels included in the
aforementioned disposal program ceased. Income from vessel operations
for the third quarter and first nine months of 1997 includes the
results of these 10 ships, as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenue from voyages $12,647,000 $35,438,000
Costs and expenses, including
agency fees ( 10,688,000) ( 31,883,000)
Depreciation ( 3,447,000) ( 9,759,000)
------------ ------------
(Loss) from vessel operations ($ 1,488,000) ($ 6,204,000)
------------ ------------
</TABLE>
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
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, 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
nine months of 1998
the Company did not record any equity in the earnings of the cruise
business, whereas the Company recorded income of $3,463,000 and
$3,284,000 in the third quarter of 1997 and first nine months of 1997,
respectively, from its then investment in CCLI through June 30, 1997
and RCCL thereafter.
Other Income - Net
- ------------------
The details of other income are shown in Note G. Aggregate interest and
dividends increased in the 1998 third quarter and first nine months as
compared to the corresponding periods of 1997 because of increased
amounts utilized for interest-bearing deposits. Gains on sale of
securities were $8,569,000 (third quarter of 1998), $22,417,000 (first
nine months of 1998), $10,195,000 (third quarter of 1997) and
$25,760,000 (first nine months of 1997).
Interest Expense
- ----------------
Interest expense decreased in the third quarter and first nine months 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 was
reduced by $1,100,000 in the first nine months of 1998 (all in the
third quarter) and by $1,300,000 in the first nine months of 1997 (none
in the third quarter), of interest capitalized in connection with
vessel construction. Interest expense reflects $1,200,000 (third
quarter of 1998), $3,300,000 (first nine months of 1998), $800,000
(third quarter of 1997) and $3,400,000 (first nine months of 1997) of
net benefits from the interest rate swaps referred to below in
Liquidity and Sources of Capital. See Liquidity and Sources of Capital
below regarding debt repurchase and related termination of certain
interest rate swaps in November 1998.
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
Provision for Federal Income Taxes
- ----------------------------------
The provisions for federal income taxes in the third quarter and first nine
months of 1998 changed from the comparable periods of 1997 because of
the changes in pretax income, a decline in the third quarter and an
increase in the first nine months (reflecting in the first nine months
of 1998 a pretax gain of $42,288,000 on the sale of shares of RCCL).
The provision in the
first nine months 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 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 September 30, 1998 was approximately $50,800,000.
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 $10,200,000 at September 30, 1998.
Net cash provided by operating activities in the first nine months of 1998
approximated $43,000,000 (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
$167,000,000 was used at September 30, 1998, and an unsecured short-
term credit facility of $30,000,000, of which $9,000,000 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 above balances reflect the use of the cash received from the
sale of RCCL common stock referred to under Equity in Results of Cruise
Business to reduce amounts outstanding under the long-term credit
facility.
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
----------------------------------------------------
Liquidity and Sources of Capital (Continued)
- --------------------------------
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 September 30, 1998, the Company was 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 (5.2%
as of September 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 $74,000,000, 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.
In November 1998, the Company reached agreement to repurchase, at a premium
of approximately $31,300,000, Unsecured Senior Notes with an aggregate
principal amount of $238 million. The Company expects to complete the
purchase on November 16, 1998. Fixed rate interest on the Unsecured
Senior Notes was converted to floating rate by certain of the interest
rates swaps referred to above. The swaps related to the debt to be
purchased were terminated in November 1998, resulting in a fourth
quarter gain of $15,700,000. The premium net of the swap gain,
$15,600,000 ($10,100,000 after tax), will be reported in the Company's
statement of operations as an extraordinary charge in the fourth
quarter of 1998, as required by Statement of Financial Accounting
Standards No. 125. The Company intends to borrow the amount needed for
the purchase initially under its Revolving Credit Agreement; it
estimates its interest cost on such borrowings to be lower than the
interest cost on the repurchased notes by $4,000,000 per year, based on
interest rates and the amount of notes outstanding at the time of the
transaction.
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 $92,000,000 for such foreign currency
from October 1, 1998 through 2004.
As of September 30, 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, is covered by refundment
guaranties from a major U.S. insurance company.
