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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO |
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SECTION 13 OR 15 (d) OF THE SECURITIES |
|
EXCHANGE ACT OF 1934 |
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For the quarterly period ended |
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JUNE 30, 1999 |
|
OR |
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( ) TRANSITION REPORT PURSUANT TO |
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SECTION 13 OR 15 (d) OF THE SECURITIES |
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EXCHANGE ACT OF 1934 |
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For the transition period from |
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to |
COMMISSION FILE NO. |
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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.) |
511 Fifth Avenue, New York, New York 10017
(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, 1999 - 36,242,797
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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AS OF JUNE 30, 1999 AND DECEMBER 31, 1998 |
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JUNE 30, |
DECEMBER 31, |
||||
1999 |
1998 (A) |
||||
(UNAUDITED) |
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ASSETS |
|||||
Current Assets: |
|||||
Cash, including interest-bearing deposits of |
|||||
$46,562,000 and $46,494,000 |
$ 50,353,000 |
$ 51,005,000 |
|||
Receivables |
38,845,000 |
33,785,000 |
|||
Prepaid expenses |
18,766,000 |
19,868,000 |
|||
Total Current Assets |
107,964,000 |
104,658,000 |
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Investments in Marketable Securities |
13,748,000 |
10,684,000 |
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Capital Construction Fund |
183,722,000 |
176,154,000 |
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Vessels, at cost, less accumulated depreciation |
|||||
of $368,743,000 and $340,617,000 - Note G |
1,132,853,000 |
1,130,397,000 |
|||
Vessels Under Capital Leases, less accumulated |
|||||
amortization of $70,236,000 and $67,547,000 |
51,854,000 |
54,543,000 |
|||
Vessels Held for Disposal, at estimated fair value - |
|||||
Note I2 |
12,852,000 |
44,170,000 |
|||
Investments in Bulk Shipping Joint Ventures - Note D |
85,666,000 |
91,942,000 |
|||
Other Assets |
85,243,000 |
82,967,000 |
|||
$ 1,673,902,000 |
$ 1,695,515,000 |
||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
|||||
Current Liabilities: |
|||||
Accounts payable |
$ 5,068,000 |
$ 5,800,000 |
|||
Sundry liabilities and accrued expenses |
36,067,000 |
31,546,000 |
|||
41,135,000 |
37,346,000 |
||||
Current installments of long-term debt - Note G |
7,549,000 |
20,194,000 |
|||
Current obligations under capital leases |
4,715,000 |
4,244,000 |
|||
Total Current Liabilities |
53,399,000 |
61,784,000 |
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Advance Time Charter Revenues |
2,457,000 |
6,412,000 |
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Long-term Debt - Note G |
754,627,000 |
757,126,000 |
|||
Obligations Under Capital Leases |
74,182,000 |
76,767,000 |
|||
Deferred Federal Income Taxes ($72,574,000 and |
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$64,584,000)and Deferred Credits - Note F |
89,552,000 |
85,804,000 |
|||
Shareholders' Equity - Notes F and I3 |
699,685,000 |
707,622,000 |
|||
Commitments and Other Comments - Note I |
|
|
|||
$ 1,673,902,000 |
$ 1,695,515,000 |
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(A) The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date. |
(See Accompanying Notes)
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
||||||||
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998 |
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(UNAUDITED) |
||||||||
THREE MONTHS ENDED |
SIX MONTHS ENDED |
|||||||
JUNE 30, 1999 |
JUNE 30, 1998 |
JUNE 30, 1999 |
JUNE 30, 1998 |
|||||
Shipping Revenues: |
||||||||
Revenue from voyages |
$ 91,209,000 |
$ 104,139,000 |
$ 187,825,000 |
$ 209,172,000 |
||||
Income attributable to bulk |
||||||||
shipping joint |
||||||||
ventures - Note D |
1,123,000 |
767,000 |
2,686,000 |
1,070,000 |
||||
92,332,000 |
104,906,000 |
190,511,000 |
2 10,242,000 |
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Shipping Expenses: |
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Vessel and voyage - Note E |
53,696,000 |
62,629,000 |
110,603,000 |
126,874,000 |
||||
Depreciation of vessels and |
||||||||
amortization of |
||||||||
capital leases |
14,822,000 |
18,284,000 |
30,805,000 |
35,065,000 |
||||
General and administrative |
||||||||
- Note E |
9,635,000 |
10,340,000 |
20,706,000 |
22,033,000 |
||||
78,153,000 |
91,253,000 |
162,114,000 |
183,972,000 |
|||||
Income from Vessel Operations |
14,179,000 |
13,653,000 |
28,397,000 |
26,270,000 |
||||
Other Income (net) - Note H |
2,161,000 |
13,419,000 |
4,960,000 |
20,730,000 |
||||
16,340,000 |
27,072,000 |
33,357,000 |
47,000,000 |
|||||
Interest Expense |
12,357,000 |
15,831,000 |
24,716,000 |
34,796,000 |
||||
3,983,000 |
11,241,000 |
8,641,000 |
12,204,000 |
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Gain on Sale of Investment in |
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Cruise Business - Note C |
42,288,000 |
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Gain (Provision for Loss) on |
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Planned Vessel |
||||||||
Dispositions - Note I2 |
9,000,000 |
_____________ |
9,000,000 |
(5,100,000) |
||||
Income before Federal Income |
||||||||
Taxes |
12,983,000 |
11,241,000 |
17,641,000 |
49,392,000 |
||||
Provision for Federal Income |
||||||||
Taxes, reflecting |
||||||||
deferred provision of |
||||||||
4,550,000, $750,000, |
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$6,150,000 and $8,175,000 |
||||||||
- Note F |
4,550,000 |
3,750,000 |
6,150,000 |
18,075,000 |
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Net Income |
$ 8,433,000 |
$ 7,491,000 |
$ 11,491,000 |
$ 31,317,000 |