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
---------------------------------------------------
Update on Impact of Year 2000
- -----------------------------
The Company is continuing its review of all phases of its activities that
could be affected by Year 2000 issues. Year 2000 issues relate to the
inability of computer programs or microchips to distinguish between the
year 1900 and the year 2000. In connection with computer processing of
its financial records, the Company primarily uses software that is Year
2000 compliant. The Company is reviewing its computer supported
operational activities (most of which do not relate to recordkeeping),
which include computer operated machinery or processes or computer
based backup systems on board its vessels. The Company is testing its
applications and has found those tested either to be Year 2000
compliant or to have minor deficiencies which are expected to be
corrected by early 1999. The Company is performing further tests of
its systems which it expects to complete in early 1999.
The Company has communicated with vendors and others whose Year 2000
compliance is critical to the Company and is following up with them
concerning their plans and progress in addressing Year 2000 issues.
The Company is not aware of any Year 2000 problems as a result of this
effort.
The costs associated with the Company's Year 2000 compliance activities are
not expected to be material to the Company's financial position and
such costs are being expensed as incurred.
An unexpected failure to have corrected a Year 2000 problem could result in
an interruption in certain normal business activities or operations.
However, the Company believes that, with completion of its Year 2000
project, significant interruptions will not be encountered.
Completion of the Company's Year 2000 project is based on management's best
estimates, which were derived utilizing numerous assumptions of future
events. However, there can be no assurance that there will not be a
delay in, or presently unanticipated costs associated with, the Year
2000 project. Specific factors that might cause differences between
the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, timely responses by
third-parties and suppliers, and similar uncertainties. The Company
expects to evaluate the necessity for a contingency plan in early to
mid 1999.
November 9, 1998
---------------------------------------------------------------
Independent Accountant's Report on Review of Interim Financial Information
The accompanying condensed consolidated financial statements as of
September 30, 1998 and for the three and nine months ended
September 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 5. Other Information
- ------ -----------------
A stockholder who intends to submit a proposal for the Registrant's
1999 Annual Meeting that the stockholder does not intend to request be
included in the Registrant's 1999 Proxy Statement in accordance with
SEC rules must give notice to the Registrant prior to March 14, 1999.
If the stockholder does not provide the Registrant with timely notice
of such a proposal, the persons designated as management proxies on the
Registrant's proxy card may exercise their discretionary authority to
vote on that proposal. If the stockholder does provide the Registrant
with timely notice of such a proposal, depending upon the
circumstances, management's proxies may not be able to exercise their
discretionary authority to vote on the proposal.
Item 6(a). Exhibits
- --------- --------
See Exhibit Index on page 22.
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 September 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 sheets of
Overseas Shipholding Group, Inc. and subsidiaries as of September 30,
1998, the related condensed consolidated statements of income for the
three month and nine month periods ended September 30, 1998 and 1997
and the related condensed consolidated statements of cash flows and
changes in shareholders' equity for the nine month periods ended
September 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
November 9, 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: November 12, 1998 /S/MORTON P. HYMAN
----------------- ------------------------
Morton P. Hyman
President
Date: November 12, 1998 /S/ALAN CARUS
----------------- ------------------------
Alan Carus
Controller
<PAGE>
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
EXHIBIT INDEX
-------------
10. Agreement with an executive officer.
15. Letter from Ernst & Young LLP.
27. Financial Data Schedule.
NOTE: Instruments authorizing long-term debt of the
Registrant and subsidiaries, where the amounts
authorized thereunder do not exceed 10% of
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 10
----------
AGREEMENT
---------
Agreement made as of the 14th day of September, 1998,
by and between Overseas Shipholding Group, Inc., a corporation
incorporated under the laws of Delaware with its principal office
at 511 Fifth Avenue, New York, New York 10017 (the "Company") and
Myles R. Itkin, residing at 1100 Park Avenue, Apt. 2C, New York,
New York 10128 (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company believes that the establishment
and maintenance of a sound and vital management of the Company
and its affiliates is essential to the protection and enhancement
of the interests of the Company and its stockholders;
WHEREAS, the Company also recognizes that the possibil
ity of a Change of Control of the Company (as defined in Section
1 hereof), with the attendant uncertainties and risks, might
result in the departure or distraction of key employees of the
Company to the detriment of the Company; and
WHEREAS, the Company has determined that it is appro-
priate to take steps to induce key employees to remain with the
Company, and to reinforce and encourage their continued attention
and dedication, when faced with the possibility of a Change of
Control of the Company.
NOW, THEREFORE, in consideration of the premises and
mutual covenants herein contained, the parties hereto hereby
agree as follows:
1. A CHANGE OF CONTROL shall be deemed to have occurred if:
(i) any person (as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and as used
in Sections 13(d) and 14(d) thereof), excluding the Company,
Maritime Overseas Corporation, any "Subsidiary" of either, any
employee benefit plan sponsored or maintained by the Company,
Maritime Overseas Corporation or any Subsidiary of either
(including any trustee of any such plan acting in his capacity as
trustee) and any person who (or group which includes a person
who) is the beneficial owner (as defined in Rule 13(d)-3 under
the Exchange Act) as of January 1, 1994 of at least fifteen
percent (15%) of the common stock of the Company, becomes the
beneficial owner (as defined in Rule 13(d)-3 under the Exchange
Act) of shares of the Company having at least thirty percent
(30%) of the total number of votes that may be cast for the
election of directors of the Company; (ii) there is a merger or
other business combination of the Company, sale of all or
substantially all of the Company's assets or combination of the
foregoing transactions (a "Transaction"), other than a
Transaction involving only the Company and one or more of its
Subsidiaries, or a Transaction immediately following which the
shareholders of the Company immediately prior to the Transaction
continue to have a majority of the voting power in the resulting
entity (excluding for this purpose any shareholder of the Company
owning directly or indirectly more than ten percent (10%) of the
shares of the other company involved in the Transaction if such
shareholder is not as of January 1, 1994, the beneficial owner
(as defined in Rule 13(d)-3 under the Exchange Act) of at least
fifteen percent (15%) of the common stock of the Company); or
(iii) during any period of two (2) consecutive years beginning on
or after October 21, 1996, the persons who were directors of the
Company immediately before the beginning of such period (the
"Incumbent Directors") shall cease (for any reason other than
death) to constitute at least a majority of the board of
directors of the Company or the board of directors of any
successor to the Company, provided that, any director who was not
a director as of October 21, 1996 shall be deemed to be an
Incumbent Director if such director was elected to the board of
directors by, or on the recommendation of or with the approval
of, at least two-thirds (2/3) of the directors who then qualified
as Incumbent Directors either actually or by prior operation of
the foregoing unless such election, recommendation or approval
occurs as a result of an actual or threatened election contest
(as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act or any successor provision) or
other actual or threatened solicitation of proxies or contests by
or on behalf of a person other than a member of the Board. Only
one (1) Change of Control may occur under this Agreement.
2. TERM. This Agreement shall commence on the date
hereof and shall expire on the earliest of (i) October 21, 1999,
subject to the right of the Board of Directors of the Company
(the "Board") and the Executive to extend it, provided that if a
Change of Control takes place prior to October 21, 1999, the
duration of this Agreement under this subpart (i) shall be until
two (2) years after the Change of Control whether such two (2)
year period ends before or after the end of such three (3) year
period; (ii) the date of the death of the Executive or retirement
or other termination of the Executive's employment (voluntarily
or involuntarily) with the Company prior to a Change of Control
other than as a result of a termination by the Company without
Cause (as defined below) or by the Executive with Good Reason (as
defined below); or (iii) one hundred twenty (120) days after a
termination by the Company without Cause or by the Executive with
Good Reason if a Change of Control does not occur on or prior to
such date. Notwithstanding anything in this Agreement to the
contrary, if the Company becomes obligated to make any payment to
the Executive pursuant to the terms hereof at or prior to the
expiration of this Agreement, then this Agreement shall remain in
effect for such and related purposes until all of the Company's
obligations hereunder are fulfilled. Further, provided that a
Change of Control has taken place prior to the termination of
this Agreement, the provisions of Sections 10(a), (d) and (e)
hereof shall survive and remain in effect notwithstanding the
termination of this Agreement, the termination of the Executive's
employment or any breach or repudiation or alleged breach or
repudiation by the Company or the Executive of this Agreement or
any one or more of its terms.