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Per Share Amounts - Note I3: |
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Basic and diluted net income |
$.23 |
$.20 |
$.31 |
$.85 |
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Cash dividends declared* |
$.30 |
$.30 |
$.45 |
$.45 |
||||
*Includes $.15 (1999 and 1998) per share for the third quarter. |
(See Accompanying Notes)
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998 |
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(UNAUDITED) |
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|
|||||||
JUNE 30, 1999 |
JUNE 30, 1998 |
||||||
Net cash provided by Operating Activities |
$ 19,785,000 |
$ 34,627,000 |
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Cash Flows from Investing Activities: |
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Proceeds from sale of investment in |
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cruise business |
198,474,000 |
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Purchase of vessel under capital lease |
(7,700,000) |
(a) |
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Purchases of marketable securities |
(2,817,000) |
(763,000) |
(b) |
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Proceeds from sales of marketable securities |
962,000 |
9,557,000 |
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Additions to vessels |
(30,582,000) |
(859,000) |
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Proceeds from sale of vessels held for disposal |
41,956,000 |
47,306,000 |
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Distributions from bulk shipping ventures |
9,000,000 |
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Other - net |
(4,501,000) |
(1,147,000) |
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Net cash provided by investing activities |
14,018,000 |
244,868,000 |
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Cash Flows from Financing Activities: |
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Purchases of treasury stock |
(6,243,000) |
||||||
Issuance of long-term debt |
30,000,000 |
||||||
Payments on long-term debt and |
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obligations under capital leases |
(47,278,000) |
(284,147,000) |
|||||
Cash dividends paid |
(10,954,000) |
(11,038,000) |
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Other - net |
20,000 |
953,000 |
|||||
Net cash (used in) financing activities |
(34,455,000) |
(294,232,000) |
|||||
Net Decrease in Cash |
(652,000) |
(14,737,000) |
|||||
Cash, including interest-bearing |
|||||||
deposits, at beginning of period |
51,005,000 |
113,195,000 |
|||||
Cash, including interest-bearing |
|||||||
deposits, at end of period |
$ 50,353,000 |
$ 98,458,000 |
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(a) Excludes $7,906,000, representing the outstanding principal balance of |
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debt assumed in connection with the purchase of a vessel under capital |
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lease. |
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(b) Excludes $4,083,000, representing the carrying amount of 131,400 |
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shares of Royal Caribbean Cruises Ltd. ("RCCL") retained and |
|||||||
reclassified upon sale of 3,650,000 shares of RCCL. |
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(See Accompanying Notes)
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
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FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998 |
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(UNAUDITED) |
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Accumulated |
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Paid-in |
Other |
||||||||||||||||||||||||
Common |
Additional |
Retained |
Treasury Stock |
Comprehensive |
|||||||||||||||||||||
Stock* |
Capital |
Earnings |
Shares |
Amount |
Income/(Loss)** |
Total |
|||||||||||||||||||
Balance at |
|||||||||||||||||||||||||
January 1, 1999 |
$ 39,591,000 |
$ 96,156,000 |
$ 625,132,000 |
2,809,062 |
$(41,869,000) |
$(11,388,000) |
$ 707,622,000 |
||||||||||||||||||
Net Income |
11,491,000 |
11,491,000 |
|||||||||||||||||||||||
Unrealized Gain |
|||||||||||||||||||||||||
on Available- |
|||||||||||||||||||||||||
For-Sale |
|||||||||||||||||||||||||
Securities |
3,297,000 |
3,297,000 |
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Comprehensive |
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Income |
14,788,000 *** |
||||||||||||||||||||||||
Cash Dividends Declared |
(16,391,000) |
(16,391,000) |
|||||||||||||||||||||||
Common Stock Acquired |
|
|
|
534,900 |
(6,334,000) |
|
(6,334,000) |
||||||||||||||||||
Balance at |
|||||||||||||||||||||||||
June 30, 1999 |
$ 39,591,000 |
$ 96,156,000 |
$ 620,232,000 |
3,343,962 |
$(48,203,000) |
$ (8,091,000) |
$699,685,000 |
||||||||||||||||||
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 |
||||||||||||||||||
*Par value $1 per share; 60,000,000 shares authorized and 39,590,759 shares issued. |
|||||||||||||||||||||||||
**Represents unrealized gains/(losses) on available-for-sale securities, net of tax. |
|||||||||||||||||||||||||
***Comprehensive income/(loss) was $14,528,000 for the three months ended June 30, 1999 and $(1,501,000) for the three months ended June 30, 1998. |
|||||||||||||||||||||||||
(See Accompanying Notes) |
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, 1998.
The statements as of June 30, 1999 and for the three month and six month periods ended June 30, 1999 and June 30, 1998 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, 1999 are not necessarily indicative of those for a full fiscal year.
(See Notes on Following Pages)
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note A - Segment Reporting:
The Company has four reportable segments: foreign flag crude tankers, products carriers and dry bulk carriers and U. S. flag tankers, including products carriers. Information about the Company's reportable segments as of and for the three month and six month periods ended June 30, 1999 and 1998 follows:
U. S. Flag |
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Tankers, |
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Foreign |
including |
||||||||||||||
Crude |
Products |
Dry Bulk |
Products |
||||||||||||
Dollars in thousands |
Tankers |
Carriers |
Carriers |
Carriers |
All Other** |
Totals |
|||||||||
Three months ended June 30, 1999: |
|||||||||||||||
Shipping revenues |
$ 44,398 |
$ 11,423 |
$ 2,596 |
$ 23,433 |
$ 10,482 |
$ 92,332 |
|||||||||
Income/(loss) from vessel operations |
8,668 |
247 |
(1,525) |
5,965 |
3,224 |
16,579 |
* |
||||||||
Total assets at June 30, 1999 |
944,727 |
119,145 |
103,849 |
156,373 |
27,607 |
1,351,701 |
|||||||||
Six months ended June 30, 1999: |
|||||||||||||||
Shipping revenues |
93,404 |
25,275 |
5,531 |
47,042 |
19,259 |
190,511 |
|||||||||
Income/(loss) from vessel operations |
18,755 |
2,204 |
(2,965) |
10,547 |
5,565 |
34,106 |
* |
||||||||
Three months ended June 30, 1998: |
|||||||||||||||
Shipping revenues |
57,397 |
13,555 |
2,750 |
29,221 |
1,983 |
104,906 |
|||||||||
Income/(loss) from vessel operations |
11,690 |
1,113 |
(1,579) |
4,847 |
(399) |
15,672 |
* |
||||||||
Total assets at June 30, 1998 |
863,128 |
137,534 |
186,765 |
165,842 |
32,095 |
1,385,364 |
|||||||||
Six months ended June 30, 1998: |
|||||||||||||||
Shipping revenues |
108,521 |
28,115 |
5,175 |
60,114 |
8,317 |
210,242 |
|||||||||
Income/(loss) from vessel operations |
21,018 |
2,763 |
(2,497) |
10,002 |
(123) |
31,163 |
* |
*
** Consists principally of U.S. flag non-tanker tonnage.
Reconciliations of total assets of the segments to amounts included in the condensed consolidated financial statements follow:
AS OF |
||||
In thousands |
JUNE 30, 1999 |
JUNE 30, 1998 |
||
Total assets of all segments, which exclude intercompany receivables |
$ 1,351,701 |
$ 1,385,364 |
||
Corporate cash and securities, including capital construction fund |
247,252 |
307,677 |
||
Other unallocated amounts |
74,949 |
72,052 |
||
Consolidated total assets |
$ 1,673,902 |
$ 1,765,093 |
(See Notes on Following Pages)
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note B - 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:
AS OF |
||||
JUNE 30, |
DECEMBER 31, |
|||
1999 |
1998 |
|||
Current assets |
$ 28,350,000 |
$ 25,518,000 |
||
Vessels, net and vessels held for disposal |
1,013,875,000 |
1,023,139,000 |
||
Other assets |
107,394,000 |
114,343,000 |
||
1,149,619,000 |
1,163,000,000 |
|||
Current installments of |
||||
long-term debt, including intercompany |
||||
of $43,100,000 and $33,400,000 |
48,845,000 |
44,024,000 |
||
Other current liabilities |
12,939,000 |
13,697,000 |
||
Total current liabilities |
61,784,000 |
57,721,000 |
||
Long-term debt (including |
||||
intercompany of $167,000,000 and |
||||
$200,400,000)and deferred credits, etc. |
335,167,000 |
356,373,000 |
||
396,951,000 |
414,094,000 |
|||
Net assets |
$ 752,668,000 |
$ 748,906,000 |
||
Note C - Investment in Cruise Business:
In March 1998, the Company recognized a gain of $42,288,000 ($26,500,000 after tax, including $1,000,000 of tax on previously untaxed RCCL earnings) from the sale of 3,650,000 shares of 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 applied the net proceeds from this sale, approximately $180,000,000, to reduce amounts outstanding under its long-term credit facility.
(See Notes on Following Pages)