3. TERMINATION FOLLOWING CHANGE OF CONTROL. If, and
only if, a Change of Control occurs and one (1) of the following
occurs: (i) the Executive's employment with the Company is
terminated by the Company without Cause (provided that for
purposes of this Section (i), Cause shall not include (ii)(E)
below) or by the Executive for Good Reason at any time within two
(2) years after the Change of Control, (ii) the Executive's
employment with the Company terminates for any reason whatsoever,
including but not limited to termination by the Executive
voluntarily with or without Good Reason, within thirty (30) days
after the end of the one (1) year period running from the date of
the Change of Control, or (iii) the Executive's employment with
the Company terminates as a result of the Executive's death after
the Change of Control, but prior to the end of the thirty (30)
day period after the end of the one (1) year period running from
the date of the Change of Control, the Executive shall be
entitled to the amounts provided in Section 4 upon such
termination. In addition, notwithstanding the foregoing, in the
event the Executive is terminated without Cause or terminates
employment (as a result of an event occurring within one hundred
twenty (120) days prior to the occurrence of a Change of Control)
for Good Reason within one hundred twenty (120) days prior to the
occurrence of a Change of Control, such termination shall, upon
the occurrence of a Change of Control, be deemed to be covered
under the Agreement and the Executive shall be entitled to the
amounts provided under Section 4 hereof reduced by any amounts
otherwise received in connection with his termination of
employment. The foregoing terms shall have the following
meanings:
(i) TERMINATION FOR GOOD REASON. For purposes of this
Agreement, termination for Good Reason shall mean a termination
by the Executive effected by a written notice given within sixty
(60) days after the occurrence of the Good Reason event. For
purposes of this Agreement, "Good Reason" shall mean the
occurrence of any of the following events without the Executive's
express written consent:
(A) following a Change of Control, any material
diminution in the Executive's duties and responsibilities,
authority, or any diminution in the Executive's title, or
the assignment to the Executive of duties and
responsibilities materially inconsistent with the position
held by the Executive immediately prior to the Change of
Control, except in each case in connection with the
termination of the Executive's employment for Cause or as a
result of the Executive's death, or temporarily as a result
of the Executive's illness or other absence; (B) a reduction
in the Executive's annual base salary; (C) a relocation of
the Executive's principal business location to an area
outside a fifty (50) mile radius of the Executive's current
principal business location; or (D) a material breach by the
Company of any other agreement with the Executive without
proper justification that remains uncured for ten (10) days
after written notice of such breach is given to the Company.
(ii) CAUSE. As used herein, the term "Cause" shall
mean: (A) the willful engaging by the Executive in gross
misconduct which is materially injurious to the Company, with
written notice of the specific misconduct given to the Executive;
(B) Executive's conviction of (or pleading of NOLO CONTENDERE to)
a crime involving any financial impropriety or other crime which
would materially interfere with the Executive's ability to
perform his services to the Company or otherwise be materially
injurious to the Company; (C) the willful breach by the Executive
of any of his material obligations under any agreement with the
Company without proper justification, which breach is not cured
within ten (10) days after written notice thereof from the
Company; (D) refusal to follow the proper and achievable written
direction of the Board within five (5) business days of it being
given, provided that the foregoing refusal shall not be "Cause"
if the Executive in good faith believes that such direction is
illegal, unethical or immoral and Executive promptly so notifies
the Board; or (E) the Executive's inability to perform his
material duties and responsibilities due to the same or related
physical or mental illness for one hundred eighty (180)
consecutive days. For purposes of this paragraph, no act, or
failure to act, on the Executive's part shall be considered
"willful" unless done, or omitted to be done, by the Executive in
bad faith and without reasonable belief that such action or
omission was in the best interest of the Company.
The Executive's continued employment for a period of up
to sixty (60) days after the occurrence of any act or failure to
act constituting Good Reason hereunder shall not constitute
consent to, or a waiver of rights with respect to, any such act
or failure to act.
4. COMPENSATION ON CHANGE OF CONTROL TERMINATION.
If, pursuant to Section 3, the Executive is entitled to amounts
and benefits under this Section 4, the Company shall, subject to
Section 8, pay and provide to Executive: (A) in a lump sum
within five (5) days after such termination (or, if such
termination occurred prior to a Change of Control, within five
(5) days after the Change of Control) (i) two (2) times
Executive's highest annual base salary in effect within one
hundred twenty-one (121) days prior to, or at any time after, the
Change of Control, (ii) subject to submission of documentation,
any incurred but unreimbursed business expenses for the period
prior to termination payable in accordance with the Company's
policies, and (iii) any base salary, bonus, vacation pay or other
compensation accrued or earned under law or in accordance with
the Company's policies applicable to the Executive but not yet
paid; (B) any other amounts or benefits due under the then
applicable employee benefit (including without limitation any
Supplemental Executive Retirement Plan), equity or incentive
plans of the Company applicable to the Executive as shall be
determined and paid in accordance with such plans; (C) two (2)
years of additional service and compensation credit (at
Executive's highest compensation level in the one hundred twenty-
one (121) day period prior to, or at any time after, the Change
of Control) for pension purposes, and an increase in his age by
two (2) years for purposes of calculating any early retirement
subsidy or actuarial reduction, under any defined benefit type
qualified or nonqualified pension plan or arrangement of the
Company and its affiliates applicable to Executive, measured from
the date of termination of employment and not credited to the
extent that the Executive is otherwise entitled to such credit
during such two (2) year period, which payments shall be made
through and in accordance with the terms of the nonqualified
defined benefit pension plan or arrangement if any then exists
that is not purely an excess plan within the meaning of 4 U.S.C.