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note D - 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:
AS OF |
||||
JUNE 30, |
DECEMBER 31, |
|||
1999 |
1998 |
|||
Cash ($41,865,000 and $49,678,000) and |
||||
other current assets |
$ 47,649,000 |
$ 55,171,000 |
||
Vessels, net |
171,555,000 |
178,592,000 |
||
Other assets (including $720,000 and |
||||
$1,197,000 due from owners) |
2,106,000 |
3,571,000 |
||
|
221,310,000 |
237,334,000 |
||
Current installments of long-term debt |
7,500,000 |
7,500,000 |
||
Other current liabilities |
4,751,000 |
4,396,000 |
||
Total current liabilities |
12,251,000 |
11,896,000 |
||
Long-term debt |
37,500,000 |
41,250,000 |
||
49,751,000 |
53,146,000 |
|||
Net assets (principally undistributed |
||||
net earnings) |
$171,559,000 |
$ 184,188,000 |
||
THREE MONTHS ENDED JUNE 30, |
SIX MONTHS ENDED JUNE 30, |
|||||||
1999 |
1998 |
1999 |
1998 |
|||||
Revenue, primarily from voyages |
||||||||
(including $4,638,000, $7,033,000, |
||||||||
$9,298,000 and $13,418,000 from |
||||||||
vessels chartered to owners) |
$10,026,000 |
$ 13,496,000 |
$22,986,000 |
$ 27,884,000 |
||||
Costs and expenses |
7,779,000 |
11,980,000 |
17,615,000 |
25,785,000 |
||||
Net income |
$ 2,247,000 |
$ 1,516,000 |
$ 5,371,000 |
$ 2,099,000 |
(See Notes on Following Pages)
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note E - Agency Fees and Brokerage Commissions:
On October 30, 1998, the Company assumed direct management and operation of its bulk shipping fleet, terminating its arrangements, by mutual consent, with Maritime Overseas Corporation ("Maritime"). 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. General and administrative expenses include $8,321,000 (three months ended June 30, 1998) and $17,140,000 (six months ended June 30, 1998) of agency fees and vessel and voyage expenses include $1,291,000 (three months ended June 30, 1998) and $2,595,000 (six months ended June 30, 1998) 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. Maritime was 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 termination of the arrangements referred to above.
Note F - 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 $6,785,000 (three months ended June 30, 1999), $6,058,000 (three months ended June 30, 1998), $12,630,000 (six months ended June 30, 1999) and $52,154,000, including $42,288,000 from the sale of 3,650,000 shares of RCCL (six months ended June 30, 1998), 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 in the six months ended June 30, 1998 amounted to $4,900,000. No payments were required or made during the six month period ended June 30, 1999.
(See Notes on Following Pages)
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note G - 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 financial covenants contained in certain of such agreements are not met.
As of June 30, 1999, the Company is a party to fixed to floating interest rate swaps with various major financial institutions covering notional amounts aggregating $240,000,000, pursuant to which it pays LIBOR (5.4% to 5.6% as of June 30, 1999, for a term equal to the swaps' reset frequency) and receives fixed rates ranging from 5.9% to 6.4% 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 $304,000,000, pursuant to which it pays fixed rates ranging from 5.1% to 7.1% and receives LIBOR. These agreements contain no leverage features and have various maturity dates from late 2000 to 2008.
Approximately 16% of the net book amount of the Company's vessels, including vessels under construction, and vessels under capital leases, representing four foreign flag and four U.S. flag vessels, is pledged as collateral for certain long-term debt.
Interest paid approximated $25,546,000 (six months ended June 30, 1999) and $35,476,000 (six months ended June 30, 1998), excluding capitalized interest.
Note H - Other Income - net:
Other income - net consists of the following:
THREE MONTHS ENDED |
SIX MONTHS ENDED |
|||||||
JUNE 30, |
JUNE 30, |
|||||||
1999 |
1998 |
1999 |
1998 |
|||||
Investment income: |
||||||||
Interest and dividends |
$ 2,708,000 |
$ 2,405,000 |
$4,946,000 |
$ 5,347,000 |
||||
Gain/(loss) on sale of |
||||||||
securities |
(671,000) |
9,802,000 |
(306,000) |
13,848,000 |
||||
2,037,000 |
12,207,000 |
4,640,000 |
19,195,000 |
|||||
Gain on disposal of vessels - net |
258,000 |
|||||||
Miscellaneous - net |
124,000 |
1,212,000 |
62,000 |
1,535,000 |
||||
$ 2,161,000 |
$13,419,000 |
$4,960,000 |
$20,730,000 |
|||||
(See Note on Following Pages)
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note I - Commitments and Other Comments:
(See Note on Following Page)
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Financial Statements
Note I - Commitments and Other Comments (continued):
In June 1999, options covering 560,000 shares were granted under the 1998 nonqualified stock option plan to senior officers of the Company at exercise prices equal to the market price at the date of grant.
In addition, the Board extended the expiration date for certain options granted under the 1989 and 1990 nonqualified stock option plans for three years, until October 2003 and December 2002, respectively. No compensation expense was recognizable in
connection therewith.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
Significant Event
In the first quarter of 1999, the Company, BP Amoco p.l.c. ("BP Amoco") and Keystone Shipping Company ("Keystone") successfully completed the formation of Alaska Tanker Company ("ATC"). ATC, which is owned 37.5% by the Company, 37.5% by Keystone and 25% by BP Amoco, provides marine transportation services in the environmentally sensitive Alaskan crude oil trade. ATC currently manages the vessels carrying BP Amoco's Alaskan crude oil, including five of the Company's vessels. These five vessels which had previously been on long-term time charters to BP Amoco were converted in the second quarter to bareboat charters to ATC, with BP Amoco guarantees, through their OPA 90 expiry dates in 2005/2006. These bareboat charters provide a core level of earnings to the Company and, with respect to such vessels, eliminate the Company's exposure to any increases in costs and/or decreases in operating days.
Planned Vessel Dispositions
During the second quarter of 1999, the Company successfully completed its dry bulk disposal program, including one vessel under contract of sale for delivery in the third quarter. The Company recognized a gain of $9,000,000 with respect to the nine
vessels sold and delivered as of June 30, 1999. Year-to-date, the Company has also sold four of its oldest tankers, including two held in joint ventures, that were held for disposal at year-end 1998. The Company expects to realize gross proceeds of
approximately $55,000,000 in 1999 from the sale of all such vessels.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
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 the 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 number 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.
In the world tanker markets, VLCC rates in the first half of 1999 averaged 33% below the same period of 1998. From a first quarter high of around $35,000 per day in late February, rates declined sharply to below $9,000 per day in late April as oil producers implemented a new round of oil production cuts, resulting in a reduction in Middle East exports. Rates then recovered to around $24,000 per day by mid-June but weakened again by late July to levels approaching their late April lows, reflecting a substantial buildup of tonnage in the Middle East.
During the first half of 1999, rates for Aframax tankers in the Caribbean market (the Company's primary Aframax trading area) which have remained at depressed levels for most of the past 12 months, averaged 11% below last year's first half and near to their lowest levels since the late 1980s. After declining to below $12,000 in early March as refineries underwent seasonal downtime, rates moved up to $22,000 per day near the start of the second quarter to their highest level of the year, bolstered by the seasonal restocking of crude by refiners. However, the implementation of OPEC's third round of oil production cuts, and a heavy newbuilding delivery schedule, caused rates to abruptly reverse direction, sending them below $12,000 per day by mid-to-late April. Rates were at $10,000 per day in late July, their lowest level of the year. The Company's Aframax tanker pool with PDV Marina continues to complement its base of Venezuelan cargoes with backhauls and contracts of affreightment, resulting in increased operating efficiencies and reduced idle time for OSG's pool vessels.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income From Vessel Operations (continued)
Rates for Suezmaxes on the West Africa to U.S. route averaged 33% below levels prevailing in the first half of 1998, approaching depressed levels not seen since the late 1980s. From a peak of around $17,500 per day in late February, rates tumbled to $7,500 per day by mid-to-late May, then settled into a trading range between $8,000 and $10,500 per day from June through late July.