114(b)(1)(I)(ii), or, if not, in an actuarially equivalent lump
sum (using the actuarial factors then applying in the Company's
defined benefit plan covering the Executive); (D) continued
coverage under the Company health plans in which the Executive
participates (whether as an active or former employee)
immediately prior to the Change of Control or equivalent plans
thereto (the "Health Plans") for the Executive (except in the
case of the Executive's death) and the Executive's dependents for
two (2) years from the date of termination of the Executive's
employment, provided that premiums for such coverage shall be
paid by the Executive on the same basis as prior to the Change of
Control; and further provided that such coverage shall cease to
the extent that the providing of such coverage would violate
applicable law or result in other participants being taxed on the
benefits under such Health Plans; and (E) continued coverage
under the Company life insurance plan in which the Executive
participates (at the same cost as for active employees of
equivalent age) at a benefit level equal to the higher level in
effect immediately prior to the Change of Control or immediately
prior to the Executive's termination or, alternatively,
equivalent coverage (on a tax grossed up basis, to the extent the
amount taxable to the Executive is greater than the amount
taxable to him if he was an employee and participated in the
Company's life insurance plan) for two (2) years from the date of
termination of the Executive's employment.
5. EXCISE TAX LIMIT. Notwithstanding anything else
herein, to the extent that the Executive would be subject to the
excise tax imposed under Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code") (and any similar tax that
may hereafter be imposed) on the payments and/or benefits
provided by Section 4 or any other amounts (whether pursuant to
the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a
change of ownership or effective control covered by Section
280G(b)(2) of the Code or any person affiliated with the Company
or such person) as a result of a Change of Control, the amounts
to be paid under this Agreement shall be automatically reduced to
an amount one dollar less than that, when combined with such
other amounts and benefits required to be so included, would
subject the Executive to excise tax under Section 4999 of the
Code. Such amount shall be reduced from the lump sum due under
Section 4(A) hereof.
6. NOTICE OF TERMINATION. After a Change of Control,
any purported termination of the Executive's employment (other
than by reason of death) shall be communicated by written Notice
of Termination from one party hereto to the other party hereto in
accordance with Section 14. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which shall set forth
in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment.
Further, a Notification of Termination for Cause after a Change
of Control is required to include a copy of a resolution duly
adopted by the affirmative vote of not less than two-thirds (2/3)
of the entire membership of the Board at a meeting of the Board
which was called and held for the purpose of considering such
termination and which the Executive had the right to attend and
speak finding that, in the good faith opinion of the Board, the
Executive has engaged in conduct set forth in the definition of
Cause herein, and specifying the particulars thereof in detail.
7. DATE OF TERMINATION. "Date of termination," with
respect to any purported termination of the Executive's employ
ment after a Change of Control, shall mean the date specified in
the Notice of Termination (which, in the case of a termination by
the Company, shall not be less than thirty (30) days (except in
the case of a termination for Cause which shall be the date
specified in the Notice of Termination) and, in the case of a
termination by the Executive for Good Reason, shall not be less
than five (5) days nor more than sixty (60) days, from the date
such Notice of Termination is given). In the event of Notice of
Termination by the Company, the Executive may treat such notice
as having a date of termination at any date between the date of
the receipt of such notice and the date of termination indicated
in the Notice of Termination by the Company; provided, that the
Executive must give the Company written notice of the date of
termination if he deems it to have occurred prior to the date of
termination indicated in the notice.