After peaking at $14,000 per day in mid-January, freight rates for product tankers in the Caribbean declined to a low of $8,500 per day by mid- May as domestic refining picked up seasonally. From this low point, rates rallied back to $12,500 towards the end of June and continued to climb to $13,500 per day in late July. Supply disruptions on the U.S. West Coast, which drew tonnage away from the Caribbean, provided support to the product trades during much of the first half of the year and were a major factor enabling product tanker rates in the Caribbean to average 16% above those of the comparable year ago period. Rates for larger product carriers trading to the Far East were off an average 31% from last year's first half and were near their lowest levels of the decade. From this year's high of over $15,000 per day in January, rates declined to a low of $7,500 per day in early March. Rates then trended up to $14,000 per day by mid-June, also spurred by supply disruptions on the U.S. West Coast. However, rates failed to hold at these levels, falling back to $12,500 by late July. Higher levels of oil consumption in Asia, especially during the second quarter, lent some support to longer-haul product movements on larger product tankers.
Freight rates for large modern Capesize vessels (about 160,000 dwt) continued at low levels during the first half of the year, reflecting reduced world steel production, stagnating steam coal demand in Europe and a seasonal decline in steam coal requirements in Japan in the second quarter. Rates in both the Atlantic and Pacific ranged between $10,000 (in early January) and $5,500 per day (reached in late June/early July). By late July, the market rallied back to $8,000 per day.
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 1999 and 1998 based on the published reports of Clarkson Research Studies, a 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.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income From Vessel Operations (continued)
Average Market Rates by Vessel Type
1999 |
1998 |
||||
Tankers |
Second Quarter |
First Quarter |
Second Quarter |
First Quarter |
|
Modern VLCCs |
$ 20,700 |
$29,800 |
$38,700 |
$34,200 |
|
Suezmaxes (W. |
|||||
Africa - U.S.) |
13,800 |
19,100 |
20,800 |
24,700 |
|
Aframaxes |
|||||
(Caribbean market) |
12,500 |
16,700 |
13,700 |
19,600 |
|
Product carriers |
|||||
(Worldwide) |
8,900 |
9,400 |
9,600 |
10,700 |
|
Dry Bulk Carriers |
|||||
Capesize |
7,200 |
7,500 |
9,400 |
12,900 |
Income from vessel operations for the second quarter and first half of 1999 increased by approximately $500,000 and $2,100,000, respectively, from the results for the corresponding 1998 periods. Results from vessel operations for the 1999 periods benefited from reductions in general and administrative expenses of approximately $700,000 and $1,300,000, respectively, and a fleet-wide reduction in vessel operating expenses in excess of $600 per day, per vessel, achieved through the Company's continuing process improvement and efficiency programs.
Income from foreign flag vessel operations decreased by approximately $3,200,000 and $2,400,000 for the same periods, reflecting significant declines in rates affecting all classes of tankers. Time-charter equivalent ("TCE" - defined as voyage revenues less voyage expenses divided by round-trip voyage days) rates for the Company's foreign flag tankers, including product carriers, declined by an average approximately of $2,000 per day for both the second quarter and first half of 1999 from the comparable 1998 periods. VLCCs were particularly hard hit with average declines of approximately $7,000 per day in both 1999 periods. The total number of operating days for the foreign flag fleet in the first half of 1999 were comparable to the 1998 period. Second quarter results, however, were negatively affected by a decline of approximately 350 operating days, partially attributable to the sale of two older tankers in the first quarter of 1999. Results from vessel operations for both 1999 periods benefited from reductions in depreciation of $1,000,000 and $2,400,000, respectively, attributable to the adjustment in carrying value of certain older and less efficient tankers scheduled for disposal.
Income from operations of the Company's U. S. flag fleet for the second quarter and first half of 1999 improved by approximately $3,700,000 and $4,500,000, respectively, from the comparable 1998 periods. This was substantially attributable to improved results of two small dry cargo ships that had been laid up for substantial portions of the 1998 periods. During the second quarter, the conversion of long-term time charters on five U. S. flag crude carriers to bareboat charters, with BP Amoco guarantees, resulted in a reduction in revenue from voyages in excess of $4,500,000 in the three and six month periods ended June 30, 1999. However, vessel and voyage expenses attributable to these five vessels decreased by a roughly comparable amount because vessel operating expenses became the responsibility of the bareboat charterer. Accordingly, this reduction in revenue had no material effect on income from vessel operations. Results for the U. S. flag tanker fleet were negatively affected by a reduction in operating days of 100 and 350 days in the 1999 second quarter and first six months of 1999 from the comparable 1998 periods, reflecting the sale of one vessel near the end of 1998 and an increase in the number of days in drydock in the 1999 periods. Results from vessel operations for both 1999 periods benefited from reduced depreciation of approximately $1,300,000 and $2,400,000, respectively, principally resulting from the extension of the depreciable lives of four vessels whose underlying charters were extended to their OPA 90 expiry days in 2005/2006.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Interest Expense
Interest expense decreased in the second quarter and first half of 1999 as a result of a substantial decrease in the average amount of debt outstanding in the 1999 periods compared with the corresponding periods of 1998, reflecting the reduction of debt through application of the proceeds of approximately $180,000,000, net of taxes, from the sale of 3,650,000 shares of Royal Caribbean Cruises Ltd. ("RCCL") common stock in the first quarter of 1998 and gross proceeds of $50,000,000 from the sale in 1998 of vessels included in the aforementioned dry cargo disposal program. In addition, in the fourth quarter of 1998 the Company refinanced $310,000,000 of Unsecured Senior Notes with coupons averaging 8.7% by borrowing under its revolving credit agreement; this reduced interest costs for the second quarter and first half of 1999 by approximately $1,400,000 and $2,600,000 respectively. Interest expense is net of interest capitalized in connection with vessel construction of $2,000,000 (second quarter of 1999) and $3,800,000 (first half of 1999). Interest expense reflects $300,000 (second quarter of 1999), $600,000 (first half of 1999), $1,100,000 (second quarter of 1998) and $2,100,000 (first half of 1998) of net benefits from the interest rate swaps referred to below in Liquidity and Sources of Capital.
Provision for Federal Income Taxes
The provision for federal income taxes in the first half of 1999 decreased from the comparable period of 1998 because of the decrease in pretax income (reflecting in the first half of 1998 a pretax gain of $42,288,000 on the sale of shares of RCCL) adjusted to reflect items that are not subject to tax and the dividends received deduction in both periods. The provision in the first half of 1998 includes approximately $1,000,000 of tax on previously untaxed RCCL earnings.
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, 2000, as amended by Statement of Financial Accounting Standards No. 137. The Company expects to adopt the new statement effective January 1, 2001. FAS 133 will require the Company to recognize all derivatives on the balance sheet at fair value. The portion of a derivative's change in fair value that is deemed not to constitute a hedge will be immediately recognized in earnings. 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 items or firm commitments through earnings or be recognized in other comprehensive income until the hedged item is recognized in earnings.
The Company believes that the adoption of FAS 133 will not have a material effect on its earnings and financial position.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of Capital
Working capital at June 30, 1999 was approximately $55,000,000. Current financial resources, together with cash anticipated to be generated from operations, are expected to be adequate to meet requirements in the next year. 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 $14,000,000 at June 30, 1999. In addition, the Company maintains a Capital Construction Fund with a market value of approximately $184,000,000 at June 30, 1999. Net cash provided by operating activities in the first half of 1999 approximated $20,000,000 (which is not necessarily indicative of the cash to be provided by operating activities for a full fiscal year).
The Company has an unsecured long-term credit facility of $600,000,000, of which $419,000,000 was used at June 30, 1999, and an unsecured short-term credit facility of $30,000,000, of which $4,000,000 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 Company has used interest rate swaps to effectively convert a portion of its debt, including capital lease obligations, either from a fixed to floating rate basis or from floating to fixed rate, reflecting management's interest rate outlook at various times. These agreements contain no leverage features. 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 $81,000,000 for such foreign currency from July 1, 1999 through 2004.