8. NO DUTY TO MITIGATE/SET-OFF. The Company agrees
that if the Executive's employment with the Company is terminated
pursuant to this Agreement during the term of this Agreement, the
Executive shall not be required to seek other employment or to
attempt in any way to reduce any amounts payable to the Executive
by the Company pursuant to this Agreement. Further, the amount
of any payment or benefit provided for in this Agreement shall
not be reduced by any compensation earned by the Executive or
benefit provided to the Executive as the result of employment by
another employer or otherwise. Except as otherwise provided
herein and apart from any disagreement between the Executive and
the Company concerning interpretation of this Agreement or any
term or provision hereof, the Company's obligations to make the
payments provided for in this Agreement and otherwise to perform
its obligations hereunder shall not be affected by any
circumstances, including without limitation, any set-off, counter
claim, recoupment, defense or other right which the Company may
have against the Executive. The amounts due under Section 4 are
inclusive, and in lieu of, any amounts payable under any other
salary continuation or cash severance arrangement of the Company
and to the extent paid or provided under any other such
arrangement shall be offset against the amount due hereunder.
9. SERVICE WITH SUBSIDIARIES. For purposes of this
Agreement, employment by a subsidiary or a parent of the Company
shall be deemed to be employment by the Company and references to
the Company shall include all such entities, except that the
payment obligation hereunder shall be solely that of the Company.
A Change of Control, however, as used in this Agreement, shall
refer only to a Change of Control of the Company.
10. CONFIDENTIALITY; NO NON-COMPETITION; NO
RESIGNATION. (a) The Executive shall not at any time during the
term of this Agreement, or thereafter, directly or indirectly,
for any reason whatsoever, communicate or disclose to any
unauthorized person, firm or corporation, or use for the
Executive's own account, without the prior written consent of the
Board, any proprietary processes, trade secrets or other
confidential data or information of the Company and its related
and affiliated companies concerning their businesses or affairs,
accounts, products, services or customers, it being understood,
however, that the obligations of this Section shall not apply to
the extent that the aforesaid matters (i) are disclosed in circum
stances in which the Executive is legally required to do so, or
(ii) become known to and available for use by the public other
than by the Executive's wrongful act or omission.
(b) In consideration of this Agreement, the Executive
agrees that he will not resign from the Company without Good
Reason for at least one hundred eighty (180) days from the date
hereof, except the foregoing shall not apply after a Change of
Control.
(c) In consideration of this Agreement, the Executive
agrees that he will, following a Change of Control and timely
payment of amounts due him hereunder, consult in a senior
advisory capacity to assist in the orderly transition to new
management for a period of ninety (90) days following a Change of
Control.
(d) The Company shall continue to cover the Executive,
or cause the Executive to be covered, under any director and
officer insurance maintained after the Change of Control for
directors and officers of the Company (whether by the Company or
another entity) at the highest level so maintained for any other
past or active director or officer with regard to any action or
omission of the Executive while an officer or director of the
Company or its affiliates. Such coverage shall continue for any
period during which the Executive may have any liability for the
aforesaid actions or omissions.
(e) Following a Change of Control, the Company shall
indemnify the Executive to the fullest extent permitted by law
against any claims, suits, judgments, expenses (including
reasonable attorney fees), with advancement of legal fees and
disbursements to the fullest extent permitted by law, arising
from, out of, or in connection with the Executive's services as
an officer or director of the Company, as an officer or director
of any affiliate for which the Executive was required to serve as
such by the Company or as a fiduciary of any benefit plan of the
Company or any affiliate.
11. SUCCESSORS; BINDING AGREEMENT. In addition to any
obligations imposed by law upon any successor to the Company, the
Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to
expressly assume and agree in writing to perform this Agreement
in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
This Agreement shall inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If the Executive shall die while any amount would
still be payable to the Executive hereunder if the Executive had
continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or adminis
trators of the Executive's estate. This Agreement is personal to
the Executive and neither this Agreement or any rights hereunder
may be assigned by the Executive.
12. MISCELLANEOUS. No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modifi
cation or discharge is agreed to in writing and signed by the
Executive and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any
condition or provision shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior
or subsequent time. This Agreement constitutes the entire
Agreement between the parties hereto pertaining to the subject
matter hereof. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not expressly set
forth in this Agreement. All references to any law shall be
deemed also to refer to any successor provisions to such laws.
13. COUNTERPARTS. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the
same instrument.