As of June 30, 1999, the Company has commitments for the construction of six double-hulled foreign flag tankers scheduled for delivery between early 2000 and early 2002, with an aggregate unpaid cost of approximately $134,000,000. Unpaid costs are net of progress payments and the prepayment in August 1998 of a substantial portion of the purchase price of two of these vessels. The prepayment, approximately $105,000,000, is covered by refundment guaranties from a major U.S. insurance company. In December 1998, the Company financed its prepayment and provided for substantially all of the remaining unpaid costs of these two vessels with a ten-year borrowing secured by an assignment of the refundment guaranties and by mortgages to be placed on the vessels upon their respective deliveries.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Risk Management
The Company is exposed to market risk from changes in interest rates, which could impact its results of operations and financial condition. The Company manages this exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company manages its ratio of fixed to floating rate debt with the objective of achieving a mix that reflects management's interest rate outlook at various times. To manage this mix in a cost-effective manner, the Company, from time to time, enters into interest rate swap agreements, in which it agrees to exchange various combinations of fixed and variable interest rates based on agreed upon notional amounts. The Company uses derivative financial instruments as risk management tools and not for speculative or trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage exposure to nonperformance on such instruments by the counterparties.
In May 1999, floating-to-fixed interest rate swaps maturing in 2002 with a notional amount of $177,000,000 were terminated.
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 uses hardware and software that is Year 2000 compliant, with a few known exceptions, which it is addressing. The Company is reviewing and testing 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. Such testing is scheduled for completion by the end of the third quarter of 1999 and takes into consideration the fact that not all equipment manufacturers have responded to the Company's request for the Year 2000 status of their equipment. The Company is testing its shore-based hardware and applications and has found those tested either to be Year 2000 compliant or to have only minor deficiencies. The Company expects to complete its testing of shore-based hardware and applications by the end of the third quarter of 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 these communications.
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.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Update on Impact of Year 2000
The failure to correct a Year 2000 problem could result in an interruption in certain normal business activities or operations. However, the Company believes that upon 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 regarding future events. There can, however, be no assurance that there will not be a delay in, or 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. A contingency plan for the Company's vessels has been completed and sent to its vessels, and the Company expects to evaluate the necessity for an office-related contingency plan by the end of the third quarter of 1999.
August 9, 1999
Independent Accountants' Report on Review of Interim Financial Information
The accompanying condensed consolidated financial statements as of
June 30, 1999 and for the three and six months ended June 30, 1999 and 1998 are unaudited; however, such financial statements have been reviewed by the Company's independent accountants.
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 8, 1999, the stockholders elected ten directors, each for a term of one year, approved the appointment of Ernst & Young LLP as independent auditors for the year 1999 and approved the adoption by the Board of Directors of the Registrant's 1999 Non-Employee Director Stock Option Plan. Proxies for the meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934. A total of 30,393,164 shares were voted with respect to each of the aforementioned matters, and there were no broker non-votes.
The tabulation of the votes cast for each nominee for director was as follows:
NUMBER OF SHARES |
||
NAME OF NOMINEE |
WITHHELD AUTHORITY |
|
FOR DIRECTOR |
VOTED FOR |
TO VOTE |
Oudi Recanati |
30,369,584 |
23,580 |
Morton P. Hyman |
30,372,917 |
20,247 |
Robert N. Cowen |
30,374,016 |
19,148 |
Thomas H. Dean |
30,371,404 |
21,760 |
Michel Fribourg |
30,371,280 |
21,884 |
William L. Frost |
30,372,430 |
20,734 |
Ran Hettena |
30,370,923 |
22,241 |
Stanley Komaroff |
30,374,115 |
19,049 |
Solomon N. Merkin |
30,374,175 |
18,989 |
Joel I. Pickett |
30,374,406 |
18,758 |
The resolution to approve the appointment of Ernst & Young LLP as independent auditors was adopted by a vote of 30,387,431 shares in favor, 3,703 shares against and 2,030 shares abstained.
The adoption by the Board of Directors of the Registrant's 1999 Non-Employee Director Stock Option Plan was approved by a vote of 30,075,136 shares in favor, 298,983 shares against and 19,045 shares abstained.
Item 6(a). Exhibits
See Exhibit Index on page 25.
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, 1999.
<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, 1999 and the related condensed consolidated statements of income for the three month and six month periods ended June 30, 1999 and 1998 and the related condensed consolidated statements of cash flows and changes in shareholders' equity for the six month periods ended June 30, 1999 and 1998. 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, 1998, 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, 1999 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, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
August 9, 1999
<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, 1999 |
s/Morton P. Hyman |
Morton P. Hyman |
|
President |
|
Date: August 13, 1999 |
s/Myles R. Itkin |
Myles R. Itkin |
|
Senior Vice President, Chief |
|
Financial Officer and Treasurer |
<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, 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. |
|