14. NOTICES. Any notice or other communication
required or permitted hereunder shall be in writing and shall be
delivered personally, or sent by registered mail, postage
prepaid. Any such notice shall be deemed given when so delivered
personally, or, if mailed, five days after the date of deposit in
the United States mails, or as follows:
(i) If to the Company, to:
Overseas Shipholding Group, Inc.
511 Fifth Avenue
New York, New York 10017
Attention: Chairman
(ii) If to the Executive, to his last shown
address on the books of the Company.
Any party may by notice given in accordance with this
Section to the other parties, designate another address or person
for receipt of notices hereunder.
15. SEPARABILITY. If any provisions of this Agreement
shall be declared to be invalid or unenforceable, in whole or in
part, such invalidity or unenforceability shall not affect the
remaining provisions hereof which shall remain in full force and
effect.
16. LEGAL FEES. In the event the Company does not
make the payments due hereunder on a timely basis and the
Executive collects any part or all of the payments provided for
hereunder or otherwise successfully enforces the terms of this
Agreement by or through a lawyer or lawyers, the Company shall
pay all costs of such collection or enforcement, including
reasonable legal fees and other reasonable fees and expenses
which the Executive may incur. The Company shall pay to the
Executive interest at the prime lending rate as announced from
time to time by Citibank, N.A. on all or any part of any amount
to be paid to Executive hereunder that is not paid when due. The
prime rate for each calendar quarter shall be the prime rate in
effect on the first day of the calendar quarter.
17. ARBITRATION. Any dispute or controversy arising
under or in connection with this Agreement shall be settled
exclusively by arbitration conducted in the City of New York in
the State of New York under the Commercial Arbitration Rules then
prevailing of the American Arbitration Association and such
submission shall request the American Arbitration Association to:
(i) appoint an arbitrator experienced and knowledgeable
concerning the matter then in dispute; (ii) require the testimony
to be transcribed; (iii) require the award to be accompanied by
findings of fact and the statement for reasons for the decision;
and (iv) request the matter to be handled by and in accordance
with the expedited procedures provided for in the Commercial
Arbitration Rules. The determination of the arbitrators, which
shall be based upon a de novo interpretation of this Agreement,
shall be final and binding and judgment may be entered on the
arbitrators' award in any court having jurisdiction. The Company
shall pay all costs of the American Arbitration Association and
the arbitrator.
18. NON-EXCLUSIVITY OF RIGHTS. Nothing in this
Agreement shall prevent or limit the Executive's continuing or
future participation in any benefit, bonus, incentive, equity or
other plan or program provided by the Company and for which the
Executive may qualify, nor shall anything herein (except Section
8) limit or otherwise prejudice such rights as the Executive may
have under any other currently existing plan, agreement as to
employment or severance from employment with the Company or
statutory entitlements, provided, that to the extent such amounts
are paid under Section 4 hereof or otherwise, they shall not be
due under any such program, plan, agreement, or statute. Amounts
that are vested benefits or which the Executive is otherwise
entitled to receive under any plan or program of the Company, at
or subsequent to the date of termination shall be payable in
accordance with such plan or program, except as otherwise
specifically provided herein.
19. NOT AN AGREEMENT OF EMPLOYMENT. This is not an
agreement assuring employment and, subject to any other agreement
between the Executive and the Company, the Company reserves the
right to terminate the Executive's employment at any time with or
without cause, subject to the payment provisions hereof if such
termination is after, or within ninety (90) days prior to a
Change of Control, as defined herein. The Executive acknowledges
that he is aware that he shall have no claim against the Company
hereunder or for deprivation of the right to receive the amounts
hereunder as a result of any termination that does not
specifically satisfy the requirements hereof or as a result of
any other action taken by the Company.
20. INDEPENDENT REPRESENTATION. The Executive
acknowledges that he has been advised by the Company to have the
Agreement reviewed by independent counsel and has been given the
opportunity to do so.
21. GOVERNING LAW. This Agreement shall be construed,
interpreted, and governed in accordance with the laws of the
State of Delaware without reference to rules relating to
conflicts of law.
IN WITNESS WHEREOF, the Company has caused this Agree
ment to be duly executed and the Executive has hereunto set his
hand as of the date first set forth above.
OVERSEAS SHIPHOLDING GROUP, INC.
By: /S/
-----------------------------
Name:
Title:
EXECUTIVE
/S/
---------------------------------
Myles R. Itkin
EXHIBIT 15
November 9, 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 November 9, 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
September 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
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This schedule contains summary financial information extracted from SEC Form
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